<PAGE>
As filed with the Securities and Exchange Commission on March 6, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONTEXT INTEGRATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 7379 94-3166676
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code
organization) Number)
One Van de Graaff Drive, Suite 104
Burlington, MA 01803
(781) 229-6500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Stephen Sharp
President and Chief Executive Officer
Context Integration, Inc.
One Van de Graaff Drive, Suite 104
Burlington, MA 01803
(781) 229-6500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Elizabeth R. Flint Keith F. Higgins
Susan L. Stapleton Jane D. Goldstein
Clay B. Simpson Ropes & Gray
Wilson Sonsini Goodrich & Rosati One International Place
Professional Corporation Boston, MA 02110
650 Page Mill Road (617) 951-7000
Palo Alto, California 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), 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 statement number of the earlier effective registration statement
for the same offering. [_] ______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price(1) Registration Fee
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<S> <C> <C>
Common Stock, par value $0.001 per
share........................... $69,000,000 $18,216
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee
required by Section 6(b) of the Securities Act, and computed pursuant to
Rule 457(o) of the Securities Act.
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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 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The Information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued March 6, 2000
Shares
Context Integration, Inc.
COMMON STOCK
-----------
Context Integration, Inc. is offering shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$ and $ per share.
-----------
We have filed an application for the common stock to be quoted on the Nasdaq
National Market under the symbol "CTXT."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 8.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Context
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total........................................ $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to an additional
shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
, 2000
<PAGE>
[Three screenshots of different web applications developed by Context for BMG
Entertainment, Liberty Financial Services and GoCargo.com.]
<PAGE>
The Context Approach
[Large graphic consisting of concentric circles containing the following text:
Local Practice, Solution Centers, Partners, Fixed Time, Time to Value,
Fixed Price, Technologists, Designers, Architects, Technology, CLIENTS, FOCUS,
TECHNOLOGY, PEOPLE, Delivery, CONTEXTWISE, QUALITY, TOOLS.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 30
Management............................................................... 40
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Transactions..................................................... 49
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 55
Certain U.S. Federal Tax Considerations for Non-U.S. Holders of Common
Stock................................................................... 57
Underwriters............................................................. 60
Legal Matters............................................................ 62
Experts.................................................................. 62
Change in Auditors....................................................... 62
Where You Can Find More Information...................................... 63
Index to Financial Statements............................................ F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
----------------
Except as set forth in the financial statements or as otherwise specified,
all information in this prospectus is based on the following assumptions:
. the conversion of each outstanding share of our preferred stock into 1.5
shares of common stock upon the closing of this offering
. the filing of an amendment to our amended and restated certificate of
incorporation prior to this offering
. no exercise of the underwriters' over-allotment option
----------------
Context Integration, Inc., ContextWISE, IAN, PETE and the Context
Integration, Inc. logo are our trademarks. This prospectus also includes
trademarks and tradenames of other parties.
----------------
We have made some statements in this prospectus, including some under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere,
which constitute forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors that may cause our or our
industry's actual results, levels of activity, performance or achievements to
be materially different from any results, levels of activity, performance or
achievements expressed or implied by any such forward-looking statements.
These factors include, among other things, those listed under "Risk Factors"
and elsewhere in this prospectus. In some cases, you can identify forward-
looking statements by terminology such as "may," "will," "should," "could,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events
or results may differ materially. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform such
statements to actual results.
----------------
Until , 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all of the information that is important to
you. You should read the entire prospectus, including the financial statements
and related notes, before making an investment decision.
CONTEXT INTEGRATION
Overview
Context Integration is a leading Internet professional services firm. Our
integrated offering of strategy, creative design, technology architecture,
solutions construction and applications management services allows us to
rapidly deliver innovative and robust web-based business-to-business, or B2B,
solutions.
The skills required to build these complex B2B solutions are beyond those
necessary for merely designing web sites or building business-to-consumer, or
B2C, e-commerce capabilities. B2B solutions typically involve large numbers of
transactions and users, and must be secure, reliable and scaleable. They must
also be integrated with the existing systems infrastructure of a client and its
customers and business partners. As a result, companies are increasingly
turning to outside Internet professional services providers like Context for
assistance.
As of February 29, 2000, we employed over 330 people who serve clients from
our regional offices in the metropolitan areas of Boston, New York, Houston,
Dallas, Denver, San Francisco, Los Angeles and central New Jersey. Our clients
include large enterprises such as Merrill Lynch, BMG Entertainment, and Merck-
Medco, as well as innovative B2B start-ups such as GoCargo.com,
PaperExchange.com and OnlineAsset.com.
Market Opportunity
Companies are increasingly using the Internet and B2B e-commerce solutions
to streamline their internal and external processes and strengthen their
relationships with suppliers and customers in order to gain a competitive
advantage. The demand for these solutions has been growing rapidly.
International Data Corporation, or IDC, estimates that the worldwide market for
Internet services will grow from $7.8 billion in 1998 to $78.5 billion in 2003,
representing a compound annual growth rate of approximately 59%. In addition,
Forrester Research, Inc. estimates that revenue from B2B e-commerce will grow
from $406 million in 2000 to $2.7 trillion by 2004, representing a compound
annual growth rate of approximately 61%.
Competitive Strengths
We believe that the combination of the following factors differentiates us
from other firms in our industry and enables us to deliver B2B solutions that
provide a sustainable competitive advantage to our clients:
. Deep technology skills. Since 1992, we have been innovators in applying
leading-edge technologies to businesses, and have developed expertise in
the advanced technologies used for building and integrating B2B
solutions. We partner selectively with some of the Internet industry's
leading technology vendors, including BroadVision and Art Technology
Group, and we employ highly experienced technologists who work in small,
high-performance teams.
. Early focus on robust B2B solutions. Our early experience was in
building strategic systems using distributed, client-server
architectures for several leading banks. These systems were typically
transaction intensive, globally distributed, available 24 hours per day,
seven days per week, or 24x7, highly secure and scaleable, and required
extensive integration with multiple existing systems. Today's B2B
solutions share many of these same demanding technical requirements, and
we are now focused primarily on this B2B market.
. Rapid project delivery model. We work with our clients to achieve their
business objectives in the shortest possible time. Our projects are
typically completed in four to five months and in some cases less. We do
most of our work on a fixed-price, fixed-time basis, sharing risk with
our clients.
4
<PAGE>
. Web-optimized methodology. We have developed and optimized our solution
development and project management methodology, ContextWISE, for web
business solutions. ContextWISE enables us to consistently deliver high-
quality solutions on-time and on-budget.
. Innovative knowledge network. We have developed a growing database of
design approaches, templates and software, which we use to deliver our
solutions rapidly and cost-effectively. Our consultants are recognized
and rewarded for sharing knowledge, best practices and software
technology across project teams, offices and industries.
Recent Event
In January 2000, we acquired all of the outstanding common stock of
Underline, Inc., a creative design firm focused on online marketing, in a
transaction that was accounted for using the purchase method of accounting.
The total consideration for this transaction was $7.6 million. The amount of
the consideration treated as purchase price for this acquisition was
approximately $4.8 million, which we plan to amortize over a three-year
period. The additional portion of the consideration, consisting of
approximately $2.8 million of restricted stock, was recorded as deferred
compensation and will be recognized as stock-based compensation ratably over
the two-year restrictive period.
----------------
We were incorporated in Delaware in October 1992. Our principal executive
office is located at One Van de Graaff Drive, Suite 104, Burlington,
Massachusetts 01803, and our telephone number is (781) 229-6500. Our web site
is located at www.context.com. The information on our web site is not
incorporated by reference into this prospectus.
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered................................ shares
Common stock to be outstanding after this offering.. shares
Over-allotment option............................... shares
Use of proceeds..................................... For general corporate
purposes, including
working capital.
Dividend policy..................................... We do not intend to pay
dividends on our common
stock. We currently
intend to retain our
future earnings, if any,
for use in the operation
and expansion of our
business, and do not
anticipate declaring or
paying cash dividends on
our common stock in the
foreseeable future. In
addition, our existing
bank line of credit
prohibits the payment of
dividends.
Proposed Nasdaq National Market symbol.............. CTXT
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on 22,393,178 shares outstanding as of January 31, 2000. This number
excludes 5,541,660 shares of common stock issuable upon exercise of outstanding
options on January 31, 2000 at a weighted average exercise price of $1.07. See
"Management--Stock Plans" and note 9 of notes to our audited financial
statements.
6
<PAGE>
SUMMARY FINANCIAL DATA
These summary financial data have been derived from our audited and
unaudited historical financial statements and the audited financial statements
of Underline, Inc. You should read the information set forth below in
conjunction with the financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
The 1999 pro forma statements of operations data give effect to our
acquisition of Underline, Inc. as if the acquisition had occurred on January 1,
1999.
The balance sheet data as of December 31, 1999 is presented:
. on an actual basis;
. on a pro forma basis to give effect to our acquisition of Underline,
Inc. as if it had occurred on December 31, 1999; and
. on a pro forma basis as adjusted to give effect to the above pro forma
adjustments, as well as the conversion of all outstanding shares of
preferred stock into 10,724,702 shares of common stock upon the closing
of this offering and the sale of shares of common stock in this
offering, at an assumed initial public offering price of $ per share
after deducting estimated underwriting discounts and estimated offering
expenses.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999
1995 1996 1997 1998 1999 Pro Forma
------ ------ ------- ------- ------- ---------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $3,243 $7,311 $15,608 $19,786 $27,077 $28,803
Operating expenses:
Professional
services............. 1,935 4,071 9,220 12,688 15,258 16,216
Sales and marketing... 170 767 1,959 3,034 4,631 4,681
General and
administrative....... 1,164 2,329 5,452 9,927 13,419 14,149
Stock-based
compensation......... -- -- 386 181 587 1,985
Amortization of
goodwill ............ -- -- 644 -- -- 1,641
------ ------ ------- ------- ------- -------
Total operating
expenses........... 3,269 7,167 17,661 25,830 33,895 38,672
------ ------ ------- ------- ------- -------
(Loss) income from
operations............. (26) 144 (2,053) (6,044) (6,818) (9,869)
Interest (expense)
income, net............ -- (50) 63 (11) (33) (49)
Income tax (expense)
benefit................ (7) (95) 94 -- -- (10)
------ ------ ------- ------- ------- -------
Net loss................ $ (33) $ (1) $(1,896) $(6,055) $(6,851) $(9,928)
====== ====== ======= ======= ======= =======
Basic and diluted net
loss per share......... $(0.01) $ -- $ (0.28) $ (0.65) $ (0.70) $ (0.87)
====== ====== ======= ======= ======= =======
Basic and diluted
weighted average common
shares outstanding..... 2,402 2,435 6,795 9,245 9,767 11,371
Unaudited pro forma
basic and diluted net
loss per share assuming
conversion of preferred
stock ................. $ (0.38) $ (0.50)
======= =======
Unaudited pro forma
weighted average number
of basic and diluted
shares outstanding
assuming conversion of
preferred stock ....... 18,134 19,738
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $ 8,697 $ 8,610 $
Working capital................................... 11,747 11,253
Total assets...................................... 21,690 30,369
Total stockholders' equity........................ 14,192 21,648
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The risks described below are not the only ones that we
face. Any of the following risks could seriously harm our business, financial
condition or results of operations. As a result, these risks could cause the
decline of the trading price of our common stock, and you may lose all or part
of your investment. You should also refer to the other information set forth
in this prospectus, including our financial statements and the related notes.
Risks Related to Our Business
If we do not effectively manage our growth, it will place significant
strain on our management and operational resources
We have recently experienced a period of rapid revenue and client growth
and an increase in the number of employees and offices and in the scope of our
supporting infrastructure. Our revenue was approximately $15.6 million for the
year ended December 31, 1997, $19.8 million for the same period in 1998 and
$27.1 million for the same period in 1999. Our headcount was 147 and 234 at
December 31, 1998 and 1999. We do not believe that this rate of growth is
sustainable. In addition, we opened 3 new offices in fiscal 1999 and expect to
open additional offices in the future. This growth has resulted in new and
increased responsibilities for management personnel and has placed and
continues to place a significant strain on our management and operating and
financial systems. We must continue to hire management personnel and improve
our systems on a timely basis and in such a manner as is necessary to
accommodate any increase in the number and size of client projects and any
increase in the size of our operations. Our failure to implement and improve
our systems or to hire and retain appropriate personnel to manage our
operations would harm our business, operating results and financial condition.
Our ability to attract and retain clients and our overall success depends
on our ability to hire, train and retain qualified information technology
professionals
Our success depends in large part on our ability to hire, train, motivate
and retain highly skilled information technology, or IT, professionals,
particularly project managers, software engineers and other senior technical
personnel. There is currently significant competition for IT professionals
with the advanced technological skills necessary to perform the services we
offer. This competition has caused wages for such professionals to increase,
which increases operating costs to Internet professional service firms like
us. Our ability to adequately manage and complete existing projects and to
obtain new projects depends, in large part, on our ability to hire, train and
retain additional technical personnel with the IT skills required to keep pace
with continuing changes in information technology, evolving industry standards
and changing client preferences. We cannot be sure that we will be successful
in attracting and retaining highly skilled IT professionals. In addition, we
generally incur substantial costs in recruiting, hiring and training IT
professionals before these employees become productive. Also, if we do not
successfully train newly hired IT professionals on our ContextWISE methodology
or if we do not successfully integrate newly hired IT professionals into our
project teams, we could experience problems in delivering our services. If we
are unable to hire a sufficient number of qualified IT professionals or to
successfully train, integrate and retain IT professionals, our business,
financial condition and results of operations could be harmed. In addition,
even if we are able to expand our team of highly skilled IT professionals, the
resources required to attract and retain such employees and the compensation
that must be paid to them may adversely affect our operating margins.
We have a history of losses, and we expect future losses
We incurred net losses of approximately $6.9 million during the year ended
December 31, 1999. As of December 31, 1999, we had an accumulated deficit of
approximately $13.9 million. We expect to continue to spend substantial
resources on sales and marketing, recruiting and hiring additional personnel,
upgrading our
8
<PAGE>
infrastructure, and expanding into new geographic markets. Although our
revenue has grown significantly in recent quarters, we may not be able to
sustain these growth rates or obtain sufficient revenue to achieve
profitability. If we do achieve profitability, we may not be able to sustain
or increase profitability in the future. Our failure to achieve and maintain
profitability could harm our stock price.
Our future revenue is unpredictable and we expect our quarterly operating
results to fluctuate, which could cause our stock price to decline
Our revenue and operating results are likely to fluctuate significantly
from quarter to quarter as a result of a variety of factors, many of which are
outside our control. Accordingly, period-to-period comparisons of our
operating results are not a good indication of our future performance. The
factors that may cause our operating results to fluctuate include:
. the number, size and scope of our client projects commenced or completed
during a quarter
. utilization rates of our consultants
. delay in commencement or termination of one or more significant projects
. our ability to hire and retain sufficient numbers of consultants and
account managers
. the accuracy of our estimates of the time and resources needed to
complete projects
. changes in our pricing policies or those of our competitors
. the length of our sales cycle
Our clients retain us on an engagement-by-engagement basis, rather than
under long-term contracts, and may cancel projects without notice and without
penalty. As a result, our revenue is difficult to predict. Because we incur
costs based on our expectations of future revenue and a large percentage of
our operating expenses, particularly personnel and related costs and rent, are
relatively fixed in advance of any particular quarter, our failure to predict
our revenue accurately may seriously harm our financial condition and results
of operations. If revenue falls below expectations, our operating results may
be harmed and our stock price would probably decline.
We enter into fixed-price, fixed-time contracts and could lose money on
these contracts
Most of our projects are based on fixed-price, fixed-time contracts, rather
than contracts in which payment to us is determined on a time and materials
basis. If we do not accurately estimate the resources required for a fixed-
price, fixed-time project, or if we fail to complete our contractual
obligations in a manner consistent with the project plan upon which our
contract is based, our gross margin and profit, if any, on the project would
be lower and we could lose money. This risk increases as we work on more
technologically complex projects.
The loss of any of our senior management or key personnel could result in
the loss of our existing clients and make it difficult to attract new clients
Our success depends on the continued employment of our senior management
team and key technical personnel. Personal relationships are a critical
element of obtaining and maintaining client engagements in our business. If
one or more members of our senior management team or key technical personnel
were unable or unwilling to continue in their present positions, such persons
would be very difficult to replace and our business could be seriously harmed.
To date, our senior management has generated a majority of our revenue through
their selling efforts. Accordingly, the loss of one or more members of our
senior management team could have a direct adverse impact on our future sales.
In addition, if any of these key employees joins a competitor or forms a
competing company, some of our clients might choose to use the services of
that competitor or new company instead of our own. Furthermore, clients or
other companies seeking to develop in-house Internet-based solutions
capabilities may hire away some of our key employees. This practice may result
in the loss not only of key employees, but also client relationships and new
business opportunities, and could seriously harm our business.
9
<PAGE>
Significant and increasing competition in our industry could cause us to
lose clients or prevent us from attracting new clients
The Internet professional services industry is comprised of a large number
of participants and is subject to rapid change and intense competition. We
currently compete for client assignments and experienced personnel with a
variety of firms, many of which have longer operating histories, larger client
bases, larger professional staffs, greater brand recognition and greater
financial, technical, marketing and other resources than we do. We may be at a
disadvantage in responding to our competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships and
other initiatives. In addition, many of our competitors have well-established
relationships with our current and potential clients and have extensive
knowledge of our industry. As a result, our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements. They may also be able to devote more resources to the
development, promotion and sale of their services than we can. Competitors
that offer more standardized services than we do may have a substantial cost
advantage, which could force us to lower our prices, adversely affecting our
operating margins.
There are low barriers to entry in our markets. We do not own any
technologies that preclude or inhibit potential competitors from entering our
industry. We expect that competition will continue to intensify in the future
and that we will face additional competition from new entrants into our
markets. Some large management and strategic consulting firms have announced
that they plan to offer e-business consulting services, and some large
information technology consulting firms have announced that they will focus
more resources on e-business opportunities. Because our clients hire us on a
project-by-project basis, there is no guarantee that we will be retained by
our existing or future clients on later stages of work. If we fail to compete
successfully against current or future competitors, our business, financial
condition and operating results will be harmed.
Our recent and potential future acquisitions could be difficult to
integrate, dilute stockholder value and adversely affect our operating results
In January 2000, we acquired Underline, Inc., a creative design firm that
had 28 employees. We may undertake additional acquisitions in the future to
grow our business. Both our recent and potential future acquisitions may
involve a number of risks, including:
. inability to integrate the acquired business
. diversion of management attention
. amortization of substantial goodwill, adversely affecting our reported
results of operations
. inability to retain the management, key personnel and other employees of
the acquired business
. inability to establish uniform standards, controls, procedures and
policies
. inability to retain customers of our acquired companies
. exposure to legal claims for activities of the acquired business prior
to the acquisition
Client satisfaction or performance problems with an acquired business could
affect our reputation. In addition, the performance of any acquired business
could be lower than we expected. Our stockholders may also suffer dilution if
we issue equity securities and our operating results may be harmed if we incur
debt or other contingent liabilities.
If we are not successful in opening and growing new offices, we may suffer
revenue shortfalls and an increase in operating costs
A key component of our strategy is to open offices in new geographic
locations. Once we select a new location, we typically devote substantial
financial and management resources to launch and grow that office. We
10
<PAGE>
cannot assure you that we will select appropriate geographic markets to enter,
open new offices efficiently or manage new offices profitably. Any failure to
accurately assess these issues could harm our business, financial condition
and operating results.
If we fail to successfully expand our operations internationally, our
financial condition and results of operations could suffer
We currently plan to open an office in the United Kingdom. We have not
previously opened an office in a foreign country and will be subject to
additional risks that could harm our financial condition and operating
results. These risks include the following:
. fluctuations in currency exchange rates
. any imposition of currency exchange controls
. problems in collecting accounts receivable and longer collection periods
. unexpected changes in regulatory requirements applicable to the Internet
. difficulties and costs of staffing and managing international operations
. differing technology standards
. restrictions on the import and export of certain sensitive technologies,
including data security and encryption technologies that we may use
. diversion of management attention
We depend on a limited number of clients for a significant portion of our
revenue and a delay in revenue from these clients could prevent us from
meeting securities analysts' expectations and could cause our stock price to
fall
We currently derive and expect to continue to derive a significant portion
of our revenue from a limited number of clients. For the years ended December
31, 1997 and 1998, a single client accounted for approximately 16.0% and 17.0%
of our revenue. For the year ended December 31, 1999, five clients accounted
for approximately 32.5% of our revenue. We cannot be certain that clients that
have accounted for significant revenue in past periods, individually or as a
group, will continue to generate revenue for us, or if continued, will reach
or exceed historical levels in any future period. We have, in the past,
experienced declines in revenue from clients that had previously accounted for
significant revenue. To the extent that any significant client uses less of
our services or terminates its relationship with us, our revenue could decline
significantly and our business, financial condition and operating results
could be harmed.
We do not have long-term contracts with our clients and they may cancel
projects without penalty which could result in revenue shortfalls and
decreased operating margins
Our contracts with our clients are generally short-term, and clients can
cancel or reduce their projects without penalty and with little or no notice.
This makes our revenue and operating results difficult to predict. If a client
reduces, delays the start of or cancels a project, we must rapidly redeploy
our employees to other projects in order to minimize underutilization of
employees and the resulting harm to our revenue and operating results. Our
operating expenses are relatively fixed and cannot be reduced on short notice.
Agreements not to perform services for our clients' competitors could limit
our revenue growth
We sometimes agree not to perform services for competitors of our clients
for limited periods of time, which have been as long as one year after we
complete a project. These non-compete agreements reduce the number of
11
<PAGE>
our prospective clients and the number of potential sources of revenue. In
addition, these agreements increase the significance of our client selection
process because many of our clients compete in markets where only a limited
number of players gain meaningful market share. If we agree not to perform
services for a particular client's competitors and our client fails to capture
a significant portion of its market, we are unlikely to receive future revenue
in that particular market.
If efforts to develop brand awareness of our services are not successful,
our revenues may fail to increase as planned
An important element of our business strategy is to develop and maintain
widespread awareness of the Context brand name. To promote our brand name, we
plan to increase our marketing expenses, which may cause our operating margins
to decline. If our initial efforts are not successful, we may not experience
any increase in revenue to offset the increase in marketing expenses.
Moreover, our brand may be closely associated with the business success or
failure of some of our high-profile clients, many of whom are pursuing
unproven business models in competitive markets. As a result, the failure or
difficulties of one of our high-profile clients may damage our brand. If we
fail to successfully promote and maintain our brand name or incur significant
related expenses, our operating margins and our growth may decline.
Our failure to meet client expectations or deliver error-free services
could result in loss of revenues, increased expenses and negative publicity
Many of our engagements involve information technology solutions that are
critical to our clients' businesses. Any defects or errors in these solutions
or failure to meet clients' specifications or expectations could result in:
. delayed or lost revenue due to adverse client reaction
. requirements to provide additional services to a client at no charge
. negative publicity about us and our services, which could adversely
affect our ability to attract or retain clients
. claims for substantial damages against us, regardless of our
responsibility for such failure, which may not be covered by our
insurance policies and which may not be limited by the contractual terms
of our engagement
Rapid technological changes in the Internet professional services market
could render our solutions obsolete or cause our expenses to increase
Our market and the enabling technologies used by our clients are
characterized by rapid technological change. Failure to respond successfully
to these technological developments, or to respond in a timely or cost-
effective way, will result in serious harm to our business and operating
results. We have derived, and we expect to continue to derive, a substantial
portion of our revenue from creating web business solutions that are based
upon today's leading technologies and that are capable of adapting to future
technologies. As a result, our success will depend in part on our ability to
offer services that keep pace with continuing changes in technology, evolving
industry standards and changing client preferences.
If our relationships with leading software vendors are terminated, the
effectiveness of our service offerings may diminish, and we may lose clients
We derive a significant portion of our revenue from projects in which we
utilize software developed by third parties. We have established relationships
with select leading-edge software vendors to develop technological expertise.
In addition, we typically get a significant number of sales leads and engage
in co-marketing with these
12
<PAGE>
companies. Although we have entered into agreements with some of these
companies, the agreements may be terminated with little or no notice. As a
result, any of the companies with whom we have established relationships can
cease making their products available to us at their discretion. In addition,
they may choose to compete against us in providing strategic consulting and
systems integration services. Moreover, our success is dependent upon the
continued popularity of the product offerings of these vendors and on our
ability to establish relationships with new vendors in the future. If we are
unable to obtain software from these or comparable vendors or, if our vendors
choose to compete with us or endorse our competitors over us or cease giving
us sales leads, or if the popularity of their products declines, our business
may be harmed.
Our success depends on our ability to build Internet solutions that address
concerns relating to the use of the Internet for e-commerce
Our future success depends on our ability to provide Internet-based
solutions that successfully address concerns relating to the use of the
Internet to conduct e-commerce. These concerns include:
. security of information being transmitted and authentication of
transactions
. speed and reliability of the system
. enabling a large number of transactions
Our failure to successfully address these concerns would harm our brand,
reputation and sales.
If we are unable to reuse software code and methodologies, we may not be
able to deliver our services rapidly and cost-effectively
Our business model depends to a significant degree on our ability to reuse
software code and methodologies that we develop in the course of client
engagements. Currently, some of our contracts do not permit us to reuse
software code and methodology developed for that client. In addition, some
contracts require us to assign intellectual property to the client. If we
generally are unable to negotiate contracts to permit us to reuse code and
methodologies, we may be unable to provide services to our clients at a cost
and within time frames that these clients find acceptable.
If the solutions we have designed and implemented are not Year 2000
compliant we may be subject to claims that could distract our management and
result in liability
We have designed, developed and implemented solutions for a large number of
clients. Despite the fact that the Year 2000 has already begun, and neither we
nor our clients have experienced any material Year 2000-related issues thus
far, we cannot be sure that all of these solutions will be Year 2000
compliant. We have also recommended, implemented and customized various third-
party technology and software packages for our clients, some of which may not
be Year 2000 compliant. We cannot be sure that we will not become involved in
disputes with clients regarding Year 2000 problems involving solutions we
developed or implemented or the interaction of those solutions with other
applications. These disputes could require us to incur unanticipated expenses
and distract us from our core business and these expenses and distractions
could harm our business, financial condition and results of operations.
If we do not adequately protect our intellectual property our competition
could use it to their advantage
Our success depends in part on our methodology, project templates and other
intellectual property rights, only some of which is proprietary to us. We rely
on a combination of nondisclosure and other contractual arrangements,
technical measures, copyrights and trade secret and trademark laws to protect
our proprietary rights. The laws of some foreign countries do not protect our
proprietary rights to the same extent as the laws of the United States. The
steps we have taken to protect our proprietary rights may not be adequate to
protect our intellectual property and we cannot be certain that third parties
will not infringe or misappropriate our copyrights, trademarks, trade secrets
and similar proprietary rights.
13
<PAGE>
Our employees may misappropriate our proprietary information and the
proprietary information of our clients
We enter into confidentiality agreements with our employees and attempt to
limit access to and distribution of our proprietary information and the
proprietary information of our clients. The steps we have taken in this regard
may not be adequate to deter misappropriation of proprietary information and
we may not be able to detect unauthorized use or take appropriate steps to
enforce intellectual property rights.
We indemnify our clients with respect to intellectual property infringement
claims
Our contracts provide that we will indemnify our clients for intellectual
property infringement claims brought by third parties against our clients
related to the projects that we complete for them. Although no third party has
ever threatened litigation of a claim of infringement by one of our clients
based on the work we have performed, we cannot be sure that claims will not be
brought in the future. If we were required to indemnify one of our clients for
a claim of this nature it would divert management attention and increase
expenses, and may have an adverse effect on our business and results of
operations.
One of our directors is also a director of another Internet professional
services firm, which could result in a conflict of interest
Christopher Greendale, a member of our board of directors, is also a
director of Breakaway Solutions, Inc., another Internet professional services
firm that is a potential competitor to us. This directorship may create actual
or perceived conflicts of interest as a result of his access to information
and business opportunities that may be useful to us and this potential
competitor.
Risks Related to the Internet Industry
Our success depends on continued and increased adoption of the Internet as
a means for commerce
Our future success depends heavily on the continued and increased
acceptance and use of the Internet as a means for commerce. The widespread
acceptance and adoption of the Internet for conducting business is likely only
in the event that the Internet reliably provides businesses with greater
efficiencies and improvements. If commerce on the Internet does not continue
to grow, or grows more slowly than expected, our growth will decline and our
business will be seriously harmed. Consumers and businesses may reject the
Internet as a viable commercial medium for a number of reasons, including:
. actual or perceived lack of security of information
. lack of easy access and ease of use
. congestion of Internet traffic or other usage delays
. inconsistent quality of service
. increases in costs of accessing the Internet
. adverse government regulation
. failure of companies to meet their customers' expectations in delivering
goods and services over the Internet
Increasing government regulation could adversely affect our clients'
businesses and decrease demand for our services
Our clients are subject not only to regulations applicable to businesses
generally, but also additional laws and regulations directly applicable to e-
commerce. Although there are currently few such laws and regulations,
14
<PAGE>
state, federal and foreign governments may adopt a number of these laws and
regulations in the future. Any such legislation or regulation could dampen the
growth of the Internet and decrease its acceptance as a communications and
commercial medium. If such a decline occurs, companies may decide in the future
not to use our services to create an electronic business channel. This decrease
in the demand for our services would seriously harm our business and operating
results.
Specifically, new laws and regulations may be enacted which govern or
restrict any of the following issues:
. user privacy
. the pricing and taxation of goods and services offered over the Internet
. the content of websites
. consumer protection
. the character and quality of products and services offered over the
Internet
For example, the Telecommunications Act of 1996 prohibits the transmission
of certain types of information and content over the Internet. The scope of
this Act's prohibition is currently unsettled. In addition, although courts
have recently held unconstitutional substantial portions of the Communications
Decency Act, federal or state governments may enact, and courts may uphold,
similar legislation in the future. Future legislation could expose companies
involved in Internet commerce, including us, to liability.
Risks Related to This Offering and the Securities Markets Generally
Our stock price may be volatile, which could result in substantial losses
for investors purchasing shares in this offering
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
following this offering. We will negotiate and determine the initial public
offering price with the representatives of the underwriters. This price may
vary from the market price of the common stock after this offering. You may be
unable to sell your shares of common stock at or above the offering price. The
market price of the common stock may fluctuate significantly and rapidly as a
result of the following factors, some of which are beyond our control:
. variations in our quarterly operating results
. changes in securities analysts' estimates of our financial performance
. changes in market valuations of similar companies
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments
. loss of a major client or partner or failure to complete significant
license transactions
. additions or departures of key personnel
. fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of Internet-based and technology
companies
We are at risk of securities class action litigation due to our expected
stock price volatility
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. This risk is especially high for us because Internet-related and
technology companies have experienced greater than average stock price
volatility in recent years and, as a result, have been subject to, on average,
a greater number of securities class action claims than companies in other
industries. Due to the potential volatility of our stock price, we may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources.
15
<PAGE>
Our management may not use the proceeds of this offering effectively
Our management has broad discretion over the use of the proceeds of this
offering. Accordingly, it is possible that our management may allocate the
proceeds differently than investors in this offering would have preferred, or
that we will fail to maximize our return on the proceeds.
We may need to raise additional capital, which may not be available
We expect that the net proceeds from this offering will be sufficient to
meet our working capital and capital expenditure needs for the next eighteen
months. We may need to raise additional funds, and we cannot be certain that
we will be able to obtain additional financing on favorable terms or at all.
If we need additional capital and cannot raise it on acceptable terms, we may
not be able to:
. open new offices, in the United States or internationally
. hire, train and retain employees
. enhance our infrastructure and services
. respond to competitive pressures or unanticipated market requirements
. pursue acquisition opportunities
Our failure to do any of these things could seriously harm our financial
condition. You should review "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" for more information regarding our expected future capital
requirements.
Substantial future sales of our common stock could cause our stock price to
fall
Our current stockholders hold a substantial number of shares of our common
stock, which they will be able to sell in the public market in the near
future. Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall. In addition, the sale of these
shares could impair our ability to raise capital through the sale of
additional stock. You should read "Shares Eligible for Future Sale" for a full
discussion of shares that may be sold in the public market in the future.
Our charter documents and Delaware law make it more difficult to acquire
us, which may depress the market price of our stock
Provisions of our certificate of incorporation and bylaws that will be
effective after this offering could make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our stockholders. These
provisions include:
. authority to issue "blank check" preferred stock that our board of
directors could use to increase the number of outstanding shares and
thwart a takeover attempt
. a super-majority voting requirement to effect certain amendments to our
certificate of incorporation and bylaws
. limitations on who may call special meetings of stockholders
. a prohibition of stockholder action by written consent, which requires
all actions to be taken at a meeting of the stockholders
. the establishment of advance notice requirements for nominations of
candidates for election to the board of directors or for proposing
matters that can be acted upon by stockholders at stockholder meetings
Delaware law also could make it more difficult for a third party to acquire
us. Specifically, Section 203 of the Delaware General Corporation Law may have
an anti-takeover effect with respect to transactions not approved in advance
by the board of directors, including discouraging attempts that might result
in a premium over the market price for the shares of common stock held by our
stockholders.
16
<PAGE>
Control by existing stockholders may limit your ability to influence the
outcome of director elections and other matters requiring stockholder approval
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will own approximately % of our
outstanding shares of common stock ( % if the underwriters' over-allotment
option is exercised in full, based on the number of shares outstanding as of
January 31, 2000). These stockholders, if acting together, would be able to
significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions. This concentration of ownership could have
the effect of delaying or preventing a change in control of Context
Integration or otherwise discouraging a potential acquirer from attempting to
obtain control of us.
Purchasers in this offering will incur immediate and substantial dilution
The initial public offering price of our common stock will be substantially
higher than the book value per share of the outstanding common stock. As a
result, if we were liquidated for book value immediately following this
offering, each stockholder purchasing in this offering would receive less than
the price they paid for their common stock. In addition, because our success
is so heavily dependent on our ability to attract and retain talented
personnel, we expect to offer a significant number of stock options to
employees in the future. Such issuances may cause further dilution to
investors.
17
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately
$ million, or approximately $ million if the underwriters fully exercise
their over-allotment option. This assumes that our common stock is offered at
$ per share, the midpoint of the range set forth on the cover page of this
prospectus, and is calculated after deducting the estimated underwriting
discounts and offering expenses. The primary purposes of this offering are to
obtain additional equity capital, create a public market for our common stock,
facilitate our future access to public equity markets and increase our
visibility in the marketplace.
We expect to use the net proceeds for general corporate purposes and
working capital. We may use a portion of the net proceeds to acquire or invest
in complementary businesses, technologies, product lines or products. However,
we have no current plans, agreements or commitments regarding any acquisitions
or investments, and we are not currently engaged in any negotiations with
respect to any transactions. Accordingly, we will have broad discretion in the
allocation of the net proceeds of this offering. Pending such uses, the net
proceeds of this offering will be invested in short term, interest-bearing,
investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain our future earnings, if any, for use in the
operation and expansion of our business, and do not anticipate declaring or
paying cash dividends on our common stock for the foreseeable future. In
addition, our existing bank line of credit prohibits the payment of dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and total
capitalization as of December 31, 1999:
. on an actual basis;
. on a pro forma basis to give effect to the acquisition of Underline,
Inc. as if it had occurred on December 31, 1999; and
. on a pro forma basis as adjusted to give effect to the above pro forma
adjustments, as well as the conversion of all outstanding shares of
preferred stock into 10,724,702 shares of common stock upon the closing
of this offering and the sale of shares of common stock in this
offering, at an assumed initial public offering price of $ per share
after deducting estimated underwriting discounts and estimated offering
expenses.
This table should be read in conjunction with our audited financial
statements and the audited financial statements of Underline, Inc. and the
related notes included at the back of this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 8,697 $ 8,610 $
======== ======== ====
Stockholders' equity:
Series C preferred stock, $.001 par value;
1,611,668, 1,611,668 and no shares
authorized, issued, and outstanding for
actual, pro forma, and pro forma as
adjusted.................................... $ 2 $ 2 $
Series B preferred stock, $.001 par value;
2,941,176, 2,941,176, and no shares
authorized, issued, and outstanding for
actual, pro forma, and pro forma as
adjusted.................................... 3 3
Series A preferred stock, $.001 par value;
2,596,957, 2,596,957, and no shares
authorized, issued, and outstanding for
actual, pro forma, and pro forma as
adjusted.................................... 3 3
Common stock, $.001 par value; 31,000,000
shares authorized; 9,925,692, 11,529,410 and
shares issued and outstanding for
actual, pro forma, and pro forma as
adjusted.................................... 10 12
Additional paid-in capital..................... 34,679 42,143
Deferred compensation.......................... (6,468) (6,468)
Subscription receivable........................ (90) (90)
Accumulated deficit............................ (13,947) (13,957)
-------- -------- ----
Total stockholders' equity................... 14,192 21,648
-------- -------- ----
Total capitalization....................... $ 14,192 $ 21,648 $
======== ======== ====
</TABLE>
This table excludes the following shares:
. 5,155,819 shares of common stock issuable upon exercise of outstanding
options on December 31, 1999 at a weighted average exercise price of
$0.75
. 223,874 shares of common stock issuable upon exercise of outstanding
options that we assumed in connection with our acquisition of Underline,
Inc. in January 2000
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $13.9 million or $0.63 per share. Pro forma net tangible book
value per share, which gives effect to our acquisition of Underline, Inc., and
pro forma adjustments to our financial statements as if the acquisition had
occurred on December 31, 1999, is equal to the amount of our total tangible
assets less our total liabilities, divided by the number of outstanding pro
forma shares of our common stock and assuming the conversion of all
outstanding shares of our preferred stock into 10,724,702 shares of common
stock.
New investors who purchase shares in this offering will be diluted to the
extent of the difference between the initial public offering price per share
of our common stock and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving
effect to the issuance and sale of shares of common stock in this offering
at an assumed initial public offering price of $ per share, after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses, our pro forma net tangible book value at December 31, 1999 would
have been $ or $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $ per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share as of December 31,
1999.......................................................... $0.63
Increase in pro forma net tangible book value per share
attributable to new investors.................................
-----
Pro forma net tangible book value per share after this offering..
---
Dilution per share to new investors.............................. $
===
</TABLE>
Assuming the conversion of all outstanding shares of our preferred stock
into 10,724,702 shares of common stock upon the closing of this offering, the
following table sets forth as of December 31, 1999, the differences between
the existing stockholders on a pro forma basis and new investors who purchase
shares of common stock in this offering with respect to the (1) number of
shares of common stock purchased from us, (2) total consideration paid, and
(3) average price paid per share.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
-------------- -------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ % $ % $
New investors................
--- ----- ---- ----- ---
Total...................... 100.0% $ 100.0% $
=== ===== ==== ===== ===
</TABLE>
This table excludes the following shares:
. 5,155,819 shares of common stock issuable upon exercise of outstanding
options on December 31, 1999 at a weighted average exercise price of
$0.75
. 223,874 shares of common stock issuable upon exercise of outstanding
options that we assumed in connection with our acquisition of Underline,
Inc. in January 2000
To the extent outstanding options are exercised, there will be further
dilution to new investors.
20
<PAGE>
SELECTED FINANCIAL DATA
In reading the selected historical and pro forma financial data set forth
below, you should refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our audited financial statements and
related notes and the audited financial statements of Underline, Inc. and the
related notes included elsewhere in this prospectus.
The statements of operations data for each of the years in the three-year
period ended December 31, 1999, and the balance sheet data at December 31,
1998 and 1999 are derived from our financial statements, which have been
audited by KPMG LLP, independent auditors, and are included elsewhere in this
prospectus. The statements of operations data for the years ended December 31,
1995 and 1996 and the balance sheet data at December 31, 1995, 1996 and 1997
are derived from unaudited financial statements which are not included in this
prospectus. The unaudited pro forma statements of operations and balance sheet
data as of and for the year ended December 31, 1999 give effect to the
acquisition of Underline, Inc. and pro forma adjustments to our financial
statements as if the acquisition had occurred on January 1, 1999 and December
31, 1999, respectively.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999
1995 1996 1997 1998 1999 Pro Forma
------ ------ ------- ------- ------- ---------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue............................................................... $3,243 $7,311 $15,608 $19,786 $27,077 $28,803
Operating expenses:
Professional services................................................ 1,935 4,071 9,220 12,688 15,258 16,216
Sales and marketing.................................................. 170 767 1,959 3,034 4,631 4,681
General and administrative........................................... 1,164 2,329 5,452 9,927 13,419 14,149
Stock-based compensation............................................. -- -- 386 181 587 1,985
Amortization of goodwill............................................. -- -- 644 -- -- 1,641
------ ------ ------- ------- ------- -------
Total operating expenses............................................. 3,269 7,167 17,661 25,830 33,895 38,672
------ ------ ------- ------- ------- -------
(Loss) income from operations......................................... (26) 144 (2,053) (6,044) (6,818) (9,869)
Interest (expense) income, net........................................ -- (50) 63 (11) (33) (49)
Income tax (expense) benefit.......................................... (7) (95) 94 -- -- (10)
------ ------ ------- ------- ------- -------
Net loss.............................................................. $ (33) $ (1) $(1,896) $(6,055) $(6,851) $(9,928)
====== ====== ======= ======= ======= =======
Basic and diluted net loss per share.................................. $(0.01) $ -- $ (0.28) $ (0.65) $ (0.70) $ (0.87)
====== ====== ======= ======= ======= =======
Basic and diluted weighted average common shares outstanding.......... 2,402 2,435 6,795 9,245 9,767 11,371
Unaudited pro forma basic and diluted net loss per share assuming
conversion of preferred stock........................................ $ (0.38) $ (0.50)
======= =======
Unaudited pro forma weighted average number of basic and diluted
shares outstanding assuming conversion of preferred stock............ 18,134 19,738
- --------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------
1999
1995 1996 1997 1998 1999 Pro Forma
------ ------ ------- ------- ------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...... $ 46 $ 176 $ 122 $ 4,170 $ 8,697 $ 8,610
Working capital................ 505 463 2,817 6,680 11,747 11,253
Total assets................... 1,289 2,342 6,231 10,813 21,690 30,369
Total stockholders' equity..... 868 870 4,262 8,398 14,192 21,648
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to
future events or the future financial performance of Context Integration,
which involve risks and uncertainties. Actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors," "Business,"
and elsewhere in this prospectus. The following information should be read in
conjunction with the "Selected Financial Data" and our audited financial
statements and accompanying notes, each of which appears elsewhere in this
prospectus.
Overview
Context Integration is a leading Internet professional services firm,
focused on the rapid delivery of innovative and robust web-based business-to-
business, or B2B, solutions. We offer integrated strategy, creative design,
technology architecture, solutions construction and applications management
services to large enterprise clients and select e-businesses.
We specialize in building relationship commerce, digital marketplace and
business intelligence solutions that are secure, reliable and scaleable.
Relationship commerce, a subset of customer relationship management, is
focused on using the web as a channel for personalizing and managing
relationships with customers, suppliers and distributors. A digital
marketplace is the electronic equivalent of a traditional marketplace where
buyers and sellers meet to transact business. Business intelligence solutions
enable organizations to analyze large databases of customers' transactions and
to summarize this information for sales and marketing purposes on the web. Our
solutions typically support large numbers of transactions and users, and are
integrated with the existing systems infrastructure of our clients and their
customers and partners.
History
Context was founded in 1992. Initially, we focused on building strategic
systems using distributed, client-server architectures. Much of our early work
was in the financial services industry. The technical requirements of these
early systems, such as security, reliability and scalability, are similar to
those required by today's B2B solutions.
In late 1996 and early 1997, we built our first Internet-based
applications, and in late 1997 we made the strategic decision to focus
exclusively on the rapid delivery of innovative and robust web-based business
solutions. Recognizing the need for deep technology skills and experience in
building these large-scale, transactional systems, we made technology our core
focus and began to aggressively enhance these capabilities. In the third
quarter of 1997, as part of our strategy to enhance our technical
capabilities, we acquired and integrated Fusion Systems, a firm recognized for
its expertise in CORBA, a technology used for integrating systems. At that
time, we also began to develop ContextWISE, our solution development and
project management methodology, and IAN, our company-wide knowledge management
system.
In 1997 and early 1998, we derived a portion of our revenue from reselling
software products and education services. As we intensified our web solutions
delivery focus, we stopped offering these services to the majority of our
clients. As a result of these decisions, there were several management changes
and we experienced high employee turnover which resulted in decreasing revenue
in the second and third quarters of 1998.
Since 1998, we have achieved several important accomplishments, including:
. the successful recruitment of a new president and chief executive
officer in July 1998 and several other key senior executives and members
of the board of directors
. the creation of a sales and marketing team and the launching of several
initiatives designed to increase the awareness of the Context brand and
create a pipeline of business opportunities
22
<PAGE>
. further development of our methodology, ContextWISE, and the
establishment of critical internal business processes focused on project
quality assurance, risk management and client satisfaction
. the addition of strategy, creative design, and applications management
to our service offerings, which had previously consisted of only
technology architecture and solutions construction
. the further expansion of our branding strategy and creative design
services through the acquisition and integration of Underline, a New
York-based creative design firm, in January 2000
. the expansion of our geographic presence through the opening of three
new regional offices during 1999
Revenue
We typically work on a fixed-price, fixed-time basis. For the most recent
quarter ended December 31, 1999, 78.8% of our revenue was derived from such
fixed-price, fixed-time contracts. The remainder of our revenue was derived
from time and materials contracts.
We usually enter into master services agreements with our clients to
outline the general business and legal terms of our relationship. As specific
projects, or phases, are identified, we enter into project-specific statements
of work that outline the scope, time frame and fees applicable.
Revenue from fixed-price, fixed-time contracts is recognized as services
are performed on the percentage-of-completion method, based on the ratio of
costs incurred to total estimated cost. We closely monitor project progress
through a series of processes designed to help estimate percentage of
completion. A portion of the project fee is typically invoiced in advance and
recorded as deferred revenue. Subsequent invoicing is typically done on a
milestone or predefined timeline basis. We recognize these payments as revenue
upon performance of services. We also perform services on a time and materials
basis. Revenue from time and materials contracts is generally recognized as
services are performed. Our revenue excludes reimbursable expenses charged to
clients. Applications management and support revenue is recognized on a pro-
rata basis for the duration of the contract.
Our revenue fluctuates from quarter-to-quarter based on a variety of
factors, including the number, size and scope of projects, the amount and
timing of our customers' expenditures, consultant utilization rates, effective
billing rates and general economic conditions.
Operating Expenses
Our primary operating expense is for professional services. Professional
services expenses consist of payroll, payroll-related costs and non-
reimbursable travel expenses related to client engagements. The number of
consultants which comprised professional services expenses was 111, 106 and
173 at December 31, 1997, 1998 and 1999. We plan to continue to hire
consultants and expect our professional services expenses to continue to
increase.
Sales and marketing expenses consist primarily of salaries, commissions,
benefits, marketing programs and travel expenses associated with our sales and
marketing efforts. We sell our services through a direct sales force focused
on our target industries and markets. We expect sales and marketing expenses
to increase as we continue to build a direct sales force and expand our
marketing programs.
General and administrative expenses consist of expenses associated with
management, finance and administration, recruiting, training, facilities,
information systems and technology, and depreciation. We expect general and
administrative expenses to continue to increase to support the planned
expansion of our operations and the costs of being a public company.
Stock-based compensation expenses represent the difference between the
exercise prices of options granted to employees and the deemed fair market
value for accounting purposes of our common stock on the grant dates. Stock-
based compensation expense was $386,000 for 1997, $181,000 for 1998 and
$587,000 for 1999.
23
<PAGE>
Results of Operations
The following table presents, for the periods indicated, selected
statements of operations data as a percentage of revenue:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1997 1998 1999
----- ----- -----
(% of revenue)
<S> <C> <C> <C>
Statements of Operations
Data:
Revenue.................. 100.0% 100.0% 100.0%
Operating expenses:
Professional services... 59.1 64.1 56.4
Sales and marketing..... 12.6 15.3 17.1
General and
administrative......... 34.9 50.2 49.6
Stock-based
compensation........... 2.5 0.9 2.2
Amortization of
goodwill............... 4.1 -- --
Loss from operations..... (13.2) (30.6) (25.2)
Net loss................. (12.2) (30.6) (25.3)
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Revenue increased $7.3 million, or 36.9%, to $27.1 million for
1999 from $19.8 million for 1998. This increase was attributable to our shift
to web-based solutions, for which we generally receive higher effective
billing rates, and an increase in both the size and number of our projects
resulting from our hiring additional sales persons in early 1999 to focus on
our efforts to target larger projects.
Professional services. Professional services expenses increased $2.6
million, or 20.3%, to $15.3 million for 1999 from $12.7 million for 1998. This
increase was primarily attributable to the hiring of additional consultants.
As a percentage of revenue, professional services expenses decreased to 56.4%
for 1999 from 64.1% for 1998. This decrease as a percentage of revenue in 1999
was attributable to a combination of higher consultant utilization and
effective billing rates.
Sales and marketing. Sales and marketing expenses increased $1.6 million,
or 52.6%, to $4.6 million for 1999 from $3.0 million for 1998. As a percentage
of revenue, sales and marketing expenses increased to 17.1% for 1999 from
15.3% for 1998. This increase was primarily attributable to the significant
expansion of our direct sales force, the hiring of marketing staff and the
increase in marketing programs in the second half of 1999.
General and administrative. General and administrative expenses increased
$3.5 million, or 35.2%, to $13.4 million for 1999 from $9.9 million for 1998.
General and administrative expenses have increased in absolute dollars each
year as we have continued to add people in general and administrative
departments to support our growth in operations. As a percentage of revenue,
general and administrative expenses decreased slightly to 49.6% for 1999 from
50.2% for 1998. This decrease was primarily attributable to economies of scale
achieved as a result of increasing revenue.
Net loss. As a result of the items described above, net loss increased
$800,000, or 13.2%, to $6.9 million for 1999, from a loss of $6.1 million for
1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue increased $4.2 million, or 26.8%, to $19.8 million for
1998 from $15.6 million for 1997. This increase was attributable to an
increase in the number and size of our projects.
Professional services. Professional services expenses increased $3.5
million, or 37.6%, to $12.7 million for 1998 from $9.2 million for 1997. As a
percentage of revenue, professional services expenses increased to
24
<PAGE>
64.1% for 1998 from 59.1% for 1997. This increase as a percentage of revenue
was attributable to decreased utilization and an increase in the average
number of consultants employed by us during the year.
Sales and marketing. Sales and marketing expenses increased $1.0 million,
or 54.9%, to $3.0 million for 1998 from $2.0 million for 1997. As a percentage
of revenue, sales and marketing expenses increased to 15.3% for 1998 from
12.6% for 1997. This increase was primarily attributable to the expansion of
our direct sales force.
General and administrative. General and administrative expenses increased
$4.4 million, or 82.1%, to $9.9 million for 1998 from $5.5 million for 1997.
As a percentage of revenue, general and administrative expenses increased to
50.2% for 1998 from 34.9% for 1997. This increase was primarily attributable
to our hiring of senior management personnel and the opening of several new
offices.
Net loss. As a result of the items described above, net loss increased $4.2
million to $6.1 million, or 219.4%, for 1998, from a loss of $1.9 million for
1997.
25
<PAGE>
Quarterly Results of Operations
The following table sets forth certain unaudited statements of operations
data for each of the last eight quarters ended December 31, 1999. In the
opinion of management, this information has been prepared on substantially the
same basis as the audited consolidated financial statements appearing
elsewhere in this prospectus, and all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited quarterly results of operations data.
The quarterly data should be read in conjunction with our audited financial
statements and the related notes appearing elsewhere in this prospectus. The
operating results for any quarter should not be considered indicative of
results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................ $ 5,632 $ 5,186 $ 4,309 $ 4,659 $ 5,186 $ 5,278 $ 6,832 $ 9,781
Operating expenses
Professional services.. 3,551 3,509 2,738 2,890 3,035 3,278 3,867 5,078
Sales and marketing.... 756 825 741 712 788 1,054 1,133 1,656
General and
administrative........ 1,401 3,086 2,840 2,600 2,822 3,284 2,921 4,392
Stock-based
compensation.......... 55 44 46 36 63 149 128 247
Amortization of
goodwill.............. -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 5,763 7,464 6,365 6,238 6,708 7,765 8,049 11,373
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations... (131) (2,278) (2,056) (1,579) (1,522) (2,487) (1,217) (1,592)
Interest income
(expense), net........ (13) (23) 1 24 46 19 (45) (53)
Income taxes........... -- -- -- -- (25) 1 30 (6)
------- ------- ------- ------- ------- ------- ------- -------
Net loss............... $ (144) $(2,301) $(2,055) $(1,555) $(1,501) $(2,467) $(1,232) $(1,651)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(% of revenue)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== ===== =====
Operating expenses
Professional services.. 63.0 67.7 63.5 62.0 58.5 62.1 56.6 51.9
Sales and marketing.... 13.4 15.9 17.2 15.3 15.2 20.0 16.6 16.9
General and
administrative........ 24.9 59.5 65.9 55.8 54.4 62.2 42.8 44.9
Stock-based
compensation.......... 1.0 0.8 1.1 0.8 1.2 2.8 1.9 2.5
Amortization of
goodwill.............. -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.............. 102.3% 143.9% 147.7% 133.9% 129.4% 147.1% 117.8% 116.3%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
26
<PAGE>
Revenue. Revenue decreased in the second and third quarters of 1998,
primarily due to a strategic realignment, which caused a significant reduction
of revenue derived from reselling certain products and education services,
which we stopped offering to the majority of our clients, and also due to high
consultant turnover. Over the following three quarters, revenue gradually
increased and effective billing rates increased more than 25% as a result of
our shift in 1998 to web-based solutions. Our number of consultants remained
relatively flat during this period and our utilization rate fluctuated only
slightly. For the remaining two quarters of 1999, revenue increased
significantly, primarily due to increases in sales, enhanced marketing and
increased benefits from our strategic partnerships. Also, our number of
consultants grew from 112 on March 31, 1999 to 173 on December 31, 1999.
Expenses. Professional services expenses decreased in the second and third
quarters of 1998 as a result of high consultant turnover. Professional
services expenses increased during the following five quarters as we added
consultants with the skills necessary to support our shift to web-based
solutions. Sales and marketing expenses remained relatively flat for 1998 and
the first quarter of 1999. Sales and marketing expenses increased beginning in
the second quarter of 1999 as we expanded our direct sales and marketing teams
as well as initiated new marketing programs. General and administrative
expenses increased significantly in the second quarter of 1998 due to a one-
time restructuring charge of $533,000. This charge was incurred in connection
with the relocation of our corporate headquarters from San Francisco,
California to Burlington, Massachusetts, the closing of several small offices
and the costs incurred in connection with the related termination of
employees. We also added facilities and hired additional management for our
larger existing offices. Expenses in the following five quarters remained
relatively flat with the exception of the second quarter of 1999, during which
time expenses increased primarily due to increased recruiting and general
infrastructure expenses. In the fourth quarter of 1999, our general and
administrative expenses increased significantly due to a general increase in
expenditures in all areas, particularly employee bonuses, to support our
growing operations. General and administrative expenses generally decreased as
a percentage of revenue throughout 1998 and 1999, reflecting greater operating
leverage derived from a growing revenue base.
Factors Affecting Operating Results
Our revenue, operating expenses and operating results may vary
significantly from quarter to quarter. The fluctuations may be due to a number
of factors, many of which are beyond our control. These factors include:
. the number and relative size of projects we begin working on or complete
in a given quarter
. increases or decreases in the utilization rates of our consultants
. unexpected delays or changes in the scope of planned or ongoing projects
. our relative success in hiring and retaining qualified consultants and
account managers
. the accuracy of our project cost estimates
. changes in our average project sales cycle or in our pricing or that of
our competitors
Because of the above factors, our quarterly revenue and operating results
are difficult to forecast, and we believe that period-to-period comparisons of
our operating results will not necessarily be meaningful and should not be
relied on as an indication of our future performance.
Liquidity and Capital Resources
We have funded our historical operations primarily through the private
placement of securities and through a bank line of credit. Our cash and cash
equivalents were $8.7 million at December 31, 1999. Our bank line of credit
provides for borrowings of up to $6.0 million. We intend to use any borrowings
under the line of credit for working capital purposes. The interest rate on
amounts borrowed under the line of credit is calculated using the prime rate
plus 0.25% per annum. The credit facility expires in October 2000. The line of
credit is secured by substantially all of our assets and contains customary
covenants and restrictions. At December 31, 1999 we had no outstanding
borrowings under the line of credit.
27
<PAGE>
Net cash used in operating activities was $2.3 million for the year ended
December 31, 1997, $5.0 million for 1998 and $5.8 million for 1999. Net cash
used in investing activities was $1.8 million for the year ended December 31,
1997, $866,000 for 1998 and $1.7 million for 1999, primarily for the purchase
of property and equipment. In 1997, we paid $644,000 for the acquisition of
substantially all of the assets and assumption of certain liabilities of
Fusion Systems Group, Inc. and Fusion Consulting, Inc. Financing activities
provided cash of $4.1 million for the year ended December 31, 1997, $9.9
million for 1998 and $12.0 million for 1999, primarily from the issuance of
preferred stock to investors.
Capital expenditures of $1.2 million in 1997, $866,000 in 1998, and $1.7
million for the year ended December 31, 1999 were primarily made for computer
equipment, office equipment and leasehold improvements related to our growth.
We expect capital expenditures to increase, as we continue to expand our
business operations. We will need to purchase additional computer equipment to
support delivery of our services, office furniture and equipment for our
existing and planned offices and other leasehold and capital expenses
necessary to sustain our operations.
We anticipate that the net proceeds of this offering, together with
existing sources of liquidity and funds generated from operations, should be
adequate to fund our currently anticipated cash needs through at least the
next 18 months. To the extent we are unable to fund our operations from cash
flows, we may need to obtain financing from external sources in the form of
either additional equity or indebtedness. There can be no assurance that
additional financing will be available at all, or that, if available, the
financing will be obtainable on favorable terms.
Recent Event
In January 2000, we acquired all of the outstanding common stock of
Underline, Inc., a creative design firm focused on online marketing, in a
transaction that was accounted for using the purchase method of accounting.
The total consideration for this transaction was $7.6 million. In connection
with the acquisition, we issued 1,603,718 shares of our common stock in
exchange for all of the outstanding shares of common stock of Underline. A
portion of these shares is subject to vesting relating to employment. We also
assumed all outstanding Underline stock options which will be exercisable for
up to 223,874 shares of our common stock. The amount of the consideration
treated as purchase price for this acquisition was approximately $4.8 million,
which we plan to amortize over a three-year period. The additional portion of
the consideration, consisting of approximately $2.8 million of restricted
stock, was recorded as deferred costs and will be recognized as stock-based
compensation ratably over the two-year restrictive period.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in Financial
Statements. SAB No. 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We believe that we have complied with the provisions of SAB No.
101.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. SOP No. 98-1 requires the capitalization of certain internal
costs related to the implementation of computer software obtained for internal
use. This standard, which we adopted in the first quarter of 1999, did not
have any impact on our financial position or our results of operations.
In April 1998, SOP No. 98-5, Reporting on the Costs of Start-Up Activities,
was issued. Under SOP No. 98-5, the costs of start-up activities should be
expensed as incurred. Start-up activities are broadly defined as those one-
time activities relating to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, commencing some new operation or organizing a new
entity. This standard, which we adopted in the first quarter of 1999, did not
have any impact on our financial condition or our results of operations.
28
<PAGE>
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. In order to
distinguish 21st century dates from 20th century dates, the date code field
must be modified to distinguish between 21st and 20th century dates. As a
result, many companies upgraded or replaced their software and computer
systems in order to comply with these Year 2000 requirements. The use of
software and computer systems that are not Year 2000 compliant could result in
system failures or miscalculations resulting in disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.
To date, we have not suffered any disruptions in our systems following
December 31, 1999. In addition, to date, we have not been made aware that any
of our clients or vendors have suffered disruptions in their systems. Failure
of our internal computer systems, third-party equipment or software, or
systems maintained by our clients to operate properly with regard to the Year
2000 could require us to incur significant unanticipated expenses to remedy
any problems.
Qualitative and Quantitative Disclosures About Market Risk
To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We do not expect to employ these or other
strategies to hedge market risk in the foreseeable future. We invest our cash
in money market funds, treasury bills, commercial paper and other securities,
which are subject to minimal credit and market risk. We believe the market
risks associated with these financial instruments are immaterial.
29
<PAGE>
BUSINESS
Overview
Context Integration is a leading Internet professional services firm,
focused on the rapid delivery of innovative and robust web-based business-to-
business, or B2B, solutions. We offer integrated strategy, creative design,
technology architecture, solutions construction and applications management
services to large enterprise clients and select e-businesses.
We specialize in building relationship commerce, digital marketplace and
business intelligence solutions that are secure, reliable and scaleable.
Relationship commerce, a subset of customer relationship management, is
focused on using the web as a channel for personalizing and managing
relationships with customers, suppliers and distributors. A digital
marketplace is the electronic equivalent of a traditional marketplace where
buyers and sellers meet to transact business. Business intelligence solutions
enable organizations to analyze large databases of customers' transactions and
to summarize this information for sales and marketing purposes on the web. Our
solutions typically support large numbers of transactions and users, and are
integrated with the existing systems infrastructure of our clients and their
customers and partners.
As of February 29, 2000, we employed over 330 people who serve clients from
our regional offices in the metropolitan areas of Boston, New York, Houston,
Dallas, Denver, San Francisco, Los Angeles and central New Jersey. Our clients
include large enterprises such as Merrill Lynch, BMG Entertainment, and Merck-
Medco, as well as innovative B2B start-ups such as GoCargo.com,
PaperExchange.com and OnlineAsset.com.
Industry Background
International Data Corporation, or IDC, estimates that the number of
Internet users will grow from 196 million in 1998 to 502 million in 2003. The
Internet enables businesses and consumers to exchange information
electronically, and is radically transforming the way business is conducted.
We believe that companies initially viewed the Internet primarily as an
incremental marketing channel. Companies engaged advertising agencies and
creative design firms to design web sites which displayed general corporate
and product information in a static format. As these corporate web sites drew
increasing numbers of visitors, businesses realized the potential for the
Internet to serve as an online store-front and started to establish basic
business-to-consumer, or B2C, e-commerce capabilities.
While B2C e-commerce was evolving, companies began to further use the
Internet to integrate internal processes with their suppliers, distributors
and key business customers. Today, companies are using the Internet to build
B2B solutions to improve their competitive position by streamlining internal
and external processes and strengthening supplier and trading relationships.
However, the Internet also offers companies the opportunity to conduct
business in new ways. One example is the emergence of B2B digital
marketplaces, the electronic equivalent of a traditional marketplace where
multiple buyers and sellers meet to transact business. Forrester Research,
Inc. estimates that revenue from B2B e-commerce will grow from $406 million in
2000 to $2.7 trillion by 2004, representing a compound annual growth rate of
approximately 61%.
Building the transaction-intensive business systems necessary for effective
B2B interaction requires expertise in complex, web-based technologies beyond
that necessary for merely designing web sites or building basic B2C e-commerce
capabilities. As a result, companies are increasingly turning to outside
Internet professional services providers for assistance. IDC estimates that
the worldwide market for Internet services will grow from $7.8 billion in 1998
to $78.5 billion in 2003, representing a five-year compound annual growth rate
of approximately 59%.
