<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ORGANIC, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7379 94-3258989
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code No.) Identification No.)
</TABLE>
510 THIRD STREET
SAN FRANCISCO, CALIFORNIA 94107
(415) 365-5500
(Address and telephone number of principal executive offices and principal place
of business)
------------------------
JONATHAN NELSON
CHIEF EXECUTIVE OFFICER
ORGANIC, INC.
510 THIRD STREET
SAN FRANCISCO, CALIFORNIA 94107
(415) 365-5500
(Name, address, and telephone number of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
BRUCE ALAN MANN, ESQ. KENNETH M. SIEGEL, ESQ.
KRISTIAN E. WIGGERT, ESQ. RICHARD S. ARNOLD, JR., ESQ.
VALERIE A. VILLANUEVA, ESQ. ROBERT E. DAWSON, ESQ.
PAMELA TY, ESQ. EFFIE TOSHAV, ESQ.
MORRISON & FOERSTER LLP WILSON SONSINI GOODRICH & ROSATI, P.C.
425 MARKET STREET 650 PAGE MILL ROAD
SAN FRANCISCO, CALIFORNIA 94105 PALO ALTO, CALIFORNIA 94304
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration 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 number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.0001 par value per share................... $ 75,000,000 $ 20,850.00
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES
IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED NOVEMBER 24, 1999.
[ ] Shares
ORGANIC, INC.
Common Stock
[ORGANIC LOGO]
----------------------
This is an initial public offering of shares of common stock of Organic,
Inc. All of the shares of common stock are being sold by Organic.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $ and $ . Application has been made for
quotation of the common stock on the Nasdaq National Market under the symbol
"OGNC".
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Organic....................... $ $
</TABLE>
To the extent that the underwriters sell more than shares of common
stock, the underwriters have the option to purchase up to an additional
shares from Organic at the initial public offering price, less the underwriting
discount.
----------------------
The underwriters expect to deliver the shares on .
GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
----------------------
Prospectus dated .
<PAGE> 3
INSIDE FRONT COVER:
ORGANIC LOGO
COPY: Connecting Customers to Businesses
INSIDE GATEFOLD:
ORGANIC LOGO
HEADLINE: Connecting Customers to Businesses
SUB HEAD: Integrated Solutions for Online Business Needs
COPY: Organic's customer-centric approach focuses on the integral relationship
between our clients and their customers.
We believe that the demand for our services will grow as companies embrace the
emerging paradigm shift towards customer empowerment.
Understanding that communication between businesses and their customers is
critical, Organic's integrated service offering addresses all of the points of
contact in the customer experience.
We built Organic to lead the trend towards customer-centric solutions by
developing a core suite of integrated services with the expertise and knowledge
to meet the needs of and connect customers to businesses.
THE DIAGRAM
CENTER OF DIAGRAM: Customers (dialog) to Business (dialog)
SECOND AND THIRD TIERS OF DIAGRAM:
(each of the four services shown below are integrated, but responsible for
specific specializations)
SERVICE: Media;
FULFILLS: Awareness, Access
SPECIALIZATIONS WITHIN SERVICE LINE: Strategic Consulting Services, Integrated
Advertising, Media Planning, Media Buying, Research & Analysis, Development
SERVICE: Communications;
FULFILLS: Publicity, Exposure
SPECIALIZATIONS WITHIN SERVICE LINE: Strategic Consulting Services, Public
Relations, Messaging, Launch Services, Analyst Relations, Marketing
SERVICE: iBusiness;
FULFILLS: Business, Product
SPECIALIZATIONS WITHIN SERVICE LINE: Strategic Consulting Services, Creative
Services, Engineering Services, Technology Integration, Research & Analysis,
Development
SERVICE: Logistics;
FULFILLS: Customer Service, Fulfillment
SPECIALIZATIONS WITHIN SERVICE LINE: Strategic Consulting Services, Customer
Service, Fulfillment, Technology Deployment Strategies, Data Management, Supply
Chain Management
CALLOUTS AT BOTTOM OF PAGE SPREAD:
SUBHEAD1: Global Expansion
IMAGE 1: map of Organic office locations
COPY: none
IMAGE 2: photo of Organic employees
SUBHEAD2: Expand Client Engagements
COPY2: It is a priority for every service line to effectively target and
solicit new clients, separately and together. Our business processes and
infrastructure are all focused on optimizing service and growth to support our
clients.
IMAGE 3: photo of Organic employees
SUBHEAD 3: Attaction & Retention
COPY3: Organic views its culture and values as core assets. Each office is
staffed with multi-disciplinary experts who contribute to the successful growth
and integration of our service offerings.
IMAGE 4: photo of Organic employees
SUBHEAD 4: Understanding & Innovating
COPY4: Through research, analysis, and testing, Organic gains a better
understanding of the customer mindset. Our innovative practice, VOICE,
represents the voice of the customer, which is integrated throughout the
development process.
IMAGE 5: photo of Organic employees
SUBHEAD 5: Knowledge Management
COPY5: Our network maximizes the opportunity to solve and innovate quickly.
Knowledge management tools give our teams the ability to effectively
communicate across service lines and innovate through technology.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our consolidated financial
statements before making an investment decision.
OUR BUSINESS
Organic is a leading Internet professional services firm focused on the
customer-to-business market. We fundamentally believe that the Internet has
caused a customer-centric revolution by shifting the balance of power and
control from businesses to customers, and has created the first truly global
marketplace. Our suite of integrated services helps our clients address the
challenges and opportunities these changes present.
We believe the key to our success, and what differentiates us, is our
complete focus on our clients' customers. We view the ultimate customer, whether
a business partner or consumer, as the central and most influential participant
in a commercial relationship. This customer-to-business approach fully
encompasses both the traditional business-to-consumer and business-to-business
markets. We believe that demand for our services will grow as companies seek
customer-focused solutions to manage these relationships. We built Organic by
anticipating customer needs, developing innovative solutions and delivering a
suite of integrated services required to build and operate successful online
businesses. By expanding our business into Asia, Europe and Latin America, we
believe we have established the presence to deliver our suite of services
globally.
We have experienced significant growth in demand for our services, with
revenues increasing from $6.8 million in 1997 to $51.8 million for the nine
months ended September 30, 1999. We believe the rapid growth of the
customer-to-business market, the strength of our integrated service offering,
our premier client base and strong client relationships, our scalable systems
and business processes as well as our collaborative team approach have been the
primary drivers of our success. We have organically grown our business by
focusing on recruiting, training and building our infrastructure, creating one
of the largest independent Internet professional services organizations with
nearly 700 employees in 7 offices worldwide.
Founded in 1993, we have a long and distinguished history as a leader and
innovator in the Internet professional services industry. Since 1994, we have
designed and developed a number of first-in-category Web sites, including AT&T,
Club Med, Volvo and Yahoo!. In addition, we led the development of the Apache
Web server and founded Accrue Software (Nasdaq: ACRU), a developer of
network-based tools for measuring Web site performance. We have performed work
for over 250 clients and have gained significant experience by working with both
leading offline and emerging Internet companies, including Barnes & Noble,
Blockbuster, Boo.com, CDNOW, Chase Manhattan Bank, Compaq, DaimlerChrysler,
Tommy Hilfiger and Washington Mutual.
OUR SERVICE MODEL
We deliver value to our clients and their ultimate customers by addressing
all of the points of contact in the customer experience. Since our inception, we
have sought to provide an integrated solution by expanding our service offering
to meet our clients' evolving needs. This is important to our clients because we
help create their online businesses and maximize the results of those online
businesses over time. Our comprehensive suite of integrated services includes:
- iBusiness: Strategic consulting, creative, engineering and integration
services necessary to design, create, implement and maintain a
successful online business;
- Media and Communications: Marketing and public relations services
necessary to build brands, generate awareness, drive visits and
transactions as well as understand customer behavior through continuous
data and feedback analysis; and
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<PAGE> 5
- Logistics: Customer service and fulfillment consulting and transaction
management services necessary to ensure superior product delivery,
customer satisfaction and loyalty.
We believe that these disciplines are not independent elements, but are
highly dependent on one another and must be fully integrated to create a
comprehensive strategy that encompasses the entire customer experience.
OUR MARKET OPPORTUNITY
Few businesses have the internal capabilities to address the opportunities
and challenges of the Internet. The complexity of conducting business online,
the rapidly changing technological environment, the need to improve
time-to-market and the limited supply of technically proficient internal
personnel creates significant demand for Internet professional services.
According to a 1998 Dataquest survey, 83% of Fortune 1000 companies currently
invest, or plan to invest, in Internet professional services solutions.
Furthermore, International Data Corporation estimates the worldwide market for
Internet professional services will grow from $7.8 billion in 1998 to $78.6
billion in 2003, which represents a compound annual growth rate of more than
58%.
OUR STRATEGY
Our objective is to be the leading Internet professional services firm
focused on the customer-to-business market. To achieve this objective, we plan
to:
- hire and retain the best people;
- leverage our business processes and infrastructure;
- continue our track record of innovation;
- expand our relationships with our existing client base;
- effectively target and solicit new clients; and
- continue our global expansion.
OUR OFFICES
Our headquarters are located at 510 Third Street, San Francisco, California
94107 and our telephone number is (415) 365-5500. Our Web site is
www.organic.com. This reference to our Web site does not constitute
incorporation by reference of the information contained at our site.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Organic................... shares
Common stock to be outstanding after shares
this offering...................................
Use of proceeds................................... To expand our corporate infrastructure, reduce
outstanding debt and for general corporate
purposes, including working capital and capital
expenditures.
Proposed Nasdaq National Market symbol............ "OGNC"
</TABLE>
------------------------
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 1999 and does
not include the following:
- 5,237,644 shares of common stock issuable upon exercise of stock
options outstanding at a weighted average exercise price of $2.17 per
share granted under our 1997 stock option plan and 1,797,651 shares
available for future issuance under our 1997 stock option plan; or
- 3,500,000 shares of common stock reserved for future issuance under our
1999 long-term stock incentive plan.
Please see "Capitalization" for a more complete description regarding the
outstanding shares of our common stock and options to purchase our common stock
and other related matters.
------------------------
Unless otherwise noted, all information in this prospectus assumes that:
- the underwriters will not exercise their option to purchase additional
shares of common stock to cover over-allotments, if any;
- each outstanding share of our preferred stock will convert into one
share of common stock prior to the closing of this offering;
- our outstanding warrant will be exercised;
- we will complete a for 1 split of our common stock
before this offering is completed; and
- the public offering price will be $ per share.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The following table is a summary of our consolidated statement of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The financial results for the nine months ended
September 30, 1998 are unaudited.
<TABLE>
<CAPTION>
JANUARY 31, FOR THE
1995 NINE MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------------------------- -------------------------
1995 1996 1997 1998 1998 1999
-------------- ----------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 1,895 $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781
Operating expenses:
Professional services...................... 530 1,889 4,285 16,801 11,191 29,929
Selling, general and administrative........ 655 2,104 5,473 12,068 7,276 26,018
Stock compensation and other stock-based
charges.................................. 14 53 87 694 291 9,648
Total operating expenses................. 1,199 4,046 9,845 29,563 18,758 65,595
Operating income (loss)...................... 696 248 (3,065) (1,829) 1,986 (13,814)
Net income (loss)............................ $ 412 $ 237 $(1,785) $ (2,766) $ 1,146 $ (13,927)
Net income (loss) per share:(1)
Basic...................................... $ 137,304 $ 78,857 $(2,006) $ (32.43) $ 25.24 $ (34.54)
Diluted.................................... $ 0.02 $ 0.01 $(2,006) $ (32.43) $ 0.05 $ (34.54)
Weighted average common shares
outstanding:(1)
Basic...................................... 3 3 890 85,296 45,420 403,197
Diluted.................................... 21,675,003 21,675,003 890 85,296 21,808,240 403,197
Unaudited pro forma basic and diluted net
loss per share(2).......................... $ (0.13) $ (0.59)
Unaudited pro forma weighted average common
shares outstanding(2)...................... 21,760,296 23,463,012
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of weighted average shares used in
computing per share data.
(2) Unaudited pro forma net loss per share has been computed by dividing net
loss by the pro forma weighted average number of shares outstanding. The pro
forma weighted average number of common shares outstanding includes the pro
forma effects of the automatic conversion on a weighted average basis of our
preferred stock, and the exercise of a warrant for common stock as if such
conversion had occurred on January 1, 1998 for the year ended December 31,
1998 and on January 1, 1999 for the nine months ended September 30, 1999, or
at the date of original issuance, if later.
The following table provides a summary of our consolidated balance sheet as
of September 30, 1999. The pro forma column gives effect to the conversion of
all outstanding preferred stock and the exercise of a warrant for 749,692 shares
of common stock upon the closing of the offering. The pro forma as adjusted
column reflects the receipt of the net proceeds from the sale in this offering
of shares of common stock at an assumed initial public offering
price of $ per share, after deducting the estimated underwriting discounts
and commissions and estimated offering expenses. See "Use of Proceeds" and
"Capitalization".
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,204 $ 3,211
Working capital............................................. 3,108 3,115
Total assets................................................ 58,519 58,526
Long-term obligations, less current portion................. 538 538
Total stockholders' equity.................................. 29,784 29,791
</TABLE>
6
<PAGE> 8
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus,
including our consolidated financial statements and the related notes, before
you purchase any shares of our common stock. Additional risks and uncertainties,
including those generally affecting the market in which we operate or that we
currently deem immaterial may also impair our business.
The information in this prospectus includes forward-looking statements
which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections and elsewhere in this prospectus.
RISKS RELATED TO ORGANIC
OUR SUCCESS DEPENDS ON RECRUITMENT AND RETENTION OF TALENTED PERSONNEL WHO ARE
ESSENTIAL FOR COMPLETING CLIENT PROJECTS
Our business is labor intensive, and our success depends on identifying,
hiring, training and retaining professionals. All of our current employees and
senior managers are employed on an at-will basis. If a significant number of our
current employees, contractors or any of our senior managers leave, we may be
unable to complete or retain existing projects or bid for new projects of
similar scope and revenues.
Even if we retain our current employees and contractors, our management
must continually recruit talented professionals for our business to grow.
Competition for these employees is intense, particularly in the Internet and
high technology industries. As a result, we may be unable to successfully
attract, assimilate or retain qualified personnel. As of September 30, 1999, we
had 681 employees. We believe that we need to hire additional personnel to
support our business. The failure to retain or attract the necessary personnel
would reduce our capacity to handle new client engagements and therefore our
revenue growth, which would seriously harm our business, financial condition and
results of operations.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR RAPID GROWTH, WHICH COULD RESULT IN
OUR BEING UNABLE TO EFFECTIVELY CONTROL OUR COSTS AND IMPLEMENT OUR BUSINESS
STRATEGIES
We have recently expanded our operations both in the U.S. and
internationally, and we believe further expansion will be required to address
the anticipated growth in our client base and market opportunities. Our current
expansion has placed, and any future expansion may continue to place, a
significant strain on our managerial, operational, financial and other
resources.
To manage our growth we intend to continue to implement and improve our
operational, administrative, financial and accounting systems and controls and
to expand, train, retain and manage our employee base. If we are unable to
manage growth effectively or if we experience disruptions during our expansion,
our expenses could increase more quickly than revenues or our revenues might be
reduced as a result of failure to adequately service new client engagements,
either of which would seriously harm our business, financial condition and
results of operations.
OUR REVENUES COULD BE SIGNIFICANTLY REDUCED BY THE LOSS OF A MAJOR CLIENT
We derive a significant portion of our revenues from a limited number of
clients. The loss of any major client, if not replaced, could dramatically
reduce our revenues. For example, for the nine months ended September 30, 1999,
our five largest clients accounted for 41% of our
7
<PAGE> 9
revenues. During this period, DaimlerChrysler accounted for approximately 12% of
our revenues and Blockbuster accounted for approximately 10% of our revenues.
OUR LACK OF LONG-TERM CONTRACTS WITH OUR CLIENTS REDUCES THE PREDICTABILITY OF
OUR REVENUES
We generally do not have long-term contracts with our clients and are
generally retained on an engagement-by-engagement basis. These engagements vary
in size and scope and cause our revenues to be difficult to predict. Our
operating expenses are relatively fixed and cannot be reduced on short notice to
compensate for unanticipated variations in the number or size of engagements in
progress. Because we incur costs based on our expectations of revenue from
future engagements, our failure to predict our revenues accurately may cause the
increase in our expenses to substantially outpace our revenue growth, which
would seriously harm our financial condition and results of operations.
IF WE FAIL TO ACCURATELY PREDICT COSTS RELATED TO OUR FIXED-PRICE CONTRACTS, WE
MAY LOSE MONEY
Many of our contracts are fixed-price, fixed-timeframe contracts, rather
than contracts based on payment for time and materials. Often, we fix the price
or timeframe before we finalize the design specifications. If we miscalculate
the resources or time necessary to complete these projects, to meet client
expectations about the services to be performed or to complete projects within
budget, we could have cost overruns and we could lose money on these projects,
which could seriously harm our operating results. The risk of miscalculations in
pricing is high because we work with complex technologies in compressed
timeframes, and therefore it can be difficult to judge the time and resources
necessary to complete a project.
WE MAY HAVE DIFFICULTY IN MANAGING OUR INTERNATIONAL EXPANSION AND OPERATIONS,
WHICH COULD HARM OUR BUSINESS AND FINANCIAL CONDITION
A key element of our strategy is to expand our business into international
markets. In addition to our U.S. operations, we have operations in Sao Paulo,
Brazil; London, England; and Singapore. Our management may have difficulty in
managing our international operations because of distance, as well as language
and cultural differences. Our management cannot assure you that they will be
able to market and deliver our services successfully in foreign markets.
Other risks related to our international operations include:
- international currency issues, including fluctuations in currency
exchange rates;
- difficulties arising from staffing and managing foreign operations;
- difficulties in using equity incentives for employees;
- restrictions on the import and export of sensitive technologies,
including data security and encryption technologies that we may wish to
use in solutions we develop for clients;
- legal and regulatory requirements of different countries, including
different tax or labor laws;
- success in finding and acquiring suitable strategic acquisition
candidates; and
- potential political or economic instability.
If any of these risks should materialize, our international and U.S.
businesses, financial conditions and results of operations could be harmed.
8
<PAGE> 10
OUR BILLABLE EMPLOYEES MAY BE UNDERUTILIZED IF CLIENTS DO NOT RETAIN OUR
SERVICES, WHICH COULD REDUCE OUR REVENUES AND MARGINS AND DAMAGE OUR POTENTIAL
PROFITABILITY
Many of our current or potential clients that are in the early stages of
development may be unable to continue to retain our services because of
financial constraints. In addition, some of our large clients who utilize our
services for multiple engagements or in stages may choose not to retain our
services for additional stages of a project or may choose to cancel or delay
additionally planned projects. Such cancellations or delays could result from
factors unrelated to our work product or the progress of the project, but could
be related to general business or financial condition of the client. If a client
defers, modifies or cancels an engagement or chooses not to retain our services
for additional phases of a project, we may be unable to rapidly redeploy
billable employees to other engagements, to minimize underutilization of those
employees. This underutilization could reduce our revenues and gross margins and
damage our potential profitability.
For example, if DaimlerChrysler, the sole client of our Detroit, Michigan
office at the present time, chooses not to retain our services, the billable
employees in our Detroit office could be underutilized.
WE ARE LIKELY TO EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS WHICH MAY MAKE THE PRICE OF OUR COMMON STOCK DIFFICULT TO PREDICT
Our quarterly operating results have varied in the past and we expect that
our revenues and operating results will continue to fluctuate significantly from
quarter to quarter due to a variety of factors, many of which are outside of our
control. Some important factors affecting revenues and operating results are:
- changes in our operating expenses as we expand operations;
- our success in obtaining suitable locations for expansion;
- our ability to develop, market and introduce new and significant online
business solutions on a timely basis;
- timing and execution of major client engagements;
- the timing and cost of advertising and related media;
- timing of employee hiring and utilization rates;
- increases in the number of independent contractors we must hire to meet
client needs, which would result in increased costs versus an
equivalent number of employees;
- demand for our Internet professional services;
- client budgetary cycles;
- pricing changes in the industry;
- economic conditions in general and specific to the Internet
professional services market;
- legal or regulatory developments regarding the Internet; and
- other general economic factors.
Our quarterly revenues and operating results are volatile and difficult to
predict. It is likely that in some future quarter or quarters our operating
results will be below the expectations of public market analysts or investors.
In such event, the market price of our common stock may decline significantly.
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<PAGE> 11
THE SEASONALITY OF OUR REVENUES COULD CAUSE OUR QUARTERLY OPERATING RESULTS TO
FALL BELOW THE EXPECTATIONS OF MARKET ANALYSTS AND INVESTORS, WHICH COULD HAVE A
NEGATIVE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK
In general, our clients concentrate their expenditures on our services in
the second and third quarters of the calendar year. We expect this concentration
of expenditures to result in fluctuations in our revenues between these quarters
and the first and fourth quarters of the calendar year. It is also possible that
in the future our revenues will decline from one quarter to the next as a result
of this concentration. If these fluctuations or declines are greater than market
analysts or investors expect, our stock price could decline.
OUR BUSINESS MODEL IS EVOLVING RAPIDLY AND INCLUDES A HISTORY OF LOSSES AND WE
MAY EXPERIENCE LOSSES IN THE FUTURE, WHICH COULD RESULT IN THE MARKET PRICE OF
OUR COMMON STOCK DECLINING
We were founded in November 1993 and we are still rapidly evolving. Because
of this rapid evolution and growth, we have only a limited operating history on
which to base an evaluation of our current business and prospects. Companies in
an early stage of development frequently encounter extra risks, expenses and
difficulties as they grow and evolve. These risks and difficulties apply
particularly to us because the Internet professional services market is also new
and rapidly evolving.
Our future success will depend on our ability to:
- implement our continuously evolving business model;
- manage our rapid growth;
- attract, retain and motivate professionals;
- respond to creative and technological challenges and developments;
- expand our client base and expand our services to current clients; and
- enhance our brand.
Our failure to succeed in one or more of these areas could harm our
business, financial condition and results of operations.
Additionally, we have experienced operating losses as well as net losses
during fiscal 1997 and 1998 and the nine months ended September 30, 1999.
Although we have experienced revenue growth, we may not be able to sustain that
growth or those levels of revenues. You should not expect that our operating
results in the future will be the same as in the past. They could be
significantly worse. In addition, we intend to continue to invest heavily in
development of our infrastructure and recruiting. As a result, we will need to
generate significant revenues to achieve profitability. We cannot assure you
that we will achieve profitability in the future or, if we achieve
profitability, that we will be able to sustain it. If we do not achieve and
maintain profitability, the market price for our common stock may decline,
perhaps substantially.
WE RELY ON THE SERVICES OF OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL, AND
THOSE PERSONS' KNOWLEDGE OF OUR BUSINESS AND TECHNICAL EXPERIENCE WOULD BE
DIFFICULT TO REPLACE
We believe that our success will depend on the continued employment of our
senior management team and certain other key personnel. Any of our officers or
employees can terminate his or her employment relationship at any time.
Currently, our key executives are Jonathan Nelson, our Chief Executive Officer
and Chairman of the Board, and Michael Hudes, our President. The loss of either
of these key employees or our inability to attract or retain other qualified
employees could harm our business, financial condition and results of
operations. While we currently maintain a key person life insurance policy for
Jonathan Nelson, the amount of this insurance may be inadequate to compensate us
for his loss.
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<PAGE> 12
IF WE ARE NOT SUCCESSFUL IN OPENING AND GROWING NEW OFFICES, OUR FINANCIAL
RESULTS MAY SUFFER
An important component of our growth strategy is to open offices in new
geographic locations. Once we select a new location, we typically devote
substantial financial and management resources to properly launch and grow that
office. We cannot assure you that we will select appropriate markets to enter,
open new offices efficiently or manage new offices profitably. Our failure to
accurately assess these issues could negatively affect our business.
IF NEW SERVICES WE DEVELOP ARE NOT SUCCESSFUL, OUR BUSINESS COULD BE HARMED
Clients may not favorably receive any new services that we launch, which
could damage our reputation and brand name. We also cannot be certain that we
will generate satisfactory revenues from any expanded services to offset the
costs we incur to expand those services. Any expansion of our operations also
would require significant additional expenses, and these efforts may strain our
management, financial and operational resources.
WE WILL LIKELY CONTINUE TO FACE INTENSE COMPETITION WHICH COULD HARM OUR
OPERATING RESULTS
The market for Internet professional services is relatively new, intensely
competitive, quickly evolving and subject to rapid technological change. In
addition, our industry is experiencing rapid consolidation. Our current
competitors include the following:
- Internet professional service firms;
- large information technology consulting service providers;
- strategic consulting firms; and
- internal information technology, marketing and other departments of
current and potential clients.
We also anticipate facing additional competition from new entrants into our
markets due to the low barriers of entry.
Moreover, many of our competitors have longer operating histories, larger
client bases, greater brand recognition, greater financial, marketing, service,
support, technical, intellectual property and other resources than we do. As a
result, our competitors may be able to devote greater resources to marketing
campaigns, adopt more aggressive pricing policies or devote substantially more
resources to client and business development than us. This increased competition
may result in reduced operating margins, loss of market share and a diminished
brand. In addition, we may from time to time make certain pricing, service or
marketing decisions or acquisitions as a strategic response to changes in the
competitive environment. These actions could reduce our profits and harm our
financial condition and results of operation.
OUR INVESTMENTS IN CLIENT COMPANIES INVOLVE RISK, INCLUDING LOSING SOME OR ALL
OF OUR INVESTMENT, WHICH COULD HARM OUR OPERATING RESULTS
In exchange for our services we have from time to time made strategic
investments in some of our clients. We may continue to invest on an
opportunistic basis in our clients. In general, these equity investments are
structured so our clients pay for all of the costs related to their engagement
in cash and use equity incentives to compensate us for a portion of our profit
margin. The businesses of the clients in which we invest, however, are generally
unproven and involve substantial risk. If these clients' businesses do not
succeed, we could lose some or all of our investment, which would harm our
operating results and cause our profitability to be lower than it would have
been if we had taken payment for our entire engagement in cash.
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<PAGE> 13
OUR BUSINESS OPPORTUNITIES MAY BE RESTRAINED BY CONFLICTS BETWEEN POTENTIAL
CLIENTS, WHICH COULD REDUCE OUR POTENTIAL PROFITABILITY
Conflicts between potential clients are inherent in aspects of our
business. We have in the past, and will likely in the future, be unable to
pursue potential opportunities because they would result in offering similar
services to direct competitors of existing clients. Additionally, we risk
alienating existing clients if we provide services to even indirect competitors.
Because these potential conflicts may jeopardize revenues generated from
existing clients and preclude access to business prospects, these conflicts
could cause our operating results to suffer. Furthermore, in limited
circumstances, we have agreed not to supply certain developed material to
competitors of our clients. These agreements reduce the number of our
prospective clients and the number of potential sources of revenues. 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 revenues in
that particular market.
WE FACE POTENTIAL LIABILITY FOR DEFECTS OR ERRORS IN THE SOLUTIONS WE DEVELOP,
THE OCCURRENCE OF WHICH COULD REDUCE OUR REVENUES
Many of the solutions we develop are critical to the operations of our
clients' businesses. Any defects or errors in these solutions could result in:
- delayed or lost client revenues;
- adverse client reaction to us;
- negative publicity;
- additional expenditures to correct the problem; or
- claims against us.
Our standard contracts limit our damages arising from our negligent conduct
and for other potential liabilities in rendering our services. However, these
contractual provisions may not protect us from liability for damages. In
addition, large claims may not be adequately covered by insurance and may raise
our insurance costs.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY, OUR
REPUTATION COULD BE DAMAGED AND OUR COMPETITIVE POSITION COULD BE HARMED
We believe our trademarks and other proprietary rights are important to our
success and competitive position. If we are unable to protect our trademarks and
other proprietary rights against unauthorized use by others, our reputation
among existing and potential clients could be damaged and our competitive
position could be harmed. We generally enter into confidentiality or license
agreements with our employees and consultants, and generally control access to
and distribution of our documentation and other proprietary information. Despite
these precautions, our management cannot ensure that these strategies will be
adequate to deter misappropriation of our proprietary information and material.
Despite efforts to protect our intellectual property, we also face the
following risks:
- non-recognition or inadequate protection of proprietary rights;
- undetected misappropriation of proprietary information or materials;
- development of similar technologies by competitors;
- unenforceability of non-competition agreements entered into by our
employees; and
- infringement claims, even if not meritorious, against us.
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<PAGE> 14
If any of these risks materialize, we could be required to pay significant
amounts to defend our rights and in some cases to indemnify our customers and as
a result the time of our senior management could be diverted.
OUR BUSINESS COULD BE HARMED IF WE FAIL TO MAINTAIN A GOOD REPUTATION OR BRAND
RECOGNITION
We believe that establishing and maintaining a good reputation and brand
recognition is critical to attract and expand our targeted client base and that
the importance of reputation and brand recognition will increase as the number
of Internet professional service providers grows. Promotion and enhancement of
our brand will depend largely on our success in continuing to provide high
quality Internet services and solutions, which cannot be assured. If clients do
not perceive our Internet professional services to be effective or of high
quality, our brand name and reputation could be harmed.
Additionally, although we intend to advertise and promote our brand, we
cannot assure you that our strategies to do so will be successful. If we are
unable to design and implement effective marketing campaigns or otherwise fail
to promote and maintain our brand, our sales could decline. Our business also
may suffer if we incur excessive expenses in an attempt to promote and maintain
our brand without a corresponding increase in revenues.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS AND MAY REQUIRE
ADDITIONAL FINANCINGS
Our future liquidity and capital requirements will depend on numerous
factors, including:
- timing and amount of funds required for, or generated by, operations;
- success and duration of our expansion program, both domestically and
internationally; and
- unanticipated opportunities or difficulties.
We may seek to raise additional funds through public or private financings,
strategic relationships or other arrangements. This additional funding may not
be available on terms acceptable to us, or at all. We may have to sell stock at
prices lower than those paid by existing stockholders, which would result in
dilution, or we may have to sell stock or bonds with rights superior to rights
of holders of common stock. Also, any debt financing might involve restrictive
covenants that would limit our operating flexibility. Moreover, strategic
arrangements may require us to relinquish our rights to certain of our
intellectual property. Finally, if adequate funds are not available on
acceptable terms, we may be unable to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON OUR CLIENTS' WILLINGNESS TO ADOPT AND OUTSOURCE THEIR
INTERNET NEEDS TO INTERNET PROFESSIONAL SERVICE PROVIDERS
The market for our services will depend upon the adoption of Internet
professional services by companies. Critical issues concerning the use of
Internet professional services remain unresolved and may affect the use of these
technologies to solve business problems. Critical issues include:
- security;
- reliability;
- cost; and
- administration and bandwidth of the Internet itself.
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<PAGE> 15
Additionally, some entities would have to make significant changes in their
current business practice to adapt to the Internet. Thus, even if the above
listed issues were resolved, businesses may choose not to outsource the design,
development and maintenance of their Internet presence to outside firms like
ours.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES IN THE
INTERNET AND THE ELECTRONIC COMMERCE INDUSTRY, OUR BUSINESS WILL BE HARMED
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online business solutions. The
Internet and the electronic commerce industry are characterized by rapid
technological change, changes in user and client requirements and preferences,
frequent new product and service introductions embodying new technologies, and
the emergence of new industry standards and practices. The evolving nature of
the Internet could render our existing proprietary technology, as well as the
skills of our employees, obsolete. Our success will depend, in part, on our
ability to:
- effectively use leading technologies critical to our business;
- enhance our existing solutions;
- continue to develop new solutions and technology that address the
increasingly sophisticated and varied needs of our current and
prospective clients and their customers; and
- influence and respond to technological advances, emerging industry and
regulatory standards and practices and competitive service offerings.
Our ability to remain technologically competitive may require substantial
expenditures and lead-time. If we are unable to adapt in a timely manner to
changing market conditions or customer requirements, our business, financial
condition and results of operations could be seriously harmed.
OUR REVENUES COULD BE HARMED IF GROWTH IN THE USE OF THE INTERNET OR GROWTH OF
ELECTRONIC COMMERCE DOES NOT OCCUR
Our future success is substantially dependent upon continued growth in the
use of the Internet, particularly growth in commerce over the Internet. However,
consumer use of the Internet for commerce may not grow as quickly as projected.
If the number of users on the Internet does not increase or commerce over the
Internet does not become more accepted and widespread, demand for our services
may decrease and, as a result, our revenues would decline. Capacity constraints
caused by growth in Internet usage may, unless resolved, impede further growth
in Internet use. Other factors that may affect Internet usage or electronic
commerce adoption include:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- congestion of Internet traffic;
- inconsistent quality or availability of Internet or customer service;
- possible outages due to difficulties or other damage to the Internet;
- excessive governmental regulation;
- uncertainty regarding intellectual property ownership;
- costs associated with the obsolescence of existing infrastructure; and
- level of consumer satisfaction with electronic commerce experiences.
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<PAGE> 16
Further, the adoption of the Internet for commerce and communications,
particularly by those individuals and companies that have historically relied
upon alternative means of commerce and communications, generally requires the
understanding and acceptance of a new way of conducting business and exchanging
information. In particular, companies that have already invested substantial
resources in other means of conducting commerce and exchanging information may
be particularly reluctant or slow to adopt a new Internet-based strategy that
may make their existing personnel and infrastructure obsolete. If the necessary
infrastructure, products, services or facilities are not developed, or if the
Internet does not become a viable commercial medium, our business, results of
operations and financial condition could be harmed.
THE APPLICATION OR ADOPTION OF GOVERNMENT REGULATIONS AND THE EXISTENCE OF LEGAL
UNCERTAINTIES MAY HARM OUR BUSINESS
We, and our clients, are subject to regulations applicable to businesses
generally, and laws and regulations directly applicable to electronic commerce.
However, laws and regulations may be modified or adopted with respect to the
Internet relating to user privacy, pricing, content, copyrights, distribution
and characteristics and quality of products and services. The modification or
adoption of any additional laws or regulations may decrease the expansion of the
Internet, which could increase our cost of doing business or decrease demand for
our online business solutions.
In addition, the applicability of existing laws to the Internet remains
uncertain with regard to many issues including property ownership, export of
encryption technology, sales tax, libel and personal privacy. Any new
legislation or regulation in these areas could seriously harm our business,
financial condition and results of operations.
Finally, the application of laws and regulations of jurisdictions where we
plan to offer our Internet services could also harm our business. Other states
or foreign countries may:
- require us to qualify to do business as a foreign corporation in each
state or foreign country, or otherwise subject us to taxes and
penalties;
- attempt to regulate our Internet solutions;
- prosecute us for unintentional violations of their laws; or
- modify or enact new laws in the near future.
YEAR 2000 RISKS MAY HARM OUR BUSINESS BECAUSE OF DAMAGE TO OUR INTERNAL SYSTEMS
OR LIABILITY ARISING FROM NON-YEAR 2000 COMPLIANT SOLUTIONS THAT WE PROVIDE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. As a result, on January
1, 2000, many of these systems could fail or malfunction because they may not be
able to distinguish between 20th century dates and 21st century dates.
Accordingly, in the coming year, many companies, including our clients,
potential customers, vendors and strategic partners, may need to upgrade their
systems or change their software to comply with applicable year 2000
requirements. We currently rely on the following computer systems to conduct our
business:
- programming software;
- graphics design software;
- accounting and billing software;
- word processing, spreadsheet, project management and presentation
software;
- communications software; and
- network, server and personal computing hardware.
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<PAGE> 17
Because we and our clients are extremely dependent upon the proper
functioning of our and their computer systems, a failure of our or their systems
to correctly recognize dates beyond December 31, 1999 could materially disrupt
our operations, which could harm our business, financial condition and results
of operations.
We have warranted in the past, and expect to continue to warrant, to
clients that our work will be year 2000 compliant. In these cases, we do not
warrant the compliance of third party software; rather, we warrant only that
software created by us will be year 2000 compliant. However, even absent a
specific year 2000 warranty, there is a risk that clients for whom we have
created or implemented software will attempt to hold us liable for any damages
that result in connection with year 2000 problems. Furthermore, if the clients
change or update their software, then their change or upgrade may not interact
properly with our previously established services.
Additionally, our failure to make our online business solutions year 2000
compliant could result in a decrease in sales of our services, or an increase in
the allocation of resources to address year 2000 problems of our clients without
additional revenue for such invested resources. Also, year 2000 issues may
affect purchasing patterns of our clients or potential clients as they may
expend significant resources to correct their current systems. These
expenditures may result in reduced funds available to use our services, which
could harm our business, operating results and financial condition.
RISKS RELATED TO THIS OFFERING
BECAUSE THERE IS NO PRIOR MARKET FOR OUR COMMON STOCK, THE PRICE OF OUR COMMON
STOCK MAY BE VOLATILE, WHICH MAY LEAD TO LOSSES BY INVESTORS AND SECURITIES
LITIGATION
There is currently no public market for our common stock. The initial
public offering price of our stock will be determined through negotiations
between us and representatives of the underwriters, and may not be
representative of the price that will prevail in the open market. You may not be
able to resell your shares at or above the initial public offering price. See
"Underwriting" for a description of factors evaluated in determining the initial
public offering price and of the arrangement between us and the underwriters.
We have filed an application for the quotation of the common stock on the
Nasdaq National Market. We do not know the extent to which investor interest
will lead to the development of a trading market or how liquid it may be. The
market price for the common stock could be highly volatile and could be subject
to wide fluctuations in response to the following factors:
- quarterly variations in operating results;
- investor perception about us and the Internet professional services
market in general;
- announcements of technological innovations;
- announcements of new products or services by us or our competitors;
- changes in financial estimates by securities analysts; and
- general economic and Internet professional services market conditions.
The common stock of many Internet professional companies has experienced
significant fluctuations in trading price and volume. Often these fluctuations
have been unrelated to operating performance. In the past, following periods of
market volatility, security holders of these companies have instituted class
action litigation. If we were involved in such litigation, we could incur
substantial costs and diversion of management's attention, which could harm our
business, results of operations and financial condition. Declines in the trading
price of our
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<PAGE> 18
common stock could also harm employee morale and retention, our access to
capital and other aspects of our business.
CONCENTRATION OF OWNERSHIP MAY LIMIT YOUR ABILITY TO INFLUENCE CORPORATE
MATTERS, AND COULD PREVENT MERGERS OR OTHER BUSINESS COMBINATIONS THAT YOU MAY
BELIEVE ARE DESIRABLE
Immediately following the offering, the stockholders set forth below
collectively will own approximately % of the outstanding shares of our common
stock and will own individually the percentage set forth opposite their
respective names:
<TABLE>
<S> <C>
Organic Holdings, Inc. ..................................... %
Omnicom Group Inc. ......................................... %
</TABLE>
Jonathan Nelson, through his ownership in Organic Holdings, Inc., after the
offering will beneficially own % of our common stock.
If the stockholders listed above choose to act or vote in concert, they
will have the power to influence the election of our directors, the appointment
of new management and the approval of any other action requiring the approval of
our stockholders, including any amendments to our certificate of incorporation
and mergers or sales of any or all of our assets. In addition, without the
consent of these stockholders, we could be prevented from entering into
transactions that could be beneficial to us. Conversely, third parties could be
discouraged from making a tender offer or bid to acquire us at a price per share
that is above the price at which the common stock will trade on the Nasdaq
National Market.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price for our common stock
to decline. See "Shares Eligible for Future Sale" for a description of the
eligibility of shares of our common stock for future sale.
WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS OF THIS OFFERING AND WE MAY
NOT USE THE PROCEEDS EFFECTIVELY
Our management could spend most of the proceeds from this offering in ways
with which you may not agree or that do not yield a favorable return. Our
primary purpose in conducting this offering is to create a public market for our
common stock. As of the date of this prospectus, we intend to use a majority of
the proceeds from this offering for working capital and general corporate
purposes. Because of the number and variability of factors that determine our
use of the net proceeds from this offering, we cannot assure you that you will
agree with our use of the proceeds. Pending their use, we intend to invest the
net proceeds of this offering in short-term, investment-grade, interest-bearing
investments or accounts.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE DILUTION AND DISPARITY IN STOCK
PURCHASE PRICE
The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after the offering. Accordingly, purchasers of common stock in
this offering will experience immediate and substantial dilution of
approximately $ in net tangible book value per share, or approximately %
of the assumed offering price of $ per share. In contrast, stockholders as
of September 30, 1999 paid an average price of $0.85 per share. Investors will
incur additional dilution upon the exercise of outstanding stock options.
Furthermore, any additional equity financing may be dilutive to stockholders and
debt financing, if available, may involve restrictive covenants, which may limit
our operating flexibility with respect to business matters. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of our
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<PAGE> 19
stockholders will be reduced. Stockholders may experience additional dilution in
net book value per share and newly-issued equity securities may have rights,
preferences and privileges senior to those of the holders of our common stock.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND SOME OF OUR CONTRACTS
COULD DETER POTENTIAL ACQUISITION BIDS THAT A STOCKHOLDER MAY BELIEVE ARE
DESIRABLE, AND THE MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER AS A RESULT
Upon completion of this offering, our board of directors will have the
authority to issue up to 25,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges and restrictions of
the preferred stock without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a change in control
transaction. As a result, the market price of our common stock and the voting
and other rights of our stockholders may be adversely affected. The issuance of
preferred stock may result in the loss of voting control to other stockholders.
We have no current plans to issue any shares of preferred stock.
Other provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These provisions include:
- authorizing our board of directors to issue additional preferred stock;
- limiting the persons who can call special meetings of stockholders;
- prohibiting stockholder actions by written consent;
- creating a classified board of directors under which our directors will
serve staggered three-year terms;
- establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings;
- limiting the ability of stockholders to remove directors without cause;
and
- adopting a stockholder rights plan, which would cause substantial
dilution to any person or group that attempts to acquire our company on
terms not approved in advance by our board of directors.
Further, some of our existing contracts may require a notice of assignment
or give other parties the right to terminate the contract or take other action
that could harm our business as a result of a takeover.
DELAWARE LAW MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS MAY ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK, DISCOURAGE MERGER OFFERS AND PREVENT
CHANGES IN OUR MANAGEMENT
Section 203 of the Delaware General Corporation Law may inhibit potential
acquisition bids for our company. Upon completion of this offering, we will be
subject to the antitakeover provision of the Delaware General Corporation Law,
which regulates corporate acquisitions. See "Description of Capital Stock" for a
discussion of how Section 203 operates. Under Delaware law, a corporation may
opt out of the antitakeover provisions. We do not intend to opt out of the
antitakeover provisions of Delaware Law.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are subject to a
number of risks and uncertainties, many of which are beyond our control, which
may include statements about our:
- plans for and ability to hire additional personnel;
- business strategy;
- expectations for future expansion both in the U.S. and internationally;
- anticipated growth in revenue from our various service offerings;
- uncertainty regarding our future operating results;
- anticipated sources of funds, including the proceeds from this
offering, to fund our operations for the 12 months following the date
of this prospectus; and
- plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
All statements, other than statements of historical facts included in this
prospectus, regarding our strategy, future operations, financial position,
estimated revenues or losses, projected costs, prospects, plans and objectives
of management are forward-looking statements. When used in this prospectus, the
words "will", "believe", "anticipate", "intend", "estimate", "expect", "project"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this prospectus. You
should not place undue reliance on these forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in or suggested by
the forward-looking statements we make in this prospectus are reasonable, we can
give no assurance that these plans, intentions or expectations will be achieved.
We disclose important factors that could cause our actual results to differ
materially from our expectations under "Risk Factors" and elsewhere in this
prospectus. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information or future events.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of $ from the sale
of the shares of common stock in this offering (approximately
$ if the underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $ per share and after deducting
the estimated underwriting discounts and offering expenses.
While we cannot predict with certainty how the proceeds of this offering
will be used, we currently intend to use them as follows:
- to expand our corporate infrastructure;
- to repay outstanding debt under our revolving credit facility with
Omnicom Group; and
- for general corporate purposes, including capital expenditures and
working capital.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses or obtain the right to use complementary technologies.
However, we have no current commitments or agreements with respect to any of
these types of investments. Pending these uses, the net proceeds of this
offering will be invested in short-term, investment-grade, interest-bearing
investments or accounts.
Our revolving credit facility with Omnicom Group bears interest at a rate
equal to the lender's commercial paper rate plus 3.0% on borrowings up to $30.0
million until the closing of this offering. After the offering, we may borrow up
to $15.0 million at the lender's commercial paper rate plus 1.25% through
September 30, 2002. The interest rate on our borrowings under this facility as
of September 30, 1999 was 6.4%.
The amounts we actually spend for the above purposes may vary significantly
and will depend on a number of factors, including our future revenues and cash
generated by operations and the other factors described under "Risk Factors".
Therefore, we will have broad discretion in the way we use the net proceeds. See
"Risk Factors -- We have broad discretion in how we use the proceeds of this
offering and we may not use the proceeds effectively" for more information.
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our common
stock. We intend to retain any future earnings for future growth and do not
anticipate paying any cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our:
- actual capitalization at September 30, 1999;
- pro forma capitalization after giving effect to the conversion of all
outstanding shares of preferred stock into 23,163,000 shares of common
stock and the exercise of a warrant for 749,692 shares of common stock
immediately prior to the completion of this offering; and
- pro forma as adjusted capitalization, which gives effect to the sale in
this offering of shares of common stock at an assumed initial
public offering price of $
per share and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current
portion................................... $ 538 $ 538 $
-------- -------- --------
Stockholders' equity:
Convertible Preferred stock, $.0001 par
value; 25,000,000 shares authorized,
23,163,000 shares issued and outstanding,
actual; no shares issued or outstanding,
pro forma and pro forma as adjusted....... 1 -- --
Common stock, $.0001 par value; 35,000,000
shares authorized, 539,708 shares issued
and outstanding, actual; 24,452,400 shares
issued and outstanding, pro forma;
shares issued and outstanding, pro forma
as adjusted............................... -- 1
Additional paid-in capital.................. 81,488 81,495
Deferred compensation....................... (33,032) (33,032)
Accumulated deficit......................... (18,659) (18,659)
Accumulated other comprehensive income...... (14) (14)
-------- -------- --------
Total stockholders' equity............. 29,784 29,791
-------- -------- --------
Total capitalization................. $ 30,322 $ 30,329
======== ======== ========
</TABLE>
This table excludes the following shares:
- 5,237,644 shares of common stock issuable upon exercise of stock
options outstanding as of September 30, 1999 at a weighted average
exercise price of $2.17 per share;
- 1,797,651 shares of common stock available for future grant or issuance
under our 1997 stock option plan as of September 30, 1999; and
- 3,500,000 shares of common stock available for future grant or issuance
under our 1999 long-term stock incentive plan.
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DILUTION
Our pro forma net tangible book value as of September 30, 1999, giving
effect to the conversion of all shares of preferred stock outstanding as of
September 30, 1999 into common stock and the exercise of a warrant for 749,692
shares of common stock upon completion of this offering, was approximately $13.7
million, or approximately $0.56 per share of common stock. Pro forma net
tangible book value per share represents the amount of tangible assets less
total liabilities, divided by 24,452,400 shares of common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock in
this offering and the pro forma net tangible book value per share of our common
stock immediately after the offering. After giving effect to our sale of
shares of common stock in this offering at an assumed initial public
offering price of $ per share and after deduction of the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value as of September 30, 1999 would have
been approximately million, 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 purchasers of common stock in this offering.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before
offering.................................................... $ 0.56
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after the
offering..................................................
--------
Net tangible book value dilution per share to new
investors................................................. $
========
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1999, after giving effect to the conversion of all outstanding shares of
preferred stock into common stock and the exercise of a warrant for 749,692
shares of common stock upon completion of this offering, the total consideration
paid and the average price per share paid by our existing stockholders and by
new investors, before deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us, at an assumed initial public
offering price of per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 24,452,400 % $20,849,274 % $0.85
New investors......................
---------- --- ----------- -----
Total.................... 100.0% 100.0%
========== === =========== =====
</TABLE>
This table assumes that no options were exercised after September 30, 1999.
As of September 30, 1999, there were outstanding options to purchase a total of
5,237,644 shares of common stock at a weighted average exercise price of
approximately $2.17 per share; 1,797,651 shares of common stock reserved for
issuance under our 1997 stock option plan; and 3,500,000 shares available for
issuance under our 1999 long-term stock incentive plan.
22
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes to the consolidated financial statements, appearing elsewhere in this
prospectus. The selected balance sheet data as of December 31, 1997 and 1998 and
September 30, 1999 and the statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and for the nine months ended September 30,
1999 are derived from our consolidated financial statements included elsewhere
in this prospectus, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected balance sheet data as of December 31, 1995
and 1996 and the statement of operations data for the period ended December 31,
1995 are derived from our consolidated financial statements that are not
included in this prospectus, which have been audited by PricewaterhouseCoopers
LLP. The statement of operations data for the nine months ended September 30,
1998 are derived from our unaudited consolidated financial statements included
elsewhere in this prospectus, which, in the opinion of our management, include
all adjustments necessary to fairly present the results of our operations for
such interim period. The historical results presented below are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31, 1995 FOR THE NINE MONTHS
(INCEPTION) YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
THROUGH ----------------------------------- -------------------------
DECEMBER 31, 1995 1996 1997 1998 1998 1999
----------------- ----------- ------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 1,895 $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781
Operating expenses:
Professional services................ 530 1,889 4,285 16,801 11,191 29,929
Selling, general and
administrative..................... 655 2,104 5,473 12,068 7,276 26,018
Stock compensation and other stock-
based charges...................... 14 53 87 694 291 9,648
----------- ----------- ------- ----------- ----------- -----------
Total operating expenses........... 1,199 4,046 9,845 29,563 18,758 65,595
----------- ----------- ------- ----------- ----------- -----------
Operating income (loss)................ 696 248 (3,065) (1,829) 1,986 (13,814)
Minority interest in operations of
consolidated subsidiary.............. -- (106) -- -- -- (38)
Interest and other income, net......... -- 4 283 73 73 (11)
----------- ----------- ------- ----------- ----------- -----------
Net income (loss) before taxes..... 696 146 (2,782) (1,756) 2,059 (13,863)
Income tax expense (benefit)........... 284 (91) (997) 1,010 913 64
----------- ----------- ------- ----------- ----------- -----------
Net income (loss).................. $ 412 $ 237 $(1,785) $ (2,766) $ 1,146 $ (13,927)
=========== =========== ======= =========== =========== ===========
Net income (loss) per share:
Basic................................ $ 137,304 $ 78,857 $(2,006) $ (32.43) $ 25.24 $ (34.54)
=========== =========== ======= =========== =========== ===========
Diluted.............................. $ 0.02 $ 0.01 $(2,006) $ (32.43) $ 0.05 $ (34.54)
=========== =========== ======= =========== =========== ===========
Weighted average common shares
outstanding:
Basic................................ 3 3 890 85,296 45,420 403,197
=========== =========== ======= =========== =========== ===========
Diluted.............................. 21,675,003 21,675,003 890 85,296 21,808,240 403,197
=========== =========== ======= =========== =========== ===========
Unaudited pro forma basic and diluted
net loss per share................... $ (0.13) $ (0.59)
=========== ===========
Weighted average common shares
outstanding -- unaudited pro forma
basic and diluted.................... 21,760,296 23,463,012
=========== ===========
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ SEPTEMBER 30,
1995 1996 1997 1998 1999
---- ------ ------- ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 66 $ 243 $ 6,135 $ 2,067 $ 3,204
Working capital............................................. 36 307 8,290 339 3,108
Total assets................................................ 979 1,677 11,426 17,605 58,519
Long-term obligations, less current portion................. -- -- 604 661 538
Total stockholders' equity.................................. 338 923 9,225 7,190 29,784
</TABLE>
Unaudited pro forma basic and diluted net loss per share for the year ended
December 31, 1998 and nine months ended September 30, 1999 has been computed
using the weighted average number of common shares outstanding, adjusted to
include the pro forma effects of the conversion of Series A and Series B
convertible preferred stock and the exercise of a warrant for shares of common
stock as if such conversion had occurred on January 1, 1998 for the year ended
December 31, 1998 and on January 1, 1999 for the nine months ended September 30,
1999, or at the date of original issuance, if later.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our consolidated
financial position and the results of our operations in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and the notes to those financial statements appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Since our founding in 1993, we have been an innovator and leader in the
Internet professional services industry. We focus on providing an integrated
suite of services to our clients including strategic consulting, creative,
engineering and integration services; marketing and public relations services;
and customer service and fulfillment consulting and transaction management
services. This package of services provides our clients with various
opportunities to manage and grow their customer and business relationships as
the Internet continues to evolve. We have performed work for over 250 leading
offline and online companies to establish or enhance brands and have introduced
several new service lines to serve their individual needs.
We expect that our revenues will be driven primarily by the number, size
and scope of our client engagements and by our professional services headcount.
The number, size and scope of our engagements have been increasing and we expect
this trend to continue. We also anticipate our clients will engage us for more
of our service offerings over time. For the nine months ended September 30,
1999, five clients accounted for approximately 41% of our revenues, with
DaimlerChrysler and Blockbuster accounting for approximately 12% and 10%,
respectively, of our revenues. Revenues from any given client will vary from
period to period; however, we expect that significant customer concentration
will continue for the foreseeable future. To the extent that any significant
client reduces its use of our services or terminates its relationship with us,
our revenues could decline substantially. As a result, the loss of any
significant client could negatively impact our business and results of
operations.
Substantially all of our revenues are derived from providing professional
services on a fixed-fee, retainer or time and materials basis. Online media
placement and research services are typically provided under long-term
relationships. Fulfillment and customer call center consulting and management
services are typically provided under contracts that range from a few months to
over a year. We generally enter into a service agreement with our clients, which
establishes the legal and general business terms of our relationship. Our
engagements vary depending on what type of services we provide and they range
from a few months to more than a year. Generally our client relationships span
several years. Revenues from fixed-fee contracts are generally recognized as
services are rendered using the percentage-of-completion method of accounting
based on the percentage of costs incurred to date to total estimated project
costs. We periodically evaluate the actual status of each project to ensure that
the estimated cost to complete each contract and provisions for estimated
losses, if necessary, are made in the period in which such losses are
determined. To date, such losses have not been significant. Revenues pursuant to
retainer contracts are generally recognized over the life of the contract on a
straight-line basis. Revenues pursuant to time and materials contracts are
generally recognized as services are provided. Revenues exclude reimbursable
expenses charged to clients.
Our professional services expenses include the direct costs associated with
employees and contractors in billable departments. These expenses include
salaries, bonuses, benefits, vacation, travel and entertainment expenses.
Historically our professional services expenses have increased and we expect
these expenses to continue to increase in the foreseeable future.
25
<PAGE> 27
Our selling, general and administrative expenses primarily consist of our
investment in our corporate support services, our employee recruitment, training
and retention programs and our research and development and knowledge management
initiatives. Our selling, general and administrative expenses also include the
direct costs associated with employees and contractors in non-billable
departments, real estate costs and other investments in our corporate support
services.
Our clients tend to spend proportionally more during the second and third
quarters. We expect this seasonality to continue in the near term future.
Therefore, our financial results may fluctuate from quarter to quarter.
Fluctuations also can result from such factors as the number, size and scope of
our engagements, the efficiency with which we utilize our employees and the
ability to complete our projects within the estimated timeframe.
We are rapidly growing to accommodate the increasing need for Internet
professional service offerings and to better serve our existing clients in their
various domestic and international locations. For the nine months ended
September 30, 1999, we opened permanent offices in Detroit, Sao Paulo, London
and Singapore and increased our headcount from 278 as of December 31, 1998 to
681 as of September 30, 1999. We intend to open additional offices in the U.S.
and internationally during 2000 and accordingly, we expect associated headcount
and infrastructure costs to continue to increase. Personnel-related compensation
represents a high percentage of our operating expenses and accordingly, if
revenues do not increase at a rate proportionally equal to expenses, our
business, consolidated financial position or results of operations could be
harmed.
26
<PAGE> 28
RESULTS OF OPERATIONS
The following table presents our consolidated statement of operations as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1996 1997 1998 1998 1999
----- ----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Professional services.................... 44.0 63.2 60.6 53.9 57.8
Selling, general and administrative...... 49.0 80.7 43.5 35.1 50.3
Stock compensation and other stock-based
charges............................... 1.2 1.3 2.5 1.4 18.6
----- ----- ----- ----- -----
Total operating expenses.............. 94.2 145.2 106.6 90.4 126.7
----- ----- ----- ----- -----
Operating income (loss).................... 5.8 (45.2) (6.6) 9.6 (26.7)
Minority interest in operations of
consolidated subsidiary.................. (2.5) 0.0 0.0 0.0 (0.1)
Interest and other income, net............. 0.1 4.2 0.3 0.3 0.0
----- ----- ----- ----- -----
Net income (loss) before taxes........ 3.4 (41.0) (6.3) 9.9 (26.8)
Income tax expense (benefit)............... (2.1) (14.7) 3.7 4.4 0.1
----- ----- ----- ----- -----
Net income (loss)..................... 5.5% (26.3)% (10.0)% 5.5% (26.9)%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES
Our revenues were $20.7 million for the nine months ended September 30,
1998, compared to $51.8 million for the nine months ended September 30, 1999.
This increase of 150% was primarily due to increases in the number of clients
and size of our engagements. Our increased sales and marketing efforts resulted
in the addition of several large accounts such as DaimlerChrysler and
Blockbuster, which represented 12% and 10% of our total revenues, respectively,
for the nine months ended September 30, 1999. To a lesser extent, existing
clients also increased the breadth and scope of their engagements with us,
attributable, in part, to the additions of marketing and public relations
services and customer service and fulfillment consulting and transaction
management services to our service offerings.
PROFESSIONAL SERVICES
Our professional services expenses were $11.2 million for the nine months
ended September 30, 1998, compared to $29.9 million for the nine months ended
September 30, 1999. This increase of 167% was primarily attributable to
increased hiring of professional services personnel, increased costs associated
with contractors and employee-related benefit accruals in 1999. The increase in
professional services headcount resulted from opening new offices in Detroit,
London, Sao Paulo and Singapore and continued growth in our San Francisco,
Chicago and New York offices and an increase in the size and number of our
projects. As a percentage of revenues, professional services expenses were 54%
and 58% for the nine months ended September 30, 1998 and 1999, respectively.
This increase was primarily due to increased costs in San Francisco engineering
contractors.
27
<PAGE> 29
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $7.3 million for the nine
months ended September 30, 1998, compared to $26.0 million for the nine months
ended September 30, 1999. This increase of 258% was primarily due to the
increase in non-billable personnel to support our growth, increased costs
associated with the addition of new offices and improvements in our office
infrastructure and increased consulting fees associated with several internal
software implementations. As a percentage of revenues, selling, general and
administrative expenses were 35% and 50% for the nine months ended September 30,
1998 and 1999, respectively. This increase reflects costs associated with hiring
of executive management and personnel to fill open positions within the
corporate services departments. We anticipate significant additional investment
throughout 2000.
STOCK COMPENSATION AND OTHER STOCK-BASED CHARGES
Stock compensation and other stock-based charges consist of non-cash
compensation expenses arising from stock option grants and the issuance of
detachable warrants to Omnicom Group. For the nine months ended September 30,
1998 and 1999, we recorded aggregate deferred stock-based compensation of $1.1
million and $42.0 million, respectively. This increase was primarily due to an
increase in the number of option grants associated with increased hiring of
personnel. Additional deferred stock-based compensation will be recorded for
future grants made prior to our initial public offering. Stock-based
compensation expense is being amortized over the vesting period of the related
options, generally four years, and is expected to be significant through 2004.
For the nine months ended September 30, 1998 and 1999, we recognized stock-based
compensation expense of $0.3 million and $9.2 million, respectively. See Note 7
of Notes to Financial Statements.
In connection with the $30.0 million revolving credit facility obtained on
August 27, 1999, we issued 749,692 warrants and were required to record a
deferred bank facility charge of approximately $16.5 million. This amount is
being amortized on a straight-line basis over 36 months, the term of the credit
facility. For the nine months ended September 30, 1999, we recognized bank
facility expense of $0.5 million. We expect to terminate the revolving credit
facility in the first quarter of year 2000, which will result in the recognition
of a one-time bank facility expense charge of $14.7 million.
INCOME TAX EXPENSE
Income tax expense for the nine months ended September 30, 1998 reflects
the establishment of a valuation allowance against our net deferred tax asset
recorded in the year ended December 31, 1997.
COMPARISON OF FISCAL YEARS 1996, 1997 AND 1998
REVENUES
Our revenues increased 58% from $4.3 million for the year ended December
31, 1996 to $6.8 million for the year ended December 31, 1997. This increase was
primarily due to increases in the number of new clients in New York. Our
revenues increased 309% from $6.8 million for the year ended December 31, 1997
to $27.7 million for the year ended December 31, 1998. This increase was
primarily due to increases in the number of clients and the average size of our
engagements as a result of increased sales and marketing efforts. This increase
also was attributable, in part, to additional revenues generated from our new
office in Chicago and from our new marketing and public relations service lines.
28
<PAGE> 30
PROFESSIONAL SERVICES
Our professional services expenses increased 127% from $1.9 million for the
year ended December 31, 1996 to $4.3 million for the year ended December 31,
1997. As a percentage of revenues, professional services expenses were 44%, 63%
and 61% for the years ended December 31, 1996, 1997 and 1998, respectively. The
increase from 1996 to 1997 was attributable to billable headcount resulting from
opening our New York office and continued growth in our San Francisco office to
accommodate revenue growth. Our professional services expenses increased 292%
from $4.3 million for the year ended December 31, 1997 to $16.8 million for the
year ended December 31, 1998, primarily due to increases in our professional
services personnel. The increase in billable headcount resulted from opening our
Chicago office and continued growth in our San Francisco and New York locations
in order to accommodate the increase in the volume of our projects.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses increased 160% from $2.1
million for the year ended December 31, 1996 to $5.5 million for the year ended
December 31, 1997. As a percentage of revenues, selling, general and
administrative expenses were 49%, 81% and 44% for the years ended December 31,
1996, 1997 and 1998, respectively. This increase from 1996 to 1997 reflected an
increase in non-billable personnel and increased costs associated with opening
our New York office and improving our office infrastructure to accommodate
growth. Our selling, general and administrative expenses increased 121% from
$5.5 million for the year ended December 31, 1997 to $12.1 million for the year
ended December 31, 1998. This increase reflected the increase in non-billable
personnel, costs associated with opening our Chicago office and improving our
office infrastructure to accommodate growth, and consulting fees associated with
several internal software implementations.
STOCK COMPENSATION AND OTHER STOCK-BASED CHARGES
Stock compensation and other stock-based charges consist of non-cash
compensation expenses arising from stock option grants. For the years ended
December 31, 1996, 1997 and 1998, we recorded aggregate deferred stock-based
compensation of $0.4 million, $0, and $2.3 million, respectively. This increase
was primarily due to an increase in the number of option grants associated with
increased hiring of personnel. During the years ended December 31, 1996, 1997
and 1998, we recognized stock-based compensation expense of $0.1 million, $0.1
million and $0.7 million, respectively.
29
<PAGE> 31
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly
financial information for the periods indicated. We derived this data from our
unaudited interim financial statements and, in our opinion, included all
adjustments necessary to fairly present the results of operations for the
periods shown. These unaudited quarterly results should be read in conjunction
with our consolidated financial statements and notes to those financial
statements included elsewhere in this prospectus. The operating results in any
quarter are not necessarily indicative of the results that may be expected for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
---------- ---------- --------- -------- --------- -------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 5,051 $ 8,114 $ 7,579 $ 6,990 $10,087 $17,267 $ 24,427
Operating expenses:
Professional services............... 2,172 3,562 5,457 5,610 5,568 8,263 16,098
Selling, general and
administrative.................... 1,677 2,688 2,911 4,792 4,649 8,325 13,044
Stock compensation and other stock-
based charges..................... 16 79 196 403 473 1,738 7,437
---------- ---------- ------- ------- ------- ------- --------
Total operating expenses.......... 3,865 6,329 8,564 10,805 10,690 18,326 36,579
---------- ---------- ------- ------- ------- ------- --------
Operating income (loss)............... 1,186 1,785 (985) (3,815) (603) (1,059) (12,152)
Minority interest in operations of
consolidated subsidiary............. -- -- -- -- 23 4 (65)
Other income (expense), net........... 44 35 (6) -- (21) 36 (26)
---------- ---------- ------- ------- ------- ------- --------
Net income (loss) before taxes.... 1,230 1,820 (991) (3,815) (601) (1,019) (12,243)
Income tax expense (benefit).......... 12 100 801 97 15 23 26
---------- ---------- ------- ------- ------- ------- --------
Net income (loss)................. $ 1,218 $ 1,720 $(1,792) $(3,912) $ (616) $(1,042) $(12,269)
========== ========== ======= ======= ======= ======= ========
</TABLE>
COMPARISON OF QUARTERS ENDED JUNE 30, 1998, SEPTEMBER 30, 1998 AND DECEMBER
31, 1998
Revenues decreased 7% from $8.1 million in the second quarter of 1998 to
$7.6 million in the third quarter of 1998 due to a $1.3 million decrease in
revenues from our San Francisco office related to reduced work on Formica, Nike
and Nortel. This decrease was partially offset by an increase in revenues from
our New York office during the third quarter. Revenues decreased 8% from $7.6
million in the third quarter of 1998 to $7.0 million in the fourth quarter of
1998 due to seasonality of a more stable office in San Francisco that was
partially offset by continued revenue growth from our New York office during the
fourth quarter.
Selling, general and administrative expenses increased 8% from $2.7 million
in the second quarter of 1998 to $2.9 million in the third quarter of 1998 due
to the opening of our Chicago office and increased infrastructure costs incurred
to support our New York office. Selling, general and administrative expenses
increased 65% from $2.9 million in the third quarter of 1998 to $4.8 million in
the fourth quarter of 1998 due to hiring of non-billable personnel, especially
middle level managers, to support our growth.
COMPARISON OF QUARTERS ENDED MARCH 31, 1999, JUNE 30, 1999 AND SEPTEMBER 30,
1999
Revenues increased 71% from $10.1 million in the first quarter of 1999 to
$17.3 million in the second quarter of 1999 due to the addition of the
DaimlerChrysler account and the opening of our Detroit office. In addition, we
recognized revenues from several of our large clients, including Blockbuster,
Global Sports Interactive and Tommy Hilfiger. Revenues increased 41% from $17.3
million in the second quarter of 1999 to $24.4 million in the third quarter of
1999 as a result of the addition of our London office as well as the seasonality
of our business.
Selling, general and administrative expenses increased 79% from $4.6
million in the first quarter of 1999 to $8.3 million in the second quarter of
1999 due to continued hiring of corporate support services personnel and the
hiring of our Chief Information Officer and the promotion of
30
<PAGE> 32
our Chief Technology Officer. Selling, general and administrative expenses
increased 57% from $8.3 million in the second quarter of 1999 to $13.0 million
in the third quarter of 1999 as we hired a Chief Financial Officer, Chief Legal
and Administrative Officer, Chief Operating Officer and Vice President of Human
Resources. We hired additional corporate personnel for a number of our support
services including human resources, finance, information services and legal.
INCOME TAX EXPENSE
Income tax expense in the year ended December 31, 1998 reflect the
establishment of a valuation allowance against our net deferred tax asset
recorded in the year ended December 31, 1997 due to projections that the Company
would incur a net operating loss for 1998 and the foreseeable future. In 1999,
taxes reflect actual payments made for state, local and foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
operating cash flows, the issuance of Series A and Series B convertible
preferred stock and bank borrowings.
OPERATING CASH FLOWS
Cash and cash equivalents increased from $1.7 million as of December 31,
1998 to $3.2 million as of September 30, 1999. Net cash used in operating
activities of $0.2 million and net cash used in investing activities of $4.0
million for the year ended December 31, 1998 was offset with borrowings of $1.9
million during 1998 from the second credit agreement for the purchase of
equipment and the $10.0 million investment by Omnicom Group in 1997 as described
below. Net cash used in operating activities of $4.7 million and net cash used
in investing activities of $5.8 million for the nine months ended September 30,
1999 was more than offset by the issuance of Series B convertible preferred
stock and borrowings under the revolving credit facility as described below.
Capital expenditures were as follows (in millions):
<TABLE>
<S> <C>
For the years ended December 31,
1996........................................................ $0.5
1997...................................................... 1.1
1998...................................................... 5.6
Nine months ended September 30, 1999........................ 6.2
</TABLE>
Capital expenditures were used primarily for computer equipment, computer
software, other internal software implementations and leasehold improvements.
Capital expenditures for year 2000 are expected to be approximately $20.0
million and will be principally made for computer equipment, computer software,
internal software implementations and leasehold improvements.
PREFERRED STOCK FINANCING
We raised $10.0 million through the issuance of 3,351,288 shares of Series
A convertible preferred stock to Omnicom Group in January 1997. In February
1999, we issued 1,488,000 shares of Series B convertible preferred stock to
Omnicom Group for net cash proceeds of $7.7 million plus the settlement of a
$3.0 million short-term bridge loan that was obtained in January 1999.
BANK AND OTHER BORROWINGS
In 1996, we had two credit agreements with a commercial lending institution
that allowed us to borrow against the purchase of equipment and against our
accounts receivable. On August 27, 1999, we entered into a revolving credit
facility with Omnicom Group to be used for working
31
<PAGE> 33
capital purposes. This credit facility allows us to borrow up to $30.0 million
at the lender's commercial paper rate plus 3.0% until the closing of our
proposed initial public offering. Thereafter, we may borrow up to $15.0 million
at the lender's commercial paper rate plus 1.25% through September 30, 2002. The
revolving credit facility expires on September 30, 2002. This credit facility
contains certain restrictions and any borrowings pursuant to this agreement
require us to comply with certain financial covenants and are collateralized by
some of our investments. As of September 30, 1999, we had approximately $4.7
million in outstanding debt, of which $4.0 million relates to this revolving
credit facility. See Note 5 of Notes to Financial Statements.
We anticipate that the net proceeds of this proposed initial public
offering, together with our existing liquidity sources and expected cash flows
from operations, if any, will be sufficient to meet our present growth
strategies and related working capital and capital expenditure requirements for
at least the next 12 months. Thereafter, to the extent that we are unable to
fund our operations from cash flows, we may need to obtain additional equity or
debt financing. There can be no assurance that such additional financing will be
readily available or can be obtained, if at all, on terms, which are favorable
to us.
YEAR 2000 READINESS
The year 2000 problem exists because many computer systems and software
products use only the last two digits to refer to a year. This convention could
affect date-sensitive calculations that treat "00" as the year 1900, rather than
as the year 2000. As a result, computer systems and software used by many
companies, including us, our vendors, our clients and our potential clients, may
need to be upgraded to comply with such year 2000 requirements.
We have identified all of the major systems and software products and have
sought external and internal resources to renovate and test the systems and
products. Although we believe that our principal internal systems are year 2000
compliant, some of our systems are not yet certified. We have received year 2000
compliance statements from the suppliers of some of our principal internal
systems, and have sought similar statements from other vendors. Our review of
our year 2000 readiness programs, including our assessment of our internal
systems as well as those of third parties with whom we have material
interactions, is ongoing and has not yet been completed. We anticipate that our
assessment of such systems will be complete by the end of December 1999.
The year 2000 problem may also affect software or code that we develop or
third party software products that are incorporated into the services that we
provide for our clients. Although our clients license software directly from
third parties, we generally discuss year 2000 issues with these suppliers and
sometimes perform internal testing on their products, but we do not guarantee
that the software licensed by these suppliers is year 2000 compliant. Any
failure on our part to provide year 2000 compliant services to our clients could
result in a re-deployment of internal resources to remediate these problems and,
as a result, hamper our ability to work or take on additional projects. This may
result in financial loss, harm to our reputation and potential liability to
others and could harm our business, financial condition and results of
operations. In addition, our current or potential clients may incur significant
expenses to achieve year 2000 compliance. If our clients are not year 2000
compliant, they may experience material costs to remedy problems, or they may
face litigation costs. In either case, year 2000 issues could reduce or
eliminate the budgets that current or potential clients could have for purchases
of our services. As a result, our business, financial condition and results of
operations could be materially affected.