In order to deliver these large-scale, robust B2B solutions, service
providers must have extensive expertise in building complex business solutions
using leading-edge web technologies, and employ a disciplined approach to
development and execution. Companies seeking these solutions are also
demanding rapid time-to-market. We believe that our competitors are not well
prepared to meet these demands.
30
<PAGE>
Competitive Advantages
We integrate strategy, creative design, technology architecture and
solutions construction services. We also offer applications management and
support services for the solutions that we have built. We believe that we have
the extensive skills in, and experience with, leading-edge web technologies,
the rigorous methodology and the project management expertise necessary to
deliver high-quality solutions on-time and on-budget.
We believe that the following factors differentiate us from our
competitors:
Deep technology skills. We have been providing highly advanced technology
solutions since 1992. Our early experience was in building global, real-time
systems using distributed client-server architectures and replication
technology. In 1996, we developed an Internet-based exchange for trading
derivative contracts for commodities, which we believe was one of the first
B2B digital marketplaces. We were also an early adopter of object-oriented and
message-based technologies for building business systems. In early 1997, as
part of our strategy to focus on technology as our core competency, we
acquired and integrated Fusion Systems, recognized for its extensive expertise
in CORBA. Today, we work with several advanced technologies for building
integrated B2B solutions, including Java, CORBA, XML and J2EE, a standard for
building Java-based enterprise solutions. Our experience in working with these
technologies enables us to rapidly build highly-scaleable solutions. We also
partner selectively with some of the Internet industry's leading technology
vendors, such as BroadVision and Art Technology Group. Finally, as of February
29, 2000, our consultants had an average of more than ten years of technology
experience. We believe this is significantly more than that of many of our
competitors.
Early focus on robust B2B solutions. Since our inception we have
specialized in building robust business solutions. The trading systems and
financial exchanges that we built in the early 1990s were typically
transaction intensive, globally distributed, available 24x7, highly secure and
scaleable, and required extensive integration with multiple existing systems.
Today's complex B2B solutions share these same demanding technical
requirements. With the growth of B2B e-commerce and the increasing
participation of large traditional companies in e-business, the size and
complexity of these large-scale integration initiatives have grown. Today, we
are focused primarily on the B2B market and have successfully deployed
innovative B2B solutions for large enterprises such as Merrill Lynch, BMG
Entertainment and Merck-Medco, among others. These projects all required
highly customized and complex technical solutions that were implemented on a
broad scale. We believe that our extensive experience with leading-edge web
technologies and robust business solutions, and our early focus on the B2B
market, provide us with a distinct competitive advantage.
Rapid project delivery model. In today's business environment, time-to-
market is critical. A primary goal of each of our client engagements is to
structure the project so that our clients achieve their business objectives in
the shortest time possible. Our methodology enables rapid delivery of
functionality. From business conceptualization to implementation, our projects
are typically completed in four to five months and, in some cases, even less.
Many of our clients retain us to deliver subsequent projects, each of which
adds additional functionality and is typically completed in two to three
months or less. We can achieve this level of productivity because:
. our consultants are experienced technologists, business analysts and
creative designers who work together in small, focused project teams.
. we are focused in a few areas where we have developed company-wide
competency. These areas include solutions expertise in relationship
commerce, digital marketplaces and business intelligence; industry
expertise in financial services and media and entertainment; and
technology expertise in the products of a select group of leading-edge
web technology vendors.
. our solution centers, located in our local offices, provide a physical
and technical environment that allows project teams to be established
and become productive very quickly.
. we encourage sharing of knowledge, best practices and software across
project teams, offices and industries.
31
<PAGE>
. we typically work on a fixed-price, fixed-time basis, sharing project
and execution risks with our clients. We believe that our rapid project
delivery model and fixed-price, fixed-time approach ensure that our
interests are closely aligned with those of our clients.
Web optimized methodology. ContextWISE is our solution development and
project management methodology, and is based on the widely-used Rational
Unified Process, a software engineering methodology developed by Rational
Software Corporation. We have incorporated several distinct features into this
methodology to support rapid, web-based solution development, including a
creative design process and project management and quality assurance
methodologies. ContextWISE enables us to consistently deliver high-quality web
solutions on-time and on-budget.
Innovative knowledge network. In order to capitalize on our broad base of
experience and best practices, our consultants are strongly encouraged to
share knowledge internally. To support this objective, we have developed our
Intellectual Asset Network, or IAN, a company-wide knowledge repository, and
our Project Enablement Team Environment, or PETE, a tool used on every project
for project team and client collaboration. As part of IAN, we have developed a
growing database of design approaches, templates and software, which we use to
deliver solutions rapidly and cost-effectively across multiple industries and
project teams. Consultants are recognized and financially rewarded for
actively participating in these knowledge sharing programs. Additionally, we
have a dedicated team responsible for supporting and enhancing these tools and
our ContextWISE methodology.
Strategy
Our goal is to become the leading Internet professional services firm
focused on delivering robust B2B solutions. Our strategy to accomplish this
goal is as follows:
Maintain and extend technology leadership. Technology leadership is central
to our mission as a company. We will continue to invest in the training and
research programs required to further develop our technical skills and
identify new technologies to support our mission. For example, we have a
distributed network of architects, an internal network of senior technology
architects, each of whom is responsible for developing a clear competency in a
particular technology. Also, we work with select leading-edge technology
vendors.
Attract and retain world-class information technology consultants. We
believe that our mission and strategy, as well as our culture, give us several
advantages in attracting and retaining highly sought-after professionals. For
example, we believe that a lack of challenging projects and extensive travel
are the primary causes of employee turnover in our industry. We offer our
employees the challenge of building complex B2B solutions using leading-edge
web technologies. Additionally, much of our development work is performed in
our local solution centers, which greatly limits the travel required of our
consultants. Finally, our consultants participate in company-wide,
collaborative knowledge sharing to promote a collective learning culture.
Invest in methodology, quality assurance and client satisfaction
initiatives. We believe that successful client engagements and the resulting
long-term client satisfaction is a key factor in determining our success. We
monitor client satisfaction in several ways, including a quarterly client
survey which is administered by an independent organization. In addition, to
ensure that our clients continue to be satisfied, we will continue to enhance
the project delivery, project management and quality assurance methodologies
in ContextWISE and to enhance our internal project controls.
Focus on Global 1000 clients and select e-businesses. We intend to continue
to target Global 1000 clients, particularly in financial services and media
and entertainment where we have developed specific industry expertise. Our
Global 1000 clients have complex business needs and established technical
infrastructures, and are aggressively seeking to integrate their existing
businesses with new and evolving Internet-based business models. We believe
these clients are attractive because they have traditionally invested heavily
in information
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technology and require innovative B2B solutions to remain competitive.
Additionally, we will continue to work with select B2B start-ups with
innovative business models and strong capital backing.
Expand our partnerships with leading-edge technology vendors. We have
established strong partnerships with select leading-edge technology vendors
such as BroadVision and Art Technology Group, both providers of software for
building personalized e-business solutions, Moai, a provider of software for
auction-based B2B digital marketplaces, and Versata, a provider of software
for automating B2B solutions. These relationships provide us with a range of
benefits, including sales leads and co-marketing opportunities, and access to
training, product support and technology. Also, we are continually evaluating
technology trends to identify emerging technologies and products that could
further enhance the solutions we provide to our clients.
Aggressively promote the Context brand. We believe it is important to build
awareness of the Context brand. To promote our brand, we intend to expand our
corporate marketing and advertising efforts with the objective of reaching
senior business and technology leaders of our target clients. Our objective is
to create recognition of Context as the leading Internet professional services
firm focused on delivering innovative and robust B2B solutions.
Broaden our geographic scope. We seek to further broaden our national
presence and expand internationally by opening new offices in strategic
locations. In particular, we expect to open offices in locations where there
is a strong and evolving technology base and a significant presence of our
target clients, as well as a large pool of qualified information technology
professionals.
Expand our applications management and support services. We have recently
begun to offer applications management and support services for solutions that
we have built for our clients. Many of our clients, and in particular the B2B
start-ups, prefer not to manage and support their web solutions internally. We
intend to expand our applications management and support capabilities, and
offer these as a follow-on service to select clients.
Solutions
We deliver innovative and robust web-based B2B solutions in three areas:
Relationship Commerce. Our relationship commerce solutions are related to
customer relationship management. These solutions are focused on the web as a
channel for managing relationships with customers, suppliers and distributors.
We design these relationship commerce solutions to capture customer profiles
from information provided by customers and by monitoring buying behaviors. Our
solutions create personalized buying experiences through the customization of
content and product suggestions, as well as offering products which build
customer loyalty. Through integration with existing systems, we enable our
clients to more accurately target sales and marketing efforts while gaining
operational efficiencies.
Digital Marketplaces. A digital marketplace is the electronic equivalent of
a traditional marketplace where multiple buyers and sellers meet to transact
business. A digital marketplace is generally highly efficient and offers
substantial potential advantages over traditional markets, including 24x7
availability, access to a larger pool of buyers and sellers across geographic
boundaries, real-time access, more information and more efficient and dynamic
pricing. Today's B2B digital marketplaces provide content and an online
community, as well as the means to complete business transactions
electronically. Increasingly, clients are integrating these marketplaces into
their existing procurement processes and systems to realize enhanced operating
efficiencies.
Business Intelligence. With the proliferation of e-commerce, organizations
are building extensive databases of customer transactions and behaviors. These
databases can be aggregated and analyzed to provide business intelligence for
sales, marketing and other operating purposes. As with traditional data
warehousing, business intelligence solutions will require extensive
integration of existing systems. Web-based business intelligence offers
substantial benefits beyond traditional data warehousing because access to the
web is widely
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available in a cost-effective manner, and the web itself is a data source.
Unlike most traditional data warehouse applications, we expect web business
intelligence solutions to be implemented not only within an organization but
extensively among an organization's customers and partners.
Services
As part of delivering these B2B solutions, we integrate strategy, creative
design, technology architecture and solutions construction services.
Typically, we do not provide these services on a stand-alone basis, but only
as part of an integrated solution offering. We also offer applications
management and support services for customized solutions that we have built.
Our services are described in more detail below.
Strategy. We help our clients evaluate strategic business and technology
opportunities to secure a competitive business advantage on the Internet. This
is often achieved in a facilitated workshop we call a Web Opportunity
Workshop, or WOW. During this process, we help our clients articulate a
business vision and mission, translate this into system requirements, and
establish a high-level technical architecture and creative design direction.
Our WOW facilitation team typically includes senior business analysts with
necessary industry skills, a lead technical architect, and a creative
designer. At the end of the process we deliver a proposed architecture and an
implementation roadmap. The WOW deliverable also includes a client
presentation package designed to highlight the solution and its business
benefits for the client's internal marketing purposes.
Creative design. We help our clients with brand strategy and brand design.
Subsequently, we design and code the web interface using art, colors, shapes
and text. We often use focus groups to assess the attractiveness of certain
design options. In addition, we invest substantial resources designing
interfaces that are ergonomic and functional, criteria which have become
increasingly important in the B2B market. To enhance our creative design
capability, we recently acquired Underline, a New York-based design firm.
Prior to acquiring Underline, we had worked together as partners on ten client
engagements during 1999.
Technology architecture. We design blueprints for building and integrating
solutions into existing systems architectures. Recognizing that technical
infrastructure is the foundation for any high performance solution, we design
a blueprint that identifies the specific technologies and processes that best
suit our clients' needs. The blueprint also defines the interrelationships
between existing systems and the planned solution. In addition, this addresses
the potential opportunities and incompatibilities of existing systems. In this
service, we apply a variety of techniques including object-oriented modeling,
workflow modeling, data modeling and rapid prototyping.
Solutions construction. We build flexible and scaleable e-business
solutions. Flexibility is vital to enhancing the integration of our solutions
with existing systems. Scalability is critical to our clients because they
often experience significant increases in transaction volumes in relatively
short periods of time. Our approach to solutions construction is object-based,
iterative, and is optimized for the development of web business solutions.
Applications management and support. We offer applications management and
support services for solutions that we have built for our clients. We provide
these services only on a limited number of technology platforms where we have
a strategic relationship with the technology vendor and extensive experience
with the products. We are building a centralized support team to provide these
services. This approach takes advantage of our knowledge and applications
expertise while at the same time strengthening our long-term client
relationships.
Clients
We provide B2B solutions to large enterprise and select e-business clients.
In 1999, 76.3% of our total revenue was derived from large enterprise clients.
We are increasingly focusing our marketing efforts on companies in the Global
1000. Although we work for clients across a range of different industries, we
have developed strong industry expertise in financial services and media and
entertainment, and specifically target leading clients in these industries. In
1999, approximately 50% of our total revenue was derived from clients in the
financial services and media and entertainment industries.
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The following is a partial list of clients that we worked for in 1999:
Media and General
Financial Services Entertainment Enterprise B2B Start-ups
- ------------------ ------------- ---------- -------------
Bank Boston Bermuda
Goldman Sachs BMG Entertainment Cisco Systems Commodities
JP Morgan DoubleDay Select Frito-Lay Exchange
Liberty Financial Harcourt Georgia Pacific GoCargo.com
Merrill Lynch Publishing Merck-Medco InsureTrade.com
Morgan Stanley Hearst Netscape NetFreight.com
Dean Witter Distribution Communications OnLineAsset.com
National Health NBC News Rohm and Haas PaperExchange.com
Insurance Nickelodeon Shell Services Vencast
Corporation Direct
Oppenheimer Funds Recording
Robertson Stephens Industry
Scudder Kemper Association of
Investments America
For the year ended December 31, 1999, our five largest clients, DoubleDay
Select, Hearst Distribution, Liberty Financial, Merck-Medco and Merrill Lynch,
accounted for 32.5% of our revenue. For the years ended December 31, 1998 and
1997, Goldman Sachs accounted for 17.0% and 16.0% of our revenue.
Representative Client Engagements
The following examples are representative of our client engagements.
BMG Entertainment
Client description. BMG Entertainment is the $4.6 billion worldwide music
and entertainment division of Bertelsmann AG which had annual revenue of $16.4
billion in 1999. BMG Distribution, the U.S. distribution arm of BMG
Entertainment, distributes more than 600,000 units daily to music and video
retailers nationwide.
Client challenge. With increased competition and changing dynamics in the
recording industry, BMG Distribution needed a B2B website to rapidly and
effectively communicate sales, marketing and inventory management information
to its customers, business partners, record labels and field staff. The
solution needed to be delivered rapidly for launch at an important marketing
event.
Context approach and deliverables. BMG engaged Context to design and build
BMG Central, a B2B portal, which was built around several distributed, Java-
based components. Among the key features which Context developed is a web-
based content management system that enables BMG Distribution to upload
artwork and streaming audio and video clips for immediate access, thereby
dramatically decreasing the time it takes to share these assets. The site also
enables BMG Distribution's customers, field representatives and record labels
to have web-based access to critical sales, marketing and inventory data.
Context was also responsible for the branding and creative design of the web
interface.
Outcomes. The application built for BMG Central has improved communication
and production throughout its distribution network, and enhanced the business
relationships among BMG Distribution's marketing employees, branches, record
labels and customers. Manual processes that sometimes took days to complete
can now be completed much more quickly via BMG Central. Through the use of
Java-based components built by Context, the solution was delivered into
production within fourteen weeks from inception.
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GoCargo.com
Client description. GoCargo.com is a shipping industry innovator which
created the first B2B exchange for international maritime container shipments.
Client challenge. GoCargo.com recognized the opportunity for the web to
dramatically change the container shipping market. Today the industry is
fragmented, and market pricing is inefficient. GoCargo.com needed to provide a
compelling web site to attract buyers and sellers in order to create value
through its innovative business model. Time to market was critical.
Context approach and deliverables. GoCargo.com engaged Context to rapidly
design and build its digital marketplace. Context's engagement began with a
WOW. This enabled the Context/GoCargo.com team to quickly crystallize business
concepts, validate requirements and establish an overall technical and
creative design direction. Based on Moai's platform for auction-based digital
marketplaces, Context created a reverse-auction platform which offers
importers and exporters lower shipping prices gained from online competitive
bidding, instant reach to multiple service providers with a single entry of
their customized shipment request, and elimination of the hassle and cost of
negotiation. GoCargo.com also allows qualified ocean carriers and freight
forwarders to tap into demand on trade routes with excess capacity, extend
their reach to new customers worldwide, and significantly reduce their sales
costs.
Outcomes. The Context team met GoCargo.com's business objectives and
delivered its digital marketplace in 10 weeks. Within the first week of
launch, GoCargo.com exceeded its targets for registered users. Context
continues to work with GoCargo.com to enhance the solution, and is supporting
GoCargo.com through its applications management and support service.
Liberty Financial
Client description. Liberty Financial is an integrated asset accumulation
and management organization that, as of December 31, 1999, managed over $65
billion of assets on behalf of 1.7 million investors worldwide. The company
sells its products through multiple distribution channels, including brokerage
firms, banks and other depository institutions, financial planners and
insurance agents, as well as directly to investors through several
individually-branded business units.
Client challenge. Liberty's objective was to drive new business by selling
its products across several business units while allowing each business unit
to retain its own identity and the flexibility to manage its own products and
content.
Context approach and deliverables. Liberty engaged Context to design and
build a next generation relationship commerce solution. Context implemented a
common e-business technology platform, based on BroadVision technology, across
several business units, built standardized interfaces to the existing systems
of each of the business units, and standardized workflow and processes. This
enabled Liberty to implement sophisticated, personalized e-commerce and one-
to-one marketing capabilities.
Outcomes. The solution has significantly streamlined the content management
process, and enabled Liberty to better manage its customer relationships and
marketing initiatives across business units. The first phase of our project
was completed in less than five months. Context is continuing to work with
Liberty on enhancing and extending this e-commerce solution.
Sales and Marketing
Our sales and marketing efforts are targeted at building and broadening
relationships with Global 1000 clients and select e-businesses. Our clients
are investing significant resources in e-business strategies and systems and
require the complex technology solutions that we provide.
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Sales. As of February 29, 2000, we had 18 industry-focused account
managers, each targeting 12 clients on average. Due to the complex nature of
our solutions, our consultants support our account managers in the sales
process. While our account managers have responsibility for the business
development aspects of a client relationship, they are also responsible for
building and maintaining long-term relationships with clients and, therefore,
work closely with our project teams to ensure the successful completion of all
client projects.
Marketing. As of February 29, 2000, we had eight marketing professionals.
The primary goal of our marketing efforts is to generate leads for our account
managers through:
. Brand recognition and awareness. Our marketing group engages in numerous
branding activities, including public relations initiatives, advertising
campaigns, and other marketing activities.
. Strategic relationships. We maintain a few, select strategic
relationships that allow us to co-market our solutions with those of our
industry-leading partners.
. Field marketing. We build local relationships with our clients by
sponsoring and participating in collaborative events and seminars.
. Packaged services offerings. We have packaged several service offerings,
such as the WOW, that assist clients in assessing their requirements and
developing proposed solutions. These packages also assist our account
managers in qualifying opportunities and accelerating the clients'
decision-making process.
Competition
The market for Internet professional services is intensely competitive and
we expect it to become increasingly so in the future. We believe that the
principal competitive factors in our industry are project management
capabilities, quality of deliverables, speed of solution delivery and the
technical skills of consultants.
Our current competitors include the following:
. Internet professional services firms (such as Sapient, Viant, Scient and
Proxicom)
. information technology consulting and systems integration firms (such as
Andersen Consulting, Cambridge Technology Partners and EDS)
. services divisions of computer hardware and software vendors (such as
IBM and Oracle)
. in-house information technology departments of our current and potential
clients
People and Culture
We consider our people essential to our success as a leading Internet
professional services firm. Therefore, we have built structured programs
designed to attract and retain highly-skilled professionals.
Recruiting. We have a dedicated recruiting team that manages recruiting
like a sales process by focusing on both candidate lead generation and the
achievement of specific quarterly hiring objectives. The recruiters work
closely with the local management and consulting teams. We identify candidates
primarily through referrals from current employees and, to a lesser extent,
responses to advertisements, web site inquiries and university recruiting. In
addition, we use professional search firms to identify candidates for senior
management, technical and sales positions. We need to attract and retain
candidates who want to be challenged, develop their skills, and participate in
innovative projects with industry-leading clients. Our selection process
targets individuals with strong analytical and problem-solving skills who also
exhibit the characteristics that we believe make our corporate culture unique.
These characteristics include teamwork orientation, knowledge-sharing
attitude, and incisive mind. Also, our objective is to attract SWANs: Smart,
hard Working, Ambitious people who are Nice to work with.
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Training and Development. We operate in an environment where technology is
constantly changing and becoming more complex. To ensure that we remain on the
leading edge of technology and continue to develop professional skills, we
have created the following training programs:
. New Employee Orientation. New employees visit our headquarters for a
three week training program during which they meet with senior
management, receive an overview of our ContextWISE methodology and are
introduced to our culture. We believe this orientation program helps to
assimilate new hires quickly into our company.
. Project Management "Boot Camp." All project managers attend a one-week
intensive training program to build their project management skills. In
addition, our project managers acquire an in-depth understanding of our
ContextWISE methodology. This includes a certification in the Rational
Unified Process.
. Technical Training. We encourage and financially reward our employees
who pursue ongoing technical training, third party certifications and
professional development. These programs are organized by our internal
professional development team and by outside technology vendors and
training institutions. We also offer web-based technical training
programs to all of our employees.
Compensation. We believe that by linking employee compensation to our
success through our incentive compensation programs, we instill a sense of
ownership, which results in decisions that maximize our value and employee
retention. Our compensation package consists of a combination of salary,
performance-based incentive compensation, stock options and additional
employer-paid benefits. We believe that we have a supportive and dynamic
environment where hard work and effort are rewarded.
Intellectual Property Rights
Our success is dependent in part on our information technology, some of
which is proprietary, and other intellectual property rights. We rely on a
combination of nondisclosure and other contractual arrangements, technical
measures, and trade secret, copyright and trademark laws to protect our
proprietary rights. We enter into confidentiality agreements with our
employees and attempt to limit access to and distribution of proprietary
information. We cannot be sure that the steps that we have taken will be
adequate to deter misappropriation of our proprietary information or that we
will be able to detect unauthorized use or take appropriate steps to enforce
our intellectual property rights. We have entered into services contracts with
clients that assign rights to certain aspects of the work performed under the
contracts to the clients. We do not believe that such contracts will limit our
ability to render services to other clients. However, we cannot be sure that
we will not receive communications in the future from third parties or clients
asserting that we have infringed or misappropriated the proprietary rights of
such parties.
Employees
As of February 29, 2000, we had a total of 333 employees, including 257
consultants, 26 in sales and marketing and 50 in general and administration
positions. Our future success will depend in part on our ability to attract,
retain and motivate highly qualified technical and management personnel, for
whom competition is intense. None of our employees is represented by a
collective bargaining agreement, and we have never experienced a work
stoppage. We consider our relations with our employees to be good.
Facilities
Our corporate headquarters are located in Burlington, Massachusetts where
we have a lease for approximately 8,600 square feet of space, which expires in
July 2002. We are currently seeking new office space in Boston, Massachusetts
and intend to move our corporate headquarters. Under a lease that expires in
July 2000, we lease approximately 10,600 square feet of space in New York. We
lease additional office space in Atlanta, Georgia; Dallas, Texas; Houston,
Texas; Littleton, Colorado; Los Angeles, California; San Francisco, California
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and Lebanon, New Jersey. We currently plan to lease office space in Chicago,
Illinois and London, United Kingdom. We continually evaluate the adequacy of
existing facilities and the opening of facilities in new cities and believe
that suitable additional space will be available in the future on commercially
reasonable terms as needed.
Legal Proceedings
From time to time, we have been subject to legal proceedings and claims in
the ordinary course of business. Although we are not currently involved in any
material legal proceedings, we expect that we will be subject to legal
disputes in the future. Any claims, even if not meritorious, could result in
the expenditure of significant financial and managerial resources.
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MANAGEMENT
Executive Officers, Directors and Key Employees
Our executive officers, directors, and key employees and their ages and
positions as of February 29, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Teck Chye Lau............. 36 Chairman and Founder
Stephen Sharp............. 41 President, Chief Executive Officer and Director
Donald Joseph 31 Vice President and Chief Creative Officer
Edgerton(/1/)............
Dror Liwer(/1/)........... 32 Vice President and Chief Technology Officer
Keith Vaughan............. 43 Vice President, Western Operations
David Weber............... 33 Vice President, Chief Financial Officer and
Secretary
Terry Yanni............... 37 Vice President, Eastern Operations and Vice
President, Marketing
Robert Davoli(/2/)(/3/)... 51 Director
Christopher Greendale..... 48 Director
Ronald Nordin(/2/)........ 49 Director
Peter Solvik(/3/)......... 41 Director
Michael Stout(/2/)........ 53 Director
Charles McCann(/1/)....... 42 Strategic Services Director
Sean Banchik(/1/)......... 33 Managing Director, Los Angeles
Larry Chandler(/1/)....... 40 Managing Director, Dallas
Mark Grimes(/1/).......... 38 Managing Director, Houston
Michael Hunziker(/1/)..... 39 Managing Director, Boston
Mark Marusin(/1/)......... 41 Managing Director, Denver
Edward Post III(/1/)...... 39 Managing Director, New Jersey
Bruce Strong(/1/)......... 43 Managing Director, San Francisco
Justin Woddis(/1/)........ 36 Managing Director, New York
</TABLE>
- --------
(1) Key employee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Teck Chye Lau was a founder of Context and has served as a director since
October 1992, Chairman of the Board since May 1996 and has held various
additional positions at Context. From 1992 to 1998, Mr. Lau served as National
Manager of Database Services and Vice President of the Western Region of
Context. Mr. Lau co-founded Nobel Technology, a high-technology consulting
company, in 1991, and served as its President and Chief Executive Officer
until September 1992. Prior to that, Mr. Lau held various positions with
Cambridge Technology Group, a systems integrator, and with SQL Solutions, a
relational database management systems consulting and tools company.
Stephen Sharp has been President and Chief Executive Officer of Context
since July 1998 and a director since May 1998. From November 1997 to June
1998, Mr. Sharp was a Senior Vice President at Siebel Systems, a customer
relationship management application software company. From January 1992 to
January 1997, Mr. Sharp served as Vice President of Worldwide Professional
Services at Sybase, a database and tools software company. From January 1997
to August 1997, Mr. Sharp served as Vice President of Customer Service &
Support for Sybase, and from August 1997 to November 1997, he served as its
Senior Vice President of Worldwide Service. From July 1990 to December 1991,
Mr. Sharp was Vice President, European Operations for SQL Solutions, a company
later acquired by Sybase. Prior to July 1990, Mr. Sharp was employed as a
senior manager by Andersen Consulting, a management consulting firm.
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Donald Joseph Edgerton has been Vice President and Chief Creative Officer
of Context since January 2000. From January 1993 to January 2000, Mr. Edgerton
was a founder and the Chief Executive Officer of Underline, Inc., a creative
design firm that was acquired by Context in January 2000. From August 1990 to
December 1993, Mr. Edgerton was an Art Director at Saatchi & Saatchi
Advertising.
Dror Liwer has been Vice President and Chief Technical Officer of Context
since September 1999. Between August 1996 and September 1999, Mr. Liwer served
as Managing Director, and was responsible for managing client engagements and
sales in our New York office. From May 1995 to August 1996, Mr. Liwer served
as Manager of our Application Development Group, and was responsible for
managing all application development engagements in our New York office. From
July 1993 to May 1995, Mr. Liwer was Manager of Client Server Development for
ADL Data Systems, Inc., a developer of integrated software packages for
healthcare and alternative healthcare facilities.
Keith Vaughan has served as Vice President, Western Operations of Context
since December 1999. From February 1999 to December 1999, Mr. Vaughan was Vice
President Americas for Autodesk, a developer of computer-aided drafting
software for design professionals. From October 1991 to February 1999, Mr.
Vaughan was Global Director at Andersen Consulting. From August 1988 to
October 1991, Mr. Vaughan was Regional Manager at Wright Systems/MAI. Prior to
that, Mr. Vaughan served as a Sales Manager for IBM's computer division.
David Weber has been Vice President and Chief Financial Officer of Context
since July 1998. From December 1996 to June 1998, Mr. Weber served as Business
Operations Director of Sybase, Inc., and was responsible for finance and
operations worldwide for Sybase Professional Services. From February 1996 to
December 1996, Mr. Weber was Senior Manager, European Finance & Operations for
Sybase. From June 1994 to January 1996, Mr. Weber served as Worldwide
Operations Manager for Sybase Professional Services. Prior to 1994, Mr. Weber
held various other positions at Sybase and also at Aetna Capital Management,
Inc.
Terry Yanni has served as Vice President, Eastern Operations of Context
since March 1999, and as Vice President, Marketing since May 1999. From
February 1996 to March 1999, Mr. Yanni was Vice President, Consulting at James
Martin, a systems integrator. From March 1994 to February 1996, Mr. Yanni was
Vice President, Consulting for Seer Technologies, Inc., a maker of application
development tools. Prior to that, Mr. Yanni held various positions at Metaphor
Computer Systems, a data warehouse software and service firm and Wang
Laboratories, a computer equipment manufacturer.
Robert Davoli has been a director of Context since March 1997. Mr. Davoli
has served as General Partner of Sigma Partners, a venture capital firm, since
April 1995. He also served as President and Chief Executive Officer of Epoch
Systems, a client-server software company, from February 1993 to September
1994. From May 1986 through June 1992, Mr. Davoli was the President and Chief
Executive Officer of SQL Solutions, which he founded and sold to Sybase, Inc.,
in January 1990. Mr. Davoli also serves on the board of directors of ISS
Group, Inc., and Vignette Corporation.
Christopher Greendale has been a director of Context since February 2000.
Since July 1999, Mr. Greendale has been a Managing Director of Internet
Capital Group, Inc., a business-to-business e-commerce venture capital
company. From January 1999 to July 1999, Mr. Greendale served as a Senior
Partner of Operations of Internet Capital Group. From December 1997 to
December 1998, Mr. Greendale served as an independent management consultant.
In March 1991, Mr. Greendale co-founded Cambridge Technology Partners, where
he served in various capacities until December 1997, most recently as
Executive Vice President, Marketing. Mr. Greendale also serves on the board of
directors of Clarify, Inc., and Breakaway Solutions, Inc.
Ronald Nordin has been a director of Context since August 1998. Mr. Nordin
is a Senior Principal at Atlas Venture, a venture capital firm, and joined
Atlas Venture in April 1998. From August 1992 to February 1997, Mr. Nordin was
Chief Executive Officer of SQA, a developer of software and services for
quality assurance, which was acquired by Rational Software Corporation in
February 1997. From 1982 to 1992, Mr. Nordin held various positions with
Cognos, a supplier of business intelligence software, most recently as Senior
Vice President.
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Peter Solvik has been a director of Context since March 1997. Mr. Solvik
has served as Senior Vice President and Chief Information Officer of Cisco
Systems, Inc. since January 1999. From 1995 to January 1999, Mr. Solvik
serviced as Vice President and Chief Information Officer of Cisco and from
January 1993 to 1995, Mr. Solvik served as Chief Information Officer. Mr.
Solvik also serves on the board of directors of Internet Capital Group, Inc.,
Cohera and Asera.
Michael Stout has been a director of Context since January 2000. Mr. Stout
has served as Vice President and Corporate Technology and Information Officer
of GE Capital since October 1998. From 1995 to September 1998, Mr. Stout was
Senior Vice President and Corporate Information Officer of Global Consumer
Finance at GE Capital. From 1989 to 1991, Mr. Stout served as General Manager
of Application Development at Galileo Europe a developer of a travel
reservation system in Europe, and from 1991 to 1995 he served as its Vice
President of Product Development.
Charles McCann has served as Strategic Services Director of Context since
September 1999. He is currently responsible for all strategic technology,
methodology, client satisfaction, quality and training initiatives at Context,
including our methodology and knowledge management systems, ContextWISE and
IAN. From January 1997 through August 1999, Mr. McCann served as Director of
Strategic Services of Sybase, Inc. From July 1996 through January 1997, Mr.
McCann served as Architecture Practice Director of Sybase. Mr. McCann served
as a Lead Architect at Sybase from 1994 to July 1996. From 1983 to 1994, Mr.
McCann held a variety of technology consulting and management positions with
Digital Equipment Corporation, a computer hardware manufacturer. From 1980 to
1983, Mr. McCann held a number of technology engineering positions with
General Electric, and from 1978 to 1980, Mr. McCann was an educator with
Digital Equipment Corporation.
Sean Banchik has been Managing Director, Los Angeles of Context since April
1999. From April 1998 to April 1999, Mr. Banchik was the managing principal of
World Class Business Solutions, Inc., an IT strategy and management consulting
firm. From December 1995 to April 1998, Mr. Banchik was Director of Operations
at Cambridge Technology Group. From June 1988 to December 1995, Mr. Banchik
held various operations, methodology development, and client management
positions at Cambridge Technology Partners.
Larry Chandler has been Managing Director, Dallas of Context since June,
1999. From November 1998 to June 1999, Mr. Chandler was Dallas Regional
Manager for product and professional services at Sybase, Inc. From January
1996 to November 1998, Mr. Chandler held a various management positions at
Sybase, where he was responsible for delivery and staff management of
professional services. Prior to Sybase, Mr. Chandler held various management
positions at IMI Systems, Inc., a provider of IT consulting services, and CAP
Gemini America, a provider of IT and management consulting services.
Mark Grimes has been Managing Director, Houston of Context since June 1999.
From September 1997 to June 1999, Mr. Grimes was Director Business Development
at MCI Systemhouse, the e-business solutions group for Electronic Data
Systems, Inc., a provider of technology, business process management,
management consulting and electronic business services. From February 1996
through August 1997, Mr. Grimes held various operations management positions
at Oracle Corporation where he specialized in design and deployment of data
marts and data warehouses. From February 1992 to February 1996, Mr. Grimes
served as Regional Director for Descartes-Roadshow, a provider of logistics
and supply chain automation applications and services.
Michael Hunziker has been Managing Director, Boston of Context since July
1998. From January 1998 to June 1998, Mr. Hunziker held the position of
Director, Security Services at Cambridge Technology Partners. From January
1997 to January 1998, Mr. Hunziker served as Director of Network Services,
West Coast of Cambridge Technology Partners. From May 1994 to January 1997,
Mr. Hunziker held the position of Project Manager in the Network Services
Group of Cambridge Technology Partners. Prior to May 1994, Mr. Hunziker held
various positions at I-Net.
Mark Marusin has been Managing Director, Denver of Context since January
1999. From June 1996 to December 1999, Mr. Marusin was the Rocky Mountain
Professional Services Practice Director at Sybase, Inc.
42
<PAGE>
From October 1992 to May 1996, Mr. Marusin held various management and
technical positions at Sybase, Inc. Prior to October 1992, Mr. Marusin worked
at Martin Marietta, Inc., an airframe supplier to U.S. military and commercial
customers which merged with and into Lockheed corporation in March 1995.
Edward Post III has been Managing Director, New Jersey of Context since
April 1999. From May 1991 to March 1999, Mr. Post held a number of management
positions at James Martin, most recently as Managing Director responsible for
the Financial Services practice in North America. From November 1982 to April
1991, Mr. Post held various positions within KPMG's Information Technology
consulting organization. Prior to November 1982, Mr. Post held various
positions at Pagenet.
Bruce Strong has been Managing Director, San Francisco of Context since
April 1999. Mr. Strong is one of the founders of Context. From November 1997
through April 1999, Mr. Strong served as Vice President of Strategic Services,
where he developed the ContextWISE methodology and its knowledge management
system IAN. From January 1995 to November 1997, Mr. Strong served as Director
of Applications Services of Context. From September 1992 through January 1995,
Mr. Strong served in various positions at Context. Before co-founding Context
in September 1992, Mr. Strong was a systems programmer for Stanford
University.
Justin Woddis has been Managing Director, New York of Context since
November 1999. From May 1999 to November 1999, Mr. Woddis served as Financial
Services Practice Manager of Context. From February 1998 to April 1999, Mr.
Woddis served as a senior manager within Financial Services Marketing for
Sybase, Inc. From July 1992 to February 1998, Mr. Woddis held a number of
management positions at Sybase including practice manager in the Professional
Services Division and Consulting Manager for the New York office. Prior to
July 1992, he was a manager at Andersen Consulting's capital markets practice
in London.
Board Composition
Our board of directors is comprised of eight individuals and we currently
have one vacancy. Each director is currently elected for a period of one year
at our annual meeting of stockholders and serves until the next annual meeting
or until his or her successor is duly elected and qualified.
Board Committees
Our board of directors currently has two standing committees, an audit
committee and a compensation committee.
Audit Committee. The board established an audit committee in October 1997,
which currently consists of Robert Davoli, Ronald Nordin and Michael Stout.
The audit committee has the following responsibilities:
. make such examinations as are necessary to monitor our corporate
financial reporting and the internal and external audits, including
continuing auditor independence
. provide to the board the results of its examinations and recommendations
derived from such examinations
. outline to the board improvements made, or to be made, in internal
accounting controls
. nominate, monitor, and, if necessary, replace our independent auditors
. provide such additional information and materials as it may deem
necessary to make the board aware of significant financial matters that
require board attention
Compensation Committee. The board established a compensation committee in
October 1997, which currently consists of Peter Solvik and Robert Davoli. The
compensation committee has the following responsibilities:
. review our executive compensation policy
43
<PAGE>
. administer our stock purchase and stock option plans
. make recommendations to the board regarding such matters
Director Compensation
Our directors currently do not receive any cash compensation for their
services as members of the board of directors or any committees, but directors
are reimbursed for reasonable expenses incurred in connection with attendance
of board or committee meetings. Some of our non-employee directors have
received grants of options to purchase shares of our common stock. See
"Certain Transactions--Stock Option Grants to Non-employee Directors." Our
1997 Stock Plan permits us to make grants to non-employee directors.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, all compensation decisions were made by the board
of directors. No interlocking relationship exists between our board of
directors or compensation committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
Executive Compensation
The following table sets forth information concerning total compensation
received by our chief executive officer and each of our most highly
compensated executive officers in 1999 whose salary and bonus was more than
$100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying All other
Name and Principal Position Salary Bonus Options Compensation
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Stephen Sharp............... $200,000 $58,338 490,528 $4,306(/2/)(/3/)
President, Chief Executive
Officer and Director
Keith Vaughan(/1/).......... 10,641 -- 180,000 --
Vice President, Western
Operations
David Weber................. 138,333 25,210 45,000 3,629(/2/)(/4/)
Vice President, Chief
Financial Officer and
Secretary
Terri Yanni................. 126,923 45,833 180,000 2,500(/2/)
Vice President, Eastern
Operations
</TABLE>
- --------
(1) Mr. Vaughan joined Context Integration in December 1999.
(2) Includes our $2,500 matching contribution to the individual's 401(k) plan.
(3) Includes payout of $1,806 for unused sick time in connection with our
discontinued sick leave policy.
(4) Includes payout of $1,129 for unused sick time in connection with our
discontinued sick leave policy.
44
<PAGE>
Options Granted in 1999
The following table sets forth information concerning stock options granted
in 1999 to the executive officers included in the summary compensation table.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------
Potential Realized Value at
Number of Percent of Assumed Annual Rates of
Securities Total Options Stock Price Appreciation for
Underlying Granted to Exercise Options Term
Options Employees in Price Per Expiration -----------------------------
Name Granted Fiscal Year Share Date 5% 10%
---- ---------- ------------- --------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Sharp........... 490,528 16.8% $1.25 11/16/09 $385,613 $ 977,219
Keith Vaughan........... 180,000 6.1 4.50 12/13/09 509,405 1,290,931
David Weber............. 45,000 1.5 .50 5/26/09 14,150 35,859
Terri Yanni............. 180,000 6.1 .50 4/19/09 56,601 143,437
</TABLE>
The options in this table are nonstatutory stock options granted under our
1997 Stock Plan and have exercise prices equal to the fair market value of our
common stock on the date of grant. These options have ten-year terms and vest
over a period of four years as follows:
. 25% of the shares subject to the option vest on the first anniversary of
the vesting commencement date
. 1/48th of the shares subject to the option vest each month after the
first anniversary date of the vesting commencement date
The figures representing percentages of total options granted to employees
in the last fiscal year are based on an aggregate of 2,925,866 options granted
by us during the fiscal year ended December 31, 1999 to our employees and
consultants, including the executive officers named in the summary
compensation table.
Under rules promulgated by the SEC, the amounts in the last two columns
represent the hypothetical gain or option spread that would exist for the
options in this table based on assumed stock price appreciation from the date
of grant until the end of such options' ten-year terms at assumed annual rates
of 5% and 10%. The 5% and 10% assumed annual rates of appreciation are
specified in the SEC rules and do not represent our estimate or projection of
future stock price growth. We do not necessarily agree that this method can
properly determine the value of an option. Actual gains, if any, on stock
option exercises will depend on the future performance of the common stock and
the date on which the options are exercised.
1999 Aggregated Option Exercises and Year-End Option Values
The following table sets forth information, as to the executive officers
included in the summary compensation table, regarding options exercised during
1999 and the number of shares subject to both exercisable and unexercisable
stock options as of December 31, 1999. Also reported are values for in-the-
money options that represent the positive spread between the exercise prices
of these options and the fair market value of our common stock as determined
by our board of directors as of December 31, 1999, which was $5.00.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Number of Shares December 31, 1999 December 31, 1999
Acquired upon --------------------------------- -------------------------
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ---------------- -------------- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Sharp........... -- -- 546,250 1,324,278 $2,550,987 $5,733,093
Keith Vaughan........... -- -- -- 180,000 -- 810,000
David Weber............. 25,000 $18,750 22,812 132,188 102,654 594,846
Terri Yanni............. -- -- -- 180,000 -- 810,000
</TABLE>
45
<PAGE>
Stock Plans
1993 Stock Option Plan
Our 1993 Stock Option Plan provides for the grant of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code, as
amended, or the Code, and nonstatutory stock options. As of January 31, 2000,
there were options to purchase 349,903 shares of our common stock outstanding
under the 1993 Stock Option Plan. In connection with the adoption of our 1997
Stock Plan, we stopped granting options under the 1993 Stock Option plan.
1997 Stock Plan
Our 1997 Stock Plan, or 1997 Plan, provides for the grant of incentive
stock options to employees and for the grant of nonstatutory stock options and
stock purchase rights to employees, directors and consultants. As of January
31, 2000, a total of 4,033,767 shares of common stock were reserved for
issuance under the 1997 Plan.
Our board of directors or an administrator appointed by our board may
administer our 1997 Plan. The plan administrator has the power to determine
the terms and conditions of the options granted, including:
. the exercise price
. the number of shares of common stock subject to each option
. the exercisability thereof
. the form of consideration payable upon such exercise
In addition, the plan administrator has the authority to amend, suspend or
terminate our plan, provided that no such action may affect any share of
common stock previously issued and sold or any option previously granted under
our plan.
Options granted under our 1997 Plan are not generally transferable by the
optionee. Each option is exercisable during the lifetime of the optionee only
by the optionee. Options granted under our 1997 Plan must generally be
exercised within three months of the end of optionee's status as an employee,
consultant or director of Context, or within twelve months after such
optionee's termination by death or disability. However, an option may never be
exercised later than the expiration of its term.
The exercise price of all incentive stock options granted under the 1997
Plan is determined by the administrator, but must be at least equal to the
fair market value of the common stock on the date of grant. With respect to
any participant who owns stock possessing more than 10% of the voting power of
all classes of our outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date. The exercise price of nonstatutory stock options
granted under the 1997 Plan is determined by the administrator, but must be
equal to at least 85% of the fair market value on the grant date. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of our outstanding capital stock, the exercise price of any
nonstatutory stock option granted must equal at least 110% of the fair market
value on the grant date. The term of all other options granted under the 1997
Plan may not exceed ten years. However, the term of incentive stock options
granted to any participant who owns stock with more than 10% of the voting
power of all classes of our outstanding capital stock cannot exceed five
years.
Our 1997 Plan provides that in the event of a merger of Context with or
into another corporation, each option shall be assumed or an equivalent option
substituted by the successor corporation. If the outstanding options are not
assumed or substituted as described in the preceding sentence, the options
shall accelerate and become fully exercisable immediately prior to, and shall
terminate as of, the date of the merger.
46
<PAGE>
Underline, Inc. 1999 Stock Option Plan
In connection with our acquisition of Underline, Inc. in January 2000, we
assumed all of the stock options outstanding under Underline's 1999 Stock
Option Plan. These stock options are exercisable for shares of our common
stock and as of January 31, 2000, there were options to purchase 223,874
shares of our common stock outstanding under the plan. No additional options
will be granted under this plan.
Change in Control Arrangements
Our offer letter to Stephen Sharp dated May 1998 and Mr. Sharp's stock
option agreement dated December 1999 provide that if we merge with another
corporation and our voting securities outstanding immediately prior to the
merger represent less than 50% of the total voting power of the surviving
entity immediately after the merger, then the unvested portion of Mr. Sharp's
stock options will immediately vest.
Limitations of Liability and Indemnification Matters
Our amended and restated certificate of incorporation will eliminate the
personal liability of our directors to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a corporation will not
be personally liable for monetary damages for breach of their fiduciary duty
as a director, except for any of the following:
. any breach of the director's duty of loyalty to Context or to its
stockholders
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law
. unlawful payments of dividends or unlawful stock repurchases or
redemptions
. any transaction from which a director derives an improper personal
benefit
In addition, as permitted by Delaware law, our amended and restated bylaws
will provide for the following:
. we must indemnify our directors and executive officers to the fullest
extent permitted by Delaware law
. we may indemnify our other officers, employees and agents to the fullest
extent permitted by Delaware law
. we must advance all expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding related to the
above, subject to limited exceptions
We believe that indemnification under our bylaws covers at least negligence
and gross negligence on the part of an indemnified party.
We also intend to enter into separate indemnification agreements with each
of our directors and executive officers prior to the offering. These
agreements will provide for the following:
. we must indemnify the director or officer against expenses (including
attorney's fees), judgments, fines, penalties and settlements paid by
the individual in connection with any action, suit or proceeding arising
out of the individual's status or service as a director or officer of
Context (other than liabilities arising from willful misconduct or
conduct that is knowingly fraudulent or deliberately dishonest)
. we must advance expenses incurred by the individual in connection with
any proceeding against the individual with respect to which he or she
may be entitled to indemnification by us
We believe that our certificate of incorporation and bylaw provisions and
indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. Following the completion of this offering,
we also plan to maintain directors' and officers' liability insurance.
47
<PAGE>
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also have the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if successful,
might otherwise benefit us and our stockholders. Furthermore, a stockholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers pursuant to these
indemnification provisions.
We are not aware of any pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
sought, required or permitted. Furthermore, we are not aware of any threatened
litigation or proceeding that might result in a claim for indemnification.
48
<PAGE>
CERTAIN TRANSACTIONS
Preferred Stock Financings
In March 1997, we issued and sold an aggregate of 2,596,957 shares of our
Series A Preferred Stock (which are convertible into 3,895,435 shares of our
common stock) at a price of $1.92533 per share. In July 1998, we issued and
sold an aggregate of 2,941,176 shares of our Series B Preferred Stock (which
are convertible into 4,411,764 shares of our common stock) at a price of $3.40
per share. In December 1999, we issued and sold an aggregate of 1,611,668
shares of our Series C Preferred Stock (which are convertible into 2,417,502
shares of our common stock) at a price of $7.4457 per share. The following
table summarizes the shares of capital stock purchased by executive officers,
directors and five-percent stockholders and their affiliates in these
transactions:
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Preferred Preferred
Investor Stock Stock Stock
-------- --------- --------- ---------
<S> <C> <C> <C>
Internet Capital Group, Inc. ..................... 1,376,387 760,553 235,794
Entities affiliated with Sigma Partners........... 908,935 502,242 155,712
Entities affiliated with Atlas Venture............ -- 1,441,764 159,087
GE Capital Equity Investments, Inc................ -- -- 805,834
Peter Solvik...................................... 25,969 17,647 4,813
Entities affiliated with Regan Coleman............ -- 57,647 160,839
Teck Chye Lau..................................... -- -- 8,054
David Smith....................................... -- -- 13,423
Stephen Sharp..................................... -- -- 13,423
David Weber....................................... -- -- 5,368
</TABLE>
Christopher Greendale, a director of Context, is a managing director of
Internet Capital Group, Inc. Robert Davoli, a director of Context, is a
general partner of Sigma Partners. Ronald Nordin, a director of Context, is a
Senior Principal at Atlas Venture. Michael Stout, a director of Context, is
Vice President and Corporate Technology and Information Officer for GE
Capital.
Loans to 5% Stockholder
From March 1998 through December 1998, we made three general loans to David
Smith. As of January 31, 2000, the total amount outstanding on these loans was
$128,000. The loans are evidenced by promissory notes that bear annual simple
interest at rates ranging from 4.52% to 5.69%, are secured by shares of our
common stock owned by Mr. Smith and are due on dates ranging from March 2003
to December 2003. The most recent loan for $60,000 was made in December 1998,
in accordance with a settlement agreement and mutual release between us and
Mr. Smith in connection with Mr. Smith's resignation from Context. In addition
to the loan, Mr. Smith also received a $27,000 settlement payment from us.
Stock Option Grants to Non-Employee Directors
In April 1997, we granted to Peter Solvik an option to purchase 37,500
shares of our common stock at a purchase price of $0.33 per share. The option
vests over a four-year period. In September 1998, we granted to Christopher
Greendale an option to purchase 49,500 shares of our common stock at a
purchase price of $0.50 per share. The option was issued in connection with a
consulting agreement that we entered into with Mr. Greendale under which he
provides business strategy advice to us. The option vests monthly at the rate
of 1/24th per month, provided that Mr. Greendale is then providing business
strategy advice to us. Mr. Greendale was appointed a director of Context in
February 2000 and is a Managing Director of Internet Capital Group, Inc.
49
<PAGE>
Certain Business Relationships
One of our clients, GoCargo.com, is a portfolio company of Atlas Venture,
an investor in Context. Ron Nordin, a member of our board of directors, is
also a Senior Principal at Atlas Venture. Axel Bichara of Atlas Venture is a
member of the board of directors of GoCargo.com. In 1999 we recorded revenue
of approximately $775,000 from projects for GoCargo.com. We are currently
discussing possibilities of additional projects with GoCargo.com.
During 1999 and the first quarter of 2000, we also performed services for
Open Ratings, Inc., an Atlas Venture portfolio company, for which we had
recorded approximately $769,000 in revenue as of January 31, 2000. We continue
to perform services for Open Rating Inc. and are currently performing services
for an estimated $350,000. Axel Bichara of Atlas Venture is a member of the
board of directors of Open Ratings, Inc.
We currently perform services for Logistics.com, an Internet Capital Group
portfolio company, and have recorded approximately $13,000 in revenue from
such services as of January 31, 2000. We are currently negotiating the terms
of potential future projects. Chris Greendale is a Managing Director of
Internet Capital Group and also serves as a member of our board of directors.
We are now currently performing services for EmployeeLife.com, an Internet
Capital Group portfolio company. However, as of January 31, 2000 we have not
recorded any revenue from services rendered to EmployeeLife.co, an Internet
Capital Group portfolio company.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of our common stock as of January 31, 2000, and as adjusted to
reflect the sale of the shares of common stock to be sold in this offering, by
the following persons and entities:
. each person or entity who owns beneficially 5% or more of our
outstanding common stock
. each of the members of our board of directors
. each of our executive officers included in the summary compensation
table
. all members of our board of directors and executive officers as a group
Under rules promulgated by the SEC, the number and percentage of shares
beneficially owned is determined in accordance with Rule 13d-3 of the Exchange
Act, and the information is not necessarily indicative of beneficial ownership
for any other purpose. Under such rule, beneficial ownership includes (1) any
shares as to which the individual or entity has voting power or investment
power and (2) any shares which the individual or entity has the right to
acquire within 60 days of January 31, 2000 through the exercise of any stock
option or other right. Unless otherwise indicated in the footnotes, each
person or entity has sole voting and investment power (or shares such powers
with his or her spouse) with respect to the shares shown as beneficially
owned.
<TABLE>
<CAPTION>
Percent Beneficially Owned(2)
Shares ------------------------------
Name of Beneficial Owner(1) Beneficially Owned Before Offering After Offering
--------------------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Internet Capital Group, 3,559,101 15.9% %
Inc. .......................
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
David Smith.................. 2,660,134 11.9
Regan Coleman(/3/)........... 2,433,804 10.9
Entities affiliated with 2,401,275 10.7
Atlas Venture(/4/)..........
222 Berkeley Street, Suite
1950
Boston, MA 02116
Entities affiliated with 2,350,333 10.5
Sigma Partners(/5/).........
2884 Sand Hill Road, Suite
121
Menlo Park, CA 94025
Bruce Strong................. 1,560,000 7.0
GE Capital Equity 1,208,751 5.4
Investments, Inc............
120 Long Ridge Road
Stamford, CT 06927
Christopher Greendale(/6/)... 3,596,226 16.1
Ronald Nordin(/7/)........... 2,401,275 10.7
Robert Davoli(/8/)........... 2,350,333 10.5
Teck Chye Lau................ 2,112,081 9.4
Michael Stout(/9/)........... 1,208,751 5.4
Stephen Sharp(/10/).......... 652,634 2.9
Peter Solvik(/11/)........... 99,986 *
David Weber(/12/)............ 64,302 *
Keith Vaughan................ -- --
Terri Yanni.................. -- --
All executive officers and
directors as a group
(10 persons)(/13/).......... 12,485,588 55.8
</TABLE>
- --------
* Less than 1% beneficially owned.
51
<PAGE>
(1) Except as otherwise noted, the address of each person listed on the table
is c/o Context Integration, Inc., One Van de Graaff Place, Suite 104,
Burlington, MA 01803.
(2) Number and percentage of shares beneficially owned is based on 22,393,178
shares outstanding as of January 31, 2000 and assumes no exercise of the
underwriters' overallotment option. 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.
Shares of common stock subject to options currently exercisable or
exercisable within 60 days of January 31, 2000 are deemed to be
outstanding and to be beneficially owned by the person holding such
options for the purpose of computing the number of shares beneficially
owned and the percentage of such person or entity holding such securities
but are not outstanding for the purpose of computing the percentage of
any other person or entity. Except as indicated by footnotes to the
table, and subject to the applicable community property laws, based on
information provided by the persons shown in the table, such persons have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(3) Includes an aggregate of 327,728 shares held by two partnerships of which
Mr. Coleman is the General Partner. Mr. Coleman disclaims beneficial
ownership of all such shares except to the extent of his pecuniary
interest therein. Also includes 6,075 shares held by Mr. Coleman's
spouse, as to which Mr. Coleman disclaims beneficial ownership.
(4) Includes 2,350,177 shares held by Atlas Venture Fund III, L.P. and 51,099
shares held by Atlas Venture Entrepreneurs' Fund III, L.P.
(5) Includes 1,660,180 shares held by Sigma Partners III, L.P., 644,431
shares held by Sigma Associates III, L.P. and 45,721 shares held by Sigma
Investors III, L.P.
(6) Includes 3,559,101 shares held by Internet Capital Group, Inc. Mr.
Greendale is a managing director of Internet Capital Group and disclaims
beneficial ownership of all shares except to the extent of his pecuniary
interest therein. Also includes 37,125 shares subject to options
exercisable within 60 days of January 31, 2000.
(7) Includes 2,350,177 shares held by Atlas Venture Fund III, L.P. and 51,099
shares held by Atlas Venture Entrepreneurs' Fund III, L.P. Mr. Nordin is
a Senior Principal of Atlas Venture and disclaims beneficial ownership of
all shares except to the extent of his pecuniary interest in the
partnerships.
(8) Includes 1,660,180 shares held by Sigma Partners III, L.P., 644,431
shares held by Sigma Associates III, L.P. and 45,721 shares held by Sigma
Investors III, L.P. Mr. Davoli is a general partner of Sigma Partners and
disclaims beneficial ownership of all shares except to the extent of his
pecuniary interest in the partnerships.
(9) Includes 1,208,751 shares held by GE Capital Equity Investments, Inc. Mr.
Stout is Corporate Technology and Information Officer of GE Capital. Mr.
Stout disclaims beneficial ownership of such shares.
(10) Includes 632,500 shares subject to options exercisable within 60 days of
January 31, 2000.
(11) Includes 27,343 shares subject to options exercisable within 60 days of
January 31, 2000.
(12) Includes 31,250 shares subject to options exercisable within 60 days of
January 31, 2000.
(13) Includes an aggregate of 728,218 shares subject to options exercisable
within 60 days of January 31, 2000.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the closing of the sale of the shares offered hereby, and the
filing of our amended and restated certificate of incorporation, our
authorized capital stock will consist of shares of common stock, $0.001
par value, and shares of preferred stock, $0.001 par value.
Common Stock
As of January 31, 2000, there were 22,393,178 shares of common stock
outstanding that were held of record by approximately 108 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
3 for 2 ratio. There will be shares of common stock outstanding (assuming
no exercise of the underwriters' over-allotment option) after giving effect to
the sale of the shares of common stock offered hereby.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably any dividends that may be declared from time
to time by the board of directors out of funds legally available for that
purpose. In the event of a liquidation, dissolution or winding up of Context,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior rights of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the common stock. All outstanding shares
of common stock are fully paid and non-assessable.
Preferred Stock
Upon the closing of this offering, each outstanding share of preferred
stock will be converted into one and one-half shares of common stock. See note
8 to financial statements for a description of this preferred stock.
Effective upon the closing of this offering, Context will be authorized to
issue 5,000,000 shares of undesignated preferred stock. The board of directors
will have the authority to issue the undesignated preferred stock in one or
more series and to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series of undesignated preferred stock, and to fix the number
of shares constituting any series and the designation of a series, without any
further vote or action by the stockholders. The issuance of preferred stock
may have the effect of delaying, deferring or preventing a change in control
of Context without further action by the stockholders and may adversely affect
the voting and other rights of the holders of common stock. At present, we
have no plans to issue any shares of preferred stock.
Registration Rights of Stockholders
The holders of 19,886,701 shares of common stock or their transferees are
entitled to rights to register these shares, called "registrable securities,"
under the Securities Act. These rights are provided under the terms of an
agreement between Context and the holders of registrable securities. Subject
to limitations in this agreement, the holders of the registrable securities
may require, on three occasions at any time after six months from the
effective date of this offering, that Context use its best efforts to register
the registrable securities for public resale, provided that the proposed
aggregate proceeds equal at least $3,000,000. If we register any of our common
stock, either for our own account or for the account of other security
holders, the holders of registrable securities are entitled to include their
shares of common stock in the registration. A holder's right to include shares
in an underwritten registration is subject to the ability of the underwriters
to limit the number of shares included in this offering. All fees, costs and
expenses of these registrations must be borne by Context and all selling
expenses (including underwriting fees, discounts, selling commissions and
stock transfer taxes) relating to registrable securities must be borne by the
holders of the securities being registered, subject to certain exceptions.
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Anti-Takeover Provisions of Delaware Law and Charter Provisions
The provisions of Delaware law, our certificate of incorporation and our
bylaws described below may have the effect of delaying, deferring or
discouraging another person or entity from acquiring control of our company.
Delaware Law
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations from engaging, under limited circumstances, in a
"business combination," which includes a merger or sale of more than 10% of
the corporation's assets, with any "interested stockholder," or a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of stockholders, for three years following the date
that the stockholder became an "interested stockholder" unless:
. the transaction is approved by the board prior to the date the
"interested stockholder" attained that status
. upon the closing of the transaction that resulted in the stockholder's
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 or
. on or subsequent to the date the "business combination" is approved by
the board and authorized at an annual or special meeting of stockholders
by at least two-thirds of the outstanding voting stock that is not owned
by the "interested stockholder"
A Delaware corporation may "opt out" of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholder's
amendment approved by at least a majority of the outstanding voting shares.
However, we have not "opted out" of this provision. Section 203 could prohibit
or delay mergers or other takeover or change-in-control attempts and,
accordingly, may discourage attempts to acquire us.
Charter and Bylaw Provisions
Our amended and restated bylaws that will be effective after the offering
will provide that any action required or permitted to be taken by our
stockholders at an annual meeting or a special meeting of the stockholders may
only be taken if it is properly brought before the meeting, including having
provided required notice. Our stockholders may not take any action by written
consent instead of by a meeting. Our amended and restated certificate of
incorporation will provide that our board of directors may issue preferred
stock with voting or other rights without stockholder action. Our bylaws
provide that special meetings of the stockholders may only be called by our
board, the chairman of our board, our chief executive officer or our
president.
Our bylaws provide that we will indemnify officers and directors against
losses that they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in connection with
takeover defense measures. These provisions may have the effect of preventing
changes in our management.
Indemnification of Directors and Executive Officers and Limitation of
Liability
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We intend to enter
into separate indemnification agreements with our directors and executive
officers that provide them with indemnification protection in the event the
certificate of incorporation is subsequently amended.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officers against losses that they may incur in
investigations and legal proceedings resulting from their services to
54
<PAGE>
us, which may include services in connection with takeover defense measures.
These provisions may have the effect of preventing changes in the management.
Nasdaq National Market Listing
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the trading symbol "CTXT."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Therefore, future sales of substantial amounts of our common stock could
negatively affect the market price of our common stock . Furthermore, since a
limited number of shares will be available for sale after this offering
because of contractual and legal restrictions on the resale of our outstanding
shares as described below, sales of substantial amounts of our common stock
after these restrictions lapse could have a negative effect on the market
price.
After this offering, we will have outstanding shares of common stock,
assuming no exercise of options after , 2000. Of these shares, all of the
shares sold in this offering will be freely tradable without restriction
or further registration under the Securities Act, unless these shares are
purchased by our affiliates. The remaining shares of common stock held by
existing shareholders are restricted securities. Restricted securities may be
sold in the public market only if (1) they are registered or (2) they qualify
for an exemption from registration under Rules 144 or 701 under the Securities
Act, which rules are summarized below.
As a result of the contractual and legal restrictions described below, the
shares of common stock that constitute restricted securities will be
available for sale in the public market as follows:
. shares on the date of this prospectus
. shares 90 days after the date of this prospectus
. shares 180 days after the date of this prospectus
Lock-Up Agreements
All of our executive officers and directors and some of our stockholders,
who in the aggregate own approximately shares of our common stock, have
agreed not to (1) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or (2) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of common stock, for a
period of 180 days after the date of this prospectus, subject to limited
exceptions. However, Morgan Stanley & Co. Incorporated may in its sole
discretion, at any time without notice, release all or any portion of the
shares subject to these restrictions.
Rule 144
Shares held for less than two years. In general, under Rule 144 as
currently in effect, beginning 90 days after the date of this prospectus, a
person who has beneficially owned shares of our common stock for at least one
year would be entitled to sell within any three-month period a number of
shares that is not more than the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed
In order for stockholders to sell their shares under Rule 144, (1) they
must also comply with manner of sale provisions and notice requirements and
(2) there must be current public information available about us.
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Shares held for more than two years. Under Rule 144(k), a person may sell
their shares without complying with the provisions of Rule 144 if they meet
the following two requirements:
. they have beneficially owned the shares for at least two years and
. they have not been an affiliate of Context at any time during the 90
days before a sale
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us
under a stock option plan or other written agreement can resell those shares
90 days after the effective date of this offering in reliance on Rule 144, but
without complying with some of the restrictions, including the holding period,
contained in Rule 144.
Registration Rights
Upon completion of this offering, the holders of 19,886,701 shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act. See "Description of Capital Stock--
Registration Rights" for a more detailed description of these registration
rights. After such a registration, these shares become freely tradable without
restriction under the Securities Act.