We have funded our year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. At this time, we cannot
estimate the costs associated with remediating the year 2000 problem. However,
we may experience unexpected problems associated with year 2000 compliance that
may adversely affect our costs and as a result, our
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results of operations. In addition, we expect that additional costs will be
incurred beyond 1999 for personnel to monitor the results of the year 2000
project to ensure client satisfaction. For example, we may experience material
problems and costs with year 2000 compliance that could seriously harm our
business, financial condition and results of operations, including:
- operational disruptions and inefficiencies for us, our clients and
vendors that provide us with internal systems that will divert
management's time and attention and financial and human resources from
ordinary business activities;
- business disputes and claims for pricing adjustments by our clients,
some of which could result in litigation or contract termination; and
- harm to our reputation to the extent that our client deliverables
experience errors or interruptions of service.
The principal risks associated with the year 2000 problem can be grouped
into three categories:
- we do not successfully ready our operations for the next century;
- disruption of our operations due to operational failures of our
significant vendors; and
- inability of our customers to achieve year 2000 compliance on a timely
basis.
The only risk largely under our control is preparing our internal
operations for the year 2000. Management believes that we will be able to make
the necessary modifications on schedule.
Operational failures among our significant vendors could jeopardize our
operations, but the seriousness of this risk depends on the nature and duration
of the failures. Despite our continuing assessment, we are unable, however, to
estimate the likelihood of significant disruptions among our basic
infrastructure suppliers.
Operational failures among our current or potential clients could result in
losses of expected or potential revenue streams. If our clients are not year
2000 compliant, they may experience material costs to remedy problems, or they
may face litigation costs. In either case, year 2000 issues could reduce or
eliminate the budgets that current or potential clients could have for purchases
of our services. The year 2000 problem may also affect software or code that we
develop or third party software products that are incorporated into the services
that we provide for our clients. Any failure on our part to provide year 2000
compliant services to our clients could result in a re-deployment of internal
resources to remediate these problems and, as a result, hamper our ability to
work or take on additional projects. As a result, these failures could have a
material adverse effect on our business, financial condition and results of
operations.
In view of this unknown probability of occurrence and impact on operations,
we consider the need to cease normal operations for an indefinite period of time
while we attempt to respond to our significant vendors' year 2000 problems to be
our worst case scenario.
We are developing year 2000 contingency plans to address situations that
may result if we are unable to successfully ready our operations for the next
century. We expect to complete our year 2000 contingency plans by the end of
December 1999. We cannot, however, guarantee that our contingency plans will
shield operations from potential failures that may occur.
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BUSINESS
OVERVIEW
Organic is a leading Internet professional services firm focused on the
customer-to-business market. We fundamentally believe that the Internet has
caused a customer-centric revolution by shifting the balance of power and
control from businesses to customers, and has created the first truly global
marketplace. Our suite of integrated services helps our clients address the
challenges and opportunities these changes present.
We believe the key to our success, and what differentiates us, is our
complete focus on our clients' customers. We view the ultimate customer, whether
a business partner or consumer, as the central and most influential participant
in a commercial relationship. This customer-to-business approach fully
encompasses both the traditional business-to-consumer and business-to-business
markets. We believe that demand for our services will grow as companies seek
customer-focused solutions to manage these relationships. We built Organic by
anticipating customer needs, developing innovative solutions and delivering a
suite of integrated services required to build and operate successful online
businesses, including:
- iBusiness: Strategic consulting, creative, engineering and integration
services necessary to design, create, implement and maintain a
successful online business;
- Media and Communications: Marketing and public relations services
necessary to build brands, generate awareness, drive visits and
transactions as well as understand customer behavior through continuous
data and feedback analysis; and
- Logistics: Customer service and fulfillment consulting and transaction
management services necessary to ensure superior product delivery,
customer satisfaction and loyalty.
By expanding our business into Asia, Europe and Latin America, we believe
we have established the presence to deliver our suite of services globally.
We have experienced significant growth in demand for our services, with
revenues increasing from $6.8 million in 1997 to $51.8 million for the nine
months ended September 30, 1999. We believe the rapid growth of the
customer-to-business market, the strength of our integrated service offering,
our premier client base and strong client relationships, our scalable systems
and business processes as well as our collaborative team approach have been the
primary drivers of our success. We have organically grown our business by
focusing on recruiting, training and building our infrastructure, creating one
of the largest independent Internet professional services organizations with
nearly 700 employees in 7 offices worldwide.
Founded in 1993, we have a long and distinguished history as a leader and
innovator in the Internet professional services industry. Since 1994, we have
designed and developed a number of first-in-category Web sites, including AT&T,
Club Med, Volvo and Yahoo!. In addition, we led the development of the Apache
Web server and founded Accrue Software (Nasdaq: ACRU), a developer of
network-based tools for measuring Web site performance. We have performed work
for over 250 clients and have gained significant experience by working with both
leading offline and emerging Internet companies, including Barnes & Noble,
Blockbuster, Boo.com, CDNOW, Chase Manhattan Bank, Compaq, DaimlerChrysler,
Tommy Hilfiger and Washington Mutual.
INDUSTRY BACKGROUND
CUSTOMER EMPOWERMENT
The rise of the Internet has created an environment for businesses where
the competition is only "one click away". Online customers can reach a virtually
limitless number of vendors and
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can easily compare pricing and product information to ensure the highest level
of service and the lowest price. These factors have increased the importance of
customer satisfaction and loyalty as well as the quality of the online
experience, forcing many businesses to redefine the way they build and maintain
relationships with their customers.
As the number of Internet users and the value of transactions over the
Internet grow, businesses are becoming increasingly aware of the importance of
focusing their online strategies on attracting, servicing and retaining
customers. International Data Corporation estimates that the number of Internet
users worldwide will grow from 159 million in 1998 to 510 million by 2003.
International Data Corporation also estimates that electronic commerce, which
totaled approximately $50 billion in 1998, is expected to increase to
approximately $1.3 trillion by 2003. This explosive growth in both the number of
users and the value of electronic commerce compounds the impact of customer
empowerment and creates significant opportunities and challenges for businesses
on the Internet.
BUSINESSES FACE SIGNIFICANT OPPORTUNITIES AND CHALLENGES ONLINE
Customer empowerment forces both traditional and online businesses to
create or redefine themselves in entirely new ways even as the global reach of
the Internet removes traditional geographic boundaries. Companies that have
never had direct relationships with their end customers can and must establish
them, in some cases bypassing traditional intermediaries. In addition, companies
now have the opportunity to form strong and lasting relationships directly with
new and distinct customers. Some companies must also integrate their online and
offline business strategies. In addressing these changes, businesses face
significant opportunities and challenges including:
CREATING STRATEGIES TO ADDRESS ONLINE OPPORTUNITIES. Developing strategies
that can be quickly evaluated and implemented is a critical factor in improving
the time-to-market for online businesses. Companies that can quickly identify
opportunities, target and service geographically and demographically diverse
groups of customers, define and develop sustainable online business models,
develop compelling online brand strategies and create a framework for evaluating
their online success have the opportunity to dramatically improve their
performance.
CREATING A COMPELLING CUSTOMER EXPERIENCE. Companies must create an online
business that presents an experience that resonates so strongly with a target
audience that they are compelled to act. This entails successfully merging form,
function and reliability to deliver a consistent, engaging and responsive
customer experience. If done effectively, a dialogue between the business and
the customer is established and the foundation for a long-term relationship is
formed.
CONNECTING WITH POTENTIAL CUSTOMERS ONLINE. Understanding how to
communicate with online customers requires businesses to develop new knowledge
and skill sets. These skill sets include identifying, targeting, attracting and
retaining customers and then effectively establishing a dialogue. These
processes differ from traditional media and require new types of interactive
communication.
MANAGING RAPIDLY DEVELOPING INTERNET TECHNOLOGY. Internet technology
differs substantially from traditional information technology. Therefore, many
businesses do not possess the technical skills required to design, build and
maintain a functional, reliable and robust online business. The rapid evolution
of Internet technology requires the expertise to select and build platforms that
are scalable, flexible and innovative.
LEVERAGING CUSTOMER DATA THROUGH CONTINUOUS FEEDBACK. Today, businesses can
collect, store and analyze significant quantities of customer information from
every point of contact in the customer experience. By proactively requesting and
establishing a continuous dialogue with their customers, businesses can collect
information and incorporate the results of their analysis, if
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properly performed, into their business planning processes, improving the total
customer experience and increasing loyalty.
MEETING CUSTOMER SERVICE AND FULFILLMENT EXPECTATIONS. A critical factor
for online success is a holistic approach to the customer experience that
includes a focus on customer service and fulfillment. Often overlooked, these
aspects of the customer experience have the power to create long-lasting,
positive or negative, impressions with customers. Businesses that can
distinguish themselves by offering best-in-class customer service and
fulfillment will maximize the value of their customer relationships.
To capitalize on these opportunities and overcome these challenges, online
businesses need to focus on delivering a compelling customer experience.
Increasingly, this requires the ability to draw upon significant experience in a
variety of disciplines, manage large multi-disciplinary teams and successfully
deliver an integrated solution worldwide.
DEMAND FOR INTERNET PROFESSIONAL SERVICES
Few businesses have the internal capabilities to address the opportunities
and challenges of the Internet. The complexity of conducting business online,
the rapidly changing technological environment, the need to improve
time-to-market and the limited supply of technically proficient internal
personnel creates significant demand for Internet professional services.
According to a 1998 Dataquest survey, 83% of Fortune 1000 companies currently
invest, or plan to invest, in Internet professional services solutions.
Furthermore, International Data Corporation estimates the worldwide market for
Internet professional services will grow from $7.8 billion in 1998 to $78.6
billion in 2003, which represents a compound annual growth rate of more than
58%.
We believe that companies seek Internet professional services firms that
deliver complete and integrated global solutions with a focus on establishing,
maintaining and enhancing strong and lasting customer relationships with the
appropriate technology. We believe that such firms must have the global
capabilities to design and build online businesses, use technology as a
strategic tool, employ effective marketing strategies and improve customer
service and fulfillment to enhance the total customer experience.
THE ORGANIC SOLUTION
We have developed an integrated global solution to address the evolving
needs of the empowered customer and the significant opportunities and challenges
facing our clients online. The key elements of the Organic solution are:
CUSTOMER-TO-BUSINESS MARKET FOCUS
Unlike many of our competitors, we are exclusively focused on, and have
built our reputation in, the large and growing customer-to-business market. The
customer-to-business market encompasses both the traditional
business-to-consumer and business-to-business markets, but views the ultimate
customer as the central and most influential participant in a commercial
relationship.
Our solution recognizes that a complete focus on the customer has become
important to our clients as the Internet empowers every customer to demand a
seamless, compelling online experience. We help our clients transform their
businesses by building them from the customer's perspective, enhancing their
ability to create and maintain a direct relationship with their customers and
effectively incorporate customer feedback into their business processes. We
believe that we provide a unique value proposition to our clients because we
approach our solutions as potential drivers of growth in overall customer
satisfaction rather than as isolated assignments. A holistic approach is
important to our clients and requires a comprehensive and integrated skill set.
Therefore, our projects are typically large and complex. For the nine months
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ended September 30, 1999, 66% of our revenues were generated from engagements
with a value of more than $1.0 million.
COMPREHENSIVE AND INTEGRATED SERVICE OFFERING
We deliver value to our clients and their ultimate customers by addressing
all of the points of contact in the customer experience. Since our inception, we
have sought to provide an integrated solution by expanding our service offering
to meet our clients' evolving needs, including:
- iBusiness: Strategic consulting, creative, engineering and integration
services necessary to design, create, implement and maintain a
successful online business;
- Media and communications: Marketing and public relations services
necessary to build brands, generate awareness, drive visits and
transactions as well as understand customer behavior through continuous
data and feedback analysis; and
- Logistics: Customer service and fulfillment consulting and transaction
management services necessary to ensure superior product delivery,
customer satisfaction and loyalty.
We believe that these disciplines are not independent elements, but are
highly dependent on one another and must be fully integrated to create a
comprehensive strategy that encompasses the entire customer experience. This is
important to our clients because we help create their online businesses and
maximize their results over time.
Our comprehensive and integrated approach helps us maintain long-term
relationships with our clients and become a true partner. This also encourages
our clients to use more than one of our service offerings and enables us to
assist our clients with the implementation of their online businesses and the
refinement of their strategies. Furthermore, the opportunity to have an ongoing
role in our clients' online businesses provides us with a recurring revenue
base.
GLOBAL PRESENCE
The Internet has removed geographic barriers. Many of our multi-national
clients demand a consistent brand image and tailored customer experience, which
often requires localized content and specific knowledge about local practices
and customs. We believe that establishing a truly global presence is critical to
our clients' and ultimately to our success. Therefore, we will continue to
expand aggressively internationally, as well as in the U.S. We currently have
offices in three international locations including London, Sao Paulo and
Singapore. Currently we serve 23 clients internationally, including Boo.com,
Brahma Beer and DaimlerChrysler. We believe that our global presence allows us
to establish and deepen relationships with multi-national clients and grow with
them by effectively meeting the needs of their customers on a global basis.
TECHNOLOGY AS A STRATEGIC TOOL
Technology is a critical element in all of our service offerings and
influences every aspect of our solutions. Our approach is to combine custom
software development with best-of-breed pre-packaged software that is integrated
with and into the existing technical infrastructure of our clients, resulting in
a robust and integrated online business. We work with our clients to create
flexible, scalable systems that can evolve as the capabilities of the Internet
and the demands of customers change over time.
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In addition to managing the process of rapid deployment of flexible
Internet solutions, we also strive to be technical innovators and introduce next
generation technology to our clients.
Examples include:
- Our creative teams' usage of customer interfaces that incorporates rich
media including streaming audio and video;
- Our media efforts to develop transaction-enabled advertising banners
that integrate a traditional banner advertisement with transaction
management and user tracking tools so that an entire electronic
commerce transaction can occur through the banner; and
- Our customer service and fulfillment solutions which utilize fully
integrated transaction management applications that link customer
orders to fulfillment centers.
These cross-disciplinary innovations all use technology as a strategic tool
to deliver a unique and compelling customer experience.
COLLABORATIVE AND BALANCED TEAM APPROACH
Our collaborative core teams work together to design, build and maintain
successful online businesses for our clients. Client teams are managed by a
multidisciplinary group of team leaders including a client partner, an
interactive strategist, a creative leader, a technical leader and a project
manager that work in close coordination to ensure successful execution of an
engagement. Marketing and public relations and customer service and fulfillment
leaders round out each team depending on the scope of the engagement. These team
leaders work together as peers to actively manage and monitor each client
engagement through the use of milestones, structured discovery, planning and
implementation processes and regular feedback mechanisms.
From planning to design to problem-solving the expertise of every
discipline is involved and team members share knowledge and ideas. This ensures
that the strategy we design can be implemented and the technology we recommend
meets customer needs. Our team-oriented culture promotes the open discussion of
strategic, design, creative and technical challenges to solve problems
efficiently and effectively, allowing us to deliver on the high expectations of
our clients and their customers.
OUR GROWTH STRATEGY
Our objective is to be the leading Internet professional services firm
focused on the customer-to-business market. To achieve this objective, the key
elements of our growth strategy include:
HIRE AND RETAIN THE BEST PEOPLE
We view our culture of innovation and commitment to professional
development to be the strongest asset we have in attracting and retaining our
professionals. We have developed a scalable recruiting function to identify and
hire outstanding professionals, an extensive training and development program to
foster employee satisfaction and productivity and a structured compensation and
benefits organization to ensure that we provide highly competitive pay packages.
Given our rapid and global growth we also provide our employees with the
opportunity for professional mobility and focus on developing our managers from
within the organization. We have invested in local human resources teams for our
offices that monitor employee morale and daily human resources operations.
LEVERAGE OUR BUSINESS PROCESSES AND INFRASTRUCTURE
We have developed a scalable business model to manage our rapid, organic
growth and to serve our expanding client base. To support this model, we have
developed and continue to
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improve our business and knowledge management processes including our
proprietary workflow methodology, the reuse of common programming elements and
our use of prototypes. We will continue to invest in our infrastructure
including our management information systems, our financial planning processes
and controls and our Intranet. Our office-in-a-box strategy is designed to
provide both a systematic approach and the processes necessary to efficiently
and effectively implement critical business functions, including workflow,
project management, recruiting, training and budgeting for new offices on a
global basis. We believe that the development and evolution of these processes
and infrastructure will allow us to continue to effectively manage our growth
and scale our business operations globally.
CONTINUE OUR TRACK RECORD OF INNOVATION
Our ability to innovate will continue to be an important factor
differentiating us from our competitors. Since our founding in 1993, we have
demonstrated a track record of innovation. We led the development of the Apache
Web server and founded Accrue Software (Nasdaq: ACRU). We continue to identify
and address the changing needs of our clients and their customers through the
creation of innovative service offerings. Our customer service and fulfillment
services and our practice known as Value Optimization through Improved Customer
Engagements, or VOICE, are two more such examples. We will continue to develop
new and innovative service offerings as we anticipate new customer needs.
EXPAND OUR RELATIONSHIPS WITH OUR EXISTING CLIENT BASE
We intend to use our comprehensive and integrated service offering to grow
and expand relationships with our existing clients as their needs change. The
Internet has proven to be a highly dynamic and powerful medium and the extent of
its global impact on traditional businesses and the creation of new commercial
opportunities is not fully known. This gives us the opportunity to sell
additional services to our existing clients as their needs change or the scope
of our engagement grows. By expanding relationships with our existing clients,
we can reduce the cost of acquiring additional revenues, strengthen our
partnership with our current clients and increase recurring revenues.
EFFECTIVELY TARGET AND SOLICIT NEW CLIENTS
We believe that by proactively targeting and selecting the most attractive
new clients we will improve our long-term prospect for success. The most
attractive clients are businesses that understand the potential power of the
Internet and that will likely benefit from using more than one of our service
offerings. We also pursue franchise-enhancing engagements that involve
implementing Internet solutions for new industries, technologies and business
models. By effectively targeting new clients, we believe that we can build
mutually beneficial long-term client relationships and gain valuable experience
and insights.
CONTINUE OUR GLOBAL EXPANSION
To be a global leader, we believe that we need to intelligently build ahead
of the growth curve for Internet-capable customers in non-U.S. markets. To meet
our global growth objectives we intend to open new offices, both in the U.S. and
internationally, to expand our base of clients and to deepen our relationships
with our existing clients around the world. In addition to organic growth, we
may make small strategic acquisitions in selected international markets to
acquire local talent and experience as appropriate.
To effectively manage and achieve our planned global growth, we anticipate
the need to open a number of new offices over the next several years. To manage
our office expansion program we have assembled and trained an experienced
corporate development team, which has successfully opened four offices since
1998. The corporate development team led the design of
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our office-in-a-box program to provide a systematic set of procedures and tools
to open new offices, including workflow, project management, recruiting,
training and budgeting. We currently have U.S. offices in San Francisco, New
York, Chicago and Detroit, and international offices in London, Sao Paulo and
Singapore.
ORGANIC SERVICES
We provide a comprehensive and integrated suite of Internet professional
services focused on the total customer experience. We developed our service
offerings to meet the changing needs of our clients and their customers and we
anticipate that these offerings will continue to evolve and expand. Our current
service offerings include:
STRATEGIC CONSULTING SERVICES
The value of our strategic consulting offering lies in our ability to
understand our clients' business objectives, collaborate with our creative and
engineering teams and recommend forward-looking, actionable strategies. Our
ability to rapidly deliver prototypes provides our clients with the opportunity
to have a significant time-to-market advantage.
SERVICES PROVIDED. Our strategic consulting teams provide Internet-focused
business strategy expertise, strategic marketing, branding and research
services, and customer service and technology consulting. Our team helps clients
identify online market opportunities, define and develop sustainable online
business models, understand sources of competitive differentiation, identify,
analyze and segment online target markets, develop compelling online brand
strategies and create a framework for evolving and evaluating their online
efforts.
Our research services focus on five key areas including audience profiling,
concept testing, site development and usability, brand strategy and market
positioning and messaging. Our researchers employ a variety of qualitative and
quantitative, offline and online methodologies including surveys, usability
testing, one-on-one interviews and focus groups at all stages of the development
and evolution of an online business.
IMPLEMENTATION. Our strategic consulting teams work in a collaborative
fashion with our clients and other specialists within Organic. These teams
articulate a vision for the future, test multiple scenarios and refine that
vision based on the rapid prototyping of potential strategies. In addition to
the collaboration associated with each client engagement our teams share ideas
and best practices through tailored education and brainstorming sessions,
summits and focused workshops.
CREATIVE SERVICES
Our creative teams are responsible for designing a compelling user
experience that enhances the interaction and communication between our clients
and their customers consistent with our clients' strategic goals and the needs
of their customers.
SERVICES PROVIDED. Our creative services involve the creation or extension
of a client's online brand identity, defining the theme or unifying concept for
the business or media campaign and creating an experience and message that is
tailored to attract and retain customers. We believe that a client's overall
strategy should be intertwined with every aspect of our creative solution and
consistent with the technical sophistication of the intended audience. Our
creative team works closely with our strategy and engineering teams to ensure
that the technical architecture and the user interface of a client's online
business work together to create a consistent, engaging and responsive customer
experience.
IMPLEMENTATION. We implement our creative services through experts in four
key areas, including visual design, editorial, information architecture and
interactive art production. Our creative staff has expertise and training as
animators, cinematographers, editors and sound,
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multi-media and game designers. Our use of prototypes to evaluate interface
design, content and customer behavior improves our ability to quickly test
multiple scenarios and incorporate feedback into the design and implementation
of a solution. The prototyping process also allows us to investigate innovative
uses for applications, technologies and platforms including broadband and
interactive television.
ENGINEERING AND INTEGRATION SERVICES
Our engineering teams combine traditional software engineering and emerging
technologies to deliver dynamic, compelling and scalable solutions for our
clients.
SERVICES PROVIDED. Our approach is to combine custom software development
with best-of-breed pre-packaged software that is integrated with and into the
existing technical infrastructure of our clients. Our Internet expertise
includes all aspects of technical design, development and integration related to
electronic commerce; Web-based applications development; database systems;
content and transaction management tools; and Internet features including
community, personalization and customization. We design our solutions to be
flexible and extensible for future development. We also incorporate the ability
to capture site performance metrics and define and track customer behavior
information allowing our clients to measure their return on investment.
IMPLEMENTATION. Our engineering teams follow a flexible and comprehensive
methodology to quickly analyze a challenge and then recommend, design and deploy
a solution. Our methodology focuses on interface development and implementation
concurrently with core application development. Our proprietary processes also
include the integration of data from multiple sources. Our systems specialists
work with our clients to specify hardware and software platforms and to
integrate our solutions with third party systems. Our engineering teams
implement interface designs developed in conjunction with our creative teams
using interactive technologies including dynamic hypertext markup language, or
DHTML, Shockwave and Flash. Throughout all phases of development, a group of
quality assurance specialists work in conjunction with our development teams to
ensure that robust, scalable and functional solutions are created to our
client's specifications.
MEDIA AND COMMUNICATIONS SERVICES
Our marketing and public relations services build brands, generate
awareness, drive traffic and transactions and improve the communication between
our clients and their customers through the management of customer data and
feedback. We believe we are the leading buyer and manager of online media, and
that by using our accumulated purchasing power and analysis of customer behavior
data we deliver measurable results for our clients through lower customer
acquisition costs, higher retention rates and increased revenues.
SERVICES PROVIDED. Our media teams use their knowledge of customer behavior
to design marketing campaigns, in conjunction with technological innovations and
other more traditional techniques including direct response, email promotion,
sampling, sponsorships, brand development and affiliate program management. In
collaboration with our engineering teams, we have created new "beyond the
banner" advertising vehicles using DHTML technology. These advertisements allow
entire transactions to be completed within the banner, facilitating commerce by
reducing the time and effort required to complete a transaction. This innovation
also delivers a consistent branding message and effectively shares information
between the Web site and the advertisement. As appropriate, we also extend our
media expertise offline either directly or through arrangements with offline
agencies.
Our communications teams offer public relations services including
strategic message and identity development; product and company launch or
relaunch services; broadcast, online and
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print media and analyst relations services. We also offer trade show support and
create corporate presentations and collateral material.
IMPLEMENTATION. Creating an online marketing program begins with research
and strategic planning from a collaborative core team that provides overall
direction consistent with our client's strategy. The team generally includes an
art director, a writer, a technical lead, a performance analyst and a media
planner and buyer. The team collaborates to develop advertising designs,
promotional or sponsorship ideas, media recommendations and test scenarios and
metrics for each campaign. After a marketing program launches, our collaborative
team analyzes the success of the campaign by reviewing response rates, traffic
and transaction volumes and using this feedback to refine the campaign or future
campaigns.
CUSTOMER SERVICE AND FULFILLMENT SERVICES
Our customer service and fulfillment offering includes both consulting and
transaction management services. Our turn-key solution focuses on delivering a
complete electronic commerce experience to our clients' customers. We provide
advice on best practices based on facility visits and audits of 20 of the
leading electronic commerce fulfillment and customer service providers as well
as our proprietary database which contains the logistical features of 500
leading Web sites and profiles of current relevant Web-based applications,
including live chat, email and collaborative filtering.
SERVICES PROVIDED. Our consulting services include a needs and capabilities
assessment, strategic advisory services, technology assessment services, third
party vendor selection and negotiation, development of performance monitoring
procedures and the integration of customer service and fulfillment functions
into our clients' Web operations in a manner which is consistent with their
goals and branding message.
Our transaction management services provide a complete outsourced solution,
including customer service, fulfillment and transportation management services.
Our fulfillment specialists monitor the performance of third party fulfillment
houses, identify and implement service enhancements and can manage all of the
vendors used by our clients. In addition to fulfillment services we also help
our clients improve their customer service experience by designing, and managing
highly automated third party call centers. Our staff incorporates telephone,
email and live chat services that extend beyond traditional order taking and
tracking functions in ways that help our clients improve and extend their
relationship with their customers and potentially increase satisfaction and
loyalty.
IMPLEMENTATION. Our customer service and fulfillment professionals are
experts in electronic commerce distribution and focus on integrating order
management, transportation management, customer fulfillment, distribution,
payment processing, call center and data management activities while enhancing
overall customer service. Our teams have experience in the design and
integration of electronic commerce technologies and in monitoring new
innovations.
INNOVATIVE NEW PRACTICES
Driven by the needs of our clients and their customers we continue to
develop new and innovative practices. We are developing a practice called Value
Optimization through Improved Customer Engagements, or VOICE. VOICE aims to
provide clients with the technology, tools, tactics and analytics for measuring,
understanding and improving their businesses by better incorporating the voice
of the customer into online business operations. The philosophy of our VOICE
practice is grounded in behavioral psychology and incorporates the appropriate
use of statistical modeling. In addition, VOICE involves the use of
permission-based marketing, in which businesses, with the permission of their
customers, engage them in a dialogue to drive a deep
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understanding of behavioral and relationship attributes. We continue to develop
new and innovative service offerings as we anticipate new customer needs.
CLIENTS
We believe that our continued success depends on maintaining a broad client
base of both large, established companies and emerging Internet companies. For
the nine months ended September 30, 1999, approximately 75% of our revenues were
derived from established, offline companies either extending their businesses or
creating a new presence or identity online. We combine the thought leadership of
Internet-based start-ups with the operating knowledge of traditional companies
when developing solutions for our clients. Since our founding in 1993, we have
performed work for over 250 clients. Consistent with our strategy, we have
derived approximately one-third of our revenues for the nine months ended
September 30, 1999 from clients who have used more than one of our service
offerings.
The following is a partial list of our clients that generated over $100,000
in revenues for us during the nine months ended September 30, 1999, which we
believe is representative of our overall client base:
ESTABLISHED COMPANIES
Avis
Barnes & Noble
Blockbuster
Brahma Beer
British Telecom
Chase Manhattan Bank
Compaq
DaimlerChrysler
Gap
Garnett Hill
Global Sport Interactive
Home Depot
Iomega
Knowledge Universe
Lucent
Nickelodeon
Payless Shoe Source
Tommy Hilfiger
United Missouri Bank
Washington Mutual
EMERGING INTERNET COMPANIES
Boo.com
CDNOW
Deja.com
E/Town
FTD.com
Guild.com
KeeBoo
JPKids
Lucy.com
Party Host.com
Textbooks.com
We currently derive a significant portion of our revenues from a limited
number of clients. For the nine months ended September 30, 1999, our five
largest clients accounted for approximately 41% of our revenues. During this
period DaimlerChrysler and Blockbuster accounted for approximately 12% and 10%
of our total revenues, respectively.
In exchange for our services we have from time to time made strategic
investments in some of our Internet clients. Our venture catalyst investment
strategy has been focused on select early stage clients with attractive business
models seeking alternative forms of payment and/or who are interested in more
closely aligning our goals through equity-based compensation. In general, these
equity investments are structured so our clients pay for all of the costs
related to their engagement in cash and use equity incentives to compensate us
for a portion of our profit margin. To date we have made several equity
investments in our clients, including Stan Lee Media and HomeGrocer.com, among
others.
CLIENT CASE STUDIES
Each of the case studies that follow demonstrate our ability to deliver
global, integrated solutions with complex technologies.
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DAIMLERCHRYSLER
The work that we are performing for DaimlerChrysler demonstrates our
ability to create a successful strategic partnership and to deliver integrated
services on a global basis to large international clients.
CLIENT CHALLENGE. In creating its online initiative, DaimlerChrysler needed
to broaden its mission to include interactive strategies and to address the
growing technical needs in the global marketplace. It had a variety of Web sites
in different countries that were controlled locally. To implement its global
strategy, DaimlerChrysler needed to create a unifying image for all of its
Internet properties. This required a global team approach to interact and build
consensus with both local and corporate constituencies within DaimlerChrysler.
ORGANIC SOLUTION. We have begun to deliver a solution that is designed to
create a unified Web strategy that presents DaimlerChrysler brands consistently
worldwide in a way that appeals to local customers. We focused our initial
efforts on Europe. A team comprised of personnel from our London, New York and
Detroit offices collaborated to: (a) conduct in-market audits to develop a
cohesive long-term European strategy; (b) develop Web sites to incorporate both
the corporate and in-market customer messages; and (c) leverage technology and
information across the organization. We developed the content and copy for
branded Web sites and implemented multi-lingual functionality for global
audiences, a process commonly referred to as localization.
To transition from locally to centrally controlled Web sites, we developed
a phased approach to conform all Web sites with our recommended global
architecture, while allowing local design input. We used Organic's proprietary
C++ common gateway interface libraries with MapQuest common gateway interfaces
run on a Sun Solaris operating system with Netscape enterprise server as the
server platform. The first phase included transforming the content of each local
Web site from 10 pages with limited functionality and product information to 300
pages using a template with multiple car information and expanded functionality
that could be easily replicated to add other countries. We leveraged
technologies created in the U.S., including email fulfillment and user data
capture for use across Europe. In the second phase, we plan to redesign the
application infrastructure using IBM Websphere to create a dynamic, personalized
experience and extensively use Macromedia Shockwave and Flash technology to
enable rich media experiences for new vehicle introductions. Recently the scope
of our efforts for DaimlerChrysler has expanded to include the Asia-Pacific
region, South America and the Middle East.
COMPAQ
The work we performed for Compaq Computer Corporation illustrates our
skills with cutting-edge Internet technology. In working with Compaq, we
developed a dynamic, highly technical Web site, to connect Compaq, a Fortune 500
company, with consumers in the online world.
CLIENT CHALLENGE. Compaq wanted to build a Web site to showcase the Sting
World Tour and enhance Compaq's position as an Internet savvy company. Compaq
wanted to create a Web site that would have a life span of 18 months, the length
of the tour, and would be able to take advantage of broadband technologies as
they become more available.
ORGANIC SOLUTION. Our solution was to create a dynamic Web site featuring
tour information, information about Sting and a behind the scenes section to
showcase the Compaq technology behind the Web site. We performed the systems
integration and database design to create a robust, scalable group of Compaq
ProLiant servers deploying Microsoft technology. Repeat visits to the Web site
are enhanced through the use of the community tools and the Songline Engine -- a
real time tool to create and compose original audio, video and text based on
rich media available throughout the Web site. It encourages word of mouth
marketing by giving users the
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ability to invite others to view a Songline creation on the site. In addition to
the Songline Engine, we developed a rich media interface using Macromedia Flash
Generator, Microsoft Site Server and Microsoft SQL Server and also created a
registration engine to capture potential customer information, allowing for
targeted marketing efforts.
Our solution makes use of some of the latest Internet technologies. We
employed Macromedia's Flash Generator extensively to enable the user to
experience a true next generation Web site sponsored by Compaq. We also designed
the Web site's architecture to allow for a long life span and eventual
integration of materials for broadband delivery. In addition, we developed
custom publishing and content management tools to allow geographically diverse
teams to manage the Web site and update rich media portions of the system
through a Web-based interface. These tools reduce the overall operating costs
and resources necessary to maintain the Web site.
SALES AND MARKETING
We market and sell our integrated suite of Internet professional services
through a coordinated team of business development professionals located in each
of our offices. Opportunities are prioritized by client engagement type,
targeted vertical industries and the opportunity to innovate. Our engagements
have been increasingly focused on fully-engaged assignments which cross multiple
service lines and/or include global strategic partnerships. Extended
engagements, defined as multi-year and recurring revenue opportunities with the
potential to evolve into fully-engaged relationships, are also prioritized. We
also pursue basic engagements, which tend to be smaller in size or shorter in
duration, when new vertical markets or innovation opportunities exist.
The attractiveness of industry verticals is determined based on the size of
the vertical market opportunity and the influence of the Internet on the related
business models. Industry verticals we currently focus on include apparel,
automotive, consumer electronics, education, entertainment and content,
financial services, healthcare, travel and home categories. Selected innovative
technologies include broadband content programming, webcasting, Internet
appliances and customer insight and relationship management services.
In addition to new clients, a key component of our growth strategy is the
ability to penetrate existing client accounts through the cross selling of
additional services. We currently manage opportunities with existing clients
through our account management process. In this process, a client partner is
responsible for understanding the client's needs and how other Organic services
could be beneficial. All members of the client team meet on a monthly basis to
review business development plans with respect to each client and evaluate our
progress on earlier initiatives.
Our business development group is complemented by a variety of marketing
programs designed to generate demand, strengthen our brand and build overall
awareness. Our reputation has been built through careful cultivation of thought
leadership and innovation and through client references, industry conferences,
trade publications and our Web site. To promote our brand, we intend to continue
to pursue a marketing strategy through both Internet and traditional media-
based channels to increase our visibility with potential clients, industry
partners and prospective employees. In addition to these formal marketing
efforts we have historically established a number of new client relationships
based on referrals from previous engagements.
MAINTAINING THE ORGANIC CULTURE
OUR CULTURE AND EMPLOYEES
We view the Organic culture as one of our most strategic assets. We have
built a creative and adaptive environment that inspires individuals to excel.
The influence of our culture extends to the design of our office space, which
has an open plan with few offices or cubicles to promote
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a barrier-free environment. Our organization is centered on people, and espouses
the core values of collaboration, innovation and learning. We are committed to
recruiting outstanding professionals, providing ongoing, role specific and
general management training and development and offering competitive
compensation and benefits packages. Our learning transfer occurs both through
structured, moderated sessions and informal employee gatherings. Examples of
structured sessions include our specialized summits, new hire orientation
seminars and local all hands meetings. Unstructured employee gatherings include
Wednesday bagel mornings and Friday afternoon socials during which employees
from all disciplines and functions within an Organic office can come together in
a supportive setting to share and generate ideas, or just to relax and have fun.
As of September 30, 1999, we had 681 full-time employees. Of these,
approximately 30 were strategy consultants, 41 were media and communications
specialists, 117 were creative specialists and 152 were engineers and technical
professionals. Experts in other functional groups included 11 in business
development, 58 in client services and 79 in project management. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and believe our relationship with our employees is good.
RECRUITING
Given our historical and anticipated growth, identifying and hiring
outstanding professionals that fit within the Organic culture is one of the most
important functions within Organic. Our recruiting department consists of 15
professionals domestically and internationally, and includes 10 full-time
recruiters. The recruiting department is organized along geographic lines so
that we can develop an in-depth knowledge of the local market and scale in
accordance with our expansion strategy. As we open and expand new offices, they
will usually be supported by the recruiting department of an existing office
until the new office reaches sufficient size, at which point a dedicated
recruiting professional is assigned.