Stock Options
Immediate after this offering we intend to file registration statements
under the Securities Act covering shares of common stock subject to
outstanding options or reserved for issuance under our stock plans. See
"Management--Stock Plans" for a more detailed description of our stock plans.
Each year as the number of shares reserved for issuance under our 1997 Stock
Plan increases, we will file amendments to the registration statements in
order to register the additional shares. When the lock-up agreements described
above expire, the shares that can be issued upon the exercise of vested
options will become freely tradable. This 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 that registration
statement will, subject to vesting provisions and Rule 144 volume limitations
applicable to our affiliates, be available for sale in the open market
immediately after the 180 day lock-up agreements expire. Upon expiration of
these lock-up agreements, at least shares of common stock will be subject
to vested options (based on options outstanding as of , 2000).
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<PAGE>
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of the material U.S. federal income
and estate tax consequences of the ownership and disposition of our common
stock by a non-U.S. holder. In general, a non-U.S. holder is:
. an individual who is a nonresident alien of the U.S.
. a corporation or other entity taxed as a corporation organized or
created under non-U.S. law
. an estate that is not taxable in the U.S. on its worldwide income, or
. a trust that is either not subject to primary supervision over its
administration by a U.S. Court or not subject to the control of a U.S.
person with respect to substantial trust decisions.
If a partnership holds common stock, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner of a partnership holding common stock, we
suggest that you consult your tax advisor.
If you are an individual, you may, in many cases, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the
current calendar year (counting for such purposes all of the days present in
the current year, one-third of the days present in the immediately preceding
year, and one-sixth of the days present in the second preceding year).
Resident aliens are subject to United States federal income tax as if they
were United States citizens.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY UNITED STATES STATE,
MUNICIPALITY OR OTHER TAXING JURISDICTION.
This discussion is based on the Internal Revenue Code of 1986, as amended,
or code, and administrative interpretations of the code as of the date of this
prospectus, all of which are subject to change, including changes with
retroactive effect. This discussion assumes that non-U.S. holders hold their
stock as capital assets. This discussion does not address all aspects of U.S.
federal income and estate taxation that may be relevant to non-U.S. holders in
light of their particular circumstances and does not address any tax
consequences arising under the laws of any state, local or foreign
jurisdiction. Prospective holders should consult their tax advisors with
respect to the particular tax consequences to them of owning and disposing of
common stock, including the consequences under the laws of any state, local or
foreign jurisdiction.
Dividends
Dividends paid to a non-U.S. holder of common stock generally will be
subject to withholding tax at a 30% rate or a reduced rate specified by an
applicable income tax treaty. Under current U.S. Treasury regulations,
dividends paid before January 1, 2001, to an address outside the United States
are presumed to be paid to a resident of the country of address, unless the
payor has knowledge to the contrary, for purposes of withholding and of
determining the applicability of a tax treaty rate. However, U.S. Treasury
regulations applicable to dividends paid after December 31, 2000 eliminate
this presumption, subject to certain transition rules.
For dividends paid after December 31, 2000, unless non-U.S. holders comply
with certain IRS certification or documentary evidence procedures, they
generally will be subject to U.S. backup withholding tax at a 31% rate under
the backup withholding rules described below, rather than at the 30% or
reduced tax treaty rate. The certification requirement may be fulfilled by
providing Internal Revenue Service Form W-8BEN or W-8ECI. You should consult
your own tax advisor concerning the effect, if any, of the rules affecting
post-December 31, 2000 dividends on your possible investment in common stock.
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The withholding tax does not apply to dividends paid to a non-U.S. holder
that provides a Form 4224 or, after December 31, 2000, a Form W-8ECI,
certifying that the dividends are effectively connected with the non-U.S.
holder's conduct of a trade or business within the United States. Instead, the
effectively connected dividends will generally be subject to regular U.S.
income tax as if the non-U.S. holder were a U.S. resident. If the non-U.S.
holder is eligible for the benefits of a tax treaty between the U.S. and the
holder's country of residence, any effectively connected income will be
subject to U.S. federal income tax only if it is attributable to a permanent
establishment in the U.S. maintained by the holder. A non-U.S. corporation
receiving effectively connected dividends may also be subject to an additional
"branch profits tax" imposed at a rate of 30% (or a lower treaty rate) on an
earnings amount that is net of the regular tax.
You may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund along with the required information with the IRS.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
on gain realized on a sale or other disposition of common stock unless:
. the gain is effectively connected with a trade or business of the non-
U.S. holder in the United States and, if certain tax treaties apply, is
attributable to a permanent establishment in the U.S. maintained by such
holder
. in the case of certain non-U.S. holders who are non-resident alien
individuals and hold the common stock as a capital asset, the
individuals are present in the United States for 183 or more days in the
taxable year of the disposition
. the non-U.S. holder is subject to tax under the provisions of the code
regarding the taxation of U.S. expatriates or
. we are or have been a U.S. real property holding corporation at any time
within the five-year period preceding the disposition or during the non-
U.S. holder's holding period, whichever period is shorter.
The tax relating to stock in a U.S. real property holding corporation does
not apply to a non-U.S. holder whose holdings, actual and constructive, at all
times during the applicable period, amount to 5% or less of the common stock
of a U.S. real property holding corporation, provided that the common stock is
regularly traded on an established securities market. Generally, a corporation
is a U.S. real property holding corporation if the fair market value of its
U.S. real property interests, as defined in the code and applicable
regulations, equals or exceeds 50% of the aggregate fair market value of its
worldwide real property interests and its other assets used or held for use in
a trade or business. We may be, or may prior to a non-U.S. holder's
disposition of common stock become, a U.S. real property holding corporation.
Information Reporting Requirements and Backup Withholding
We must report annually to the IRS the amount of dividends paid, the name
and address of the recipient, and the amount of any tax withheld. A similar
report is sent to the non-U.S. holder. Under tax treaties or other agreements,
the IRS may make its reports available to tax authorities in the recipient's
country of residence. Dividends paid on or before December 31, 2000 at an
address outside the United States are not subject to backup withholding,
unless the payor has knowledge that the payee is a U.S. person. However, a
non-U.S. holder will be required to certify its non-U.S. status in order to
avoid backup withholding at a 31% rate on dividends paid after December 31,
2000 or dividends paid on or before that date at an address inside the United
States.
U.S. information reporting and backup withholding generally will not apply
to a payment of proceeds of a disposition of common stock where the
transaction is effected outside the United States through a non-U.S. office of
a non-U.S. broker.
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However, information reporting requirements, but not backup withholding,
generally will apply to such a payment if the broker is
. a U.S. person
. a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the U.S.
. a controlled foreign corporation as defined in the code
. a foreign partnership with certain U.S. connections (for payments made
after December 31, 2000)
Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that the holder is a non-U.S.
holder and certain conditions are met or the holder otherwise establishes an
exemption.
A non-U.S. holder will be required to certify its non-U.S. status in order
to avoid information reporting and backup withholding at a 31% rate on
disposition proceeds where the transaction is effected by or through a U.S.
office of a broker.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. When withholding results in an overpayment of taxes, a refund may be
obtained if the required information is furnished to the IRS.
Federal Estate Tax
An individual non-U.S. holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the common stock will be
required to include the value of the stock in his gross estate for U.S.
federal estate tax purposes, and may be subject to U.S. federal estate tax
unless an applicable estate tax treaty provides otherwise.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Deutsche Bank Securities Inc. and FleetBoston
Robertson Stephens Inc., are acting as representatives, have severally agreed
to purchase, and we have agreed to sell to the underwriters, severally, the
respective number of shares of our common stock indicated opposite the names
of the underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Deutsche Bank Securities Inc.......................................
FleetBoston Robertson Stephens Inc.................................
---
Total............................................................
===
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus
are subject to the approval of certain legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take and pay for
all of the shares of common stock offered by us in this offering, other than
those covered by the over-allotment option described below, if any such shares
are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents
a concession not in excess of $ a share under the public offering price.
Any underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to certain dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of additional
shares of common stock at the public offering price listed on the cover page
of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase about the same percentage of the additional shares of
common stock as the number listed next to the underwriter's name in the
preceding table bears to the total number of shares of common stock listed
next to the names of all underwriters in the preceding table. If the
underwriters' option is exercised in full, the total price to the public would
be $ , the total underwriters' discounts and commissions would be $ and
total proceeds to us would be $ .
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "CTXT."
We, our directors and executive officers and substantially all of our other
stockholders, who in the aggregate own approximately shares of our common
stock, have agreed that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the underwriters, he, she or it will not, during
the period ending 180 days after the date of this prospectus:
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. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. However, Morgan Stanley
& Co. Incorporated may in its sole discretion, at any time without notice,
release all or any portion of the shares subject to these restrictions.
The restrictions described in the previous paragraph do not apply to:
. the sale of shares to the underwriters
. the issuance by us of shares of common stock upon the exercise of an
option or the conversion of a security outstanding on the date of this
prospectus of which the underwriters have been advised in writing
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares
Context has also entered into agreements with holders of approximately 98%
of its outstanding common stock and preferred stock under which the
stockholders will be restricted from selling during the period ending 180 days
after the date of this prospectus.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
At our request, the underwriters have reserved for sale, at the initial
offering price, up to shares offered by us in this offering for
directors, officers, employees, business associates, and related persons of
Context. 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.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by our
negotiations with the representatives. Among the factors to be considered in
determining the initial public offering price will be:
. our future prospects and our industry in general
. our sales, earnings and certain other financial operating information in
recent periods and
. the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies
engaged in activities similar to ours
The estimated initial public offering price range set forth on the cover
page of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
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LEGAL MATTERS
The validity of the issuance of the shares of common stock offered in this
offering will be passed upon by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Legal matters in connection with this
offering will be passed upon for the underwriters by Ropes & Gray, Boston,
Massachusetts.
EXPERTS
The financial statements of Context Integration, Inc. as of December 31,
1998 and 1999 and for each of the years in the three-year period ended
December 31, 1999 have been included in this prospectus in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere in this prospectus, and upon the authority of this firm as experts
in accounting and auditing.
The financial statements of Underline, Inc. as of and for the year ended
December 31, 1999 have been included in this prospectus in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere in this prospectus, and upon the authority of this firm as experts
in accounting and auditing.
CHANGE IN AUDITORS
Effective November 16, 1999, KPMG LLP was engaged as our independent
auditors and replaced PricewaterhouseCoopers LLP, who were dismissed as our
independent auditors on November 15, 1999. The decision to change independent
auditors was approved by our board of directors. During their engagement,
PricewaterhouseCoopers LLP issued no audit report which was qualified or
modified as to uncertainty, audit scope or accounting principles, no adverse
opinions or disclaimers of opinion on any of our financial statements, and
there were no disagreements with PricewaterhouseCoopers LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedures. PricewaterhouseCoopers LLP has not audited or
reported on any of the financial statements or information included in this
prospectus. Prior to November 1999, we had not consulted with KPMG LLP on
items which involved our accounting principles or the form of audit opinion to
be issued on our financial statements.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933 with respect to the shares of common stock to be sold
in this offering. Although this prospectus is part of the registration
statement, it does not contain all of the information set forth in the
registration statement and the related exhibits and schedules thereto. For
further information with respect to us and the common stock to be sold in this
offering, we refer you to the registration statement and the exhibits and
schedules filed with the registration statement. Statements contained in this
prospectus as to the contents of any contract or any other document referred
to are not necessarily complete, and, in each instance, we refer you to the
copy of such contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement, and the related
exhibits and schedules, may be inspected without charge at the public
reference facilities maintained by the SEC in the following locations:
. Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549
. Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661
. Seven World Trade Center, 13th Floor, New York, New York 10048
Copies of all or any part of the registration statement may be obtained
from such offices upon the payment of the fees prescribed by the SEC. The
public may obtain information on the operations of the public reference
facilities in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The SEC
maintains a web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC. The web site is located at www.sec.gov.
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CONTEXT INTEGRATION, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements of Context Integration, Inc.
Independent Auditors' Report............................................. F-2
Balance Sheets as of December 31, 1998 and 1999.......................... F-3
Statements of Operations for the years ended December 31, 1997, 1998 and
1999.................................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1997,
1998 and 1999........................................................... F-5
Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999.................................................................... F-6
Notes to Financial Statements............................................ F-7
Financial Statements of Underline, Inc.
Independent Auditors' Report............................................. F-18
Balance Sheet as of December 31, 1999.................................... F-19
Statement of Operations for the year ended December 31, 1999............. F-20
Statement of Stockholders' Deficit for the year ended December 31, 1999.. F-21
Statement of Cash Flows for the year ended December 31, 1999............. F-22
Notes to Financial Statements............................................ F-23
Unaudited Pro Forma Consolidated Financial Statements for Context
Integration, Inc.
Basis of Presentation.................................................... F-29
Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1999... F-30
Unaudited Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1999................................................. F-31
Notes to Unaudited Pro Forma Consolidated Financial Statement............ F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Context Integration, Inc.:
We have audited the accompanying balance sheets of Context Integration, Inc.
as of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 Context Integration, Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
February 21, 2000
F-2
<PAGE>
CONTEXT INTEGRATION, INC.
BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 4,170 $ 8,697
Accounts receivable, net of allowance for doubtful
accounts of $223 and $669 in 1998, and 1999,
respectively............................................. 4,466 8,490
Unbilled revenues......................................... 88 1,110
Prepaid expenses.......................................... 371 948
------- --------
Total current assets.................................... 9,095 19,245
------- --------
Property and equipment, net................................. 1,530 2,213
Loans to employees.......................................... 111 146
Deposits.................................................... 77 86
------- --------
Total assets............................................ $10,813 $ 21,690
======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................................... $ 561 $ 1,318
Accrued expenses.......................................... 1,313 2,496
Deferred revenue.......................................... 541 3,684
------- --------
Total current liabilities............................... 2,415 7,498
------- --------
Commitments and contingencies
Stockholders' equity:
Series C preferred stock, $0.001 par value; 0 and 1,612
shares authorized, issued and outstanding at December 31,
1998, and 1999, respectively (liquidation preference of
$12,000)................................................. -- 2
Series B preferred stock, $0.001 par value; 2,941 shares
authorized, issued and outstanding at December 31, 1998
and 1999 (liquidation preference of $10,000)............. 3 3
Series A preferred stock, $0.001 par value; 2,597 shares
authorized, issued and outstanding at December 31, 1998
and 1999 (liquidation preference of $5,000).............. 3 3
Common stock, $0.001 par value; 25,000 and 31,000 shares
authorized at December 31, 1998 and 1999, respectively;
9,672 and 9,926 shares issued and outstanding at December
31, 1998 and 1999, respectively ......................... 10 10
Additional paid-in capital................................ 16,946 34,679
Deferred compensation..................................... (1,378) (6,468)
Subscription receivable................................... (90) (90)
Accumulated deficit....................................... (7,096) (13,947)
------- --------
Total stockholders' equity.............................. 8,398 14,192
------- --------
Total liabilities and stockholders' equity.............. $10,813 $ 21,690
======= ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CONTEXT INTEGRATION, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue.......................................... $ 15,608 $ 19,786 $ 27,077
-------- -------- --------
Operating expenses:
Professional services.......................... 9,220 12,688 15,258
Sales and marketing............................ 1,959 3,034 4,631
General and administrative..................... 5,452 9,927 13,419
Stock-based compensation....................... 386 181 587
Amortization of goodwill....................... 644 -- --
-------- -------- --------
Total operating expenses..................... 17,661 25,830 33,895
-------- -------- --------
Loss from operations............................. (2,053) (6,044) (6,818)
Interest income (expense), net................... 63 (11) (33)
-------- -------- --------
Loss before income taxes......................... (1,990) (6,055) (6,851)
Income tax benefit............................... 94 -- --
-------- -------- --------
Net loss......................................... $ (1,896) $ (6,055) $ (6,851)
======== ======== ========
Basic and diluted net loss per share............. $ (0.28) $ (0.65) $ (0.70)
======== ======== ========
Basic and diluted weighted average common shares
outstanding..................................... 6,795 9,245 9,767
======== ======== ========
Unaudited pro forma basic and diluted net loss
per share assuming conversion of preferred
stock........................................... $ (0.38)
========
Unaudited pro forma weighted average number of
basic and diluted shares outstanding assuming
conversion of preferred stock................... 18,134
========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CONTEXT INTEGRATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Series C Series B Series A
Preferred Stock Preferred Stock Preferred Stock Common Stock Additional
----------------- ----------------- ----------------- ------------- Paid-In Deferred Subscription
Shares Amount Shares Amount Shares Amount Shares Amount Capital Compensation Receivable
-------- ------- -------- ------- -------- ------- ------ ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ -- $ -- -- $ -- -- $ -- 2,457 $ 3 $ 505 $ (495) $ --
Issuance of
series A
preferred
stock, net of
issuance costs
of $125........ -- -- -- -- 2,597 3 -- -- 4,872 -- --
Deferred
compensation... -- -- -- -- -- -- -- -- 171 (171) --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- -- 386 --
Exercise of
stock options.. -- -- -- -- -- -- 5,882 6 25 -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
-------- ------- -------- ------- -------- ------- ----- --- ------- ------- ----
Balance at
December 31,
1997............ -- -- -- -- 2,597 3 8,339 9 5,573 (280) --
Issuance of
series B
preferred
stock, net of
issuance costs
of $54......... -- -- 2,941 3 -- -- -- -- 9,943 -- --
Deferred
compensation... -- -- -- -- -- -- -- -- 1,279 (1,279) --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- -- 181 --
Exercise of
stock options.. -- -- -- -- -- -- 1,333 1 151 -- --
Subscription
receivable..... -- -- -- -- -- -- -- -- -- (90)
Net loss........ -- -- -- -- -- -- -- -- -- -- --
-------- ------- -------- ------- -------- ------- ----- --- ------- ------- ----
Balance at
December 31,
1998............ -- -- 2,941 3 2,597 3 9,672 10 16,946 (1,378) (90)
Issuance of
series C
preferred
stock, net of
issuance costs
of $35......... 1,612 2 -- -- -- -- -- -- 11,963 -- --
Deferred
compensation... -- -- -- -- -- -- -- -- 5,575 (5,575) --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- -- 485 --
Stock-based
compensation... -- -- -- -- -- -- -- -- 102 -- --
Exercise of
stock options.. -- -- -- -- -- -- 254 93 -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
-------- ------- -------- ------- -------- ------- ----- --- ------- ------- ----
Balance at
December 31,
1999............ 1,612 $ 2 2,941 $ 3 2,597 $ 3 9,926 $10 $34,679 $(6,468) $(90)
======== ======= ======== ======= ======== ======= ===== === ======= ======= ====
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
----------- -------------
<S> <C> <C>
Balance at
December 31,
1996............ $ 857 $ 870
Issuance of
series A
preferred
stock, net of
issuance costs
of $125........ -- 4,875
Deferred
compensation... -- --
Amortization of
deferred
compensation... -- 386
Exercise of
stock options.. (2) 29
Net loss........ (1,896) (1,896)
----------- -------------
Balance at
December 31,
1997............ (1,041) 4,264
Issuance of
series B
preferred
stock, net of
issuance costs
of $54......... -- 9,946
Deferred
compensation... -- --
Amortization of
deferred
compensation... -- 181
Exercise of
stock options.. -- 152
Subscription
receivable..... -- (90)
Net loss........ (6,055) (6,055)
----------- -------------
Balance at
December 31,
1998............ (7,096) 8,398
Issuance of
series C
preferred
stock, net of
issuance costs
of $35......... -- 11,965
Deferred
compensation... -- --
Amortization of
deferred
compensation... -- 485
Stock-based
compensation... -- 102
Exercise of
stock options.. -- 93
Net loss........ (6,851) (6,851)
----------- -------------
Balance at
December 31,
1999............ $(13,947) $14,192
=========== =============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
CONTEXT INTEGRATION, INC.
Statements of Cash Flows
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (1,896) $(6,055) $(6,851)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.................................. 462 656 989
Amortization of goodwill...................... 644 -- --
Stock-based compensation...................... 386 181 587
Changes in operating assets and liabilities:
Increase accounts receivable................ (2,681) (303) (4,024)
(Increase) decrease unbilled revenues....... (302) 214 (1,022)
Increase prepaid and other assets........... (138) (174) (577)
Increase (decrease) accounts payable........ 597 (236) 757
Increase accrued expenses................... 695 155 1,183
Increase deferred revenue................... 4 529 3,143
Decrease deferred tax....................... (94) -- --
-------- -------- --------
Net cash used in operating activities..... (2,323) (5,033) (5,815)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment........... (1,184) (866) (1,672)
Acquistion, net of cash acquired.............. (644) -- --
-------- -------- --------
Net cash used in investing activities..... (1,828) (866) (1,672)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock,
net.......................................... 4,875 9,946 11,965
Proceeds from exercise of stock options....... 29 152 93
Subscription receivable....................... -- (90) --
Loans to employees............................ (73) (111) (35)
Payments on debt.............................. (210) -- --
Payments on credit line....................... (500) -- --
(Increase) decrease in deposits............... (24) 50 (9)
-------- -------- --------
Net cash provided by financing
activities............................... 4,097 9,947 12,014
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.............................. (54) 4,048 4,527
Cash and cash equivalents, at beginning of
year........................................... 176 122 4,170
-------- -------- --------
Cash and cash equivalents, at end of year....... $ 122 $ 4,170 $ 8,697
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest........................ $ 16 $ 55 $ 108
======== ======== ========
Cash paid for taxes........................... $ 35 $ 5 $ 87
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
(1) The Company
Context Integration, Inc. (the "Company") is a leading Internet
professional services firm, focused on the rapid delivery of innovative and
robust web-based, business-to-business, or B2B, solutions. The Company offers
integrated strategy, creative design, technology architecture, solutions
construction and applications management services to large enterprise clients
and select e-businesses.
The Company specializes in building relationship commerce, digital
marketplace and business intelligence solutions that are secure, reliable and
scalable. Relationship commerce, a subset of customer relationship management,
is focused on using the web as a channel for personalizing and managing
relationships with customers, suppliers and distributors. A digital
marketplace is the electronic equivalent of a traditional marketplace where
buyers and sellers meet to transact business. Business intelligence solutions
enable organizations to analyze large databases of customers' transactions and
to summarize this information for sales and marketing purposes on the web. The
Company's solutions typically support large numbers of transactions and users,
and are integrated with the existing systems infrastructure of our clients and
their customers and partners.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 periods. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investment securities with an
original maturity of three months or less to be cash equivalents.
(c) Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, and
accounts receivable.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. At December 31, 1998, amounts
due from four customers represented $2,250, or 48% of gross accounts
receivable. At December 31, 1999 an amount from one customer represented
$1,500, or 16% of gross accounts receivable.
The fair market values of cash and cash equivalents, and accounts
receivable at December 31, 1998 and 1999 approximate their carrying amounts.
(d) Property and Equipment
Investments in property and equipment are recorded at cost. Depreciation is
recorded on the straight-line basis over the estimated useful life of the
related assets, which range from three to five years. Maintenance and repairs
are charged to operations when incurred.
F-7
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
(e) Deferred Offering Costs
Deferred offering costs, amounting to $55, which are specific incremental
costs directly attributable to the Company's planned initial public offering,
have been capitalized at December 31, 1999 and will be recorded as a reduction
of the proceeds of the offering. If the offering is unsuccessful, all deferred
offering costs will be charged to operations.
(f) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(g) Revenue Recognition
The Company derives its revenues from service contracts. Revenues pursuant
to fixed-price contracts are recognized as services are rendered on the
percentage-of-completion method of accounting (based on the ratio of costs
incurred to total estimated costs). Revenues pursuant to time and materials
contracts are recognized as services are provided. Revenues from applications
management and support agreements are recognized ratably over the terms of the
agreement.
Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such
losses become probable and can be reasonably estimated. Unbilled revenues on
contracts are comprised of costs plus fees in excess of billings on such
contracts. Advanced billings and billings in excess of costs plus fees are
classified as deferred revenue until the period such services are provided.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in Financial
Statements. SAB No. 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Management believes the Company has complied with the provisions
of SAB No. 101.
(h) Professional Services
Professional services costs consist of payroll and payroll-related costs
and non-reimbursable travel expenses dedicated to client assignments.
(i) Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
approximately $18, $11 and $61, for the years ended December 31, 1997, 1998
and 1999, respectively, and are included in general and administrative
expenses.
(j) Income Taxes
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred taxes of a change
in tax rate is recognized in income in the period that includes the enactment
date.
F-8
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
(k) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of
stock-based awards on the date of grant. For employee stock-based awards, SFAS
No. 123 allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and provide pro forma net earnings
disclosures as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB No. 25 and
provide the pro forma disclosure of SFAS No. 123.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
(l) Segment Reporting
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, establishes standards for the way that public business
enterprises report selected information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 requires the use of the "management approach" in disclosing segment
information, based largely on how senior management generally analyzes the
business operations. The Company currently operates in only one segment and,
as such, no additional disclosures are required.
(m) Historical and Unaudited Pro Forma Basic and Diluted Net Loss Per Share
SFAS No. 128, Earnings per Share, requires the presentation of basic
earnings per share and diluted earnings per share for all periods presented.
As the Company has been in a net loss position for all periods presented,
common stock equivalents of 5,182, 8,164 and 11,836 for the years ended
December 31, 1997, 1998 and 1999, respectively, were excluded from the diluted
net loss per share calculation as they would be antidilutive. As a result,
diluted net loss per share is the same as basic net loss per share, and has
not been presented separately.
Unaudited pro forma basic and diluted net loss per share assumes conversion
of all outstanding shares of preferred stock into 10,725 shares of common
stock upon the closing of a qualifying initial public offering. The weighted
average number of such shares amounts to 8,367.
Pursuant to SAB No. 98, common stock and convertible preferred stock issued
for nominal consideration, prior to the anticipated effective date of an IPO,
are required to be included in the calculation of basic and diluted net income
per share as if they were outstanding for all periods presented. To date, the
Company has not had any issuances or grants for nominal consideration.
(n) Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. SOP No. 98-1 requires the capitalization of certain internal
costs related to the implementation of computer software obtained for internal
use. This standard, which the Company adopted in the first quarter of 1999,
did not have any impact on its financial position or its results of
operations.
F-9
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
In April 1998, SOP No. 98-5, Reporting on the Costs of Start-Up Activities,
was issued. Under SOP No. 98-5, the costs of start-up activities should be
expensed as incurred. Start-up activities are broadly defined as those one-
time activities related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, commencing some new operation or organizing a new
entity. This standard, which the Company adopted in the first quarter of 1999,
did not have any impact on its financial condition or its results of
operations.
(3) Property and Equipment
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Computer equipment and software............................... $1,938 $3,282
Leasehold improvements........................................ 148 168
Furniture and fixtures........................................ 462 624
------ ------
2,548 4,074
Less: Accumulated depreciation and amortization............... 1,018 1,861
------ ------
$1,530 $2,213
====== ======
</TABLE>
The Company wrote-off fully depreciated assets in the amount of $124 and
$146, for the years ended December 31, 1998 and 1999, respectively.
(4) Accrued Expenses
Accrued expenses consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Accrued bonus................................................. $ 188 $ 805
Accrued vacation.............................................. 460 561
Accrued commissions........................................... 284 281
Other accrued expenses........................................ 381 849
------ ------
$1,313 $2,496
====== ======
</TABLE>
(5) Debt
(a) Line of Credit
On October 27, 1999, the Company's line of credit was amended to increase
the line to $6,000 (previously $4,000), maturing in October 2000, with
interest accruing at prime plus 1.25% until a capital event, which occurred at
the time of the Series C Preferred Stock financing in December 1999, at which
time the interest rate was adjusted to prime plus .25%. On June 30, 1999 the
Company had amended the line of credit changing the interest rate to prime
plus .75% (previously .25%). At December 31, 1998 and 1999, the Company had no
borrowings outstanding and the interest rates were 8.0% and 8.75%,
respectively.
The line is secured by substantially all business assets of the Company.
F-10
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
(b) Equipment Facility
On January 22, 1999, the Company amended and extended its equipment
facility agreement to allow for equipment purchases against the facility until
October 21, 1999. On that date the principal plus accrued interest of prime
plus .50% was due and payable in 36 equal monthly installments, maturing on
October 21, 2002. At December 31, 1998 and 1999, the Company had no borrowings
outstanding with regards to the equipment facility. The Company paid off the
facility completely in 1999 and it is no longer in effect.
On April 13, 1998, the Company had amended and extended its equipment
facility agreement, dated November 6, 1996, to provide for advances of up to
$1,000 available through January 31, 1999. The equipment advance plus interest
of prime plus .50% originally was to mature on January 13, 2002.
(6) Commitments and Contingencies
The Company leases its facilities under various operating leases, which
expire at various times over the next five years. Such leases include
provisions that may require the Company to pay its proportionate share of
operating costs, which exceed specific thresholds. The Company also leases
various office equipment under operating leases, which expire at various times
over the next five years. Rent expense for facilities and equipment leases for
the years ended December 31, 1997, 1998 and 1999 were $723, $1,149 and $1,147,
respectively.
Minimum annual rental commitments are as follows at December 31, 1999:
<TABLE>
<S> <C>
2000.............................. $1,319
2001.............................. 981
2002.............................. 801
2003.............................. 516
2004.............................. 351
------
$3,968
======
</TABLE>
(7) Income Taxes
No provision for federal or state income taxes was recorded for 1998 or
1999, as the Company incurred net operating losses. The components of income
tax benefit for the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Federal.............................................. $ -- $(72) $(72)
State................................................ -- (22) (22)
---- ---- ----
$ -- $(94) $(94)
==== ==== ====
</TABLE>
The following is a reconciliation between the statutory federal income tax
rate and the Company's effective rate for the three years ended December 31,
1999:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate.................. (34.0)% (34.0)% (34.0)%
State income taxes, net of federal income tax
benefit........................................... (0.7) -- --
Change in valuation allowance...................... 29.0 33.5 33.2
Permanent items and other.......................... 0.7 0.5 0.8
----- ----- -----
(5.0)% --% --%
===== ===== =====
</TABLE>
F-11
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1998 and 1999.
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Bad debts..................................................... $ 97 $ 291
Stock options and other compensation.......................... 522 850
Depreciation and amortization................................. 229 204
Operating loss and credit carryforwards....................... 3,285 5,325
------ ------
Total gross deferred tax assets............................... 4,133 6,670
Less: valuation allowance..................................... (3,146) (6,013)
------ ------
Net deferred tax assets....................................... 987 657
Deferred tax liabilities:
Cash to accrual adjustment.................................... (987) (657)
------ ------
Total gross deferred tax liabilities.......................... (987) (657)
------ ------
Net deferred tax liability.................................... $ -- $ --
====== ======
</TABLE>
No provision for federal or state income taxes has been recorded in 1998 or
1999 because the Company incurred a net operating loss for each of those
years. The Company has recorded a valuation allowance against its deferred tax
assets because management believes that, after considering all the available
objective evidence, historical and prospective, with greater weight given to
historical evidence, it is more likely than not that these assets will not be
realized. No income tax benefit has been recorded for 1998 or 1999 because of
the valuation allowance.
The Company has previously reported its results of operations for federal
and state income tax purposes using the cash basis of accounting. Effective
with the year beginning January 1, 1998, the Company was required to change
its method of accounting from cash to accrual for federal and state income tax
reporting purposes. As a result of this change, the Company will be required
to record additional taxable income of $756 each year for the next two years
for federal and state income tax reporting.
The Company had federal net operating loss carryovers of approximately
$7,500 and $12,200 at December 31, 1998 and 1999, respectively, that may be
used to offset future taxable income, if any, through 2019. Deferred tax
assets and related valuation allowance of $273 related to the net operating
loss carryforward results from the exercise of employee stock options, the tax
benefit of which, when recognized, will be accounted for as a credit to
additional paid-in-capital rather than a reduction of income tax expense. Net
operating loss carryforwards and other tax attributes may be limited in the
event of certain changes in ownership interests of significant stockholders.
(8) Stockholders' Equity
(a) Common Stock
In 1999, the Company increased the number of authorized shares from 25,000
to 31,000 shares with a par value of $0.001 per share. The number of
authorized shares of common stock was previously increased in 1998 by 5,000
shares to an amount of 25,000 shares with a par value of $0.001 per share.
F-12
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
(b) Stock Dividend
On August 24, 1999, the Board of Directors approved a 3-for-2 stock split
effected in the form of a dividend of the Company's common stock. All common
stock and per share amounts in prior periods have been restated to reflect
this stock dividend.
(c) Preferred Stock -- General
On December 21, 1999, the Company's stockholders authorized an increase in
shares of preferred stock to 7,150 with a par value of $0.001 per share, of
which 2,597 have been designated as Series A convertible preferred stock
("Series A Preferred Stock"), 2,941 shares have been designated as Series B
convertible preferred stock ("Series B Preferred Stock"), and 1,612 shares
have been designated as Series C convertible preferred stock ("Series C
Preferred Stock").
In 1998 the Company's stockholders authorized an increase in the number of
authorized shares of preferred stock from 5,000 shares to 5,538 with a par
value of $0.001 per share, of which 2,597 were designated as Series A
Preferred Stock and 2,941 shares were designated as Series B Preferred Stock.
All preferred stock (Series A, B and C) rank in preference over common
stock with regards to dividends and liquidation.
As of December 31, 1999, no cash dividends had been declared or paid by the
Company.
(d) Series A Preferred Stock
On March 14, 1997, the Company issued 2,597 shares of Series A Preferred
Stock in exchange for net proceeds of approximately $4,900. The Series A
Preferred Stock is entitled to receive quarterly non-cumulative dividends at
$0.038507 per share, if declared. Each share of Series A Preferred Stock votes
on an as-converted basis and is convertible into common stock based on a
conversion ratio, under certain conditions and is subject to certain
adjustments. In the event of any liquidation, dissolution or winding up of the
Company, Series A Preferred Stock has a liquidation preference of $1.92533 per
share, plus any declared but unpaid dividends.
All outstanding shares of Series A Preferred Stock will convert to 3,895
shares of common stock, with a par value of $0.001 per share, immediately upon
the completion of a qualifying initial public offering, or at the option of
the holder.
(e) Series B Preferred Stock
On July 22, 1998, the Company issued 2,941 shares of Series B Preferred
Stock in exchange for net proceeds of approximately $9,900. The Series B
Preferred Stock is entitled to receive quarterly non-cumulative dividends at
$0.068 per share, if declared. Each share of Series B Preferred Stock votes on
an as-converted basis and is convertible into shares of common stock based on
a conversion ratio, under certain conditions and is subject to certain
adjustments. In the event of any liquidation, dissolution or winding up of the
Company, Series B Preferred Stock has a liquidation preference of $3.40 per
share, plus any declared but unpaid dividends, and ranks pari passu with
Series A Preferred Stock.
All outstanding shares of Series B Preferred Stock will convert to 4,412
shares of common stock, with a par value of $0.001 per share, immediately upon
the completion of a qualifying initial public offering, or at the option of
the holder.
F-13
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
(f) Series C Preferred Stock
On December 22, 1999, the Company issued 1,612 shares of the Company's
preferred stock as Series C Preferred Stock in exchange for net proceeds of
approximately $12,000. The Series C Preferred Stock is entitled to receive
quarterly non-cumulative dividends at $0.14891 per share, if declared. Each
share of Series C Preferred Stock votes on an as-converted basis and is
convertible into shares of common stock based on a conversion ratio, under
certain conditions and is subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of the Company, Series C Preferred
Stock has a liquidation preference of $7.4457 per share, plus any declared but
unpaid dividends, and ranks pari passu with Series B Preferred Stock and
Series A Preferred Stock.
All outstanding shares of Series C Preferred Stock will convert to 2,418
shares of common stock, with a par value of $0.001 per share, immediately upon
the completion of a qualifying initial public offering, or at the option of
the holder.
(9) Stock Option Plans
The Company's 1997 Stock Plan (the "Stock Plan") authorizes the Company to
grant options to purchase common stock, to make awards of restricted common
stock, and to issue certain other equity-related awards to employees and
directors of, and consultants to, the Company. The total number of shares of
common stock, which may be issued under the Stock Plan, is 3,700 shares. The
Stock Plan is administered by the Board of Directors, which selects the
persons to whom stock options and other awards are granted and determines the
number of shares, the exercise or purchase prices, the vesting terms and the
expiration date. Non-qualified stock options may be granted at exercise prices
which are above, equal to, or below the grant date fair market value of the
common stock. The exercise price of options qualifying as incentive stock
options may not be less than the fair market value of the common stock on the
grant date.
Stock options granted under the Stock Plan are nontransferable, generally
become exercisable over a four year period (25% vest upon the first
anniversary date and 1/48 each month thereafter), expire ten years after the
date of grant (subject to earlier termination in the event of the termination
of the optionee's employment or other relationship with the Company).
Upon adoption of the Stock Plan, in November 1997, the Company terminated
the 1993 Stock Plan (the "1993 Plan"). No further stock options were granted
under the 1993 Plan. Outstanding options and shares issued upon the exercise
of options granted continue to be governed by the terms and conditions of the
1993 Plan.
In 1998, the Company granted 49 stock options to a non-employee. The
Company is accounting for this grant under SFAS No. 123. As such, the Company
has recognized stock compensation related to these options in the amount of
$37 and $102, for the years ended December 31, 1998 and 1999, respectively.
F-14
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
A summary of the status of the Stock Plan and the 1993 Plan is presented
below:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise
Outstanding Price
----------- --------
<S> <C> <C>
Balance at December 31, 1996............................... 8,259 0.028
Granted.................................................. 1,490 0.333
Exercised................................................ (5,882) 0.005
Canceled................................................. (590) 0.130
------ -----
Balance at December 31, 1997............................... 3,277 0.189
=====
Granted.................................................. 3,748 0.395
Exercised................................................ (1,213) 0.093
Canceled................................................. (2,114) 0.263
------ -----
Balance at December 31, 1998............................... 3,698 0.387
=====
Granted.................................................. 2,926 1.053
Exercised................................................ (254) 0.367
Canceled................................................. (1,214) 0.448
------ -----
Balance at December 31, 1999............................... 5,156 0.751
====== =====
</TABLE>
The following table summarizes information about the Company's outstanding
stock options at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------- --------------------
Weighted Weighted
average average
Number remaining Number exercise
Exercise prices outstanding contractual life exercisable price
- --------------- ----------- ---------------- ----------- --------
<S> <C> <C> <C> <C>
$0.0624....................... 21 6.33 years 19 $0.0624
$0.3333....................... 1,862 7.94 years 855 0.3333
$0.5000....................... 2,360 9.17 years 218 0.5000
$0.7500....................... 38 9.66 years -- 0.7500
$1.2500....................... 584 9.88 years -- 1.2500
$4.5000....................... 280 9.95 years -- 4.5000
$5.0000....................... 11 9.99 years -- 5.0000
----- -----
5,156 8.84 years 1,092 $0.3620
===== =====
</TABLE>
F-15
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS 123 for 1997, 1998 and 1999, its
net loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported..................................... $ (1,896) $ (6,055) $ (6,851)
Pro forma....................................... $ (1,981) $ (6,260) $ (7,398)
Loss per share:
As reported..................................... (0.28) (0.65) (0.70)
Pro forma....................................... (0.29) (0.68) (0.76)
</TABLE>
The per share weighted-average fair value of stock options granted during
1997, 1998 and 1999 was $0.10, $0.22 and $0.42, respectively, on the date of
grant, with the following weighted average assumptions used: no expected
dividend yield; risk free interest rate of 6.19%, 5.48% and 5.16% for December
31, 1997, 1998 and 1999, respectively; volatility of 65%, 70%, and 70% for
December 31, 1997, 1998 and 1999, respectively; expected life of approximately
3-5 years.
(10) Significant Customer
The following table summarizes sales to a major customer (sales in excess
of 10% for the year) as a percentage of total sales:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Customer A..................................... 16% 17% --%
</TABLE>
(11) Deferred Compensation Plan
The Company sponsors a qualified 401(k) deferred compensation plan (the
"Plan"), which covers substantially all of its employees. Participants are
permitted, in accordance with the provisions of Section 401(k) of the Internal
Revenue Code, to contribute up to 15% of their earnings into the Plan.
According to the provisions of the Plan, the Company is required to make
matching contributions of 50% of a participant's contribution, up to 3% of an
employee's salary for the years ended December 31, 1997 and 1998. In 1999 the
rate was changed to 5% of an employee's salary, up to a maximum matching
contribution equal to approximately $3, per employee. The Company contributed
$62, $153 and $298 to the Plan for the years ended December 31, 1997, 1998 and
1999, respectively.
(12) Related Party
The Company granted loans to employees in 1997 and 1998. The term of each
loan is five years, maturing at various times during 2002 and 2003. The
interest rates on the loans range from 4.52% to 6.10%, depending upon when the
loan was signed. Interest is payable annually upon the anniversary date of the
loan. The loans are prepayable at any time before the maturity date at the
option of the borrower, without any penalty. Management believes such loans
have been granted with market terms.
F-16
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
(in thousands, except per share data)
(13) Acquisition
In 1997, the Company acquired Fusion Systems Group, Inc. and Fusion
Consulting, Inc. ("Fusion"), companies engaged in providing database
consulting services. At the end of 1997, the Company closed the independent
activities of the Fusion business. All goodwill associated with the
acquisition was charged to amortization of goodwill in 1997.
(14) Restructuring
In June 1998, the Company made the decision to move its corporate
headquarters from South San Francisco, California to Burlington,
Massachusetts. With this, along with other strategic decisions that were made,
it was determined that restructuring charges were necessary to reorganize the
business operations. All restructuring charges have been charged to general
and administrative expense.
Details of the restructuring charges are as follows:
<TABLE>
<CAPTION>
Utilized
Initial ---------
Provision 1998 1999 Balance
--------- ---- ---- -------
<S> <C> <C> <C> <C>
Employee related severance.......................... 162 162 -- --
Termination of leases............................... 371 306 65 --
--- --- --- ---
Total............................................... 533 468 65 --
=== === === ===
</TABLE>
(15) Subsequent Event
On January 31, 2000 the Company acquired all the outstanding stock of
Underline, Inc. ("Underline"), a provider of creative design solutions on the
Internet, which was accounted for under the purchase method of accounting. The
purchase price was comprised of: $100 in cash, 982 shares of common stock
valued at $4.50 per share, and options to purchase an additional 224 shares of
common stock at an exercise price of $4.50 per share. The excess acquisition
cost over the fair value of net assets acquired will be amortized over a 3
year period. In addition, the Company issued 621 shares of common stock to
employees of Underline which are subject to restrictions relating to
employment. As a result, the fair value of such stock will be recorded as
deferred costs and recognized as compensation expense over the two year
restriction period.
Had the acquisition occurred on January 1, 1999, the results of operations
and per share amounts would have been as follows:
<TABLE>
<S> <C>
Revenues........................................................... 28,803
======
Net loss........................................................... (9,928)
======
Basic and diluted net loss per share............................... (0.87)
======
</TABLE>
In 1999, Underline provided creative design services to the Company, which
resulted in revenue to Underline in the amount of $274.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Underline, Inc.:
We have audited the accompanying balance sheet of Underline, Inc. as of
December 31, 1999, and the related statements of operations, stockholders'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 Underline, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Boston, Massachusetts
February 21, 2000
F-18
<PAGE>
UNDERLINE, INC.
BALANCE SHEET
December 31, 1999
(in thousands, except per share data)
<TABLE>
<S> <C>
Assets
Current assets:
Cash................................................................. $ 13
Accounts receivable, net of allowance for doubtful accounts of $31... 773
Prepaid expenses..................................................... 122
Deferred tax asset................................................... 10
------
Total current assets............................................... 918
------
Property and equipment, net............................................ 216
Deposits............................................................... 15
------
Total assets....................................................... $1,149
======
Liabilities and Stockholders' Deficit
Current liabilities:
Line of credit....................................................... $ 201
Accounts payable..................................................... 61
Accrued expenses..................................................... 298
Deferred revenue..................................................... 742
------
Total current liabilities.......................................... 1,302
------
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.035 par value; 3,000 shares authorized; 850 shares
issued and outstanding.............................................. 30
Accumulated deficit.................................................. (183)
------
Total stockholders' deficit........................................ (153)
------
Total liabilities and stockholders' deficit........................ $1,149
======
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
UNDERLINE, INC.
STATEMENT OF OPERATIONS
For the year ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<S> <C>
Revenue............................................................... $ 2,000
-------
Operating expenses:
Professional services............................................... 1,232
Sales and marketing................................................. 50
General, administrative, depreciation and amortization.............. 730
-------
Total operating expenses.......................................... 2,012
-------
Loss from operations.................................................. (12)
Interest expense...................................................... (16)
-------
Loss before income taxes.............................................. (28)
Income taxes.......................................................... --
-------
Net loss.............................................................. $ (28)
=======
Basic and diluted net loss per share.................................. $ (0.03)
=======
Basic and diluted weighted average common shares outstanding.......... 850
=======
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
UNDERLINE, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
For the year ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Common Stock Total
------------- Accumulated Stockholders'
Shares Amount Deficit Deficit
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998............ 850 $30 $ (56) $ (26)
Capital distribution.................. -- -- (99) (99)
Net loss.............................. -- -- (28) (28)
--- --- ----- -----
Balance at December 31, 1999............ 850 $30 $(183) $(153)
=== === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
UNDERLINE, INC.
STATEMENT OF CASH FLOWS
For the year ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<S> <C>
Net loss............................................................... $ (28)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization........................................ 30
Loss on disposal of fixed asset...................................... 6
Changes in operating assets and liabilities:
Increase accounts receivable....................................... (702)
Increase prepaid expenses.......................................... (122)
Increase accounts payable.......................................... 40
Increase accrued expenses.......................................... 299
Increase deferred tax asset........................................ (10)
Increase deferred revenue.......................................... 711
-----
Net cash provided by operating activities........................ 224
-----
Cash flows from investing activities:
Purchases of property and equipment.................................. (230)
-----
Net cash used in investing activities............................ (230)
-----
Cash flows from financing activities:
Payments on line of credit........................................... (68)
Proceeds from line of credit......................................... 201
Increase in deposits................................................. (15)
Capital distribution................................................. (99)
-----
Net cash provided by financing activities........................ 19
-----
Net increase in cash............................................. 13
Cash, at beginning of period........................................... --
-----
Cash, at end of period................................................. $ 13
=====
Supplemental disclosure of cash flow information:
Cash paid for interest............................................... $ 16
=====
Cash paid for taxes.................................................. $ 10
=====
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
UNDERLINE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(in thousands, except per share data)
(1) The Company
Underline, Inc. (the "Company") is a creative design company that uses both
off-line and on-line marketing approaches to support its customers marketing
needs. The Company has begun to focus more on the rapid delivery of business-
to-business ("B2B") solutions. Working with best-in-class partners, the
Company offers integrated creative design solutions related to business web
solution strategies.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 periods. Actual results could differ from those estimates.
(b) Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. At December 31, 1999, an amount from one
customer represented $379, or 47% of gross accounts receivable.
The fair market values of cash and accounts receivable at December 31, 1999
approximate their carrying amounts.
(c) Property and Equipment
Investments in property and equipment are recorded at cost. Depreciation is
recorded on the straight-line basis over the estimated useful life of the
related assets, which range from two to three years. Leasehold improvements
are depreciated over the lesser of the useful life of the asset or the term of
the lease. Maintenance and repairs are charged to operations when incurred.
(d) Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
(e) Revenue Recognition
The Company derives its revenues from service contracts. Revenues pursuant
to fixed-price contracts are recognized based on the completed-contract method
of accounting. Revenues pursuant to time and materials contracts are
recognized as services are provided.
F-23
<PAGE>
UNDERLINE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(in thousands, except per share data)
Unbilled revenues on contracts are comprised of costs plus fees in excess
of billings on such contracts. Advanced billings and billings in excess of
costs plus fees are classified as deferred revenue until the period such
services are provided.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in Financial
Statements. SAB No. 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Management believes the Company has complied with the provisions
of SAB No. 101.
(f) Professional Services
Professional services costs consist of payroll, payroll-related expenses,
and printing and reproduction costs related to client assignments.
(g) Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs,
which are included in general and administrative expenses, was approximately
$50 for 1999.
(h) Income Taxes
The Company has elected S Corporation status for federal income tax
purposes. Accordingly, no provision is made for federal income taxes at the
corporate level. The Company's federal income or loss is passed through to its
stockholders. The Company is liable for certain state income taxes.
The Company's state income taxes are accounted for under the asset and
liability method. This method requires that deferred state tax assets and
liabilities be recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
state tax assets and liabilities are measured using enacted tax rates expected
to be applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on the
deferred state tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(i) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of
stock-based awards on the date of grant. For employee stock-based awards, SFAS
No. 123 allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and provide pro forma net earnings
disclosures as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB No. 25 and
provide the pro forma disclosures of SFAS No. 123.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
F-24
<PAGE>
UNDERLINE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(in thousands, except per share data)
(j) Segment Reporting
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, establishes standards for the way that public business
enterprises report selected information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 requires the use of the "management approach" in disclosing segment
information, based largely on how senior management generally analyzes the
business operations. The Company currently operates in only one segment and,
as such, no additional disclosures are required.
(k) Net Loss Per Share
SFAS No. 128, Earnings per Share, requires the presentation of basic
earnings per share and diluted earnings per share for all periods presented.
As the Company incurred a net loss for 1999, common stock equivalents of 7,528
were excluded from the diluted net loss per share calculation, as they would
be antidilutive. As a result, diluted net loss per share is the same as basic
net loss per share, and has not been presented separately.
(l) Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. SOP No. 98-1 requires the capitalization of certain internal
costs related to the implementation of computer software obtained for internal
use. This standard, which the Company adopted in the first quarter of 1999,
did not have any impact on its financial position or its results of
operations.
In April 1998, SOP No. 98-5, Reporting on the Costs of Start-Up Activities,
was issued. Under SOP No. 98-5, the costs of start-up activities should be
expensed as incurred. Start-up activities are broadly defined as those one-
time activities related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, commencing some new operation or organizing a new
entity. This standard, which the Company adopted in the first quarter of 1999,
did not have any impact on its financial condition or its results of
operations.
(3) Property and Equipment
Property and equipment consisted of the following at December 31, 1999:
<TABLE>
<S> <C>
Computer............................................................... $258
Leasehold improvements................................................. 60
Furniture, fixtures and equipment...................................... 20
----
338
Less: Accumulated depreciation and amortization........................ 122
----
$216
====
</TABLE>
F-25
<PAGE>
UNDERLINE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(in thousands, except per share data)
(4) Line of Credit
On August 30, 1999, the Company entered into a line of credit, which allows
the Company to borrow up to the lesser of 75% of the eligible accounts of the
Company, or $250. The principal amount and any unpaid interest matures on
August 23, 2000. Interest accrues at prime plus 2% and is payable on the 30th
day of each month. At December 31, 1999, the Company had borrowings of $201
outstanding with an interest rate of 10.5%.
The line is secured by substantially all business assets of the Company.
On January 21, 1997, the Company entered into an unsecured line of credit,
which allowed the Company to borrow up to $75. Interest accrued at prime plus
2% and was payable on the 5th day of each month. On December 1, 1999, the
Company repaid the outstanding principal and interest in full.
(5) Commitments and Contingencies
The Company leases its facilities under an operating lease, which expires
on March 28, 2004. The lease includes provisions that may require the Company
to pay its proportionate share of operating costs, which exceed specific
thresholds. The Company also leases various office equipment under operating
leases, which expire at various times over the next two years. Rent expense
for facilities and equipment leases for 1999 was $74.
Minimum annual rental commitments are as follows at December 31, 1999:
<TABLE>
<S> <C>
2000.................................................................... $102
2001.................................................................... 101
2002.................................................................... 99
2003.................................................................... 102
2004.................................................................... 26
----
$430
====
</TABLE>
(6) Income Taxes
The Company has elected S Corporation status for federal income tax
purposes. Accordingly, no provision is made for federal income taxes at the
corporate level. The Company's federal income or loss is passed through to its
stockholders. The Company has provided for certain state income taxes, and the
related deferred taxes.
State income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
1999.................................................. $10 $(10) $ --
=== ==== ====
</TABLE>
(7) Common Stock
In 1994, the Company was incorporated, authorizing and issuing 200 shares
with no par value.
F-26
<PAGE>
UNDERLINE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(in thousands, except per share data)
On November 12, 1999, the Board of Directors approved a restated
certificate of incorporation, effectively increasing the shares authorized and
outstanding to 3,000 shares, with a par value of $0.01 per share. This was a
15,000 to 1 stock split effected like a stock dividend. On the same day, the
Board of Directors approved a 17 to 60 reverse stock split which resulted in
850 shares being issued and outstanding with a par value of $0.035 per share.
The Board of Directors also authorized 2,150 in additional common stock, of
which 150 was reserved for the Company's stock option plan. All common stock
and per share amounts have been restated to reflect the stock dividend and
reverse stock split.
(8) Stock Option Plan
The Company's 1999 Stock Plan (the "Stock Plan") authorizes the Company to
grant options to purchase common stock, to make awards of restricted common
stock, and to issue certain other equity-related awards to employees and
directors of, and consultants to, the Company. The total number of shares of
common stock, which may be issued under the Stock Plan, is 150 shares. The
Stock Plan is administered by the Board of Directors, which selects the
persons to whom stock options and other awards are granted and determines the
number of shares, the exercise or purchase prices, the vesting terms and the
expiration date. Non-qualified stock options may be granted at exercise prices
which are above, equal to, or below the grant date fair market value of the
common stock. The exercise price of options qualifying as incentive stock
options may not be less than the grant date fair market value of the common
stock. If, at the time the incentive stock option is granted, the optionee is
deemed to own stock possessing greater than 10% of the total combined voting
power of stock, the exercise price shall not be less than 110% of the fair
market value of common stock at the date of grant.
Stock options granted under the Stock Plan are nontransferable (subject to
earlier termination in the event of the termination of the optionee's
employment or other relationship with the Company).
The Company had not granted options until December 1999. In December 1999,
150 stock options were granted at an exercise price of $4.50. No options were
exercisable at December 31, 1999 and the weighted average exercise price and
weighted average remaining contractual life was $4.50 and 10 years,
respectively. Generally the options vest over a four year period (25% vest
upon the first anniversary date, and 25% vest on each anniversary date
thereafter), unless otherwise determined by the Board of Directors.
The per share weighted-average fair value of stock options granted during
1999 was $2.24 on the date of grant, with the following weighted average
assumptions used: no expected dividend yield; risk free interest rate of
5.16%, expected volatility of 70%; expected life of approximately 3 years.
(9) Significant Customers
The following table summarizes sales to major customers (sales in excess of
10% for the year) as a percentage of total sales for 1999:
<TABLE>
<S> <C>
Customer A............................................................... 17%
Customer B............................................................... 14%
</TABLE>
F-27
<PAGE>
UNDERLINE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(in thousands, except per share data)
(10) Related Party
The Company performed creative design work for an entity whose owner was
related to one of the Company's founders. This work resulted in $193 of
revenue, of which $25 is still owed to the Company at December 31, 1999 and is
included in accounts receivable.
(11) Subsequent Event
On January 31, 2000, Context Integration, Inc. ("Context") acquired all the
outstanding stock of the Company. The purchase price was comprised of: $100 in
cash, 982 shares of common stock and options to purchase an additional 224
shares of common stock at an exercise price of $4.50 per share. In addition,
Context issued 621 shares of common stock which are subject to restrictions
relating to employment.
During 1999, the Company provided creative design services to Context,
which resulted in revenue to the Company in the amount of $274, of which $79
is still owed to the Company at December 31, 1999. Such amount is included in
accounts receivable.
F-28
<PAGE>
CONTEXT INTEGRATION, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma consolidated balance sheet and statement
of operations give effect to the acquisition by Context Integration, Inc. (the
"Company") of all of the stock of Underline, Inc. ("Underline") on January 31,
2000 as if it had occurred on December 31 and January 1, 1999, respectively.
These statements are based on the historical financial statements of the
Company and Underline, and the estimates and assumptions set forth below and
in the notes to the unaudited pro forma consolidated financial statements.
The effects of the acquisition have been presented using the purchase
method of accounting and, accordingly, the purchase price was allocated to the
acquired assets and assumed liabilities based upon management's estimate of
fair value with any excess purchase price being allocated to goodwill or other
identifiable intangible assets. The pro forma adjustments related to the
purchase price allocation of the acquisition represents management's best
estimate of the effects of the acquisition.
The pro forma adjustments are based upon estimates, currently available
information and certain assumptions that management deems appropriate. The
unaudited pro forma consolidated financial data presented herein are not
necessarily indicative of the results the Company would have obtained had such
events occurred on January 1 or December 31, 1999, as assumed, or the future
results of the Company. The unaudited pro forma consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included elsewhere in this prospectus.
F-29
<PAGE>
CONTEXT INTEGRATION, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Context Pro Forma Pro Forma
Integration, Inc. Underline, Inc. Adjustments Consolidated
----------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents.......... $ 8,697 $ 13 $ (100)c $ 8,610
Accounts receivable,
net.................. 8,490 773 (79)a 9,184
Unbilled revenues..... 1,110 -- 1,110
Prepaid expenses...... 948 122 1,070
Deferred tax asset.... -- 10 (10)g --
------- ------ ------ -------
Total current
assets............. 19,245 918 (189) 19,974
------- ------ ------ -------
Deferred costs.......... -- -- 2,796 b/c 2,796
Property and equipment,
net.................... 2,213 216 2,429
Goodwill................ -- 4,923 b 4,923
Loans to employees...... 146 -- 146
Deposits................ 86 15 101
------- ------ ------ -------
Total assets........ $21,690 $1,149 $7,530 $30,369
======= ====== ====== =======
Liabilities and
Stockholders' Equity
Current liabilities:
Line of credit........ $ -- $ 201 $ $ 201
Accounts payable...... 1,318 61 (79)a 1,300
Accrued expenses...... 2,496 298 2,794
Deferred revenue...... 3,684 742 4,426
------- ------ ------ -------
Total liabilities... 7,498 1,302 (79) 8,721
------- ------ ------ -------
Commitments and
contingencies
Stockholders' equity:
Series C preferred
stock................ 2 -- 2
Series B preferred
stock................ 3 -- 3
Series A preferred
stock................ 3 -- 3
Common stock.......... 10 30 (28)b/c 12
Additional paid-in
capital.............. 34,679 -- 7,464 b/c 42,143
Deferred
compensation......... (6,468) -- -- (6,468)
Subscription
receivable........... (90) -- (90)
Retained (deficit)
earnings............. (13,947) (183) 173 c/g (13,957)
------- ------ ------ -------
Total stockholders'
equity............. 14,192 (153) 7,609 21,648
------- ------ ------ -------
Total liabilities
and stockholders'
equity............. $21,690 $1,149 $7,530 $30,369
======= ====== ====== =======
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
CONTEXT INTEGRATION, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Context Pro Forma Pro Forma
Integration, Inc. Underline, Inc. Adjustments Consolidated
----------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue................. $27,077 $2,000 $ (274)d $28,803
------- ------ ------- -------
Operating expenses:
Professional
services............. 15,258 1,232 (274)d 16,216
Sales and marketing... 4,631 50 -- 4,681
General and
administrative....... 13,419 730 -- 14,149
Stock-based
compensation......... 587 -- 1,398 f 1,985
Amortization of
goodwill............. -- -- 1,641 e 1,641
------- ------ ------- -------
Total operating
expenses........... 33,895 2,012 2,765 38,672
------- ------ ------- -------
Loss from operations.... (6,818) (12) (3,039) (9,869)
Interest expense, net... (33) (16) -- (49)
------- ------ ------- -------
Loss before income
taxes.................. (6,851) (28) (3,039) (9,918)
Income tax expense...... -- -- (10)g (10)
------- ------ ------- -------
Net loss ............... $(6,851) $ (28) $(3,049) $(9,928)
======= ====== ======= =======
Basic and diluted net
loss per share......... $ (0.70) (0.87)
======= =======
Basic and diluted
weighted average common
shares outstanding..... 9,767 1,604 h 11,371 h
======= ======= =======
Unaudited pro forma
basic and diluted net
loss per share assuming
conversion of preferred
stock.................. $ (0.50)
=======
Unaudited pro forma
weighted average number
of basic and diluted
shares outstanding
assuming conversion of
preferred stock........ 19,738 i
=======
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
CONTEXT INTEGRATION, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
a) Elimination of accounts receivable balance owed to Underline by the
Company.
b) To reflect the excess of acquisition cost over the estimated fair value
of net assets acquired ("goodwill"). The goodwill is calculated using
the net assets of Underline at December 31, 1999. In addition, a portion
of the purchase price has been allocated to deferred costs, representing
the fair value of restricted shares issued to employees of Underline.
For future financial reporting purposes of the Company, the initial
goodwill amount will be determined after calculating it using the net
assets on or about the consummation date of January 31, 2000. The
purchase price allocation of the transaction is summarized below:
Purchase price paid as:
<TABLE>
<CAPTION>
Common stock...................................................... $7,217
<S> <C>
Stock options..................................................... 249
Cash.............................................................. 100
------
Total purchase consideration..................................... 7,566
Allocated to:
Deferred costs.................................................... 2,796
Estimated fair value of Underline's net assets at December 31,
1999............................................................. (153)
------
Goodwill.......................................................... $4,923
======
</TABLE>
c) To reflect the elimination of Underline's stockholders' equity accounts,
and the issuance of the Company's common stock and stock options and
payment of cash as partial consideration.
d) Elimination of revenue and corresponding professional services costs
associated with creative design work Underline performed for the
Company.
e) Amortization of goodwill associated with the acquisition of Underline
for the year ended December 31, 1999 as if the acquisition was
consummated on January 1, 1999. The goodwill is being amortized over 3
years.
f) Amortization of the deferred costs associated with the acquisition of
Underline for the year ended December 31, 1999, as if the acquisition
was consummated on January 1, 1999. The deferred costs are being
amortized over the vesting period of 2 years.
g) Elimination of the deferred tax asset on Underline's historical
financial statements. The asset would have been fully reserved for if
Underline was part of the Company for the year ended December 31, 1999.
h) The pro forma weighted average common shares was calculated by taking
the weighted average shares of common stock for the Company as of
December 31, 1999 and adding the shares issued to Underline as part of
the acquisition, assuming the shares issued were outstanding since
January 1, 1999.
i) Unaudited pro forma basic and diluted net loss per share assumes
conversion of all outstanding shares of preferred stock into 10,725
shares of common stock upon the closing of a qualifying initial public
offering. The weighted average number of such shares amounts to 8,367.
F-32
<PAGE>
[Graphic depicting weightlifter's hand gripping barbell]
When it comes to building e-business solutions we do all the heavy lifting.
[Context Integration logo]
When you really need your B2B solution to work, you'd better put it all in
Context.
Boston. New York. New Jersey. Dallas. Houston. Denver. San Francisco. Los
Angeles.
<PAGE>
[CONTEXT INTEGRATION, INC. LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized statement of the costs and expenses, other
than underwriting discounts and commissions, incurred and to be incurred by
the Registrant in connection with the issuance and distribution of the
securities registered in this offering. All amounts are estimates except the
Securities and Exchange Commission ("SEC") registration fee and the National
Association of Securities Dealers, Inc. ("NASD") filing fee.