We recruit through a broad array of channels, including general and job
specific advertising, internal hires, job fairs, open houses and trade shows. We
are currently implementing a number of key recruiting initiatives including (a)
an enterprise-wide, Web-based hiring automation system with a PeopleSoft
interface, (b) an internal sourcing team focused on proactive identification of
key talent and (c) a college relations program to target highly qualified
students and promote our image at colleges and universities around the world.
Our new recruiting system is designed to enhance our ability to maintain
detailed performance metrics to monitor and control open positions, time to fill
open positions, cost per hire, source of hire and quality of hire.
TRAINING AND DEVELOPMENT
We have an extensive training and development program, which is designed to
accelerate employee productivity, complement our recruiting and retention
efforts by enhancing employee job satisfaction and promote knowledge sharing to
maintain our market leadership. Our training and development initiatives include
new hire orientation, recurring management and professional skills training and
annual summits for a number of functions including creative, project management,
engineering, media, business development, strategy and client services
personnel. Training and development also complements our office expansion
strategy by promoting consistency across all of our offices, service lines and
departments. As we continue to open new offices and expand existing offices, we
can deploy existing employees who have mastery of the skills required and an
understanding of and commitment to the Organic culture in new offices.
RESEARCH AND DEVELOPMENT
Our research and development, or R&D, is focused on ensuring the ability of
our local teams to provide advanced solutions to challenges we currently address
and to prepare our
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teams for problems we will be asked to solve. Our R&D philosophy is to support
innovation efforts on a local level through a global support system that assures
a uniformly high standard of quality. We believe attaining this goal will enable
a faster time-to-market for our clients. Additionally, our R&D team maintains
relationships with companies that provide knowledge and recommendations on
software, hardware and training that will speed team problem solving.
Our R&D efforts are focused on three service lines: engineering, creative
and strategy. Our engineering R&D efforts involve investigating new
technologies, products and emerging standards. We also develop platforms that
allow for rapid solution delivery. While developing core skill sets, our
engineering team has taken a technology-agnostic stance, allowing our clients to
benefit from objective recommendations. Our engineering R&D supports our teams
with the knowledge to quickly select the best technology solution, and if
necessary, provide the support to implement it.
Our creative R&D focuses on both extending and enabling our engineering
team efforts. Three areas of particular emphasis are exploratory prototypes,
re-use strategies for information design and strategic creative partnerships.
Our creative R&D team also collaborates with local creative teams, as well as
our strategic consulting and VOICE teams to increase our understanding of the
patterns and interfaces that allow our solutions to connect with their intended
audience. Behavioral knowledge and communication expertise are intrinsic to
success on any interactive platform; therefore, creative research, analysis and
invention are all methodically gathered and shared with our teams.
Our R&D teams also work closely with our strategy teams throughout the
organization to create new and enhanced business models, revenue streams and
cost savings opportunities for our clients. The end result is faster, more
robust, more efficient solutions for developing our client's businesses.
KNOWLEDGE MANAGEMENT
We work to capture and share knowledge and re-use technology throughout our
business. Knowledge-sharing occurs in several ways, including through our
Intranet, training and development classes, discipline summits, off-site
management meetings and our office-in-a-box tools and processes. We re-use
technology when appropriate through the development of standard software
platforms, centrally-managed software licensing, software re-use and strategic
technology partnerships. We also share best-practice creative design solutions
across our teams for use with our clients.
INTRANET
The mission of our Intranet is to create a sense of community, enhance
communication and simplify processes. Our workflow processes are accessible
through the Intranet, and teams are expected to follow them as standard
procedure on client engagements. We encourage constant improvement in these
processes, which are discussed at our various discipline summits. Although every
solution created for a client is unique, many of the underlying functional
elements can either be re-used for a period of time or share common building
blocks that serve as a base for other engagements.
LEARNING AND SUMMITS
In recognition of the need to create and maintain relationships with our
employees, we have a number of initiatives that focus on participatory learning,
culture sharing and knowledge transfer. We provide general training and
development classes through our human resources department to both new hires and
current employees. In addition, each of the discipline heads is responsible for
the development and communication of best practices and tools throughout the
organization. We share key learning at various summits that are held each year
within the
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strategic consulting, creative, project management, engineering, media and
business development disciplines. Our senior executives also participate twice a
year in off-site management sessions.
OFFICE-IN-A-BOX
The corporate development team has created our office-in-a-box program to
systematize the process of opening new offices. It provides a road map for new
office initiation, including process documents, monitoring and control tools and
training plans. The office-in-a-box information exists in centralized hardcopy
form as well as electronically on our Intranet. It includes manuals on
departmental descriptions, organization charts, job descriptions, roles and
responsibilities, contact lists, workflows, policies and procedures and
templates, formats and example documents.
COMPETITION
The market for Internet professional services is relatively new, intensely
competitive, quickly evolving and subject to rapid technological change.
Further, our industry is experiencing rapid consolidation. Our principal current
competitors include the following:
- other providers of Internet professional services, including
Agency.com, iXL, Proxicom, Razorfish, Scient, USWeb/CKS and Viant;
- large information technology consulting services providers, including
Andersen Consulting, Cambridge Technology Partners, Cap Gemini, CSC,
EDS, IBM and Sapient;
- strategic consulting firms, including Bain & Company, Booz Allen &
Hamilton and Boston Consulting Group; and
- internal information technology, marketing and other departments of
current and potential clients.
We anticipate facing additional competition from new entrants into our
markets due to low barriers to entry.
We believe that the principal factors upon which we compete are the ability
to offer a comprehensive suite of services, the ability to handle large, complex
projects, the ability to attract and retain the best professionals through our
culture, the blending of strategy, creative and engineering expertise, brand
recognition and reputation, client service and price. Although we believe that
few of our competitors currently offer as comprehensive a suite of services as
we offer, many competitors have announced an intention to expand their service
offerings. Many of our competitors have longer operating histories, larger
client bases, longer relationships with clients, greater brand or name
recognition and significantly greater financial, technical, marketing and public
relations resources than we have. These competitors, as well as new competitors,
could develop or offer services that are comparable to or superior to ours, or
are less expensive. The entry of new competitors or changes in the service
offerings of existing competitors would harm our business, financial condition
and results of operations.
INTELLECTUAL PROPERTY
We rely on a combination of nondisclosure and other contractual
arrangements with our employees and third parties, copyright trademark, service
mark and trade secret laws to protect our intellectual property. We are pursuing
the protection of our trademarks in the United States and internationally. We
have obtained trademark registrations in the U.S. for the "Organic" and "Organic
Online" marks and have applied for registration of the "Organic Media" mark and
some of our other trademarks and service marks. We are pursuing expanded
international trademark and service mark protection. In addition, although we do
not currently pursue patent protection for our intellectual property, we may do
so in the future, as appropriate.
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If we fail to adequately protect our intellectual property rights and
proprietary information or if we become involved in litigation relating to our
intellectual property rights and proprietary technology, our business could be
harmed. Any actions we take may not be adequate to protect our proprietary
rights and other companies may develop technologies that are similar or superior
to our proprietary technology. In addition, the legal status of intellectual
property on the Internet is currently subject to various uncertainties.
Although we believe that our products and services do not infringe on the
intellectual property rights of others and that we have all rights needed to use
the intellectual property employed in our business, it is possible that we could
in the future become subject to claims alleging infringement of third party
intellectual property rights. Any claims could subject us to costly litigation,
and may require us to pay damages and develop non-infringing intellectual
property or acquire licenses to the intellectual property that is the subject of
the alleged infringement.
FACILITIES
Our headquarters are located in a leased facility in San Francisco,
California consisting of approximately 52,000 square feet of office space. The
primary lease for this office space expires in September 2002. We also have
entered into a lease for a new headquarters location in San Francisco consisting
of approximately 210,000 square feet of office space, commencing September 2000
and expiring in September 2010. We also lease office space in Chicago, Detroit,
New York, London, Sao Paulo and Singapore. We are currently exploring real
estate options consistent with our future growth plans. We do not anticipate
acquiring property or buildings in the foreseeable future.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation incidental to the
conduct of our business. We are not currently party to any material legal
proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors as of November 22, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jonathan Nelson.................. 32 Chief Executive Officer and Chairman of the Board
Michael Hudes.................... 38 President and Director
Susan L. Field................... 40 Executive Vice President and Chief Financial Officer
Larry K. Geisel.................. 58 Executive Vice President and Chief Operating Officer
Daniel J. Lynch.................. 34 President, Logistics
Margaret Maxwell Zagel........... 50 Vice President, Chief Legal and Administrative
Officer and Secretary
Matthew Bernardini............... 26 Vice President, Chief Technology Officer
Marita C. Scarfi................. 33 Vice President, Finance
Janis M. Nakano Spivack.......... 36 Vice President, Chief Creative Officer
Lynda Ward Pierce................ 36 Vice President, Human Resources
Gary F. Hromadko................. 47 Director
Gerald Bruce Redditt............. 48 Director
</TABLE>
Biographies of our executive officers and directors are as follows:
JONATHAN NELSON co-founded our company in 1993 and has served as our Chief
Executive Officer and Chairman of the Board since January 1995. From February
1996 to May 1996, Mr. Nelson served as President and Chief Executive Officer of
Accrue Software, a developer of network based tools for measuring Web site
performance. Mr. Nelson has served as Chairman of the Board of Accrue since
February 1996.
MICHAEL HUDES has served as our President and as a member of our board of
directors since October 1995 and until August 1999 he also served as our Chief
Operating Officer. From October 1993 to September 1995, Mr. Hudes was the
Director of Marketing for daVinci Time & Space, an interactive media company.
SUSAN L. FIELD has served as our Executive Vice President and Chief
Financial Officer since June 1999. From June 1997 to April 1999, Ms. Field was
employed at Sears, Roebuck and Co., a multi-line retailer providing merchandise
and services, most recently as the Senior Vice President -- Strategy, Planning
and Corporate Development. From August 1985 to June 1997, Ms. Field served in
various capacities at Merrill Lynch & Co., a global investment bank, most
recently as a Managing Director.
LARRY K. GEISEL has served as our Executive Vice President and Chief
Operating Officer since September 1999. From April 1998 to September 1999, Mr.
Geisel served as the Executive Vice President, Chief Technical Officer of
Knowledge Universe, Inc., a holding company focused on educational products and
services. From February 1996 to April 1998, Mr. Geisel was the Senior Vice
President, Chief Information Officer of Netscape Communications, Inc., a
provider of client and server software, development tools and commercial
applications. From February 1994 to February 1996, Mr. Geisel was an Executive
Vice President of Xerox Corporation, a provider of various document services.
DANIEL J. LYNCH has served as President, Logistics since May 1999. From
February 1993 to March 1999, Mr. Lynch served as the Senior Vice President,
Marketing and Sales of Technicolor Entertainment, a film processing and
distribution company.
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MARGARET MAXWELL ZAGEL has served as our Vice President, Chief Legal and
Administrative Officer and Secretary since August 1999. From March 1998 to March
1999, Ms. Zagel served as the Vice President, General Counsel and Secretary of
Tellabs Operations, Inc., a manufacturer of telecommunications equipment
solutions. From September 1984 to January 1998, Ms. Zagel served as General
Counsel of Grant Thornton LLP, an accounting and management consulting firm.
MATTHEW BERNARDINI has served as our Vice President, Chief Technology
Officer since July 1999, and prior to that, from October 1997 to July 1999, he
served as our Director of Engineering. From January 1996 to August 1997, Mr.
Bernardini was Vice President, Technology of Meta4Digital Design, an interactive
marketing company. From May 1995 to January 1996, Mr. Bernardini was an
independent consultant, working as a programmer and developer.
MARITA C. SCARFI has served as our Vice President, Finance since January
1998. She served as our Director of Finance from January 1997 to January 1998
and as our Controller from July 1996 to July 1997. From August 1988 to July
1996, Ms. Scarfi served as a Manager of Business Assurance for Coopers &
Lybrand, an accounting firm.
JANIS M. NAKANO SPIVACK has served as our Vice President, Chief Creative
Officer since November 1996. From October 1993 to October 1996, Ms. Spivack was
a partner of leftBrain-rightBrain, a provider of consulting, technical and
design production expertise to both Web site builders and individual companies.
LYNDA WARD PIERCE has served as our Vice President, Human Resources since
July 1999. From August 1998 to July 1999, Ms. Pierce served as the Director of
Human Resources of The Metzler Group, Inc., a provider of consulting services to
the utilities industry. From April 1997 to August 1998, Ms. Pierce served as the
Director of Human Resources for LECG, Inc., a provider of expert analysis,
litigation support and management consulting. From October 1996 to March 1997,
Ms. Pierce served as the Director of Human Resources for Party America, Inc., a
party merchandise retailer. From April 1991 to October 1996, Ms. Pierce served
as the Manager of Human Resources of Mervyn's, a department store.
GARY F. HROMADKO has served as one of our directors since January 1997 and
has served as a director of Organic United Kingdom, one of our wholly-owned
subsidiaries, since February 1999. Since 1993, Mr. Hromadko has been a private
venture investor in early stage technology companies.
GERALD BRUCE REDDITT has served as a member of our board of directors since
October 1998. Since May 1998, Mr. Redditt has served as an Executive Vice
President of Omnicom Group Inc., a strategic and financial holding company. From
July 1995 to May 1998, Mr. Redditt served as an Executive Vice President of Sony
Pictures Entertainment, a creator and distributor of entertainment products,
services and technology. From March 1991 to July 1995, Mr. Redditt served as a
Corporate Vice President of GTE Corporation, a telecommunications company. Since
January 1999, Mr. Redditt has served as a director of Agency.com, an Internet
professional services company.
BOARD COMPOSITION
Our bylaws authorize the number of directors to be not less than five nor
more than nine. The number of directors on the Board is currently fixed at six.
Our bylaws provide that following the completion of this offering our board of
directors will be divided into three classes of directors designated Class I,
Class II and Class III. Each class will have a three-year term. Initially, two
directors will serve in Class I, two directors will serve in Class II and two
directors will serve in Class III. The initial directors in each class will hold
office for terms of one year, two years or three years. Thereafter each class
will serve a three-year term. Executive officers are elected by and serve at the
direction of the board of directors.
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BOARD COMMITTEES
The board of directors has established a compensation committee and an
audit committee. The compensation committee, consisting of Mr. Hromadko and Mr.
Redditt, reviews and approves the salaries, bonuses and other compensation
payable to our executive officers and administers and makes recommendations
concerning our employee benefit plans.
The audit committee, consisting of Mr. Hromadko and Mr. Redditt, recommends
the selection of independent public accountants to the board of directors,
reviews the scope and results of the audit and other services provided by our
independent accounts, and reviews our accounting practices and systems of
internal accounting controls.
DIRECTOR COMPENSATION
Our directors currently are not compensated for their services. However, in
the future we intend to compensate our non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
There are no family relationships among any of our directors or executive
officers other than between Michael Hudes and Daniel Lynch, who are
brothers-in-law.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table contains information in summary form concerning the
compensation paid to our chief executive officer and each of our most highly
compensated executive officers whose total salary, bonus and other compensation
exceeded $100,000 during the fiscal year ended December 31, 1998. In accordance
with the rules of the SEC, the compensation described in this table does not
include perquisites and other personal benefits received by the executive
officers named in the table below which do not exceed the lesser of $50,000 or
10% of the total salary and bonus reported for these officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER 1998
1998 ANNUAL COMPENSATION
COMPENSATION --------------
------------------- TOTAL HEALTH
NAME AND PRINCIPAL POSITION SALARY BONUS INSURANCE
- --------------------------- -------- -------- --------------
<S> <C> <C> <C>
Jonathan Nelson
Chief Executive Officer and Chairman of the Board...... $ 90,000 -- $4,947
Michael Hudes
President and Director............................... 160,000 $ 65,000 5,792
Janis Nakano Spivack
Vice President, Chief Creative Officer............... 132,500 11,000 --
Michael Golden
Executive Vice President of Corporate Development.... 150,716 141,000 --
William Sequeira
Vice President of Engineering........................ 147,598 9,000 --
</TABLE>
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Michael Golden served as our Executive Vice President of Corporate
Development from April 1997 to March 1999. Additionally, from March 1999 to May
1999, he served as a consultant for us. William Sequeira served as our Vice
President of Engineering from September 1997 to August 1998.
OPTION GRANTS DURING FISCAL 1998
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during the
fiscal year ended December 31, 1998. All options granted to these executive
officers in the last fiscal year were granted under our 1997 stock option plan.
Each option vests and becomes exercisable over a period of four years. The
percentage of total options set forth below is based on an aggregate of
2,514,525 options granted to employees in fiscal 1998. All options were granted
at a fair market value as determined by the board of directors on the date of
grant. The board of directors determined the fair market value based on our
financial results and prospects and the share price in arms-length transactions.
The exercise price may in some cases be paid by delivery of other shares or by
offset of the shares subject to options. The deemed value for the date of grant
has been adjusted solely for financial accounting purposes. Potential realizable
values are net of exercise price, but before taxes associated with exercise.
Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock
price appreciation are based on the exercise price of the options and are
provided in accordance with the rules of the SEC and do not represent our
estimate or projection of the future common stock price.
OPTIONS GRANTED IN FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM
OPTIONS FISCAL YEAR PRICE PER EXPIRATION ---------------------
NAME GRANTED 1998 SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Nelson........... -- -- -- -- -- --
Michael Hudes............. 492,000 19.6% $0.2933 06/24/08 $90,752 $229,983
Janis Nakano Spivack...... -- -- -- -- -- --
Michael Golden............ 309,000 12.3% $0.2933 06/24/08 $56,997 $144,440
William Sequeira.......... -- -- -- -- -- --
</TABLE>
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<PAGE> 55
OPTION EXERCISES
The following table sets forth information concerning exercisable and
unexercisable stock options held by each of the executive officers named in the
summary compensation table at December 31, 1998. The value of unexercised
in-the-money options represents the positive spread between the exercise price
of the stock options and the deemed fair market value of our common stock as of
December 31, 1998, which our board of directors determined was $1.17 per share.
All options were granted under our 1997 stock option plan. These options vest
over four years and otherwise generally conform to the terms of our 1997 stock
option plan.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1998
AND OPTION VALUES AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT IN-THE-MONEY
FISCAL OPTIONS AT FISCAL
YEAR END YEAR END
SHARES -------------- -----------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- -------------- -----------------
<S> <C> <C> <C> <C>
Jonathan Nelson......................... -- -- --/-- --/--
Michael Hudes........................... -- --/492,000 --/$429,713
Janis Nakano Spivack.................... -- -- 34,531/92,969 $30,159/$ 81,199
Michael Golden.......................... -- -- 99,875/464,125 $87,231/$405,367
William Sequeira........................ -- -- --/-- --/--
</TABLE>
EMPLOYMENT AGREEMENTS
JONATHAN NELSON
On January 29, 1997, Jonathan Nelson entered into an employment agreement
with us to serve as our Chief Executive Officer. Mr. Nelson currently serves as
our Chief Executive Officer and as a member of our board of directors. As
amended on February 24, 1997, the employment agreement provides Mr. Nelson with
an annual base salary of $90,000. In addition, Mr. Nelson is eligible to receive
discretionary bonus compensation in an amount determined by the board of
directors.
Under the terms of his agreement, Mr. Nelson's employment shall continue
until either party gives the other party 90 days advance written notice of the
expiration of the employment agreement. Should we terminate Mr. Nelson's
employment for cause, we must pay Mr. Nelson all compensation due on the date of
termination. Cause is defined as: (a) repeated failure or refusal by Mr. Nelson
to materially perform his duties and responsibilities, or his failure to devote
substantially all of his business time and attention exclusively to our business
and affairs; (b) willful misappropriation of our funds or property; (c) use of
alcohol or illegal drugs, which interferes with his performance and which
continues after written warning; (d) conviction in a court of law of, or
entering a plea of guilty or no contest to, any felony or any crime involving
moral turpitude, dishonesty or theft; (e) any commission in bad faith of any act
which injures or could reasonably injure our reputation, business or business
relationships; or (f) any material breach of his employment agreement, which is
not cured within 30 days of our written notice.
Should we terminate Mr. Nelson's employment without cause and without 90
days advance written notice, Mr. Nelson is entitled to receive from us, so long
as Mr. Nelson is not in breach of the non-competition and protection of
confidential information provisions of his employment agreement, (a) his
applicable salary compensation less any income earned from subsequent
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<PAGE> 56
employment, limited to 90 days once written notice is given, and (b) any unpaid
reimbursable expenses outstanding, and any unused accrued vacation, as of the
date of termination.
Under the terms of his employment agreement, Mr. Nelson agrees that while
he is employed by us and for a period of two years after the date of his
termination, he shall not, except on our behalf: (a) solicit any client
business; (b) solicit any of our employees or exclusive consultants; or (c)
render to or for any client any services that we provide. Additionally, Mr.
Nelson also agrees that he will not at any time (a) disclose any confidential
information or trade secret of ours or our clients; or (b) use any confidential
information or trade secret for his own benefit, or for the benefit of third
parties.
MICHAEL HUDES
On January 29, 1997, Michael Hudes entered into an employment agreement
with us to serve as our President. Mr. Nelson currently serves as our President
and a member of our board of directors. As amended on February 24, 1997, the
employment agreement provides Mr. Hudes with an annual base salary of $140,000.
In addition, Mr. Hudes is eligible to receive discretionary bonus compensation
in an amount determined by the board of directors.
Under the terms of his agreement, Mr. Hudes' employment shall continue
until either party gives the other party 90 days advance written notice of the
expiration of the employment agreement. Should we terminate Mr. Hudes'
employment for cause, we must pay Mr. Hudes all compensation due on the date of
termination. Cause is defined as: (a) repeated failure or refusal by Mr. Hudes
to materially perform his duties and responsibilities, or his failure to devote
substantially all of his business time and attention exclusively to our business
and affairs; (b) willful misappropriation of our funds or property; (c) use of
alcohol or illegal drugs, which interferes with his performance and which
continues after written warning; (d) conviction in a court of law of, or
entering a plea of guilty or no contest to, any felony or any crime involving
moral turpitude, dishonesty or theft; (e) any commission in bad faith of any act
which injures or could reasonably injure our reputation, business or business
relationships; or (f) any material breach of his employment agreement, which is
not cured within 30 days of our written notice.
Should we terminate Mr. Hudes' employment without cause and without 90 days
advance written notice, Mr. Hudes is entitled to receive from us, so long as Mr.
Hudes is not in breach of the non-competition and protection of confidential
information provisions of his employment agreement, (a) his applicable salary
compensation less any income earned from subsequent employment, limited to 90
days once written notice is given, and (b) any unpaid reimbursable expenses
outstanding, and any unused accrued vacation, as of the date of termination.
Under the terms of his employment agreement, Mr. Hudes agrees that while he
is employed by us and for a period of two years after the date of his
termination, he shall not, except on our behalf: (a) solicit any client
business; (b) solicit any of our employees or exclusive consultants; or (c)
render to or for any client any services that we provide. Additionally, Mr.
Hudes also agrees that he will not at any time (a) disclose any confidential
information or trade secret of ours or our clients; or (b) use any confidential
information or trade secret for his own benefit, or for the benefit of third
parties.
SUSAN L. FIELD
On June 22, 1999, Susan L. Field entered into an employment agreement with
us to serve as our Executive Vice President and Chief Financial Officer. The
employment agreement provides Ms. Field with an annual base salary of $250,000
and a bonus of up to 40% of her base salary upon achievement of specific goals
and objectives. Additionally, Ms. Field was paid a signing bonus of $50,000 in
connection with her entering the employment agreement.
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<PAGE> 57
Ms. Field's employment agreement also provides her with an incentive stock
option for the purchase of 160,000 shares of our common stock pursuant to our
1997 stock option plan, and a nonstatutory stock option for the purchase of
375,000 shares of our common stock pursuant to our 1997 stock option plan, at an
exercise price of $2.50 per share. These options contain a four year vesting
period, with 25% vesting after the first continuous year of employment and the
remaining option shares vesting in equal monthly portions through the fourth
year. Also, Ms. Field is entitled to an additional nonstatutory stock option
grant of 50,000 shares of common stock pursuant to our 1997 stock option plan,
at an exercise price of $2.50 per share. Of these shares, 25,000 will vest upon
the closing of this offering and 25,000 of the shares will vest upon our hiring
employees to fill at least two key management positions and our retaining these
employees for nine continuous months of employment.
Under the terms of her agreement, Ms. Field's employment may be terminated
by either party at any time with or without cause and with or without notice.
Should we terminate Ms. Field's employment for cause or should she voluntarily
resign, she will not be entitled to severance pay, pay in lieu of notice, or any
other compensation or benefits, other than payment of accrued salary and
vacation. Cause is defined as: (a) conviction of any felony or of any crime
against us; (b) participation of any fraud against us; (c) willful breach of any
duties to us, including persistent unsatisfactory job performance; (d) breach of
provisions in the employment agreement or of her proprietary information and
invention agreement; or (e) engagement of conduct determined by our board of
directors to demonstrate gross unfitness to serve.
In the event, Ms. Field's employment is terminated without cause, we will
provide her with (a) a payment equal to three months of her salary, less
standard withholdings and deductions and (b) a one-year acceleration of vesting
of the common stock subject to purchase pursuant to the options granted to her
as of the date of the employment agreement.
Under the terms of her employment agreement, Ms. Field agrees that while
she is employed by us, she will not in any capacity whatsoever engage in, become
financially interested in, be employed by or have any business connection with
any of our competitors.
In connection with her employment agreement, Ms. Field entered into a
proprietary information and invention agreement, which provides that she: (a)
will not use any of our proprietary information without our prior written
authorization; (b) will assign to us in the future her interest in any and all
inventions, subject to a limited exclusion; and (c) will not, for a period of
one year after the termination of her employment, solicit any of our employees
or clients.
BENEFIT PLANS
1997 STOCK OPTION PLAN
Our 1997 stock option plan was approved by our board of directors and our
stockholders in April 1997 and was amended in November 1998, February 1999,
September 1999 and November 1999. Our 1997 stock option plan provides for the
grant to our employees, including officers and employee directors, of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code and
for the grant of nonstatutory stock options to our employees, outside directors
and consultants. Our 1997 stock option plan is currently administered by our
board of directors which selects the optionees, determines the number of shares
to be subject to each option and determines the exercise price of each option.
Our 1997 stock option plan authorizes the issuance of an aggregate of up to
7,575,000 shares of common stock. The maximum number of shares that may be
granted to any individual under our 1997 stock option plan in any year is
318,750. As of September 30, 1999, options to purchase an aggregate of 5,237,644
shares of common stock were outstanding under the 1997 stock option plan, and an
aggregate of 1,797,651 shares of common stock remained available for future
grants.
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<PAGE> 58
The exercise price of all incentive stock options granted under our 1997
stock option plan must be at least equal to the fair market value of the common
stock on the date of grant. The exercise price of all nonstatutory stock options
granted under our 1997 stock option plan shall be determined by the
administrator, but in no event may be less than 85% of the fair market value on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all our classes of stock, the exercise
price of any incentive or nonstatutory option granted must equal at least 110%
of the fair market value on the grant date and the maximum term of any these
options must not exceed five years. The term of all other options granted under
our 1997 stock option plan may not exceed ten years.
In the event a participant in our 1997 stock option plan ceases to be an
employee, director or consultant, other than upon the participant's death or
disability, the participant may exercise his or her vested options for a period
of three months following termination, unless a different exercise period is
specified in his or her option agreement.
In the event of our merger with or into another corporation or a sale of
substantially all of our assets, our 1997 stock option plan requires that each
outstanding option be assumed or an equivalent option substituted by the
successor corporation; provided, however, that in the event the successor
corporation refuses to assume or substitute for the outstanding options, the
vesting of these options and the time during which these options may be
exercised shall be accelerated prior to such event and the options terminated if
not exercised after such acceleration and at or prior to such event.
In the event of a change of control, all participants shall receive two
additional years of vesting for all outstanding options and all stock acquired
through the exercise of an option. In addition, if a participant is employed by
us or a subsidiary at the time of the change of control and, prior to the
one-year anniversary of the change of control, the participant is either
terminated for reasons other than for cause or terminates employment for good
reason, the participant shall have the greater of 90 days from the date of
termination or the period otherwise specified for exercise after termination to
exercise any vested options. Under the 1997 stock option plan, a change of
control is defined as: (a) acquisition of 25% or more of our stock by any
individual or entity; (b) a change of a majority of the members on our board of
directors; (c) consummation of our reorganization, merger or consolidation or
the sale or disposition of more than 50% of our operating assets; (d) a tender
offer made for our stock; or (e) approval of a plan of complete liquidation by
our stockholders.
Our 1997 stock option plan will terminate in 2007. Our board of directors
has authority to amend or terminate our 1997 stock option plan, provided that
this such action will not impair the rights of the holder of any outstanding
options without the written consent of that holder.
1999 LONG-TERM STOCK INCENTIVE PLAN
Our 1999 long-term stock incentive plan was approved by our board of
directors and our stockholders in November 1999. Our 1999 long-term stock
incentive plan provides for the grant to our employees, including officers and
employee directors, of incentive stock options within the meaning of Section 422
of the Internal Revenue Code and for the grant of nonstatutory stock options to
our employees, directors and consultants, stock appreciation rights and other
types of awards. Our 1999 long-term stock incentive plan will be administered by
our compensation committee which selects the optionees, determines the number of
shares to be subject to each option, determines the exercise price of each
option and determines the vesting and exercise periods of each option. Our 1999
long-term stock incentive plan authorizes the issuance of an aggregate of up to
3,500,000 shares of common stock. No options to purchase shares of common stock
have yet been granted under this plan, therefore options to purchase 3,500,000
shares of common stock remain available for grant.
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<PAGE> 59
The exercise price of all incentive stock options granted under our 1999
long-term stock incentive plan must be at least equal to the fair market value
of the common stock on the date of grant. The exercise price of all nonstatutory
stock options granted under our 1999 long-term stock incentive plan shall be
determined by the compensation committee, but in no event may be less than 85%
of the fair market value on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all our classes
of stock, the exercise price of any incentive or nonstatutory option granted
must equal at least 110% of the fair market value on the grant date and the
maximum term of any these options must not exceed five years. The term of all
other options granted under our 1999 long-term stock incentive plan may not
exceed ten years.
In the event a participant in our 1999 long-term stock incentive plan
terminates employment, or is terminated by us for any reason other than cause,
any options which have become exercisable prior to the time of termination,
shall remain exercisable for six months from the date of termination if
termination was caused by death or disability, or 30 days from the date of
termination if termination was caused by reasons other than death or disability.
In the event of a change of control, all participants shall receive two
additional years of vesting for all outstanding options and share appreciation
rights, all stock acquired through the exercise of an option or a share
appreciation right, and all other awards. In addition, if a participant is
employed by us or a subsidiary at the time of the change of control and, prior
to the one-year anniversary of the change of control, the participant is either
terminated for reasons other than for cause or terminates employment for good
reason, the participant shall have the greater of 90 days from the date of
termination or the period otherwise specified for exercise after termination to
exercise any vested options. Under the 1999 long-term stock incentive plan, a
change of control is defined as: (a) acquisition of 25% or more of our stock by
any individual or entity; (b) a change of a majority of the members on our board
of directors; (c) consummation of our reorganization, merger or consolidation or
the sale or disposition of more than 50% of our operating assets; (d) a tender
offer made for our stock; or (e) a plan of complete liquidation by our
stockholders.
Unless terminated sooner, our 1999 long-term stock incentive plan will
terminate in 2009. Our board of directors has authority to amend or terminate
our 1999 long-term stock incentive plan, provided that no this action will not
impair the rights of any participant without the written consent of that
participant.
2000 EMPLOYEE STOCK PURCHASE PLAN
We intend to adopt an employee stock purchase plan that would become
effective in 2000 and would be intended to qualify under Section 423 of the
Internal Revenue Code.
The plan will be administered by the compensation committee of our board of
directors and will permit each eligible employee to purchase our common stock
through payroll deductions.
401(K) PLAN
In January 1997, we established a 401(k) Plan. All employees with at least
one month of service are eligible to participate in the plan. Employees may
contribute up to 20% of their pre-tax covered compensation through salary
deductions. In 1999, we began contributing 25% of every pre-tax dollar an
employee contributes up to the first 5% of the employee's pre-tax covered
compensation. Employees are 50% vested in the employer's contributions after one
year of service and fully vested after two years. The 401(k) Plan is intended to
qualify under Section 401 of the Internal Revenue Code so that all contributions
and income earned in the plan are not taxable to employees until withdrawn and
our contributions will be deductible by us when made. Our matching contribution
expense was not material for the nine months ended September 30, 1999. In
addition, we may make a discretionary profit-sharing contribution to all
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<PAGE> 60
eligible employees, regardless of whether an employee is participating in the
401(k) Plan. However, no such contributions have been made through September 30,
1999.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation and bylaws provide that we will indemnify
all of our directors and officers to the fullest extent permitted by Delaware
law. Our certificate of incorporation and bylaws also authorize us to indemnify
our employees and other agents, at our option, to the fullest extent permitted
by Delaware. We intend to enter into agreements to indemnify our directors and
officers, in addition to indemnification provided for in our charter documents.
These agreements, among other things, will provide for the indemnification of
our directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of Organic,
arising out of such person's services as one of our directors or officers or any
other company or enterprise to which such person provides services at our
request to the fullest extent permitted by applicable law. We believe that these
provisions and agreements will assist us in attracting and retaining qualified
persons to serve as directors and officers.
Delaware law permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for any breach of the
director's duty of loyalty to the corporation or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, under Section 174 of the General Corporation Law of the State
of Delaware, or for any transaction from which the director derived an improper
personal benefit. Our certificate of incorporation provides for the elimination
of personal liability of a director for breach of fiduciary duty, as permitted
by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the provisions contained in our charter documents, Delaware law or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by one of
our directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of this issue.
We intend to purchase and maintain insurance on behalf of the officers and
directors insuring them against liabilities that they may incur in such
capacities or arising out of such status.
There is no pending litigation or proceeding involving one of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
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RELATED PARTY TRANSACTIONS
ORGANIC HOLDINGS
On January 29, 1997, our predecessor company changed its name from Organic
Online, Inc. to Organic Holdings, Inc., and we were formed as a subsidiary under
the name Organic Online, Inc. At that time, we exchanged 18,323,712 shares of
our Series A preferred stock and three shares of our common stock for
substantially all of the assets and liabilities of Organic Holdings. Organic
Holdings retained some of our non-operating assets and liabilities.
Our directors Jonathan Nelson, Michael Hudes and Gary Hromadko are also
directors of Organic Holdings.
OMNICOM GROUP
In January 1997, we issued 3,351,288 shares of our Series A preferred stock
at $2.9833 per share to Omnicom Group for net cash proceeds of $10.0 million.
In February 1999, we issued 1,488,000 shares of our Series B preferred
stock at $7.2067 per share to Omnicom Group for net cash proceeds of $7.7
million plus the settlement of a $3.0 million short-term bridge loan that we
obtained from Omnicom Group in January 1999.
On August 27, 1999, we entered into a revolving credit facility with
Omnicom Group, which allows us to borrow up to $30.0 million at the lender's
commercial paper rate plus 3.0% until the closing of this offering. Thereafter,
we may borrow up to $15.0 million from Omnicom Group at the lender's commercial
paper rate plus 1.25% through September 30, 2002. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for further information. Additionally, in connection with the
revolving credit facility, we issued a warrant to purchase 749,692 shares of our
common stock to Omnicom Group at an exercise price of $0.01 per share.
One of our directors, Bruce Redditt, has served as Executive Vice President
of Omnicom Group since 1998.
OFFICER LOAN
On March 31, 1999, we loaned $200,000 to Michael Hudes. This loan was
secured by a pledge by Mr. Hudes to us of his shares of our common stock, with
principal and interest payments due upon the second, fourth, sixth, eighth and
tenth anniversaries of the loan. The amount becomes payable upon the
consummation of this offering, as long as the offering price is at least $10 per
share and the aggregate proceeds are at least $75.0 million.
STOCK OPTION GRANTS TO OFFICERS
On March 20, 1997, we issued to Marita Scarfi options to purchase 255,000
shares of our common stock at an exercise price of $0.0033 per share.
On December 8, 1997, we issued to Janis Nakano Spivack options to purchase
127,500 shares of our common stock at an exercise price of $0.2933 per share. On
the same date, we issued to Matthew Bernardini options to purchase 30,000 shares
of our common stock at the same exercise price.
On June 24, 1998, we issued to Michael Hudes options to purchase 492,000
shares of our common stock at an exercise price of $0.2933 per share.
On November 25, 1998, we issued to Matthew Bernardini options to purchase
15,000 shares of our common stock at an exercise price of $1.1667 per share.
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On June 23, 1999, we issued to Susan Field options to purchase 585,000
shares of our common stock at an exercise price of $2.50 per share.
On July 13, 1999, we issued to Matthew Bernardini options to purchase
127,500 shares of our common stock at an exercise price of $4.00 per share.
On August 26, 1999, we issued to (a) Margaret Maxwell Zagel options to
purchase 75,000 shares of our common stock, (b) Lynda Ward Pierce options to
purchase 30,000 shares of our common stock, and (c) Larry Geisel options to
purchase 400,000 shares of our common stock. Each of these officers were issued
these options at an exercise price of $5.00 per share.
On November 22, 1999, we issued to (a) Daniel Lynch options to purchase
281,690 shares of our common stock, (b) Janis Nakano Spivack options to purchase
22,500 shares of our common stock, and (c) Lynda Ward Pierce options to purchase
30,000 shares of our common stock. Each of these officers were issued these
options at an exercise price of $8.00 per share.
We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require us to
indemnify these individuals to the fullest extent permitted by Delaware law.
We also have entered into various employment agreements with our officers.
See "Management -- Employment Agreements" for a more detailed description.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of November 22, 1999 and as adjusted to reflect the sale of the shares of
common stock in this offering by:
- each person or entity known by us to own beneficially more than five
percent of our common stock;
- our chief executive officer, each of the executive officers named in
the summary compensation table and each of our directors; and
- all of our executive officers and directors as a group.
The beneficial ownership is calculated based on 23,878,781 shares of our
common stock outstanding as of November 22, 1999 and shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Unless otherwise
indicated, each person or entity named in the table has sole voting power and
investment power, or shares voting and investment power with his or her spouse,
with respect to all shares of capital stock listed as owned by such person.
Shares issuable upon the exercise of options that are currently exercisable or
become exercisable within sixty days of November 22, 1999 are considered
outstanding for the purpose of calculating the percentage of outstanding shares
of our common stock held by the individual, but not for the purpose of
calculating the percentage of outstanding shares of our common stock held by
another individual.
The address of each of the executive officers and directors is c/o Organic,
Inc., 510 Third Street, San Francisco, California 94107.
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
SHARES ISSUABLE BENEFICIALLY OWNED
UPON EXERCISE --------------------
NUMBER OF SHARES OF STOCK OPTIONS PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OR WARRANTS OFFERING OFFERING
---------------- ------------------ ---------------- -------- --------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS
Omnicom Group Inc.
437 Madison Avenue
New York, New York 10022......... 5,844,675 749,692 26.8% %
Organic Holdings, Inc.
c/o Organic, Inc.
510 Third Street
San Francisco, California
94107.......................... 17,318,325 -- 72.5% %
NAMED EXECUTIVE OFFICERS AND
DIRECTORS
Jonathan Nelson.................. 17,318,325 -- 72.5% %
Michael Hudes.................... -- 184,500 *
Janis Nakano Spivack............. -- 69,063 *
Michael Golden................... 126,438 -- *
William Sequeira................. -- -- *
Gary F. Hromadko................. -- -- *
Bruce Redditt.................... -- -- *
All executive officers and
directors as a group (12
persons)....................... 17,646,029 367,095 74.3% %
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent of the common stock.
Shares beneficially owned by Jonathan Nelson consist of 17,318,325 shares owned
by Organic Holdings, Inc., of which Mr. Nelson is the majority stockholder.
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DESCRIPTION OF CAPITAL STOCK
Following the closing of this offering, our authorized capital stock will
consist of 80,000,000 shares of common stock and 25,000,000 shares of
undesignated preferred stock. The following description of our capital stock
does not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of our certificate of incorporation and bylaws, which are
included as exhibits to the registration statement of which this prospectus is a
part, and by the provisions of applicable law.
COMMON STOCK
As of September 30, 1999, after giving effect to the conversion of all
outstanding shares of our Series A and Series B preferred stock prior to the
closing of this offering, 23,702,708 shares of common stock were issued and
outstanding and held by approximately 50 stockholders. The holders of our common
stock are entitled to one vote for each share held of record upon such matters
and in such manner as may be provided by law. Subject to preferences applicable
to any outstanding shares of preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared by the board
of directors out of funds legally available for dividend payments. In the event
we liquidate, dissolve or wind up, the holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and
liquidation preferences of any outstanding shares of the preferred stock.
Holders of common stock have no preemptive rights or rights to convert their
common stock into any other securities. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable.
PREFERRED STOCK
As of September 30, 1999, there were 23,163,000 shares of preferred stock
outstanding and held of record by two stockholders. In connection with the
closing of this offering, all outstanding shares of our Series A and Series B
preferred stock will automatically be converted into common stock on a
one-for-one basis. Upon the closing of this offering, our board of directors
will be authorized, absent any limitations prescribed by law, without
stockholder approval, to issue up to an aggregate of 25,000,000 shares of
preferred stock, in one or more series, each of the series to have rights and
preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
board of directors. The rights of the holders of common stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that maybe issued in the future. Issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of our outstanding voting stock. We have no present plans to
issue any shares of preferred stock.
WARRANTS
As of September 30, 1999, a warrant to purchase an aggregate of 749,692
shares of our common stock was outstanding at an exercise price of $0.01 per
share. This warrant contains provisions for the adjustment of the exercise price
and the aggregate number of shares issuable upon the exercise of the warrant in
the event of stock dividends, stock splits, reorganizations and
reclassifications and consolidations. Upon the closing of this offering, this
warrant to purchase common stock will expire.
DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make our acquisition by means of a tender offer, a proxy contest, or
otherwise, and the removal of
63
<PAGE> 65
incumbent officers and directors more difficult. These provisions are expected
to discourage types of coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control to first negotiate with us.
We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure us outweighs the disadvantages of discouraging proposals,
including proposals that are priced above the then current market value of our
common stock, because, among other things, negotiation of these proposals could
result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder, unless:
- prior to that date the board of directors approved either the business
combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
began; or
- on or following that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines a business combination to include:
- any merger or consolidation involving the corporation and the
interested stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our bylaws provide that following the completion of this offering our board
of directors will be divided into three classes of directors designated Class I,
Class II and Class III. Each class will have a three-year term. Initially, two
directors will serve in Class I, two directors will serve in Class II and two
directors will serve in Class III. The initial directors in each class will hold
office for terms of one year, two years or three years. Thereafter each class
will serve a three-year term.
We believe that a classified board of directors will help to assure the
continuity and stability of the board of directors and our business strategies
and policies as determined by the board of directors, since a majority of the
directors at any given time will have had prior experience as our directors. We
believe that this, in turn, will permit the board of directors to more
effectively represent the interest of our stockholders. With a classified board
of directors, at least two
64
<PAGE> 66
annual meetings of our stockholders, instead of one, will generally be required
to effect a change in the majority of the board of directors. As a result, a
provision relating to a classified board of directors may discourage proxy
contests for the election of directors or purchases of a substantial block of
our common stock because its provisions could operate to prevent obtaining
control of the board of directors in a relatively short period of time. The
classification provision and the prohibition on stockholder action by written
consent also could have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of us. Under Delaware
law, a director on a classified board may be removed by the stockholders of the
corporation only for cause.
Our bylaws provide that special meetings of the stockholders may be called
only by our President or at the direction of the board of directors, by our
Secretary. Our bylaws require advance written notice, which generally must be
received by our Secretary not less than 30 days prior to the meeting, by a
stockholder of a proposal or director nomination which a stockholder desires to
present at a meeting of stockholders. Our certificate of incorporation does not
include a provision for cumulative voting in the election of directors. Under
cumulative voting, a minority stockholder holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence of
cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in the board of directors and, as a result, may
have the effect of deterring hostile takeover or delaying or preventing changes
in control or our management.
STOCKHOLDER RIGHTS PLAN
We intend to adopt a stockholder rights plan. Under the plan we will
distribute preferred stock purchase rights to our stockholders at a rate of one
purchase right for each share of common stock outstanding. Purchase rights also
will be attached to all shares of common stock that we issue in the future,
including the shares of common stock to be issued in this offering.
The purchase rights will have anti-takeover effects. The purchase rights
may cause substantial dilution to a person or group that attempts to acquire us
in a manner or on terms not approved by our board of directors. The purchase
rights, however, should not deter any prospective offeror willing to negotiate
in good faith with our board of directors, nor should the purchase rights
interfere with any merger or other business combination approved by our board of
directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe. Its
address is 150 Royall Street, Canton, Massachusetts 02021, and its telephone
number is (781) 575-3400.
65
<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse or are
released could adversely affect the prevailing market price and impair our
ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding shares
of common stock. Of these shares, the shares sold in the offering,
plus any shares issued upon exercise of the underwriters' over-allotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors or 10%
stockholders.
The remaining shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and stockholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock without the prior written consent of Goldman, Sachs & Co.
The lock-up restrictions will expire on the date which is 180 days after the
date of this prospectus. Notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not be salable until these agreements expire or are waived by
Goldman, Sachs & Co. Taking into account the lock-up agreements, and assuming
Goldman, Sachs & Co. does not release stockholders from these agreements, the
following shares will be eligible for sale in the public market at the following
times:
- Beginning on the date of this prospectus, only the shares sold in the
offering will be immediately available for sale in the public market.
- Beginning 180 days after the date of this prospectus, shares
will be freely tradable pursuant to Rule 144(k), and an additional
shares will be eligible for sale subject to volume
limitations, as explained below, pursuant to Rules 144 and 701.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding
which will equal approximately shares immediately after the
offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice, and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate and
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
these shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
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<PAGE> 68
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell these shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file a registration statement on Form S-8 under
the Securities Act within 180 days following the date of this prospectus to
register shares to be issued pursuant to our employee benefit plans. As a
result, any options or rights exercised under the 1997 stock option plan, the
1999 long-term stock incentive plan, the 2000 employee stock purchase plan we
intend to adopt or any other benefit plan after the effectiveness of the
registration statement will also be freely tradable in the public market.
However, these shares held by affiliates will still be subject to the volume
limitation, manner of sale, notice and public information requirements of Rule
144 unless otherwise resaleable under Rule 701. As of September 30, 1999, there
were outstanding options for the purchase of 5,237,644 shares of common stock,
of which options to purchase 841,834 shares were vested and exercisable.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Morrison & Foerster LLP, San Francisco, California. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Wilson
Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
EXPERTS
The audited financial statements included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed with Securities and Exchange Commission in Washington, D.C. a
Registration Statement on Form S-1 under the Securities Act with respect to the
common stock offered in this prospectus. This prospectus, filed as part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and its exhibits and schedules, certain portions of which
have been omitted as permitted by the rules and regulations of the SEC. For
further information about us and the common stock, we refer you to the
Registration Statement and to its exhibits and schedules. Statements in this
prospectus about the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, we refer you to the copy of such
contract, agreement or document filed as an exhibit to the Registration
Statement, and each such statement being qualified in all respects by reference
to the document to which it refers. Anyone may inspect the Registration
Statement and its exhibits and schedules without charge at the public reference
facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661. You may obtain copies of all or any part of these materials
from the SEC upon the payment of certain fees prescribed by the SEC. You may
also inspect these reports and other information without charge at a Web site
maintained by the SEC. The address of this site is http://www.sec.gov.
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<PAGE> 69
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act and will be required to file
reports, proxy statements and other information with the SEC. You will be able
to inspect and copy these reports, proxy statements and other information at the
public reference facilities maintained by the SEC and at the SEC's regional
offices at the addresses noted above. You also will be able to obtain copies of
this material from the Public Reference Section of the SEC as described above,
or inspect them without charge at the SEC's Web site. We have applied for
quotation of our common stock on the Nasdaq National Market. If we receive
approval for quotation on the Nasdaq National Market, then you will be able to
inspect reports, proxy and information statements and other information
concerning us at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
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<PAGE> 70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-2
Consolidated Balance Sheet.................................. F-3
Consolidated Statement of Operations........................ F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Consolidated Statement of Cash Flows........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF PRICEWATERHOUSECOOPERS LLP,
INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Organic, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Organic,
Inc. ("the Company") at December 31, 1997, 1998 and September 30, 1999, and the
results of its operations and its cash flows for the years ended December 31,
1996, 1997, and 1998 and the nine months ended September 30, 1999, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
November 22, 1999
San Francisco, California
F-2
<PAGE> 72
ORGANIC, INC.
CONSOLIDATED BALANCE SHEET
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
----------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
------- ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 4,264 $ 1,667 $ 3,204
Short-term investments...................................... 1,871 400 --
Accounts receivable, net of allowance of $96 at December 31,
1997, $283 at December 31, 1998, and $564 at September 30,
1999...................................................... 2,597 5,447 18,084
Accounts receivable -- media spending....................... -- 1,472 2,762
Costs in excess of billings................................. 3 574 5,707
Deposits and prepaid expenses............................... 160 287 612
Other assets................................................ 4 108 318
Deferred tax asset, current................................. 988 -- --
------- ------- --------
Total current assets.................................... 9,887 9,955 30,687
Property and equipment, net................................. 1,313 6,570 9,604
Long-term investments....................................... 100 602 1,289
Deferred bank facility charge, net of accumulated
amortization of $460...................................... -- -- 16,089
Other assets................................................ 126 478 850
------- ------- --------
Total assets............................................ $11,426 $17,605 $ 58,519
======= ======= ========
LIABILITIES
Accounts payable............................................ $ 722 $ 3,899 $ 5,996
Current portion of long-term debt........................... 364 2,735 4,302
Current portion of obligations under capital leases......... -- 36 42
Accrued expenses............................................ 67 674 4,182
Accrued employee costs...................................... 93 187 3,157
Deferred revenue............................................ 351 1,013 3,106
Deferred revenue -- media spending.......................... -- 1,072 6,794
------- ------- --------
Total current liabilities............................... 1,597 9,616 27,579
Long-term debt, net of current portion...................... 604 553 430
Obligations under capital leases, net of current portion.... -- 108 108
Deferred rent............................................... -- 138 338
------- ------- --------
Total liabilities....................................... 2,201 10,415 28,455
------- ------- --------
Commitments and contingencies (Note 10)
Minority interest in consolidated subsidiary................ -- -- 280
STOCKHOLDERS' EQUITY
Convertible Series A preferred stock, $.0001 par value,
21,675,000 shares authorized, issued and outstanding at
December 31, 1997 and 1998 and September 30, 1999
(aggregate liquidation preference $64,664) (none pro
forma).................................................... 1 1 1 $ --
Convertible Series B preferred stock, $.0001 par value,
1,488,000 shares authorized, issued and outstanding at
September 30, 1999 (aggregate liquidation preference
$10,724) (none pro forma)................................. -- -- -- --
Common stock, $.0001 par value, 35,000,000 shares
authorized, 2,334, 300,939 and 539,708 shares issued and
outstanding at December 31, 1997, December 31, 1998 and
September 30, 1999, respectively (24,452,400 pro forma)... -- -- -- 1
Additional paid-in capital.................................. 11,251 13,585 81,488 81,495
Deferred compensation....................................... (61) (1,664) (33,032) (33,032)
Accumulated deficit......................................... (1,966) (4,732) (18,659) (18,659)
Accumulated other comprehensive income...................... -- -- (14) (14)
------- ------- -------- --------
Total stockholders' equity.............................. 9,225 7,190 29,784 $ 29,791
------- ------- -------- ========
Total liabilities and stockholders' equity.............. $11,426 $17,605 $ 58,519
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 73
ORGANIC, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781
Operating expenses:
Professional services.................. 1,889 4,285 16,801 11,191 29,929
Selling, general and administrative.... 2,104 5,473 12,068 7,276 26,018
Stock compensation and other stock-
based charges........................ 53 87 694 291 9,648
----------- ------- ----------- ----------- -----------
Total operating expenses............. 4,046 9,845 29,563 18,758 65,595
----------- ------- ----------- ----------- -----------
Operating income (loss).................. 248 (3,065) (1,829) 1,986 (13,814)
Minority interest in operations of
consolidated subsidiary................ (106) -- -- -- (38)
Interest and other income, net........... 4 283 73 73 (11)
----------- ------- ----------- ----------- -----------
Net income (loss) before taxes....... 146 (2,782) (1,756) 2,059 (13,863)
Income tax expense (benefit)............. (91) (997) 1,010 913 64
----------- ------- ----------- ----------- -----------
Net income (loss).................... $ 237 $(1,785) $ (2,766) $ 1,146 $ (13,927)
=========== ======= =========== =========== ===========
Basic net income (loss) per share........ $ 78,857 $(2,006) $ (32.43) $ 25.24 $ (34.54)
=========== ======= =========== =========== ===========
Diluted net income (loss) per share...... $ 0.01 $(2,006) $ (32.43) $ 0.05 $ (34.54)
=========== ======= =========== =========== ===========
Weighted average common shares
outstanding:
Basic.................................. 3 890 85,296 45,420 403,197
=========== ======= =========== =========== ===========
Diluted................................ 21,675,003 890 85,296 21,808,240 403,197
=========== ======= =========== =========== ===========
Unaudited pro forma basic and diluted net
loss per share......................... $ (0.13) $ (0.59)
=========== ===========
Weighted average common shares
outstanding -- unaudited pro forma
basic and diluted...................... 21,760,296 23,463,012
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 74
ORGANIC, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ---------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
---------- ------ ------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.................. -- $-- -- $-- $ 900 $ (145) $ (418)
Deferred stock-based compensation............. -- -- -- -- 426 (426) --
Amortization of deferred stock-based
compensation................................ -- -- -- -- -- 53 --
Cash received in connection with investments
in Organic Holdings prior to
reorganization.............................. -- -- -- -- 400 -- --
Adjustments related to certain assets and
liabilities retained by Organic Holdings.... -- -- -- -- (105) -- --
Net income.................................... -- -- -- -- -- -- 237
---------- -- ------- -- ------- -------- --------
BALANCE AT DECEMBER 31, 1996.................. -- -- -- -- 1,621 (518) (181)
Issuance of Series A preferred stock on
reorganization.............................. 18,323,712 1 3 -- (1) -- --
Issuance of Series A preferred stock.......... 3,351,288 -- -- -- 10,000 -- --
Common stock options exercised................ -- -- 2,331 -- 1 -- --
Amortization of deferred stock-based
compensation................................ -- -- -- -- -- 87 --
Reduction in deferred stock-based compensation
expense related to stock options
cancelled................................... -- -- -- -- (370) 370 --
Net loss...................................... -- -- -- -- -- -- (1,785)
---------- -- ------- -- ------- -------- --------
BALANCE AT DECEMBER 31, 1997.................. 21,675,000 1 2,334 -- 11,251 (61) (1,966)
Common stock options exercised................ -- -- 298,605 -- 37 -- --
Deferred stock-based compensation............. -- -- -- -- 2,348 (2,348) --
Amortization of deferred stock-based
compensation................................ -- -- -- -- -- 694 --
Reduction in deferred stock-based compensation
expense related to stock options
cancelled................................... -- -- -- -- (51) 51 --
Net loss...................................... -- -- -- -- -- -- (2,766)
---------- -- ------- -- ------- -------- --------
BALANCE AT DECEMBER 31, 1998.................. 21,675,000 1 300,939 -- 13,585 (1,664) (4,732)
Net loss...................................... -- -- -- -- -- -- (13,927)
Foreign currency translation adjustment....... -- -- -- -- -- -- --
Comprehensive loss............................
Issuance of Series B preferred stock, net of
issuance costs of $6........................ 1,488,000 -- -- -- 10,718 -- --
Common stock options exercised................ -- -- 238,769 -- 81 -- --
Deferred stock-based compensation............. -- -- -- -- 42,021 (42,021) --
Amortization of deferred stock-based
compensation................................ -- -- -- -- -- 9,188 --
Reduction in deferred stock-based compensation
expense related to stock options
cancelled................................... -- -- -- -- (1,465) 1,465 --
Issuance of common stock warrants............. -- -- -- -- 16,548 -- --
---------- -- ------- -- ------- -------- --------
BALANCE AT SEPTEMBER 30, 1999................. 23,163,000 $1 539,708 $-- $81,488 $(33,032) $(18,659)
========== == ======= == ======= ======== ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
------------- -------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995.................. $ -- $ 337
Deferred stock-based compensation............. -- --
Amortization of deferred stock-based
compensation................................ -- 53
Cash received in connection with investments
in Organic Holdings prior to
reorganization.............................. -- 400
Adjustments related to certain assets and
liabilities retained by Organic Holdings.... -- (105)
Net income.................................... -- 237
---- --------
BALANCE AT DECEMBER 31, 1996.................. -- 922
Issuance of Series A preferred stock on
reorganization.............................. -- --
Issuance of Series A preferred stock.......... -- 10,000
Common stock options exercised................ -- 1
Amortization of deferred stock-based
compensation................................ -- 87
Reduction in deferred stock-based compensation
expense related to stock options
cancelled................................... -- --
Net loss...................................... -- (1,785)
---- --------
BALANCE AT DECEMBER 31, 1997.................. -- 9,225
Common stock options exercised................ -- 37
Deferred stock-based compensation............. -- --
Amortization of deferred stock-based
compensation................................ -- 694
Reduction in deferred stock-based compensation
expense related to stock options
cancelled................................... -- --
Net loss...................................... -- (2,766)
---- --------
BALANCE AT DECEMBER 31, 1998.................. -- 7,190
--------
Net loss...................................... -- (13,927)
Foreign currency translation adjustment....... (14) (14)
--------
Comprehensive loss............................ (13,941)
Issuance of Series B preferred stock, net of
issuance costs of $6........................ -- 10,718
Common stock options exercised................ -- 81
Deferred stock-based compensation............. -- --
Amortization of deferred stock-based
compensation................................ -- 9,188
Reduction in deferred stock-based compensation
expense related to stock options
cancelled................................... -- --
Issuance of common stock warrants............. -- 16,548
---- --------
BALANCE AT SEPTEMBER 30, 1999................. $(14) $ 29,784
==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 75
ORGANIC, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------------
1996 1997 1998 1998 1999
----- ------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 237 $(1,785) $(2,766) $ 1,146 $(13,927)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................. 203 432 1,248 765 2,226
Stock-based compensation and other stock-based charges.... 53 87 694 291 9,648
Provision for doubtful accounts........................... -- -- 280 180 637
Write-off of fixed assets................................. -- -- 12 -- 1,171
Minority interest in operations of consolidated
subsidiary.............................................. -- -- -- -- 280
Provision (benefit) for deferred income taxes............. (91) (1,000) 1,000 830 --
Revenue recognized in exchange for investments............ (90) (100) (577) (252) (687)
Changes in assets and liabilities:
Increase in accounts receivable......................... (159) (1,911) (4,622) (6,651) (14,763)
(Increase) decrease in costs in excess of billings...... 40 34 (571) (355) (5,133)
Increase in deposits and prepaid expenses............... (22) (138) (127) (58) (325)
Increase in other assets................................ (72) (76) (480) (405) (466)
Increase in accounts payable and accrued expenses....... 87 603 3,878 1,406 8,576
Increase (decrease) in deferred revenue................. (139) 235 1,734 2,132 7,814
Increase in deferred rent............................... -- -- 138 19 200
Decrease in income taxes payable........................ (111) -- -- -- --
----- ------- ------- ------- --------
Net cash used in operating activities................. (64) (3,619) (159) (952) (4,749)
----- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (509) (1,099) (5,579) (3,143) (6,195)
Purchase of short-term investments.......................... -- (2,271) (1,865) (1,865) (2,005)
Proceeds from the sale and maturity of short-term
investments............................................... -- 400 3,336 1,880 2,405
Proceeds from the sale of long-term investments............. -- -- 75 75 --
----- ------- ------- ------- --------
Net cash used in investing activities................. (509) (2,970) (4,033) (3,053) (5,795)
----- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from investment in Organic Holdings................ 400 -- -- -- --
Proceeds from issuance of convertible preferred stock,
net....................................................... -- 10,000 -- -- 7,718
Proceeds from exercises of common stock options............. -- 1 37 34 81
Proceeds from long-term debt................................ 350 757 1,938 1,100 7,000
Payments on notes payable -- related party.................. -- (8) -- -- --
Payments on capital leases.................................. -- -- (25) (16) (29)
Payments on long-term debt.................................. -- (140) (355) (212) (2,675)
----- ------- ------- ------- --------
Net cash provided by financing activities............. 750 10,610 1,595 906 12,095
Effect of exchange rate changes on cash and cash
equivalents......................................... -- -- -- -- (14)
----- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 177 4,021 (2,597) (3,099) 1,537
Cash and cash equivalents at beginning of period............ 66 243 4,264 4,264 1,667
----- ------- ------- ------- --------
Cash and cash equivalents at end of period.................. $ 243 $ 4,264 $ 1,667 $ 1,165 $ 3,204
===== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest...................................... $ 13 $ 44 $ 138 $ 81 $ 231
===== ======= ======= ======= ========
Cash paid for income taxes.................................. $ 115 $ 5 $ 90 $ 90 $ 86
===== ======= ======= ======= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under financing
obligations............................................... $ -- $ -- $ 906 $ 906 $ 153
===== ======= ======= ======= ========
Conversion of debt into preferred stock..................... $ -- $ -- $ -- $ -- $ 3,000
===== ======= ======= ======= ========
Issuance of common stock warrants........................... $ -- $ -- $ -- $ -- $ 16,548
===== ======= ======= ======= ========
Notes payable issued for investment......................... $ 8 $ -- $ -- $ -- $ --
===== ======= ======= ======= ========
Deferred stock-based compensation........................... $ 426 $ -- $ 2,348 $ 1,058 $ 42,021
===== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 76
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Organic, Inc. ("Organic" or "the Company") is an Internet professional services
firm focused on the customer-to-business market. Organic provides an integrated
suite of services to their clients including strategic consulting, creative,
engineering and integration services, media and communications services and
customer service and fulfillment consulting and transaction management services.
The media and communications services are typically provided under long-term
agreements. The customer service and fulfillment consulting and transaction
management services are typically provided under contracts that range from a few
months to over a year.
The accompanying financial statements present the results of operations of the
Company and its predecessor, Organic Online, Inc. On January 29, 1997, Organic
Online Inc. was renamed Organic Holdings, Inc. and the Company was formed as a
subsidiary under the name Organic Online, Inc. The Company exchanged 18,323,712
shares of Series A convertible preferred stock and three shares of common stock
for substantially all of the assets and liabilities of Organic Holdings, Inc.
Certain non-operating assets and liabilities (approximately $0.3 million, net)
were retained by Organic Holdings, Inc. and have been excluded from the
accompanying financial statements. Because this reorganization did not result in
a change in control of the Company, there was no change in the basis of
accounting at the time of the reorganization. The Company changed its name from
Organic Online, Inc. to Organic, Inc. on January 28, 1999.
CONSOLIDATION AND BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements include the accounts of the Company's
wholly owned subsidiaries, Organic Media, Inc., Organic Online, Ltd., and
Organic.com Private Ltd. and its share of a 70% owned subsidiary, Organic Brazil
Comunicacao Interativa Limitada. All intercompany transactions have been
eliminated in consolidation.
On May 25, 1999, the Company's Board of Directors effected a 3-for-1 split of
its outstanding shares of common and preferred stock. All share and per share
information included in these financial statements have been retroactively
adjusted to reflect these stock splits.
INTERIM FINANCIAL STATEMENTS
The accompanying interim consolidated financial statements and related footnote
information as of and for the nine months ended September 30, 1998 are unaudited
but include, in management's opinion, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly, in all material respects,
the consolidated financial position, results of operations and cash flows.
Results for the nine months ended September 30, 1998 and 1999 are not
necessarily indicative of results for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
F-7
<PAGE> 77
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash and investments in a money
market fund. The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts that, at times, may exceed federally
insured limits.
SHORT-TERM INVESTMENTS
The Company's investments in certain debt and equity securities are categorized
as available for sale securities, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". At December 31, 1997 and 1998, the fair value of
the investments approximated their cost.
CONCENTRATION OF CREDIT RISK
The Company extends credit to customers based on an evaluation of their
financial condition and collateral is not required. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for doubtful
accounts. Revenue derived from customers outside the United States has not been
significant. At December 31, 1997 and 1998, and September 30, 1999, three
customers, two customers and one customer accounted for 48%, 24%, and 21% of
total accounts receivable, respectively. In the year ended 1996, three customers
accounted for 30% of the Company's revenues. In the year ended 1997, no
customers accounted for more than 10% of the Company's revenues. In the year
ended 1998, one customer accounted for 12% of the Company's revenues. For the
nine months ended September 30, 1998 and 1999, one customer and two customers
accounted for 16% and 22% of the Company's revenues, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the related assets
ranging from three to five years. Leasehold improvements and equipment under
capital leases are amortized over the lease term or estimated useful lives,
whichever is shorter. Repairs and maintenance costs are charged to expense when
incurred. When assets are sold or retired, the cost and the related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
included in operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable approximate fair value
because of the short-term maturity of these instruments. Fair values are based
on quoted market prices and assumptions concerning the amount and timing of
estimated future cash flows and assumed discount rates reflecting varying
degrees of perceived risk. Based upon borrowing rates currently available to the
Company with similar terms, the carrying value of long-term debt and capital
lease obligations approximate fair value.
F-8
<PAGE> 78
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of foreign subsidiaries are
measured using the currency of the respective countries as the functional
currency. Assets and liabilities are translated into the reporting currency
(U.S. dollars) at the foreign exchange rate in effect at the balance sheet date,
while revenues and expenses for the year are translated at the average exchange
rate in effect during the year. Translation gains and losses are not included in
determining net income or loss but are accumulated and reported in stockholders'
equity, as a component of other comprehensive income, on a net of tax basis. The
Company has not entered into hedging contracts during any of the periods
presented.
REVENUE RECOGNITION
Revenue on contracts is recorded using the percentage-of-completion method,
retainer basis, or on a time and materials basis. Under the
percentage-of-completion method, revenue on contracts is recognized based on the
percentage of costs incurred to date to total estimated project costs. Earned
but unbilled project revenues are classified under current assets as costs in
excess of billings. Deferred revenue includes billings in excess of project
revenues earned, amounts payable on behalf of and billed to customers, and cash
received and other amounts billed in advance for services to be performed. The
Company periodically evaluates the estimated costs to complete its contracts.
Provisions for losses are recognized on uncompleted contracts when they become
known. Under the retainer basis, which relates primarily to media and
communications, revenue on contracts is recognized over the life of the contract
on a straight-line basis. Under the time and materials basis, revenue on
contracts is recognized based on agreed-upon hourly rates for the positions that
recorded time on the project during the period plus any materials used and
charged against the project. Sales of other services are recorded as revenue
when services are rendered.
ADVERTISING EXPENSES
The Company expenses the cost of advertising and promoting its services as
incurred. These costs are included in selling, general and administrative on the
statement of operations.
INCOME TAXES
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred taxes, which arise principally from temporary
differences between the period in which certain income and expenses are
recognized for financial reporting purposes and the period in which they affect
taxable income, are included in the amounts provided for income taxes. Under
this method, the computation of deferred tax assets and liabilities give
recognition to enacted tax rates in effect in the year the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts that the Company expects to
realize.
NET INCOME (LOSS) PER SHARE
The Company computes basic and diluted net income (loss) per share in accordance
with SFAS No. 128, "Earnings Per Share", and SEC Staff Accounting Bulletin
("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net
income (loss) per share is computed by dividing net income (loss) available to
common stockholders for the period by the weighted
F-9
<PAGE> 79
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing net income available to common
stockholders for the period by the weighted average number of common and common
equivalent shares outstanding during the period. For those periods in which the
Company has incurred a net loss, diluted net loss per share is equivalent to
basic net loss per share since the assumed exercise of the Company's stock
options and a warrant and the assumed conversion of the Company's preferred
stock would be anti-dilutive and, accordingly, have been excluded from the
calculation.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Unaudited pro forma net loss per share for the year ended December 31, 1998 and
nine months ended September 30, 1999 included in the statement of operations is
computed using the weighted average number of common shares outstanding,
adjusted to include the pro forma effects of the conversion of Series A and
Series B convertible preferred stock and the exercise of a warrant for common
stock as if such conversion had occurred on January 1, 1998 for the year ended
December 31, 1998 and on January 1, 1999 for the nine months ended September 30,
1999, or at the date of original issuance, if later.
PRO FORMA BALANCE SHEET (UNAUDITED)
Effective upon the closing of the Company's proposed initial public offering,
subject to certain conditions as described in Note 6, the outstanding shares of
Series A and Series B convertible preferred stock and warrants to purchase
shares of common stock will automatically convert into 21,675,000 and 1,488,000
shares of common stock, respectively, and a warrant is exercisable for 749,692
shares of common stock. The unaudited pro forma amounts included on the balance
sheet reflect these conversions and the assumed exercise, as if they had
occurred on September 30, 1999.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires that an enterprise report and display, by major components and as a
single total, the change in its net assets during the period from non-owner
sources. The adoption of this Statement did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", and complies with the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". Under APB No. 25,
compensation expense is based on the difference, if any, on the date of grant
between the fair value of the Company's common stock and the exercise price of
the options to purchase that stock.
SEGMENT REPORTING
The Company manages its operations on a geographical basis and, to date, has
provided services primarily in the United States. Through September 30, 1999,
foreign operations have not been significant in either revenue or investment in
long-lived assets. Revenues from major customers are disclosed above in
"Concentration of Credit Risk".
F-10
<PAGE> 80
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. SFAS No. 133 requires that derivative instruments used to
hedge be identified specifically to assets, liabilities, unrecognized firm
commitments or forecasted transactions. The gains or losses resulting from
changes in the fair value of derivative instruments will either be recognized in
current earnings or in other comprehensive income, depending on the use of the
derivative and whether the hedging instrument is effective or ineffective when
hedging changes in fair value or cash flows. This Statement, as amended, is
effective for fiscal years beginning after June 15, 2000. Management believes
that the adoption of this Statement will not have a material effect on the
Company's consolidated financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP provides guidance on
accounting for certain costs in connection with obtaining or developing computer
software for internal use and requires that entities capitalize such costs once
certain criteria are met. The Company adopted SOP 98-1 as of January 1, 1999.
The adoption of this SOP did not have a material effect on the Company's
consolidated financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". This SOP requires that entities expense start-up costs and
organization costs as they are incurred. The Company adopted SOP 98-5 as of
January 1, 1999. The adoption of this SOP did not have a material effect on the
Company's consolidated financial position or results of operations.
NOTE 2 -- PROPERTY AND EQUIPMENT, NET
Property and equipment are carried at cost, less accumulated depreciation and
amortization. As of December 31, 1997 and 1998, and September 30, 1999, the
amounts were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Computer hardware..................................... $1,322 $ 4,354 $ 7,780
Computer software..................................... 208 1,461 1,707
Equipment............................................. 159 721 986
Furniture............................................. 40 243 278
Leasehold improvements................................ 214 1,638 2,432
------ ------- -------
$1,943 $ 8,417 $13,183
Less: accumulated depreciation and amortization....... (630) (1,847) (3,579)
------ ------- -------
$1,313 $ 6,570 $ 9,604
====== ======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998, and
for the nine months ended September 30, 1998 and 1999 were $196, $401, $1,220,
$744 and $2,144, respectively.
F-11
<PAGE> 81
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
Included in the above is equipment acquired under capital leases of $169 at
December 31, 1998 and $204 at September 30, 1999. Accumulated amortization on
equipment acquired under capital leases was $28 and $66 at December 31, 1998 and
September 30, 1999 respectively.
NOTE 3 -- INVESTMENTS
The Company's investments comprise of common stock received from its customers
in exchange for services. The common stock, all of which is from privately held
companies, has been recorded on the financial statements based on the estimated
fair value of the services provided to the customers. The Company records a
writedown for any declines in value that are judged to be other than temporary.
During the years ended December 31, 1996, 1997 and 1998, and nine months ended
September 30, 1998 and 1999, the Company received common stock that was recorded
at $90, $100, $577, $252 and $687, respectively.