<TABLE>
<S> <C>
SEC registration fee................................................ $18,216
NASD filing fee..................................................... 7,400
Nasdaq National Market listing fee.................................. *
Printing fees and expenses.......................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Blue sky fees and expenses.......................................... 15,000
Transfer agent and registrar fees................................... *
Miscellaneous....................................................... *
-------
Total........................................................... $ *
=======
</TABLE>
--------
*To be disclosed by amendment
Item 14. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of Delaware (the "DGCL")
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation)
by reason of the fact that any such person is or was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided that such officer
or director acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful. A Delaware corporation may
indemnify officers and directors against expenses (including attorneys' fees)
in connection with the defense or settlement of an action by or in the right
of the corporation under the same conditions, except that no indemnification
is permitted without judicial approval if the officer or director is adjudged
to be liable to the corporation. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him or her against the expenses (including
attorney's fees) which such officer or director actually and reasonably
incurred. The foregoing description is qualified in its entirety by reference
to the more detailed provisions of Section 145 of the DGCL.
Section 102 of the DGCL allows a Delaware corporation to eliminate or limit
the personal liability of a director to the corporation or to any of its
stockholders for monetary damage for a breach of fiduciary duty as a director,
except in the case where the director (i) breaches such person's duty of
loyalty to the corporation or its
II-1
<PAGE>
stockholders, (ii) fails to act in good faith, engages in intentional
misconduct or knowingly violates a law, (iii) authorizes the payment of a
dividend or approves a stock purchase or redemption in violation of Section
174 of the DGCL or (iv) obtains an improper personal benefit.
In accordance with the DGCL, the Registrant's Certificate of Incorporation
contains a provision to limit the personal liability of its directors for
monetary damages for breach of their fiduciary duty to the fullest extent
permitted by the DGCL now, or as it may hereafter be amended.
In addition, as permitted by the DGCL, the Registrant's Bylaws provide that
(i) the Registrant is required to indemnify its directors and officers and
persons serving in such capacities in other business enterprises at the
Registrant's request, to the fullest extent permitted by Delaware law; (ii)
the Registrant may indemnify its employees and agents to the maximum extent
permitted by Delaware law; (iii) the Registrant is required to advance
expenses incurred by its directors and officers in connection with defending a
proceeding (except that a director or officer must undertake to repay any
advances if it should ultimately be determined that the director or officer is
not entitled to indemnification); (iv) the rights conferred in the Bylaws are
not exclusive; and (v) the Registrant may not retroactively amend the Bylaw
provisions in a way that adversely affects any director or officer.
The Registrant maintains insurance covering its directors and officers
against certain liabilities incurred by them in their capacities as such,
including among other things, certain liabilities under the Securities Act of
1933, as amended (the "Securities Act"). The Registrant also intends to enter
into indemnification agreements with its directors and officers prior to the
closing of this offering that provide the maximum indemnity allowed to
directors and officers by the DGCL and the Registrant's Bylaws.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant and its directors and officers who sign this Registration
Statement against certain liabilities, including liabilities under the
Securities Act.
The Registrant intends to enter into indemnification agreements with its
directors and executive officers and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
Item 15. Recent Sales of Unregistered Securities
Since our inception, we have issued and sold unregistered securities as
described below.
(a) In April 1993, we issued and sold an aggregate of 200,000 shares of
common stock to our four founders for an aggregate purchase price of $8,000.
In October 1996, we effected a 8 for 1 stock split and in August 1999, we
effected a 3 for 2 stock split on our common stock.
(b) In March 1997, we issued and sold 2,596,957 shares of Series A
Preferred Stock to investors for an aggregate purchase price of $4,999,999.22.
(c) In April 1998, we issued 80,000 shares of common stock upon the
exercise of an option granted outside of our stock option plans at an exercise
price of $0.50 per share. In August 1999, we effected a 3 for 2 stock split on
our common stock.
(d) In July 1998, we issued and sold 2,941,176 shares of Series B Preferred
stock to investors for an aggregate purchase price of $9,999,998.40.
(e) In December 1999, we issued and sold 1,611,668 shares of Series C
Preferred Stock to investors for an aggregate purchase price of
$11,999,996.42.
II-2
<PAGE>
(f) In January 2000, we issued 1,603,718 shares of common stock for all of
the outstanding shares of Underline, Inc.
(g) As of January 31, 2000, we had issued an aggregate of 7,544,775 shares
of common stock upon exercise of options granted under our 1993 Stock Option
Plan and the 1997 Stock Plan.
We believe that each transaction listed above was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2), or
Regulation D promulgated thereunder, or Rule 701, as transactions by an issuer
not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under Rule
701. The recipients of securities in the transactions represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as amended.
3.2* Form of Certificate of Amendment of the Amended and Restated
Certificate of Incorporation to be filed prior to the offering.
3.3* Form of Amended and Restated Certificate of Incorporation to be
filed promptly after the closing of the offering.
3.4* Bylaws, as amended.
3.5* Amended and Restated Bylaws to take effect upon the closing of the
offering.
4.1* Specimen Common Stock Certificate.
4.2 Third Amended and Restated Rights Agreement between the Registrant
and the parties named therein dated February 17, 2000, as amended.
4.3 Agreement and Plan of Reorganization by and among the Registrant,
Underline, Inc. and the shareholders of Underline, Inc. dated as of
January 31, 2000.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement entered into between the
Registrant and each of its directors and executive officers.
10.2 1993 Stock Option Plan and form of agreement thereto.
10.3 1997 Stock Plan and form of agreement thereto.
10.4 Underline, Inc. 1999 Stock Option Plan, and form of agreement
thereto.
10.5* Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated November 6, 1996, as amended.
Lease Agreement between the Registrant and MassMutual dated May 28,
10.6* 1997, as amended.
16.1 Letter regarding change in certifying auditors.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23.1 Consent of KPMG LLP, Independent Auditors.
23.2 Consent of KPMG LLP, Independent Auditors.
Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit
23.3 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing, as 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of 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 hereunder, 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of the 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, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Burlington, Commonwealth of Massachusetts, on the 6th day of March 2000.
CONTEXT INTEGRATION, INC.
/s/ Stephen Sharp
By: _________________________________
Stephen Sharp
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of Stephen Sharp and David Weber or any of them, each acting alone, his
or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, in connection with this Registration
Statement, including to sign and file in the name and on behalf of the
undersigned as director or officer of the Registrant (i) any and all
amendments or supplements (including any and all stickers and post-effective
amendments) to this Registration Statement, with all exhibits thereto, and
other documents in connection therewith, and (ii) any and all additional
registration statements, and any and all amendments thereto, relating to the
same offering of securities as those that are covered by this Registration
Statement that are filed pursuant to Rule 462(b) under the Securities Act of
1933, with the Securities and Exchange Commission and any applicable
securities exchange or securities self-regulatory body, 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 or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
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 or her substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on March 6,
2000 in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Stephen Sharp President and Chief Executive Officer and
______________________________________ Director (principal executive officer)
Stephen Sharp
/s/ David Weber Vice President and Chief Financial Officer
______________________________________ (principal financial and accounting officer)
David Weber
/s/ Robert Davoli Director
______________________________________
Robert Davoli
/s/ Christopher Greendale Director
______________________________________
Christopher Greendale
/s/ Teck Chye Lau Director
______________________________________
Teck Chye Lau
/s/ Ronald Nordin Director
______________________________________
Ronald Nordin
/s/ Peter Solvik Director
______________________________________
Peter Solvik
/s/ Michael Stout Director
______________________________________
Michael Stout
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as amended.
3.2* Form of Certificate of Amendment of the Amended and Restated
Certificate of Incorporation to be filed prior to the offering.
3.3* Form of Amended and Restated Certificate of Incorporation to be
filed promptly after the closing of the offering.
3.4* Bylaws, as amended.
3.5* Amended and Restated Bylaws to take effect upon the closing of the
offering.
4.1* Specimen Common Stock Certificate.
4.2 Third Amended and Restated Rights Agreement between the Registrant
and the parties named therein dated February 17, 2000, as amended.
4.3 Agreement and Plan of Reorganization by and among the Registrant,
Underline, Inc. and the shareholders of Underline, Inc. dated as of
January 31, 2000.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement entered into between the
Registrant and each of its directors and executive officers.
10.2 1993 Stock Option Plan and form of agreement thereto.
10.3 1997 Stock Plan and form of agreement thereto.
10.4 Underline, Inc. 1999 Stock Option Plan, and form of agreement
thereto.
10.5* Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated November 6, 1996, as amended.
Lease Agreement between the Registrant and MassMutual dated May 28,
10.6* 1997, as amended.
16.1 Letter regarding change in certifying auditors.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2 Consent of KPMG LLP, Independent Auditors.
Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit
23.3 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
_______________ SHARES
CONTEXT INTEGRATION, INC.
COMMON STOCK, $0.001 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
__________, 2000
<PAGE>
Exhibit 1.1
_____________, 20__
Morgan Stanley & Co. Incorporated
Deutsche Bank Securities Inc.
Fleet Boston Robertson Stephens Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
CONTEXT INTEGRATION, a Delaware corporation (the "COMPANY"), proposes
to issue and sell to the several Underwriters named in Schedule I hereto (the
"UNDERWRITERS") _______________ shares of its common stock, $0.001 par value per
share (the "FIRM SHARES"). The Company also proposes to issue and sell to the
several Underwriters not more than an additional ______________ shares of its
common stock, $0.001 par value per share (the "ADDITIONAL SHARES") if and to the
extent that you, as Managers of the offering, shall have determined to exercise,
on behalf of the Underwriters, the right to purchase such shares of common stock
granted to the Underwriters in Section 2 hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "SHARES." The
shares of common stock, $0.001 par value per share of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON STOCK."
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") has agreed to
reserve a portion of the Shares to be purchased by it under this Agreement
for sale to the Company's directors, officers, employees and business
associates and other parties related to the Company (collectively,
"PARTICIPANTS"), as set forth in the Prospectus under the heading
"Underwriters" (the "DIRECTED SHARE PROGRAM").
<PAGE>
The Shares to be sold by Morgan Stanley and its affiliates pursuant to the
Directed Share Program are referred to hereinafter as the "DIRECTED SHARES"
and will be sold by Morgan Stanley and its affiliates pursuant to the terms
of this Agreement at the public offering price. Any Directed Shares not
orally confirmed for purchase by any Participants by the beginning of the
first business day after the date on which this Agreement is executed will
be offered to the public by the Underwriters as set forth in the
Prospectus.
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or to the Company's
Knowledge threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own or lease its property and to
conduct its business as described in the Prospectus and is duly qualified
to transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to
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conduct its business as described in the Prospectus and is duly qualified
to transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole; all of the issued
shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued, are fully paid and non-assessable and
are owned directly by the Company, free and clear of all liens,
encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(i) The Shares have been approved for listing on the Nasdaq National
Market, subject to official notice of issuance.
(j) There are no outstanding options to acquire shares of capital
stock of the Company except as disclosed in the Registration Statement and
the Prospectus and except as have been granted under the Company's stock
option plans and employee stock purchase plan and Underline, Inc.'s stock
option plan described therein.
(k) There are no outstanding warrants to acquire shares of capital
stock of the Company except as disclosed in the Registration Statement and
the Prospectus.
(l) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or by-
laws of the Company or any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any subsidiary, except for any such
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contravention which would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by the Company of its obligations
under this Agreement, except (i) such as may be required by the securities
or Blue Sky laws of the various states and other jurisdictions in
connection with the offer and sale of the Shares and (ii) such as if not
obtained would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(m) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(n) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
(o) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(p) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and
its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (3) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its subsidiaries, except in each case as described in the
Prospectus.
(q) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or
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unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names currently employed
by them in connection with the Company's business as presently conducted,
or adequate licenses or other rights to use the same, and neither the
Company nor any of its subsidiaries has received any notice of infringement
of or conflict with asserted rights of others with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(r) The Company and its subsidiaries have good and marketable title
in fee simple to all real property, and good and marketable title to all
personal property owned by them, in each case which is material to the
business of the Company and its subsidiaries, in each case free and clear
of all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property
and do not interfere in any material respect with the use made and
currently proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere in any material respect with the use made and currently proposed
to be made of such property and buildings by the Company and its
subsidiaries, in each case except as described in the Prospectus in all
material respects.
(s) The Company and its subsidiaries are insured by the insurers of
recognized financial responsibility against such losses and risks and in
such amounts as the Company believes to be prudent and customary in the
businesses in which they are engaged; neither the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied for;
and neither the Company nor any of its subsidiaries has any reason to
believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost
that would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described in the Prospectus in
all material respects.
(t) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's general
or specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the amounts reflected on the Company's
balance sheet for assets is compared with the
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existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(u) To the Company's knowledge, the accountants who have certified or
shall certify the financial statements filed or to be filed with the
Commission as part of the Registration Statement and the Prospectus are
independent accountants as required by the Securities Act. The
consolidated financial statements of the Company (together with the related
notes thereto) included in the Registration Statement present fairly the
financial position and results of operations of the Company at the
respective dates and for the respective periods to which they apply,
subject to normal year-end adjustments. Such financial statements have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as otherwise
stated therein. The pro forma financial information of the Company
included in the Registration Statement has been prepared in accordance with
the Commission's rules and guidelines with respect to pro forma financial
statements, has been properly compiled on the bases described therein and
the Company currently believes that the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to
give effect to the transactions and circumstances referred to therein.
(v) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described in the Prospectus.
(w) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be required to register as an "investment
company" as such term is defined in the Investment Company Act of 1940, as
amended.
(x) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
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<PAGE>
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(y) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement, except in each case as described in the Prospectus.
(z) Except as described in the Prospectus, material labor dispute
with the employees of the Company or any of its subsidiaries exists, or, to
the knowledge of the Company, is imminent; and the Company is not aware of
any existing, threatened or imminent labor disturbance by the employees of
any of its principal suppliers, manufacturers or contractors that could
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(aa) To the Company's knowledge, no officer or director of the
Company is in breach or violation of any employment agreement, non-
competition agreement, confidentiality agreement, or other agreement
restricting the nature or scope of employment to which such officer or
director is a party, and, to the Company's knowledge, the conduct of the
Company's business, as described in the Registration Statement and
Prospectus, will not result in a breach or violation of any such agreement.
(bb) The Registration Statement, the Prospectus and any preliminary
prospectus comply, and any amendments or supplements thereto will comply,
with any applicable laws or regulations of foreign jurisdictions in which
the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share
Program.
(cc) No consent, approval, authorization or order of, or
qualification with, any governmental body or agency, other than those
obtained, is required in connection with the offering of the Directed
Shares in any jurisdiction where the Directed Shares are being offered.
(dd) The Company has not offered, or caused Morgan Stanley or its
affiliates to offer, Shares to any person pursuant to the Directed Share
Program with the specific intent to unlawfully influence (i) a customer or
supplier of the Company to alter the customer's or supplier's level or type
of business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to sell
to the several Underwriters, and each Underwriter, upon the basis of the
representations
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<PAGE>
and warranties herein contained, but subject to the conditions hereinafter
stated, agrees, severally and not jointly, to purchase from the Company the
respective numbers of Firm Shares set forth in Schedule I hereto opposite its
name at $______ a share (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to _______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof which is described in
the Prospectus or of which the Underwriters have been advised in writing or (C)
any plans to purchase Common Stock, or shares of Common Stock issued by the
Company upon the exercise of such options, granted under the Company's stock
option and employee stock purchase plans described in the Prospectus.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares
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<PAGE>
as soon after the Registration Statement and this Agreement have become
effective as in your judgment is advisable. The Company is further advised by
you that the Shares are to be offered to the public initially at $_____________
a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected by you at
a price that represents a concession not in excess of $______ a share under the
Public Offering Price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of $_____ a share, to any Underwriter or to
certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made
to the Company in Federal or other funds immediately available at a closing to
be held at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill
Road, Palo Alto, California 94304 against delivery of such Firm Shares for the
respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on ____________, 2000, or at such other time on the same or such other
date, not later than _________, 2000, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "CLOSING
DATE".
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 2000, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "OPTION CLOSING DATE".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date and
the Option Closing Date, as the case may be, are subject to the condition that
the Registration Statement shall have become effective not later than [_____]
(New York City time) on the date hereof.
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<PAGE>
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date and the Option Closing Date, as the case may be,
there shall not have occurred any change, or any development involving a
prospective change, in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its subsidiaries, taken
as a whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement)
that, in your judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date and the
Option Closing Date, as the case may be, a certificate, dated the Closing
Date or the Option Closing Date, as the case may be, and signed by an
executive officer of the Company, to the effect that the representations
and warranties of the Company contained in this Agreement are true and
correct as of the Closing Date or the Option Closing Date, as the case may
be, and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date or the Option Closing Date, as the
case may be.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date and the
Option Closing Date, as the case may be, an opinion of Wilson, Sonsini,
Goodrich & Rosati, P.C., outside counsel for the Company, dated the Closing
Date or the Option Closing Date, as the case may be, to the effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction
of its incorporation, has the corporate power and authority to own or
lease its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation, has the corporate power and
authority to own or lease its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business
and is in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires such
qualification, except to the
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extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable and, to such counsel's
knowledge, fully paid;
(v) all of the issued shares of capital stock of each subsidiary
of the Company have been duly and validly authorized and issued, non-
assessable and to such counsel's knowledge, fully paid, and are owned
directly by the Company, free and clear of all liens, encumbrances,
equities or claims;
(vi) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or to such counsel's
knowledge, similar rights;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any material provision of applicable law or the
certificate of incorporation or by-laws of the Company or, to the best
of such counsel's knowledge, any agreement or other instrument binding
upon the Company or any of its subsidiaries that is material to the
Company and its subsidiaries, taken as a whole and that is set forth
as an exhibit to the Registration Statement, or, to the best of such
counsel's knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or any
subsidiary other than any such contravention not constituting a
material adverse effect with respect to the Company, and to such
counsel's knowledge, no consent, approval, authorization or order of,
or qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale
of the Shares or the NASD (as to which such counsel need not express
any opinion) and except for such consents, approvals, authorizations,
orders or
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qualifications which if not obtained would not result in a material
adverse effect on the Company;
(ix) the statements (A) in the Prospectus under the captions
"Description of Capital Stock" and "Underwriters" (to the extent of
the description of this Agreement only), and (B) in the Registration
Statement in Items 14 and 15, in each case insofar as such statements
constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(x) after due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company
or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is subject that
are required to be described in the Registration Statement or the
Prospectus and are not so described and, to such counsel's knowledge
there are no regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(xi) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be required to register as an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended; and
(xii) the Registration Statement and Prospectus (except for
financial statements and schedules and other financial and statistical
data included therein as to which such counsel need not express any
opinion) comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the
Commission thereunder. In addition, such counsel shall state that in
addition to rendering legal advice and assistance to the Company in
the course of the preparation of the Registration Statement and the
Prospectus, involving, among other things, discussions and inquiries
concerning various legal matters and the review of certain corporate
records, documents and proceedings (in addition to those described in
paragraphs (i) through (__) above), such counsel also participated in
conferences with certain officers and other representatives of the
Company, including its independent certified public accountants and
with the Underwriters and their counsel, at which the contents of the
Registration Statement and the Prospectus and related matters were
discussed; provided, such counsel may state that they have not
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independently verified the accuracy, completeness or fairness of the
information contained in the Registration Statement and Prospectus.
Such counsel shall also state that based upon its participation as
described in the preceding paragraph, they confirm that they have no
reason to believe that (except for financial statements and schedules
and other financial and statistical data as to which they need express
no belief) (i) the Registration Statement, as of its effective date,
contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
(xiii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be required to
register as an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended; and
(d) The Underwriters shall have received on the Closing Date and the
Option Closing Date, as the case may be, an opinion of Ropes & Gray,
counsel for the Underwriters, dated the Closing Date or the Option Closing
Date, as the case may be, covering the matters referred to in Sections
5(c)(vi), 5(c)(vii), 5(c)(ix) (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters") and
5(c)(xiii) above.
With respect to Section 5(c)(xiii) above, Wilson, Sonsini, Goodrich &
Rosati, P.C. and Ropes & Gray may state that their opinion and belief are
based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and
review and discussion of the contents thereof, but are without independent
check or verification, except as specified.
The opinion of Wilson, Sonsini, Goodrich & Rosati, P.C. described in
Section 5(c) above shall be rendered to the Underwriters at the request of
the Company and shall so state therein.
(e) The Underwriters shall have received, on each of the date hereof,
the Closing Date and the Option Closing Date, a letter dated such date, in
form and substance satisfactory to the Underwriters, from KPMG LLP,
independent public accountants, containing statements and information of
the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a "cut-off
date" not earlier than the date hereof.
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(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and the shareholders, officers and directors
of the Company relating to sales and certain other dispositions of shares
of Common Stock or certain other securities, delivered to you on or before
the date hereof, shall be in full force and effect on the Closing Date and
the Option Closing Date, as the case may be.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such other documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the reasonable opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall occur or
condition exist as a result of which it is necessary to amend or supplement
the Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the reasonable opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the Commission
and furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which Shares
may have been sold by you on behalf of the Underwriters and to any other
dealers upon reasonable request, either amendments
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<PAGE>
or supplements to the Prospectus so that the statements in the Prospectus
as so amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so that
the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-
month period ending ________, 2000 that satisfies the provisions of Section
11(a) of the Securities Act and the rules and regulations of the Commission
thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes
payable thereon, (iii)all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp
duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program, (iv) the cost
of printing or producing any Blue Sky memorandum in connection with the
offer and sale of the Shares under state securities laws and all expenses
in connection with the qualification of the Shares for offer and sale under
state securities laws as provided in Section 6(d) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with
the Blue Sky memorandum, (v) all filing fees and the reasonable fees and
disbursements of counsel to the Underwriters incurred in connection with
the review and qualification of the offering of the Shares by the National
Association of Securities Dealers, Inc., (vi) all fees and expenses in
connection with the preparation and filing of the registration statement on
Form 8-A relating to the Common Stock and all costs and expenses incident
to listing the Shares on the Nasdaq National Market, (vii) the cost of
printing certificates representing the Shares, (viii) the costs and charges
of any transfer agent, registrar or depositary, (ix) the costs and expenses
of the Company relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Shares,
including, without limitation, expenses associated with the production
- 15 -
<PAGE>
of road show slides and graphics, fees and expenses of any consultants
engaged in connection with the road show presentations with the prior
approval of the Company, travel and lodging expenses of the representatives
and officers of the Company and any such consultants, and the cost of any
aircraft chartered in connection with the road show, and (x) all other
costs and expenses incident to the performance of the obligations of the
Company hereunder for which provision is not otherwise made in this
Section. It is understood, however, that except as provided in this
Section, Section 7 entitled "Indemnity and Contribution", and the last
paragraph of Section 10 below, the Underwriters will pay all of their costs
and expenses, including fees and disbursements of their counsel, stock
transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
(g) To place stop transfer orders on any Directed Shares that have
been sold to Participants subject to the three month restriction on sale,
transfer, assignment, pledge or hypothecation imposed by NASD Regulation,
Inc. under its Interpretative Material 2110-1 on free-riding and
withholding to the extent necessary to ensure compliance with the three
month restrictions.
(h) To comply with all applicable securities and other applicable
laws, rules and regulations in each jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
7. Indemnity and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; provided, however, that
-------- -------
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter, or any person controlling
such Underwriter, from whom the person asserting any such losses, claims,
damages or liabilities purchased Shares, if a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
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<PAGE>
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such losses, claims, damages or liabilities.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act to the same extent as the foregoing indemnity from the
Company to such Underwriter, but only with reference to information
relating to such Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to Section 7(a) or 7(b), such person (the "INDEMNIFIED
PARTY") shall promptly notify the person against whom such indemnity may be
sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party,
upon request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
and any others the indemnifying party may designate in such proceeding and
shall pay the reasonable fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any indemnified party shall have
the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall
not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate
firm (in addition to any local counsel) for all such indemnified parties
and that all such fees and expenses shall be reimbursed as they are
incurred. Such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated, in the case of parties indemnified pursuant to Section 7(a),
and by the Company, in the case of parties indemnified pursuant to Section
7(b). The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss
or liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for fees
and expenses of counsel as contemplated
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<PAGE>
by the second and third sentences of this paragraph, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered into
more than 30 days after receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such proceeding.
(d) To the extent the indemnification provided for in Section 7(a) or
7(b) is unavailable to an indemnified party or insufficient in respect of
any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if
the allocation provided by clause 7(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and of the Underwriters on
the other hand in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the
same respective proportions as the net proceeds from the offering of the
Shares (before deducting expenses) received by the Company and the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover of the Prospectus, bear to
the aggregate Public Offering Price of the Shares. The relative fault of
the Company on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether 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 the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the respective
number of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by
pro rata
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<PAGE>
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in Section 7(d). The amount paid
or payable by an indemnified party as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages that
such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
remedies provided for in this Section 7 are not exclusive and shall not
limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter or by or on behalf of the Company, its officers
or directors or any person controlling the Company and (iii) acceptance of
and payment for any of the Shares.
8. Directed Share Program Indemnification.
(a) The Company agrees to indemnify and hold harmless Morgan Stanley
and its affiliates and each person, if any, who controls Morgan Stanley or
its affiliates within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act ("MORGAN STANLEY ENTITIES"), from and
against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) (i)
caused by any untrue statement or alleged untrue statement of a material
fact contained in any material prepared by or with the consent of the
Company for distribution to Participants in connection with the Directed
Share Program, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; (ii) caused by the failure of any
Participant to pay for and accept delivery of Directed Shares that the
Participant has agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program other than losses, claims,
damages or liabilities (or expenses
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<PAGE>
relating thereto) that are finally judicially determined to have resulted
from the bad faith or gross negligence of Morgan Stanley Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Morgan Stanley Entity in respect of which
indemnity may be sought pursuant to Section 8(a), the Morgan Stanley Entity
seeking indemnity shall promptly notify the Company in writing and the
Company, upon request of the Morgan Stanley Entity, shall retain counsel
reasonably satisfactory to the Morgan Stanley Entity to represent the
Morgan Stanley Entity and any other indemnified party that the Company may
designate in such proceeding and shall pay the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
Morgan Stanley Entity shall have the right to retain its own counsel, but
the fees and expenses of such counsel shall be at the expense of such
Morgan Stanley Entity unless (i) the Company shall have agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the Company and the Morgan
Stanley Entity and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between
them. The Company shall not, in respect of the legal expenses of the
Morgan Stanley Entities in connection with any proceeding or related
proceedings the same jurisdiction, be liable for the fees and expenses of
more than one separate firm (in addition to any local counsel) for all
Morgan Stanley Entities. Any such firm for the Morgan Stanley Entities
shall be designated in writing by Morgan Stanley. The Company shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment
for the plaintiff, the Company agrees to indemnify the Morgan Stanley
Entities from and against any loss or liability by reason of such
settlement or judgment. The Company shall not, without the prior written
consent of Morgan Stanley, effect any settlement of any pending or
threatened proceeding in respect of which any Morgan Stanley Entity is or
could have been a party and indemnity could have been sought hereunder by
such Morgan Stanley Entity, unless such settlement includes an
unconditional release of the Morgan Stanley Entities from all liability on
claims that are the subject matter of such proceeding.
(c) To the extent the indemnification provided for in Section 8(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then the
Company, in lieu of indemnifying the Morgan Stanley Entity thereunder,
shall contribute to the amount paid or payable by the Morgan Stanley Entity
as a result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Morgan Stanley Entities on the other
hand from the offering of the Directed Shares or (ii) if the allocation
provided by clause 8(c)(i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause 8(c)(i) above but also the relative fault of the
Company on the
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<PAGE>
one hand and of the Morgan Stanley Entities on the other hand in connection
with the statements or omissions that resulted in such losses, claims,
damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one
hand and of the Morgan Stanley Entities on the other hand in connection
with the offering of the Directed Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the
Directed Shares (before deducting expenses) and the total underwriting
discounts and commissions received by the Morgan Stanley Entities for the
Directed Shares, bear to the aggregate Public Offering Price of the Shares.
If the loss, claim, damage or liability is caused by an untrue or alleged
untrue statement of a material fact, the relative fault of the Company on
the one hand and the Morgan Stanley Entities on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement or the omission or alleged omission relates to
information supplied by the Company or by the Morgan Stanley Entities and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would
not be just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Morgan Stanley Entities were
treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations
referred to in Section 8(c). The amount paid or payable by the Morgan
Stanley Entities as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by the Morgan Stanley Entities in connection
with investigating or defending any such action or claim. Notwithstanding
the provisions of this Section 8, no Morgan Stanley Entity shall be
required to contribute any amount in excess of the amount by which the
total price at which the Directed Shares distributed to the public were
offered to the public exceeds the amount of any damages that such Morgan
Stanley Entity has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. The remedies
provided for in this Section 8 are not exclusive and shall not limit any
rights or remedies which may otherwise be available to any Morgan Stanley
Entity at law or in equity.
(e) The indemnity and contribution provisions contained in this
Section 8 shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Morgan Stanley Entity or the Company, its officers or
directors or any person controlling the Company and (iii) acceptance of and
payment for any of the Directed Shares.
9. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or
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<PAGE>
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the National Association of Securities
Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange or the Chicago Board of Trade, (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market, (iii) a general moratorium on commercial banking activities in New York
shall have been declared by either Federal or New York State authorities or (iv)
there shall have occurred any outbreak or escalation of hostilities or any
change in financial markets or any calamity or crisis that, in your judgment, is
material and adverse and (b) in the case of any of the events specified in
clauses 9(a)(i) through 9(a)(iv), such event, singly or together with any other
such event, makes it, in your judgment, impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus.
10. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such non-
defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 10 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares
with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares to be purchased, and arrangements satisfactory
to you and the Company for the purchase of such Firm Shares are not made within
36 hours after such default, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter or the Company. In any such case
either you or the Company shall have the right to postpone the Closing Date, but
in no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. If, on the Option Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Additional Shares
and the aggregate number of Additional Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been
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<PAGE>
obligated to purchase in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York.
13. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
CONTEXT INTEGRATION, INC.
By:____________________________
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Deutsche Bank Securities Inc.
FleetBoston Robertson Stephens Inc.
Acting severally on behalf
of themselves and the
several Underwriters named
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<PAGE>
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:__________________________
Name:
Title:
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<PAGE>
SCHEDULE I
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
Morgan Stanley & Co. Incorporated
Deutsche Bank Securities Inc.
FleetBoston Robertson Stephens Inc.
[NAMES OF OTHER UNDERWRITERS]
_______________
Total ........
===============
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<PAGE>
EXHIBIT A
[FORM OF LOCK-UP LETTER]
_____________, 2000
Morgan Stanley & Co. Incorporated
Deutsche Bank Securities Inc.
FleetBoston Robertson Stephens Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with Context Integration, Inc., a Delaware corporation
(the "COMPANY"), providing for the public offering (the "PUBLIC OFFERING") by
the several Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of ___
shares (the "SHARES") of the common stock, $0.001 par value per share, of the
Company.
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (a) the sale of
any Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
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<PAGE>
commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
_________________________
(Name)
_________________________
(Address)
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<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CONTEXT INTEGRATION, INC.
Context Integration, Inc., a corporation organized and existing under the
laws of the State of Delaware, does hereby certify:
1. The company was incorporated under the name "The Context Group"
pursuant to its original Certificate of Incorporation filed with the Secretary
of State of the State of Delaware on October 13, 1992.
2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the corporation's Certificate of
Incorporation as heretofore amended. The amendments and restatement herein set
forth have been duly approved by the Board of Directors in accordance with
Sections 242 and 245 of the General Corporation Law of Delaware and by the
written consent of a majority of the stockholders of the corporation and a
majority of the holders of each class entitled to a class vote thereon in
accordance with the provisions of Sections 228 and 242 of the General
Corporation Law of Delaware.
3. The text of the Certificate of Incorporation is hereby restated and
further amended to read in its entirety as follows:
ARTICLE I.
The name of this corporation is Context Integration, Inc. (hereinafter, the
"Company").
ARTICLE II.
The address of the Company's registered office in the State of Delaware is
15 E. North Street, Dover, Kent County, Delaware 19901. The name of the
Company's registered agent at such address is Paracorp Incorporated.
ARTICLE III.
The purpose of the Company is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV.
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A. The Company is authorized to issue two classes of capital stock to be
designated, respectively, Preferred Stock (the "Preferred Stock") and Common
Stock (the "Common Stock"). The total number of shares of capital stock that
this Company shall have authority to issue is thirty million five hundred
thirty-eight thousand one hundred thirty-three (30,538,133). The total number of
shares of Preferred Stock this Company shall have authority to issue is five
million five hundred thirty-eight thousand one hundred thirty-three (5,538,133).
The total number of shares of Common Stock this Company shall have authority to
issue is twenty-five million (25,000,000). The Preferred Stock shall have a par
value of $0.001 per share, and the Common Stock shall have a par value of $0.001
per share.
B. The Preferred Stock shall be divided into series. The first series of
Preferred Stock shall consist of two million five hundred ninety-six thousand
nine hundred fifty-seven (2,596,957) shares and is designated "Series A
Preferred Stock." The second series of Preferred Stock shall consist of two
million nine hundred forty-one thousand one hundred seventy-six (2,941,176)
shares and is designated "Series B Preferred Stock". As used herein, the term
"Series A Preferred" without designation shall refer to shares of the Company's
Series A Preferred Stock, the term "Series B Preferred" shall refer to shares of
the Company's Series B Preferred Stock and the term "Common" shall refer to the
Company's Common Stock. The remaining shares of Preferred Stock, if any, may be
issued from time to time in one or more series. The board of directors of the
Company (the "Board of Directors") is expressly authorized to provide for the
issue of all or any of such remaining shares of the Preferred Stock in one or
more series, and to fix the number of shares and to determine or alter for each
such series, such voting powers, full or limited, or no voting powers, and such
designations, preferences, and relative, participating, optional, or other
rights and such qualifications, limitations, or restrictions thereof, as shall
be stated and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issue of such shares (a "Preferred Stock
Designation") and as may be permitted by the General Corporation Law of the
State of Delaware. The Board of Directors is also expressly authorized to
increase or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any series other than the Series A
Preferred Stock and the Series B Preferred Stock subsequent to the issue of
shares of that series. In case the number of shares of any such series shall be
so decreased, the shares constituting such decrease shall resume the status that
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
The relative rights, preferences, privileges and restrictions granted to or
imposed upon the Common Stock, the Series A Preferred Stock and the Series B
Preferred Stock are as follows:
1. Dividends.
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(a) The holders of outstanding shares of Series A Preferred and Series
B Preferred shall be entitled to receive in any fiscal quarter, when, as and if
declared by the Board of Directors, out of any assets at the time legally
available therefor, non-cumulative dividends at the rate of $0.038507 and $0.068
per share, respectively, per fiscal quarter, as adjusted for any
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consolidations, combinations, stock distributions, stock dividends, stock splits
or similar events (collectively a "Recapitalization Event"). Dividends may be
declared and paid upon Common Stock in any fiscal quarter of the Company only if
the preferred dividends described above have been paid or declared and set apart
during that fiscal quarter, and no dividends shall be paid on any share of
Common Stock unless a dividend (including the amount of any dividends paid
pursuant to the above provisions of this Section B.1) is paid with respect to
all outstanding shares of Series A Preferred and Series B Preferred in an amount
for each such share of Series A Preferred and Series B Preferred equal to or
greater than the aggregate amount of such dividends for all such shares of
Common Stock into which each such share of Series A Preferred and Series B
Preferred could then be converted. The right to dividends on shares of Series A
Preferred and Series B Preferred shall not be cumulative, and no right shall
accrue to holders of shares of Series A Preferred and Series B Preferred by
reason of the fact that distributions on said shares are not declared in any
prior fiscal quarter, nor shall any undeclared or unpaid distribution bear or
accrue interest.
2. Liquidation Preference.
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(a) In the event of any liquidation, dissolution, or winding up
of the Company, either voluntary or involuntary, distributions to the
stockholders of the Company shall be made in the following manner:
(i) The holders of outstanding shares of Series A Preferred
and Series B Preferred shall be entitled to receive, prior and in preference to
any distribution of any of the assets or surplus funds of the Company to the
holders of the Common Stock or any other class or series of capital stock of the
Company by reason of their ownership of such stock, the amount of $1.92533 per
share for each share of Series A Preferred then held by them and the amount of
$3.40 per share for each share of Series B Preferred then held by them
(appropriately adjusted for any Recapitalization Event), plus all accrued or
declared and unpaid dividends on each share of Series A Preferred and Series B
Preferred then held by them (the "Preferred Liquidation Preference"). The Series
A Preferred and Series B Preferred shall rank on a parity as to the receipt of
the respective preferential amounts for each such series upon the occurrence of
such event. If upon occurrence of such event of liquidation, dissolution or
winding up, the assets and funds legally available to be distributed among the
holders of the Series A Preferred and Series B Preferred shall be insufficient
to permit the payment to such holders of the appropriate Preferred Liquidation
Preference, then the entire assets and funds of the Company legally available
for distribution shall be distributed ratably among the holders of the Series A
Preferred and Series B Preferred in proportion to the preferential amount each
such holder is otherwise entitled to receive.
(ii) After payment has been made to the holders of the
Series A Preferred and Series B Preferred of the full amounts to which they
shall be entitled pursuant to Section B.2(a)(i) above, the remaining assets and
funds of the Company legally available for distribution, if any, shall be
distributed ratably among the holders of the Common Stock, the Series A
Preferred and the Series B Preferred based upon the number of shares of Common
Stock then held (assuming for such purpose the conversion of Series A Preferred
into Common Stock at the
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then-applicable Series A Conversion Price and the conversion of Series B
Preferred into Common Stock at the then-applicable Series B Conversion Price) by
each such holder until the net proceeds received by the holders of Series A
Preferred and Series B Preferred pursuant to Section B.2(a)(i) above and this
Section B.2(a)(ii) equal $2.887995 and $5.10 (appropriately adjusted for any
Recapitalization Event) per share of Series A Preferred and Series B Preferred,
respectively.
(iii) After payment has been made pursuant to Sections
B.2(a)(i) and B.2(a)(ii) of the full amounts to be paid under each such section,
all remaining assets and funds legally available for distribution, if any, shall
be distributed ratably among the holders of the Common Stock.
(b) Shares of Preferred Stock shall not be entitled to be
converted into shares of Common Stock in order to participate in any
distribution, or series of distributions, as shares of Common Stock, without
first foregoing participation in such distribution, or series of distributions,
as shares of Preferred Stock.
(c) For purposes of this Section B.2, a sale, conveyance or
other disposal of substantially all of the assets of the Company or a merger or
consolidation of the Company with or into any other corporation or corporations
in which the stockholders of the Company immediately prior to such transaction
shall own less than fifty percent (50%) of the voting securities of the
surviving corporation or a sale of all or substantially all of the assets of the
Company shall be treated as a liquidation, dissolution or winding up of the
Company. The valuation of any securities or other property other than cash
received by the Company in any transaction covered by this Section B.2(b) shall
be computed at the fair value thereof at the time of receipt as determined in
good faith by the Board of Directors.
3. Conversion. The holders of the Series A Preferred and Series B
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Preferred shall have conversion rights (the "Conversion Rights") as follows:
(a) Each share of Series A Preferred shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share, at the office of the Company or the transfer agent for such stock into
such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $1.92533 by the Conversion Price (as hereinafter defined)
applicable to such share in effect at the time of conversion. The price at
which shares of Common Stock shall be deliverable upon conversion of shares of
the Series A Preferred (the "Series A Conversion Price") shall initially be
$1.92533 per share of Common Stock subject to adjustment as provided in Section
B.4 of this Article IV. Each share of Series B Preferred shall be convertible,
at the option of the holder thereof, at any time after the date of issuance of
such share, at the office of the Company or the transfer agent for such stock
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $3.40 by the Conversion Price (as hereinafter defined)
applicable to such share in effect at the time of conversion. The price at
which shares of Common Stock shall be deliverable upon conversion of shares of
the Series B Preferred (the "Series B Conversion Price") shall initially be
$3.40 per share of Common Stock
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subject to adjustment as provided in Section B.4 of this Article IV. The Series
A Conversion Price and the Series B Conversion Price are herein referred
collectively as the "Conversion Prices."
(b) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock utilizing the then-effective Conversion
Price for each such share upon the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of shares of
Common Stock to the public for the account of the Company at a price to the
public of not less than $6.738655 per share (subject to adjustment for any
Recapitalization Events) and an aggregate offering price (net of selling
stockholder proceeds, if any, and underwriters' discounts expenses, including,
without limitation, fees of the Company's counsel) to the public of not less
than Fifteen Million Dollars ($15,000,000). In the event of such an offering,
the person(s) entitled to receive the Common Stock issuable upon such automatic
conversion of Preferred Stock shall be deemed to have converted such Preferred
Stock immediately prior to the closing of such sale of securities.
(c) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock utilizing the then-effective appropriate
Conversion Price for each such share upon the vote or written consent of holders
of at least two-thirds (2/3) of the shares of Preferred Stock then outstanding.
(d) No fractional shares of Common Stock shall be issued upon
conversion of Preferred Stock. In lieu of any fractional shares to which the
holder would otherwise be entitled, the Company shall pay cash equal to such
fraction multiplied by the fair market value of the Common Stock on the
Conversion Date, as determined by the Board of Directors. Before any holder of
Preferred Stock shall be entitled to convert the same into full shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Company or of the transfer agent for such shares,
and shall give written notice to the Company at such office that he elects to
convert the same; provided, however, that in the event of an automatic
conversion pursuant to Section B.3(b) or B.3(c) of this Article IV, all
outstanding shares of all Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent; and provided further, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such automatic conversion unless either the certificates evidencing such
shares of Preferred Stock are delivered to the Company or its transfer agent as
provided above, or the holder notifies the Company or its transfer agent that
such certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates.
(e) The Company shall, as soon as practicable after such
delivery, or after such agreement and indemnification, issue and deliver at such
office to such holder of Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid and a check, if applicable, payable to the holder in the amount of any
cash amounts payable as the result of any fractional shares resulting from the
conversion of Preferred
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Stock into Common Stock, plus any declared and unpaid dividends on the converted
Preferred Stock, and a certificate for any shares of Preferred Stock not so
converted. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of
Preferred Stock to be converted, or, in the case of automatic conversion, on the
date of the closing of the offering or the receipt of the written consent (as
the case may be), and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.
(f) In the event of any taking by the Company of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend (other than a cash dividend) or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Company shall mail to each holder of Preferred
Stock, at least twenty (20) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
4. Adjustments to Conversion Prices.
--------------------------------
(a) In the event the Company at any time or from time to time,
after the date this Amendment is filed with the Delaware Secretary of State,
effects a subdivision or combination of its outstanding Common Stock into a
greater or lesser number of shares without a proportionate and corresponding
subdivision or combination of its outstanding Preferred Stock, then and in each
such event the Conversion Prices shall be decreased or increased
proportionately.
(b) In the event the Company at any time or from time to time,
after the date this Amendment is filed with the Delaware Secretary of State,
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
additional shares of Common Stock or other securities or rights (hereinafter
referred to as "Common Stock Equivalents") convertible into or entitling the
holder thereof to receive additional shares of Common Stock without payment of
any consideration by such holder for such Common Stock Equivalents or the
additional shares of Common Stock, then and in each such event the maximum
number of shares (as set forth in the instrument relating thereto without regard
to any provisions contained therein for a subsequent adjustment of such number)
of Common Stock issuable in payment of such dividend or distribution or upon
conversion or exercise of such Common Stock Equivalents shall be deemed to be
issued and outstanding as of the time of such issuance or, in the event such a
record date shall have been fixed, as of the close of business on such record
date. In each such event, the Conversion Prices shall be proportionately
decreased as of the time of such issuance or, in the event such a record date
shall have been fixed, as of the close of business on such record date.
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(c) If at any time after the first date on which a share of
Series B Preferred Stock is first issued ("Original Issue Date"), the Company
shall issue or sell Equity Securities, as defined in subsection (A) below, at a
consideration per share (the "Lower Price") less than the appropriate Conversion
Price with respect to any series of Preferred Stock in effect immediately prior
to the time of such issue or sale, then forthwith upon such issue or sale, the
Conversion Price for such series of Preferred Stock shall be adjusted to a price
(calculated to the nearest cent) determined by dividing:
(i) an amount equal to the sum of (x) the number of shares
of Common Stock outstanding immediately prior to such issue or sale multiplied
by such then-existing Conversion Price, (y) the number of shares of Common Stock
issuable upon conversion or exchange of any obligations or of any shares of
stock of the Company outstanding immediately prior to such issue or sale
multiplied by such then-existing Conversion Price, and (z) an amount equal to
the aggregate "consideration actually received" by the Company upon such issue
or sale, by
(ii) an amount equal to the sum of (x) the number of shares
of Common Stock outstanding immediately prior to such issue or sale, (y) the
number of shares of Common Stock issuable upon conversion or exchange of any
obligations or of any shares of stock of the Company outstanding immediately
prior to such issue or sale and (z) the additional shares of Common Stock issued
as and/or issuable upon conversion or exchange of the Equity Securities issued
in such issuance or sale.
For purposes hereof the following provisions shall be applicable:
(A) The term "Equity Securities" shall mean any shares
of Common Stock, or any obligation, any share of stock or other security of the
Company convertible into or exchangeable for Common Stock or any other security
convertible into or exchangeable for Common Stock except for (1) Common Stock
issued or issuable pursuant to stock grants or upon exercise of options to
purchase Common Stock granted after the Original Issue Date to officers,
directors, employees or consultants of the Company pursuant to stock grant,
stock purchase and/or stock option plans or any other stock incentive program,
agreement or arrangement approved by the Board of Directors, but not exceeding
2,863,407 shares of Common Stock (as adjusted for any Recapitalization Event)
net of repurchases and option expirations and cancellations, (2) securities
issued pursuant to (A) the Company's purchase of substantially all of the assets
of another company, or an identifiable business division or segment of another
company, in each case approved by the Board of Directors or (B) any transaction
or series of related transactions (including, without limitation, any
reorganization, merger or consolidation) which will result in the holders of the
outstanding voting equity securities of the Company immediately prior to such
transaction holding less than fifty percent (50%) of the voting equity
securities of the surviving entity immediately following such transaction, (3)
shares issued pursuant to Section B.4(a) or B.4(b) of this Article IV, (4)
Common and/or Preferred Stock issuable upon exercise, conversion or exchange of
warrants to purchase Common or Preferred Stock issued in connection with a bank
line of credit or equipment financing approved by the Board of Directors, but
not exceeding 735,000 shares of Common Stock
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(as adjusted for any Recapitalization Event), and (5) shares of Common Stock
issued upon conversion of the Preferred Stock or upon the exercise of options to
purchase shares of Common Stock granted prior to the Original Issue Date.
(B) In the case of an issuance or sale for cash of Equity
Securities, the "consideration actually received" by the Company therefor shall
be deemed to be the amount of cash received, before deducting therefrom any
commissions or expenses paid by the Company.
(C) In case of the issuance (otherwise than upon conversion
or exchange of obligations or shares of stock of the Company) of Equity
Securities for a consideration other than cash or a consideration partly other
than cash, the amount of the consideration other than cash received by the
Company for such shares shall be deemed to be the fair value of such
consideration as determined in good faith by the Board of Directors.
(D) In case of the issuance by the Company in any manner of
any rights to subscribe for or to purchase Equity Securities, or any options for
the purchase of Equity Securities or stock convertible into Equity Securities,
all Equity Securities or stock convertible into Equity Securities to which the
holders of such rights or options shall be entitled to subscribe for or purchase
pursuant to such rights or options shall be deemed "outstanding" as of the date
of the offering of such rights or the granting of such options, as the case may
be, and the minimum aggregate consideration named in such rights or options for
the Equity Securities or stock convertible into Equity Securities covered
thereby, plus the consideration, if any, received by the Company for such rights
or options, shall be deemed to be the "consideration actually received" by the
Company (as of the date of the offering of such rights or the granting of such
options, as the case may be) for the issuance of such rights or the granting of
such options.
(E) In case of the issuance or issuances by the Company in
any manner of any obligations or of any shares of stock of the Company that
shall be convertible into or exchangeable for Common Stock, all shares of Common
Stock issuable upon the conversion or exchange of such obligations or shares
shall be deemed issued as of the date such obligations or shares are issued, and
the amount of the "consideration actually received" by the Company for such
Equity Securities shall be deemed to be the total of (1) the amount of
consideration received by the Company upon the issuance of such obligations or
shares, as the case may be, plus (2) the minimum aggregate consideration, if
any, other than such obligations or shares, receivable by the Company upon such
conversion or exchange.
(F) The amount of the "consideration actually received" by
the Company upon the issuance of any rights or options referred to in subsection
(D) above or upon the issuance of any obligations or shares which are
convertible or exchangeable as described in subsection (E) above, and the amount
of the consideration, if any, other than such obligations or shares so
convertible or exchangeable, receivable by the Company upon the exercise,
conversion or exchange thereof shall be determined in the same manner provided
in subsections (B) and (C) above
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with respect to the consideration received by the Company in case of the
issuance of Equity Securities; provided, however, that if such obligations or
shares of stock so convertible or exchangeable are issued in payment or
satisfaction of any dividend upon any stock of the Company other than Common
Stock, the amount of the "consideration actually received" by the Company upon
the original issuance of such obligations or shares of stock so convertible or
exchangeable shall be deemed to be the fair value of such obligations or shares
of stock, as of the date of the adoption of the resolution declaring such
dividend, as determined by the Board of Directors at or as of that date. On the
expiration of any rights or options referred to in subsection (D), or the
termination of any right of conversion or exchange referred to in subsection
(E), or any change in the number of shares of Common Stock deliverable upon
exercise of such options or rights or upon conversion of or exchange of such
convertible or exchangeable securities, the Conversion Prices then in effect
shall forthwith be readjusted to such Conversion Prices as would have obtained
had the adjustments made upon the issuance of such option, right or convertible
or exchangeable securities been made upon the basis of the delivery of only the
number of shares of Common Stock actually delivered or to be delivered upon the
exercise of such rights or options or upon the conversion or exchange of such
securities.
(G) In the event this Company shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by this
Company or other persons or options or rights not referred to in this Section
B.4(c), then, in each such case, the holders of the Preferred Stock shall be
entitled to the distributions provided for in Section B.1 above, and no
adjustment to the Conversion Prices provided for in this Section B.4(c) shall be
applicable.
(d) Without the consent of the holders of a majority in interest
of the outstanding Preferred Stock, the Company will not, by amendment of its
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
Section B.4.
(e) Upon the occurrence of each adjustment or readjustment of
either of the Conversion Prices pursuant to this Section B.4, the Company at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to each holder of shares of Preferred Stock
adjusted or readjusted a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of any holder of Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and readjustments,
(ii) the Conversion Prices at the time in effect, and (iii) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of each series of Preferred Stock.
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(f) This Company shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock solely for the purpose
of effecting the conversion of the shares of the Preferred Stock such number of
its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of the Preferred Stock; and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, in addition to such other remedies as shall be available to the
holder of such Preferred Stock, this Company will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes.
5. Voting Rights.
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(a) The holders of Series A Preferred Stock, voting as a
separate class, shall be entitled to elect two (2) directors. The holders of
Series B Preferred Stock, voting as a separate class, shall be entitled to elect
one (1) director. The holders of Common Stock, voting as a separate class, shall
be entitled to elect three (3) directors. The remaining directors shall be
elected by the holders of Common Stock and the holders of Preferred Stock voting
together as a single class. Any vacancy in the Board of Directors occurring
because of the death, resignation or removal of a director elected by the
holders of the outstanding class with voting power entitled to elect him or her
shall be filled by the vote or written consent of the holders of the outstanding
class with voting power entitled to elect him or her or, in the absence of
action by such holders, by action of the remaining directors. A director may be
removed with or without cause by the vote or consent of the holders of the
outstanding class with voting power entitled to elect him or her in accordance
with the General Corporation Law of Delaware.
(b) On all other matters, each share of Common Stock issued and
outstanding shall have one (1) vote, and each share of Preferred Stock issued
and outstanding shall have the number of votes equal to the number of shares of
Common Stock into which such share of Preferred Stock could be converted at the
record date for determination of the stockholders entitled to vote on such
matters, or, if no such record date is established, at the date such vote is
taken or any written consent of stockholders is solicited, such votes to be
counted together with all other shares of stock of the Company having general
voting power and not separately as a class. The Preferred Stock and the Common
Stock shall vote as a single class on all matters except as otherwise required
by this Restated Certificate or by law.
6. Protective Provisions.
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(a) Changes in authorized number of Directors. The Company shall
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not increase the authorized number of members of the Board of Directors of the
Company beyond eight (8) without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of at least two-thirds (2/3)
of the then-outstanding shares of Preferred Stock, voting separately as a class,
and at least a majority of the then-outstanding shares of Common Stock, voting
separately as a class.
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(b) Preferred Stock. So long as 2,500,000 shares of Preferred
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Stock (as adjusted for any Recapitalization Event) are outstanding, this Company
shall not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least two-thirds (2/3) of the then-
outstanding shares of Preferred Stock, voting together as a class:
(i) alter or change the rights, preferences or privileges
of any series of Preferred Stock;
(ii) take any action that reclassifies any outstanding
shares of this Company's capital stock into shares of capital stock having
preferences or priority as to dividends or liquidation senior to or on parity
with the preferences and priority of the Preferred Stock;
(iii) authorize, designate or issue, or obligate itself to
issue, any other equity security, including any security convertible into or
exercisable for any equity security, having a preference or priority as to
dividend rights, liquidation preference, or redemption rights, senior to or on
parity with the preferences and priority of the Preferred Stock;
(iv) make any declaration or payment of any dividend with
respect to the Common Stock;
(v) redeem, purchase, repurchase, retire or otherwise
acquire for value (or pay into or set aside for a sinking fund for such
purpose), directly or indirectly, any shares of capital stock other than (A)
shares of Preferred Stock (or shares of Common Stock issued upon conversion of
the Preferred Stock) purchased by the Company pursuant to an exercise of its
right of first refusal on the sale of such shares by the holders of such shares
and (B) shares of Common Stock repurchased from officers, directors, employees
or consultants of the Company pursuant to agreements or plans providing for such
repurchase approved by the Board of Directors ("Permitted Repurchases");
provided, however, that the total amount applied to Permitted Repurchases
pursuant to this clause (B) shall not exceed One Hundred and Fifty Thousand
Dollars ($150,000) during any consecutive twelve (12) month period;
(vi) sell, convey, or otherwise dispose of or encumber all
or substantially all of its assets or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect any
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of;
(vii) effect a dissolution, liquidation or winding up of
the Company;
(viii) permit any subsidiary of the Company to issue or
sell, or obligate itself to issue or sell, except to the Company or any wholly-
owned subsidiary, any stock of such subsidiary; or
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<PAGE>
(ix) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Preferred Stock.
(c) Series of Preferred Stock. The Company shall not amend its
-------------------------
certificate of incorporation, as amended from time to time, or its bylaws
without the approval, by vote or written consent, by holders of at least two-
thirds (2/3) of the then-outstanding shares of a series of Preferred Stock if
such amendment would change any of the rights, preferences or privileges
provided for herein for the benefit of any shares of that series of Preferred
Stock. Without limiting the generality of the preceding sentence, the Company
will not amend its certificate of incorporation, as amended from time to time,
or its bylaws without the approval of holders of at least two-thirds (2/3) of
the then-outstanding shares of that series of Preferred Stock if such amendment
would:
(i) reduce the dividend rates on that series of Preferred
Stock provided for herein, or change the relative seniority rights of the
holders of that series of Preferred Stock as to the payment of dividends in
relation to the holders of any other capital stock of the Company;
(ii) reduce the amount payable to the holders of that
series of Preferred Stock upon the voluntary or involuntary liquidation,
dissolution, or winding up of the Company, or change the relative seniority of
the liquidation preferences of the holders of that series of Preferred Stock to
the rights upon liquidation of the holders of any other capital stock of the
Company;
(iii) make the Series A Preferred or Series B Preferred
redeemable at the option of the Company;
(iv) cancel or modify the conversion rights of that series
of Preferred Stock provided for herein; or
(v) change the authorized number of directors of the
Company.
7. Increasing Common Stock. The number of authorized shares of
-----------------------
Common Stock may be increased or decreased (but not below the number of shares
of Common Stock then outstanding) by an affirmative vote of a majority of the
shares of Common Stock and the Preferred Stock voting together as a single
class.
8. No Reissuance of Preferred Stock. No share or shares of Preferred
--------------------------------
Stock acquired by the Company by reason of redemption, purchase, repurchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Company shall be
authorized to issue.
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<PAGE>
ARTICLE V.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors shall have the power, subject to the provisions of
Section B.6(c) of Article IV, both before and after receipt of any payment for
any of the Company's capital stock, to adopt, amend, repeal or otherwise alter
the bylaws of the Company without any action on the part of the stockholders;
provided, however, that the grant of such power to the Board of Directors shall
not divest the stockholders of, nor limit, the stockholders' power, subject to
the provisions of Section B.6(c) of Article IV, to adopt, amend, repeal or
otherwise alter the Company's bylaws.
ARTICLE VI.
Elections of directors need not be by written ballot unless the Company's
bylaws so provide.
ARTICLE VII.
The Company reserves the right to adopt, repeal, rescind or amend in any
respect any provisions contained in this Restated Certificate of Incorporation
in the manner now or hereafter prescribed by applicable law, and all rights
conferred on stockholders herein are granted subject to this reservation.
ARTICLE VIII.
A director of the Company, shall to the full extent permitted by the
Delaware General Corporation Law as it now exists or as it may hereafter be
amended, not be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director. Neither any amendment nor repeal of
this Article VIII, nor the adoption of any provision of this Restated
Certificate of Incorporation inconsistent with this Article VIII, shall
eliminate or reduce the effect of this Article VIII in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article
VIII, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
4. The foregoing amendment of the Certificate of Incorporation was duly
approved as of June 22, 1998 by a vote of the holders of a majority of the
outstanding shares of the Company's Series A Preferred Stock voting as a
separate series, a majority of the outstanding shares of the Company's Preferred
Stock voting as a separate class, and a majority of the outstanding shares of
the Company's Common Stock in accordance with Section 242(b) of the Delaware
General Corporation Law.
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<PAGE>
THE UNDERSIGNED, being the President and Chief Executive Officer of the
Company, does hereby declare and certify that this is his act and deed and the
facts herein stated are true, and accordingly, has hereunto set his hand this 16
day of July, 1998.
CONTEXT INTEGRATION, INC.
/s/ Stephen Sharp
---------------------------------
Stephen Sharp, President
and Chief Executive Officer
Attest:
/s/ Regan Coleman
- ----------------------------
Regan Coleman, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CONTEXT INTEGRATION, INC.
Context Integration, Inc., a Delaware corporation (the "Company"), does
hereby certify that the following amendment to the Company's Amended and
Restated Certificate of Incorporation has been duly adopted by the Board of
Directors in accordance with Sections 242 and 141 of the General Corporation Law
of Delaware and by the written consent of a majority of the stockholders of the
Company and a majority of the holders of each class entitled to a class vote
thereon in accordance with the provisions of Section 242 and 228 of the General
Corporation Law of Delaware.
1. Article IV of the Company's Amended and Restated Certificate of
Incorporation is hereby amended in its entirety to read as follows:
ARTICLE IV.
A. The Company is authorized to issue two classes of capital stock to be
designated, respectively, Preferred Stock (the "Preferred Stock") and Common
Stock (the "Common Stock"). The total number of shares of capital stock that
this Company shall have authority to issue is thirty-eight million one hundred
forty-nine thousand eight hundred one (38,149,801). The total number of shares
of Preferred Stock this Company shall have authority to issue is seven million
one hundred forty-nine thousand eight hundred one (7,149,801). The total number
of shares of Common Stock this Company shall have authority to issue is thirty-
one million (31,000,000). The Preferred Stock shall have a par value of $0.001
per share, and the Common Stock shall have a par value of $0.001 per share.
B. The Preferred Stock shall be divided into series. The first series of
Preferred Stock shall consist of two million five hundred ninety-six thousand
nine hundred fifty-seven (2,596,957) shares and is designated "Series A
Preferred Stock." The second series of Preferred Stock shall consist of two
million nine hundred forty-one thousand one hundred seventy-six (2,941,176)
shares and is designated "Series B Preferred Stock". The third series of
Preferred Stock shall consist of one million six hundred eleven thousand six
hundred sixty-eight (1,611,668) shares and is designated "Series C Preferred
Stock." As used herein, the term "Series A Preferred" shall refer to shares of
the Company's Series A Preferred Stock, the term "Series B Preferred" shall
refer to shares of the Company's Series B Preferred Stock, the term "Series C
Preferred" shall refer to shares of the Company's Series C Preferred Stock and
the term "Common" shall refer to the Company's Common Stock. Subject to the
restrictions set forth in this Amended and Restated Certificate of Incorporation
(including, without limitation, Article IV.B.6 hereof), the remaining shares of
<PAGE>
Preferred Stock, if any, may be issued from time to time in one or more series.
Subject to the restrictions set forth in this Amended and Restated Certificate
of Incorporation (including, without limitation, Article IV.B.6. hereof), the
board of directors of the Company (the "Board of Directors") is expressly
authorized to provide for the issue of all or any of such remaining shares of
the Preferred Stock in one or more series, and to fix the number of shares and
to determine or alter for each such series, such voting powers, full or limited,
or no voting powers, and such designations, preferences, and relative,
participating, optional, or other rights and such qualifications, limitations,
or restrictions thereof, as shall be stated and expressed in the resolution or
resolutions adopted by the Board of Directors providing for the issue of such
shares (a "Preferred Stock Designation") and as may be permitted by the General
Corporation Law of the State of Delaware. The Board of Directors is also
expressly authorized to increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares of any series other than
the Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock subsequent to the issue of shares of that series. In case the
number of shares of any such series shall be so decreased, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
The relative rights, preferences, privileges and restrictions granted to or
imposed upon the Common Stock, the Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock are as follows:
1. Dividends.
---------
(a) The holders of outstanding shares of Series A Preferred,
Series B Preferred and Series C Preferred shall be entitled to receive in any
fiscal quarter, when, as and if declared by the Board of Directors, out of any
assets at the time legally available therefor, non-cumulative dividends at the
rate of $0.038507, $0.068 and $0.14891 per share, respectively, per fiscal
quarter, as adjusted for any consolidations, combinations, stock distributions,
stock dividends, stock splits or similar events occurring after the date this
Amendment is filed with the Delaware Secretary of State (collectively a
"Recapitalization Event"). Dividends (other than a dividend payable solely in
additional shares of Common Stock) may be declared and paid upon Common Stock in
any fiscal quarter of the Company only if the preferred dividends described
above have been paid or declared and set apart during that fiscal quarter, and
no dividends (other than a dividend payable solely in additional shares of
Common Stock) shall be paid on any share of Common Stock unless a dividend
(including the amount of any dividends paid pursuant to the above provisions of
this Section B.1, and in no event less than the amount provided by the above
provisions of this Section B.1) is paid with respect to all outstanding shares
of Series A Preferred, Series B Preferred and Series C Preferred in an amount
for each such share of Series A Preferred, Series B Preferred and Series C
Preferred equal to or greater than the aggregate amount of such dividends for
all such shares of Common Stock into which each such share of Series A
Preferred, Series B Preferred and Series C Preferred could then be converted.
The right to dividends on shares of Series A Preferred, Series B Preferred and
Series C Preferred shall not be cumulative, and no right shall accrue to holders
of shares of Series A Preferred, Series B Preferred and Series C Preferred by
reason of the fact that distributions on said shares are not declared in any
prior fiscal quarter, nor shall any undeclared or unpaid distribution bear or
accrue interest.