NOTE 4 -- ACCRUED EXPENSES AND EMPLOYEE COSTS
The following table presents the detailed categories of the Company's accrued
expenses and employee costs that, on an individual basis, exceed five percent of
total current liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
---- ---- -------------
<S> <C> <C> <C>
Accrued vacation....................................... $ 92 $183 $ 639
Accrued bonuses........................................ -- -- 2,407
Other.................................................. 68 678 4,293
---- ---- ------
$160 $861 $7,339
==== ==== ======
</TABLE>
NOTE 5 -- DEBT
The Company had the following debt outstanding at December 31, 1998 and 1999 and
September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
----- ------- -------------
<S> <C> <C> <C>
Revolving credit facility.............................. $ -- $ -- $ 4,000
Amounts borrowed under equipment line of credit........ 968 2,551 --
Amounts borrowed under software financing agreements... -- 737 732
----- ------- -------
968 3,288 4,732
Less: current portion.................................. (364) (2,735) (4,302)
----- ------- -------
Total long-term debt................................... $ 604 $ 553 $ 430
===== ======= =======
</TABLE>
The revolving credit facility was established in August 1999 with Omnicom Group
and allows the Company to borrow up to $30.0 million at the lender's commercial
paper rate plus 3.0% until the closing of the Company's proposed initial public
offering. Thereafter, the Company may borrow up to $15.0 million at the lender's
commercial paper rate plus 1.25% through September 30, 2002. Interest is payable
quarterly. A portion of the funds was used to repay the amounts borrowed under
the equipment line of credit.
F-12
<PAGE> 82
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
Borrowings under the revolving loan agreement are collateralized by certain
long-term investments of the Company and are subject to certain financial
covenants, including minimum revenue targets and limitations on capital
equipment purchases. At September 30, 1999, the Company was in compliance with
these covenants.
In connection with this agreement, the Company issued warrants to purchase
749,692 shares of its common stock at $0.01 per share (Note 6).
The equipment line of credit, together with an additional credit agreement
permitting borrowings through September 30, 1999 with the same financial
institution, allows the Company to borrow up to $1.5 million for equipment
purchases and $2.5 million limited to 75% of eligible accounts receivable and
any outstanding letters of credit up to $1.0 million. At September 30, 1999, the
Company had $144 in outstanding letters of credit under this agreement. Interest
for amounts borrowed under the equipment line of credit was at the bank's prime
lending rate plus 0.50%.
The amounts borrowed under the software financing agreements bear interest at
rates of 6.89% and 8.25% and are repayable $73, $307, $329, and $22, during the
three months ended December 31, 1999 and for each of the years through 2002,
respectively.
NOTE 6 -- COMMON AND CONVERTIBLE PREFERRED STOCK
COMMON AND CONVERTIBLE PREFERRED STOCK
At September 30, 1999, the Company had authorized 35,000,000 shares and
25,000,000 shares of common stock and preferred stock, respectively. Of the
25,000,000 authorized shares of preferred stock, the Company has designated
21,675,000 shares as Series A preferred stock and 1,488,000 shares as Series B
preferred stock.
VOTING RIGHTS
Preferred stockholders receive one vote for each share of common stock into
which the preferred shares are convertible.
LIQUIDATION PREFERENCE
In the event of liquidation, Series A and B preferred stockholders are entitled
to receive $2.9833 and $7.2067 per share, respectively, plus any declared but
unpaid dividends prior to and in preference to any distribution to the holders
of the Company's common stock. If assets remain upon completion of this
liquidation distribution, the remaining assets of the Company would be
distributed ratably among the holders of the Company's common stock.
DIVIDENDS
Holders of Series A and B preferred stock are entitled to receive noncumulative
dividends at an annual rate of $0.1667 per share, payable when and if declared
by the Company's Board of Directors. The Company may not pay a dividend on its
common stock until Series A and B preferred stock dividends have been paid. The
Company may not pay a dividend if the resulting aggregate stockholders' equity
of the Company falls below $14.0 million. The Company's Board of Directors
through September 30, 1999 has declared no dividends.
F-13
<PAGE> 83
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
CONVERSION
At the option of the holder, each share of Series A and B preferred stock is
convertible into one share of the Company's common stock, subject to adjustments
under certain conditions as provided for in the Company's Articles of
Incorporation. Each share of Series A and B preferred stock will be
automatically converted into one share of common stock upon the earlier of i) a
vote or written consent by at least a majority of such shares when fewer than
700,000 shares of Series A preferred stock remain outstanding or ii) the closing
of the sale of the Company's common stock at a public offering price equal to or
exceeding $10 per share with aggregate proceeds of at least $7.5 million.
WARRANTS
In connection with the revolving credit facility (Note 5), the Company issued a
warrant that entitles the lender to purchase 749,692 shares of the Company's
common stock at an exercise price of $0.01 per share. The warrant is exercisable
until the earlier of an initial public offering of the Company's common stock or
the expiration of the credit facility on September 30, 2002. The fair value of
the warrant of $22.07 per share was estimated using the Black-Scholes pricing
model with the following weighted average assumptions: risk-free interest rate
of 6.77%, expected life of six months, expected dividend rate of 0%, and
volatility of 110%. The Company recorded $16,548 as a deferred bank facility
charge that is being amortized on a straight-line basis over the life of the
revolving credit facility of three years.
NOTE 7 -- STOCK OPTIONS
In April 1997, the Company adopted the 1997 Stock Option Plan ("the Plan") which
authorizes the Board of Directors to grant incentive stock options and
nonstatutory stock options. Incentive stock options ("ISO") may be granted only
to Company employees (including officers and directors who are also employees).
Nonstatutory stock options ("NSO") may be granted to employees, outside
directors and consultants. The maximum number of options, as amended, cannot
exceed 7,575,000 shares of the Company's common stock.
The stock options vest at a rate of 25% of the options granted after one year
from date of grant, with the remaining options vesting on a pro rata monthly
basis over the next 36 months. Options generally expire ten years from the date
of grant; however, in the case of a stock option granted to a person owning more
than 10% of the combined voting power of all classes of the Company's stock, the
term of the option will be five years from the date of the grant. All cancelled
or expired options become available for future grants.
In accordance with the Plan, the stated exercise price shall not be less than
85% of the estimated fair value of the shares on the date of grant as determined
by the Board of Directors, provided, however, that (i) the exercise price of an
ISO and NSO shall not be less than 100% and 85% of the estimated fair value of
the shares on the date of grant, respectively, and (ii) the exercise price of an
ISO and NSO granted to a 10% shareholder shall not be less than 110% of the
estimated fair value of the shares on the date of grant, respectively.
The Company accounts for the Plan in accordance with APB No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations. In connection with
certain stock grants, the Company recognized deferred compensation that is being
amortized over the vesting period of the options. Total stock-based compensation
expense for the years ended December 31, 1996, 1997 and 1998 and nine months
ended September 30, 1998 and 1999 was $53, $87, $694, $291,
F-14
<PAGE> 84
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
and $9,188, respectively, for options granted to employees where the deemed fair
value of the stock for accounting purposes exceeded the exercise price of the
option at the grant date.
The following table summarizes the transactions under the Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------- ----------------------------------------------
1997 1998 1998 1999
--------------------- ---------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ---------- --------- --------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period.. -- $ -- 2,743,335 $0.27 2,743,335 $0.27 3,549,986 $0.39
Granted.............. 3,454,950 0.27 2,514,525 0.43 1,335,150 0.29 3,176,050 3.41
Exercised............ (2,331) 0.29 (298,605) 0.12 (116,202) 0.29 (238,769) 0.34
Expired or
cancelled.......... (709,284) 0.29 (1,409,269) 0.29 (978,393) 0.29 (1,249,623) 0.58
--------- ---------- --------- ----------
Options outstanding,
end of period........ 2,743,335 $0.27 3,549,986 $0.39 2,983,890 $0.27 5,237,644 $2.17
========= ========== ========= ==========
Options exercisable,
end of period........ 623,578 $0.25 483,983 $0.29 626,369 $0.23 841,834 $0.28
========= ========== ========= ==========
</TABLE>
The following table summarizes information about stock options outstanding under
the Plan.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.00...................... 79,734 10.79 years $0.00 26,609 $0.00
0.29 - 1.67...................... 2,577,360 10.08 0.60 815,225 0.29
2.00 - 4.00...................... 1,683,550 9.73 3.05 -- --
5.00 - 6.00...................... 897,000 9.92 5.24 -- --
--------- -------
5,237,644 9.95 $2.17 841,834 $0.28
========= =======
</TABLE>
At December 31, 1997 and 1998, and September 30, 1998 and 1999, 4,829,334,
3,724,078, 4,472,577, and 1,797,651 shares, respectively, were available for
future stock option grants under the Plan.
F-15
<PAGE> 85
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
The weighted-average fair value of Plan options granted was $0.07 and $1.02 for
the years ended December 31, 1997 and 1998, respectively, and $0.85 and $13.92
for the nine months ended September 30, 1998 and 1999. The fair value of each
option grant has been estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Risk-free interest rates.......................... 6.09% 5.72% 5.12% 5.12% 5.78%
Expected lives (years)............................ 4 4 4 4 4
Expected dividend yields.......................... 0% 0% 0% 0% 0%
Expected volatility............................... 0% 0% 0% 0% 0%
</TABLE>
Because the determination of fair value of all options granted after such time
as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described above and because additional grants
are made each year, the results below may not be representative of future
periods.
Had the Company accounted for compensation expense on stock options granted to
employees according to SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company's net income (loss) and net income (loss) per share would have
decreased (increased) to the pro forma amounts indicated in the following table.
Since no options were granted prior to 1997 under this Plan, the pro forma
results indicated for those periods presented in the following table do not
reflect the full effect of amortization over the entire vesting period, and
thus, may not be representative of future periods.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------------
1997 1998 1998 1999
------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) -- as reported.......... $(1,785) $(2,766) $1,146 $(13,927)
Net income (loss) -- pro forma............ (1,808) (2,883) 1,079 (14,761)
Basic net income per common share -- as
reported................................ $(2,006) $(32.43) $25.24 $ (34.54)
Basic net income per common share -- pro
forma................................... (2,031) (33.81) 23.75 (36.61)
Diluted net income (loss) per common
share -- as reported.................... $(2,006) $(32.43) $ 0.05 $ (34.54)
Diluted net income (loss) per common
share -- pro forma...................... (2,031) (33.81) 0.05 (36.61)
</TABLE>
F-16
<PAGE> 86
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
Prior to the adoption of the 1997 Stock Plan, the Company did not have a formal
stock option plan and options were granted to employees and directors to
purchase shares of the Company's predecessor, Organic Online Inc., at various
exercise prices. For the years ended December 31, 1996, 1997 and 1998, and nine
months ended September 30, 1998 and 1999, the employees and directors were
granted 58,000, 24,000, 5,000, 5,000, and 225,409 options, respectively, under
this arrangement. As of September 30, 1999, the number of options outstanding
under this arrangement was 364,517.
NOTE 8 -- INCOME TAXES
As of September 30, 1999, the Company had net operating loss carryforwards of
approximately $2.7 million for federal and state income tax purposes arising
from the taxable loss in the years ended December 31, 1997 and 1998. The federal
net operating loss carryforwards expire in the years 2012 and 2018,
respectively. The state net operating loss carryforwards expire in the years
2005. Valuation allowances have been provided against the net deferred tax
assets due to the uncertainty of their realization.
The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income may be subject to restrictions attributable to equity
transactions that result in changes in ownership as defined in the Tax Reform
Act of 1986. These restrictions may limit, on an annual basis, the Company's
future use of its net operating loss carryforwards.
The difference between the income tax expense (benefit) at the federal statutory
rate of 34% and the Company's effective tax rate is due primarily to net
operating loss carryforwards and the valuation allowance.
Effective January 1, 1996, the Company became an S-Corporation and accordingly,
was not subject to income tax in 1996. The tax benefit in 1996 represents the
reversal of the net deferred tax liabilities at the date the Company changed
from a C-Corporation to an S-Corporation. Upon the formation of the Company into
Organic Online (see Note 1), in January 1997, the Company operated as a
C-Corporation.
F-17
<PAGE> 87
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
The components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- --------------------
1997 1998 1998 1999
------- ------ ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal........................................ $ -- $ -- $ 60 $--
State........................................ 3 10 23 9
Foreign...................................... -- -- -- 55
------- ------ ---- ---
Total currently payable................... 3 10 83 64
------- ------ ---- ---
Deferred
Federal...................................... (753) 753 629 --
State........................................ (247) 247 201 --
------- ------ ---- ---
Total deferred............................ (1,000) 1,000 830 --
------- ------ ---- ---
Total income tax expense (benefit)........ $ (997) $1,010 $913 $64
======= ====== ==== ===
</TABLE>
'The components of the deferred tax assets of the Company were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Accumulated depreciation.............................. $ 12 $ (26) $ 203
Compensation costs.................................... -- -- 1,365
Organizational costs.................................. -- 6 11
Tax credits........................................... -- 9 66
Accruals and reserves................................. 132 243 2,028
Net operating loss carryforward....................... 856 1,240 1,371
------ ------- -------
Gross deferred tax asset......................... 1,000 1,472 5,044
Valuation allowance................................... -- (1,472) (5,044)
------ ------- -------
Net deferred tax asset........................... $1,000 $ -- $ --
====== ======= =======
</TABLE>
NOTE 9 -- 401(k) SAVINGS PLAN
In January 1997, the Company established a defined contribution plan authorized
under Section 401(k) of the Internal Revenue Code. All benefits-eligible
employees with at least one month of service are eligible to participate in the
plan. Employees may contribute up to 20 percent of their pre-tax covered
compensation through salary deductions. In 1999, the Company began contributing
25 percent of every pre-tax dollar an employee contributes up to the first 5
percent of the employee's pre-tax covered compensation. Employees are 50 percent
vested in the employer's contributions after one year of service and fully
vested after two years.
F-18
<PAGE> 88
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
All employer contributions are tax deductible by the Company. The Company's
matching contribution expense was $57 for the nine months ended September 30,
1999. In addition, the Company may make a discretionary profit-sharing
contribution to all eligible employees, regardless of whether an employee is
participating in the 401(k) plan. However, no such contributions have been made
through September 30, 1999.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company leases various office space and office equipment under
non-cancelable operating and capital leases with initial or remaining terms of
one year or more. Total rent expense under operating leases was $70, $207, and
$876 for the years ended December 31, 1996, 1997 and 1998, respectively, and
$526 and $1,815 for the nine months ended September 30, 1998 and 1999,
respectively. At September 30, 1999, the future minimum lease payments under all
lease arrangements are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Three months ending December 31, 1999....................... $ 546 $ 15
Years ending December 31, 2000.............................. 2,050 62
2001...................................................... 1,607 49
2002...................................................... 1,553 46
2003...................................................... 1,354 26
2004...................................................... 1,118 1
Thereafter.................................................. 4,368 --
------- ----
Total minimum lease payments................................ $12,596 199
=======
Less: amount representing interest.......................... 49
----
Present value of net minimum payments....................... 150
Less: current portion of obligations under capital leases... 42
----
Long-term obligations under capital leases.................. $108
====
</TABLE>
The Company has one lease in San Francisco, California that contains an
escalation clause that will become effective upon the consummation of the
proposed initial public offering. There are no restrictions on paying dividends,
incurring additional debt or negotiating additional leases under the terms of
the present lease agreements.
F-19
<PAGE> 89
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
NOTE 11 -- EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted net income
per share for the year ended December 31, 1996 and nine months ended September
30, 1998.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, 1996 1998
---------------------- ----------------------
BASIC DILUTED BASIC DILUTED
------- ----------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income applicable to common stock.... $ 237 $ 237 $ 1,146 $ 1,146
======= =========== ======= ===========
Weighted average common shares
outstanding.............................. 3 3 45,420 45,420
Additional shares due to:
Assumed conversion of dilutive stock
options............................. -- -- -- 87,820
Assumed conversion of Series A
convertible preferred stock......... -- 21,675,000 -- 21,675,000
------- ----------- ------- -----------
Adjusted weighted average common shares
outstanding............................ 3 21,675,003 45,420 21,808,240
======= =========== ======= ===========
Net income per share..................... $78,857 $ 0.01 $ 25.24 $ 0.05
======= =========== ======= ===========
</TABLE>
The following table sets forth common stock equivalents that were not included
in the calculation of diluted net loss per share because to do so would be
anti-dilutive for those periods presented.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, FOR THE NINE MONTHS
------------------------ ENDED SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------------
<S> <C> <C> <C>
Weighted average effect of common stock
equivalents:
Series A convertible preferred stock... 21,675,000 21,675,000 21,675,000
Series B convertible preferred
stock............................. -- -- 1,335,385
Common stock options................. 890 771,237 3,018,716
Common stock warrants................ -- -- 49,430
</TABLE>
NOTE 12 -- RELATED PARTY TRANSACTIONS
On March 31, 1999, the Company entered into a promissory note agreement for $200
with an Executive of the Company. This note bears an annual interest rate of 7%
with interest payments due every other year beginning on March 31, 2001. Under
the terms of this agreement, the entire principal amount will become payable
upon the consummation of the Company's proposed initial public offering, as long
as the offering price is at least $10 per share and the aggregate proceeds are
at least $75.0 million.
Concurrent with the reorganization in January 1997, the Company issued 3,351,288
shares of Series A convertible preferred stock to Omnicom Group for cash
proceeds of $10.0 million. In
F-20
<PAGE> 90
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
February 1999, the Company issued 1,488,000 shares of Series B convertible
preferred stock to Omnicom Group for net cash proceeds of $7,718 plus the
settlement of a $3.0 million short-term bridge loan that was obtained from
Omnicom Group in January 1999. See Note 5 and 6 for detailed information on the
Company's revolving credit facility agreement with Omnicom Group and related
warrants. In the future, the Company expects to have transactions in the
ordinary course of business with Omnicom Group.
NOTE 13 -- SUBSEQUENT EVENTS
On November 4, 1999, the Company entered into a lease for office space in New
York. The office space consists of approximately 110,000 square feet and has a
lease term of 15 years, with a projected commencement date of June 1, 2000. The
monthly lease payment will be approximately $275, $298, and $321 during the
first five years, subsequent five years and last five years, respectively. The
lease has been guaranteed by Omnicom Group for up to $4.5 million.
On November 8, 1999, the Company entered into a lease for new headquarters
office space in San Francisco. In accordance with this lease agreement, the
Company provided a $10.0 million letter of credit to the landlord to secure this
space. The office space consists of approximately 212,000 square feet and has a
lease term of 10 years, with a projected commencement date of September 1, 2000.
The anticipated monthly lease payment during the first year will be
approximately $705 with an annual escalation clause of approximately 4%. The
Company expects to sublease a portion of the office space.
In November 1999 the Company's Board of Directors approved 1,250,925 stock
options at $8 per share, an increase in the number of authorized common shares
to 80,000,000 and adopted the 1999 long-term stock incentive plan of 3,500,000
authorized shares.
F-21
<PAGE> 91
UNDERWRITING
Organic and the underwriters named below (the "Underwriters") have entered
into an underwriting agreement with respect to the shares being offered. Subject
to certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation and Thomas Weisel Partners
LLC are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Thomas Weisel Partners LLC..................................
---------
Total.............................................
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from us to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Organic. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid By Organic No Exercise Full Exercise
--------------- ----------- -------------
<S> <C> <C>
Per share............................................... $ $
Total................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per
share from the initial public offering price. If all the shares are not sold at
the initial public offering price, the representatives may change the offering
price and the other selling terms.
Organic has agreed with the underwriters not to dispose of or hedge any of
the common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. This agreement does not apply to
any existing employee benefit plan. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
Prior to the offering, there has been no public market for the shares. The
initial public offering price for the common stock will be negotiated among us
and the representatives of the underwriters. Among the factors to be considered
in determining the initial public offering price of the shares, in addition to
prevailing market conditions, will be Organic's historical performance,
estimates of the business potential and earnings prospects of Organic, an
assessment of Organic's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Organic has applied to have the common stock listed on the Nasdaq National
Market under the symbol "OGNC".
U-1
<PAGE> 92
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect that market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered. Organic currently
anticipates that it will undertake a directed share program, pursuant to which
it will direct the underwriters to reserve up to shares of its
common stock for sale at the initial public offering price to directors,
officers and friends of Organic, through a directed share program. The number of
shares of common stock available for sale to the general public will be reduced
to the extent such persons purchase any reserved shares. Any shares not so
purchased will be offered by the underwriters to the general public on the same
basis as other shares offered hereby.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998 Thomas Weisel Partners has been named as a lead or co-manager of 88 filed
public offerings of equity securities, of which 68 have been completed, and has
acted as a syndicate member in an additional 46 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except for
our contractual relationship with us under the terms of the underwriting
agreement entered into in connection with this offering.
Organic estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$ .
Organic has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE> 93
INSIDE BACK COVER:
ORGANIC LOGO
HEADLINE: Connecting Customers to Businesses
SUBHEAD: Organic continuing a track record of growth, innovation & leadership
IMAGE: Timeline illustrating, BY YEAR (1993, 1994, 1995, 1996, 1997, 1998,
1999);
EMPLOYEE GROWTH: 4, 10+, 20+, 40+, 70+, 270+, 680+
SIGNIFICANT BUSINESS OR SERVICE ADDITIONS: Apache, Accrue, Strategic
Consulting, Media, Communications, VOICE, Logistics
ADDITION OF LOCATIONS: San Francisco, New York, Chicago, Brazil, Detroit,
London, Singapore
<PAGE> 94
- ----------------------------------------------------------
- ----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
Special Note Regarding Forward-Looking
Statements............................ 19
Use of Proceeds......................... 20
Dividend Policy......................... 20
Capitalization.......................... 21
Dilution................................ 22
Selected Consolidated Financial Data.... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 25
Business................................ 34
Management.............................. 50
Related Party Transactions.............. 60
Principal Stockholders.................. 62
Description of Capital Stock............ 63
Shares Eligible for Future Sale......... 66
Legal Matters........................... 67
Experts................................. 67
Available Information................... 67
Index to Financial Statements........... F-1
Underwriting............................ U-1
</TABLE>
-------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as underwriter and with respect to an unsold allotment or
subscription.
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
Shares
ORGANIC, INC.
Common Stock
-------------------------
[ORGANIC LOGO]
-------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
Representatives of the Underwriters
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be paid by the Registrant in connection with the distribution of
the securities being registered, other than underwriting discounts and
commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Filing Fee............... $20,850.00
NASD Filing Fee............................................. 8,000
Nasdaq National Market Listing Fee.......................... **
Accounting Fees and Expenses................................ 345,000
Blue Sky Fees and Expenses.................................. 3,000
Legal Fees and Expenses..................................... 300,000
Transfer Agent and Registrar Fees and Expenses.............. **
Printing Expenses........................................... **
Miscellaneous Expenses...................................... **
----------
Total.................................................. $ **
==========
</TABLE>
- ---------------
* All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.
** To be included by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to award,
or a corporation's board of directors to grant, indemnity to officers, directors
and other corporate agents under certain circumstances and subject to certain
limitations. Our certificate of incorporation and bylaws provide that we shall
indemnify our directors, officers, employees and agents to the full extent
permitted by Delaware General Corporation Law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. In
addition, we intend to enter into separate indemnification agreements with our
directors, officers and certain employees which would require us, among other
things, to indemnify them against certain liabilities which may arise by reason
of their status as directors, officers or certain other employees. We also
intend to maintain director and officer liability insurance, if available on
reasonable terms.
These indemnification provisions and the indemnification agreement to be entered
into between us and our officers and directors may be sufficiently broad to
permit indemnification of our officers and directors for liabilities, including
reimbursement of expenses incurred, arising under the Securities Act.
The underwriting agreement filed as Exhibit 1.1 to this registration statement
provides for indemnification by the underwriters of us and our officers and
directors for certain liabilities arising under the Securities Act, or
otherwise.
II-1
<PAGE> 96
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From our incorporation to September 30, 1999, we have granted or issued and sold
the following unregistered securities:
1. Stock options to employees, officers, directors and consultants under our
1997 stock option plan exercisable for up to an aggregate of 5,237,644 shares of
our common stock, with a weighted average exercise price of $2.17 per share.
2. An aggregate of 539,705 shares exercised under our 1997 stock option plan,
with a weighted average exercise price of $.22 per share.
3. On January 29, 1997, we sold to Organic Holdings, Inc. 3 shares of our common
stock at $0.333 per share for $1.00, and 18,323,712 shares of our Series A
preferred stock at $2.9839 per share for a total of $54,664,735.
4. On January 29, 1997, we sold to Omnicom Group Inc. 3,351,288 shares of our
Series A preferred stock at $2.9839 per share for an aggregate total of
approximately $10,000,000.
5. On January 7, 1999, we sold to Omnicom Group Inc. 1,488,000 shares of our
Series B preferred stock at $7.2067 per share for a total of $10,723,520.
6. On September 13, 1999, we issued a warrant to Omnicom Group Inc. to purchase
749,692 shares of common stock at $0.01 per share for a total of $7,497.
The issuances of the securities in all of the transactions above were deemed to
be exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act by an issuer not involving a public offering, where the
purchasers represented their intention to acquire the securities for investment
only and not with a view to distribution and received or had access to adequate
information about the Registrant, or were deemed to be exempted in reliance on
Rule 701 promulgated under the Securities Act as transactions pursuant to a
compensatory benefit plan or written compensation contract.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The exhibits are as set forth in the Exhibit Index.
(b) Financial Statement Schedules
All schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriters at the closing specified in
the underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by one of our directors, officers
or controlling persons 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, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court
II-2
<PAGE> 97
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.
We hereby undertake that:
(1) For purposes of any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by us
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-3
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Organic, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California on the 23rd day of November, 1999.
ORGANIC, INC.
By: /s/ JONATHAN NELSON
-----------------------------------
Jonathan Nelson
Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jonathan Nelson, Michael Hudes and Susan L.
Field, and each of them, as their true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for them and in their name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
sign any registration statement for the same offering covered by the
registration statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933 and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JONATHAN NELSON Chief Executive November 23, 1999
- ----------------------------------------------------- Officer and Chairman
Jonathan Nelson of the Board
(Principal Executive
Officer)
/s/ MICHAEL HUDES President and Director November 23, 1999
- -----------------------------------------------------
Michael Hudes
/s/ SUSAN L. FIELD Executive Vice November 23, 1999
- ----------------------------------------------------- President and Chief
Susan L. Field Financial Officer
(Principal Financial
and Accounting
Officer)
/s/ GARY F. HROMADKO Director November 23, 1999
- -----------------------------------------------------
Gary F. Hromadko
Director November , 1999
- -----------------------------------------------------
Gerald Bruce Redditt
</TABLE>
II-4
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of Registrant*
3.2 Bylaws of Registrant*
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen Stock Certificate of Registrant*
5.1 Opinion of Morrison & Foerster LLP as to the legality of the
common stock*
10.1 Form of Indemnification Agreement between Registrant and
each of its executive officers and directors
10.2 Registrant's 1997 Stock Option Plan, as amended and
restated, including forms of agreements thereunder*
10.3 Registrant's 1999 Long-Term Stock Incentive Plan, including
forms of agreement thereunder*
10.4 Employment Agreement between Registrant and Jonathan Nelson,
dated January 29, 1997, and amendment on February 24, 1997
10.5 Employment Agreement between Registrant and Michael Hudes,
dated January 29, 1997, and amendment on February 24, 1997
10.6 Employment Agreement between Registrant and Susan L. Field,
dated June 22, 1999
10.7 Loan Agreement between Registrant and Omnicom Group Inc.
dated as of August 27, 1999
10.8 Guaranty and Security Agreement by and among Registrant,
Organic Media, Inc. and Omnicom Group Inc., dated August
27, 1999
10.9 Revolving Note of Registrant payable to Omnicom Group Inc.,
dated August 27, 1999
10.10 Lease between 500 Third Street Associates and Registrant,
dated July 22, 1996*
10.11 Lease between 500 Third Street Associates and Registrant,
dated July 22, 1996*
10.12 Lease between 500 Third Street Associates and Registrant,
dated December 5, 1996*
10.13 Lease between Trustees of the Masonic Hall and Asylum Fund
and Registrant, dated June 1998*
10.14 Lease between Trustees of the Masonic Hall and Asylum Fund
and Registrant, dated September 15, 1999*
10.15 Lease between Baker Hamilton Properties, LLC and Registrant,
dated November 8, 1999*
10.16 Lease between 233 Broadway Owners LLC and Registrant, dated
October 29, 1999*
21.1 Subsidiaries of Registrant
23.1 Consent of Morrison & Foerster LLP. Reference is made to
Exhibit 5.1*
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1 Powers of Attorney. Reference is made to Page II-[4]
27.1 Financial Data Schedule as of and for the year ended
December 31, 1997
27.2 Financial Data Schedule as of and for the year ended
December 31, 1998
27.3 Financial Data Schedule as of and for the nine months ended
September 30, 1999
</TABLE>
- ---------------
* To be filed by amendment
<PAGE> 1
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is entered into, effective as of _______________,
1999, by and between Organic, Inc., a Delaware corporation (the "Company"), and
__________________________________________ ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director and/or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims currently being asserted against directors
and officers of corporations;
WHEREAS, the Certificate of Incorporation and Bylaws of the
Company require the Company to indemnify and advance expenses to its directors
and officers to the fullest extent permitted under Delaware law, and the
Indemnitee has been serving and continues to serve as a director and/or officer
of the Company in part in reliance on the Company's Certificate of Incorporation
and Bylaws; and
WHEREAS, in recognition of Indemnitee's need for (i) substantial
protection against personal liability based on Indemnitee's reliance on the
aforesaid Certificate of Incorporation and Bylaws, (ii) specific contractual
assurance that the protection promised by the Certificate of Incorporation and
Bylaws will be available to Indemnitee (regardless of, among other things, any
amendment to or revocation of the Certificate of Incorporation and Bylaws or any
change in the composition of the Company's Board of Directors or acquisition
transaction relating to the Company), and (iii) an inducement to provide
effective services to the Company as a director and/or officer, the Company
wishes to provide in this Agreement for the indemnification of and the advancing
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted under Delaware law and as set forth in this Agreement, and, to the
extent insurance is maintained, to provide for the continued coverage of
Indemnitee under the Company's directors' and officers' liability insurance
policies.
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee continuing to serve the Company directly or, at its request, with
another enterprise, and intending to be legally bound hereby, the parties agree
as follows:
<PAGE> 2
1. Certain Definitions:
(a) Board: the Board of Directors of the Company.
(b) Affiliate: any corporation or other person or entity
that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
(c) Change in Control: shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 30% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board and any new director whose
election by the Board or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority of the Board, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation that would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company (in one
transaction or a series of transactions) of all or substantially all of the
Company's assets.
(d) Expenses: any expense, liability, or loss, including
attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts
paid or to be paid in settlement, any interest, assessments, or other charges
imposed thereon, any federal, state, local, or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement, and all
other costs and obligations, paid or incurred in connection with investigating,
defending, being a witness in, participating in (including on appeal), or
preparing for any of the foregoing in, any Proceeding relating to any
Indemnifiable Event.
(e) Indemnifiable Event: any event or occurrence that
takes place either prior to or after the execution of this Agreement, related to
the fact that Indemnitee is or was a director or officer of the Company, or
while a director or officer is or was serving at the request of the Company as a
director, officer, employee, trustee, agent, or fiduciary of another foreign or
domestic corporation, partnership, joint venture, employee benefit plan, trust,
or other enterprise, or was a director, officer, employee, or agent of a foreign
or domestic corporation
2
<PAGE> 3
that was a predecessor corporation of the Company or of another enterprise at
the request of such predecessor corporation, or related to anything done or not
done by Indemnitee in any such capacity, whether or not the basis of the
Proceeding is alleged action in an official capacity as a director, officer,
employee, or agent or in any other capacity while serving as a director,
officer, employee, or agent of the Company, as described above.
(f) Independent Counsel: the person or body appointed in
connection with Section 3.
(g) Proceeding: any threatened, pending, or completed
action, suit, or proceeding (including an action by or in the right of the
Company), or any inquiry, hearing, or investigation, whether conducted by the
Company or any other party, that Indemnitee in good faith believes might lead to
the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative, or other.
(h) Reviewing Party: the person or body appointed in
accordance with Section 3.
(i) Voting Securities: any securities of the Company that
vote generally in the election of directors.
(j) Potential Change in Control: shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions that, if consummated, would constitute a Change in
Control; (iii) any person (other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such capacity
or a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of stock of the
Company), who is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases his beneficial
ownership of such securities by 5% or more over the percentage so owned by such
person on the date hereof, or (iv) the Board adopts a resolution to the effect
that, for purposes of this Agreement, a Potential Change in Control has
occurred.
2. Agreement to Indemnify.
(a) General Agreement. In the event Indemnitee was, is, or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Proceeding by reason of
(or arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee from and against any and all Expenses to the fullest
3
<PAGE> 4
extent permitted by law, as the same exists or may hereafter be amended or
interpreted (but in the case of any such amendment or interpretation, only to
the extent that such amendment or interpretation permits the Company to provide
broader indemnification rights than were permitted prior thereto). The parties
hereto intend that this Agreement shall provide for indemnification in excess of
that expressly permitted by statute, including, without limitation, any
indemnification provided by the Company's Certificate of Incorporation, its
Bylaws, vote of its shareholders or disinterested directors, or applicable law.
(b) Initiation of Proceeding. Notwithstanding anything in
this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Proceeding
initiated by Indemnitee against the Company or any director or officer of the
Company unless (i) the Company has joined in or the Board has consented to the
initiation of such Proceeding; (ii) the Proceeding is one to enforce
indemnification rights under Section 5; or (iii) the Proceeding is instituted
after a Change in Control and Independent Counsel has approved its initiation.
(c) Expense Advances. If so requested by Indemnitee, the
Company shall advance (within ten business days of such request) any and all
Expenses to Indemnitee (an "Expense Advance"); provided that, (i) such an
Expense Advance shall be made only upon delivery to the Company of an
undertaking by or on behalf of the Indemnitee to repay the amount thereof if it
is ultimately determined that Indemnitee is not entitled to be indemnified by
the Company, and (ii) if and to the extent that the Reviewing Party determines
that Indemnitee would not be permitted to be so indemnified under applicable
law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby
agrees to reimburse the Company) for all such amounts theretofore paid. If
Indemnitee has commenced or commences legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, as provided in Section 4, any determination made by the
Reviewing Party that Indemnitee would not be permitted to be indemnified under
applicable law shall not be binding, and Indemnitee shall not be required to
reimburse the Company for any Expense Advance until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or have lapsed). Indemnitee's obligation to
reimburse the Company for Expense Advances shall be unsecured and no interest
shall be charged thereon.
(d) Mandatory Indemnification. Notwithstanding any other
provision of this Agreement (other than Section 2(f) below), to the extent that
Indemnitee has been successful on the merits or otherwise in defense of any
Proceeding relating in whole or in part to an Indemnifiable Event or in defense
of any issue or matter therein, Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.
(e) Partial Indemnification. If Indemnitee is entitled
under any provision of this Agreement to indemnification by the Company for some
or a portion of
4
<PAGE> 5
Expenses, but not, however, for the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled.
(f) Prohibited Indemnification. No indemnification
pursuant to this Agreement shall be paid by the Company on account of any
Proceeding in which judgment is rendered against Indemnitee for an accounting of
profits made from the purchase or sale by Indemnitee of securities of the
Company pursuant to the provisions of Section 16(b) of the Securities Exchange
Act of 1934, as amended, or similar provisions of any federal, state, or local
laws.
3. Reviewing Party. Prior to any Change in Control, the Reviewing
Party shall be any appropriate person or body consisting of a member or members
of the Board or any other person or body appointed by the Board who is not a
party to the particular Proceeding with respect to which Indemnitee is seeking
indemnification; after a Change in Control, the Independent Counsel referred to
below shall become the Reviewing Party. With respect to all matters arising
after a Change in Control concerning the rights of Indemnitee to indemnity
payments and Expense Advances under this Agreement or any other agreement or
under applicable law or the Company's Certificate of Incorporation or Bylaws now
or hereafter in effect relating to indemnification for Indemnifiable Events, the
Company shall seek legal advice only from Independent Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company or the
Indemnitee (other than in connection with indemnification matters) within the
last five years. The Independent Counsel shall not include any person who, under
the applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or Indemnitee in an
action to determine Indemnitee's rights under this Agreement. Such counsel,
among other things, shall render its written opinion to the Company and
Indemnitee as to whether and to what extent the Indemnitee should be permitted
to be indemnified under applicable law. The Company agrees to pay the reasonable
fees of the Independent Counsel and to indemnify fully such counsel against any
and all expenses (including attorneys' fees), claims, liabilities, loss, and
damages arising out of or relating to this Agreement or the engagement of
Independent Counsel pursuant hereto.