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<PAGE>
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution, or winding up
of the Company, either voluntary or involuntary, distributions to the
stockholders of the Company shall be made in the following manner:
(i) The holders of outstanding shares of Series A
Preferred, Series B Preferred and Series C Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Company to the holders of the Common Stock or any other
class or series of capital stock of the Company by reason of their ownership of
such stock, the amount of $1.92533 per share for each share of Series A
Preferred then held by them, the amount of $3.40 per share for each share of
Series B Preferred then held by them and the amount of $7.4457 per share for
each share of Series C Preferred then held by them (appropriately adjusted for
any Recapitalization Event), plus all accrued or declared and unpaid dividends
on each share of Series A Preferred, Series B Preferred and Series C Preferred
then held by them (the "Preferred Liquidation Preference"). The Series A
Preferred, Series B Preferred and Series C Preferred shall rank on a parity as
to the receipt of the respective preferential amounts for each such series upon
the occurrence of such event. If upon occurrence of such event of liquidation,
dissolution or winding up, the assets and funds legally available to be
distributed among the holders of the Series A Preferred, Series B Preferred and
Series C Preferred shall be insufficient to permit the payment to such holders
of the appropriate Preferred Liquidation Preference, then the entire assets and
funds of the Company legally available for distribution shall be distributed
ratably among the holders of the Series A Preferred, Series B Preferred and
Series C Preferred in proportion to the preferential amount each such holder is
otherwise entitled to receive.
(ii) After payment has been made to the holders of the
Series A Preferred, Series B Preferred and Series C Preferred of the full
amounts to which they shall be entitled pursuant to Section B.2(a)(i) above, the
remaining assets and funds of the Company legally available for distribution, if
any, shall be distributed ratably among the holders of the Common Stock, the
Series A Preferred, the Series B Preferred and Series C Preferred based upon the
number of shares of Common Stock then held (assuming for such purpose the
conversion of Series A Preferred into Common Stock at the then-applicable Series
A Conversion Price, the conversion of Series B Preferred into Common Stock at
the then-applicable Series B Conversion Price and the conversion of Series C
Preferred into Common Stock at the then-applicable Series C Conversion Price) by
each such holder until the net proceeds received by the holders of Series A
Preferred, Series B Preferred and Series C Preferred pursuant to Section
B.2(a)(i) above and this Section B.2(a)(ii) equal $2.887995, $5.10 and $11.16855
(appropriately adjusted for any Recapitalization Event) per share of Series A
Preferred, Series B Preferred and Series C Preferred, respectively.
(iii) After payment has been made pursuant to Sections
B.2(a)(i) and B.2(a)(ii) of the full amounts to be paid under each such section,
all remaining assets and funds legally available for distribution, if any, shall
be distributed ratably among the holders of the Common Stock.
(b) Shares of Preferred Stock shall not be entitled to be
converted into shares of Common Stock in order to participate in any
distribution, or series of distributions, as
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<PAGE>
shares of Common Stock, without first foregoing participation in such
distribution, or series of distributions, as shares of Preferred Stock.
(c) For purposes of this Section B.2, a sale, conveyance or
other disposal of substantially all of the assets of the Company or a merger or
consolidation of the Company with or into any other corporation or corporations
in which the stockholders of the Company immediately prior to such transaction
shall own less than fifty percent (50%) of the voting securities of the
surviving corporation or a sale of all or substantially all of the assets of the
Company shall be treated as a liquidation, dissolution or winding up of the
Company. The valuation of any securities or other property other than cash
received by the Company in any transaction covered by this Section B.2(b) shall
be computed at the fair value thereof at the time of receipt as determined in
good faith by the Board of Directors.
3. Conversion. The holders of the Series A Preferred, Series B
----------
Preferred and Series C Preferred shall have conversion rights (the "Conversion
Rights") as follows:
(a) Each share of Series A Preferred shall be convertible,
at the option of the holder thereof, at any time after the date of issuance of
such share, at the office of the Company or the transfer agent for such stock
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $1.92533 by the Conversion Price (as hereinafter defined)
applicable to such share in effect at the time of conversion. The price at which
shares of Common Stock shall be deliverable upon conversion of shares of the
Series A Preferred (the "Series A Conversion Price") shall be $1.28355 per share
of Common Stock subject to further adjustment as provided in Section B.4 of this
Article IV. Each share of Series B Preferred shall be convertible, at the option
of the holder thereof, at any time after the date of issuance of such share, at
the office of the Company or the transfer agent for such stock into such number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing $3.40 by the Conversion Price (as hereinafter defined) applicable to
such share in effect at the time of conversion. The price at which shares of
Common Stock shall be deliverable upon conversion of shares of the Series B
Preferred (the "Series B Conversion Price") shall be $2.267 per share of Common
Stock subject to further adjustment as provided in Section B.4 of this Article
IV. Each share of Series C Preferred shall be convertible, at the option of the
holder thereof, at any time after the date of issuance of such share, at the
office of the Company or the transfer agent for such stock into such number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
$7.4457 by the Conversion Price (as hereinafter defined) applicable to such
share in effect at the time of conversion. The price at which shares of Common
Stock shall be deliverable upon conversion of shares of the Series C Preferred
(the "Series C Conversion Price") shall initially be $4.9638 per share of Common
Stock subject to adjustment as provided in Section B.4 of this Article IV. The
Series A Conversion Price, the Series B Conversion Price and the Series C
Conversion Price are herein referred collectively as the "Conversion Prices."
(b) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock utilizing the then-effective Conversion
Price for each such share upon the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of shares of
Common Stock to the public for the account of the Company at a price to the
public of not less than
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<PAGE>
$7.4457 per share (subject to adjustment for any Recapitalization Events) and an
aggregate offering price (net of selling stockholder proceeds, if any, and
underwriters' discounts expenses, including, without limitation, fees of the
Company's counsel) to the public of not less than Twenty Million Dollars
($20,000,000). In the event of such an offering, the person(s) entitled to
receive the Common Stock issuable upon such automatic conversion of Preferred
Stock shall be deemed to have converted such Preferred Stock immediately prior
to the closing of such sale of securities.
(c) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock utilizing the then-effective appropriate
Conversion Price for each such share upon the vote or written consent of holders
of a majority of the Series A Preferred, holders of a majority of the Series B
Preferred and holders of a majority of the Series C Preferred, each voting
separately as a series.
(d) No fractional shares of Common Stock shall be issued
upon conversion of Preferred Stock. In lieu of any fractional shares to which
the holder would otherwise be entitled, the Company shall pay cash equal to such
fraction multiplied by the fair market value of the Common Stock on the
Conversion Date, as determined by the Board of Directors. Before any holder of
Preferred Stock shall be entitled to convert the same into full shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Company or of the transfer agent for such shares,
and shall give written notice to the Company at such office that he elects to
convert the same; provided, however, that in the event of an automatic
conversion pursuant to Section B.3(b) or B.3(c) of this Article IV, all
outstanding shares of all Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent; and provided further, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such automatic conversion unless either the certificates evidencing such
shares of Preferred Stock are delivered to the Company or its transfer agent as
provided above, or the holder notifies the Company or its transfer agent that
such certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates.
(e) The Company shall, as soon as practicable after such
delivery, or after such agreement and indemnification, issue and deliver at such
office to such holder of Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid and a check, if applicable, payable to the holder in the amount of any
cash amounts payable as the result of any fractional shares resulting from the
conversion of Preferred Stock into Common Stock, plus any declared and unpaid
dividends on the converted Preferred Stock, and a certificate for any shares of
Preferred Stock not so converted. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Preferred Stock to be converted, or, in the case of automatic
conversion, on the date of the closing of the offering or the receipt of the
written consent (as the case may be), and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
-5-
<PAGE>
(f) In the event of any taking by the Company of a record
of the holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend (other than a cash
dividend or dividend payable solely in additional shares of Common Stock) or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Company shall mail to each holder of Preferred
Stock, at least twenty (20) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
4. Adjustments to Conversion Prices.
--------------------------------
(a) In the event the Company at any time or from time to
time, after the date this Amendment is filed with the Delaware Secretary of
State, effects a subdivision or combination of its outstanding Common Stock into
a greater or lesser number of shares without a proportionate and corresponding
subdivision or combination of its outstanding Preferred Stock, then and in each
such event the Conversion Prices shall be decreased or increased
proportionately.
(b) In the event the Company at any time or from time to
time, after the date this Amendment is filed with the Delaware Secretary of
State, shall make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
(hereinafter referred to as "Common Stock Equivalents") convertible into or
entitling the holder thereof to receive additional shares of Common Stock
without payment of any consideration by such holder for such Common Stock
Equivalents or the additional shares of Common Stock, then and in each such
event the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable in payment of such dividend
or distribution or upon conversion or exercise of such Common Stock Equivalents
shall be deemed to be issued and outstanding as of the time of such issuance or,
in the event such a record date shall have been fixed, as of the close of
business on such record date. In each such event, the Conversion Prices shall be
proportionately decreased as of the time of such issuance or, in the event such
a record date shall have been fixed, as of the close of business on such record
date.
(c) If at any time after the first date on which a share of
Series C Preferred Stock is first issued ("Original Issue Date"), the Company
shall issue or sell Equity Securities, as defined in subsection (A) below, at a
consideration per share (the "Lower Price") less than the appropriate Conversion
Price with respect to any series of Preferred Stock in effect immediately prior
to the time of such issue or sale, then forthwith upon such issue or sale, the
Conversion Price for such series of Preferred Stock shall be adjusted to a price
(calculated to the nearest cent) determined by dividing:
(i) an amount equal to the sum of (x) the number of shares
of Common Stock outstanding immediately prior to such issue or sale multiplied
by such then-existing Conversion Price, (y) the number of shares of Common Stock
issuable upon conversion or exchange of any obligations or of any shares of
stock of the Company outstanding immediately prior to such
-6-
<PAGE>
issue or sale multiplied by such then-existing Conversion Price, and (z) an
amount equal to the aggregate "consideration actually received" by the Company
upon such issue or sale, by
(ii) an amount equal to the sum of (x) the number of shares
of Common Stock outstanding immediately prior to such issue or sale, (y) the
number of shares of Common Stock issuable upon conversion or exchange of any
obligations or of any shares of stock of the Company outstanding immediately
prior to such issue or sale and (z) the additional shares of Common Stock issued
as and/or issuable upon conversion or exchange of the Equity Securities issued
in such issuance or sale.
For purposes hereof the following provisions shall be applicable:
(A) The term "Equity Securities" shall mean any shares
of Common Stock, or any obligation, any share of stock or other security of the
Company convertible into or exchangeable for Common Stock or any other security
convertible into or exchangeable for Common Stock except for (1) Common Stock
issued or issuable pursuant to stock grants or upon exercise of options to
purchase Common Stock granted after the Original Issue Date to officers,
directors, employees or consultants of the Company pursuant to stock grant,
stock purchase and/or stock option plans or any other stock incentive program,
agreement or arrangement approved by the Board of Directors, not exceeding
2,000,000 shares of Common Stock (as adjusted for any Recapitalization Event)
net of repurchases and option expirations and cancellations, (2) securities
representing, or convertible into or exchangeable for, not more than 1,850,000
shares of Common Stock, issued pursuant to (A) the Company's purchase of
substantially all of the assets of another company, or an identifiable business
division or segment of another company, in each case approved by the Board of
Directors or (B) any transaction or series of related transactions (including,
without limitation, any reorganization, merger or consolidation) which will
result in the holders of the outstanding voting equity securities of the Company
immediately prior to such transaction holding less than fifty percent (50%) of
the voting equity securities of the surviving entity immediately following such
transaction, (3) shares issued pursuant to Section B.4(a) or B.4(b) of this
Article IV, (4) Common and/or Preferred Stock issuable upon exercise, conversion
or exchange of warrants to purchase Common or Preferred Stock issued in
connection with a bank line of credit or equipment financing approved by the
Board of Directors, but not exceeding 1,102,500 shares of Common Stock (as
adjusted for any Recapitalization Event), and (5) shares of Common Stock issued
upon conversion of the Preferred Stock or upon the exercise of options to
purchase shares of Common Stock granted prior to the Original Issue Date.
(B) In the case of an issuance or sale for cash of
Equity Securities, the "consideration actually received" by the Company therefor
shall be deemed to be the amount of cash received, before deducting therefrom
any commissions or expenses paid by the Company.
(C) In case of the issuance (otherwise than upon
conversion or exchange of obligations or shares of stock of the Company) of
Equity Securities for a consideration other than cash or a consideration partly
other than cash, the amount of the consideration other than cash received by the
Company for such shares shall be deemed to be the fair value of such
consideration as determined in good faith by the Board of Directors.
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<PAGE>
(D) In case of the issuance by the Company in any
manner of any rights to subscribe for or to purchase Equity Securities, or any
options for the purchase of Equity Securities or stock convertible into Equity
Securities, all Equity Securities or stock convertible into Equity Securities to
which the holders of such rights or options shall be entitled to subscribe for
or purchase pursuant to such rights or options shall be deemed "outstanding" as
of the date of the offering of such rights or the granting of such options, as
the case may be, and the minimum aggregate consideration named in such rights or
options for the Equity Securities or stock convertible into Equity Securities
covered thereby, plus the consideration, if any, received by the Company for
such rights or options, shall be deemed to be the "consideration actually
received" by the Company (as of the date of the offering of such rights or the
granting of such options, as the case may be) for the issuance of such rights or
the granting of such options.
(E) In case of the issuance or issuances by the
Company in any manner of any obligations or of any shares of stock of the
Company that shall be convertible into or exchangeable for Common Stock, all
shares of Common Stock issuable upon the conversion or exchange of such
obligations or shares shall be deemed issued as of the date such obligations or
shares are issued, and the amount of the "consideration actually received" by
the Company for such Equity Securities shall be deemed to be the total of (1)
the amount of consideration received by the Company upon the issuance of such
obligations or shares, as the case may be, plus (2) the minimum aggregate
consideration, if any, other than such obligations or shares, receivable by the
Company upon such conversion or exchange.
(F) The amount of the "consideration actually
received" by the Company upon the issuance of any rights or options referred to
in subsection (D) above or upon the issuance of any obligations or shares which
are convertible or exchangeable as described in subsection (E) above, and the
amount of the consideration, if any, other than such obligations or shares so
convertible or exchangeable, receivable by the Company upon the exercise,
conversion or exchange thereof shall be determined in the same manner provided
in subsections (B) and (C) above with respect to the consideration received by
the Company in case of the issuance of Equity Securities; provided, however,
that if such obligations or shares of stock so convertible or exchangeable are
issued in payment or satisfaction of any dividend upon any stock of the Company
other than Common Stock, the amount of the "consideration actually received" by
the Company upon the original issuance of such obligations or shares of stock so
convertible or exchangeable shall be deemed to be the fair value of such
obligations or shares of stock, as of the date of the adoption of the resolution
declaring such dividend, as determined in good faith by the Board of Directors
at or as of that date. On the expiration of any rights or options referred to in
subsection (D), or the termination of any right of conversion or exchange
referred to in subsection (E), or any change in the number of shares of Common
Stock deliverable upon exercise of such options or rights or upon conversion of
or exchange of such convertible or exchangeable securities, the Conversion
Prices then in effect shall forthwith be readjusted to such Conversion Prices as
would have obtained had the adjustments made upon the issuance of such option,
right or convertible or exchangeable securities been made upon the basis of the
delivery of only the number of shares of Common Stock actually delivered or to
be delivered upon the exercise of such rights or options or upon the conversion
or exchange of such securities.
-8-
<PAGE>
(G) In the event this Company shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by this Company or other persons or options or rights not referred to in
this Section B.4(c), then, in each such case, the holders of the Preferred Stock
shall be entitled to the distributions provided for in Section B.1 above, and no
adjustment to the Conversion Prices provided for in this Section B.4(c) shall be
applicable.
(d) The Company will not, by amendment of its certificate
of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
Section B.4.
(e) Upon the occurrence of each adjustment or readjustment
of either of the Conversion Prices pursuant to this Section B.4, the Company at
its expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to each holder of shares of Preferred Stock
adjusted or readjusted a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of any holder of Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and readjustments,
(ii) the Conversion Prices at the time in effect, and (iii) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of each series of Preferred Stock.
(f) This Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock solely for
the purpose of effecting the conversion of the shares of the Preferred Stock
such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Preferred
Stock; and if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
shares of the Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, this Company will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
5. Voting Rights.
-------------
(a) The holders of Series A Preferred Stock, voting as a
separate class, shall be entitled to elect two (2) directors. The holders of
Series B Preferred Stock, voting as a separate class, shall be entitled to elect
one (1) director. The holders of Common Stock, voting as a separate class, shall
be entitled to elect three (3) directors. The remaining directors shall be
elected by the holders of Common Stock and the holders of Preferred Stock voting
together as a single class. Any vacancy in the Board of Directors occurring
because of the death, resignation or removal of a director elected by the
holders of the outstanding class with voting power entitled to elect him or her
shall be filled by the vote or written consent of the holders of the outstanding
class with voting power entitled to elect him or her or, in the absence of
action by such holders, by action of the remaining directors. A director may be
removed with or without cause by the vote or consent of the
-9-
<PAGE>
holders of the outstanding class with voting power entitled to elect him or her
in accordance with the General Corporation Law of Delaware.
(b) On all other matters, each share of Common Stock issued and
outstanding shall have one (1) vote, and each share of Preferred Stock issued
and outstanding shall have the number of votes equal to the number of shares of
Common Stock into which such share of Preferred Stock could be converted at the
record date for determination of the stockholders entitled to vote on such
matters, or, if no such record date is established, at the date such vote is
taken or any written consent of stockholders is solicited, such votes to be
counted together with all other shares of stock of the Company having general
voting power and not separately as a class. The Preferred Stock and the Common
Stock shall vote as a single class on all matters except as otherwise required
by this Restated Certificate or by law.
6. Protective Provisions.
---------------------
(a) Changes in authorized number of Directors. The Company shall
-----------------------------------------
not increase the authorized number of members of the Board of Directors of the
Company beyond eight (8) without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of at least two-thirds (2/3)
of the then-outstanding shares of Preferred Stock, voting separately as a class,
and at least a majority of the then-outstanding shares of Common Stock, voting
separately as a class.
(b) Preferred Stock. In addition to and not in limitation of any
---------------
approval that may be required pursuant to Article IV.B.6(c) or IV.B.6(d), so
long as 2,500,000 shares of Preferred Stock (as adjusted for any
Recapitalization Event) are outstanding, this Company shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least two-thirds (2/3) of the then-outstanding shares of Preferred
Stock, voting together as a class:
(i) alter or change the rights, preferences or privileges
of any series of Preferred Stock;
(ii) take any action that reclassifies any outstanding
shares of this Company's capital stock into shares of capital stock having
preferences or priority as to dividends or liquidation senior to or on parity
with the preferences and priority of the Preferred Stock;
(iii) authorize, designate or issue, or obligate itself to
issue, any other equity security, including any security convertible into or
exercisable for any equity security, having a preference or priority as to
dividend rights, liquidation preference, or redemption rights, senior to or on
parity with the preferences and priority of the Preferred Stock;
(iv) make any declaration or payment of any dividend with
respect to the Common Stock;
(v) redeem, purchase, repurchase, retire or otherwise
acquire for value (or pay into or set aside for a sinking fund for such
purpose), directly or indirectly, any shares of capital stock other than (A)
shares of Preferred Stock (or shares of Common Stock issued upon conversion of
the Preferred Stock) purchased by the Company pursuant to an exercise of its
right of
-10-
<PAGE>
first refusal on the sale of such shares by the holders of such shares and (B)
shares of Common Stock repurchased from officers, directors, employees or
consultants of the Company pursuant to agreements or plans providing for such
repurchase approved by the Board of Directors ("Permitted Repurchases");
provided, however, that the total amount applied to Permitted Repurchases
pursuant to this clause (B) shall not exceed One Hundred and Fifty Thousand
Dollars ($150,000) during any consecutive twelve (12) month period;
(vi) sell, convey, or otherwise dispose of or encumber all
or substantially all of its assets or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect any
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of;
(vii) effect a dissolution, liquidation or winding up of
the Company;
(viii) permit any subsidiary of the Company to issue or
sell, or obligate itself to issue or sell, except to the Company or any wholly-
owned subsidiary, any stock of such subsidiary; or
(ix) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Preferred Stock.
(c) Series of Preferred Stock. In addition to and not in
-------------------------
limitation of any approval that may be required pursuant to Article IV.B.6(b) or
IV.B.6(d), the Company shall not amend its certificate of incorporation, as
amended from time to time, or its bylaws without the approval, by vote or
written consent, by holders of at least two-thirds (2/3) of the then-outstanding
shares of a series of Preferred Stock if such amendment would change any of the
rights, preferences or privileges provided for herein for the benefit of any
shares of that series of Preferred Stock. Without limiting the generality of the
preceding sentence, the Company will not amend its certificate of incorporation,
as amended from time to time, or its bylaws without the approval of holders of
at least two-thirds (2/3) of the then-outstanding shares of that series of
Preferred Stock if such amendment would:
(i) reduce the dividend rates on that series of Preferred
Stock provided for herein, or change the relative seniority rights of the
holders of that series of Preferred Stock as to the payment of dividends in
relation to the holders of any other capital stock of the Company;
(ii) reduce the amount payable to the holders of that
series of Preferred Stock upon the voluntary or involuntary liquidation,
dissolution, or winding up of the Company, or change the relative seniority of
the liquidation preferences of the holders of that series of Preferred Stock to
the rights upon liquidation of the holders of any other capital stock of the
Company;
(iii) make the Series A Preferred, Series B Preferred or
Series C Preferred redeemable at the option of the Company;
-11-
<PAGE>
(iv) cancel or modify the conversion rights of that series
of Preferred Stock provided for herein; or
(v) change the authorized number of directors of the
Company.
(d) Series C Preferred Stock. In addition to and not in
------------------------
limitation of any approval that may be required pursuant to Article IV.B.6(b) or
IV.B.6(c), so long as 600,000 shares of Series C Preferred (as adjusted for any
Recapitalization Event) are outstanding, this Company shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then-outstanding shares of Series C
Preferred:
(i) authorize, designate or issue, or obligate itself to
issue, any other security, including any security convertible into or
exercisable for any security, having a preference or priority as to dividend
rights, liquidation preference, or redemption rights, senior to or on parity
with the preferences and priority of the Series C Preferred Stock; or
(ii) incur indebtedness in excess of $10,000,000 in the
aggregate at any one time outstanding. As used herein, "indebtedness" shall
include: (A) all indebtedness of the Company and/or any of its subsidiaries for
borrowed money or for the deferred purchase price of property or services
(including, without limitation, reimbursement and all other obligations with
respect to surety bonds, letters of credit and bankers' acceptances, whether or
not matured, but not including obligations to trade creditors incurred in the
ordinary course of business), (B) all obligations of the Company and/or any of
its subsidiaries evidenced by notes, bonds, debentures or similar instruments,
(C) all indebtedness created or arising under any conditional sale or other
title retention agreements with respect to property acquired by the Company
and/or any of its subsidiaries (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), (D) all lease obligations of the Company
and/or any of its subsidiaries that would in accordance with generally accepted
accounting principles appear on a balance sheet of the Company and/or any of its
subsidiaries, or otherwise be disclosed in a note to any such balance sheet, (E)
all indebtedness, leases, dividends or other obligations of others guaranteed by
the Company and/or any of its subsidiaries, or with respect to which the Company
and/or any of its subsidiaries has agreed to purchase, fund or otherwise support
or in respect of which the Company and/or any of its subsidiaries has agreed to
indemnify and person, (F) all indebtedness referred to in clause (A), (B), (C),
(D) or (E) above secured by (or for which the holder of such indebtedness has an
existing right, contingent or otherwise, to be secured by) any mortgage, deed of
trust, security agreement, pledge, title retention agreement, financing lease or
other lien or encumbrance upon or in property (including, without limitation,
accounts and contract rights) owned by the Company and/or any of its
subsidiaries, whether or not the Company or any of its subsidiaries has assumed
or become liable for the payment of such indebtedness and (G) all liabilities of
the Company and/or any of its subsidiaries under Title IV of the Employee
Retirement Income Security Act of 1974 (or any successor limitation), as amended
from time to time, or any rules or regulations issued thereunder.; or
(iii) amend its certificate of incorporation, as amended
from time to time, or its bylaws if such amendment would change any of the
rights, preferences or privileges
-12-
<PAGE>
provided for herein for the benefit of any shares of the Series C Preferred
Stock, or otherwise adversely affect the holders of the Series C Preferred
Stock; or.
(iv) reduce the price at which the Series C Preferred Stock
is automatically converted to Common Stock pursuant to Article IV.B.3(b).
7. Increasing Common Stock. The number of authorized shares of
-----------------------
Common Stock may be increased or decreased (but not below the sum of the number
of shares of Common Stock then outstanding) plus the number of shares required
to be reserved pursuant to Article IV.B.4(f) by an affirmative vote of a
majority of the shares of Common Stock and the Preferred Stock voting together
as a single class.
8. No Reissuance of Preferred Stock. No share or shares of
--------------------------------
Preferred Stock acquired by the Company by reason of redemption, purchase,
repurchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares which the Company shall be
authorized to issue.
2. The foregoing amendment of the Amended and Restated Certificate
of Incorporation was duly approved as of December ___, 1999 by a vote of the
holders of a majority of the outstanding shares of the Company's Series A
Preferred Stock voting as a separate series a majority of the outstanding shares
of the Company's Series B Preferred Stock voting as a separate series, a
majority of the outstanding shares of the Company's Preferred Stock voting as a
separate class, and a majority of the outstanding shares of the Company's Common
Stock in accordance with Section 242(b) of the Delaware General Corporation Law.
-13-
<PAGE>
THE UNDERSIGNED, being the President and Chief Executive Officer of the
Company, does hereby declare and certify that this is his act and deed and the
facts herein stated are true, and accordingly, has hereunto set his hand this
22nd day of December, 1999.
CONTEXT INTEGRATION, INC.
/s/ Stephen Sharp
______________________________________
Stephen Sharp, President
and Chief Executive Officer
Attest:
/s/ David Weber
____________________________________
David Weber, Assistant Secretary
<PAGE>
Exhibit 4.2
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
THIS THIRD AMENDED AND RESTATED RIGHTS AGREEMENT (this "Rights
Agreement") is entered into as of February 17, 2000 by and among Context
Integration, Inc., a Delaware corporation (the "Company"), the holders of Series
A Preferred Stock of the Company listed on Schedule A attached hereto (the
"Series A Purchasers"), the holders of Series B Preferred Stock of the Company
listed on Schedule A attached hereto (the "Series B Purchasers"), the holders of
Series C Preferred Stock of the Company listed on Schedule A attached hereto
other than Teck Chye Lau and David L. Smith (the "Series C Purchasers" and
together with the Series A Purchasers and the Series B Purchasers, the
"Purchasers" and each a "Purchaser"), and the holders of Common Stock listed on
Schedule A attached hereto (the "Common Holders"). The Purchasers and the
Common Holders are collectively referred to as the "Investors".
RECITALS:
--------
A. The Series A Purchasers, the Series B Purchasers, the Series C
Purchasers and the Common Holders (together, the "Existing Rights Holders")
possess certain rights pursuant to that Second Amended and Restated Rights
Agreement dated as of December 22, 1999 (the "Prior Agreement");
B. The Existing Rights Holders and the Company have determined that
the Company's impending initial registered underwritten public offering of its
securities to the general public has eliminated the necessity for a right of
first refusal on shares of stock held by the Common Holders; and
C. The Existing Rights Holders and the Company desire to amend and
restate the Prior Agreement and to accept the rights created pursuant hereto in
lieu of the rights granted to them under the Prior Agreement.
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the mutual promises, covenants
and conditions set forth herein and other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the Existing Rights
Holders agree that the Prior Agreement shall be amended and restated in its
entirety by this Rights Agreement and the parties hereto agree as follows:
1. Registration Rights.
-------------------
1.1 Definitions. As used in this Rights Agreement, the following
-----------
terms shall have the following respective meanings:
<PAGE>
(a) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
and the declaration or ordering of the effectiveness of such registration
statement.
(b) The term "Registrable Securities" means (i) any and all shares of
Common Stock issued or issuable upon conversion of the Company's Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, (ii) for
purposes of Sections 1.3, 1.5, 1.6, 1.7, 1.8, 1.10, 1.12 and 1.13 of this Rights
Agreement only, the shares of Common Stock held, now or hereafter, by the Common
Holders (other than Common Stock issued or issuable upon conversion of the
Company's Series C Preferred Stock) and (iii) any and all shares of Common Stock
issued pursuant to any stock split, stock dividend, recapitalization or similar
event on the Common Stock listed in (i) and (ii); provided, however, that any
and all shares described in clauses (i)-(iii) above which have been resold to
the public either pursuant to a registration statement or Rule 144 or resold in
a private transaction in which the rights under this Section 1 are not assigned
in accordance with Section 1.10 shall cease to be Registrable Securities upon
such resale, and any shares as to which registration rights have terminated
pursuant to Section 1.13 below shall cease to be Registrable Securities upon
such termination.
(c) The term "Holder" means any Investor who holds Registrable
Securities and any holder of Registrable Securities to whom registration rights
have been transferred in compliance with Section 1.10 hereof.
(d) The term "Initiating Holders" means any Holder or Holders holding
thirty percent (30%) or more of the aggregate of the Registrable Securities then
outstanding.
(e) The term "SEC" means the Securities and Exchange Commission.
(f) The term "Registration Expenses" shall mean all expenses incurred
by the Company in complying with subsections 1.2, 1.3 and 1.4 hereof, including,
without limitation, all registration, qualification and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for the Company, fees
and disbursements of one (1) special counsel for all Holders which are selling
Registrable Securities under such registration statement, blue sky fees and
expenses, and the expense of any special audits incident to or required by any
such registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company.)
1.2 Demand Registration.
-------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holders a written request that the Company effect a registration with
respect to Registrable Securities, the Company will:
(i) give, within five (5) days of receiving such written request
from the Initiating Holders, written notice of the proposed registration to all
other Holders; and
-2-
<PAGE>
(ii) as soon as practicable, use its best efforts to effect such
registration (including, without limitation, the execution of an undertaking to
file post-effective amendments, appropriate qualifications under the applicable
blue sky or other state securities laws and appropriate compliance with
exemptive regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Initiating
Holder's or Initiating Holders' Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of any
Holder or Holders joining in such request as are specified in a written request
given within thirty (30) days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to take any
action to effect such registration pursuant to this subsection 1.2:
(A) at any time prior to the earlier to occur of (i) March 14,
2002 or (ii) six (6) months following the effective date of the registration
statement under the Securities Act for the Company's initial registered
underwritten public offering of its securities to the general public (other than
a registration statement relating either to the sale of securities to employees
of the Company pursuant to a stock option, stock purchase or similar plan or a
SEC Rule 145 transaction) (the "IPO");
(B) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as required by the Securities Act;
(C) after the Company has effected three (3) such registrations
pursuant to this subsection 1.2(a) and such registrations have been declared or
ordered effective;
(D) if the aggregate gross proceeds of such registration equal
less than Three Million Dollars ($3,000,000); or
(E) if the Company, within ten (10) days of the receipt of the
request of the Initiating Holders, gives notice of its bona fide intention to
effect the filing of a registration statement with the SEC within thirty (30)
days of receipt of such request (other than with respect to a registration
statement relating to a Rule 145 transaction, an offering solely to employees or
any other registration which is not appropriate for the registration of
Registrable Securities), and does so file within said thirty (30) day period and
makes reasonable efforts to cause such registration to become effective.
Subject to the foregoing clauses (A) through (E), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practical, but in any event within ninety (90) days, after
receipt of the request or requests of the Initiating Holders; provided, however,
that if the Company shall furnish to such Initiating Holders a certificate
signed by the President of the Company stating that in the good faith judgment
of the Company's board of directors (the "Board of Directors") of the Company,
it would be seriously detrimental to the
-3-
<PAGE>
Company and its stockholders for such registration statement to be filed on or
before the date filing would be required, the Company shall have the right to
defer such filing for a period of not more than one hundred twenty (120) days
after the furnishing of such a certificate of deferral; and provided further,
however, that the Board of Directors shall not exercise such right to defer a
filing more than once in any consecutive twelve (12) month period. If the
Initiating Holders withdraw their request for registration once requested
pursuant to this Section 1.2, then the Initiating Holders will forfeit their
right to one (1) registration pursuant to Section 1.2(a)(ii)(C); provided,
however, that if (i) notice of such withdrawal is given within 60 days after the
exercise by the Company of its right to delay a filing pursuant to subsection
1.2 or (ii) if at the time of such withdrawal, the Holders have learned of a
material adverse change in the condition, business or prospects of the Company
from that known to the Holders at the time of their request and have withdrawn
the request with reasonable promptness following disclosure by the Company of
such material adverse change, then the Holders shall not have to forfeit a
demand right pursuant to subsection 1.2.
(b) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as part of their request made pursuant to
subsection 1.2 and the Company shall include such information in the written
notice referred to in subsection 1.2(a)(i). In such event, the underwriter
shall be selected by a majority in interest of the Initiating Holders subject to
the consent of the Company, which consent shall not be unreasonably withheld.
The right of any Holder to registration pursuant to subsection 1.2 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. The Company shall (together
with all Holders proposing to distribute their securities through such
underwriting) enter into an underwriting agreement in customary form with the
underwriter or underwriters. Notwithstanding any other provision of this
subsection 1.2, if the underwriter advises the Initiating Holders in writing
that marketing factors require a limitation of the number of shares to be
underwritten, the Initiating Holders shall so advise all Holders, and the number
of shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among all Holders thereof in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities held
by such Holders; provided, however, that the number of shares of Registrable
Securities to be included in such underwriting shall not be reduced unless all
other securities are first entirely excluded from the underwriting. If any
Holder of Registrable Securities disapproves of the terms of the underwriting,
such Holder may elect to withdraw therefrom by written notice to the Company,
the underwriter and the Initiating Holders. Any Registrable Securities which
are excluded from the underwriting by reason of the underwriter's marketing
limitation or withdrawn from such underwriting shall be withdrawn from such
registration.
(c) Company Shares. If the managing underwriter has not limited the
--------------
number of Registrable Securities to be underwritten, the Company may include
securities for its own account or for the account of others in such registration
if the managing underwriter so agrees and if
-4-
<PAGE>
the number of Registrable Securities which would otherwise have been included in
such registration and underwriting will not thereby be limited.
1.3 Company Registration.
--------------------
(a) Registration. If at any time or from time to time, the Company
------------
shall determine to register any of its securities, for its own account or the
account of any of its stockholders, other than a registration on Form S-8
relating solely to employee stock option or purchase plans, or a registration on
Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on
any other form (other than Form S-1, S-2, S-3 or S-18, or their successor forms)
or any successor to such forms, which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
(i) promptly give to each Holder written notice thereof and
(ii) use its reasonable best efforts to include in such
registration (and compliance), and in any underwriting involved therein, all the
Registrable Securities specified in a written request or requests, made within
twenty (20) days after receipt of such written notice from the Company, by any
Holder or Holders, except as set forth in subsection 1.3(b) below.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to subsection 1.3(a)(i). In such event the right of any Holder to
registration pursuant to subsection 1.3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other stockholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provision of this
subsection 1.3, if the underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, and (i) if such
registration is the first registered offering of the sale of the Company's
securities to the general public, the underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting, or
may exclude Registrable Securities entirely from such registration and
underwriting, or (ii) if such registration is other than the first registered
offering of the sale of the Company's securities to the general public, the
underwriter may limit the amount of securities to be included in the
registration and underwriting by the Company's stockholders; provided, however,
the number of Registrable Securities to be included in such registration and
underwriting under this subsection 1.3(b)(ii) shall not be reduced to less than
thirty percent (30%) of the aggregate securities included in such registration
without the prior consent of at least a majority of the Holders who have
requested their shares to be included in such registration and underwriting. The
Company shall so advise all Holders of Registrable Securities which would
otherwise be registered and underwritten pursuant hereto, and the number of
shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among Holders requesting registration in
proportion,
-5-
<PAGE>
as nearly as practicable, to the respective amounts of Registrable Securities
held by each of such Holders as of the date of the notice pursuant to subsection
1.3(a)(i) above; provided, however, that in no instance shall Registrable
Securities held by the Common Holders (other than Common Stock issued upon
conversion of the Company's Series C Preferred Stock) be included in such
registration and underwriting if such inclusion would reduce the number of
shares of Registrable Securities held by other Holders able to be included in
such registration and underwriting. If any Holder disapproves of the terms of
any such underwriting, he may elect to withdraw therefrom by written notice to
the Company and the underwriter. Any Registrable Securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
1.4 Form S-3. In addition to the rights and obligations set forth in
--------
subsection 1.2 above, if Holders request that the Company file a registration
statement on Form S-3 (or any successor to Form S-3) for a public offering of
shares of Registrable Securities, the reasonably anticipated aggregate price to
the public of which (net of underwriting discounts and commissions) would exceed
Two Million Dollars ($2,000,000) and the Company is then a registrant entitled
to use Form S-3 to register the shares for such an offering, the Company shall
use its best efforts to cause such shares to be registered for the offering as
soon as practicable on Form S-3 (or any successor form to Form S-3); provided,
however, the Company shall not be required to effect a registration pursuant to
this subsection 1.4:
(a) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(b) if the Company, within ten (10) days of the receipt of the
request of the Holders, gives notice of its bona fide intention to effect the
filing of a registration statement with the SEC within thirty (30) days of
receipt of such request (other than with respect to a registration statement
relating to a Rule 145 transaction, an offering solely to employees or any other
registration which is not appropriate for the registration of Registrable
Securities), and does so file within said thirty (30) day period and makes
reasonable efforts to cause such registration to become effective;
(c) during a period of one hundred twenty (120) days following the
effective date of a registration statement;
(d) if the Company has effected two (2) registration pursuant to this
subsection 1.4 within a twelve (12) month period from the date of such request;
or
(e) if the Company shall furnish to such Holders a certificate signed
by the President of the Company stating that in the good faith judgment of the
Board of Directors, it would be seriously detrimental to the Company and its
stockholders for such registration statement to be filed on or before the date
filing would be required, in which case the Company shall have the right to
defer such filing for a period of not more than one hundred twenty (120) days
after the furnishing of such a certificate of deferral; provided, however, that
the Board of Directors shall not exercise such right to defer a filing more than
once in any consecutive twelve (12)- month period.
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In the event such Holders propose to offer the shares of Registrable
Securities pursuant to this subsection 1.4 by means of an underwriting, the
proposed underwriter(s) shall be reasonably acceptable to the Company, provided,
however, that in the event such underwriter(s) is (are) not reasonably
acceptable to the Company, the Company shall be required to furnish to the
Holders, within twenty (20) days of the receipt of the request for registration
from Holders pursuant to this subsection 1.4, the names of at least two (2)
underwriters acceptable to the Company, who agree to act as underwriter for the
proposed offering on terms no less favorable to the Holders than those terms
proposed in writing by the underwriter(s) selected by the Holders. The Company
shall give written notice to all Holders of the receipt of a request for
registration pursuant to this subsection 1.4 and shall provide a reasonable
opportunity (but in no event less than 20 days) for other Holders to participate
in the registration, provided that if the registration is for an underwritten
offering, the terms of subsection 1.2(b) shall apply to all participants in such
offering.
1.5 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration pursuant to this Section 1 shall be borne by
the Company except as follows:
(a) The Company shall not be required to pay for expenses of any
registration proceeding begun pursuant to subsection 1.2 if the request for
which has been subsequently withdrawn by the Initiating Holders (in which case,
such expenses shall be borne by the Holders requesting such withdrawal), unless
either (i) notice of such withdrawal is given within 60 days after the exercise
by the Company of its right to delay a filing pursuant to subsection 1.2, (ii)
if at the time of such withdrawal, the Holders have learned of a material
adverse change in the condition, business or prospects of the Company from that
known to the Holders at the time of their request and have withdrawn the request
with reasonable promptness following disclosure by the Company of such material
adverse change or (iii) the Holders forfeit a demand right as provided in
subsection 1.2.
(b) The Company shall not be required to pay fees or
disbursements of legal counsel of a Holder other than a single law firm selected
by a majority in interest of all Holders selling Registrable Securities in a
registration pursuant to subsection 1.2, 1.3 or 1.4.
(c) The Company shall not be required to pay underwriters' fees,
discounts or commissions relating to Registrable Securities.
1.6 Registration Procedures. In the case of each registration
-----------------------
effected by the Company pursuant to this Rights Agreement, the Company will keep
each Holder participating therein advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. Except as otherwise provided in subsection 1.5, at its expense the
Company will:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its reasonable best efforts to
cause such registration statement to become effective, and, upon the request of
the Holders of a majority of the Registrable Securities registered thereunder,
keep such registration statement effective for (i) up to one hundred eighty
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<PAGE>
(180) days or, if a shorter period, until securities included in the
registration statement are sold if such registration statement is on Form S-3
(or successor form thereto) and (ii) up to one hundred twenty (120) days or, if
a shorter period, until securities included in the registration are sold if such
registration statement is on a form other than Form S-3 (or successor form
thereto);
(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 to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them;
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions unless the Company is
already subject to service in such jurisdictions;
(e) 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. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement;
(f) 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 or 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
(g) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 1, 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, (i) 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 requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent public accountants of the Company, in form and substance as is
customarily given by independent certified public
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<PAGE>
accountants to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Holders requesting registration of Registrable
Securities.
1.7 Indemnification.
---------------
(a) The Company will indemnify and defend each Holder of Registrable
Securities and each of its officers, directors and partners, and each person
controlling such Holder, with respect to which a registration has been effected
pursuant to this Rights Agreement, and each underwriter, if any, and each person
who controls any underwriter against all claims, losses, expenses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any registration statement or prospectus incident to such registration, or based
on any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statement therein not misleading,
or any violation or alleged violation by the Company of the Securities Act, the
Securities Exchange Act of 1934, as amended, ("Exchange Act"), or any state
securities law applicable to the Company or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any such state law and in each
case relating to action or inaction required of the Company in connection with
any such registration, and will reimburse each such Holder, each of its
officers, directors and partners, and each person controlling such Holder, each
such underwriter and each person who controls any such underwriter, as incurred
for any reasonable legal and any other expenses incurred in connection with
investigating, defending or settling any such claim, loss, damage, liability or
action; provided, however, that the indemnity agreement contained in this
subsection 1.7(a) shall not apply to amounts paid in settlement of any such
claim, loss, damage, liability, or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld);
and provided further, however, that the Company will not be liable in any such
case to the extent that any such claim, loss, expense, damage or liability
arises out of or is based on any untrue statement or omission based upon and
made in conformity with written information furnished to the Company by such
Holder (or its representative) or underwriter specifically for use therein.
(b) Each Holder will, if Registrable Securities held by or issuable
to such Holder are included in the securities as to which such registration is
being effected, indemnify and defend the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company within the
meaning of the Securities Act, and each other such Holder, each of its officers,
directors and partners and each person controlling such Holder, against all
claims, losses, expenses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement or
prospectus incident to such registration, or any omission (or alleged omission)
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse the Company and
such Holders, directors, officers, partners, persons, underwriters or control
persons for any reasonable legal or any other expenses incurred in connection
with investigating, defending or settling any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement or prospectus in reliance upon
and in conformity with written
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<PAGE>
information furnished to the Company by the Holder in an instrument duly
executed by such Holder specifically for use therein; provided, however, that
the indemnity agreement contained in this subsection 1.7(b) shall not apply to
amounts paid in settlement of any such claim, loss, 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 the total amount
for which any Holder shall be liable under this subsection 1.7(b) shall not in
any event exceed the aggregate proceeds received by such Holder from the sale of
Registrable Securities held by such Holder in such registration.
(c) Each party entitled to indemnification under this subsection 1.7
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, however, that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the Indemnified Party may participate in such
defense at its own expense; and provided further, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations hereunder, unless such failure resulted in
prejudice to the Indemnifying Party; and provided further, however, that an
Indemnified Party (together with all other Indemnified Parties which may be
represented without conflict by one counsel) shall have the right to retain one
separate 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 a conflict of interests
between such Indemnified Party and any other party represented by such counsel
in such proceeding. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(d) If the indemnification provided for in this subsection 1.7 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any claim, loss, damage, liability, action, or expense
referred to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such claim, loss, damage, liability,
action, or expense in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party on the one hand and of the Indemnified Party on
the other in connection with the statements or omissions that resulted in such
claim, loss, damage, liability, action or expense as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party and of
the Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to written information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission. Notwithstanding the foregoing, the total amount for which
any Holder shall be liable under this
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<PAGE>
subsection 1.7(d) shall in no event exceed the aggregate proceeds received by
such Holder from the sale of Registrable Securities held by such Holder in such
registration.
1.8 Information by Holder. Any Holder or Holders of Registrable
---------------------
Securities included in any registration shall promptly furnish to the Company
such information regarding such Holder or Holders and the distribution proposed
by such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to herein.
1.9 Rule 144 Reporting. With a view to making available to Holders
------------------
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees at all times to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144 of the Securities Act, after ninety (90)
days after the effective date of the first registration filed by the Company for
an offering of its securities to the general public;
(b) 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
(at any time after it has become subject to such reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to furnish
to such Holder forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company as the Holder may reasonably request in complying with
any rule or regulation of the SEC allowing the Holder to sell any such
securities without registration.
1.10 Transfer of Registration Rights. Holders' rights to cause the
-------------------------------
Company to register their securities and keep information available, granted to
them by the Company under subsections 1.2, 1.3, 1.4 and 1.9, may be assigned to
a transferee or assignee of at least three hundred fifty thousand (350,000)
shares (as adjusted for stock splits, stock dividends, recapitalization and like
events occurring after the date hereof) of a Holder's Registrable Securities not
sold to the public, provided, that the Company is given written notice by such
Holder at the time of or within a reasonable time after said transfer, stating
the name and address of said transferee or assignee and identifying the
securities with respect to which such registration rights are being assigned and
if immediately following such transfer the transferee is bound by the terms and
conditions of sections 1, 3 and 7 of this Agreement. Notwithstanding anything
else in this subsection 1.10, any Holder may transfer rights to a transferee of
fewer than three hundred fifty thousand (350,000) shares (as adjusted for stock
splits, stock dividends, recapitalizations and like events occurring after the
date hereof) of a Holder's Registrable Securities if such transferee is an
affiliate (as defined in the
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<PAGE>
Securities Act) of such Holder and if immediately following such transfer the
transferee is bound by the terms and conditions of this Agreement.
1.11 Limitations on Subsequent Registration Rights. From and after
---------------------------------------------
the date hereof, the Company shall not, without the prior written consent of the
Holders (which consent will not be unreasonably withheld) of not less than a
majority of the Registrable Securities then outstanding enter into any
agreement, with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder to demand any
registration or include such securities in any registration filed under
subsections 1.2, 1.3 or 1.4 hereof if such inclusion would adversely affect the
rights of any Holder (or any qualifying transferee under subsection 1.10) under
such subsections, including reducing the number of shares of Registrable
Securities of a Holder able to be included in any registration.
1.12 "Market Stand-Off" Agreement. Each Holder hereby agrees that,
---------------------------
during the period of duration (not to exceed one hundred eighty (180) days)
specified by the lead underwriter of common stock or other securities of the
Company following the effective date of a registration statement of the Company
filed under the Securities Act, it shall not, to the extent requested by the
Company (pursuant to a request from such underwriter), directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase, pledge or otherwise transfer or dispose of
(other than to donees who agree to be similarly bound) any securities of the
Company held by it at any time during such period except common stock included
in such registration; provided, however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers common stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
(b) such agreement shall not be required unless all officers and
directors of the Company and all holders of two percent or more of the Company's
outstanding capital stock (on a common-equivalent basis) enter into similar
agreements;
(c) such agreement shall permit transfers of the Company's capital
stock to affiliates of the Holder during the market stand-off period; provided,
however, that it shall be a condition to the transfer that the transferee
execute an agreement stating that the transferee agrees to be bound by the
provisions of this subsection 1.12; and
(d) such agreement shall not cover securities of the Company
acquired in the public markets.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to the Registrable Securities of each Holder
(and the shares of securities of every other person subject to the foregoing
restriction) until the end of such period.
Each Holder agrees not to transfer or sell any securities of the Company
unless the transferee agrees to be bound by this Market Stand-Off Agreement.
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1.13 Termination of Registration Rights. The obligations of the Company
----------------------------------
pursuant to this Section 1 ("Registration Rights") shall terminate with respect
to any Holder on the earlier of (i) the date seven (7) years after the closing
of the IPO, or (ii) the date on which the Holder owns less than 1% of the
Company's outstanding stock and can sell all of his/her remaining Registrable
Securities under Rule 144 during any three (3)-month period.
2. Right of First Offer.
--------------------
2.1 If, at any time prior to the termination of this right of first offer
pursuant to subsection 2.6, the Company should desire to issue in a transaction
not registered under the Securities Act in reliance upon a claimed exemption
thereunder, any Equity Securities (as hereinafter defined), it shall give each
Purchaser, Michael E. Dunn ("Dunn"), and each of Regan B. Coleman, Teck Chye
Lau, David L. Smith and Bruce Strong (each a "Founder," and collectively, the
"Founders") the right to purchase such Purchaser's, Dunn's or such Founder's, as
applicable, pro rata share (or any part thereof) of all of such privately
offered Equity Securities on the same terms as the Company is willing to sell
such Equity Securities to any other person. Each Purchaser's, Dunn's and
Founder's, as applicable, pro rata share of the Equity Securities shall be equal
to that percentage of the outstanding Common Stock then held by such Purchaser,
Dunn or Founder, as applicable. For purposes of this subsection 2.1, the
outstanding Common Stock shall include (a) outstanding shares of Common Stock,
and (b) shares of Common Stock issued or issuable upon exercise and/or
conversion of any then outstanding options (which are fully vested), warrants,
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock.
2.2 Prior to any sale or issuance by the Company of any Equity Securities,
the Company shall notify each Purchaser, Dunn and each Founder in writing of its
intention to sell and issue such securities, setting forth the terms under which
it proposes to make such sale. Within ten (10) business days after receipt of
such notice, each Purchaser, Dunn and each Founder shall notify the Company in
writing whether such Purchaser, Dunn or such Founder desires to exercise the
option to purchase such Purchaser's, Dunn's or such Founder's, as applicable,
pro rata share (or any part thereof) of the Equity Securities so offered. If a
Purchaser, Dunn or a Founder, as applicable, elects to purchase such
Purchaser's, Dunn's or such Founder's, as applicable, pro rata share, then such
Purchaser, Dunn or Founder shall have a right of over-allotment such that if any
other Purchaser, Dunn or Founder fails to purchase such Purchaser's, Dunn's or
Founder's, as applicable, pro rata share of the Equity Securities, such
Purchaser(s), Dunn and such Founder(s) who have elected to purchase their pro
rata shares may purchase, on a pro rata basis, that portion of the Equity
Securities which such other Purchasers, Dunn's and Founder(s), as applicable,
elected not to purchase.
2.3 After termination of the ten (10) business day period specified in
subsection 2.2 above, the Company may, during a period of ninety (90) days
following the end of such ten (10) day period, sell and issue such Equity
Securities as to which (a) the Purchasers, Dunn or Founders have no right under
this Section 2 to purchase or (b) the Purchasers, Dunn and Founders do not
indicate a desire to purchase, to another person upon the same terms and
conditions as those set forth in the notice to the Purchasers, Dunn and the
Founders. In the event the Company has not
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sold the Equity Securities, or has not entered into an agreement to sell the
Equity Securities, within said ninety (90)-day period, the Company shall not
thereafter issue or sell any Equity Securities without first offering such
securities to the Purchasers, Dunn and the Founders in the manner provided
above.
2.4 If a Purchaser, Dunn or a Founder gives the Company written notice
that such Purchaser, Dunn or such Founder desires to purchase any of the Equity
Securities offered by the Company, payment for the Equity Securities shall be by
check, or wire transfer, against delivery of the Equity Securities at the
executive offices of the Company within ten (10) business days after giving the
Company such notice, or, if later, the closing date for the sale of such Equity
Securities. The Company shall use its reasonable best efforts to take all such
actions as may be required by any regulatory authority in connection with the
exercise by a Purchaser, Dunn or Founder of the right to purchase Equity
Securities as set forth in this Section 2.
2.5 The right of first offer contained in this Section 2 shall not apply
to the issuance by the Company of the following Equity Securities: (a) Common
Stock reserved for issuance to employees, consultants, directors or officers of
the Company pursuant to stock grant, stock purchase and/or stock option plans or
any other stock incentive program, agreement or arrangement approved by the
Board of Directors, (b) as part of an acquisition by the Company of all or
substantially all of the assets or shares of another company or entity or an
identifiable business division or segment of another company or entity in each
case approved by the Board of Directors, (c) any transaction or series of
related transactions (including, without limitation any reorganization, merger
or consolidation) which will result in the holders of the outstanding voting
equity securities of the Company immediately prior to such transaction holding
less than fifty percent (50%) of the voting equity securities of the surviving
entity immediately following such transaction, (d) pursuant to equipment
financing or leasing arrangements or in connection with strategic partnering
transactions in each case approved by the Board of Directors, (e) issued upon
conversion of the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock of the Company, (f) issued in connection with any stock split,
stock dividend, recapitalization or similar event, or (g) issued in connection
with an underwritten public offering of shares of the Company's capital stock.
2.6 The right of first offer contained in this Section 2 shall terminate
upon the earlier to occur of (a) March 14, 2007, (b) the closing of the IPO or
(c) the closing of (i) a merger or consolidation of the Company with or into any
other corporation in which the Company's stockholders shall own less than fifty
percent (50%) of the voting securities of the surviving corporation or (ii) a
sale, transfer, or disposition of all or substantially all of the assets of the
Company.
2.7 The term "Equity Securities" shall mean (a) Common Stock or Preferred
Stock, rights, options or warrants to purchase Common Stock or Preferred Stock,
(b) any security other than Common Stock or Preferred Stock having voting rights
in the election of the Board of Directors, not contingent upon a failure to pay
dividends, (c) any security convertible into or exchangeable for any of the
foregoing except that Equity Securities shall not include the Series A
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Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, and (d)
any agreement or commitment to issue any of the foregoing.
2.8 A Purchaser's right to purchase any Equity Securities pursuant to
this Section 2 may be assigned by a Purchaser to an affiliate (as defined in the
Securities Act) of a Purchaser.
3. Company's Right of First Refusal.
--------------------------------
3.1 Grant. The Company is hereby granted the right of first refusal (the
-----
"Right of First Refusal"), exercisable in connection with any proposed sale or
other transfer of the Company's capital stock now or hereafter owned by any
Purchaser or Common Holder (the "ROFR Shares"). For purposes of this Section 3,
the term "transfer" shall include any assignment, pledge (other than a pledge to
the Company), encumbrance or other disposition for value of the ROFR Shares
intended to be made by the holder of such ROFR Shares (the "Owner"); provided,
however, that the term "transfer" shall not include or apply to any disposition
of ROFR Shares to (a) any of the issue of the Owner or to any trustee or
trustees for the benefit of any issue of the Owner, or (b) the heirs or estate
of the Owner upon the death of the Owner or (c) any affiliate (as defined in the
Securities Act) of the Owner; and provided further, however, that in the case of
clauses (a), (b) and (c) above, the transferees shall furnish the Company with a
written agreement to be bound by or comply with all provisions of this Section
3. Notwithstanding the foregoing, the term "transfer" shall not include or apply
to any disposition of ROFR Shares by or from an Owner to his former spouse
pursuant to a divorce decree under applicable state law; provided, however, that
such ROFR shares shall continue to be subject to the terms of this Rights
Agreement as if such shares were held by the Owner. In addition, such former
spouse shall furnish the Company with a written agreement to be bound by or
comply with all provisions of this Section 3.
3.2 Notice of Intended Disposition. In the event the Owner desires to
------------------------------
accept a bona fide third-party offer for any or all of the ROFR Shares (the
shares subject to such offer to be hereinafter called, solely for the purposes
of this Section 3 the "Target Shares"), the Owner shall promptly deliver to the
Secretary of the Company written notice (the "Disposition Notice") of the offer
and the basic terms and conditions thereof, including the proposed purchase
price.
3.3 Exercise of Right. The Company (or its assignees) shall, for a period
-----------------
of thirty (30) days following receipt of the Disposition Notice, have the right
to repurchase any or all of the Target Shares specified in the Disposition
Notice (a) at a per share cash purchase price equal to Book Value (as defined
below) and upon substantially the same other terms and conditions specified
therein, in the case of a Disposition Notice given prior to (and not relating
to) the closing of the IPO by a Common Holder other than Dunn and (b) upon
substantially the same terms and conditions specified therein, in the case of a
Disposition Notice given by a Purchaser or Dunn or, after (or relating to) the
closing of the IPO, by a Common Holder other than Dunn. Such right shall be
exercisable by written notice (the "Exercise Notice") delivered to the Owner
prior to the expiration of the thirty (30) day exercise period. If such right is
exercised with respect to all the Target Shares specified in the Disposition
Notice, then the Company (or its assignee) shall effect the repurchase of the
Target Shares, including payment of the purchase price therefor, not more than
five (5) business
-15-
<PAGE>
days after delivery of the Exercise Notice. At such time the Owner shall deliver
to the Company the certificates representing the Target Shares to be purchased,
each certificate to be properly endorsed for transfer. The Target Shares so
purchased shall thereupon be canceled and cease to be issued and outstanding
shares of the Company's capital stock.
In the case of a Disposition Notice given by a Purchaser or Dunn, should
the purchase price specified in the Disposition Notice be payable in property
other than cash or evidences of indebtedness, the Company (or its assignees)
shall have the right to pay the purchase price in the form of cash equal in
amount to the value of such property. If the Owner and the Company (or its
assignees) cannot agree on such cash value within ten (10) days after the
Company's receipt of the Disposition Notice, the valuation shall be made by an
appraiser of recognized standing selected by the Owner and the Company (or its
assignees), or, if they cannot agree on an appraiser within twenty (20) days
after the Company's receipt of the Disposition Notice, each shall select an
appraiser of recognized standing, and the two appraisers shall designate a third
appraiser of recognized standing, whose appraisal shall be determinative of such
value. The cost of such appraisal shall be shared equally by the Owner and the
Company. The closing shall then be held on the latter of (i) the date five (5)
business days following delivery of the Exercise Notice or (ii) the date fifteen
(15) business days after such cash valuation shall have been made.
3.4 Non-Exercise of Right. In the event the Exercise Notice is not
---------------------
given to the Owner within thirty (30) days following the date of the Company's
receipt of the Disposition Notice, the Owner shall have a period of thirty (30)
days thereafter, in which to sell or otherwise dispose of the Target Shares upon
terms and conditions (including the purchase price) no more favorable to the
third-party purchaser than those specified in the Disposition Notice. The
third-party purchaser shall acquire the Target Shares free and clear of all the
terms and provisions of this Right of First Refusal. In the event the Owner
does not sell or otherwise dispose of the Target Shares within the specified
thirty (30) day period, the Right of First Refusal shall continue to be
applicable to any subsequent disposition of the Target Shares by the holder of
such Target Shares until such right terminates in accordance with Section 3.7
3.5 Partial Exercise of Right. In the event the Company (or its
-------------------------
assignees) makes a timely exercise of the Right of First Refusal with respect to
a portion, but not all, of the Target Shares specified in the Disposition
Notice, the Owner shall have the option, exercisable by written notice to the
Company delivered within thirty (30) days after the date of the Disposition
Notice, to effect the sale of the Target Shares pursuant to one or both of the
following alternatives:
(a) sale or other disposition of all the Target Shares to a
third-party purchaser in compliance with the requirements of section 3.4, as if
the Company did not exercise the Right of First Refusal hereunder; or
(b) sale to the Company (or its assignees) of the portion of the
Target Shares which the Company (or its assignees) has elected to purchase, such
sale to be effected in substantial conformity with the provisions of Section
3.3, and sale or other disposition of the remaining Target Shares to a third
party purchaser in compliance with Section 3.4, as if the Company did not
exercise the Right of First Refusal as to such remaining shares.
-16-
<PAGE>
Failure of the Owner to deliver timely notification to the Company under
this Section 3.5 shall be deemed to be an election by the Owner to sell the
Target Shares pursuant to alternative (a) above.
3.6 Recapitalization. In the event of any stock dividend, stock
----------------
split, recapitalization or other transaction affecting the Company's outstanding
capital stock effected without receipt of consideration, then any new,
substituted or additional securities or other property which is by reason of
such transaction distributed with respect to the ROFR Shares shall be
immediately subject to the Right of First Refusal hereunder, but only to the
extent the ROFR Shares are at a time covered by such right.
3.7 Termination. The Right of First Refusal under this Section 3
-----------
shall terminate and cease to have effect upon the earliest to occur of (a) the
first date on which shares of Common Stock are held of record by more than five
hundred (500) persons, (b) the closing of the IPO, or (c) the date of closing of
(i) a merger or consolidation of the Company with any other corporation or other
business entity in which the Company's stockholders shall own less than fifty
percent (50%) of the voting securities of the surviving corporation or business
entity or (ii) a sale, transfer, or disposition of all or substantially all of
the assets of the Company or outstanding capital stock of the Company.
3.8 Legend. All certificates representing ROFR Shares subject to the
------
Right of First Refusal shall be endorsed with the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN
COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY
AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN-
INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN
RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES. THE
SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF
SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE."
3.9 Co-Sale Rights Subordinate to Right of First Refusal. The
----------------------------------------------------
Company's Right of First Refusal and all of the rights attendant thereto
(regardless of whether exercised by the Company or, as provided in Subsection
3.3, its assignees) set forth in this Section 3 are senior to any rights of co-
sale granted by the Company or any of the Company's stockholders. Any and all
such rights of co-sale are subordinate to the Company's Right of First Refusal
and all rights attendant thereto (regardless of whether exercised by the Company
or, as provided in Subsection 3.3, its assignees) set forth in this Section 3
and shall pertain only to shares as to which the Company's Right of First
Refusal is not exercised.
3.10 Book Value. For purposes of this Section 3, "Book Value" shall
----------
be determined according to this Section 3.10. The accounting firm regularly
retained by the Company
-17-
<PAGE>
shall determine the book value per share of Common Stock, which shall be
calculated by dividing (x) the book value of the Company (total assets at book
value less total liabilities), but not treating as assets any intangible assets
(including, without limitation, contract rights with clients, future income and
goodwill), or any accounts receivable remaining unpaid after 150 days after the
date of invoice, by (y) the fully-diluted total number of shares of Common
Stock.
For purposes of the foregoing calculation:
(a) An asset value equal to the greater of (i) the original purchase
price paid for shares of preferred stock or (ii) the amount that would be
payable in respect of such shares upon the dissolution and liquidation of the
Company, shall be allocated to such shares as their preference value and
deducting in arriving at the Company's total assets.
(b) The Company's total assets and total liabilities shall be determined
by reference to the most recent balance sheet of the Company that has been
audited or reviewed by the accounting firm regularly retained by the Company.
The foregoing shall apply even if a fiscal year has transpired since the date of
such balance sheet, so long as such firm is proceeding in the normal course in
the preparation of its auditor's or reviewer's report in respect of the
Company's financial statements for such fiscal year and so long as not more than
ninety (90) days have so transpired.
(c) A fully-diluted basis assumes (i) the exercise of all stock options
and warrants and other contingent obligations to issue shares of Common Stock
(other than the conversion of shares of preferred stock), whether or not such
options, warrants or other obligations are presently vested or exercisable, and
(ii) the Company's receipt of the related exercise prices and other applicable
consideration.
4. Information Rights.
------------------
4.1 Annual Financial Information. As soon as practicable after the
----------------------------
end of each fiscal year, and in any event within ninety (90) days thereafter,
the Company will furnish to each Purchaser, so long as such Purchaser still
holds shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock (or Common Stock issued upon conversion of the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock), audited
financial statements, including consolidated balance sheets of the Company and
its subsidiaries, if any, as at the end of such fiscal year and consolidated
statements of income and surplus and consolidated statements of changes in
financial position of the Company and its subsidiaries, if any, for such year,
prepared in accordance with generally accepted accounting principles and setting
forth in each case in comparative form the figures for the previous fiscal year.
Not later than thirty (30) days prior to the beginning of each fiscal year of
the Company, the Company will deliver to each Purchaser the Company's business
plan and projected operating budget for the next fiscal year.
4.2 Quarterly Financial Information. As soon as available and in any
-------------------------------
event within forty-five (45) days after each quarterly accounting period (other
than the fourth such quarterly period in a fiscal year; provided, however, that
the annual information provided by the Company to the Purchasers pursuant to
Section 4.1 includes such financial information for the fourth quarter), the
-18-
<PAGE>
Company will furnish to each Purchaser, so long as such Purchaser still holds
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock (or Common Stock issued upon conversion of the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock),
quarterly financial statements of the Company, including a balance sheet, profit
and loss statement, cash flow analysis and a comparison to budget.
4.3 Confidentiality of Information. Each Purchaser agrees that any
------------------------------
information obtained by it pursuant to subsections 4.1 and 4.2 will not be
disclosed to any person or entity without the prior written consent of the
Company; provided however, that such consent shall not be unreasonably withheld
and that notwithstanding the foregoing, each Purchaser may disclose such
information without the prior written consent of the Company to its partners,
legal counsel, professional accountants, advisors or employees in order to
evaluate this investment and as may be necessary to continue to evaluate the
Company. Each Purchaser agrees that any recipient of information obtained by
the Purchaser pursuant to subsections 4.1 and 4.2 shall agree to be bound by the
provisions of this subsection 4.3 respect to such information. Each Purchaser's
obligations under this subsection 4.3 shall not apply to any information which:
(a) was in the public domain at the time it was communicated to
the Purchaser by the Company;
(b) entered the public domain subsequent to the time it was
communicated to the Purchaser through no fault of the Purchaser;
(c) was in the Purchaser's possession free of any obligation of
confidence at the time it was communicated to the Purchaser by the Company;
(d) was rightfully communicated to the Purchaser by a third party
free of any obligation of confidence subsequent to the time it was communicated
to the Purchaser by the Company;
(e) was disclosed by the Purchaser in response to a valid order
by a court or other governmental body, was otherwise required by law, or was
necessary to establish the rights of either party under this Rights Agreement;
or
(f) was independently developed by the Purchaser without using
the confidential information of the Company.
4.4 Transfer of Information Rights. The Purchasers' rights to
------------------------------
receive financial information pursuant to this Section 4 are not assignable
except to a transferee of the Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock or Common Stock issuable upon conversion of the
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
made in compliance with this Rights Agreement and the Second Amended and
Restated Co-Sale Agreement. The Company may prohibit the transfer of any
Holders' rights under this subsection 4.4 to any proposed transferee or assignee
who the Company reasonably believes is a competitor of the Company.
-19-
<PAGE>
4.5 Termination of Covenants. The covenants set forth in subsections
------------------------
4.1, 4.2 and 4.3 shall terminate and be of no further force and effect upon the
earlier to occur of (a) the closing of the IPO or (b) upon any merger or
consolidation of the Company with any other corporation in which the
stockholders of the Company immediately prior to such transaction shall own less
than fifty percent (50%) of the voting securities of the surviving corporation.
5. Attendance at Board Meetings. Kenneth A. Fox (or a representative
----------------------------
appointed by Mr. Fox), David Whitmore (or a representative chosen by GE Capital
Equity Investments, Inc.) and each Founder who is not then a director of the
Company shall have the right to attend all meetings of the Board of Directors in
a nonvoting observer capacity and to receive notice of such meetings and to
receive the information provided by the Company to the Board of Directors. The
covenants set forth in this Section 5 shall terminate and be of no further force
and effect upon the earlier to occur of (a) the closing of the IPO or (b) upon
any merger or consolidation of the Company with any other corporation in which
the stockholders of the Company immediately prior to such transaction shall own
less than fifty percent (50%) of the voting securities of the surviving
corporation.
6. Expenses Incurred in Connection with Attending Board Meetings. The
-------------------------------------------------------------
Company agrees to reimburse all reasonable costs and expenses incurred by the
directors representing the Purchasers in attending all meetings of the Board of
Directors or any committee thereof in accordance with Company policy. The
covenants set forth in this Section 6 shall terminate and be of no further force
and effect upon the earlier to occur of (a) the closing of the IPO or (b) upon
any merger or consolidation of the Company with any other corporation in which
the stockholders of the Company immediately prior to such transaction shall own
less than fifty percent (50%) of the voting securities of the surviving
corporation.
7. General.
-------
7.1 Waivers and Amendments. With the written consent of the holders
----------------------
of at least a majority of the Registrable Securities (other than Registrable
Securities of the Common Holders), the obligations of the Company and the rights
of the parties under this agreement may be waived (either generally or in a
particular instance, either retroactively or prospectively, and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Rights
Agreement; provided, however, that no such modification, amendment or waiver
shall reduce the aforesaid majority of Registrable Securities consent
requirement without the consent of all of the Holders of the Registrable
Securities; and provided further, however, that no such modification, amendment
or waiver shall adversely affect the rights of holders of any series of
Preferred Stock in a manner different from holders of all other series of
Preferred Stock without the prior written consent of the holders of a majority
of the series of Preferred Stock so affected, and that no such modification,
amendment or waiver shall affect the rights of the Common Holders under this
Rights Agreement without the prior written consent of a majority of the Common
Holders. Upon the effectuation of each such waiver, consent, agreement of
amendment or modification, the Company shall promptly give written notice
thereof to the record holders of the Registrable Securities who
-20-
<PAGE>
have not previously consented thereto in writing. This Rights Agreement or any
provision hereof may be changed, waived, discharged or terminated only by a
statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, except to the extent
provided in this subsection 7.1.
7.2 Governing Law. This Rights Agreement shall be governed in all
-------------
respects by the laws of the State of Delaware as such laws are applied to
agreements between Delaware residents entered into and to be performed entirely
within Delaware.
7.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
7.4 Entire Agreement. This Rights Agreement and the Second Amended
----------------
and Restated Co-Sale Agreement constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and this Rights
Agreement shall supersede and cancel all prior agreements between the parties
hereto with regard to the subject matter hereof except for the right of first
refusal set forth in the Amended and Restated Stockholder Agreement dated March
13, 1997 among the Company and its stockholders identified therein; provided,
however, that (a) the provisions of the Right of First Refusal set forth in this
Rights Agreement are superior to and have priority over the provisions of the
right of first refusal provisions set forth in the Stockholder Agreement and (b)
the right of first refusal provisions set forth in the Stockholder Agreement are
expressly subordinate to the provisions of the Right of First Refusal set forth
in this Rights Agreement.
7.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be effective on (i) the date
of delivery by facsimile (with confirmation of receipt by phone) or personally
or (ii) the business day after deposit with an overnight courier service or
(iii) five (5) business days after deposit in the United States first class mail
by certified or registered mail. All notices not delivered personally or by
facsimile will be sent with postage and other charges prepaid and addressed (a)
if to any Purchaser, at such party's address as set forth in the Company's
records, or at such other address as such party shall have furnished to the
Company in writing, with a copy to Weil, Gotshal & Manges LLP, 2882 Sand Hill
Road, Menlo Park, California 94025, Attention: Richard Millard, Esq., Facsimile:
(650) 854-3713 or (b) if to the Company, Context Integration, Inc., One Van de
Graaff, Suite 104, Burlington, Massachusetts 01803, Facsimile: (781) 229-0808,
or at such other address as the Company shall have furnished to the Purchaser in
writing with a copy to Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road,
Palo Alto, California, 94304-1050, attention: Elizabeth R. Flint, Esq.,
facsimile: (650) 493-6811.
7.6 Severability. In case any provision of this Rights Agreement
------------
shall be invalid, illegal, or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Rights Agreement shall not in
any way be affected or impaired thereby.
-21-
<PAGE>
7.7 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Rights Agreement are for convenience of reference only and are not to be
considered in construing this Rights Agreement.
7.8 Counterparts. This Rights 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.
-22-
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Rights Agreement
on the date first above written.
"COMPANY"
CONTEXT INTEGRATION, INC.,
a Delaware corporation
By: /s/ Stephen Sharp
_____________________________________
Name: Stephen Sharp
Title: CEO
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February 17, 2000
"PURCHASER"
GE Capital Equity Investments, Inc., a
Delaware corporation
By: /s/ David Whitmore
___________________________________
Name: David Whitmore
_________________________________
Title: Senior Vice President
________________________________
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February 17, 2000
"PURCHASER"
Atlas Venture Fund III, L.P.
By: Atlas Venture Associates III, LLC,
its general partner
By: /s/ Ronald Nordin
______________________________________
Member Manager
Name:
"PURCHASER"
Atlas Venture Entrepreneurs' Fund III, L.P.
By: Atlas Venture Associates III, LLC,
its general partner
By: /s/ Ronald Nordin
______________________________________
Member Manager
Name:
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February 17, 2000
"PURCHASER"
RBC Ventures II, Ltd.
By: RBC Management LLC, its general partner
By:______________________________________
Name:
Title:
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February 17, 2000
"PURCHASER"
Internet Capital Group, Inc.
By: /s/ Christopher Greendale
______________________________________
Name: Christopher Greendale
Title: Managing Director
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February 17, 2000
"PURCHASER"
Sigma Partners III, L.P.
By: /s/ Wade Woodson
--------------------------------------
General Partner
Name:
"PURCHASER"
Sigma Associates III, L.P.
By: /s/ Wade Woodson
--------------------------------------
General Partner
Name:
"PURCHASER"
Sigma Investors III, L.P.
By: /s/ Wade Woodson
--------------------------------------
General Partner
Name:
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February 17, 2000
"PURCHASER"
Donald McKinney and Rebecca McDaniel
McKinney TTEES UAD (6/2/86)
By:____________________________________
Donald McKinney, Trustee
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February 17, 2000
"PURCHASER"
/s/ Peter Solvik
------------------------------------------
Peter Solvik
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February 17, 2000
"PURCHASER"
______________________________________
John R. Mandile
"PURCHASER"
/s/ David Weber
______________________________________
David Weber
"PURCHASER"
/s/ Steven Sharp
______________________________________
Steven Sharp
"COMMON HOLDER"
Bruce Strong
______________________________________
(Printed Name)
/s/ Bruce Strong
______________________________________
(Signed Name)
"COMMON HOLDER"
Teck Chye Lau
______________________________________
(Printed Name)
/s/ Teck Chye Lau
______________________________________
(Signed Name)
"COMMON HOLDER"
David L. Smith
______________________________________
(Printed Name)
/s/ David L. Smith
______________________________________
(Signed Name)
<PAGE>
Schedule A
Common Stockholders
-------------------
David Smith
T.C. Lau
Bruce Strong
Regan Coleman
Michael Dunn
Series A Preferred Stockholders
-------------------------------
Internet Capital Group, Inc.
Sigma Partners III, L.P.
Sigma Associates III, L.P.
Sigma Investors III, L.P.
Donald & Rebecca McKinney
Peter Solvik
John R. Mandile
Series B Preferred Stockholders
-------------------------------
Atlas Venture Fund III, L.P.
Atlas Venture Entrepreneurs' Fund III, L.P.
RBC Ventures
Internet Capital Group, Inc.
Sigma Partners III, L.P.
Sigma Associates III, L.P.
Sigma Investors III, L.P.
Donald & Rebecca McKinney
Peter Solvik
John R. Mandile
Series C Preferred Stockholders
-------------------------------
GE Capital Equity Investments, Inc.
Atlas Venture Fund III, L.P.
Atlas Venture Entrepreneurs' Fund III, L.P.
RBC Ventures II, Ltd.
Internet Capital Group, Inc.
Sigma Partners III, L.P.
Sigma Associates III, L.P.
Sigma Investors III, L.P.
Donald & Rebecca McKinney
Peter Solvik
<PAGE>
John R. Mandile
David Weber
Stephen Sharp
2
<PAGE>
CONTEXT INTEGRATION, INC.
AMENDMENT TO THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
This Amendment to the Third Amended and Restated Rights Agreement (the
"Amendment") is entered into as of March 2, 2000 by and among Context
Integration, Inc., a Delaware corporation (the "Company"), the holders of Series
A Preferred Stock of the Company listed on Schedule A attached hereto (the
"Series A Purchasers"), the holders of Series B Preferred Stock of the Company
listed on Schedule A attached hereto (the "Series B Purchasers"), the holders of
Series C Preferred Stock of the Company listed on Schedule A attached hereto
other than Teck Chye Lau and David L. Smith (the "Series C Purchasers" and
together with the Series A Purchasers and the Series B Purchasers, the
"Purchasers" and each a "Purchaser"), and the holders of Common Stock listed on
Schedule A attached hereto (the "Common Holders"). The Purchasers and the
Common Holders are collectively referred to as the "Investors".
RECITALS:
--------
A. The Holders of Registrable Securities (as defined in the Third Amended
and Restated Rights Agreement) possess certain registration rights pursuant to
the Third Amended and Restated Rights Agreement dated as of February 17, 2000
(the "Rights Agreement").
B. Under Section 7.1 of the Rights Agreement, the Company and the Holders
of a majority of the Registrable Securities and a majority of the Common Holders
may amend the Rights Agreement.
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions set forth herein and other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
8. Section 1.3(a) of the Rights Agreement is hereby amended and restated to
read in full as follows:
1.3 Company Registration.
--------------------
(a) Registration. If at any time or from time to time, the
------------
Company shall determine to register any of its securities, for its own account
or the account of any of its stockholders, other than a registration on Form S-8
relating solely to employee stock option or purchase plans, or a registration on
Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on
any other form (other than Form S-1, S-2, S-3 or S-18, or their successor forms)
or any successor to such forms, which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
-3-
<PAGE>
(i) promptly give to each Holder written notice thereof and
(ii) use its reasonable best efforts to include in such
registration (and compliance), and in any underwriting involved therein, all the
Registrable Securities specified in a written request or requests, made within
twenty (20) days after receipt of such written notice from the Company, by any
Holder or Holders, except as set forth in subsection 1.3(b) below; provided,
however, that the Company shall not be required to notify Holders of Registrable
Securities and such Holders shall not be entitled to include Registrable
Securities in a registration statement relating to the Company's first
registered offering of the sale of the Company's securities to the general
public, the closing of which occurs on or prior to August 31, 2000.
9. All other provisions of the Rights Agreement shall remain in full
force and effect.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Amendment to the
Rights Agreement on the date first above written.
"COMPANY"
CONTEXT INTEGRATION, INC.,
a Delaware corporation
By: David Weber
--------------------------
Name: David Weber
Title: Chief Financial
Officer
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
AMENDMENT TO RIGHTS AGREEMENT
February ___, 2000
"PURCHASER"
GE Capital Equity Investments, Inc.,
a Delaware corporation
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
AMENDMENT TO RIGHTS AGREEMENT
February ___, 2000
"PURCHASER"
Atlas Venture Fund III, L.P.
By: Atlas Venture Associates III, LLC,
its general partner
By: /s/ Ronald Nordin
-------------------------------------
Member Manager
Name:
"PURCHASER"
Atlas Venture Entrepreneurs' Fund III, L.P.
By: Atlas Venture Associates III, LLC,
its general partner
By: /s/ Ronald Nordin
-------------------------------------
Member Manager
Name:
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
AMENDMENT TO RIGHTS AGREEMENT
February 28, 2000
"PURCHASER"
RBC Ventures II, Ltd.
By: RBC Management LLC, its general partner
By: /s/ Regan Coleman
-------------------------------------
Name: Regan Coleman
Title: Sole Member
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
AMENDMENT TO RIGHTS AGREEMENT
February ___, 2000
"PURCHASER"
Internet Capital Group, Inc.
By: /s/ C.H. Arendale
----------------------------
Name: C.H. Arendale
Title: Managing Director
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
AMENDMENT TO RIGHTS AGREEMENT
February ___, 2000
"PURCHASER"
Sigma Partners III, L.P.
By: /s/ Robert Davoli
-------------------------
General Partner
Name: Robert Davoli
"PURCHASER"
Sigma Associates III, L.P.
By: /s/ Robert Davoli
-------------------------
General Partner
Name: Robert Davoli
"PURCHASER"
Sigma Investors III, L.P.
By: /s/ Robert Davoli
-------------------------
General Partner
Name: Robert Davoli
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
AMENDMENT TO RIGHTS AGREEMENT
February ___, 2000
"PURCHASER"
Donald McKinney and Rebecca McDaniel
McKinney TTEES UAD (6/2/86)
By:_____________________________________
Donald McKinney, Trustee
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February __, 2000
"PURCHASER"
/s/ Peter Solvik
----------------------------------
Peter Solvik
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February __, 2000
"PURCHASER"
/s/ John R. Mandile
----------------------------------
John R. Mandile
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February __, 2000
"PURCHASER"
/s/ David Weber
----------------------------------
David Weber
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February __, 2000
"PURCHASER"
/s/ Steven Sharp
----------------------------------
Steven Sharp
<PAGE>
PURCHASER'S COUNTERPART SIGNATURE PAGE
CONTEXT INTEGRATION, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February __, 2000
"COMMON HOLDER"
David Smith
----------------------------------
(Printed Name)
/s/ David Smith
----------------------------------
(Signed Name)
T.C. Lau
----------------------------------
(Printed Name)
/s/ T.C. Lau
----------------------------------
(Signed Name)
Bruce Strong
----------------------------------
(Printed Name)
/s/ Bruce Strong
----------------------------------
(Signed Name)
Regan Coleman
----------------------------------
(Printed Name)
/s/ Regan Coleman
----------------------------------
(Signed Name)
<PAGE>
Schedule A
Common Stockholders
-------------------
David Smith
T.C. Lau
Bruce Strong
Regan Coleman
Michael Dunn
Series A Preferred Stockholders
-------------------------------
Internet Capital Group, Inc.
Sigma Partners III, L.P.
Sigma Associates III, L.P.
Sigma Investors III, L.P.
Donald & Rebecca McKinney
Peter Solvik
John R. Mandile
Series B Preferred Stockholders
-------------------------------
Atlas Venture Fund III, L.P.
Atlas Venture Entrepreneurs' Fund III, L.P.
RBC Ventures
Internet Capital Group, Inc.
Sigma Partners III, L.P.
Sigma Associates III, L.P.
Sigma Investors III, L.P.
Donald & Rebecca McKinney
Peter Solvik
John R. Mandile
Series C Preferred Stockholders
-------------------------------
GE Capital Equity Investments, Inc.
Atlas Venture Fund III, L.P.
Atlas Venture Entrepreneurs' Fund III, L.P.
RBC Ventures II, Ltd.
Internet Capital Group, Inc.
Sigma Partners III, L.P.
Sigma Associates III, L.P.
Sigma Investors III, L.P.
Donald & Rebecca McKinney
Peter Solvik
<PAGE>
Exhibit 4.3
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CONTEXT INTEGRATION, INC.,
UNDERLINE, INC
AND
DONALD JOSEPH EDGERTON, PAUL GECZIK, ANDREAS BENDER AND
THE DONALD JOSEPH EDGERTON FAMILY TRUST
Dated as of January 31, 2000
<PAGE>
TABLE OF CONTENTS
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<S> <C>
ARTICLE I THE MERGER........................................................................................... 2
1.1 The Merger...................................................................................... 2
1.2 Effective Time.................................................................................. 2
1.3 Effect of the Merger............................................................................ 2
1.4 Certificate of Incorporation; Bylaws............................................................ 2
1.5 Directors and Officers.......................................................................... 2
1.6 Maximum Shares to Be Issued; Effect on Capital Stock............................................ 3
1.7 Dissenting Shares............................................................................... 4
1.8 Surrender of Certificates....................................................................... 5
1.9 No Further Ownership Rights in Company Common Stock............................................. 5
1.10 Tax and Accounting Consequences................................................................. 6
1.11 Taking of Necessary Action; Further Action...................................................... 6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................................... 6
2.1 Organization of the Company..................................................................... 6
2.2 Company Capital Structure....................................................................... 6
2.3 Subsidiaries.................................................................................... 7
2.4 Authority....................................................................................... 7
2.5 No Conflicts.................................................................................... 7
2.6 Company Financial Statements.................................................................... 8
2.7 No Undisclosed Liabilities...................................................................... 8
2.8 No Changes...................................................................................... 8
2.9 Tax and Other Returns and Reports............................................................... 10
2.10 Restrictions on Business Activities............................................................. 12
2.11 Title to Properties; Absence of Liens and Encumbrances.......................................... 12
2.12 Intellectual Property........................................................................... 12
2.13 Agreements, Contracts and Commitments........................................................... 13
2.14 Interested Party Transactions................................................................... 15
2.15 Compliance with Laws............................................................................ 15
2.16 Litigation...................................................................................... 15
2.17 Insurance....................................................................................... 15
2.18 Minute Books.................................................................................... 16
2.19 Environmental Matters........................................................................... 16
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(continued)
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2.20 Brokers' and Finders' Fees; Third Party Expenses.......................................... 17
2.21 Employee Matters and Benefit Plans........................................................ 17
2.22 Change of Control and Non-Compete Payments................................................ 20
2.23 Year 2000 Compliance...................................................................... 20
2.24 Representations Complete.................................................................. 21
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR...................................................... 21
3.1 Organization, Standing and Power.......................................................... 21
3.2 Authority................................................................................. 21
3.3 Capital Structure......................................................................... 22
3.4 No Undisclosed Liabilities................................................................ 22
3.5 Acquiror Financial Statements............................................................. 22
3.6 No Changes................................................................................ 23
3.7 Taxes..................................................................................... 25
3.8 Restrictions on Business Activities....................................................... 25
3.9 Title to Properties; Absence of Liens and Encumbrances.................................... 26
3.10 No Conflicts.............................................................................. 26
3.11 Intellectual Property..................................................................... 26
3.12 Interested Party Transactions............................................................. 27
3.13 Compliance with Laws...................................................................... 27
3.14 Employees................................................................................. 27
3.15 Litigation................................................................................ 28
3.16 Brokers' and Finders' Fees; Third Party Expenses.......................................... 28
3.17 Representations Complete.................................................................. 28
ARTICLE IV [RESERVED]....................................................................................... 28
ARTICLE V ADDITIONAL AGREEMENTS............................................................................. 28
5.1 Access to Information..................................................................... 28
5.2 Confidentiality........................................................................... 29
5.3 Expenses.................................................................................. 29
5.4 Public Disclosure......................................................................... 29
5.5 Consents.................................................................................. 29
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(continued)
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5.6 FIRPTA Compliance........................................................................ 29
5.7 Reasonable Efforts....................................................................... 29
5.8 Notification of Certain Matters.......................................................... 30
5.9 Additional Documents and Further Assurances.............................................. 30
5.10 Employment Matters....................................................................... 30
5.11 Stock Options............................................................................ 30
5.12 Third Party Consents..................................................................... 31
5.13 Tax Matters.............................................................................. 31
5.14 Rule 144 Reporting....................................................................... 32
5.15 Financial Information.................................................................... 32
ARTICLE VI CONDITIONS TO THE MERGER........................................................................ 32
6.1 Conditions to Obligations of Each Party to Effect the Merger............................. 32
6.2 Additional Conditions to Obligations of the Company...................................... 32
6.3 Additional Conditions to the Obligations of Acquiror..................................... 33
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION; ESCROW............................ 35
7.1 Survival of Representations and Warranties............................................... 35
7.2 Obligation of the Company to Indemnify, Reimburse, etc................................... 35
7.3 Obligation of Acquiror to Indemnify, Reimburse, etc...................................... 36
7.4 Limits on Indemnification, Reimbursement, etc............................................ 36
7.5 Escrow Arrangements...................................................................... 37
7.6 Claims for Indemnification............................................................... 37
ARTICLE VIII [RESERVED].................................................................................... 39
ARTICLE IX GENERAL PROVISIONS.............................................................................. 39
9.1 Notices.................................................................................. 39
9.2 Interpretation........................................................................... 41
9.3 Material Adverse Effect.................................................................. 41
9.4 Counterparts............................................................................. 41
9.5 Entire Agreement; Assignment............................................................. 41
9.6 Severability............................................................................. 42
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(continued)
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9.7 Other Remedies.............................................................. 42
9.8 Governing Law............................................................... 42
9.9 Rules of Construction....................................................... 42
9.10 Stock Certificate Legends................................................... 42
9.11 Amendment................................................................... 43
9.12 Extension; Waiver........................................................... 43
9.13 Arbitration................................................................. 43
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is dated as of
---------
January 31, 2000, among Context Integration, Inc., a Delaware corporation
("Acquiror"), Underline, Inc., a New York corporation (the "Company"), and
--------- -------
Donald Joseph Edgerton, Paul Geczik, Andreas Bender and the Donald Joseph
Edgerton Family Trust (each a "Shareholder" and together the "Shareholders").
----------- ------------
RECITALS
A. The Boards of Directors of each of the Company and Acquiror believe it
is in the best interests of each company and their respective shareholders that
Acquiror acquire the Company through the statutory merger of the Company with
and into Acquiror (the "Merger") and, in furtherance thereof, have approved the
------
Merger.
B. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, (i) all outstanding shares of common stock of
the Company ("Company Common Stock") shall be converted into shares of common
--------------------
stock of Acquiror ("Acquiror Common Stock") and (ii) all outstanding options to
---------------------
acquire shares of Company Common Stock (each a "Common Stock Option") shall be
-------------------
assumed and become outstanding options to acquire shares of Acquiror Common
Stock.
C. A portion of the shares of Acquiror Common Stock otherwise issuable by
Acquiror in connection with the Merger shall be placed in escrow by Acquiror for
purposes of satisfying losses incurred by Acquiror in connection with breaches
of representations, warranties or covenants contained herein.
D. The parties intend, having executed this Agreement, to adopt a plan of
reorganization within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code").
----
E. The parties intend for the Merger to be accounted as a purchase for
financial accounting purposes.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration
intending to be legally bound hereby the parties agree as follows:
<PAGE>
ARTICLE I
THE MERGER
----------
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 the
applicable provisions of the Delaware General Corporation Law (the "DGCL") and
----
the Business Corporation Law of New York (the "NYBCL"), the Company shall be
-----
merged with and into Acquiror, the separate corporate existence of the Company
shall cease and Acquiror shall continue as the surviving corporation. Acquiror
as the surviving corporation after the Merger is hereinafter sometimes referred
to as the "Surviving Corporation."
---------------------
1.2 Effective Time. The closing of the Merger (the "Closing") will take
-------------- -------
place on the date hereof at the offices of Wilson Sonsini Goodrich & Rosati, 650
Page Mill Road, Palo Alto, California, unless another place or time is agreed to
by Acquiror and the Company. The date upon which the Closing actually occurs is
herein referred to as the "Closing Date." On the Closing Date, the parties
------------
hereto shall cause the Merger to be consummated by filing a Certificate of
Merger (or like instrument) with the Secretaries of State of the States of
Delaware and New York (the "Certificate of Merger"), in accordance with the
---------------------
relevant provisions of applicable law. The date and time the Merger becomes
effective in accordance with the provisions of the DGCL and the NYBCL is the
"Effective Time."
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in the applicable provisions of the DGCL and the NYBCL.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
the Company shall vest in the Surviving Corporation, and all debts, liabilities
and duties of the Company shall become the debts, liabilities and duties of the
Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws. Unless otherwise determined by
------------------------------------
Acquiror prior to the Effective Time, at the Effective Time:
(a) The Certificate of Incorporation of Acquiror shall be the
Certificate of Incorporation of the Surviving Corporation.
(b) The Bylaws of Acquiror, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation.
1.5 Directors and Officers. The director(s) of Acquiror immediately prior
----------------------
to the Effective Time shall be the director(s) of the Surviving Corporation,
each to hold office in accordance with the Certificate of Incorporation and
Bylaws of the Surviving Corporation. The officers of Acquiror immediately prior
to the Effective Time shall be the officers of the Surviving Corporation, each
to hold office in accordance with the Bylaws of the Surviving Corporation.
-2-
<PAGE>
1.6 Maximum Shares to Be Issued; Effect on Capital Stock. Subject to
----------------------------------------------------
Section 1.6(f), the maximum number of shares of Acquiror Common Stock to be
issued (including Acquiror Common Stock to be reserved for issuance upon
exercise of any of the Company's options to be assumed by Acquiror) in exchange
for the acquisition by Acquiror of all outstanding Company Common Stock and the
assumption of all unexpired and unexercised options to acquire Company Common
Stock shall be 1,827,601 (the "Aggregate Share Number"). No adjustment shall
----------------------
be made in the number of shares of Acquiror Common Stock issued in the Merger as
a result of any cash proceeds received by the Company from the date hereof to
the Closing Date pursuant to the exercise of options to acquire Company Common
Stock. Subject to the terms and conditions of this Agreement, as of the
Effective Time, by virtue of the Merger and without any action on the part of
Acquiror, the Company or the holder of any shares of the Company Common Stock,
the following shall occur:
(a) Conversion of Company Common Stock. Each share of Company Common
----------------------------------
Stock issued and outstanding immediately prior to the Effective Time (other than
any shares of Company Common Stock to be canceled pursuant to Section 1.6(c),
and any Dissenting Shares (as defined and to the extent provided in Section
1.7(a)) will be canceled and extinguished and be converted automatically into
the right to receive: that number of shares of Acquiror Common Stock equal to
the product of each such share of Company Common Stock multiplied by the
-------------
Exchange Ratio (as defined in paragraph (h) below), upon surrender of the
certificate representing such share of Company Common Stock in the manner
provided in Section 1.8.
(b) [Reserved].
(c) Cancellation of Acquiror-Owned and Company-Owned Stock. Each
------------------------------------------------------
share of Company Common Stock owned by Acquiror, the Company or any direct or
indirect wholly-owned subsidiary of Acquiror or of the Company immediately prior
to the Effective Time shall be canceled and extinguished without any conversion
thereof.
(d) Stock Options. At the Effective Time, all options to purchase
-------------
Company Common Stock then outstanding under the Company's 1999 Stock Option Plan
(the "Option Plan"), or otherwise, will be assumed by Acquiror in accordance
-----------
with Section 5.11.
(e) Common Stock of Acquiror. Each share of Common Stock of Acquiror
------------------------
issued and outstanding immediately prior to the Effective Time shall remain
issued and outstanding as Common Stock of the Surviving Corporation. Each stock
certificate of Acquiror evidencing ownership of any such shares shall continue
to evidence ownership of such shares of capital stock of the Surviving
Corporation.
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be
-----------------------------
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Acquiror Common Stock or Company Common Stock), reorganization, recapitalization
or other like change with respect to Acquiror Common Stock or Company Common
Stock occurring after the date hereof and prior to the Effective Time.
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<PAGE>
(g) Fractional Shares. No fraction of a share of Acquiror Common
-----------------
Stock will be issued, but in lieu thereof, each holder of shares of Company
Common Stock who would otherwise be entitled to a fraction of a share of
Acquiror Common Stock (after aggregating all fractional shares of Acquiror
Common Stock to be received by such holder) shall be entitled to receive from
Acquiror an amount of cash (rounded to the nearest whole cent) equal to the
product of (i) such fraction, multiplied by (ii) $5.00.
(h) Definitions.
-----------
(i) Escrow Amount. The "Escrow Amount" shall mean one-tenth
------------- -------------
(1/10/th/) of the number of shares of Acquiror Common Stock obtained by
multiplying (x) the Outstanding Common Amount by (y) the Exchange Ratio.
(ii) Exchange Ratio. The "Exchange Ratio" shall mean the
-------------- --------------
quotient obtained by dividing (x) the Aggregate Share Number by (y) the sum of
(A) the Outstanding Common Amount plus (B) the Outstanding Option Amount.
(iii) Outstanding Common Amount. The "Outstanding Common
------------------------- ------------------
Amount" shall mean the aggregate number of shares of Company Common Stock
- ------
outstanding immediately prior to the Effective Time.
(iv) Outstanding Option Amount. The "Outstanding Option
------------------------- ------------------
Amount" shall mean the aggregate number of shares of Company Common Stock
- ------
issuable upon the exercise of all outstanding options to acquire shares of
Company Common Stock immediately prior to the Effective Time, whether or not
presently exercisable.
1.7 Dissenting Shares.
-----------------
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Common Stock held by a holder who has demanded and
perfected appraisal or dissenters' rights for such shares in accordance with the
NYBCL and who, as of the Effective Time, has not effectively withdrawn or lost
such appraisal or dissenters' rights ("Dissenting Shares"), shall not be
-----------------
converted into or represent a right to receive Acquiror Common Stock or cash
pursuant to Section 1.6, but the holder thereof shall only be entitled to such
rights as are granted by the NYBCL.
(b) Notwithstanding the provisions of subsection (a), if any holder
of shares of Company Common Stock who demands appraisal of such shares under the
NYBCL shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of the Effective Time
and the occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive the consideration as
provided in Section 1.6, without interest thereon, upon surrender of the
certificate representing such shares.
(c) The Company shall give Acquiror (i) prompt notice of any written
demands for appraisal of any shares of Company Common Stock, withdrawals of such
demands, and any
-4-
<PAGE>
other instruments served pursuant to the NYBCL and received by the Company and
(ii) the opportunity to participate in all negotiations and proceedings with
respect to demands for appraisal under the NYBCL. The Company shall not, except
with the prior written consent of Acquiror, voluntarily make any payment with
respect to any demands for appraisal of capital stock of the Company or offer to
settle or settle any such demands.
1.8 Surrender of Certificates.
-------------------------
(a) Exchange Procedures. At the Closing, (i) each holder of record
-------------------
of a certificate or certificates (the "Certificates") which immediately prior
------------
to the Effective Time represented outstanding shares of Company Common Stock and
which shares were converted into the right to receive shares of Acquiror Common
Stock pursuant to Section 1.6 shall surrender such Certificates in exchange for
certificates representing shares of Acquiror Common Stock, (ii) upon such
surrender of a Certificate the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Acquiror Common Stock, plus cash in lieu of fractional shares in
accordance with Section 1.6, to which such holder is entitled pursuant to
Section 1.6, and (iii) the Certificate so surrendered shall forthwith be
canceled. Each outstanding Certificate that, prior to the Effective Time,
represented shares of Company Common Stock and that is not surrendered at the
Closing will be deemed from and after the Effective Time, for all corporate
purposes, other than the payment of dividends, to evidence the ownership of the
number of full shares of Acquiror Common Stock into which such shares of Company
Common Stock shall have been so converted and the right to receive an amount in
cash in lieu of the issuance of any fractional shares in accordance with Section
1.6. Upon surrender of any such outstanding Certificate to Acquiror after the
Effective Time, Acquiror shall promptly deliver, or cause to be delivered, a
certificate representing the number of shares of Acquiror Common Stock into
which the shares of Company Common Stock represented by such Certificate were
converted, together with such amount in cash in lieu of fractional shares.
(b) Transfers of Ownership. If any certificate for shares of Acquiror
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Acquiror or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Acquiror Common Stock in any name other than that of the registered holder of
the Certificate surrendered, or established to the satisfaction of Acquiror or
any agent designated by it that such tax has been paid or is not payable.
1.9 No Further Ownership Rights in Company Common Stock. All shares of
---------------------------------------------------
Acquiror Common Stock issued and cash paid upon the surrender for exchange of
shares of Company Common Stock in accordance with the terms hereof (including
any cash paid in respect of fractional shares) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Company
Common Stock, and there shall be no further registration of transfers on the
records of
-5-
<PAGE>
the Surviving Corporation of shares of Company Common Stock which were
outstanding immediately prior to the Effective Time.
1.10 Tax and Accounting Consequences. It is intended by the parties hereto
-------------------------------
that (a) the Merger shall constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code") (b)
----
all of the Acquiror Common Stock shall be reported as transferred solely in
exchange for the Company Common Stock and (c) the Merger shall be accounted for
as a purchase for financial accounting purposes. The parties shall report the
transaction for all purposes as provided in the preceding sentence and shall not
for any purpose take any position inconsistent therewith unless required by an
applicable taxing authority. Each party has consulted with its own tax advisors
with regard to the tax consequences of the Merger.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Acquiror, the officers and directors of the
Company and Acquiror are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Acquiror, subject to such
exceptions as are specifically disclosed in the disclosure letter supplied
(referencing the appropriate section numbers) by the Company to Acquiror (the
"Company Schedules") and dated as of the date hereof, as follows:
-----------------
2.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
New York. The Company has the corporate power to own its properties and to carry
on its business as now being conducted. The Company is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified would have a Material Adverse Effect (as
defined in Section 9.3) on the Company. The Company has delivered a true,
correct and complete copy of its Certificate of Incorporation and Bylaws, each
as amended to date, to Acquiror.
2.2 Company Capital Structure.
-------------------------
(a) The authorized capital stock of the Company consists of (i)
3,000,000 shares of Common Stock, of which 877,500 shares are issued and
outstanding. The Company Common Stock is held of record by the persons, with the
domicile addresses and in the amounts set forth on Schedule 2.2(a). All
outstanding shares of Company Common Stock are duly authorized, validly issued,
fully paid and non-assessable, issued in compliance with all applicable federal
and state securities laws and not subject to preemptive rights created by
statute, the Certificate of
-6-
<PAGE>
Incorporation or Bylaws of the Company or any agreement to which the Company is
a party or by which it is bound.
(b) The Company has reserved 150,000 shares of Common Stock for
issuance to employees and consultants pursuant to the Option Plan, of which
122,500 shares are subject to outstanding, unexercised options and 27,500 shares
of which have been issued upon exercise of options. Schedule 2.2(b) sets forth
for each Company Stock Option outstanding, the name of the holder of such
option, the domicile address of such holder, the number of shares of Common
Stock subject to such option, the exercise price of such option and the vesting
schedule for such option, including the extent vested to date and whether the
exercisability of such option will be accelerated and become exercisable by the
transactions contemplated by this Agreement. Except for the Company Stock
Options described in Schedule 2.2(b), there are no options, warrants, calls,
rights, commitments or agreements of any character, written or oral, to which
the Company is a party or by which it is bound obligating the Company to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of the capital stock of the Company. Except
for the Company Stock Options described in Schedule 2.2(b), there are no
options, warrants, calls, rights, commitments or agreements of any character,
written or oral, to which the Company is a party or by which it is bound
obligating the Company to grant, extend, accelerate the vesting of, change the
price of, otherwise amend or enter into any such option, warrant, call, right,
commitment or agreement. Except as set forth on Schedule 2.2(b), the holders of
Company Stock Options (in their capacity as such) do not have any rights to
prior notice of the Merger. As a result of the Merger, Acquiror will be the
record and sole beneficial owner of all Company Common Stock and rights to
acquire or receive Company Common Stock.
2.3 Subsidiaries. Except as set forth on Schedule 2.3, the Company does
------------
not have and has never had any subsidiaries or affiliated companies and does not
otherwise own and has never otherwise owned any shares of capital stock or any
interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity.
2.4 Authority. The Company has all requisite corporate power and authority
---------
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company. The Company's Board of Directors
and the Shareholders have unanimously approved the Merger and this Agreement.
This Agreement has been duly executed and delivered by the Company and
constitutes the valid and binding obligation of the Company, enforceable in
accordance with its terms, except as enforceability may be limited by bankruptcy
and other similar laws and general principles of equity.
2.5 No Conflicts. Except as set forth on Schedule 2.5, the execution and
------------
delivery of this Agreement by the Company does not, and, as of the Effective
Time, the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit under (any
such event, a
-7-
<PAGE>
"Conflict") (i) any provision of the Certificate of Incorporation or Bylaws of
--------
the Company or (ii) any mortgage, indenture, lease, contract or other agreement
or instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or its
properties or assets. No consent, waiver, approval, order or authorization of,
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
-------------------
third party (so as not to trigger any Conflict), is required by or with respect
to the Company in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby, except for (x) the
filing of the Certificate of Merger with the Secretaries of State of the States
of Delaware and New York, (y) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable federal and state securities laws, and (z) such other consents,
waivers, authorizations, filings, approvals and registrations which are set
forth on Schedule 2.5.
2.6 Company Financial Statements. Schedule 2.6 sets forth (i) the
----------------------------
Company's unaudited balance sheet as of December 31, 1999 (the "Company Balance
---------------
Sheet") and (ii) the related unaudited statements of operations and cash flows
- -----
for the year then ended (collectively, the "Company Financials"). The Company
------------------
Financials are correct in all material respects and have been prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
----
basis consistent throughout the periods indicated, except that unaudited Company
Financials may not contain all footnotes required by GAAP. The Company
Financials present fairly in all material respects the financial condition and
operating results of the Company as of the dates and during the periods
indicated therein, subject to year-end audit adjustments by the Company's
auditors which adjustments, taken in the aggregate, do not materially adversely
change the Company Financials.
2.7 No Undisclosed Liabilities. Except as set forth in Schedule 2.7, the
--------------------------
Company does not have any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be reflected
in financial statements in accordance with GAAP), which individually or in the
aggregate, (i) has not been recorded in the Balance Sheet or disclosed in the
Company Financials, or (ii) has not arisen in the ordinary course of the
Company's business.
2.8 No Changes. Except as set forth in Schedule 2.8, since December 31,
----------
1999 there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Certificate of Incorporation or
Bylaws of the Company;
(c) capital expenditure or commitment by the Company of $10,000 in
any individual case or $50,000 in the aggregate;
-8-
<PAGE>
(d) destruction of, damage to or loss of any material assets of the
Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change
in depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its material assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock other than the redemption of Company Common Stock from terminated
employees of the Company at the original sales price pursuant to the terms of
the agreements pursuant to which such Company Common Stock was issued and sold;
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such person except as otherwise contemplated by this Agreement since
December 31, 1999;
(j) sale, lease, license or other disposition of any of the assets or
properties of the Company, except in the ordinary course of business as
conducted on that date;
(k) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound except in the
ordinary course of business;
(l) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others except for advances to employees for travel and
business expenses in the ordinary course of business;
(m) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company
except in the ordinary course of business;
(n) to the Company's knowledge, commencement or notice or threat of
commencement of any lawsuit or proceeding against or investigation of the
Company or its affairs;
(o) notice of any claim of ownership by a third party of the
Company's Intellectual Property (as defined in Section 2.12 below) or of
infringement by the Company of any third party's Intellectual Property rights;
-9-
<PAGE>
(p) issuance or sale by the Company of any of its shares of capital
stock since December 31, 1999;
(q) issuance or sale by the Company of any securities exchangeable,
convertible or exercisable for Company Common Stock, or of any other of its
securities;
(r) change in pricing or royalties set or charged by the Company to
its customers or licensees except in the ordinary course of business or in
pricing or royalties set or charged by persons who have licensed Intellectual
Property to the Company;
(s) any sale, assignment, or transfer or any patents, trademarks,
copyrights, trade secretes, or other intangible assets;
(t) any resignation or termination of employment of any key employee
of the Company; and the Company does not know of the impending resignation or
termination of employment or any such key employee; or
(u) receipt of notice that there has been a loss of, or order
cancellation by, any major customer of the Company;
(v) event or condition of any character that has had or could
reasonably be expected to have a Material Adverse Effect on the Company; or
(w) agreement by the Company or any officer or employees thereof to
do any of the things described in the preceding clauses (a) through (s) (other
than negotiations with Acquiror and its representatives regarding the
transactions contemplated by this Agreement).
2.9 Tax and Other Returns and Reports. Definition of Taxes. For the
--------------------------------- -------------------
purposes of this Agreement, "Tax" or, collectively, "Taxes", means any and all
--- -----
federal, state, local and foreign taxes, assessments and other governmental
charges, duties, impositions and liabilities, including taxes based upon or
measured by gross receipts, income, profits, sales, use and occupation, and
value added, ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes, together with all interest, penalties and
additions imposed with respect to such amounts and any obligations under any
agreements or arrangements with any other person with respect to such amounts
and including any liability for taxes of a predecessor entity.
(a) Tax Returns and Audits. Except as set forth in Schedule 2.9:
----------------------
(i) The Company as of the Effective Time will have prepared and
filed all federal, state, local and foreign returns, estimates, information
statements and reports (each a "Return") required to be filed by such date
------
relating to any and all Taxes concerning or attributable to the Company and such
Returns are or will be true and correct in all material respects and have been
completed in accordance with applicable law.
-10-
<PAGE>
(ii) The Company as of the Effective Time: (A) will have paid
all material Taxes due and payable by the Effective Time, (B) will have properly
accrued all Material Taxes on the books and records of the Company in accordance
with GAAP and made a provision for the payment of Taxes due but not yet payable
by the Effective Time and (C) will have withheld with respect to its employees
all material federal and state income taxes, FICA, FUTA and other Taxes required
to be withheld.
(iii) The Company is not delinquent in the payment of any Tax
attributable to the Company nor is there any outstanding, or to the best of the
Company's knowledge, unpaid Tax deficiency outstanding, assessed, notified or
proposed against the Company or any Shareholder, nor has the Company or any
Shareholder executed any waiver of any statute of limitations on or extending
the period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of the Company
or either Shareholder is currently in progress, nor has the Company or either
Shareholder been notified in writing of any request for such an audit or other
examination.
(v) The Company does not have any liabilities for federal,
state, local or foreign Taxes due and payable which have not been accrued or
reserved against on the Company Financials, in accordance with GAAP, and the
Company does not have knowledge of any basis for the assertion of any such
liability attributable to the Company, its assets or operations.
(vi) The Company has provided to Acquiror copies of all federal
and state income and all state sales and use Tax Returns filed to date for each
of the last three taxable periods.
(vii) There are (and to the best of the Company's knowledge, as
a result of the Merger, immediately following the Closing there will be) no
liens, pledges, charges, claims, security interests or other encumbrances of any
sort ("Liens") on the assets of the Company relating to or attributable to Taxes
-----
except liens for current taxes not yet due and payable.
(viii) None of the Company's assets are treated as "tax-exempt
use property" within the meaning of Section 168(h) of the Code.
(ix) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including, (other than as set forth in this
Agreement or any agreement attached hereto as an exhibit), covering any employee
or former employee of the Company that, individually or collectively, will give
rise to the payment of any amount that would be nondeductible pursuant to
Section 280G, 404 or 162(m) of the Code.
(x) The Company has not filed any consent under Section 341(f)
of the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the
Code) owned by the Company.
-11-
<PAGE>
(xi) The Company is not a party to a Tax sharing or allocation
agreement nor does the Company owe any amount under any such agreement.
(xii) The Company has been an "S corporation" within the
meaning of Section 1361(a) of the Code (and any similar statute of a state in
which the Company is required to file an income or franchise Tax Return) since
its inception.
(xiii) The Company files its income tax returns using the cash
method of accounting.
2.10 Restrictions on Business Activities. Except as set forth on Schedule
-----------------------------------
2.10, there is no agreement (noncompete or otherwise), commitment, judgment,
injunction, order or decree to which the Company is a party or otherwise binding
upon the Company which has or reasonably could be expected to have the effect of
prohibiting or impairing any material business practice of the Company, any
acquisition of property (tangible or intangible) by the Company or the conduct
of business by the Company. Without limiting the foregoing, the Company has not
entered into any agreement under which the Company is restricted from selling,
licensing or otherwise distributing any of its products to any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.11 Title to Properties; Absence of Liens and Encumbrances.
------------------------------------------------------
(a) The Company owns no real property, nor has it ever owned any real
property. Schedule 2.11(a) sets forth a list of all real property currently, or
at any time in the past, leased by the Company, the name of the lessor and the
date of the lease and each amendment thereto and, with respect to any current
lease, the aggregate annual rental and/or other fees payable under any such
lease. All such current leases are in full force and effect, are valid and
effective in accordance with their respective terms. The Company is not in
default under any of such leases. To the Company's knowledge, no other party to
any of such leases is in default under any of such leases.
(b) The Company has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens (as defined in Section 2.9(b)(vii)),
except as reflected in the Company Financials or in Schedule 2.11(b) and except
for liens for taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which are not material in character, amount or extent, and
which do not materially detract from the value, or materially interfere with the
present use, of the property subject thereto or affected thereby.
2.12 Intellectual Property. The Company owns or possesses sufficient legal
---------------------
rights to all patents, patent applications, trademarks, service marks, trade
names, copyrights, trade secrets, licenses, know-how, concepts, computer
programs, technical data, proprietary rights, proprietary processes and other
information (each such item "Intellectual Property") necessary for its business
---------------------
as
-12-
<PAGE>
now conducted and as currently proposed to be conducted without any conflict
with or infringement of the rights of others. Schedule 2.12 contains a complete
list of all patents, trademarks and copyrights of the Company throughout the
world and pending applications therefor and registrations, renewals, extensions
and the like thereof. Except for proprietary information agreements with its own
employees or consultants and standard end-user license agreements, there are no
outstanding options, licenses, or agreements of any kind relating to the
Company's Intellectual Property, nor is the Company bound by or a party to any
options, licenses, or agreements of any kind with respect to the Intellectual
Property of any other person or entity. The Company has not received any
written communications alleging, nor does the Company have reason to believe,
that the Company has violated or, by conducting its business as proposed, would
violate any Intellectual Property of any other person or entity, and is not
aware of any reasonable basis therefor or threat thereof. The Company is not
aware that any of its employees, agents or contractors 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
administrative agency, that would interfere with the use of such employee's best
efforts to promote the interests of the Company, or that would conflict with the
Company's business. The Company is not aware of any violation or infringement
by a third party of any of the Company's Intellectual Property. Neither the
execution nor delivery of this Agreement or any of the agreements attached
hereto as exhibits (the "Related Agreements"), nor the carrying on of the
------------------
Company's business by the employees of the Company, nor the conduct of the
Company's business will 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 is now obligated. The
Company has no plan to, and does not believe it is or will be necessary to
utilize any inventions of any of its employees (or people it currently intends
to hire) made prior to their employment by the Company.
2.13 Agreements, Contracts and Commitments.
-------------------------------------
(a) except as set forth on Schedule 2.13(a), the Company does not
have, is not a party to nor is it bound by:
(i) any collective bargaining agreements,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement with an employee or
individual consultant or salesperson or consulting or sales agreement with a
firm or other organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be
-13-
<PAGE>
increased, or the vesting of benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property having a value individually
in excess of $20,000,
(viii) any agreement of indemnification or guaranty other than
those substantially the same as the agreements of indemnification or guarantees
attached hereto as Schedule 2.13(a),
(ix) any agreement containing any covenant limiting the freedom
of the Company to engage in any line of business or to compete with any person,
(x) any agreement relating to capital expenditures and
involving future payments in excess of $50,000,
(xi) any agreement relating to the disposition or acquisition
of assets or any interest in any business enterprise outside the ordinary course
of the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of raw
materials involving $20,000 or more,
(xiv) any construction contracts, (xv) any distribution, joint
marketing or development agreement,
(xvi) any agreement pursuant to which the Company has granted or
may grant in the future, to any party a source-code license or option or other
right to use or acquire source-code, or
(xvii) any other agreement that involves $20,000 or more or is
not cancelable without penalty within 30 days.
(b) Except for such alleged breaches, violations and defaults, and
events that would constitute a breach, violation or default with the lapse of
time, giving of notice, or both, as are all noted in Schedule 2.13(b), the
Company has not materially breached, violated or defaulted under, or received
notice that it has materially breached, violated or defaulted under, any of the
terms or conditions of any agreement, contract or commitment required to be set
forth on Schedule 2.13(a) or
-14-
<PAGE>
Schedule 2.12 (any such agreement, contract or commitment, a "Contract"). Each
--------
Contract is in full force and effect and, except as otherwise disclosed in
Schedule 2.13(b), the Company has no knowledge of any default thereunder by any
party obligated to the Company pursuant thereto.
2.14 Interested Party Transactions. Except as set forth on Schedule 2.14,
-----------------------------
to the Company's knowledge, no officer, director or shareholder of the Company
(nor any ancestor, sibling, descendant or spouse of any of such persons, or any
trust, partnership or corporation in which any of such persons has or has had an
economic interest), has or has had, directly or indirectly, (i) an economic
interest in any entity which furnished or sold, or furnishes or sells, services
or products that the Company furnishes or sells, or proposes to furnish or sell,
(ii) an economic interest in any entity that purchases from, or sells or
furnishes to, the Company, any goods or services or (iii) a beneficial interest
in any contract or agreement set forth in Schedule 2.13(a) or Schedule 2.12;
provided, that (x) ownership of no more than one percent (1%) of the outstanding
voting stock of a publicly traded corporation and no more than ten percent (10%)
of the outstanding equity of any other entity shall not be deemed an "economic
interest in any entity" for purposes of this Section 2.14 and (y) this provision
shall only apply if the terms and conditions applicable to the subject
relationship are materially less favorable to the Company than the terms and
conditions that could be obtained in an arms-length relationship.
2.15 Compliance with Laws. The Company has complied in all material
--------------------
respects with, is not in material violation of, and has not received any notices
of violation with respect to, any foreign, federal, state or local statute, law
or regulation known by the Company to apply to it.
2.16 Litigation. Except as set forth in Schedule 2.16, there is no action,
----------
suit or proceeding of any nature pending or to the Company's knowledge
threatened against the Company, its properties or any of its officers or
directors, in their respective capacities as such. Except as set forth in
Schedule 2.16, to the Company's knowledge, there is no investigation pending or
threatened against the Company, its properties or any of its officers or
directors, in their respective capacities as such, by or before any governmental
entity. Schedule 2.16 sets forth, with respect to any pending or threatened
action, suit, proceeding or investigation, the forum, the parties thereto, the
subject matter thereof and the amount of damages claimed or other remedy
requested. No governmental entity has at any time formally challenged the legal
right of the Company to manufacture, offer or sell any of its products or
services in the present manner or style thereof.
2.17 Insurance. With respect to the insurance policies and fidelity bonds
---------
covering the assets, business, equipment, properties, operations, employees,
officers and directors of the Company, there is no claim by the Company pending
under any of such policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such policies or bonds. All premiums
due and payable under all such policies and bonds have been paid and the Company
is otherwise in material compliance with the terms of such policies and bonds
(or other policies and bonds providing substantially similar insurance
coverage). The Company has no knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies. Schedule 2.17
contains a complete list and brief description of (a) each of the
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<PAGE>
Company's fire and casualty insurance policies and products liability and errors
and omissions policies presently in effect and (b) each key-man life insurance
policy on the life of any key employee of the Company presently in effect.
2.18 Minute Books. The minute books of the Company provided to counsel for
------------
Acquiror are the only minute books of the Company and contain a reasonably
accurate summary of all meetings of directors (or committees thereof) and
shareholders or actions by written consent since the time of incorporation of
the Company.
2.19 Environmental Matters.
---------------------
(a) Hazardous Material. The Company has not: (i) operated any
------------------
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws, (a
"Hazardous Material"), but excluding office and janitorial supplies properly and
------------------
safely maintained. No Hazardous Materials are present, as a result of the
deliberate actions of the Company, or, to the Company's knowledge, as a result
of any actions of any third party or otherwise, in, on or under any property,
including the land and the improvements, ground water and surface water thereof,
that the Company has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not transported,
------------------------------
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities") in
------------------------------
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental
-------
approvals, permits, licenses, clearances and consents (the "Environmental
-------------
Permits") necessary for the conduct of the Company's Hazardous Material
- -------
Activities and other businesses of the Company as such activities and businesses
are currently being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Company's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activities of the Company. The Company is
not aware of any fact or circumstance which could
-16-
<PAGE>
involve the Company in any environmental litigation or impose upon the Company
any environmental liability.
2.20 Brokers' and Finders' Fees; Third Party Expenses. The Company has not
------------------------------------------------
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
2.21 Employee Matters and Benefit Plans.
----------------------------------
(a) Definitions. With the exception of the definition of "Affiliate"
-----------
set forth in Section 2.21(a)(i) below (such definition shall only apply to this
Section 2.21), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under
---------
common control with the Company within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations thereunder;
(ii) "ERISA" shall mean the Employee Retirement Income Security
-----
Act of 1974, as amended;
(iii) "Company Employee Plan" shall refer to any plan, program,
---------------------
policy, practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or stock-
related awards, fringe benefits or other employee benefits or remuneration of
any kind, whether formal or informal, funded or unfunded, including, without
limitation, each "employee benefit plan" within the meaning of Section 3(3) of
ERISA, which is or has been maintained, contributed to, or required to be
contributed to, by the Company or any Affiliate for the benefit of any
"Employee" (as defined below), and pursuant to which the Company or any
Affiliate has or may have any material liability contingent or otherwise;
(iv) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of the Company or any Affiliate;
(v) "Employee Agreement" shall refer to each management,
------------------
employment, severance, consulting, relocation, repatriation, expatriation, visa,
work permit or similar agreement or contract currently in effect or pursuant to
which Acquiror will have a material liability between the Company or any
Affiliate and any Employee or consultant;
(vi) "IRS" shall mean the Internal Revenue Service;
---
(vii) "Multiemployer Plan" shall mean any "Pension Plan" (as
------------------
defined below) which is a "multiemployer plan", as defined in Section 3(37) of
ERISA; and
-17-
<PAGE>
(viii) "Pension Plan" shall refer to each Company Employee Plan
which is an "employee pension benefit plan", within the meaning of Section 3(2)
of ERISA.
(b) Schedule. Schedule 2.21(b) contains an accurate and complete
--------
list of each Company Employee Plan and each Employee Agreement, together with a
schedule of all liabilities, whether or not accrued, under each such Company
Employee Plan or Employee Agreement. The Company does not have any plan or
commitment to establish any new Company Employee Plan or Employee Agreement, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Acquiror in writing, or as required by this Agreement), or to enter
into any Company Employee Plan or Employee Agreement, nor does it have any
intention or commitment to do any of the foregoing.
(c) Documents. The Company has provided to Acquiror (i) except as
---------
set forth on Schedule 2.21(c), correct and complete copies of all documents
embodying or relating to each Company Employee Plan and each Employee Agreement,
including all amendments thereto and written interpretations thereof; (ii) the
most recent annual actuarial valuations, if any, prepared for each Company
Employee Plan; (iii) the three most recent annual reports (Series 5500 and all
schedules thereto), if any, required under ERISA or the Code in connection with
each Company Employee Plan or related trust; (iv) if the Company Employee Plan
is funded, the most recent annual and periodic accounting of Company Employee
Plan assets; (v) the most recent summary plan description together with the most
recent summary of material modifications, if any, required under ERISA with
respect to each Company Employee Plan; (vi) all IRS determination letters and
rulings relating to Company Employee Plans and copies of all applications and
correspondence to or from the IRS or the Department of Labor ("DOL") with
---
respect to any Company Employee Plan; (vii) all communications material to any
Employee or Employees relating to any Company Employee Plan and any proposed
Company Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any material liability
to the Company; and (viii) all registration statements and prospectuses prepared
in connection with each Company Employee Plan.
(d) Employee Plan Compliance. Except as set forth on Schedule
------------------------
2.21(d), (i) the Company has performed in all material respects all obligations
required to be performed by it under each Company Employee Plan and each Company
Employee Plan has been established and maintained in all material respects in
accordance with its terms and in compliance with all applicable laws, statutes,
orders, rules and regulations, including but not limited to ERISA or the Code;
(ii) no "prohibited transaction", within the meaning of Section 4975 of the Code
or Section 406 of ERISA, has occurred with respect to any Company Employee Plan
subject to Section 4975 of the Code or Section 406 of ERISA, unless an
applicable exemption was available subject to Section 4975 of the Code or
Section 406 of ERISA; (iii) there are no actions, suits or claims pending, or,
to the knowledge of the Company, threatened or anticipated (other than routine
claims for benefits) against any Company Employee Plan or against the assets of
any Company Employee Plan; (iv) each Company Employee Plan can be amended,
terminated or otherwise discontinued after the Effective
-18-
<PAGE>
Time in accordance with its terms, without liability to the Company, Acquiror or
any of its Affiliates (other than ordinary administration expenses typically
incurred in a termination event); (v) there are no inquiries or proceedings
pending or, to the knowledge of the Company or any affiliates, threatened by the
IRS or Department of Labor with respect to any Company Employee Plan; and (vi)
neither the Company nor any Affiliate is subject to any penalty or tax with
respect to any Company Employee Plan under Section 502(i) of ERISA or Section
4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to or
-------------------
been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Schedule
------------------------------
2.21(g), no Company Employee Plan provides, or has any liability to provide,
life insurance, medical or other employee welfare benefits to any Employee upon
his or her retirement or termination of employment for any reason, except as may
be required by statute, and the Company has never represented, promised or
contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
(h) Effect of Transaction.
---------------------
(i) Except as provided in Section 1.6 of this Agreement or as
set forth on Schedule 2.21(h)(i), the execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Employee Agreement, trust or loan that will or
may result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(ii) Except as set forth on Schedule 2.21(h)(ii) with respect
to any written agreement entered into by the Company, no payment or benefit
which will or may be made by the Company or Acquiror or any of their respective
affiliates with respect to any Employee will be characterized as an "excess
parachute payment", within the meaning of Section 280G(b)(1) of the Code.
(i) Employment Matters. The Company (i) is in compliance in all
------------------
material respects with all applicable federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Employees; (ii)
has withheld all amounts required by law or by agreement to be withheld from the
wages, salaries and other payments to Employees; (iii) is not liable for any
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<PAGE>
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any payment to any trust or other fund
or to any governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice).
(j) Labor. No work stoppage or labor strike against the Company is
-----
pending or, to the knowledge of the Company, threatened. Except as set forth in
Schedule 2.21(j), the Company is not involved in or, to the knowledge of the
Company, threatened with, any labor dispute, grievance, or litigation relating
to labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in material liability to the Company. Neither the Company nor
any of its subsidiaries has engaged in any unfair labor practices within the
meaning of the National Labor Relations Act which would, individually or in the
aggregate, directly or indirectly result in a material liability to the Company.
Except as set forth in Schedule 2.21(j), the Company is not presently, nor has
it been in the past, a party to, or bound by, any collective bargaining
agreement or union contract with respect to Employees and no collective
bargaining agreement is being negotiated by the Company.
(k) Employees. To the best of the Company's knowledge after
---------
reasonable investigation, no employee of the Company is in material violation of
any term of any employment contract, patent disclosure agreement or any other
contract or agreement relating to the right of any such employee to be employed
by the Company because of the nature of the business conducted or to be
conducted by the Company or for any other reason, and the continued employment
by the Company of its present employees will not result in any such violations.
Each employee of the Company and each consultant who has performed services for
the Company has executed an employee inventions and proprietary rights
assignment and confidentiality agreement with the Company, a copy of which has
been made available to Acquiror. The Company has complied in all material
respects with all applicable state and federal equal employment opportunity and
other laws related to employment. The Company is not aware that any officer or
key employee, or that any group of key employees, intends to terminate his or
their employment with the Company, nor does the Company have a present intention
to terminate the employment of any of the foregoing. Subject to general
principles related to wrongful termination of employees, the employment of each
officer and employee of the Company is terminable at the will of the Company.