4. Indemnification Process and Appeal.
(a) Indemnification Payment. Indemnitee shall be entitled
to indemnification of Expenses, and shall receive payment thereof, from the
Company in accordance with this Agreement as soon as practicable after
Indemnitee has made written demand on the Company for indemnification, unless
the Reviewing Party has given a written opinion to the Company that Indemnitee
is not entitled to indemnification under applicable law.
5
<PAGE> 6
(b) Suit to Enforce Rights. Regardless of any action by
the Reviewing Party, if Indemnitee has not received full indemnification within
thirty days after making a demand in accordance with Section 4(a), Indemnitee
shall have the right to enforce its indemnification rights under this Agreement
by commencing litigation in any court in the State of California or the State of
Delaware having subject matter jurisdiction thereof seeking an initial
determination by the court or challenging any determination by the Reviewing
Party or any aspect thereof. The Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
not challenged by the Indemnitee shall be binding on the Company and Indemnitee.
The remedy provided for in this Section 4 shall be in addition to any other
remedies available to Indemnitee at law or in equity.
(c) Defense to Indemnification, Burden of Proof, and
Presumptions. It shall be a defense to any action brought by Indemnitee against
the Company to enforce this Agreement (other than an action brought to enforce a
claim for Expenses incurred in defending a Proceeding in advance of its final
disposition where the required undertaking has been tendered to the Company)
that it is not permissible under applicable law for the Company to indemnify
Indemnitee for the amount claimed. In connection with any such action or any
determination by the Reviewing Party or otherwise as to whether Indemnitee is
entitled to be indemnified hereunder, the burden of proving such a defense or
determination shall be on the Company. Neither the failure of the Reviewing
Party or the Company (including its Board, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action by Indemnitee that indemnification of the claimant is proper under the
circumstances because Indemnitee has met the standard of conduct set forth in
applicable law, nor an actual determination by the Reviewing Party or Company
(including its Board, independent legal counsel, or its stockholders) that the
Indemnitee had not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that the Indemnitee has not met the
applicable standard of conduct. For purposes of this Agreement, the termination
of any claim, action, suit, or proceeding, by judgment, order, settlement
(whether with or without court approval), conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law.
5. Indemnification for Expenses Incurred in Enforcing Rights. The
Company shall indemnify Indemnitee against any and all Expenses that are
incurred by Indemnitee in connection with any action brought by Indemnitee for
(i) indemnification or advance payment of Expenses or Expense
Advances by the Company under this Agreement or any other
agreement or under applicable law or the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to
indemnification for Indemnifiable Events, and/or
6
<PAGE> 7
(ii) recovery under directors' and officers' liability insurance
policies maintained by the Company, but only in the event that
Indemnitee ultimately is determined to be entitled to such
indemnification, Expense Advances, or insurance recovery, as the
case may be. In addition, the Company shall, if so requested by
Indemnitee, advance the foregoing expenses to Indemnitee, subject
to and in accordance with Section 2(c).
6. Notification and Defense of Proceeding.
(a) Notice. Promptly after receipt by Indemnitee of notice
of the commencement of any Proceeding, Indemnitee shall, if a claim in respect
thereof is to be made against the Company under this Agreement, notify the
Company of the commencement thereof; but the omission so to notify the Company
will not relieve the Company from any liability that it may have to Indemnitee,
except as provided in Section 6(c).
(b) Defense. With respect to any Proceeding as to which
Indemnitee notifies the Company of the commencement thereof, the Company will be
entitled to participate in the Proceeding at its own expense and except as
otherwise provided below, to the extent the Company so wishes, it may assume the
defense thereof with counsel reasonably satisfactory to Indemnitee. After notice
from the Company to Indemnitee of its election to assume the defense of any
Proceeding, the Company shall not be liable to Indemnitee under this Agreement
or otherwise for any Expenses subsequently incurred by Indemnitee in connection
with the defense of such Proceeding other than reasonable costs of investigation
or as otherwise provided below. Indemnitee shall have the right to employ legal
counsel in such Proceeding, but all Expenses related thereto incurred after
notice from the Company of its assumption of the defense shall be at
Indemnitee's expense unless: (i) the employment of legal counsel by Indemnitee
has been authorized by the Company, (ii) Indemnitee has reasonably determined
that there may be a conflict of interest between Indemnitee and the Company in
the defense of the Proceeding, (iii) after a Change in Control the employment of
counsel by Indemnitee has been approved by the Independent Counsel, or (iv) the
Company shall not in fact have employed counsel to assume the defense of such
Proceeding, in each of which cases all Expenses of the Proceeding shall be borne
by the Company. The Company shall not be entitled to assume the defense of any
Proceeding brought by or on behalf of the Company or as to which Indemnitee
shall have made the determination provided for in (ii) above.
(c) Settlement of Claims. The Company shall not be liable
to indemnify Indemnitee under this Agreement or otherwise for any amounts paid
in settlement of any Proceeding effected without the Company's written consent,
such consent not to be unreasonably withheld; provided, however, that if a
Change in Control has occurred [(other than a Change in Control approved by a
majority of the directors on the Board who were directors immediately prior to
such Change in Control)], the Company shall be liable for indemnification of
Indemnitee
7
<PAGE> 8
for amounts paid in settlement if the Independent Counsel has approved the
settlement. The Company shall not settle any Proceeding in any manner that would
impose any penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the Company nor the Indemnitee will unreasonably withhold their
consent to any proposed settlement. The Company shall not be liable to indemnify
the Indemnitee under this Agreement with regard to any judicial award if the
Company was not given a reasonable and timely opportunity, at its expense, to
participate in the defense of such action; the Company's liability hereunder
shall not be excused if participation in the Proceeding by the Company was
barred by this Agreement.
7. Establishment of Trust. In the event of a Change in Control or
a Potential Change in Control the Company shall, upon written request by
Indemnitee, create a Trust for the benefit of the Indemnitee and from time to
time upon written request of Indemnitee shall fund the Trust in an amount
sufficient to satisfy any and all Expenses reasonably anticipated at the time of
each such request to be incurred in connection with investigating, preparing
for, participating in, and/or defending any Proceeding relating to an
Indemnifiable Event. The amount or amounts to be deposited in the Trust pursuant
to the foregoing funding obligation shall be determined by the Independent
Counsel. The terms of the Trust shall provide that (i) the Trust shall not be
revoked or the principal thereof invaded without the written consent of the
Indemnitee, (ii) the Trustee shall advance, within ten business days of a
request by the Indemnitee, any and all Expenses to the Indemnitee (and the
Indemnitee hereby agrees to reimburse the Trust under the same circumstances for
which the Indemnitee would be required to reimburse the Company under Section
2(c) of this Agreement), (iii) the Trust shall continue to be funded by the
Company in accordance with the funding obligation set forth above, (iv) the
Trustee shall promptly pay to the Indemnitee all amounts for which the
Indemnitee shall be entitled to indemnification pursuant to this Agreement or
otherwise, and (v) all unexpended funds in the Trust shall revert to the Company
upon a final determination by the Independent Counsel or a court of competent
jurisdiction, as the case may be, that the Indemnitee has been fully indemnified
under the terms of this Agreement. The Trustee shall be chosen by the
Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its
obligations under this Agreement. All income earned on the assets held in the
Trust shall be reported as income by the Company for federal, state, local, and
foreign tax purposes. The Company shall pay all costs of establishing and
maintaining the Trust and shall indemnify the Trustee against any and all
expenses (including attorneys' fees), claims, liabilities, loss, and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
8. Non-Exclusivity. The rights of Indemnitee hereunder shall be
in addition to any other rights Indemnitee may have under the Company's
Certificate of Incorporation, Bylaws, applicable law, or otherwise. To the
extent that a change in applicable law (whether by statute or judicial decision)
permits greater indemnification than would be afforded currently under the
Company's Certificate of Incorporation, Bylaws, applicable law, or this
Agreement, it is the
8
<PAGE> 9
intent of the parties that Indemnitee enjoy by this Agreement the greater
benefits so afforded by such change.
9. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing general and/or directors' and officers'
liability insurance, Indemnitee shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer.
10. Period of Limitations. No legal action shall be brought and
no cause of action shall be asserted by or on behalf of the Company or any
Affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs,
executors, or personal or legal representatives after the expiration of two
years from the date of accrual of such cause of action, or such longer period as
may be required by state law under the circumstances. Any claim or cause of
action of the Company or its Affiliate shall be extinguished and deemed released
unless asserted by the timely filing and notice of a legal action within such
period; provided, however, that if any shorter period of limitations is
otherwise applicable to any such cause of action, the shorter period shall
govern.
11. Amendment of this Agreement. No supplement, modification, or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be binding unless in the form of a writing signed by the party against
whom enforcement of the waiver is sought, and no such waiver shall operate as a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver. Except as specifically provided herein,
no failure to exercise or any delay in exercising any right or remedy hereunder
shall constitute a waiver thereof.
12. Subrogation. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
13. No Duplication of Payments. The Company shall not be liable
under this Agreement to make any payment in connection with any claim made
against Indemnitee to the extent Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable hereunder.
14. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors (including any direct or indirect successor by purchase,
merger, consolidation, or otherwise to all or substantially all of the business
and/or assets of the Company), assigns, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
9
<PAGE> 10
direct or indirect by purchase, merger, consolidation, or otherwise) to all,
substantially all, or a substantial part, of the business and/or assets of the
Company, by written agreement in form and substance satisfactory to Indemnitee,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform if no such
succession had taken place. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity pertaining to an Indemnifiable Event even though he
may have ceased to serve in such capacity at the time of any Proceeding.
15. Severability. If any provision (or portion thereof) of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, or otherwise unenforceable, the remaining provisions shall remain
enforceable to the fullest extent permitted by law. Furthermore, to the fullest
extent possible, the provisions of this Agreement (including, without
limitation, each portion of this Agreement containing any provision held to be
invalid, void, or otherwise unenforceable, that is not itself invalid, void, or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, void, or unenforceable.
16. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed in such State without giving
effect to its principles of conflicts of laws.
17. Notices. All notices, demands, and other communications
required or permitted hereunder shall be made in writing and shall be deemed to
have been duly given if delivered by hand, against receipt, or mailed, postage
prepaid, certified or registered mail, return receipt requested, and addressed
to the Company at:
Organic, Inc.
510 Third Street, Suite 540
San Francisco, CA 94107
Attention: Chief Executive Officer
and to Indemnitee at:
--------------------------
--------------------------
--------------------------
--------------------------
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Notice of change of address shall be effective only when given in accordance
with this Section. All notices complying with this Section shall be deemed to
have been received on the date of hand delivery or on the third business day
after mailing.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have duly executed
and delivered this Agreement as of the day specified above.
ORGANIC, INC.
By:
--------------------------------
Name:
Title:
INDEMNITEE
------------------------------------
[Signature]
------------------------------------
[Print Name]
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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
AGREEMENT made this 29th day of January, 1997, by and between
ORGANIC ONLINE, INC., a Delaware corporation (the "COMPANY"), and JONATHAN
NELSON (the "EXECUTIVE").
WITNESSETH:
WHEREAS, entering into this Agreement is a condition of closing
under a certain Stock Purchase Agreement of even date herewith (the "PURCHASE
AGREEMENT") pursuant to which Omnicom Group Inc. ("OMNICOM") acquired 20.1% of
the shares of Series A Preferred Stock of the Company, and, in certain
circumstances as set forth under a Shareholders Agreement of even date herewith
(the "SHAREHOLDERS AGREEMENT"), the right to acquire additional shares of
capital stock of the Company; and
WHEREAS, the Company wishes to ensure the continued employment
of the Executive with the Company and the Executive wishes to accept such
employment upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and other good
and valuable consideration, receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. EMPLOYMENT
The Company agrees to employ the Executive during the Term
specified in Section 2, and the Executive agrees to accept such employment, upon
the terms and conditions hereinafter set forth.
2. TERM
(a) Subject to Section 6 below and the other terms and
conditions of this Agreement, the Executive's employment by the Company shall be
for a term commencing on the date hereof and expiring on the close of business
on December 31, 1999 (the "INITIAL TERM"); provided, however, that the
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term of the Executive's employment by the Company shall continue thereafter
unless and until either party shall give to the other 90 days advance written
notice ("NOTICE OF TERMINATION") of expiration of the term (the Initial Term and
the period, if any, thereafter, during which the Executive's employment shall
continue are collectively referred to as the "TERM"). Any notice of Termination
given under this Section 2(a) shall specify the date of expiration (which may
not be earlier than December 31, 1999) and may be given at any time on or after
September 30, 1999. The Company shall have the right during any such 90 day
notice period to relieve the Executive of his offices, duties and
responsibilities and to place him on a paid leave-of-absence status, provided
that during such notice period the Executive shall remain an employee of the
Company and shall continue to receive his salary compensation and other benefits
as provided in this Agreement. The effective date of the termination of the
Executive's employment with the Company, regardless of the reason therefor, is
referred to in this Agreement as the "DATE OF TERMINATION".
(b) Upon termination of the employment of the Executive with the
Company pursuant to a Notice of Termination under Section 2(a) above, the
Company shall pay the Executive, subject to appropriate offsets, as permitted by
applicable law, for debts or money owed by the Executive to the Company or
another company within the group of companies directly or indirectly owned by
Holdings (collectively, "OFFSETS"), his salary compensation and any unused
accrued vacation only through, and any unpaid reimbursement expenses outstanding
as of, the Date of Termination. Any benefits to which the Executive or his
beneficiaries may be entitled under the plans and programs described in Sections
5(b) and (c) below, or any other applicable plans and programs, shall be
determined as of the Date of Termination in accordance with the terms of such
plans and programs. Except as provided in this Section 2(b), in connection with
the Executive's termination of employment pursuant to Section 2(a), the Company
shall have no further liability to the Executive or the Executive's heirs,
beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amount of whatever nature.
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3. DUTIES AND RESPONSIBILITIES
(a) During the Term, the Executive shall have the title of Chief
Exective Officer of the Company. The Executive shall report to the Board of
Directors of the Company (the "Board"), at such times and in such detail as he
shall reasonably require.
(b) In his position as Chief Executive Officer of the Company,
the Executive shall perform such executive and managerial duties and
responsibilities customary to his office as are reasonably necessary to the
operations of the Company and as may be assigned to him from time to time by or
under authority of the Board of the Company, consistent with his position as
designated in Section 3(a) above.
(c) The Executive shall use his best efforts to ensure that the
Company and its subsidiaries, if any, comply on a timely basis with all
budgetary and reporting requirements reasonably requested by the Board. In no
event will the Executive without the approval of the Board incur obligations on
behalf of the Company other than in the ordinary course of business or enter
into any transaction on behalf of the Company not in the ordinary course of
business. In addition, as long as the provisions of the Shareholders Agreement
are operative, the Executive shall not cause the Company to take any of the
actions listed in Article III without such actions being properly authorized by
the Board and/or the shareholders of the Company, as the case may be.
(d) The Executive's employment by the Company shall be full-time
and exclusive, and during the Term, the Executive agrees that he will (i) devote
substantially all of his business time and attention, his best efforts, and all
his skill and ability to promote the interests of the Company; (ii) carry out
his duties in a competent and professional manner; (iii) work with other
employees of the Company in a competent and professional manner; and (iv)
generally promote the interests of the Company and its clients. Notwithstanding
the foregoing, the Executive shall be permitted to engage in other business or
charitable activities
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(as an active participant or a passive investor), provided that such activities
are not rendered for a company which transacts business with the Company or
engages in business competitive with that conducted by the Company (or, if such
company does transact business with the Company or does engage in a competitive
business, either it is a publicly held corporation and the Executive's
participation is limited to owning less than 1/4 of 1% of its outstanding
shares) and further provided that such activities (individually or collectively)
do not materially interfere with the performance of his duties or
responsibilities under this Agreement.
(e) The Executive's services hereunder shall be performed at the
offices of the Company in San Francisco, California (or such other location to
which the primary office of the Company shall be moved), subject to necessary
travel requirements of his position and duties hereunder.
4. COMPENSATION
(a) As compensation for his services hereunder and in
consideration of his agreement not to compete as set forth in Section 8 below,
during the Term, the Company shall pay the Executive, in accordance with its
normal payroll practices, direct salary compensation at an annual rate of
$50,000. The Executive's annual rate of salary compensation may be increased
(but not decreased) by or under the authority of the Board of the Company in
accordance with the salary review policy of the Company as in effect from time
to time.
(b) In addition to the salary compensation provided for under
clause (a) above, during the Term the Executive shall be eligible to receive
discretionary bonus compensation in an amount determined by the Board.
(c) During the Term, the Executive shall be eligible to
participate in and receive awards under the Company's 1997 Stock Option Plan (or
any other compensation plan hereafter adopted by the Company), in the discretion
of the Board (or any compensation committee thereof).
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5. EXPENSES; FRINGE BENEFITS
(a) In addition to the compensation provided for under Section
4, the Company agrees to pay or to reimburse the Executive during the Term for
all reasonable, ordinary and necessary vouchered business or entertainment
expenses incurred in the performance of his services hereunder in accordance
with the policy of the Company as from time to time in effect. The Executive, as
a condition precedent to obtaining such payment or reimbursement, shall provide
to the Company any and all statements, bills or receipts evidencing the travel
or out-of-pocket expenses for which the Executive seeks payment or
reimbursement, and any other information or materials, as the Company may from
time to time reasonably require.
(b) During the Term, the Executive and, to the extent eligible,
his dependents, shall be entitled to participate in and receive all benefits
under any welfare benefit plans and programs provided by the Company (including
without limitation, medical, dental, disability, group life (including
accidental death and dismemberment) and business travel insurance plans and
programs) applicable generally to the employees of the Company.
(c) During the Term, the Executive shall be entitled to
participate in all retirement plans and programs (including without limitation
any profit sharing/401(k) plan) applicable generally to the employees of the
Company, subject, however, to generally applicable eligibility and other
provisions of the various plans and programs in effect from time to time. In
addition, during the Term, the Executive shall be entitled to receive fringe
benefits and perquisites in accordance with the plans, practices, programs and
policies of the Company from time to time in effect and available generally to
the senior executives of the Company.
(d) The Executive shall be entitled to ___ weeks paid vacation
during each calendar year of the Term, to be taken at such time(s) as shall not,
in the reasonable judgment of the Board of the Company, materially interfere
with
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the Executive's fulfillment of his duties hereunder, and shall be entitled to as
many holidays, sick days and personal days as are in accordance with the policy
of the Company then in effect for its senior executives generally, upon such
terms as may be generally applicable to senior executives of the Company.
(e) Notwithstanding anything to the contrary contained above,
the Company shall be entitled to terminate or reduce any employee benefit or
perquisite enjoyed by the Executive pursuant to the provisions of Section 5(b),
(c) or (d) above if such reduction is part of an across-the-board reduction
applicable to all executive officers of the Company.
6. TERMINATION
(a) The Company, by direction of its Board, shall be entitled to
terminate the Term and to discharge the Executive for "CAUSE" effective upon the
giving of written notice which notice shall in each case refer to this Section 6
and set out in detail the Company's determination of "CAUSE". The term "cause"
shall be limited to the following grounds:
(i) The Executive's repeated failure or refusal to
materially perform his duties and responsibilities as set forth
in Section 3 hereof, or the failure of the Executive to devote
substantially all of his business time and attention exclusively
to the business and affairs of the Company in accordance with
the terms hereof, in each case if such failure or refusal is not
cured within 10 days after written notice thereof to the
Executive by the Company;
(ii) The willful misappropriation of the funds or
property of the Company;
(iii) Use of alcohol or illegal drugs, interfering with
the performance of the Executive's obligations under this
Agreement, continuing after written warning;
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(iv) Conviction in a court of law of, or entering a plea
of guilty or no contest to, any felony or any crime involving
moral turpitude, dishonesty or theft;
(v) The commission in bad faith by the Executive of any
act which injures or could reasonably be expected to injure the
reputation, business or business relationships of the Company,
including without limitation, a willful or intentional breach of
the provisions of Section 8 of this Agreement; and
(vi) Any material breach (not covered by any of the
clauses (i) through (v)) of any term, provision or condition of
this Agreement, if such breach is not cured within 30 days after
written notice thereof to the Executive by the Company.
Upon the termination of the employment of the Executive with the Company (x)
pursuant to this Section 6(a) or (y) by virtue of a resignation by the Executive
other than pursuant to Section 2(a) above, the Company shall pay the Executive,
subject to any Offsets, his salary compensation and any unused accrued vacation
only through, and any unpaid reimbursable expenses outstanding as of, the Date
of Termination. Any benefits to which the Executive or his beneficiaries may be
entitled under the plans and programs described in Sections 5(b) and (c) above,
or any other applicable plans and programs, shall be determined as of the Date
of Termination in accordance with the terms of such plans and programs. Except
as provided in this Section 6(a), in connection with the Executive's termination
by the Company for cause, the Company shall have no further liability to the
Executive or the Executive's heirs, beneficiaries or estate for damages,
compensation, benefits, severance, indemnities or other amount of whatever
nature.
(b) In the event of a termination without cause by the Company
excluding a termination by the Company under Section 2(a) above (a "WRONGFUL
TERMINATION"), as liquidated damages, the Executive shall be entitled to
continue to receive from the Company, subject to any Offsets, for so long as the
Executive is not in breach of his obligations to the Company under Section 8
hereof, (i) his
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then applicable salary compensation when otherwise payable through the minimum
remaining Term reduced by any income earned from subsequent employment, and (ii)
any unpaid reimbursable expenses outstanding, and any unused accrued vacation,
as of the Date of Termination. Any benefits to which Executive or his
beneficiaries may be entitled under the plans and programs described in Sections
5(b) and (c) above, or any other applicable plans and programs, shall be
determined as of the Date of Termination in accordance with the terms of such
plans and programs. In connection with a Wrongful Termination, except as
provided in this Section 6(b), (x) the Company shall have no further liability
to the Executive or the Executive's heirs, beneficiaries or estate for damages,
compensation, benefits, severance, indemnities or other amount of whatever
nature and (y) the Executive shall be under no obligation to mitigate his
damages or to seek other employment; provided that, as indicated in this Section
6(c), any income earned by the Executive from subsequent employment shall reduce
payments by the Company under Section 6(c)(i). From time to time, upon the
Company's reasonable request, the Executive shall provide the Company written
verification of amounts earned from subsequent employment. In the event the
Executive fails to supply such information, the obligations of the Company to
the Executive under this Section 6(c) shall terminate.
7. DISABILITY; DEATH
(a) In the event the Executive shall be unable to perform his
duties hereunder by virtue of illness or physical or mental incapacity or
disability (from any cause or causes whatsoever) in substantially the manner and
to the extent required hereunder prior to the commencement of such disability
(all such causes being herein referred to as "DISABILITY") and the Executive
shall fail to perform such duties for periods aggregating 180 days, whether or
not continuous, in any continuous period of 270 days, the Company shall have the
right to terminate the Executive's employment hereunder as at the end of any
calendar month during the continuance of such disability upon at least 30 days'
prior
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written notice to him, which notice shall refer to this Section. In the event of
the Executive's death, the Executive's employment shall terminate on the date of
such death.
(b) In the event the Executive's employment terminates pursuant
to Section 7(a), the Executive, or in the case of his death, the Executive's
estate, shall be entitled to receive when otherwise payable, subject to any
Offsets, (i) all salary compensation earned but unpaid as of the Date of
Termination and (ii) any unpaid reimbursable expenses outstanding, and any
unused accrued vacation, as of such date. Any benefits to which the Executive or
his beneficiaries may be entitled under the plans and programs described in
Sections 5(b) and (c) above, or any other applicable plans and programs, shall
be determined as of the Date of Termination in accordance with the terms of such
plans and programs. In the event of the Executive's termination due to
disability or death, except as provided in this Section 7(b), the Company shall
have no further liability to the Executive or the Executive's heirs,
beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amounts of whatever nature.
8. NON-COMPETITION AND PROTECTION OF CONFIDENTIAL INFORMATION
(a) The Executive agrees that his services hereunder are of a
special, unique, extraordinary and intellectual character, and his position with
the Company places him in a position of confidence and trust with the clients
and employees of the Company. The Executive acknowledges that the rendering of
services to the clients of the Company necessarily requires the disclosure to
the Executive of confidential information and trade secrets of the Company (such
as without limitation, proprietary software programs, marketing plans, media
plans, budgets, corporate policies, client preferences and policies, and
identity of appropriate personnel of clients with sufficient authority to
influence a shift in suppliers). The parties hereto agree that in the course of
the Executive's employment with the Company, the Executive has and will continue
to develop a personal relationship with the clients of the Company and a
knowledge of those
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clients' affairs and requirements, and that the relationship of the Company with
its established clientele will therefore be placed in the Executive's hands in
confidence and trust. The Executive consequently agrees that it is reasonable
and necessary for the protection of the trade secrets, goodwill and business of
the Company that the Executive make the covenants contained herein. Accordingly,
the Executive agrees that while he is in the employ of the Company and for a two
year period after the Date of Termination, he shall not, except on behalf of the
Company, directly or indirectly, and regardless of the reason for his ceasing to
be employed by the Company:
(i) attempt in any manner to solicit from any client
business of the type performed by the Company or to persuade any
client to cease to do business or to reduce the amount of
business which any such client has customarily done or is
reasonably expected to do with the Company, whether or not the
relationship between the Company and such client was originally
established in whole or in part through his efforts; or
(ii) employ as an employee or retain as an exclusive
consultant any person who is then or at any time during the
preceding twelve months was an employee of or exclusive
consultant to the Company or the Company, or persuade or attempt
to persuade any employee of or exclusive consultant to the
Company to leave the employ of the Company or to become employed
as an employee or retained as a consultant by anyone other than
the Company; or
(iii) render to or for any client any services of the
type rendered by the Company.
As used in this Section 8, the term "CLIENT" shall mean ( 1) anyone who is a
client of the Company on the Date of Termination or, if the Executive's
employment shall not have terminated, at the time of the alleged prohibited
conduct (the "DETERMINATION DATE");
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(2) anyone who was a client of the Company at any time during the two year
period immediately preceding the Determination Date; and (3) any prospective
clients to whom the Company had made a new business presentation (or similar
offering of services) at any time during the one year period immediately
preceding the Determination Date.
(b) The Executive also agrees that he will not at any time
(whether during the Term or after termination of this Agreement), disclose to
anyone any confidential information or trade secret of the Company, or any
client of the Company, or utilize such confidential information or trade secret
for his own benefit, or for the benefit of third parties and all memoranda,
notes, records or other documents compiled by him or made available to him
during the Term pertaining to the business of the Company or its clients shall
be the property of the Company and shall be delivered to the Company on the
termination of his employment or at any other time, upon request. The term
"confidential information or trade secret" does not include information which
(i) becomes generally available to the public other than by breach of this
provision or (ii) the Executive learns from a third party who is not under an
obligation of confidence to the Company. In the event that the Executive becomes
legally required to disclose any confidential information or trade secret, he
will provide the Company with prompt notice thereof so that the Company may seek
a protective order or other appropriate remedy and/or waive compliance with the
provisions of this Section 8(b). In the event that such protective order or
other remedy is not obtained, or the Company waives compliance with the
provisions of this Section 8(b), the Executive will furnish only that portion of
the confidential information or trade secret which is legally required and will
exercise his best efforts to obtain a protective order or other reliable
assurance that confidential treatment will be accorded the confidential
information or trade secret.
(c) If the Executive commits a breach, or is about to commit a
breach, of any of the provisions of Sections 8(a) or (b) above, the Company
shall have the right to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction without being required to post
bond or other
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security and without having to prove the inadequacy of the available remedies at
law, it being acknowledged and agreed that any such breach or threatened breach
will cause irreparable injury to the Company and that money damages will not
provide an adequate remedy to the Company. In addition, the Company may take all
such other actions and remedies available to it under law or in equity and shall
be entitled to such damages as it can show it has sustained by reason of such
breach.
(d) The parties acknowledge that the type and periods of
restriction imposed in the provisions of Sections 8(a) and (b) above are fair
and reasonable and are reasonably required for the protection of the Company and
the goodwill associated with the business of the Company (including without
limitation the business acquired pursuant to the Purchase Agreement); and that
the time, scope, geographic area and other provisions of this Section 8 have
been specifically negotiated by sophisticated commercial parties and are given
as an integral part of the transactions contemplated by the Purchase Agreement,
it being understood that the clients of the Company may be serviced from any
location and accordingly it is reasonable that the restrictive covenants set
forth herein are not limited by narrow geographic area but generally by the
location of such clients and potential clients. The Executive specifically
acknowledges that his being restricted from servicing clients and prospective
clients as contemplated by this Agreement will not prevent him from being
employed or earning a livelihood in the type of business conducted by the
Company. If any of the covenants in Sections 8(a) or (b) above, or any part
thereof, is hereafter construed to be invalid or unenforceable, the same shall
riot affect the remainder of the covenant or covenants, which shall be given
full effect, without regard to the invalid portions. If any of the covenants
contained in
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Sections 8(a) or (b), or any part thereof, is held to be unenforceable because
of the duration of such provision or the area covered thereby, the parties agree
that the court making such determination shall have the power to reduce the
duration and/or areas of such provision and, in its reduced form, such provision
shall then be enforceable. The parties hereto intend to and hereby confer
jurisdiction to enforce the covenants contained in Sections 8(a) and (b) above
upon the courts of any state or other jurisdiction within the geographical scope
of such covenants in which a breach or alleged breach of a covenant contained in
Section 8(a) or (b) has been alleged to have occurred. In the event that the
courts of any one or more of such states or other jurisdictions shall hold such
covenants wholly unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the parties hereto that such determination not
bar or in any way affect the right of the Company to the relief provided above
in the courts of any other states or other jurisdictions within the geographical
scope of such covenants, as to breaches of such covenants in such other
respective states or other jurisdictions, the above covenants as they relate to
each state or other jurisdiction being, for this purpose, severable into diverse
and independent covenants.
9. INTELLECTUAL PROPERTY
During the Term, the Executive will disclose to the Company all
ideas, inventions and business plans developed by him during such period which
relate directly or indirectly to the business of the Company, including without
limitation, any design, logo, slogan or campaign or any process, operation,
product or improvement which may be patentable or copyrightable. The Executive
agrees that all patents, licenses, copyrights, tradenames, trademarks, service
marks, advertising campaigns, promotional campaigns, designs, logos, slogans and
business plans developed or created by the Executive in the course of his
employment hereunder, either individually or in collaboration with others, will
be deemed works for hire and the sole and absolute property of the Company. The
Executive agrees, that at the Company's request, he will take all steps
necessary to secure the rights thereto to the Company by patent, copyright or
otherwise. The Executive acknowledges and agrees that the Company has hereby
notified the Executive that the assignment provided for in this Section 9 does
not apply to any invention which qualifies fully for exemption for assignment
under the provisions of Section 2870 of the California Labor Code, a copy of
which is attached hereto as Exhibit A.
10. ENFORCEABILITY
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The failure of any party at any time to require performance by
another party of any provision hereunder shall in no way affect the right of
that party thereafter to enforce the same, nor shall it affect any other party's
right to enforce the same, or to enforce any of the other provisions in this
Agreement; nor shall the waiver by any party of the breach of any provision
hereof be taken or held to be a waiver of any subsequent breach of such
provision or as a waiver of the provision itself.
11. ASSIGNMENT
This Agreement is a personal contract and the Executive's rights
and obligations hereunder may not be sold, transferred, assigned, pledged or
hypothecated by the Executive. The rights and obligations of the Company
hereunder shall be binding upon and run in favor of the successors and assigns
of the Company; provided, however, the Company may not assign or transfer its
rights under this Agreement except in connection with a merger or consolidation
(whether or not the Company is the continuing entity), or the sale or
liquidation of all or substantially all the assets of the Company and such
assignee or transferee assumes the liabilities, obligations and duties of the
Company as contained in this Agreement, either contractually or as a matter of
law.
12. MODIFICATION
This Agreement may not be orally canceled, changed, modified or
amended, and no cancellation, change, modification or amendment shall be
effective or binding, unless in writing and signed by the parties to this
Agreement and approved by the President of Omnicom.
13. SEVERABILITY; SURVIVAL
In the event any provision or portion of this Agreement is
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall nevertheless be binding upon
the parties with the same effect as though the invalid or unenforceable part had
been severed and deleted. The respective rights and obligations of the parties
hereunder shall survive the termination of the Executive's employment to the
extent necessary to the intended preservation of such rights and obligations.
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14. LIFE INSURANCE
The Executive agrees that the Company shall have the right to
obtain life insurance on the Executive's life, at the sole expense of the
Company and with the Company as the sole beneficiary thereof. The Executive
shall (a) cooperate fully in obtaining such life insurance, (b) sign any
necessary consents, applications and other related forms or documents and (c)
take any reasonably required medical examinations.
15. NOTICES
Any notice, request, instruction or other document to be given
hereunder by any party hereto to another party shall be in writing and shall be
deemed effective (a) upon personal delivery, if delivered by hand, or (b) three
days after the date of deposit in the mails, postage prepaid, if mailed by
certified or registered mail, or (c) on the next business day, if sent by
facsimile transmission (if receipt is electronically confirmed) or prepaid
overnight courier service, and in each case, addressed as follows:
If to the Executive:
Jonathan Nelson
________________________________
________________________________
If to the Company, to:
Organic Online, Inc.
510 Third Street
Suite 540
San Francisco, California 94107
Attention: Director of Finance
Fax: 415-284-6891
with a copy to:
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, California 94111
Attention: Kenneth L. Guernsey, Esq.
Fax: 415-951-3699
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Any party may change the address to which notices are to be sent by giving
notice of such change of address to the other party in the manner herein
provided for giving notice.
16. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance
with the laws of the State of California without regard to its conflict of laws
principles.
17. NO CONFLICT
The Executive represents and warrants that he is not subject to
any agreement, instrument, order, judgment or decree of any kind, or any other
restrictive agreement of any character, which would prevent him from entering
into this Agreement or which would be breached by the Executive upon his
performance of his duties pursuant to this Agreement.
18. ENTIRE AGREEMENT
This Agreement represents the entire agreement between the
Company and the Executive with respect to the subject matter hereof, and all
prior agreements, plans and arrangements relating to the employment of the
Executive by the Company are nullified and superseded hereby. Notwithstanding
the foregoing, the Employee Proprietary Information and Inventions Agreement
executed by the Executive shall remain in full force and effect in accordance
with its terms.
19. HEADINGS
The headings contained in this Agreement are for reference
purposes only, and shall not affect the meaning or interpretation of this
Agreement.
20. MISCELLANEOUS
(a) The Company may withhold from any amounts payable under this
Agreement such federal, state and local taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
16
<PAGE> 17
(b) Following the date hereof and regardless of any dispute that
may arise in the future, the Executive will not, and will use his best efforts
to cause his business associates to not, disparage, criticize or make statements
to the detriment of the Company, Omnicom, or any of their affiliates; and the
Company will not, and will use its best efforts to cause its affiliated
companies to not, disparage, criticize or make statements to the detriment of
the Executive.
17
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
ORGANIC ONLINE, INC.
BY: /s/ MICHAEL HUDES
-----------------------------------
NAME: Michael Hudes
TITLE: President
/s/ JONATHAN NELSON
---------------------------------------
JONATHAN NELSON
18
<PAGE> 19
EXHIBIT A
TO EMPLOYMENT AGREEMENT
Labor Code Section 2870.
Employment agreements; assignment of rights
(a) Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(i) relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or
demonstrably anticipated research or development of the
employer; or
(ii) result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement
purports to require an employee to assign an invention otherwise excluded from
being required to be assigned under subdivision (a), the provision is against
the public policy of this state and is unenforceable.
19
<PAGE> 20
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT ("Amendment") is entered
into by and between ORGANIC ONLINE, INC., a Delaware corporation (the
"Company"), and JONATHAN NELSON (the "Executive").
RECITALS
A. The Company and the Executive are parties to that certain Employment
Agreement dated December 29, 1997 (the "Original Agreement").
B. The Company and the Executive wish to amend the Original Agreement on
the terms set forth in this Amendment. Certain capitalized terms used in this
Amendment are defined in the Original Agreement.