2.22 Change of Control and Non-Compete Payments. Schedule 2.22 sets forth
------------------------------------------
each plan or agreement pursuant to which any amounts may become payable (whether
currently or in the future) to current or former employees, officers and
directors of the Company as a result of or in connection with the Merger.
2.23 Year 2000 Compliance. Each system comprised of software, hardware,
--------------------
databases or embedded control systems (microprocessor controlled or controlled
by any robotic or other device) (collectively, a "System") that constitutes any
------
material part of, or is used in connection with the use,
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<PAGE>
operation or enjoyment of, any material tangible or intangible asset or real
property of the Company was not materially adversely affected by the advent of
the year 2000, the advent of the twenty-first century or the transition from the
twentieth century through the year 2000 and into the twenty-first century ("Year
----
2000 Compliant"). The Company did not incur material expenses arising from or
- --------------
relating to the failure of any of their Systems as a result of the advent of the
year 2000, the advent of the twenty-first century or the transition from the
twentieth century through the year 2000 and into the twenty-first century. Each
System of the Company is able to accurately process date data, including, but
not limited to, calculating, comparing and sequencing from, into and between the
twentieth century (through year 1999), the year 2000 and the twenty-first
century, including leap year calculations. Each vendor of products or services
to the Company has continued to furnish such products or services to the Company
without interruption or material delay, on and after January 1, 2000.
2.24 Representations Complete. None of the representations or warranties
------------------------
made by the Company (as modified by the Company Schedules), nor any statement
made in any Schedule or certificate furnished by the Company pursuant to this
Agreement taken as a whole contains or will contain at the Effective Time, any
untrue statement of a material fact, or omits or will omit at the Effective Time
to state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which they were made,
not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror hereby represents and warrants to the Shareholders, subject to
such exceptions as are specifically disclosed in the disclosure letter supplied
(referencing the appropriate section numbers) by Acquiror to the Company (the
"Acquiror Schedules") and dated as of the date hereof, as follows:
------------------
3.1 Organization, Standing and Power. Acquiror is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. Acquiror has the corporate power to own its properties and to carry on
its business as now being conducted and is duly qualified to do business and is
in good standing in each jurisdiction in which the failure to be so qualified
would have a Material Adverse Effect on the ability of Acquiror to consummate
the transactions contemplated hereby. Acquiror has delivered to the Company a
true, correct and complete copy of its Certificate of Incorporation and Bylaws
as amended to date.
3.2 Authority. Acquiror has all requisite corporate power and authority to
---------
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Acquiror. The Board of Directors of Acquiror has
approved the Merger and this Agreement. This Agreement has been duly executed
and delivered by Acquiror and constitutes the valid and binding obligation of
Acquiror, enforceable in
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<PAGE>
accordance with its terms, except as enforceability may be limited by bankruptcy
and other similar laws and general principles of equity.
3.3 Capital Structure. The authorized capital stock of Acquiror consists
-----------------
of 31,000,000 shares of Common Stock, of which 9,925,689 shares are issued and
outstanding, and 7,149,801 shares of Preferred Stock, of which 2,596,957 shares
have been designated as Series A Preferred Stock, 2,941,176 shares have been
designated as Series B Preferred Stock and 1,611,668 shares have been designated
as Series C Preferred Stock, all of which are issued and outstanding. Except as
described on Schedule 3.3(a), all outstanding shares have been duly authorized,
validly issued, are fully paid and nonassessable, were issued in compliance with
all applicable federal and state securities laws and are not subject to
preemptive rights created by statute, the Certificate of Incorporation or Bylaws
of Acquiror or any agreement to which Acquiror is a party or by which it is
bound. Acquiror has reserved 12,863,880 shares of Acquiror Common Stock for
issuance to employees and consultants pursuant to its 1993 Stock Option Plan and
its 1997 Stock Plan, of which 5,449,067 shares are subject to outstanding,
unexercised options (the "Acquiror Stock Options") and 9,125 shares are
available for grant. Except for the Acquiror Stock Options and except as
described on Schedule 3.3(a), there are no options, warrants, calls, rights,
commitments or agreements of any character, written or oral, to which Acquiror
is a party or by which it is bound obligating Acquiror to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of Acquiror. Except for the Acquiror
Stock Options and except as described in Schedule 3.3(a), there are no options,
warrants, calls, rights, commitments or agreements of any character, written or
oral, to which Acquiror is a party or by which it is bound obligating Acquiror
to grant, extend, accelerate the vesting of, change the price of, otherwise
amend or enter into any such option, warrant, call, right, commitment or
agreement.
(a) The shares of Acquiror Common Stock to be issued pursuant to the
Merger will, when issued in accordance with the terms of this Agreement, be duly
authorized, validly issued, fully paid, nonassessable
3.4 No Undisclosed Liabilities. Acquiror does not have any liability,
--------------------------
indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of
any type, whether accrued, absolute, contingent, matured, unmatured or other
(whether or not required to be reflected in financial statements in accordance
with generally accepted accounting principles), which individually or in the
aggregate, (i) has not been recorded in Acquiror Balance Sheet (as defined
below) or disclosed in Acquiror Financials, or (ii) has not arisen in the
ordinary course of Acquiror's business since December 31, 1999, consistent with
past practices.
3.5 Acquiror Financial Statements. Schedule 3.5 sets forth the Acquiror's
-----------------------------
unaudited balance sheet as of December 31, 1999 (the "Acquiror Balance Sheet")
and the related unaudited statements of operations and cash flows for the year
then ended (collectively, the "Acquiror Financials"). The Acquiror Financials
are correct in all material respects and have been prepared in accordance with
GAAP applied on a basis consistent throughout the periods indicated, except that
unaudited Acquiror Financials may not contain all footnotes required by GAAP.
The Acquiror
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<PAGE>
Financials present fairly the financial condition and operating results of the
Acquiror as of the dates and during the periods indicated therein.
3.6 No Changes. Except as disclosed on Schedule 3.6, since December 31,
----------
1999, there has not been:
(a) any change in the assets, liabilities, financial condition, or
operating results of Acquiror from that reflected in the Acquiror Financials,
except changes in the ordinary course of business that have not been, in the
aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of Acquiror (as such business is presently
conducted and as it is presently proposed to be conducted);
(c) any waiver or compromise by Acquiror of a valuable right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or encumbrance
or payment of any obligation by Acquiror, except in the ordinary course of
business and that is not material to the business, properties, prospects, or
financial condition of Acquiror (as such business is presently conducted and as
it is presently proposed to be conducted);
(e) the entering into or change in the terms of any material contract
or arrangement by which Acquiror or any of its assets or properties is bound or
to which Acquiror or any of such assets or properties is subject;
(f) any change to a material contract or arrangement by which
Acquiror or any of its assets is bound or subject;
(g) any material change in any compensation arrangement or agreement
with any employee, officer, director or shareholder;
(h) any sale, assignment, or transfer of any of Acquiror's
Intellectual Property;
(i) any resignation or termination of employment of any key officer
of Acquiror; and Acquiror, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
(j) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(k) change in accounting methods or practices (including any change
in depreciation or amortization policies or rates) by Acquiror;
(l) revaluation by Acquiror of any of its material assets;
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<PAGE>
(m) waiver or release of any right or claim of Acquiror, including
any write-off or other compromise of any account receivable of Acquiror except
in the ordinary course of business;
(n) to Acquiror's knowledge, commencement or notice or threat of
commencement of any lawsuit or proceeding against or investigation of Acquiror
or its affairs;
(o) notice of any claim of ownership by a third party of Acquiror's
Intellectual Property or of infringement by Acquiror of any third party's
Intellectual Property rights;
(p) issuance or sale by Acquiror of any of its shares of capital
stock since December 31, 1999;
(q) issuance or sale by Acquiror of any securities exchangeable,
convertible or exercisable for Acquiror Common Stock, or of any other of its
securities;
(r) change in pricing or royalties set or charged by Acquiror to its
customers or licensees except in the ordinary course of business or in pricing
or royalties set or charged by persons who have licensed Intellectual Property
to Acquiror;
(s) receipt of notice that there has been a loss of, or material
order cancellation by, any customer of Acquiror;
(t) any mortgage, pledge, transfer of a security interest in, or
lien, created by Acquiror, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(u) any loans or guarantees made by Acquiror to or for the benefit of
its employees, shareholders, officers, or directors, or any members of their the
ordinary course of its business;
(v) any declaration, setting aside, or payment of any dividend or
other distribution of Acquiror's assets in respect of any of Acquiror's capital
stock, or any direct or indirect redemption, purchase, or other acquisition of
any of such stock by Acquiror;
(w) amendments or changes to the Certificate of Incorporation or
Bylaws of Acquiror;
(x) any capital expenditure in excess of $100,000
(y) to the best of Acquiror's knowledge, any other event or condition
of any character that might materially and adversely affect the business,
properties, prospects, or financial condition of Acquiror (as such business is
presently conducted and as it is presently proposed to be conducted); or
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<PAGE>
(z) any agreement or commitment by Acquiror or any officer thereof to
do any of the things described in this Section 3.6.
3.7 Taxes.
-----
(a) Tax Returns and Audits. Except as set forth in Schedule 3.7:
----------------------
(i) Acquiror as of the Effective Time will have prepared and
filed all Returns required to be filed by such date relating to any and all
Taxes concerning or attributable to Acquiror and such Returns are or will be
true and correct in all material respects and have been completed in accordance
with applicable law.
(ii) Acquiror as of the Effective Time: (A) will have paid all
material Taxes due and payable by the Effective Time, (B) will have properly
accrued all Material Taxes on the books and records of Acquiror in accordance
with GAAP and made a provision for the payment of Taxes due but not yet payable
by the Effective Time and (C) will have withheld with respect to its employees
all material federal and state income taxes, FICA, FUTA and other Taxes required
to be withheld.
(iii) Acquiror is not delinquent in the payment of any Tax
attributable to Acquiror nor is there any outstanding, or to the best of
Acquiror's knowledge, unpaid Tax deficiency outstanding, assessed, notified or
proposed against Acquiror, nor has Acquiror executed any waiver of any statute
of limitations on or extending the period for the assessment or collection of
any Tax.
(iv) No audit or other examination of any Return of Acquiror is
currently in progress, nor has Acquiror been notified in writing of any request
for such an audit or other examination.
(v) Acquiror does not have any liabilities for federal, state,
local or foreign Taxes due and payable which have not been accrued or reserved
against on the Acquiror Financials, in accordance with GAAP, and Acquiror does
not have knowledge of any basis for the assertion of any such liability
attributable to Acquiror, its assets or operations.
(vi) There are (and to the best of Acquiror's knowledge, as a
result of the Merger, immediately following the Closing there will be) no Liens
on the assets of Acquiror relating to or attributable to Taxes except liens for
current taxes not yet due and payable.
(vii) Acquiror has not filed any consent under Section 341(f) of
the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the
Code) owned by Acquiror.
3.8 Restrictions on Business Activities. There is no agreement (noncompete
-----------------------------------
or otherwise), commitment, judgment, injunction, order or decree to which
Acquiror is a party or otherwise binding upon Acquiror which has or reasonably
could be expected to have the effect of
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<PAGE>
prohibiting or impairing any business practice of Acquiror, any acquisition of
property (tangible or intangible) by Acquiror or the conduct of business by
Acquiror. Without limiting the foregoing, Acquiror has not entered into any
agreement under which Acquiror is restricted from selling, licensing or
otherwise distributing any of its products to any class of customers, in any
geographic area, during any period of time or in any segment of the market.
3.9 Title to Properties; Absence of Liens and Encumbrances. Acquiror has
------------------------------------------------------
good and valid title to, or, in the case of leased properties and assets, valid
leasehold interests in, all of its tangible properties and assets, real,
personal and mixed, used or held for use in its business, free and clear of any
Liens, except as reflected in the Acquiror Financials or in Schedule 3.9 and
except for liens for taxes not yet due and payable and such imperfections of
title and encumbrances, if any, which are not material in character, amount or
extent, and which do not materially detract from the value, or materially
interfere with the present use, of the property subject thereto or affected
thereby.
3.10 No Conflicts. The execution and delivery of this Agreement by
------------
Acquiror does not, and, as of the Effective Time, the consummation of the
transactions contemplated hereby will not, Conflict with (i) any provision of
the Certificate of Incorporation or Bylaws of Acquiror or (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Acquiror or its properties or assets. No consent,
waiver, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity or any third party (so as not to trigger
any Conflict), is required by or with respect to Acquiror in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) the filing of the Certificate of Merger with
the Secretaries of State of the States of Delaware and New York, (ii) such
consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws, and (iii) such other consents, waivers, authorizations,
filings, approvals and registrations which are set forth on Schedule 3.10.
3.11 Intellectual Property. Acquiror owns or possesses (or can obtain the
---------------------
right to use on reasonable commercial terms) sufficient legal rights to all
Intellectual Property necessary for its business as now conducted and as
currently proposed to be conducted without any conflict with or infringement of
the rights of others. Except for proprietary information agreements with its own
employees or consultants and standard end-user license agreements, there are no
outstanding material options, licenses, or agreements of any kind relating to
Acquiror's Intellectual Property, nor is Acquiror bound by or a party to any
options, licenses, or agreements of any kind with respect to the Intellectual
Property of any other person or entity. Except as set forth on Schedule 3.11,
Acquiror has not received any written communications alleging, nor does Acquiror
have reason to believe, that Acquiror has violated or, by conducting its
business as proposed, would violate any Intellectual Property of any other
person or entity, and is not aware of any reasonable basis therefor or threat
thereof. Acquiror is not aware that any of its employees, agents or contractors
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 administrative agency, that would interfere
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<PAGE>
with the use of such employee's best efforts to promote the interests of
Acquiror, or that would conflict with Acquiror's business as now conducted.
Acquiror is not aware of any violation or infringement by a third party of any
of Acquiror's Intellectual Property. Neither the execution nor delivery of this
Agreement or any of the Related Agreements, nor the carrying on of Acquiror's
business by the employees of Acquiror, nor the conduct of Acquiror's business
will conflict with or result in a material breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant, or
instrument under which any of such employees is now obligated. Acquiror has no
plan to, and does not believe it is or will be necessary to utilize any
inventions of any of its employees (or people it currently intends to hire) made
prior to their employment by Acquiror.
3.12 Interested Party Transactions. To Acquiror's knowledge, no officer,
-----------------------------
director or shareholder of Acquiror (nor any ancestor, sibling, descendant or
spouse of any of such persons, or any trust, partnership or corporation in which
any of such persons has or has had an economic interest), has or has had,
directly or indirectly, (i) an economic interest in any entity which furnished
or sold, or furnishes or sells, services or products that Acquiror furnishes or
sells, or proposes to furnish or sell, (ii) an economic interest in any entity
that purchases from, or sells or furnishes to, Acquiror, any goods or services
or (iii) a beneficial interest in any contract or agreement set forth in
Schedule 3.11; provided, that (x) ownership of no more than one percent (1%) of
the outstanding voting stock of a publicly traded corporation and no more than
ten percent (10%) of the outstanding equity of any other entity shall not be
deemed an "economic interest in any entity" for purposes of this Section 3.12
and (y) this provision shall only apply if the terms and conditions applicable
to the subject relationship are materially less favorable to Acquiror than the
terms and conditions that could be obtained in an arms-length relationship.
3.13 Compliance with Laws. Acquiror has complied in all material respects
--------------------
with, is not in material violation of, and has not received any notices of
violation with respect to, any foreign, federal, state or local statute, law or
regulation known by Acquiror to apply to it.
3.14 Employees. To the best of Acquiror's knowledge after reasonable
---------
investigation, no employee of Acquiror is in material violation of any term of
any employment contract, patent disclosure agreement or any other contract or
agreement relating to the right of any such employee to be employed by Acquiror
because of the nature of the business conducted or to be conducted by Acquiror
or for any other reason, and the continued employment by Acquiror of its present
employees will not result in any such violations. Except as set forth on
Schedule 3.14, each employee of Acquiror and each consultant who has performed
services for Acquiror has executed an employee inventions and proprietary rights
assignment and confidentiality agreement with Acquiror, the form of which has
been made available to the Company. Acquiror has complied in all material
respects with all applicable state and federal equal employment opportunity and
other laws related to employment. To the best of Acquiror's knowledge after
reasonable investigation, no employee of Acquiror is in material violation of
any term of any employment contract, patent disclosure agreement or any other
contract or agreement relating to the right of any such employee to be employed
by Acquiror because of the nature of the business conducted or to be conducted
by
-27-
<PAGE>
Acquiror or for any other reason, and the continued employment by Acquiror of
its present employees will not result in any such violations. Acquiror is not
aware that any officer or key employee, or that any group of key employees,
intends to terminate his or their employment with Acquiror, nor does Acquiror
have a present intention to terminate the employment of any of the foregoing.
Subject to general principles related to wrongful termination of employees, the
employment of each officer and employee of Acquiror is terminable at the will of
Acquiror.
3.15 Litigation. Except as set forth in Schedule 3.15, there is no
----------
action, suit or proceeding of any nature pending or to Acquiror's knowledge
threatened against Acquiror, its properties or any of its officers or directors,
in their respective capacities as such. Except as set forth in Schedule 3.15, to
Acquiror's knowledge, there is no investigation pending or threatened against
Acquiror, its properties or any of its officers or directors, in their
respective capacities as such, by or before any governmental entity. Schedule
3.15 sets forth, with respect to any pending or threatened action, suit,
proceeding or investigation, the forum, the parties thereto, the subject matter
thereof and the amount of damages claimed or other remedy requested. No
governmental entity has at any time formally challenged the legal right of
Acquiror to manufacture, offer or sell any of its products or services in the
present manner or style thereof.
3.16 Brokers' and Finders' Fees; Third Party Expenses. Acquiror has not
------------------------------------------------
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
3.17 Representations Complete. None of the representations or warranties
------------------------
made by the Acquiror (as modified by the Acquiror Schedules), nor any statement
made in any Schedule or certificate furnished by the Acquiror pursuant to this
Agreement taken as a whole contains or will contain at the Effective Time, any
untrue statement of a material fact, or omits or will omit at the Effective Time
to state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which they were made,
not misleading.
ARTICLE IV
[Reserved]
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Access to Information. Subject to any applicable contractual
---------------------
confidentiality obligations (which the Company shall use its best efforts to
cause to be waived) each party shall afford the others and its auditors, counsel
and other representatives, reasonable access during normal business hours during
the period prior to the Effective Time to (a) all of its properties, books,
contracts, agreements and records, and (b) all other information concerning the
business, properties
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<PAGE>
and personnel (subject to restrictions imposed by applicable law) of it as the
others may reasonably request. No information or knowledge obtained in any
investigation pursuant to this Section 5.1 shall affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger. Prior to the Closing,
Acquiror shall deliver to the Company written notice if it has actual knowledge
that any representation or warranty made by the Company is inaccurate,
referencing the section number of the representation and warranty and specifying
the nature of such inaccuracy.
5.2 Confidentiality. Each of the parties hereto hereby agrees to and
---------------
reaffirms the confidentiality provisions in the letter dated December 15, 1999
from the Acquiror to the Company.
5.3 Expenses. Whether or not the Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
--------------------
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses (except to the extent
contemplated by Sections 7.2 and 7.3).
5.4 Public Disclosure. Upon execution and delivery of this Agreement by
-----------------
the parties hereto, Acquiror and the Company shall release a jointly prepared
announcement describing the Merger. Except as aforesaid, unless otherwise
required by law prior to the Effective Time, no disclosure (whether or not in
response to an inquiry) of the subject matter of this Agreement shall be made by
any party hereto unless approved by Acquiror and the Company prior to release,
provided that such approval shall not be unreasonably withheld.
5.5 Consents. The Company shall use its commercially reasonable best
--------
efforts to obtain the consents, waivers and approvals under any of the Contracts
as may be required in connection with the Merger (all of such consents, waivers
and approvals are set forth in Company Schedules) so as to preserve all rights
of, and benefits to the Company thereunder.
5.6 FIRPTA Compliance. On the Closing Date, the Shareholders shall
-----------------
deliver to Acquiror a properly executed statement or statements in a form
reasonably acceptable to Acquiror for purposes of satisfying Acquiror's
obligations under Treasury Regulation Section 1.1445-2.
5.7 Reasonable Efforts. Subject to the terms and conditions provided in
------------------
this Agreement, each of the parties hereto shall use its reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Acquiror shall not be required to agree to any divestiture by
Acquiror or the Company or any of Acquiror's subsidiaries or affiliates of
shares of capital stock or of any
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<PAGE>
business, assets or property of Acquiror or its subsidiaries or affiliates or
the Company or its affiliates, or the imposition of any material limitation on
the ability of any of them to conduct their businesses or to own or exercise
control of such assets, properties and capital stock.
5.8 Notification of Certain Matters. The Company shall give prompt notice
-------------------------------
to Acquiror, and Acquiror shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company and
Acquiror, respectively, contained in this Agreement to be untrue or inaccurate
at or prior to the Effective Time except as contemplated by this Agreement
(including the Company Schedules) and (ii) any failure of the Company or
Acquiror, as the case may be, to comply with or satisfy in any material respect
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 5.8 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.9 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be reasonably
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
5.10 Employment Matters. From and after March 1, 2000, (i) all continuing
------------------
employees of the Company and all employees of the Company engaged by Acquiror
shall be eligible for employee benefits generally available to employees of
Acquiror to the same extent as all other employees of Acquiror and (ii) Acquiror
shall grant all continuing employees of the Company credit for service (to the
same extent as service with Acquiror or any subsidiary of Acquiror is taken into
account with respect to similarly situated employees of Acquiror and its
subsidiaries) with the Company for determining benefit levels under such
employee benefits. Except for the stock option grants set forth in Schedule
5.10, which Acquiror has agreed to grant, nothing contained in this Agreement
shall create or imply any obligation on the part of Acquiror, the Company or the
Surviving Corporation to provide any continuing employment right to any
individual.
5.11 Stock Options.
-------------
(a) At the Effective Time, each Company Stock Option, whether or not
exercisable, will be assumed by Acquiror and, as of the Effective Time, Acquiror
hereby assumes such Company Stock Options in accordance with the terms of this
Section 5.11. Each Company Stock Option so assumed by Acquiror under this
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the applicable Company Stock Option Plan immediately
prior to the Effective Time, except that (i) each Company Stock Option will be
exercisable (or will become exercisable in accordance with its terms) for that
number of whole shares of Acquiror Common Stock equal to the product of the
number of shares of Company Common Stock that were issuable upon exercise of
such Company Stock Option immediately prior to the Effective Time times (y) the
Exchange Ratio, rounded down to the nearest whole share of Acquiror Common Stock
and (ii) the per share exercise price for the Acquiror Common Stock issuable
upon exercise of such
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assumed Company Stock Option will be equal to the quotient determined by
dividing (x) the exercise price per share of Company Common Stock at which such
Company Stock Option was exercisable immediately prior to the Effective Time by
(y) the Exchange Ratio, rounded up to the nearest whole cent. As soon as
reasonably practicable after the Effective Time (and in any event within 5 days
after the Effective Time), Acquiror will issue to each holder of an outstanding
Company Stock Option a notice describing the foregoing assumption of such
Company Stock Option by Acquiror.
(b) It is intended that, subject to Section 5.11(a) and to the extent
permitted by applicable law, the Company Stock Options assumed by Acquiror shall
qualify following the Effective Time as incentive stock options as defined in
Section 422 of the Code to the extent Company Stock Options qualified as
incentive stock options immediately prior to the Effective Time and the
provisions of this Section 5.11 shall be applied consistent with such intent.
5.12 Third Party Consents. As soon as practicable after the date hereof,
--------------------
Acquiror and the Company shall each use its commercially reasonable efforts to
obtain any material consents, waivers and approvals required to be obtained in
connection with the consummation of the transactions contemplated hereby.
5.13 Tax Matters.
-----------
(a) The Shareholders shall be responsible for timely filing all
federal, state and local income and franchise Tax Returns of the Company for
taxable periods ending on or prior to the Effective Date (the "Pre-Closing
-----------
Periods"). The Acquiror shall reimburse the Shareholders for the reasonable
- -------
expenses of preparing any such Tax Returns of the Company pursuant to this
Section 5.13(a) and the amount of the Taxes shown on such Tax Returns of the
Company; provided, however, that the amount reimbursed for Taxes shall not
exceed $30,000. Such Tax Returns will be prepared and filed in accordance with
applicable law and in a manner consistent with past practices and shall be
subject to review and consent by Acquiror, which consent will not be
unreasonably withheld.
(b) The Shareholders shall provide Acquiror with a copy of all Tax
Returns filed pursuant to Section 5.13(a) with respect to the Pre-Closing
Periods. From and after the Effective Date, Acquiror and the Company, on the one
hand, and the Shareholders, on the other hand, shall make available to the
other, as reasonably requested, all information, records or documents relating
to the Tax liabilities of the Company for all periods ending on or prior to the
Effective Date, and will preserve such information, records or documents until
the expiration of any applicable statute of limitations or extensions thereof.
(c) Acquiror shall take no action, and shall cause the Company to
take no action, that would adversely affect the treatment of the Merger as a
reorganization within the meaning of Section 368 of the Code.
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<PAGE>
5.14 Rule 144 Reporting. Acquiror agrees to make and keep public
------------------
information available promptly after the earlier to occur of (i) ninety (90)
days after the effective date of the first registration statement filed by the
Acquiror for an offering of its Common Stock to the general public and (ii) the
date that Acquiror's Common Stock is registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
5.15 Financial Information. Acquiror will furnish to each Shareholder who
---------------------
holds at least 25,000 shares of Acquiror's Common Stock, quarterly and annual
financial statements. Quarterly financial statements will be provided within
forty-five (45) days after each quarterly period (other than the fourth quarter)
and the annual financial statements will be provided within ninety (90) days
after the end of the fiscal year. Acquiror's obligation to provide the foregoing
financial statements shall terminate and be of no further force and effect upon
the earlier to occur of (a) the closing of Acquiror's initial public offering
pursuant to a registration statement declared effective by the Securities and
Exchange Commission or (b) upon any merger or consolidation of Acquiror with any
other corporation in which the shareholders of Acquiror immediately prior to
such transaction shall own in the aggregate less than fifty (50%) of the voting
securities of the surviving corporation.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Shareholder Approval. This Agreement and the Merger shall have
--------------------
been approved and adopted by the shareholders of the Company by the requisite
vote under applicable law and the Company's Certificate of Incorporation.
(b) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect. No
litigation challenging the legality of the transactions contemplated by this
Agreement shall be pending or overtly threatened.
(c) Receipt of Information; Due Diligence. Each of Acquiror and the
-------------------------------------
Company shall have received reasonably satisfactory responses to each of their
requests for information from the other. Each of Acquiror and the Company shall
have completed its customary due diligence review to its reasonable
satisfaction.
6.2 Additional Conditions to Obligations of the Company. The obligations
---------------------------------------------------
of the Company to consummate the Merger and the transactions contemplated by
this Agreement shall be
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subject to the satisfaction at or prior to the Closing of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Acquiror contained in this Agreement shall have been true and
correct in all material respects as of the date of this Agreement, except in
such cases (other than the representations in Section 3.3) where the failure to
be so true and correct would not have a Material Adverse Effect on Acquiror. In
addition, the representations and warranties of Acquiror contained in this
Agreement shall be true and correct in all material respects on and as of the
Effective Time except for changes contemplated by this Agreement and except for
those representations and warranties which address matters only as of a
particular date (which shall remain true and correct as of such particular
date), with the same force and effect as if made on and as of the Effective
Time, except in such cases (other than the representations in Section 3.3) where
the failure to be so true and correct would not have a Material Adverse Effect
on Acquiror. The Company shall have received a certificate with respect to the
foregoing signed on behalf of Acquiror by the President of Acquiror.
(b) Agreements and Covenants. Acquiror shall have performed or
------------------------
complied (which performance or compliance shall be subject to Acquiror's ability
to cure as provided in Section 8.1(e) below) in all material respects with all
agreements and covenants required by this Agreement to be performed or complied
with by it on or prior to the Effective Time.
(c) Material Adverse Change. There shall not have occurred any
-----------------------
material adverse change in the business, assets (including intangible assets),
financial condition or results of operations of Acquiror since December 31,
1999.
(d) Consents. Acquiror and the Company shall have obtained all
--------
consents, waivers and approvals required in connection with the consummation of
the transactions contemplated hereby.
(e) Legal Opinion. The Company shall have received a legal opinion
-------------
from Wilson Sonsini Goodrich & Rosati, legal counsel to the Company, in
substantially the form attached hereto as Exhibit B.
(f) Stock Restriction Escrow Agreement. Acquiror, the Escrow Agent
----------------------------------
and each of Donald Joseph Edgerton and Paul Geczik shall have entered into the
Stock Restriction Escrow Agreement substantially in the form attached hereto as
Exhibit G
(g) Employment Agreements. Acquiror shall have entered into
---------------------
Employment Agreements with each of the Shareholders in substantially the form
attached hereto as Exhibit A and such agreements shall be in full force and
effect.
6.3 Additional Conditions to the Obligations of Acquiror. The
-----------------------------------------------------
obligations of Acquiror to consummate the Merger and the transactions
contemplated by this Agreement shall be subject to the
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<PAGE>
satisfaction at or prior to the Closing of each of the following conditions, any
of which may be waived, in writing, exclusively by Acquiror:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in this Agreement shall have been true and
correct in all material respects as of the date of this Agreement, except in
such cases (other than the representations in Section 2.2) where the failure to
be so true and correct would not have a Material Adverse Effect on the Company.
In addition, the representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects on and as of the
Effective Time except for changes contemplated by this Agreement and except for
those representations and warranties which address matters only as of a
particular date (which shall remain true and correct as of such particular
date), with the same force and effect as if made on and as of the Effective
Time, except in such cases (other than the representations in Sections 2.2)
where the failure to be so true and correct would not have a Material Adverse
Effect on the Company. Acquiror shall have received a certificate with respect
to the foregoing signed on behalf of the Company by the President and the Chief
Financial Officer of the Company.
(b) Agreements and Covenants. The Company shall have performed or
------------------------
complied (which performance or compliance shall be subject to the Company's
ability to cure as provided in Section 8.1(d) below) in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time.
(c) Legal Opinion. Acquiror shall have received a legal opinion
-------------
from Parker, Chapin Flattau & Klimpl, LLP, counsel to the Company, in
substantially the form attached hereto as Exhibit C.
(d) Material Adverse Change. There shall not have occurred any
-----------------------
material adverse change in the business, assets (including intangible assets)
financial condition or results of operations of the Company since December 31,
1999.
(e) Employment Agreements. Each of the Shareholders shall have
---------------------
executed and delivered to Acquiror an Employment Agreement in substantially the
form attached hereto as Exhibit A and such agreements shall be in full force and
effect.
(f) Escrow Agreement. Acquiror, the Company, Escrow Agent and the
----------------
Shareholders' Representatives (as defined in the Escrow Agreement) shall have
entered into the Escrow Agreement substantially in the form attached hereto as
Exhibit F.
(g) Dissenters' Rights. No holder of Company Common Stock shall
------------------
have exercised appraisal, dissenters' or similar rights under applicable law
with respect to their shares by virtue of the Merger.
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<PAGE>
(h) Resignation of Directors and Officers. All directors and
-------------------------------------
officers of the Company shall have resigned their respective offices as
directors and officers of the Company effective as of the Effective Time.
(i) Investment Representation Statements and Shareholder Agreements.
---------------------------------------------------------------
Each shareholder of the Company who is to receive shares of Acquiror Common
Stock in connection with the Merger shall have executed and delivered to
Acquiror an Investment Representation Statement and Shareholder Agreement in the
form attached hereto as Exhibit D.
(j) Consents. Acquiror and the Company shall have obtained all
--------
consents, waivers and approvals required in connection with the consummation of
the transactions contemplated hereby.
(k) Stock Restriction Agreements and Elections. Each Company
------------------------------------------
shareholder shall have (i) executed a Stock Restriction Agreement in the form
attached hereto as Exhibit E and (ii) executed an election under Section 83(b)
of the Code in connection therewith.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's and
------------------------------------------
Acquiror's representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement (each as modified by the Company Schedules)
shall survive the Merger and continue until 5:00 p.m., California time, on the
date which is one year following the Closing Date (the "Expiration Date");
---------------
provided, however, that the representations and warranties in Section 2.9 and
the indemnification provisions in Section 5.13 shall survive until the lapsing
of the applicable statute of limitations period.
7.2 Obligation of the Company to Indemnify, Reimburse, etc. Subject to
------------------------------------------------------
the provisions of Sections 7.4 and 8.2 hereof, the Shareholders severally (in
accordance with their proportionate stock interest of Acquiror Common Stock
received by the Stockholders pursuant to the Merger), shall indemnify,
reimburse, defend and hold harmless Acquiror and its successors and assigns and
each of its directors, officers, employees, affiliates, and its respective
successors and assigns (each a "Acquiror Indemnitee") from and against all
-------------------
Losses resulting from, imposed upon, incurred or suffered by any of them,
directly or indirectly, based upon, arising out of or otherwise in respect of
any inaccuracy in or any breach of any representation, warranty, covenant or
agreement of the Company; provided that no claim for indemnification may be made
by any Acquiror Indemnitee pursuant to this Section 7.2 at any time following
the Expiration Date; provided, however, that the
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<PAGE>
foregoing limitations to indemnification shall not apply to any claims that
result from a breach of Sections 2.9 or 5.13. With respect to claims for
indemnification that result from a breach of Sections 2.9 or 5.13, Acquiror
Indemnitees shall be entitled to recover all Losses incurred as a result of such
breach until the lapsing of the applicable statute of limitations period. For
purposes of this Agreement, "Losses" shall mean any claims, losses, liabilities,
------
damages, causes of action, costs and expenses (including reasonable attorney's,
accountant's, consultant's and expert's fees and expenses), net of any insurance
proceeds, to which the indemnified party is entitled by virtue of such claims,
losses, liabilities, damages, causes of action, costs and expenses.
7.3 Obligation of Acquiror to Indemnify, Reimburse, etc. Subject to the
---------------------------------------------------
provisions of Sections 7.4 and 8.2 hereof, Acquiror and its respective
successors and assigns, jointly and severally, shall indemnify, defend and hold
harmless the Company and its successors and assigns and each of its directors,
officers, employees, affiliates, and their respective successors and assigns
(each a "Company Indemnitee") from and against any Losses resulting from,
------------------
imposed upon, incurred or suffered by any of them, directly or indirectly, based
upon, arising out of or otherwise in respect of any inaccuracy in or breach of
any representation, warranty, covenant or agreement of Acquiror; provided that
no claim for indemnification may be made by any Company Indemnitee pursuant to
this Section 7.3 at any time following the Expiration Date.
7.4 Limits on Indemnification, Reimbursement, etc. No Acquiror Indemnitee
----------------------------------------------
and no Company Indemnitee shall have any right to seek indemnification,
reimbursement or defense under this Agreement or the Escrow Agreement until
Losses which would otherwise be indemnifiable hereunder, and have been incurred
by such party and other indemnitees associated with or related to such party,
exceed $25,000 (at which point such party to be indemnified shall be entitled to
recover indemnification for all Losses). In the event that any claim for
indemnification, reimbursement or defense is made by Acquiror pursuant to this
Section, the amount of any Losses shall be satisfied out of the Escrow Fund (as
defined below); provided, however, that if the amount of the Losses exceeds the
Escrow Fund, the Losses will be settled by the Shareholders (with the form of
the consideration to be at the election of the Shareholders), either by paying
cash or surrendering that number of shares of Acquiror Common Stock whose value
equal the amount of the claim, using the fair market value of a share of
Acquiror Common Stock on the date that any written claim for indemnification is
made. For purposes of the foregoing, (a) if the Common Stock is not publicly
traded, the fair market value will be the higher of (i) the price at which
Acquiror's Board of Directors at such time has determined is the fair market
value of Acquiror's Common Stock for purposes of stock option grants and (ii)
the price used for the Company's most recent arms' length third party
transaction or (b) if the Common Stock is publicly traded, the fair market value
will be the closing sales price on the last trading day prior to the date that
the written claim for indemnification is made. Notwithstanding the foregoing,
absent fraud of any party (for which there shall be no limitation of liability),
no party shall be entitled to seek indemnification, reimbursement or defense for
an amount which would require the Shareholders to surrender more than an
aggregate of 40% of the shares issued to the Shareholders pursuant to the merger
(or not more than 641,487 shares of Acquiror Common Stock, as adjusted for stock
splits, stock dividends, recapitalizations and the like), calculated based on
the assumption that all Shareholders elect to surrender shares to satisfy all
indemnification claims.
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<PAGE>
7.5 Escrow Arrangements. Concurrent with the Effective Time, the Escrow
-------------------
Amount shall be placed in an escrow fund (the "Escrow Fund"), to be governed by
-----------
the terms of the Escrow Agreement. The Escrow Fund shall be available to
compensate Acquiror and its affiliates for losses incurred by Acquiror and its
affiliates in connection with breaches of representations, warranties, or
covenants contained herein or delivered pursuant hereto. The terms and
conditions of the Escrow Fund shall be set forth more fully in the Escrow
Agreement. The Escrow Fund shall terminate at the Expiration Date. Donald Joseph
Edgerton and Paul Geczik have been selected and authorized by the Company's
shareholders to act as their representatives (the "Representatives") in regard
to the Escrow Fund.
7.6 Claims for Indemnification. Whenever any claim shall arise for
--------------------------
indemnification under this Section 7, and such claim is not made against the
Escrow Fund, Acquiror or the Company, as the case may be, seeking
indemnification (the "Indemnified Party"), shall promptly notify (the "Claim
----------------- -----
Notice") the party for whom indemnification is sought hereunder (the
- ------
"Indemnifying Party") of the claim and, when known, the facts constituting the
------------------
basis for such claim. In the event of any such claim for indemnification
hereunder resulting from or in connection with any claim or legal proceedings by
a third party (each, a "Proceeding"), the Claim Notice shall set forth in
----------
reasonable detail the nature thereof and the basis upon which such Indemnified
Party seeks indemnification hereunder; provided, however, that the failure of
-------- -------
any Indemnified Party to give such notice shall not relieve the Indemnifying
Party of its obligations under such Section, except to the extent that the
Indemnifying Party is actually prejudiced by the failure to give such notice.
(b) In the case of any such Proceeding by a third party against an
Indemnified Party, the Indemnifying Party shall, upon notice as provided above,
assume the defense thereof, with counsel reasonably satisfactory to the
Indemnified Party, and, after prompt notice (and, in any event, within twenty
(20) days from receipt of written notice of such Proceeding in accordance with
Section 7.6(a)) from the Indemnifying Party to the Indemnified Party of its
assumption of the defense thereof, the Indemnifying Party shall not be liable to
such Indemnified Party for any legal or other expenses subsequently incurred by
the Indemnified Party in connection with the defense thereof (but the
Indemnified Party shall have the right, but not the obligation, to participate
at its own cost and expense in such defense by counsel of its own choice) or for
any amounts paid or foregone by the Indemnified Party as a result of the
settlement or compromise thereof (without the written consent of the
Indemnifying Party).
(c) Anything in Section 7.6(b) notwithstanding, if both the
Indemnifying Party and the Indemnified Party are named as parties or subject to
such Proceeding and either such party determines with advice of counsel that
there may be one or more legal defenses available to it that are different from
or additional to those available to the other party or that a material conflict
of interest between such parties may exist in respect of such Proceeding, then
the Indemnifying Party may decline to assume the defense on behalf of the
Indemnified Party or the Indemnified Party may retain the defense on its own
behalf, and, in either such case, after notice to such effect is duly given
hereunder to the other party, the Indemnifying Party shall be relieved of its
obligation to assume the defense on behalf of the Indemnified Party, but shall
be required to pay any legal or other expenses
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<PAGE>
including, without limitation, reasonable attorneys' fees and disbursements,
incurred by the Indemnified Party in such defense.
(d) If the Indemnifying Party assumes the defense of such Proceeding,
the Indemnified Party shall cooperate fully with the Indemnifying Party and
shall appear and give testimony, produce documents and other tangible evidence,
allow the Indemnifying Party access to the books and records of the Indemnified
Party and otherwise assist the Indemnifying Party in conducting such defense. No
Indemnifying Party shall, without the consent of the Indemnified Party, consent
to entry of any judgment or enter into any settlement or compromise which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
of such claim or Proceeding; provided, however, the Indemnified Party shall have
--------
the sole and exclusive right to consent to entry of any judgment or enter into
any settlement or compromise on such terms and conditions as it deems
appropriate to the extent such claim or Proceeding involves equitable or other
non-monetary relief. Provided that proper notice is duly given, if the
Indemnifying Party shall fail promptly and diligently to assume the defense
thereof, then the Indemnified Party may respond to, contest and defend against
such Proceeding (but the Indemnifying Party shall have the right to participate
at its own cost and expense in such defense by counsel of its own choice) and
may make in good faith any compromise or settlement with respect thereto
(subject to this Section 7.6(d)), and recover from the Indemnifying Party the
entire cost and expense thereof including, without limitation, reasonable
attorneys' fees and disbursements and all amounts paid or foregone as a result
of such Proceeding, or the settlement or compromise thereof. The indemnification
required hereunder shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as and when bills or invoices
are received or loss, liability, obligation, damage or expense is actually
suffered or incurred.
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<PAGE>
ARTICLE VIII
[RESERVED]
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
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 Acquiror, to:
Context Integration
One Van de Graaff Place, Suite 104
Burlington, MA 01803
Attn: Chief Financial Officer
Telephone No.: (781) 229-6500
Facsimile No.: (781) 229-0808
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94301-1050
Attention: Elizabeth R. Flint
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(b) if to the Company, to:
Underline, Inc.
678 Broadway, 4/th/ Floor
New York, NY 10012
Attn: Chief Executive Officer
Telephone No.: (212) 460-8687
Facsimile No. (212) 460-5537
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<PAGE>
With a copy to:
Parker Chapin Flattau & Klimpl, LLP
Chrysler Building
405 Lexington Avenue
New York, NY 10174
Attention: James Alterbaum
Telephone: (212) 704-6000
Fax: (212) 704-6288
(c) if to the Shareholders, to:
Donald Joseph Edgerton
651 East 14/th/ Street
Apartment 6H
New York, NY 10009
Telephone:
Fax:
and
Paul Geczik
237 East 5/th/ Street
Apartment 7
New York, NY 10003
Telephone:
Fax:
and
Andreas Bender
548 West Saddle River Road
Upper Saddle River, New Jersey 07458
Telephone: (201) 785-0484
Fax: (201) 785-0475
and
The Donald Joseph Edgerton Family Trust
c/o Carolyn Kearny Edgerton, Trustee
51 East 14/th/ Street
Apartment 6H
New York, NY 10009
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<PAGE>
Telephone:
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
Chrysler Building
405 Lexington Avenue
New York, NY 10174
Attention: James Alterbaum
Telephone: (212) 704-6000
Fax: (212) 704-6288
(d) if to the Escrow Agent, to:
U.S. Bank Trust, National Association
Global Depository Escrow Services
One California Street, 4/th/ Floor
San Francisco, CA 94111
Attention: Ann Gadsby
Fax: (415) 273-4593
9.2 Interpretation. The words "include," "includes" and "including" when
--------------
used herein shall be deemed in each case to be followed by the words "without
limitation." The word "agreement" when used herein shall be deemed in each case
to mean any contract, commitment or other agreement, whether oral or written,
that is legally binding. As used in this Agreement, the phrase "to the best of
[a party's] knowledge," "to [a party's] knowledge," "[a party] is not aware,"
and similar phrases shall mean the actual knowledge of such party, or of the
officers and directors of such party. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
9.3 Material Adverse Effect. The term "Material Adverse Effect" with
-----------------------
respect to any person means a material adverse effect on the business, financial
condition, assets (including intangible assets) or results of operations of such
person and subsidiaries of such person taken as a whole.
9.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.5 Entire Agreement; Assignment. This Agreement, the schedules and
----------------------------
Exhibits hereto, and the documents and instruments and other agreements among
the parties hereto referenced herein: (a) constitute the entire agreement among
the parties with respect to the subject matter
-41-
<PAGE>
hereof and supersede all prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof; (b) are not
intended to confer upon any other person any rights or remedies hereunder; and
(c) shall not be assigned by operation of law or otherwise except as otherwise
specifically provided, except that Acquiror may assign its respective rights and
delegate its obligations (other than the obligation of Acquiror to issue
Acquiror Common Stock in the Merger) hereunder to their respective affiliates.
9.6 Severability. In the event that any provision of this Agreement or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.7 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto agrees that process may be served upon them in any
manner authorized by the laws of the State of Delaware for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
9.9 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.10 Stock Certificate Legends. Each certificate representing any of the
shares of Acquiror Common Stock to be issued pursuant to this Agreement shall
have endorsed thereon a legend substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED UNLESS:
(i) A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH SHARES, OR
(ii) THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE
COMPANY) REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE, TRANSFER OR PLEDGE
IS EXEMPT
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<PAGE>
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT."
9.11 Amendment. Except as is otherwise required by applicable law after
---------
the Shareholders approve this Agreement, this Agreement may be amended by the
parties hereto at any time by execution of an instrument in writing signed on
behalf of each of the parties hereto.
9.12 Extension; Waiver. At any time prior to the Effective Time,
-----------------
Acquiror, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
9.13 Arbitration. Each party agrees that any dispute arising out of or
-----------
relating to this Agreement shall be resolved by binding arbitration to be held
in New York, New York. All claims shall be resolved by three arbitrators in
accordance with the Commercial Arbitration Rules then in effect of the American
Arbitration Association (the "Arbitration Rules"). Acquiror and the Company
shall each designate one (1) arbitrator and such designated arbitrators shall
mutually agree upon and shall designate a third arbitrator (the "third
arbitrator"). Any award rendered in any such arbitration proceeding shall be
non-appealable, and final and binding upon the parties (and any attempted appeal
shall be void and of no effect), and judgment thereon may be entered by any
court of competent jurisdiction and application may be made to such court for
judicial confirmation of any award and an order of enforcement, as the case may
be. Each party shall bear its own fees (including its designated arbitrator's
fees and attorney's fees) and other expenses associated with the arbitration,
including fifty percent of the fees of the third arbitrator. However, the
arbitrators shall have the discretion to declare one party the prevailing party
such that the non-prevailing party bears all costs associated with such
arbitration.
(Remainder of page intentionally left blank)
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<PAGE>
IN WITNESS WHEREOF, Acquiror, the Company and the Shareholders have caused
this Agreement to be signed by their duly authorized respective officers, all as
of the date first written above.
CONTEXT INTEGRATION, INC. UNDERLINE, INC.
By: /s/ Stephen Sharp By: /s/ Donald Joseph Edgerton
---------------------------------- --------------------------------
Stephen Sharp _________________________________
President and Chief Executive Officer
SHAREHOLDERS
/s/ Donald Joseph Edgerton
------------------------------------
Donald Joseph Edgerton
/s/ Paul Geczik
------------------------------------
Paul Geczik
/s/ Andreas J. Bender
------------------------------------
Andreas Bender
THE DONALD JOSEPH
EDGERTON FAMILY TRUST
By: /s/ C.H. Edgerton
---------------------------------
Trustee
By: /s/ C.H. Edgerton
---------------------------------
Trustee
*AGREEMENT AND PLAN OF REORGANIZATION*
<PAGE>
EXHIBIT 10.2
1993 STOCK OPTION PLAN OF CONTEXT INTEGRATION, INC.
WHEREAS, the Board of Directors of CONTEXT INTEGRATION, INC., a Delaware
corporation, deems it to be in the best interest of the Company that certain
employees of the Company or of its Subsidiaries be given the opportunity to
acquire Stock pursuant to a stock option plan and thereby to increase their
incentive to contribute to the growth of the Company and its Subsidiaries;
NOW, THEREFORE, the Board of Directors has adopted this Stock Option Plan
as of the date set forth below:
1. GENERAL
-------
1.1 Purpose of Plan. This Plan is intended to encourage Stock ownership by
---------------
employees of the Company or of its Subsidiaries and to provide additional
incentive for them to remain in the employ of the Company or its Subsidiaries
and to promote the growth and success of the Company and such Subsidiaries. It
is intended that the options issued pursuant to this Plan shall constitute
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or non-incentive stock options.
1.2 Definitions. Whenever used herein, the following terms shall have the
-----------
following meanings:
(A) "Board" - the Board of Directors of the Company.
(B) "Code" - the Internal Revenue Code of 1986, as amended from time
to time.
(C) "Committee" - a committee designated by the Board which shall
consist of one or more members of the Board who shall be appointed by
and serve at the pleasure of the Board.
(D) "Company" - Context Integration, Inc., a Delaware corporation
formerly known as The Context Group, Inc.
(E) "Disability" - permanent and total disability as defined in Code
Section 105(d)(4).
(F) "Fair Market Value" - (a) prior to a public offering of the
Stock, the fair market value of the Stock as determined by, and in
accordance with procedures to be established by the Committee, (b)
subsequent to a public offering of the Stock, (i) the mean between
dealer "bid" and "ask" prices of the Stock in the New York over-the-
counter market on the day the Option is granted, as reported by the
National Association of Securities
<PAGE>
Dealers, Inc. and (ii) if the Stock becomes listed upon an established
stock exchange or exchanges such fair market value shall be deemed to
be the highest closing price of the Stock on such stock exchange or
exchanges on the day the Option is granted or if no sale of the Stock
shall have been made on any stock exchange on that day, on the next
preceding day on which there was a sale of such Stock.
(G) "Incentive Stock Option" - an option to purchase Stock granted
pursuant to the Plan that constitutes an "incentive stock option"
within the meaning of Section 422 of the Code.
(H) "Non-Incentive Stock Option" - an option to purchase Stock
granted pursuant to the Plan that does not constitutes an Incentive
Stock Option.
(I) "Option" - an option to purchase Stock granted pursuant to the
Plan which constitutes an Incentive Stock Option or a Non-Incentive
Stock Option.
(J) "Option Agreement" - the agreement between the Company and a
Participant evidencing the grant of an Option under the Plan and
containing the terms and conditions, not inconsistent with the Plan,
that - are applicable to such Option.
(K) "Participant" - an individual to whom an Option is granted under
the Plan.
(L) "Plan" - the 1993 Stock Option Plan of Context Integration, Inc.
(M) "Reorganization" - any merger or consolidation in which the
Company is not the surviving corporation other than a merger of the
Company into a wholly owned subsidiary of the Company; sale of all or
substantially all of the assets of the Company; or sale, pursuant to
an agreement with the Company, of Stock of the Company pursuant to
which another corporation, person, or other entity acquires fifty
percent (50%) or more of the outstanding Stock of the Company.
(N) "Stock" - the $.01 par value Common Stock of the Company.
(0) "Subsidiary" - any corporation (other than the Company) in any
unbroken chain of corporations beginning with the Company if, at the
time of granting of the Option, each of the corporations other than
the last corporation, in the unbroken chain owns stock possessing
fifty percent (50%) or more of the total combined voting
-2-
<PAGE>
power of all classes of stock in one of the other corporations in such
chain.
2. ADMINISTRATION OF THE PLAN
--------------------------
2.1 Administration. The Plan shall be administered by the Committee.
--------------
Subject to the provisions of the Plan, the Committee is authorized to:
(A) determine the employees to whom Options are to be granted;
(B) determine the number of shares of Stock to be covered by each of
the Options, the time or times at which options shall be granted and
exercisable, the exercise price for shares subject to the Options, and
whether such Options shall be Incentive Stock Options or Non-
Incentive Stock Options;
(C) interpret the Plan provisions;
(D) terminate the Plan;
(E) prescribe, amend and rescind rules and regulations relating to
the Plan;
(F) rely on the employees of the Company for such clerical and
record-keeping duties as may be necessary in connection with the
administration of the Plan; and
(G) make all other determinations and take all other actions
necessary or advisable for the administration of the Plan.
2.2 Absolute Discretion. All questions of interpretation and application
-------------------
of the Plan, or pertaining to any Option granted hereunder, shall be subject to
the determination by a majority of the Committee, which determination shall be
in the absolute discretion of the Committee.
3. ELIGIBILITY OF PARTICIPANTS
---------------------------
3.1 Participants. The individuals who are eligible to be granted an Option
------------
hereunder shall be all officers and directors of the Company who are full-time,
paid employees of the Company, and all other full-time, paid employees of the
Company.
3.2 Factors in Determination. In making any determination as to the
------------------------
employees of the Company and its Subsidiaries entitled to grants of Options
hereunder, the Committee shall take into account the performance of the
respective employees, their expected contributions to the growth and success
of the Company and its Subsidiaries, and such other factors as the Committee
shall deem
-3-
<PAGE>
relevant in connection with accomplishing the purpose of the Plan. The Committee
shall not be precluded from approving the grant of an Option to any eligible
employee solely because such employee may previously have been granted an Option
under this Plan.
4. STOCK SUBJECT TO PLAN
---------------------
4.1 Stock. There shall be reserved for use upon exercise of Options to be
-----
granted from time to time under the Plan a maximum of 800,000 shares of Stock
(unless such maximum shall be increased by or decreased by reason of changes in
capitalization as provided in Paragraph 8.4 hereof). The Stock subject to the
Plan may be authorized but unissued shares, or may be issued shares which have
been reacquired by the Company. At any time and from time to time after the Plan
takes effect, Options may be granted to purchase any or all of the Stock subject
to the Plan until the maximum number of such shares of Stock shall be exhausted
or the Plan shall be sooner terminated.
4.2 Expiration or Cancellation of Options. Should any Option expire or be
-------------------------------------
canceled without being fully exercised, the number of shares of Stock with
respect to which such Option shall not have been exercised prior to its
expiration or cancellation may again be optioned pursuant to the provisions
hereof.
5. GRANT OF OPTIONS
----------------
5.1 Decision of Committee. From time to time the Committee shall, in its
---------------------
sole discretion but subject to all of the provisions of the Plan, determine
which employees will be granted Options under the Plan and the size, terms and
conditions of the Options to be granted to each Participant, including whether
the Options will be Incentive Stock Options or Non-Incentive Stock Options. In
any year, the Committee may approve the grant to any employee of Options subject
to differing terms and conditions. The Committee's decision to approve the grant
of Options to an employee in any year shall not require the Committee to approve
the grant of Options to that employee in any other year or to any other employee
in any year; nor shall the Committee's decision with respect to the size, terms
and conditions of the Options to be granted to an employee in any year require
it to approve the grant of Options of the same size or with the same terms and
conditions to that employee in any other year or to any other employee in any
year.
5.2 Acceptance of Grant. Each such employee shall have a reasonable period
-------------------
of time as determined by the Committee within which to accept or reject the
grant of the Options. Failure to accept in writing within the period so fixed by
the Committee may be treated as a rejection. Each employee who accepts the grant
of the Options offered to him shall enter into an Option Agreement pursuant to
Paragraph 6.1 hereof.
-4-
<PAGE>
5.3 Limitation of Time of Grant. In no event shall any Incentive Stock
---------------------------
Option be granted hereunder after the expiration of ten (10) years from the
earlier of the date this Plan is adopted by the Board or the date this Plan is
approved by the stockholders of the Company pursuant to Paragraph 8.1 hereof.
5.4 Limitation on Incentive Stock Options. In no event shall any employee
-------------------------------------
be granted Incentive Stock Options that will first become exercisable by such
employee in any one calendar year covering Stock the aggregate Fair Market Value
of which exceeds $100,000.00. The aggregate Fair Market Value of the Stock
shall be determined as of the time the Incentive Stock Option is granted. All
incentive stock options granted under a plan of the Company or any of its
Subsidiaries shall be included in the computation of the limitation contained in
this Paragraph 5.4. It is intended that the limitation on granted Incentive
Stock Options provided hereinabove shall be the maximum limitation available for
incentive stock options under Code Section 422.
5.5 Limitation on Recipients of Grant. Notwithstanding any other
---------------------------------
provisions contained herein to the contrary, in no event shall any employee
owning directly or indirectly (pursuant to Code Section 425) more than ten
percent (10%) of the total combined voting power of the Company or any
Subsidiary be granted an Incentive Stock Option hereunder unless (A) the option
price is one hundred ten percent (110%) of the Fair Market Value of the Stock
at the time the Option is granted and (B) the term of the Option does not exceed
five (5) years.
6. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
6.1 Option Agreement. Each Option granted under the Plan shall be
----------------
evidenced by an Option Agreement in such form as the Committee may prescribe
setting forth the terms and conditions of the Options, consistent with the
provisions of the Plan. The Option Agreement shall identify the Options granted
as either Incentive Stock Options or Non-Incentive Stock Options. At any time
and from time to time, the Committee and a Participant may agree to modify an
Option Agreement in order that Incentive Stock Options may be converted to Non-
Incentive Stock Options.
6.2 Method of Determining Number of Shares. The number of shares subject
--------------------------------------
to each Option granted to a Participant shall be determined by the Committee
according to the factors set forth in Section 3.2 above. Each Option Agreement
shall specify the number of shares of Stock subject to each Option.
6.3 Method of Determining Option Price. The price for each share purchased
----------------------------------
under any Option granted under the Plan shall be the Fair Market Value of each
share of the Stock on the date the Option is granted and shall be specified in
the Option Agreement relating to such Option. The price specified in the Option
Agreement for an Incentive Stock Option shall not be less than one
-5-
<PAGE>
hundred percent (100%) of the Fair Market Value of the shares of Stock on the
date the Option is granted.
6.4 Payment of Option Price. Payment of the option price for Stock
-----------------------
purchased under the Plan shall be made upon the exercise of an Option and may be
paid to the Company either:
(A) in cash (including check, bank draft or money order); or
(B) at the discretion of the Committee, or if the Option Agreement so
provides, by the delivery of shares of the Company's Stock already
owned by the Participant and having a Fair Market Value on the date of
exercise equal to the option price; or
(C) at the discretion of the Committee, or if the Option Agreement so
provides, by a combination of cash and Stock.
6.5 Term of Options. The term of each Option shall be for such period of
---------------
months and years from the date of granting thereof as may be determined by the
Committee, but no Incentive Stock Option shall be exercisable later than ten
(10) years from the date such Incentive Stock Option is granted.
6.6 Exercise of Options Generally. An Option may be exercised as to shares
-----------------------------
of Stock only in such minimum quantities and at such intervals of time as may be
specified in the Option Agreement between the Company and the Participant. Each
exercise of an Option, or any part thereof, shall be evidenced by a notice in
writing to the Company. The purchase price of the shares of Stock as to which an
Option shall be exercised shall be paid in full at the time of exercise as
specified in Paragraph 6.4 herein. The holder of an Option shall not have any of
the rights of a stockholder of the Company with respect to the Stock covered by
the Option until he has exercised the Option and received a stock certificate or
has been determined to be a stockholder of record by the Company's transfer
agent.
6.7 Nontransferability of Options. No Option granted pursuant to the
-----------------------------
provisions hereunder shall be transferable by a Participant otherwise than by
will or the laws of descent and distribution or pursuant to a qualified domestic
relations order (as defined by the Code). Except with respect to any such order,
during the lifetime of a Participant, an Option shall be exercisable only by
such Participant. Any attempted assignment, transfer, pledge, hypothecation or
other disposition of an Option contrary to the provisions hereof, or the levy of
any execution, attachment or similar process upon an Option shall be null, void
and without effect.
-6-
<PAGE>
7. TERMINATION OF EMPLOYMENT
-------------------------
7.1 Termination Before Option Becomes Exercisable. If the Participant's
---------------------------------------------
employment shall be terminated for any reason whatsoever before the date that an
Option shall have become exercisable by the Participant, then the Participant's
full interest in such Option shall terminated on the date of such termination of
employment and all rights thereunder shall cease.
7.2 Discharge or Resignation. If the Participant ceases to be an employee
------------------------
of the company, or a Subsidiary, by reason of the fact that he is discharged for
cause, as determined solely and exclusively by the Committee, or by reason of
his resignation or voluntary action, all rights of the Participant to exercise
an Option shall terminate, lapse and be forfeited at the time of the
Participant's termination of employment.
7.3 Retirement. If any termination of employment is due to retirement with
----------
the consent of the Company or a Subsidiary, the Participant shall have the right
to exercise an Option exercisable on the date of such retirement at any time
within three (3) months after such retirement; provided, however, that in case
the Participant shall die within three (3) months after such date of retirement
without having exercised the Option, the personal representatives, heirs,
legatees or distributees of the Participant, as appropriate, shall have the
right up to twelve (12) months from such date of retirement to exercise any such
Option to the extent that the Option was exercisable prior to the Participant's
termination and had not been so exercised.
7.4 Death. If any Participant ceases to be an employee of the Company,
-----
or a Subsidiary, by reason of death, the personal representatives, heirs,
legatees or distributees of Participant, as appropriate, shall have the right up
to twelve (12) months from the termination of employment to exercise any Option
to the extent that the Option was exercisable prior to the Participant's death
and had not been so exercised.
7.5 Disability. If the Participant ceases to be an employee of the Company
----------
or a Subsidiary because of Disability, as determined solely and exclusively by
the Committee, the Participant shall have the right to exercise an Option at
any time within one (1) year after such termination; provided, however, that in
case the Participant shall die within one (1) year after such date of
termination without having exercised the Option, the personal representatives,
heirs, legatees or distributees of the Participant, as appropriate, shall have
the right up to one (1) year from such date of termination to exercise any such
Option to the extent that the Option was exercisable prior to the Participant's
termination and had not been so exercised.
7.6 Limitations on Exercise. Despite the provisions of Paragraphs 7.3,
-----------------------
7.4 and 7.5, no Incentive Stock Option shall be
-7-
<PAGE>
exercisable under any condition after the expiration of ten (10) years from the
date of its grant. In addition, the provisions of Paragraphs 7.3, 7.4 and 7.5
shall be subject to the provisions of Paragraphs 8.5 and 8.6.
8. MISCELLANEOUS
-------------
8.1 Effective Date. The Plan shall be effective as of the date set forth
--------------
below.
8.2 Duration of Plan. Unless sooner terminated, the Plan shall remain in
----------------
effect to and through ten years from the date set forth below. Termination of
the Plan shall not effect any Options previously granted thereunder; such
Options shall remain in effect until they have been terminated or exercised, all
in accordance with their terms.
8.3 Restrictions on Exercise. The exercise of each Option granted under
------------------------
the Plan shall be subject to the condition that if at any time the Company shall
determine, in its discretion, that the satisfaction of withholding taxes or
other withholding liabilities, or that the listing, registration or
qualification of any shares otherwise deliverable upon such exercise upon any
securities exchange or under any state or federal law, of the consent or
approval of any regulatory body, is necessary or desirable as a condition of, or
in connection with, such exercise or the delivery or purchase of shares
thereunder, then in any such event such exercise shall not be effective unless
such withholding, listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not acceptable to
the Company.
8.4 Changes in Capital Structure. (A) If there is any change in the
----------------------------
capital structure of the Company through merger, consolidation, reorganization,
recapitalization or otherwise, or (B) if there shall be any dividend on the
Stock, payable in such Stock, or (C) if there shall be a Stock split or
combination of shares, then the maximum aggregate number of shares with respect
to which Options may be exercised hereunder and the number and the option price
of the shares of Stock with respect to which an Option has been granted
hereunder, shall be proportionately adjusted by the Board as it deems
equitable, in its absolute discretion, to prevent dilution or enlargement of
the rights of Participants. The issuance of stock, warrants, or options shall
not be considered a change in the Company's capital structure. No adjustment
provided for in this section shall require the issuance of any fractional
shares.
8.5 Dissolution or Liquidation. In the event of the dissolution or
--------------------------
liquidation of the Company, any Option granted under the Plan shall terminate as
of a date to be fixed by the Board, provided that not less than thirty (30)
days' written notice of the date so fixed shall be given to each Participant and
each such
-8-
<PAGE>
Participant shall have the right during such period to exercise his Options even
though such Options would not otherwise be exercisable by reason of an
insufficient lapse of time. At the end of such period any unexercised Options
shall terminate and be of no further effect.
8.6 Reorganization. In the event of a Reorganization in which the Company
--------------
is not the surviving or acquiring company, or in which the Company is or becomes
a wholly owned subsidiary of another company after the effective date of the
Reorganization, then
(A) If there is no plan or agreement respecting the Reorganization or
if such plan or agreement does not specifically provide for the
change, conversion, or exchange of the shares of Stock under
outstanding and unexercised Options for securities of another
corporation substantially identical in terms and conditions and
equivalent in value to the Option subject hereto, then the Board shall
take such action, and the Options shall terminate, as provided in
Paragraph 8.5; or
(B) If there is a plan or agreement respecting the Reorganization and
if such plan or agreement specifically provides for the change,
conversion or exchange of the shares of Stock under outstanding and
unexercised Options for securities of another corporation, then the
Board shall adjust the shares under such outstanding and unexercised
Options (and shall adjust the shares remaining under the Plan which
are then available to be optioned under the Plan, if such plan or
agreement makes specific provision therefor) in a manner not
inconsistent with the provisions of such plan or agreement for the
adjustment, change, conversion, or exchange of such Stock and such
Options.
8.7 Amendment or Termination. The Board may, by resolution, amend or
------------------------
terminate the Plan at any time; provided, however, that subject to the
provisions of Paragraph 8.4, the Board may not, without approval by the holders
of a majority of the outstanding shares of Stock, increase the maximum aggregate
number of shares with respect to which Options may be exercised under the Plan;
materially increase the benefits accruing to Participants under the Plan; or
materially modify the requirements with respect to eligibility for participation
in the Plan. The Board may not, without the consent of the holder of an Option,
alter or impair any Option previously granted under the Plan except as
authorized herein.
Anything in this Paragraph 8.7 to the contrary notwithstanding, this
Plan may from time to time be amended to satisfy the conditions and requirements
set forth in Rule 16b-3
-9-
<PAGE>
promulgated under the Securities Exchange Act of 1934, as amended, or in any
successor rule.
8.8 Treasury and Unissued Shares. When shares are required to be issued
----------------------------
under the Plan, such shares may either be treasury shares or authorized and
unissued shares.
8.9 Application of Proceeds. The proceeds received by the Company from the
-----------------------
sale of Stock under the Plan will be used for general corporate purposes.
8.10 Nonguarantee of Employment. Nothing in this Plan shall confer upon a
--------------------------
Participant any right to continue in the employ of the Company or any of its
Subsidiaries or interfere in any way with the right of the Company or any of its
Subsidiaries to terminate his employment at any time.
IN WITNESS WHEREOF, the Company has executed this 1993 Stock Option Plan
effective as of the 30th day of August, 1993.
CONTEXT INTEGRATION, INC.
By: /s/ David L. Smith
---------------------------
David L. Smith, President
ATTEST:
/s/ Regan Coleman
- -------------------------
Regan Coleman, Secretary
-10-
<PAGE>
FIRST AMENDMENT
TO
1993 STOCK OPTION PLAN OF CONTEXT INTEGRATION, INC.
WHEREAS, the Board of Directors of CONTEXT INTEGRATION, INC., a Delaware
corporation (the "Company"), adopted, and the stockholders of the Company
approved, that certain 1993 Stock Option Plan of Context Integration, Inc. (the
"Plan"), in both cases as of August 30, 1993;
WHEREAS, the purpose of the Plan was then and today remains to, among other
things, encourage ownership of the Company's Common Stock, $.01 par value per
share (the "Stock"), by employees of the Company or of its subsidiaries and to
provide additional incentive for such employees to remain in the employ of the
Company or its subsidiaries and to promote the growth and success of the Company
and its subsidiaries;
WHEREAS, at the time of its adoption the Plan provided for the reservation
for use upon exercise of options to purchase Stock granted from time to time
under the Plan a maximum of 800,000 shares of Stock (subject to adjustment as
provided in the Plan);
WHEREAS, the Board of Directors of the Company desires to make certain
amendments to the Plan, including to expand the types of participants eligible
to receive options to purchase Stock;
WHEREAS, effective October 7, 1996, the Board of Directors of the Company
has by resolution effected a eight-to-one Stock split through the declaration of
a seven-for-one Stock dividend entitling each stockholder of record to seven
shares of Stock for each one share of Stock held on the record date; and
WHEREAS, the Board of Directors of the Company desires to memorialize such
stock dividend in connection with the adoption of such amendments;
NOW, THEREFORE, the Board of Directors of the Company has adopted the
following amendments to the Plan as of the date set forth below (with
capitalized terms used herein and not defined herein being defined as provided
in the Plan):
1. Amendment of Paragraph 2.1(B). Paragraph 2.1(B) of the Plan is amended to
provide in its entirety as follows:
"(B) determine the number of shares of Stock to be covered by each of the
Options, the time or times at which Options shall be granted and
exercisable, the exercise price for shares subject to the Options, the
vesting provisions, if any, thereon (and whether or not such provisions
apply to Options or to the Stock issuable upon exercise of such Options, or
both) and whether such Options shall be Incentive Stock Options or Non-
Incentive Stock Options;"
<PAGE>
2. Amendment of Paragraph 3.1. Paragraph 3.1 of the Plan is amended to provide
in its entirety as follows:
"3.1 Participants. The individuals who are eligible to be granted an
------------
Option hereunder shall be all officers and directors of the Company or a
Subsidiary, full-time or part-time employees of the Company or a
Subsidiary, and contractors and consultants to the Company or a Subsidiary;
provided, however, that only full-time employees of the Company or a
-------- -------
Subsidiary shall be eligible to be granted an Incentive Stock Option
hereunder."
3. Amendment of Portion of Paragraph 4.1. The first sentence of Paragraph 4.1 of
the Plan is amended to provide in its entirety as follows:
"4.1 Stock. There shall be reserved for use upon exercise of Options
-----
to be granted from time to time under the Plan a maximum of 6,400,000
shares of Stock (unless such maximum shall be increased by or decreased by
reason of changes in capitalization as provided in Paragraph 8.4 hereof),
which maximum number of shares (a) gives effect to that certain eight-to-
one stock split effected in the form of a seven-for-one stock dividend on
October 7, 1996 and (b) includes (i.e., is not in addition to) all Options
granted prior to the date of such First Amendment."
4. Amendment of Paragraph 6.3. Paragraph 6.3 of the Plan is amended to provide
in its entirety as follows:
"6.3 Method of Determining Option Price. The price for each share
----------------------------------
purchased under any Option granted under the Plan shall be as specified in
the Option Agreement relating to such Option, and may be the Fair Market
Value of each share of the Stock on the date the Option is granted, or may
be a discount or premium thereto; provided, however, that, subject to
-------- -------
Paragraph 5.5, the price specified in the Option Agreement for an Incentive
Stock Option shall not be less than one hundred percent (100%) of the Fair
Market Value of the shares of Stock on the date the Option is granted."
5. New Paragraph 7.7. A new Paragraph 7.7 of the Plan is added to the Plan, to
provide in its entirety as follows:
"7.7 Limitations on Exercise of Incentive Stock Options.
--------------------------------------------------
Notwithstanding anything herein to the contrary, an Incentive Stock Option
shall not be exercisable by the holder thereof more than three (3) months after
such holder ceases to be a full-time employee of the Company or a Subsidiary
(except in the case of retirement, death or disability, as provided in
Paragraphs 7.3, 7.4 and 7.5 above)."
FIRST AMENDMENT TO 1993 STOCK OPTION
PLAN OF CONTEXT INTEGRATION, INC. - Page 2
<PAGE>
6. Amendment of Paragraph 8.6(B). Paragraph 8.6 of the Plan is amended to
provide in its entirety as follows:
"(B) If there is a plan or agreement respecting the Reorganization and if
such plan or agreement specifically provides for the change, conversion, or
exchange of the shares of Stock under outstanding and unexercised Options
for securities of another corporation, then the Board shall adjust the
shares under such outstanding and unexercised Options (and shall adjust the
shares remaining under the Plan which are then available to be optioned
under the Plan, if such plan or agreement makes specific provision
therefor) in a manner the Board deems equitable and not inconsistent with
the provisions of such plan or agreement for the adjustment, change,
conversion, or exchange of such Stock and such Options."
7. Effect. This First Amendment to 1993 Stock Option Plan shall be effective
with respect to all Options granted under the Plan on and after the date hereof.
IN WITNESS WHEREOF, the Company has executed this First Amendment to 1993
Stock Option Plan effective as of October 21, 1996.
CONTEXT INTEGRATION, INC.
By: /s/ T.C. Lau
---------------------
Its: T.C. Lau
-------------------
ATTEST:
/s/ Samuel Steinhardt
- -----------------------
FIRST AMENDMENT TO 1993 STOCK OPTION
PLAN OF CONTEXT INTEGRATION, INC. - Page 3
<PAGE>
CONTEXT INTEGRATION, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
(To be provided to each individual who receives a
Notice of Grant of Stock Options and Option
Agreement evidencing an option grant under the
1993 Stock Option Plan of Context Integration, Inc., as amended.)
<PAGE>
CONTEXT INTEGRATION, INC. (the "Company") hereby grants to the individual
("Optionee") named in the attached Notice of Grant of Stock Options and Option
Agreement (the "Notice") an option (the "Option") to purchase from the Company
shares of Common Stock, $.01 par value per share of the Company (the "Stock")
pursuant to the 1993 Stock Option Plan of Context Integration, Inc., as amended
(the "Plan"). This grant of Options shall be subject to the terms and conditions
set forth herein, in the attached Notice, and in the Plan. This Option is not
intended to constitute an incentive stock option within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended from time to time (the
"Code").
The number of shares of Stock subject to Options under this Agreement and
the attached Notice shall be the number of shares set forth in the attached
Notice.
The purchase price for the Stock subject to the Option ("Option Price")
shall be the amount set forth in the attached Notice.
The Option term shall be as stated in the attached Notice. During the
Option term, this Option may be exercised and shares purchased under the
following conditions:
1.1 Optionee shall vest in and shall have the right to exercise the
Option during the time intervals and with respect to the number of shares as set
forth in the Notice. This Option may be exercised in whole or from time to time
in part, but only within the time intervals and with respect to the number of
shares as specified in the attached Notice. Each exercise of an Option, or any
part thereof, shall be evidenced by a notice in writing to the Company as
provided in Paragraph 1.2. The Option Price of the shares of Stock shall be paid
in full at the time of exercise as specified in Paragraph 1.3 herein. Optionee
shall not have any of the rights of a stockholder of the Company with respect to
the Stock covered by an Option until Optionee has exercised the Option and
received a stock certificate or has been determined to be a stockholder of
record by the Company's transfer agent.
1.2 The Options granted herein shall be exercised only at the
principal office of the Company by Optionee by delivering to the Secretary or
the Assistant Secretary of the Company a written notice specifying the number of
shares Optionee then desires to purchase, such written notice to be in
substantially the following form and to be signed by Optionee:
"I hereby purchase from CONTEXT INTEGRATION, INC. (the "Company")
_____ shares of its Common Stock in accordance with the Company's 1993
Stock Option Plan, as adopted by the Board of Directors of the Company, and
in accordance with my Stock Option dated as of ______. I hereby tender a
cash payment therefor in the amount of $________."
In addition, the Optionee shall deliver to the Corporation a written notice
specifying:
(a) the number of whole shares of Stock to be purchased together with
payment in full of the aggregate option price of such shares,
provided that this Option may not be exercised for less than
fifty (50) shares of Stock or the number of shares of Stock
remaining subject to this Option, whichever is smaller;
(b) the address to which any dividends, notices, reports, etc. are to
be sent; and
(c) the Optionee's social security number.
1.3 Payment of the Option Price for Stock purchased under this
Agreement and the attached Notice shall be made upon the exercise of an Option
and shall be paid in cash
-2-
<PAGE>
(including check, bank draft or money order).
1.4 If Optionee's employment with the Company or a Subsidiary shall
be terminated for any reason whatsoever before the date that an Option granted
hereunder shall have become exercisable by Optionee, then Optionee's full
interest in such Option shall terminate on the date of such termination of
employment and all rights under such Option shall cease.
1.5 If Optionee ceases to be an employee of the Company or a
Subsidiary, by reason of the fact that Optionee is discharged for "cause," or by
reason of Optionee's resignation or voluntary action, all rights of Optionee to
exercise the Options granted under this Agreement and the attached Notice shall
terminate, lapse and be forfeited at the time of Optionee's termination of
employment. For purposes of this Agreement, termination for "cause" shall
include (a) the conviction of a felony, (b) the use, after written notice by the
Company's Board of Directors and a reasonable opportunity to cure such, of
alcohol or drugs to an extent that materially interferes with Optionee's
performance of Optionee's duties, (c) the conviction of fraud, misappropriation,
embezzlement, or other crimes of moral, turpitude, (d) Optionee has committed
a willful act of dishonesty in the course of Optionee's duties which injures the
Company, or (e) Optionee has repeatedly disregarded written policy directives
from the Company's Chairman of the Board, President or Board of Directors.
1.6 If Optionee's termination of employment is due to retirement with
the consent of the Company or a Subsidiary, Optionee shall have the right to
exercise all Options then exercisable under this Agreement and the attached
Notice at any time within three (3) months after such retirement; provided,
however, that if Optionee dies within three (3) months after such date of
retirement without having exercised such Options, the personal representatives,
heirs, legatees or distributees of Optionee, as appropriate, shall have the
right for up to twelve (12) months from such date of retirement to exercise any
such Option, to the extent that the Option was exercisable prior to the
termination of Optionee and had not been so exercised.
1.7 If Optionee ceases to be an employee of the Company or a
Subsidiary by reason of death, the personal representatives, heirs, legatees or
distributees of Optionee, as appropriate, shall have the right up to twelve (12)
months from the termination of employment to exercise any Options which were
exercisable prior to death and had not been so exercised.
1.8 If Optionee ceases to be an employee of the Company or a
Subsidiary because of Disability, as determined solely and exclusively by the
Committee, Optionee shall have the right to exercise all Options then
exercisable under this Agreement and the attached Notice at any time within one
(1) year after such termination; provided, however, that in case Optionee shall
die within one (1) year after such date of termination without having exercised
such Options, the personal representatives, heirs, legatees or distributees of
Optionee, as appropriate, shall have the right up to one (1) year from such date
of termination to exercise any such Option to the extent that the Option was
exercisable prior to the termination of Optionee and had not been so exercised.
1.9 Despite the provisions of Paragraphs 1.6, 1.7 and 1.8 no Option
shall be exercisable under any condition after the dates specified in the
attached Notice. In addition, the provisions of Paragraphs 1.6, 1.7 and 1.8
shall be subject to the provisions of Paragraphs 5 and 6.
2. No Option granted pursuant to this Agreement and the attached Notice
shall be transferable by Optionee otherwise than by will or the laws of descent
and distribution or pursuant to a qualified domestic relations order (as defined
by the Code). Except with respect to any such order, during the lifetime of
Optionee, the Option shall be exercisable only by Optionee. Any attempted
assignment, transfer, pledge, hypothecation or other disposition of an Option
contrary to the provisions hereof, or the levy of any execution, attachment or
similar process upon an Option
-3-
<PAGE>
shall be null, void and without effect.
3. The exercise of each Option granted under this Agreement shall be
subject to the condition that at any time the Company shall determine, in its
discretion, that the satisfaction of withholding taxes or other withholding
liabilities, or that the listing, registration or qualification of any shares of
Stock otherwise deliverable upon such exercise upon any securities exchange or
under any state or federal law, or the consent or approval of any regulatory
body, is necessary or desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of such shares thereunder, then in any such
event such exercise shall not be effective unless such withholding, listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Company.
4. If there is (i) any change in the capital structure of the Company
through merger, consolidation, reorganization or otherwise, or (ii) any stock
dividend, stock split or combination of shares, then the number and the Option
Price of the shares of Stock with respect to which an Option has been granted
hereunder shall be proportionately adjusted by the Board as it deems equitable,
in its absolute discretion, to prevent dilution or enlargement of the rights of
Optionee. The issuance of Stock, warrants, or options shall not be considered a
change in the Company's capital structure. No adjustment provided for in this
Paragraph 4 shall require the issuance of any fractional shares.
5. In the event of the dissolution or liquidation of the Company, any
Option granted under this Agreement and the attached Notice shall terminate as
of a date to be fixed by the Board, provided that no less than thirty (30) days
written notice of the date so fixed shall be given to Optionee and Optionee
shall have the right during such period to exercise all Options granted
hereunder to the extent not previously exercised even though such Options might
not otherwise be exercisable by reason of an insufficient lapse of time. At the
end of such period all unexercised Options shall terminate and be of no further
effect.
6. In the event of a Reorganization in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a wholly
owned subsidiary of another company after the effective date of the
Reorganization, then
(a) If there is no plan or agreement respecting the Reorganization or
if such plan or agreement does not specifically provide for the
change, conversion, or exchange of the shares of Stock under
outstanding and unexercised Options for securities of another
corporation substantially identical in terms and conditions and
equivalent in value to the Option subject hereto, then the Board
shall take such action, and the Options shall terminate, as
provided in Paragraph 5; or
(b) If there is a plan or agreement respecting the Reorganization and
if such plan or agreement specifically provides for the change,
conversion, or exchange of the shares of Stock under outstanding
and unexercised Options for securities of another corporation,
then the Board shall adjust the shares under such outstanding and
unexercised Options (and shall adjust the shares remaining under
the Plan which are then available to be optioned under the Plan,
if such plan or agreement makes specific provision therefor) in a
manner the Board deems equitable and not inconsistent with the
provisions of such plan or agreement for the adjustment, change,
conversion, or exchange of such Stock and such Options.
7. Nothing in this Agreement or the attached Notice shall confer upon
Optionee any right to continue in the employ of the Company or any of its
Subsidiaries or interfere in any way
-4-
<PAGE>
with the right of the Company or any of its Subsidiaries to terminate Optionee's
employment at any time.
8. The Options granted hereunder are subject to the terms and provisions
of the Plan as adopted by the Board. In case of any conflict between this
Agreement and the Plan, the terms and provisions of the Plan shall be
controlling. Unless otherwise defined herein, all terms used herein that are
defined in the Plan shall have the same meaning herein as in the Plan.
9. By execution of the attached Notice, Optionee agrees that in order to
exercise the Option, Optionee must make such representations and warranties and
become subject to such restrictions on transfer and comply with any other
requirements relating to the Option or the Stock subject to the Option, as the
Company deems necessary or appropriate in order to comply with all applicable
securities laws and all rules and regulations thereunder; provided that Optionee
shall not be allowed to exercise the Option, and the Company shall not be
required to issue any of the Stock covered by the Option, if such issuance of
any of the Stock covered by the Option would result in a violation by the
Company of any securities laws, rules or regulations.
10. By execution of the attached Notice, Optionee agrees that in order to
exercise the Option, Optionee shall enter into that certain Stockholders
Agreement dated April 1, 1993 among the Company and its then stockholders, as
the same may be amended from time to time, with such additional amendments
thereto, if any, as the Company shall deem appropriate.
11. The effectiveness of this Option is contingent upon Optionee's signing
below and returning a copy of the attached Notice to the Company within ten (10)
days of the actual date of the Notice.
12. This Option and the terms and conditions set forth in this Agreement
and the attached Notice are subject in all respects to the terms and conditions
of the Plan, which shall be controlling and are incorporated herein by
reference. Capitalized terms used but not otherwise defined herein shall have
the meanings ascribed to such terms in the Plan. All interpretations or
determinations of the Board of Directors with respect to the Plan and this
Option shall be binding and conclusive upon the Optionee and his or her legal
representatives with respect to any question arising hereunder.
13. By executing the attached Notice, Optionee acknowledges and agrees
that any powers, rights or responsibilities of the Company's Board of Directors
set forth herein may be delegated to and exercised by the Committee as defined
in and as permitted under the Plan.
14. This Agreement and the attached Notice shall be governed by and
construed in accordance with the laws of the State of Delaware without
application of the conflict of laws principles thereof, except to the extent
preempted by federal law, which shall govern to such extent.
15. By executing the attached Notice, Optionee agrees to execute and
deliver to the Company all documents reasonably necessary to evidence his or her
agreement with the Company, or with the underwriters of the Company's equity
securities, or both, that Optionee will not sell, transfer, or otherwise dispose
of any shares of Stock acquired under this Agreement, including a sale pursuant
to Rule 144 of the Securities Act of 1933, as amended, during the 14 days prior
to, and during the 270-day period beginning on, the effective date of a
registration statement in connection with any public offering of the Company's
equity securities (except as part of such registration), if and to the extent
requested by the Company in the case of a non-underwritten public offering or if
and to the extent requested by the managing underwriter in the case of an
underwritten public offering.
-5-
<PAGE>
EXHIBIT 10.3
CONTEXT INTEGRATION, INC.
1997 STOCK PLAN
(as amended February 17, 2000)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Context Integration, Inc., a Delaware corporation.
-------
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services to such entity.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
------
-2-
<PAGE>
(r) "Option Agreement" means a written or electronic agreement between
----------------
the Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of
the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 1997 Stock Plan.
----
(x) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(y) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
-------------
of 1934, as amended.
(z) "Service Provider" means an Employee, Director or Consultant.
----------------
(aa) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(bb) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(cc) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to options
and sold under the Plan is 4,833,767 Shares plus any Shares covered by grants
under the 1993 Stock Option Plan that are not issued to participants. The
Shares may be authorized but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the
-3-
<PAGE>
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated). However, Shares
that have actually been issued under the Plan, upon exercise of either an Option
or Stock Purchase Right, shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if Shares of
Restricted Stock are repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Administrator. The Plan shall be administered by the Board or a
-------------
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan
---------------------------
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each such
award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
-4-
<PAGE>
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by Optionees to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 14 of the Plan.
-5-
<PAGE>
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of grant
of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5)
-6-
<PAGE>
consideration received by the Company under a cashless exercise program
implemented by the Company in connection with the Plan, or (6) any combination
of the foregoing methods of payment. In making its determination as to the type
of consideration to accept, the Administrator shall consider if acceptance of
such consideration may be reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable according to the terms hereof at such times and
under such conditions as determined by the Administrator and set forth in the
Option Agreement. Except in the case of Options granted to Officers, Directors
and Consultants, Options shall become exercisable at a rate of no less than 20%
per year over five (5) years from the date the Options are granted. An Option
may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). In the absence of a specified time in
the Option Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified by
the
-7-
<PAGE>
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
(of at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified
time in the Option Agreement, the Option shall remain exercisable for twelve
(12) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (of at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) by the Optionee's
estate or by a person who acquires the right to exercise the Option by bequest
or inheritance. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. The Options
--------------------------------------------------------
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. The
-8-
<PAGE>
terms of the offer shall comply in all respects with Section 260.140.42 of Title
10 of the California Code of Regulations. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five (5) years from the date of
purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
-9-
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
would not otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an
Option or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
13. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Service
-10-
<PAGE>
Provider to whom an Option or Stock Purchase Right is so granted within a
reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or terminate the Plan.
(b) Stockholder Approval. The Board shall obtain stockholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-11-
<PAGE>
18. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
-12-
<PAGE>
CONTEXT INTEGRATION, INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
20. Grant of Option. The Plan Administrator of the Company has granted you
---------------
(the "Optionee"), an option (the "Option") to purchase the number of Shares set
forth in the Notice of Grant of Stock Options (the "Notice of Grant"), at the
exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan and the Notice of
Grant, which are incorporated herein by reference, and this Option Agreement.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code. Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
21. Exercise of Option.
------------------
(a) Right to Exercise. This Option shall be exercisable during its
-----------------
term in accordance with the vesting schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
22. Termination Period. This Option shall be exercisable for three months
------------------
after Optionee ceases to be a Service Provider. Upon Optionee's death or
Disability, this Option may be exercised for one year after Optionee ceases to
be a Service Provider. In no event may Optionee exercise this Option after the
expiration date as provided in the Notice of Grant.
-13-
<PAGE>
23. Optionee's Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
B.
24. Lock-Up Period. Optionee agrees that, if so requested by the Company
--------------
or any representative of the underwriters (the "Managing Underwriter") in
connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
25. Method of Payment. Payment of the aggregate Exercise Price shall be by
-----------------
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
(c) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
26. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
27. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
-14-
<PAGE>
28. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
29. Tax Consequences. Set forth below is a brief summary as of the date of
----------------
this Option of some of the federal tax consequences of exercise of this Option
and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A
TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of ISO. If this Option qualifies as an ISO, there will be
---------------
no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(b) Exercise of Nonstatutory Stock Option. There may be a regular
-------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is
an Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(c) Disposition of Shares. In the case of an NSO, if Shares are held
---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and of at least two years after the Date of Grant, any
gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held.
(d) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
-15-
<PAGE>
30 Entire Agreement; Governing Law. The Plan and the Notice of Grant are
-------------------------------
incorporated herein by reference. The Plan, this Option Agreement and the
Notice of Grant constitute the entire agreement of the parties with respect to
the subject matter hereof and supersede in their entirety all prior undertakings
and agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee. This agreement is
governed by the internal substantive laws but not the choice of law rules of
California.
31 No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE SET FORTH IN THE
NOTICE OF GRANT IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS
AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET
FORTH IN THE NOTICE OF GRANT DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF
CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY
PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR
THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER
AT ANY TIME, WITH OR WITHOUT CAUSE.
32 Decisions of Administrator; Change of Address. Optionee agrees to
---------------------------------------------
accept as binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated in the Notice of Grant.
-16-
<PAGE>
EXHIBIT A
---------
1997 STOCK PLAN
EXERCISE NOTICE
Context Integration, Inc.
One Van de Graaff Place, Suite 104
Burlington, MA 01803
Attention: [Secretary]
1 Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Context Integration, Inc.
(the "Company") under and pursuant to the 1997 Stock Plan (the "Plan") and the
Stock Option Agreement dated ________, 19______ (the "Option Agreement").
2 Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Agreement.
3 Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan, the Notice of Grant of Stock Options
(the "Notice of Grant") and the Option Agreement and agrees to abide by and be
bound by their terms and conditions.
4 Rights as Stockholder. Until the issuance of the Shares (as evidenced
---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5 Company's Right of First Refusal. Before any Shares held by Optionee or
--------------------------------
any transferee (either being sometimes referred to herein as the "Holder") may
be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the
name of each proposed purchaser or other transferee
-1-
<PAGE>
("Proposed Transferee"); (iii) the number of Shares to be transferred to each
Proposed Transferee; and (iv) the bona fide cash price or other consideration
for which the Holder proposes to transfer the Shares (the "Offered Price"), and
the Holder shall offer the Shares at the Offered Price to the Company or its
assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty (30)
----------------------------------
days after receipt of the Notice, the Company and/or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
-2-
<PAGE>
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares upon the first sale of Common Stock of the
Company to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
6 Tax Consultation. Optionee understands that Optionee may suffer adverse
----------------
tax consequences as a result of Optionee's purchase or disposition of the
Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7 Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER
OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE
ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE
OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER
RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF
THESE SHARES.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
-3-
<PAGE>
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
8 Successors and Assigns. The Company may assign any of its rights under
----------------------
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
9 Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
10 Governing Law; Severability. This Agreement is governed by the
---------------------------
internal substantive laws but not the choice of law rules, of California.
-4-
<PAGE>
11 Entire Agreement. The Plan, Notice of Grant and Option Agreement are
----------------
incorporated herein by reference. This Agreement, the Plan, the Notice of
Grant, the Option Agreement and the Investment Representation Statement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.
Submitted by: Accepted by:
OPTIONEE: CONTEXT INTEGRATION, INC.
____________________________ ___________________________________________
Signature By
____________________________ ___________________________________________
Print Name Its
Address: Address:
- ------- -------
____________________________ One Van de Graaff Place, Suite 104
____________________________ Burlington, MA 01803
_____________________________________
Date Received
-5-
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: CONTEXT INTEGRATION, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of
California and any other legend required under applicable state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to
-1-
<PAGE>
the satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions specified by Rule 144, including: (1) the resale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being
sold during any three month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the
time of grant of the Option, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than one year after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than two years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that
any such other registration exemption will be available in such event.
Signature of Optionee:
_____________________________________
Date:_________________________, 19___
-2-
<PAGE>
Exhibit 10.4
1999 STOCK OPTION PLAN
OF
UNDERLINE, INC.
1. PURPOSES OF THE PLAN. This stock option plan (the "Plan") is
designed to provide an incentive to key employees (including directors and
officers who are key employees) and to consultants and directors who are not
employees of Underline, Inc., a New York corporation (the "Company"), and its
present and future Subsidiaries (as defined in Section 19), and to offer an
additional inducement in obtaining the services of such persons. The Plan
provides for the grant of "incentive stock options" ("ISOs") within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and nonqualified stock options which do not qualify as ISOs ("NQSOs"), but the
Company makes no representation or warranty, express or implied, as to the
qualification of any option as an "incentive stock option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section
12, the aggregate number of shares of common stock, $.01 par value per share, of
the Company ("Common Stock") for which options may be granted under the Plan
shall not exceed 150,000. Such shares of Common Stock may, in the discretion of
the Board of Directors of the Company (the "Board of Directors"), consist either
in whole or in part of authorized but unissued shares of Common Stock or shares
of Common Stock held in the treasury of the Company. Subject to the provisions
of Section 13, any shares of Common Stock subject to an option which for any
reason expires, is canceled or is terminated unexercised or which ceases for any
reason to be exercisable shall again become available for the granting of
options under the Plan. The Company shall at all times during the term of the
Plan reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Board of Directors or by a committee of the Board of Directors consisting of not
less than two directors, each of whom shall be a "non-employee director" within
the meaning of Rule 16b-3 (together with any successor rule or regulation "Rule
16b-3") promulgated under the Securities Exchange Act of 1934 (the Board of
Directors or such committee, as applicable, is hereafter referred to as the
"Plan Administrator"). A majority of the members of the Plan Administrator shall
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present, and any acts approved in writing by all
members without a meeting, shall be the acts of the Plan Administrator. In the
case of Non-Employee Director Options, the Plan Administrator shall be the Board
of Directors and all references to the Plan Administrator shall be deemed to
refer to the Board of Directors.
<PAGE>
Subject to the express provisions of the Plan, the Plan Administrator
shall have the authority, in its sole discretion, with respect to Employee
Options and Consultant Options (as defined in Section 19): to determine the key
employees who shall be granted Employee Options and the consultants and advisors
who shall be granted Consultant Options; the times when options shall be
granted; whether an Employee Option shall be an ISO or a NQSO; the number of
shares of Common Stock to be subject to each option; the term of each option;
the date each option shall become exercisable; whether an option shall be
exercisable in whole, in part or in installments and, if in installments, the
number of shares of Common Stock to be subject to each installment, whether the
installments shall be cumulative, the date each installment shall become
exercisable and the term of each installment; whether to accelerate the date of
exercise of any option or installment; whether shares of Common Stock may be
issued upon the exercise of an option as partly paid and, if so, the dates when
future installments of the exercise price shall become due and the amounts of
such installments; the fair market value of a share of Common Stock; the
exercise price of each option; the form of payment of the exercise price;
whether to restrict the sale or other disposition of the shares of Common Stock
acquired upon the exercise of an option and, if so, whether to waive any such
restriction; whether to subject the exercise of all or any portion of an option
to the fulfillment of contingencies as specified in the contract referred to in
Section 11 (the "Contract"), including without limitation, contingencies
relating to entering into a covenant not to compete with the Company, any of its
Subsidiaries or a Parent, to financial objectives for the Company, any of its
Subsidiaries or a Parent, a division of any of the foregoing, a product line or
other category, and/or the period of continued employment of the optionee with
the Company, any of its Subsidiaries or a Parent, and to determine whether such
contingencies have been met; whether an optionee is Disabled (as defined in
Section 9); and with respect to Employee Options and Consultant Options, the
amount, if any, necessary to satisfy the Company's obligation to withhold taxes
or other amounts; the fair market value of a share of Common Stock; to construe
the respective Contracts and the Plan; with the consent of the optionee, to
cancel or modify an option, provided, that the modified provision is permitted
--------
to be included in an option granted under the Plan on the date of the
modification, and further, provided, that in the case of a modification (within
------- --------
the meaning of Section 424(h) of the Code) of an ISO, such option as modified
would be permitted to be granted on the date of such modification under the
terms of the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; and to make all other determinations necessary or
advisable for administering the Plan. Any controversy or claim arising out of or
relating to the Plan, any option granted under the Plan or any Contract shall be
determined unilaterally by the Plan Administrator in its sole discretion. The
determinations of the Plan Administrator on the matters referred to in this
Section 3 shall be conclusive and binding on the parties. The Board of Directors
shall have the authority described above with respect to the granting of Non-
Employee Director Options.
No member or former member of the Plan Administrator shall be liable
for any action, failure to act or determination made in good faith with respect
to the Plan or any option hereunder.
-2-
<PAGE>
4. ELIGIBILITY; GRANTS. The Plan Administrator may from time to
time, in its sole discretion, consistent with the purposes of the Plan, grant
Employee Options to key employees (including officers and directors who are key
employees) of, and Consultant Options to consultants to, the Company or any of
its Subsidiaries. The Board of Directors may grant Non-Employee Director Options
to any Non-Employee Director. Such options granted shall cover such number of
shares of Common Stock as the Plan Administrator may determine, in its sole
discretion; provided, however, that the maximum number of shares subject to
-------- -------
Employee Options that may be granted to any individual during any calendar year
under the Plan (the "162(m) Maximum") shall not exceed 100,000 shares; and
further provided, that the aggregate market value (determined at the time the
- ------- --------
option is granted in accordance with Section 5) of the shares of Common Stock
for which any eligible employee may be granted ISOs under the Plan or any other
plan of the Company, or of a Parent or a Subsidiary of the Company, which are
exercisable for the first time by such optionee during any calendar year shall
not exceed $ 100,000. Such limitation shall be applied by taking ISOs into
account in the order in which they were granted. Any option (or the portion
thereof) granted in excess of such amount shall be treated as a NQSO.
5. EXERCISE PRICE. The exercise price of the shares of Common Stock
under each Employee Option and Consultant Option shall be determined by the Plan
Administrator in its sole discretion; provided, however that the exercise
-------- -------
price of an ISO shall not be less than the fair market value of the Common Stock
subject to such option on the date of grant; and further provided, that if, at
------- --------
the time an ISO is granted, the optionee owns (or is deemed to own under Section
424(d) of the Code) stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, of any of its Subsidiaries or of a
Parent, the exercise price of such ISO shall not be less than 110% of the fair
market value of the Common Stock subject to such ISO on the date of grant. The
exercise price of the shares of Common Stock under each Non-Employee Director
Option shall be equal to the fair market value of the Common Stock subject to
such option on the date of grant.
The fair market value of a share of Common Stock on any day shall be
(a) if the Common Stock is then publicly traded, the price at which the last
purchase and sale transaction was consummated on the last trading day prior to
the day of determination or, if no purchase and sale transaction was consummated
on that day, the price at which the last such transaction was consummated prior
to the day of determination; and provided further that if the Common Stock is
traded on more than one exchange or market on the last such day, then the price
to be used shall be the price of the last purchase and sale transaction on the
principal exchange or market on which the Common Stock is listed for trading,
(b) if the Common Stock is not publicly traded, the fair market value of the
Common Stock shall be determined by the Plan Administrator in good faith by any
method not inconsistent with applicable regulations adopted by the Treasury
Department relating to stock options.
-3-
<PAGE>
6. TERM. The term of each Employee Option and Consultant Option
granted pursuant to the Plan shall be such term as is established by the Plan
Administrator, in its sole discretion; provided, however, that the term of each
-------- -------
ISO granted pursuant to the Plan shall be for a period not exceeding 10 years
from the date of grant thereof; and further, provided, that if, at the time an
------- --------
ISO is granted, the optionee owns (or is deemed to own under Section 424(d) of
the Code) stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company, of any of its Subsidiaries or of a Parent,
the term of the ISO shall be for a period not exceeding five years from the date
of grant. Employee Options and Consultant Options shall be subject to earlier
termination as hereinafter provided. Subject to earlier termination as
hereinafter provided, each Non-Employee Director Option shall be exercisable for
a term of ten years commencing on the date of grant.
7. EXERCISE. An option (or any part or installment thereof), to the
extent then exercisable, shall be exercised by giving written notice to the
Company at its principal office stating which option is being exercised,
specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price
therefor (or the amount due on exercise if the Contract with respect to an
Employee Option permits installment payments) (a) in cash or by certified check
or (b) in the case of an Employee Option or a Consultant Option, if the
applicable Contract permits, with previously acquired shares of Common Stock
having an aggregate fair market value on the date of exercise (determined in
accordance with Section 5) equal to the aggregate exercise price of all options
being exercised, or with any combination of cash, certified check or shares of
Common Stock.
The Plan Administrator may, in its sole discretion, permit payment of
the exercise price of an option by delivery by the optionee of a properly
executed notice, together with a copy of his irrevocable instructions to a
broker acceptable to the Plan Administrator to deliver promptly to the Company
the amount of sale or loan proceeds sufficient to pay such exercise price. In
connection therewith, the Company may enter into agreements for coordinated
procedures with one or more brokerage firms.
A person entitled to receive Common Stock upon the exercise of an
option shall not have the rights of a stockholder with respect to such shares of
Common Stock until the date of issuance of a stock certificate to him for such
shares; provided, however, that until such stock certificate is issued, any
-------- -------
optionee using previously acquired shares-of Common Stock in payment of an
option exercise price shall continue to have the rights of a stockholder with
respect to such previously acquired shares.
In no case may a fraction of a share of Common Stock be purchased or
issued under the Plan.
8. TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly
provided in the applicable Contract, any holder of an Employee Option or
Consultant
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<PAGE>
Option whose relationship with the Company, its Parent and Subsidiaries as an
employee or a consultant has terminated for any reason (other than in the case
of an individual optionee his the death or Disability) may exercise such option,
to the extent exercisable on the date of such termination, at any time within
three months after the date of termination, but not thereafter and in no event
after the date the option would otherwise have expired.
For the purposes of the Plan, an employment relationship shall be
deemed to exist between an individual and a corporation if, at the time of the
determination, the individual was an employee of such corporation, or the parent
or any subsidiary of such corporation, for purposes of Section 422(a) of the
Code. As a result, an individual on military, sick leave or other bona fide
leave of absence shall continue to be considered an employee for purposes of the
Plan during such leave if the period of the leave does not exceed 90 days, or,
if longer, so long as the individual's right to reemployment with the Company
(or a related corporation) is guaranteed either by statute or by contract. If
the period of leave exceeds 90 days and the individual's right to reemployment
is not guaranteed by statute or by contract, the employment relationship shall
be deemed to have terminated on the 91 st day of such leave.
Except as may otherwise be expressly provided in the applicable
Contract, Employee Options and Consultant Options granted under the Plan shall
not be affected by any change in the status of the optionee so long as the
optionee continues to be an employee of, or a consultant or advisor to, the
Company, or any of the Subsidiaries or a Parent (regardless of having changed
from one to the other or having been transferred from one corporation to
another).
Except as provided below, a Non-Employee Director Option may be
exercised at any time during its ten year term. The Non-Employee Director Option
shall not be affected by the optionee ceasing to be a director of the Company or
becoming an employee of, or consultant to, the Company, any of its Subsidiaries
or a Parent.
Nothing in the Plan or in any option granted under the Plan shall
confer on any optionee any right to continue in the employ of, or as a
consultant or advisor to, the Company, any of its Subsidiaries or a Parent, or
as a director of the Company, or interfere in any way with any right of the
Company, any of its Subsidiaries or a Parent to terminate the optionee's
relationship at any time for any reason whatsoever without liability to the
Company, any of its Subsidiaries or a Parent.
9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be
expressly provided in the applicable Contract, if an individual optionee dies
(a) while he is an employee of, or consultant to, the Company, any of its
Subsidiaries or a Parent, (b) within three months after the termination of such
relationship or (c) within one year following the termination of such
relationship by reason of his Disability, his Employee Option or Consultant
Option may be exercised, to the extent exercisable on the date of his death, by
his Legal
-5-
<PAGE>
Representative (as defined in Section 19) at any time within one year after
death, but not thereafter and in no event after the date the option would
otherwise have expired.
Except as may otherwise be expressly provided in the applicable
Contract, any individual optionee whose relationship as an employee of, or
consultant to, the Company, its Parent and Subsidiaries has terminated by reason
of such optionee's Disability may exercise his Employee Option or Consultant
Option, to the extent exercisable upon the effective date of such termination,
at any time within one year after such date, but not thereafter and in no event
after the date the option would otherwise have expired.
The term of a Non-Employee Director Option shall not be affected by
the death or Disability of the optionee. If an optionee holding a Non-Employee
Director Option dies during the term of such option, the option may be exercised
at any time during its term by his Legal Representative.
10. COMPLIANCE WITH SECURITIES LAWS. The Plan Administrator may
require, in its sole discretion, as a condition to the exercise of any option
that either (a) a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the shares of Common Stock to be
issued upon such exercise shall be effective and current at the time of
exercise, or (b) there is an exemption from registration under the Securities
Act for the issuance of the shares of Common Stock upon such exercise. Nothing
herein shall be construed as requiring the Company to register shares subject to
any option under the Securities Act or to keep any Registration Statement
effective or current.
The Plan Administrator may require, in its sole discretion, as a
condition to the exercise of any option that the optionee execute and deliver to
the Company his representations and warranties, in form, substance and scope
satisfactory to the Plan Administrator, which the Plan Administrator determines
are necessary or convenient to facilitate the perfection of an exemption from
the registration requirements of the Securities Act, applicable state securities
laws or other legal requirement, including without limitation that (a) the
shares of Common Stock to be issued upon the exercise of the option are being
acquired by the optionee for his own account, for investment only and not with a
view to the resale or distribution thereof, and (b) any subsequent resale or
distribution of shares of Common Stock by such optionee will be made only
pursuant to (i) a Registration Statement under the Securities Act which is
effective and current with respect to the shares of Common Stock being sold, or
(ii) a specific exemption from the registration requirements of the Securities
Act, but in claiming such exemption, the optionee shall prior to any offer of
sale or sale of such shares of Common Stock provide the Company with a favorable
written opinion of counsel satisfactory to the Company, in form, substance and
scope satisfactory to the Company, as to the applicability of such exemption to
the proposed sale or distribution.
In addition, if at any time the Plan Administrator shall determine, in
its sole discretion, that the listing or qualification of the shares of Common
Stock subject to such option
-6-
<PAGE>
on any securities exchange, Nasdaq or under any applicable law, or the consent
or approval of any governmental regulatory body, is necessary or desirable as a
condition to, or in connection with, the granting of an option or the issue of
shares of Common Stock thereunder, such option may not be exercised in whole or
in part unless such listing, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Plan
Administrator.
11. STOCK OPTION CONTRACTS. Each option shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Plan Administrator.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any
other provision of the Plan, in the event of a stock dividend, split-up,
combination, reclassification, recapitalization, merger (whether or not the
Company is the surviving corporation), consolidation or exchange of shares or
similar transaction that results in a change in the shares of Common Stock
outstanding immediately prior to such event (any of the foregoing, an
"Adjustment Event"), then the aggregate number and kind of securities subject to
the Plan, the aggregate number and kind. of securities subject to each
outstanding option and the exercise price thereof, the number and kind of
securities subject to future options and the 162(m) Maximum shall be
automatically adjusted so that the optionee with respect to such option subject
to this Plan shall be entitled to purchase (subject to the vesting provisions of
any applicable option contract entered into between the Company and this
optionee, provided that to the extent that such vesting is dependent directly or
indirectly upon continued employment with the Company, continued employment with
any successor to the Company shall satisfy such employment requirement) the
number and kind of securities that the optionee would have owned if the optionee
had owned the full number (regardless of vesting limitations) of shares of
Common Stock subject to the option immediately prior to such Adjustment Event,
unless the Board of Directors, in their reasonable discretion, determines that
other adjustments are appropriate to give economic effect to the Adjustment
Event, which determination of the Board of Directors shall be conclusive and
binding on all parties.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by
the Board of Directors and approved by the Company's stockholders on November
10, 1999. No option may be granted under the Plan after October 31, 2009. The
Board of Directors, without further approval of the Company's stockholders, may
at any time suspend or terminate the Plan, in whole or in part, or amend it from
time to time in such respects as it may deem advisable, including, without
limitation, in order that ISOs granted hereunder meet the requirements for
"incentive stock options" under the Code, to comply with the provisions of Rule
16b-3, Section 162(m) of the Code, or any change in applicable law, regulations,
rulings or interpretations of administrative agencies; provided, however, that
-------- -------
no amendment shall be effective without the requisite prior or subsequent
stockholder approval which would (a) except as contemplated in Section 12,
increase the maximum number of shares of Common Stock for which options may be
-7-
<PAGE>
granted under the Plan or the 162(m) Maximum or (b) materially increase the
benefits accruing to participants under the Plan. No termination, suspension or
amendment of the Plan shall, without the consent of the holder of an existing
and outstanding option affected thereby, adversely affect his rights under such
option. The power of the Plan Administrator to construe and administer any
options granted under the Plan prior to the termination or suspension of the
Plan nevertheless shall continue after such termination or during such
suspension.
14. NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan
shall be transferable otherwise than by will or the laws of descent and
distribution, and options may be exercised, during the lifetime of the optionee,
only by the optionee or his Legal Representatives. Except to the extent provided
above, options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment or similar process, and any such attempted
assignment, transfer, pledge, hypothecation or disposition shall be null and
void ab initio and of no force or effect. Anything to the contrary
-- ------
notwithstanding, the optionee cannot exercise any option if to do so would
result in the termination of the Company's election to be taxed as an
"S-corporation."
15. WITHHOLDING TAXES. The Company may withhold (a) cash, (b) subject
to any limitations under Rule 16b-3, shares of Common Stock to be issued with
respect thereto having an aggregate fair market value on the exercise date
(determined in accordance with Section 5), or (c) any combination thereof, in an
amount equal to the amount which the Plan Administrator determines is necessary
to satisfy the Company's obligation to withhold Federal, state and local income
taxes or other amounts incurred by reason of the grant or exercise of an option,
its disposition, or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the holder to pay to the Company such
amount, in cash, promptly upon demand. The Company shall not be required to
issue any shares of Common Stock pursuant to any such option until all required
payments have been made.
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend
or legends upon the certificates for shares of Common Stock issued upon exercise
of an option under the Plan and may issue such "stop transfer" instructions to
its transfer agent in respect of such shares as it determines, in its
discretion, to be necessary or appropriate to (a) prevent a violation of, or to
perfect an exemption from, the registration requirements of the Securities Act
and any applicable state securities laws, (b) implement the provisions of the
Plan or any agreement between the Company and the optionee with respect to such
shares of Common Stock, or (c) permit the Company to determine the occurrence of
a "disqualifying disposition," as described in Section 421(b) of the Code, of
the shares of Common Stock issued or transferred upon the exercise of an ISO
granted under the Plan.
-8-
<PAGE>
The Company shall pay all issuance taxes with respect to the issuance
of shares of Common Stock upon the exercise of an option granted under the Plan,
as well as all fees and expenses incurred by the Company in connection with such
issuance.
17. USE OF PROCEEDS. The cash proceeds from the sale of shares of
Common Stock pursuant to the exercise of options under the Plan shall be added
to the general funds of the Company and used for such corporate purposes as the
Board of Directors may determine.
18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT
CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board
of Directors may, without further approval by the stockholders, substitute new
options for prior options of a Constituent Corporation (as defined in Section
19) or assume the prior options of such Constituent Corporation.
19. DEFINITIONS. For purposes of the Plan, the following terms shall
be defined as set forth below:
(a) Constituent Corporation. The term "Constituent Corporation"
shall mean any corporation which engages with the Company, any of its
Subsidiaries or a Parent in a transaction to which Section 424(a) of the Code
applies (or would apply if the option assumed or substituted were an ISO), or
any Parent or any Subsidiary of such corporation.
(b) Consultant Option. The term "Consultant Option" shall mean a
NQSO granted pursuant to the Plan to a person who, at the time of grant, is a
consultant to the Company or a Subsidiary of the Company, and at such time is
neither a common law employee of the Company or any of its Subsidiaries nor a
director of the Company.
(c) Disability. The term "Disability" shall mean a permanent
and total disability within the meaning of Section 22(e)(3) of the Code.
(d) Employee Option. The term "Employee Option" shall mean an
option granted pursuant to the Plan to an individual who, at the time of grant,
is a key employee of the Company or any of its Subsidiaries.
(e) Legal Representative. The term "Legal Representative" shall
mean the executor, administrator or other person who at the time is entitled by
law to exercise the rights of a deceased or incapacitated optionee with respect
to an option granted under the Plan.
(f) Non-Employee Director. The term "Non-Employee Director"
shall mean a person who is a director of the Company, but is not a common law
employee of the Company, any of its Subsidiaries or a Parent.
-9-
<PAGE>
(g) Non-Employee Director Option. The term "Non-Employee
Director Option" shall mean a NQSO granted pursuant to the Plan to a person who,
at the time of the grant, is a Non-Employee Director.
(h) Parent. The term "Parent" shall have the same definition as
"parent corporation" in Section 424(e) of the Code.
(i) Subsidiary. The term "Subsidiary" shall have the same
definition as "subsidiary corporation" in Section 424(f) of the Code.
20. GOVERNING LAW; CONSTRUCTION. The Plan, such options as may be
granted hereunder and all related matters shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to conflict
of law provisions.
Neither the Plan nor any Contract shall be construed or interpreted
with any presumption against the Company by reason of the Company causing the
Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
21. PARTIAL INVALIDITY. The invalidity, illegality or
unenforceability of any provision in the Plan or any Contract shall not affect
the validity, legality or enforceability of any other provision, all of which
shall be valid, legal and enforceable to the fullest extent permitted by
applicable law.
-10-
<PAGE>
UNDERLINE, INC.
STOCK OPTION PLAN
STOCK OPTION CONTRACT
Dated as of December 1, 1999
----------------------------
THIS STOCK OPTION CONTRACT is between Underline, Inc., a New York
corporation (the "Company"), and (the "Optionee").
------- --------
1. Grant. The Company, in accordance with the allotment made by the
-----
Company's Board of Directors or (if applicable) committee of the Company's Board
of Directors (as applicable, the "Plan Administrator") and subject to the terms
and conditions of the 1999 Stock Option Plan of the Company (the "Plan"), hereby
----
grants to the Optionee an option to purchase an aggregate of shares (the
"Shares") of the common stock, $.01 par value, of the Company (the "Common
------
Stock") at an exercise price of $4.50 per share (the "Exercise Price").
- ----- --------------
2. Term; Vesting; Exercise. a) The term of this option shall be 10
-----------------------
years from the date hereof, subject to earlier termination as provided in the
Plan. This option shall vest and become exercisable as to 25% of the Shares on
December 1, 2000 (the "Vesting Date"), as to an additional 25% of the Shares
------------
upon the first anniversary of the Vesting Date, as to an additional 25% of the
Shares upon the second anniversary of the Vesting Date, and as to the remaining
25% of the Shares upon the third anniversary of the Vesting Date. The right to
purchase Shares of Common Stock under this option shall be cumulative, so that
if the full number of shares purchasable in a period shall not be purchased, the
balance may be purchased at any time or from time to time thereafter, but not
after the expiration of the option. This option shall be deemed to be a stock
option only as to the first $100,000 of shares with respect to which this option
is exercised in any year.
(b) Notwithstanding the foregoing, upon the approval by the stockholders
of the Company of (i) the sale of all or substantially all of the assets or
equity of the Company or (ii) a plan of complete liquidation of the Company or
plan of merger or consolidation of the Company, in either case pursuant to which
the stockholders of the Company immediately prior to the merger will own, as a
result of their ownership of such shares, less than 50% of the voting power of
the Company (determined based on the right to vote for directors of the Company)
immediately after the consummation of such event (a "Trigger Event"), the
-------------
successor entity or a parent or subsidiary of the successor entity shall agree
to either:
(x) grant to the Optionee options to purchase a number of shares of such
successor entity or a parent or subsidiary of such successor entity,
<PAGE>
at an exercise price and having other terms (including the terms
relating to the vesting thereof) and conditions so that the value of
that option shall be as nearly equivalent as practicable to this
option.; or
(y) to assume this option.
In the event that the successor entity or a parent or subsidiary of
the successor entity refuses to substitute or assume this option, then the
vesting of the option granted hereunder shall be accelerated such that all
unvested options shall become exercisable for a period of fifteen (15) days
prior to the closing of the transaction.
(c) In the event that the Optionee's relationship with the Company, its
Parent and Subsidiaries as an employee or a consultant is terminated (or is
deemed terminated in accordance with the provisions of the Plan) for any reason
(other than in the case of the Optionee's death or Disability (as defined in the
Plan)), the Optionee may exercise this option, to the extent exercisable on the
date of such termination, at any time within three months after the date of
termination, but not thereafter and in no event after the date this option would
otherwise have expired.
Except as may otherwise be expressly provided herein, this option
shall not be affected by any change in the status of the Optionee so long as the
Optionee continues to be an employee of, or a consultant or advisor to, the
Company, or any of the Subsidiaries or a Parent (regardless of having changed
from one to the other or having been transferred from one corporation to
another).
(d) If the Optionee dies (a) while he is an employee of, or consultant
to, the Company, any of its Subsidiaries or a Parent, (b) within three months
after the termination of such relationship or (c) within one year following the
termination of such relationship by reason of his Disability, this option may be
exercised, to the extent exercisable on the date of his death, by his Legal
Representative (as defined in the Plan) at any time within one year after death,
but not thereafter and in no event after the date the option would otherwise
have expired.
(e) If the Optionee's relationship as an employee of, or consultant to,
the Company, its Parent and Subsidiaries has terminated by reason of the
Optionee's Disability, the Optionee may exercise this option, to the extent
exercisable upon the effective date of such termination, at any time within one
year after such date, but not thereafter and in no event after the date the
option would otherwise have expired.
3. Exercise. This option shall be exercised by giving written notice
--------
to the Company at its then principal office, presently 678 Broadway, 4th Floor,
New York, New
-2-
<PAGE>
York 10012, Attn: D.J. Edgerton, Chief Executive Officer, stating that the
Optionee is exercising the option hereunder specifying the number of shares
being purchased and accompanied by payment in full of the aggregate purchase
price therefor (a) (i) in cash or by personal check, (ii) with previously
acquired shares of Common Stock which have been held by the Optionee for at
least six months or (iii) a combination of the foregoing or (b) in the manner
provided by a "cashless exercise" program adopted by the Company. In addition,
the Optionee shall, if requested by the Company, make such reasonable
representations to the Company as the Company may require.
4. Taxes. The Company or its Parent or Subsidiary may withhold cash
-----
and/or shares of Common Stock to be issued to the Optionee in the amount which
the Company determines is necessary to satisfy its obligation to withhold taxes
or other amounts incurred by reason of the grant, exercise or disposition of
this option or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the Optionee to pay the Company such
amount and the Optionee agrees to pay such amount to the Company in cash
promptly upon demand.
5. Notice of Transfers. In the event of any disposition of the
-------------------
shares of Common Stock acquired pursuant to the exercise of this option within
two years from the date hereof or one year from the date of transfer of such
shares to him, the Optionee shall notify the Company thereof in writing within
30 days after such disposition. In addition, the Optionee shall provide the
Company on demand with such information as the Company shall reasonably request
in connection with determining the amount and character of the Optionee's
income, the Company's deduction and its obligation to withhold taxes or other
amounts incurred by reason of such disqualifying disposition, including the
amount thereof.
6. Restriction or Exercise. Notwithstanding the foregoing, this
-----------------------
option shall not be exercisable by the Optionee unless (a) a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act")
--------------
with respect to the shares of Common Stock to be received upon the exercise of
this option shall be effective and current at the time of exercise or (b) there
is an exemption from registration under the Securities Act for the issuance of
the shares of Common Stock upon such exercise. The Optionee hereby represents
and warrants to the Company that, unless such a Registration Statement is
effective and current at the time of exercise of this option, the shares of
Common Stock to be issued upon the exercise of this option will be acquired by
the Optionee for his own account, for investment only and not with a view to the
resale or distribution thereof. Such representations and warranties shall also
be deemed to be made by the Optionee upon each exercise of this option. In any
event, the Optionee shall notify the Company of any proposed resale of the
shares of Common Stock issued to him upon exercise of this option. Any
subsequent resale or distribution of shares of Common Stock by the Optionee
shall be made only pursuant to (x) a Registration Statement under the Securities
Act which is effective and current with respect to the sale of shares of Common
Stock being sold, or (y) a specific exemption from the registration requirements
-3-
<PAGE>
of the Securities Act, but in claiming such exemption, the Optionee shall, prior
to any offer of sale or sale of such shares of Common Stock, provide the Company
(unless waived by the Company) with a favorable written opinion of counsel
satisfactory to the Company, in form, substance and scope satisfactory to the
Company, as to the applicability of such exemption to the proposed sale or
distribution. Nothing herein shall be construed as requiring the Company to
register the shares subject to this option under the Securities Act.
7. Lock-Up Period. The Optionee agrees that, if so requested by
--------------
the Company or any representative of the underwriters (the "Managing
Underwriter") in connection with any registration of the offering of any
securities of the Company under the Securities Act, the Optionee shall not sell
or otherwise transfer any Common Stock or other securities of the Company during
the 180-day period (or such other period as may be requested in writing by the
Managing Underwriter and agreed to in writing by the Company) (the "Market
Standoff Period") following the effective date of a registration statement of
the Company filed under the Securities Act. Such restriction shall apply only
to the first registration statement of the Company to become effective under the
Securities Act that includes securities to be sold on behalf of the Company to
the public in an underwritten public offering under the Securities Act. The
Company may impose stop-transfer instructions with respect to securities subject
to the foregoing restrictions until the end of such Market Standoff Period.
8. Listing of Common Stock Prior to Exercise. Notwithstanding
-----------------------------------------
anything herein to the contrary, if at any time the Plan Administrator shall
determine, in its discretion, that the listing or qualification of the shares of
Common Stock subject to this option on any securities exchange or under any
applicable law, or the consent or approval of any governmental agency or
regulatory body, is necessary or desirable as a condition to, or in connection
with, the granting of an option or the issue of shares of Common Stock
hereunder, this option may not be exercised in whole or in part unless such
listing, qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Plan Administrator.
9. Legends. The Company may affix appropriate legends upon the
-------
certificates for shares of Common Stock issued upon exercise of this option and
may issue such "stop transfer" instructions to its transfer agent in respect of
such shares as it determines, in its discretion, to be necessary or appropriate
to (a) prevent a violation of, or to perfect an exemption from, the registration
requirements of the Securities Act, or (b) implement the provisions of the Plan
or this Contract or any other agreement between the Company and the Optionee
with respect to such shares of Common Stock.
10. Shareholders Agreement. Simultaneously with the grant of this
----------------------
option, the Optionee and the Company have entered into the Shareholder Agreement
in the form annexed hereto as Exhibit A. The Shareholders Agreement, among
other things, restricts
-4-
<PAGE>
the transfer of shares owned by the Optionee and provides the Company with
certain rights to purchase such shares upon any termination of the employment.
11. Stock Option Plan. The Company and the Optionee agree that they
-----------------
will both be subject to and bound by all of the terms and conditions of the
Plan, a copy of which is attached hereto and made a part hereof. Any capitalized
term not defined herein shall have the meaning ascribed to it in the Plan. In
the event of a conflict between the terms of this Contract and the terms of the
Plan, the terms of the Plan shall govern and be controlling for all purposes.
12. Compliance with Law. The Optionee represents and agrees that he
-------------------
will comply with all applicable laws relating to the Plan and the grant and
exercise of this option and the disposition of the shares of Common Stock
acquired upon exercise of the option, including without limitation, federal and
state securities and "blue sky" laws and the rules and regulations promulgated
thereunder.
13. Transferability. This option is not transferable by the Optionee
---------------
otherwise than by will or the laws of descent and distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee or the
Optionee's legal representatives.
14. Miscellaneous.
-------------
a. This Contract shall be binding upon and inure to the benefit of
any successor or assign of the Company and to any heir,
distributee, executor, administrator or legal representative
entitled to the Optionee's rights hereunder.
b. This Contract shall be governed by, and construed and enforced in
accordance with, the laws of the State of Delaware, without regard
to the conflicts of law provisions that would defer to the
substantive laws of another jurisdiction. Neither this Contract
nor the Plan shall not be construed with a presumption against any
party by reason of such party having caused it to be drafted.
c. The invalidity, illegality or unenforceability of any provision
herein shall affect the validity, legality or enforceability of
any other provision, all of which shall be valid, legal and
enforceable to the fullest extent permitted by applicable law.
d. The Optionee agrees that the Company may amend the Plan and the
options granted to the Optionee under the Plan, subject to the
limitations contained in the Plan.
-5-
<PAGE>
e. The Optionee agrees to accept as final, conclusive and binding
all decisions and interpretations of the Plan Administrator upon
any question arising under the Plan or this contract. The
Optionee further agrees to notify the Company promptly in the
event of any change in the Optionee's residence address set forth
below the Optionee's signature at the end of this contract.
f. This Contract, together with the Plan and the Shareholder
Agreement, constitute the entire understanding and agreement
between the parties hereto with respect to the subject matter
hereof and supersedes all prior understandings and agreements
with respect to such subject matter, all of which are merged
herein.
g. This Contract may be executed in counterparts, all of which shall
be deemed an original, but all of which together shall constitute
one and the same agreement.
h. Nothing in the Plan or herein shall confer upon the Optionee any
right to continue in the employ of the Company, any Parent or any
of its Subsidiaries, or interfere in any way with any right of
the Company, any Parent or its Subsidiaries to terminate such
employment at any time for any reason whatsoever without
liability to the Company, any Parent or any of its Subsidiaries.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Contract as of
the day and year first above written.
UNDERLINE, INC.
By:_________________________________
____________________________________
Optionee:
-7-
<PAGE>
EXHIBIT 16.1
PricewaterhouseCoopers [LOGO]
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]
March 3, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We have read the section entitled "Change in Accountants" in the Registration
Statement on Form S-1 of Context Integration, Inc. to be filed with the
Securities and Exchange Commission and are in agreement with the statements
contained therein.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Context Integration, Inc.:
We consent to the use of our report on the financial statements of Context
Integration, Inc. as of December 31, 1998 and 1999, and for each of the years
in the three year period ended December 31, 1999, included herein and to the
references to our firm under the headings "Selected Financial Data" and
"Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 6, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Underline, Inc.:
We consent to the use of our report on the financial statements of Underline,
Inc. as of and for the year ended December 31, 1999, included herein and to
the reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 6, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,697
<SECURITIES> 0
<RECEIVABLES> 9,159
<ALLOWANCES> 669
<INVENTORY> 0
<CURRENT-ASSETS> 19,245
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,690
<CURRENT-LIABILITIES> 7,498
<BONDS> 0
0
8
<COMMON> 10
<OTHER-SE> 14,174
<TOTAL-LIABILITY-AND-EQUITY> 21,690
<SALES> 27,077
<TOTAL-REVENUES> 27,077
<CGS> 0
<TOTAL-COSTS> 33,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 803
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> (6,851)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,851)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,851)
<EPS-BASIC> (.70)
<EPS-DILUTED> (.70)
</TABLE>