AGREEMENT
The Company and the Executive, intending to be legally bound, agree as
follows:
SECTION 1. MODIFICATION OF ORIGINAL AGREEMENT. The fourth line of
Section 4(a) ("Compensation") is hereby amended to delete "$50,000" and
substitute "$90,000" therefore.
SECTION 2. MISCELLANEOUS PROVISIONS.
2.1 REAFFIRMATION OF ORIGINAL AGREEMENT. The Original Agreement, as
amended by this AMENDMENT, shall continue in full force and effect.
2.2 GOVERNING LAW. This Amendment shall be construed in accordance with,
and governed in all respects by, the laws of the State of California (without
giving effect to principles of conflicts of law.)
2.3 HEADINGS. The underlined headings contained in this Amendment are
for convenience of reference only, shall not be deemed to be a part of this
Amendment and shall not be referred to in connection with the construction or
interpretation of this Amendment.
2.4 SEVERABILITY. In the event that any provision of this Amendment, or
the application of such provision to any party or set of circumstances, shall be
determined to be invalid, unlawful, void or unenforceable to any extent, the
remainder of this Amendment, and the application of such provision to Persons or
circumstances other than those as to which it is determined to be invalid,
unlawful, void or unenforceable, shall not be affected and shall continue to be
valid and enforceable to the fullest extent permitted by law.
<PAGE> 21
2.5 COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed shall constitute an original copy
hereof, but all of which together shall constitute one agreement.
2.6 INTERPRETATION OF AMENDMENT.
(a) Each party hereto acknowledges that it has participated in
the drafting of this Amendment, and any applicable rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in connection with the construction or interpretation of this
Amendment.
(b) Whenever required by the context hereof, the singular number
shall include the plural, and vice versa; the masculine gender shall include the
feminine and neuter genders; and the neuter gender shall include the masculine
and feminine genders.
(c) As used in this Amendment, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, and shall be deemed to be followed by the words "without
limitation."
(d) References herein to "Sections" are intended to refer to
Sections of this Amendment.
The Company and the Executive have caused this Amendment to be executed
as of February 24, 1997.
the "Company"
ORGANIC ONLINE, INC.
a Delaware corporation
By: /s/ MICHAEL HUDES
-------------------------------------
Michael Hudes, President
the "Executive"
/s/ JONATHAN NELSON
----------------------------------------
JONATHAN NELSON
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
AGREEMENT made this 29th day of January, 1997, by and between
ORGANIC ONLINE, INC., a Delaware corporation (the "Company"), and MICHAEL HUDES
(the "EXECUTIVE").
WITNESSETH:
WHEREAS, entering into this Agreement is a condition of closing
under a certain Stock Purchase Agreement of even date herewith (the "PURCHASE
AGREEMENT") pursuant to which Omnicom Group Inc. ("OMNICOM") acquired 20.1% of
the shares of Series A Preferred Stock of the Company, and, in certain
circumstances as set forth under a Shareholders Agreement of even date herewith
(the "SHAREHOLDERS AGREEMENT"), the right to acquire additional shares of
capital stock of the Company; and
WHEREAS, the Company wishes to ensure the continued employment
of the Executive with the Company and the Executive wishes to accept such
employment upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and other good
and valuable consideration, receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. EMPLOYMENT
The Company agrees to employ the Executive during the Term
specified in Section 2, and the Executive agrees to accept such employment, upon
the terms and conditions hereinafter set forth.
2. TERM
(a) Subject to section 6 below and the other terms and
conditions of this Agreement, the Executive's employment by the Company shall be
for a term commencing on the date hereof and expiring on the close of business
on December 31, 1999 (the "INITIAL TERM");
<PAGE> 2
provided, however, that the term of the Executive's employment by the Company
shall continue thereafter unless and until either party shall give to the other
90 days advance written notice ("NOTICE OF TERMINATION") of expiration of the
term (the Initial Term and the period, if any, thereafter, during which the
Executive's employment shall continue are collectively referred to as the
"TERM"). Any notice of Termination given under this Section 2(a) shall specify
the date of expiration (which may not be earlier than December 31, 1999) and may
be given at any time on or after September 30, 1999. The Company shall have the
right during any such 90 day notice period to relieve the Executive of his
offices, duties and responsibilities and to place him on a paid leave-of-absence
status, provided that during such notice period the Executive shall remain an
employee of the Company and shall continue to receive his salary compensation
and other benefits as provided in this Agreement. The effective date of the
termination of the Executive's employment with the Company, regardless of the
reason therefor, is referred to in this Agreement as the "DATE OF TERMINATION".
(b) Upon termination of the employment of the Executive with the
Company pursuant to a Notice of Termination under Section 2(a) above, the
Company shall pay the Executive, subject to appropriate offsets, as permitted by
applicable law, for debts or money owed by the Executive to the Company or
another company within the group of companies directly or indirectly owned by
Holdings (collectively, "OFFSETS"), his salary compensation and any unused
accrued vacation only through, and any unpaid reimbursement expenses outstanding
as of, the Date of Termination. Any benefits to which the Executive or his
beneficiaries may be entitled under the plans and programs described in Sections
5(b) and (c) below, or any other applicable plans and programs, shall be
determined as of the Date of Termination in accordance with the terms of such
plans and programs. Except as provided in this Section 2(b), in connection with
the Executive's termination of employment pursuant to Section 2(a), the Company
shall have no further liability to the Executive or the Executive's heirs,
beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amount of whatever nature.
3. DUTIES AND RESPONSIBILITIES
<PAGE> 3
(a) During the Term, the Executive shall have the title of
President of the Company. The Executive shall report to the Chief Executive
Officer the Company, at such times and in such detail as he shall reasonably
require.
(b) In his position as President of the Company, the Executive
shall perform such executive and managerial duties and responsibilities
customary to his office as are reasonably necessary to the operations of the
Company and as may be assigned to him from time to time by or under authority of
the Chief Executive Officer of the Company, consistent with his position as
designated in Section 3(a) above.
(c) The Executive shall use his best efforts to ensure that the
Company and its subsidiaries, if any, comply on a timely basis with all
budgetary and reporting requirements reasonably requested by the Board of
Directors of the Company (the "Board"). In no event will the Executive without
the approval of the Board incur obligations on behalf of the Company other than
in the ordinary course of business or enter into any transaction on behalf of
the Company not in the ordinary course of business. In addition, as long as the
provisions of the Shareholders Agreement are operative, the Executive shall not
cause the Company to take any of the actions listed in Article III without such
actions being properly authorized by the Board and/or the shareholders of the
Company, as the case may be.
(d) The Executive's employment by the Company shall be full-time
and exclusive, and during the Term, the Executive agrees that he will (i) devote
substantially all of his business time and attention, his best efforts, and all
his skill and ability to. promote the interests of the Company; (ii) carry out
his duties in a competent and professional manner; (iii) work with other
employees of the Company in a competent and professional manner; and (iv)
generally promote the interests of the Company and its clients. Notwithstanding
the foregoing, the Executive shall be permitted to engage in other business or
charitable activities (as an active participant or a passive investor), provided
that such activities are not rendered for a company which transacts business
with the Company or engages in business competitive with that conducted by the
Company (or, if such company does transact business with the Company or does
engage in a competitive business, either it is a publicly held corporation and
the
<PAGE> 4
Executive's participation is limited to owning less than 1/4 of 1% of its
outstanding shares) and further provided that such activities (individually or
collectively) do not materially interfere with the performance of his duties or
responsibilities under this Agreement.
(e) The Executive's services hereunder shall be performed at the
offices of the Company in San Francisco, California (or such other location to
which the primary office of the Company shall be moved), subject to necessary
travel requirements of his position and duties hereunder.
4. COMPENSATION
(a) As compensation for his services hereunder and in
consideration of his agreement not to compete as set forth in Section 8 below,
during the Term, the Company shall pay the Executive, in accordance with its
normal payroll practices, direct salary compensation at an annual rate of
$80,000. The Executive's annual rate of salary compensation may be increased
(but not decreased) by or under the authority of the Chief Executive Officer of
the Company in accordance with the salary review policy of the Company as in
effect from time to time.
(b) In addition to the salary compensation provided for under
clause (a) above, during the Term the Executive shall be eligible to receive
discretionary bonus compensation in an amount determined by the Board.
(c) During the Term, the Executive shall be eligible to
participate in and receive awards under the Company's 1997 Stock Option Plan (or
any other compensation plan hereafter adopted by the Company), in the discretion
of the Board (or any compensation committee thereof).
5. EXPENSES; FRINGE BENEFITS
(a) In addition to the compensation provided for under Section
4, the Company agrees to pay or to reimburse the Executive during the Term for
all reasonable, ordinary and necessary vouchered business or entertainment
expenses incurred in the performance of his services hereunder in accordance
with the policy of the Company as from time to time in effect. The Executive, as
a condition precedent to obtaining such payment or
<PAGE> 5
reimbursement, shall provide to the Company any and all statements, bills or
receipts evidencing the travel or out-of-pocket expenses for which the Executive
seeks payment or reimbursement, and any other information or materials, as the
Company may from time to time reasonably require.
(b) During the Term, the Executive and, to the extent eligible,
his dependents, shall be entitled to participate in and receive all benefits
under any welfare benefit plans and programs provided by the Company (including
without limitation, medical, dental, disability, group life (including
accidental death and dismemberment) and business travel insurance plans and
programs) applicable generally to the employees of the Company.
(c) During the Term, the Executive shall be entitled to
participate in all retirement plans and programs (including without limitation
any profit sharing/401(k) plan) applicable generally to the employees of the
Company, subject, however, to generally applicable eligibility and other
provisions of the various plans and programs in effect from time to time. In
addition, during the Term, the Executive shall be entitled to receive fringe
benefits and perquisites in accordance with the plans, practices, programs and
policies of the Company from time to time in effect and available generally to
the senior executives of the Company.
(d) The Executive shall be entitled to __ weeks paid vacation
during each calendar year of the Term, to be taken at such time(s) as shall not,
in the reasonable judgment of the Chief Executive Officer of the Company,
materially interfere with the Executive's fulfillment of his duties hereunder,
and shall be entitled to as many holidays, sick days and personal days as are in
accordance with the policy of the Company then in effect for its senior
executives generally, upon such terms as may be generally applicable to senior
executives of the Company.
(e) Notwithstanding anything to the contrary contained above,
the Company shall be entitled to terminate or reduce any employee benefit or
perquisite enjoyed by the Executive pursuant to the provisions of Section 5(b),
(c) or (d) above if such reductiori is part of an across-the-board reduction
applicable to all executive officers of the Company.
6. TERMINATION
<PAGE> 6
(a) The Company, by direction of its Chief Executive Officer,
shall be entitled to terminate the Term and to discharge the Executive for
"CAUSE" effective upon the giving of written notice which notice shall in each
case refer to this Section 6 and set out in detail the Company's determination
of "cause". The term "CAUSE" shall be limited to the following grounds:
(i) The Executive's repeated failure or refusal to
materially perform his duties and responsibilities as set forth
in Section 3 hereof, or the failure of the Executive to devote
substantially all of his business time and attention exclusively
to the business and affairs of the Company in accordance with
the terms hereof, in each case if such failure or refusal is not
cured within 10 days after written notice thereof to the
Executive by the Company;
(ii) The willful misappropriation of the funds or
property Company;
(iii) Use of alcohol or illegal drugs, interfering with
the performance of the Executive's obligations under this
Agreement, continuing after written warning;
(iv) Conviction in a court of law of, or entering a plea
of guilty or no contest to, any felony or any crime involving
moral turpitude, dishonesty or theft;
(v) The commission in bad faith by the Executive of any
act which injures or could reasonably be expected to injure the
reputation, business or business relationships of the Company,
including without limitation, a willful or intentional breach of
the provisions of Section 8 of this Agreement; and
(vi) Any material breach (not covered by any of the
clauses (i) through (v)) of any term, provision or condition of
this Agreement, if such breach is not cured within 30 days after
written notice thereof to the Executive by the Company.
<PAGE> 7
Upon the termination of the employment of the Executive with the Company (x)
pursuant to this Section 6(a) or (y) by virtue of a resignation by the Executive
other than pursuant to Section 2(a) above, the Company shall pay the Executive,
subject to any Offsets, his salary compensation and any unused accrued vacation
only through, and any unpaid reimbursable expenses outstanding as of, the Date
of Termination. Any benefits to which the Executive or his beneficiaries may be
entitled under the plans and programs described in Sections 5(b) and (c) above,
or any other applicable plans and programs, shall be determined as of the Date
of Termination in accordance with the terms of such plans and programs. Except
as provided in this Section 6(a), in connection with the Executive's termination
by the Company for cause, the Company shall have no further liability to the
Executive or the Executive's heirs, beneficiaries or estate for damages,
compensation, benefits, severance, indemnities or other amount of whatever
nature.
(b) In the event of a termination without cause by the Company
excluding a termination by the Company under Section 2(a) above (a "WRONGFUL
TERMINATION"), as liquidated damages, the Executive shall be entitled to
continue to receive from the Company, subject to any Offsets, for so long as the
Executive is not in breach of his obligations to the Company under Section 8
hereof, (i) his then applicable salary compensation when otherwise payable
through the minimum remaining Term reduced by any income earned from subsequent
employment, and (ii) any unpaid reimbursable expenses outstanding, and any
unused accrued vacation, as of the Date of Termination. Any benefits to which
Executive or his beneficiaries may be entitled under the plans and programs
described in Sections 5(b) and (c) above, or any other applicable plans and
programs, shall be determined as of the Date of Termination in accordance with
the terms of such plans and programs. In connection with a Wrongful Termination,
except as provided in this Section 6(b), (x) the Company shall have no further
liability to the Executive or the Executive's heirs, beneficiaries or estate for
damages, compensation, benefits, severance, indemnities or other amount of
whatever nature and (y) the Executive shall be under no obligation to mitigate
his damages or to seek other employment; provided that, as indicated in this
Section 6(c), any income earned by the Executive from subsequent employment
shall reduce payments by the Company under Section 6(c)(i). From time to time,
upon the Company's reasonable request, the Executive shall provide the Company
<PAGE> 8
written verification of amounts earned from subsequent employment. In the event
the Executive fails to supply such information, the obligations of the Company
to the Executive under this Section 6(c) shall terminate.
7. DISABILITY; DEATH
(a) In the event the Executive shall be unable to perform his
duties hereunder by virtue of illness or physical or mental incapacity or
disability (from any cause or causes whatsoever) in substantially the manner and
to the extent required hereunder prior to the commencement of such disability
(all such causes being herein referred to as "DISABILITY") and the Executive
shall fail to perform such duties for periods aggregating 180 days, whether or
not continuous, in any continuous period of 270 days, the Company shall have the
right to terminate the Executive's employment hereunder as at the end of any
calendar month during the continuance of such disability upon at least 30 days'
prior written notice to him, which notice shall refer to this Section. In the
event of the Executive's death, the Executive's employment shall terminate on
the date of such death.
(b) In the event the Executive's employment terminates pursuant
to Section 7(a), the Executive, or in the case of his death, the Executive's
estate, shall be entitled to, receive when otherwise payable, subject to any
Offsets, (i) all salary compensation earned but unpaid as of the Date of
Termination and (ii) any unpaid reimbursable expenses outstanding, and any
unused accrued vacation, as of such date. Any benefits to which the Executive or
his beneficiaries may be entitled under the plans and programs described in
Sections 5(b) and (c) above, or any other applicable plans and programs, shall
be determined as of the Date of Termination in accordance with the terms of such
plans and programs. In the event of the Executive's termination due to
disability or death, except as provided in this Section 7(b), the Company shall
have no further liability to the Executive or the Executive's heirs,
beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amounts of whatever nature.
8. NON-COMPETITION AND PROTECTION OF CONFIDENTIAL INFORMATION
<PAGE> 9
(a) The Executive agrees that his services hereunder are of a
special, unique, extraordinary and intellectual character, and his position with
the Company places him in a position of confidence and trust with the clients
and employees of the Company. The Executive acknowledges that the rendering of
services to the clients of the Company necessarily requires the disclosure to
the Executive of confidential information and trade secrets of the Company (such
as without limitation, proprietary software programs, marketing plans, media
plans, budgets, corporate policies, client preferences and policies, and
identity of appropriate personnel of clients with sufficient authority to
influence a shift in suppliers). The parties hereto agree that in the course of
the Executive's employment with the Company, the Executive has and will continue
to develop a personal relationship with the clients of the Company and a
knowledge of those clients' affairs and requirements, and that the relationship
of the Company with its established clientele will therefore be placed in the
Executive's hands in confidence and trust. The Executive consequently agrees
that it is reasonable and necessary for the protection of the trade secrets,
goodwill and business of the Company that the Executive make the covenants
contained herein. Accordingly, the Executive agrees that while he is in the
employ of the Company and for a two year period after the Date of Termination,
he shall not, except on behalf of the Company, directly or indirectly, and
regardless of the reason for his ceasing to be employed by the Company:
(i) attempt in any manner to solicit from any client
business of the type performed by the Company or to persuade any
client to cease to do business or to reduce the amount of
business which any such client has customarily done or is
reasonably expected to do with the Company, whether or not the
relationship between the Company and such client was originally
established in whole or in part through his efforts; or
(ii) employ as an employee or retain as an exclusive
consultant any person who is then or at any time during the
preceding twelve months was an employee of or exclusive
consultant to the Company or the Company, or persuade or attempt
to persuade any employee of or exclusive consultant to the
Company to
<PAGE> 10
leave the employ of the Company or to become employed as an
employee or retained as a consultant by anyone other than the
Company; or
(iii) render to or for any client any services of the
type rendered by the Company.
As used in this Section 8, the term "CLIENT" shall mean (1) anyone who is a
client of the Company on the Date of Termination or, if the Executive's
employment shall not have terminated, at the time of the alleged prohibited
conduct (the "DETERMINATION DATE"); (2) anyone who was a client of the Company
at any time during the two year period immediately preceding the Determination
Date; and (3) any prospective clients to whom the Company had made a new
business presentation (or similar offering of services) at any time during the
one year period immediately preceding the Determination Date.
(b) The Executive also agrees that he will not at any time
(whether during the Term or after termination of this Agreement), disclose to
anyone any confidential, information or trade secret of the Company, or any
client of the Company, or utilize such confidential information or trade secret
for his own benefit, or for the benefit of third parties and all memoranda,
notes, records or other documents compiled by him or made available to him
during the Term pertaining to the business of the Company or its clients shall
be the property of the Company and shall be delivered to the Company on the
termination of his employment or at any other time, upon request. The term
"confidential information or trade secret" does not include information which
(i) becomes generally available to the public other than by breach of this
provision or (ii) the Executive learns from a third party who is not under an
obligation of confidence to the Company. In the event that the Executive becomes
legally required to disclose any confidential information or trade secret, he
will provide the Company with prompt notice thereof so that the Company may seek
a protective order or other appropriate remedy and/or waive compliance with the
provisions of this Section 8(b). In the event that such protective order or
other remedy is not obtained, or the Company waives compliance with the
provisions of this Section 8(b), the Executive will furnish only that portion of
the confidential information or trade secret which is legally required and will
exercise his best efforts to obtain a protective order or
<PAGE> 11
other reliable assurance that confidential treatment will be accorded the
confidential information or trade secret.
(c) If the Executive commits a breach, or is about to commit a
breach, of any of the provisions of Sections 8(a) or (b) above, the Company
shall have the right to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction without being required to post
bond or other security and without having to prove the inadequacy of the
available remedies at law, it being acknowledged and agreed that any such breach
or threatened breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company. In addition, the
Company may take all such other actions and remedies available to it under law
or in equity and shall be entitled to such damages as it can show it has
sustained by reason of such breach.
(d) The parties acknowledge that the type and periods of
restriction imposed in the provisions of Sections 8(a) and (b) above are fair
and reasonable and are reasonably required for the protection of the Company and
the goodwill associated with the business of the Company (including without
limitation the business acquired pursuant to the Purchase Agreement); and that
the time, scope, geographic area and other provisions of this Section 8 have
been specifically negotiated by sophisticated commercial parties and are given
as an integral part of the transactions contemplated by the Purchase Agreement,
it being understood that the clients of the Company may be serviced from any
location and accordingly it is reasonable that the restrictive covenants set
forth herein are not limited by narrow geographic area but generally by the
location of such clients and potential clients. The Executive specifically
acknowledges that his being restricted from servicing clients and prospective
clients as contemplated by this Agreement will not prevent him from being
employed or earning a livelihood in the type of business conducted by the
Company. If any of the covenants in Sections 8(a) or (b) above, or any part
thereof, is hereafter construed to be invalid or unenforceable, the same shall
riot affect the remainder of the covenant or covenants, which shall be given
full effect, without regard to the Invalid portions. If any of the covenants
contained in Sections 8(a) or (b), or any part thereof, is held to be
unenforceable because of the duration of such provision or the area covered
thereby, the parties agree that the court making such determination shall have
the power to reduce the
<PAGE> 12
duration and/or areas of such provision and, in its reduced form, such provision
shall then be enforceable. The parties hereto intend to and hereby confer
jurisdiction to enforce the covenants contained in Sections 8(a) and (b) above
upon the courts of any state or other jurisdiction within the geographical scope
of such covenants in which a breach or alleged breach of a covenant contained in
Section 8(a) or (b) has been alleged to have occurred. In the event that the
courts of any one or more of such states or other jurisdictions shall hold such
covenants wholly unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the parties hereto that such determination not
bar or in any way affect the right of the Company to the relief provided above
in the courts of any other states or other jurisdictions within the geographical
scope of such covenants, as to breaches of such covenants in such other
respective states or other jurisdictions, the above covenants as they relate to
each state or other jurisdiction being, for this purpose, severable into diverse
and independent covenants.
9. INTELLECTUAL PROPERTY
During the Term, the Executive will disclose to the Company all
ideas, inventions and business plans developed by him during such period which
relate directly or indirectly to the business of the Company, including without
limitation, any design, logo, slogan or campaign or any process, operation,
product or improvement which may be patentable or copyrightable. The Executive
agrees that all patents, licenses, copyrights, tradenames, trademarks, service
marks, advertising campaigns, promotional" campaigns, designs, logos, slogans
and business plans developed or created by the Executive in the course of his
employment hereunder, either individually or in collaboration with others, will
be deemed works for hire and the sole and absolute property of the Company. The
Executive agrees, that at the Company's request, he will take all steps
necessary to secure the rights thereto to the Company by patent, copyright or
otherwise. The Executive acknowledges and agrees that the Company has hereby
notified the Executive that the assignment provided for in this Section 9 does
not apply to any invention which qualifies fully for exemption for assignment
under the provisions of Section 2870 of the California Labor Code, a copy of
which is attached hereto as Exhibit A.
10. ENFORCEABILITY
<PAGE> 13
The failure of any party at any time to require performance by
another party of any provision hereunder shall in no way affect the right of
that party thereafter to enforce the same, nor shall it affect any other party's
right to enforce the same, or to enforce any of the other provisions in this
Agreement; nor shall the waiver by any party of the breach of any provision
hereof be taken or held to be a waiver of any subsequent breach of such
provision or as a waiver of the provision itself.
11. ASSIGNMENT
This Agreement is a personal contract and the Executive's rights
and obligations hereunder may not be sold, transferred, assigned, pledged or
hypothecated by the Executive. The rights and obligations of the Company
hereunder shall be binding upon and run in favor of the successors and assigns
of the Company; provided, however, the Company may not assign or transfer its
rights under this Agreement except in connection with a merger or consolidation
(whether or not the Company is the continuing entity), or the sale or
liquidation of all or substantially all the assets of the Company and such
assignee or transferee assumes the liabilities, obligations and duties of the
Company as contained in this Agreement, either contractually or as a matter of
law.
12. MODIFICATION
This Agreement may not be orally canceled, changed, modified or
amended, and no cancellation, change, modification or amendment shall be
effective or binding, unless in writing and signed by the parties to this
Agreement and approved by the President of Omnicom.
13. SEVERABILITY: SURVIVAL
In the event any provision or portion of this Agreement is
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall nevertheless be binding upon
the parties with the same effect as though the invalid or unenforceable part had
been severed and deleted. The respective rights and obligations of the parties
hereunder shall survive the termination of the Executive's employment to the
extent necessary to the intended preservation of such rights and obligations.
<PAGE> 14
14. LIFE INSURANCE
The Executive agrees that the Company shall have the right to
obtain life insurance on the Executive's life, at the sole expense of the
Company and with the Company as the sole beneficiary thereof. The Executive
shall (a) cooperate fully in obtaining such life insurance, (b) sign any
necessary consents, applications and other related forms or documents and (c)
take any reasonably required medical examinations.
15. NOTICES
Any notice, request, instruction or other document to be given
hereunder by any party hereto to another party shall be in writing and shall be
deemed effective (a) upon personal delivery, if delivered by hand, or (b) three
days after the date of deposit in the mails, postage prepaid, if mailed by
certified or registered mail, or (c) on the next business day, if sent by
facsimile transmission (if receipt is electronically confirmed) or prepaid
overnight courier service, and in each case, addressed as follows:
If to the Executive:
Michael Hudes
_______________________________
_______________________________
If to the Company. to:
Organic Online, Inc.
510 Third Street
Suite 540
San Francisco, California 94107
Attention: Director of Finance
Fax: 415-284-6891
with a copy to:
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, California 94111
Attention: Kenneth L. Guernsey, Esq.
Fax: 415-951-3699
<PAGE> 15
Any party may change the address to which notices are to be sent by giving
notice of such change of address to the other party in the manner herein
provided for giving notice.
16. APPLICABLE LAW
This Agreement shall be governed by and construed in accord laws
of the State of California without regard to its conflict of laws principles.
17. NO CONFLICT
The Executive represents and warrants that he is not subject to
any agreement, instrument, order, judgment or decree of any kind, or any other
restrictive agreement of any character, which would prevent him from entering
into this Agreement or which would be breached by the Executive upon his
performance of his duties pursuant to this Agreement.
18. ENTIRE AGREEMENT
This Agreement represents the entire agreement between the
Company and the Executive with respect to the subject matter hereof, and all
prior agreements, plans and arrangements relating to the employment of the
Executive by the Company are nullified and superseded hereby. Notwithstanding
the foregoing, the Employee Proprietary Information and Inventions Agreement
executed by the Executive shall remain in full force and effect in accordance
with its terms.
19. HEADINGS
The headings contained in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
20. MISCELLANEOUS
(a) The Company may withhold from any amounts payable under this
Agreement such federal, state and local taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
<PAGE> 16
(b) Following the date hereof and regardless of any dispute that
may arise in the future, the Executive will not, and will use his best efforts
to cause his business associates to not, disparage, criticize or make statements
to the detriment of the Company, Omnicom, or any of their affiliates; and the
Company will not, and will use its best efforts to cause its affiliated
companies to not, disparage, criticize or make statements to the detriment of
the Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ORGANIC ONLINE, INC.
BY: /s/ JONATHAN NELSON
-----------------------------------
NAME: Jonathan Nelson
TITLE: Chief Executive Officer
/s/ MICHAEL HUDES
---------------------------------------
MICHAEL HUDES
j a
<PAGE> 17
EXHIBIT A
TO EMPLOYMENT AGREEMENT
Labor Code Section 2870,
Employment agreements; assignment of rights
(a) Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(i) relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or
demonstrably anticipated research or development of the
employer; or
(ii) result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement
purports to require an employee to assign an invention otherwise
excluded from being required to be(TM) assigned under
subdivision (a), the provision is against the public policy of
this state and is unenforceable.
<PAGE> 18
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT ("Amendment") is entered
into by and between ORGANIC ONLINE, INC., a Delaware corporation (the
"Company"), and MICHAEL HUDES (the "Executive").
RECITALS
A. The Company and the Executive are parties to that certain Employment
Agreement dated December 29, 1997 (the "Original Agreement").
B. The Company and the Executive wish to amend the Original Agreement on
the terms set forth in this Amendment. Certain capitalized terms used in this
Amendment are defined in the Original Agreement.
AGREEMENT
The Company and the Executive, intending to be legally bound, agree as
follows:
SECTION 1. MODIFICATION OF ORIGINAL AGREEMENT. The fourth line of Section 4(a)
("Compensation") is hereby amended to delete "$80,000" and substitute
"$140,000" therefore.
SECTION 2. MISCELLANEOUS PROVISIONS.
2.1 REAFFIRMATION OF ORIGINAL AGREEMENT. The Original Agreement, as
amended by this AMENDMENT, shall continue in full force and effect.
2.2 GOVERNING LAW. This Amendment shall be construed in accordance with,
and governed in all respects by, the laws of the State of California (without
giving effect to principles of conflicts of law.)
2.3 HEADINGS. The underlined headings contained in this Amendment are
for convenience of reference only, shall not be deemed to be a part of this
Amendment and shall not be referred to in connection with the construction or
interpretation of this Amendment.
2.4 SEVERABILITY. In the event that any provision of this Amendment, or
the application of such provision to any party or set of circumstances, shall be
determined to be invalid, unlawful, void or unenforceable to any extent, the
remainder of this Amendment, and the application of such provision to Persons or
circumstances other than those as to which it is determined to be invalid,
unlawful, void or unenforceable, shall not be affected and shall continue to be
valid and enforceable to the fullest extent permitted by law.
<PAGE> 19
2.5 COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed shall constitute an original copy
hereof, but all of which together shall constitute one agreement.
2.6 INTERPRETATION OF AMENDMENT.
(a) Each party hereto acknowledges that it has participated in
the drafting of this Amendment, and any applicable rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in connection with the construction or interpretation of this
Amendment.
(b) Whenever required by the context hereof, the singular number
shall include the plural, and vice versa; the masculine gender shall include the
feminine and neuter genders; and the neuter gender shall include the masculine
and feminine genders.
(c) As used in this Amendment, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, and shall be deemed to be followed by the words "without
limitation."
(d) References herein to "Sections" are intended to refer to
Sections of this Amendment.
The Company and the Executive have caused this Amendment to be executed
as of February 24, 1997.
the "Company"
ORGANIC ONLINE, INC.
a Delaware corporation
By: /s/ JONATHAN NELSON
------------------------------------
Jonathan Nelson
Chief Executive Officer
the "Executive"
/s/ MICHAEL HUDES
----------------------------------------
MICHAEL HUDES
<PAGE> 1
EXHIBIT 10.6
ORGANIC, INC.
EMPLOYMENT AGREEMENT FOR SUSAN FIELD
This Employee Agreement ("Agreement") is entered into as of June 22,
1999 (the "Effective Date") by and between Susan Field and Organic, Inc., a
Delaware corporation (the "Company").
1. POSITION AND RESPONSIBILITIES.
1.1 Subject to the terms set forth herein, the Company agrees to
employ you in the position of Executive Vice President and Chief Financial
Officer and you hereby accept such employment effective as of June 23, 1999 (the
"Employment Date"). During the term of your employment you will devote your best
efforts and substantially all of your business time to the business of the
Company.
1.2 You shall perform the duties customarily associated with
your then position, at such place or places as the Company shall reasonably
designate or as shall be reasonably appropriate and necessary in connection with
such employment. You will report to Michael Hudes, the Company's current
President, or any successor (the "President").
1.3 You will duly, punctually and faithfully perform and observe
any and all rules and regulations which the Company may now or shall hereafter
establish governing the conduct of its business, except to the extent that such
rules and regulations may be inconsistent with your position.
1.4 You agree to serve as a director and/or officer of the
Company and to perform such executive duties as may be assigned to you by the
Board of Directors (the "Board") from time to time. You will be entitled to
attend all meetings of the Board for so long as you hold the position of
Executive Vice President and Chief Financial Officer.
2. COMPENSATION:
2.1 SALARY. For services rendered hereunder, the Company shall
pay to you a base salary at an annualized rate of $250,000, less standard
withholdings and deductions, payable twice per month in accordance with the
Company's standard payroll practices. You will be eligible for a salary review
pursuant to the Company's standard salary review process.
2.2 BONUS. You will be eligible to receive an annual bonus of up
to forty percent (40%) of your base salary, less standard withholdings and
deductions, upon your successful achievement of goals and objectives to be
mutually agreed upon by you and Michael Hudes annually. Your 1999 bonus, if any,
will be earned on December 31, 1999 and will not be prorated for the partial
year of service. Any annual bonuses will be paid out in February of the
subsequent year.
2.3 SIGNING BONUS. The Company shall pay you a signing bonus in
the amount of $50,000, less standard withholdings and deductions. This bonus
shall be paid in your first paycheck. You will not be eligible for any
additional reimbursement for moving expenses.
2.4 STOCK OPTIONS. On or about the Employment Date, subject to
Board approval, the Company will grant you the following:
<PAGE> 2
(a) FIRST OPTIONS. An incentive stock option for the
purchase of 160,000 shares of the Company's common stock (the "Common Stock")
pursuant to the Company's 1997 Stock Option Plan, as amended (the "Plan"), and a
nonstatutory stock option for the purchase of 375,000 shares of Common Stock
pursuant to the Plan at an exercise price of $2.50. The options shall contain a
four (4) year vesting period commencing on the Employment Date as follows:
twenty-five percent (25%) of the option shares will vest at the end on your
first year of continuous employment with the Company, with the remaining option
shares vesting in equal portions on a monthly basis during the second through
fourth years following the Employment Date. Such options, if approved by the
Board, will be subject to the terms and conditions of the Plan, any amendments
thereto, and the Company's corresponding grant to you.
(b) SECOND OPTION. A nonstatutory stock option for the
purchase of 50,000 shares of Common Stock pursuant to the Plan, at an exercise
price of $2.50. Subject to Board approval, the option will vest on the fourth
anniversary of the Employment Date; provided, however:
(i) 25,000 of the shares subject to such option
will vest effective on the date on which the Company completes a sale of Common
Stock in a firm commitment underwritten public offering satisfactory to the
Board pursuant to a registration statement on Form S-1 (or any successor form)
under the Securities Act of 1933, as amended; and
(ii) 25,000 of the shares subject to such option
will vest effective if the Company hires employees to fill at least two (2) of
the Key Positions (as defined below) and each of such employees has completed
nine (9) continuous months of employment with the Company (each, a "Nine Month
Anniversary"). Such vesting shall be effective on the Nine Month Anniversary if
both Nine Month Anniversaries are the same date and on the later of the two Nine
Month Anniversaries if the Nine Month Anniversaries are different dates. As used
herein, "Key Positions" means the following positions: Group President-Media;
Group President-ibusinesses; Group President-Strategic Consulting; Chief
Operating Officer-North America; Chief Operating Officer-International; and
Technology Lead of Systems Integration Group.
Such option, if approved by the Board, will be subject to the terms and
conditions of the Plan, any amendments thereto, and the Company's corresponding
grant to you.
2.5 VACATION, PERSONAL DAYS AND SICK TIME. You shall accrue
three (3) weeks of paid vacation per year at a rate of five (5) hours per
payperiod, under the terms of the Company's standard vacation policy. You shall
be eligible for two (2) personal days per calendar year. Accrued but unused
vacation and personal days will be paid out upon termination of your employment.
In addition, you shall be eligible for six (6) days of paid sick leave each
calendar year, consistent with the Company's standard practice for its employees
generally.
2.6 STANDARD COMPANY BENEFITS. You shall also be entitled to all
rights and benefits for which you shall be eligible under the terms and
conditions of the standard Company benefits plans (e.g. 401(k) Plan, medical,
dental, vision, and long-term disability insurance) which may be in force from
time to time and provided to you or for the Company's employees generally.
Details about these benefits are provided in the Summary Plan Descriptions,
available for your review.
3. PROPRIETARY INFORMATION OBLIGATIONS.
<PAGE> 3
3.1 AGREEMENT. You agree to execute and abide by the Employee
Proprietary Information and Inventions Agreement, attached hereto as Exhibit A.
3.2 REMEDIES. Your duties under the Proprietary Information and
Inventions Agreement shall survive termination of your employment with the
Company. You acknowledge that a remedy at law for any breach or threatened
breach by you of the provisions of the Proprietary Information Agreement would
be inadequate and you therefore agree that the Company shall be entitled to
injunctive relief in case of any such breach or threatened breach.
4. OTHER ACTIVITIES DURING EMPLOYMENT.
4.1 ACTIVITIES. Except with the prior written consent of the
Board, you will not during the term of this Agreement undertake or engage in any
other employment, occupation or business enterprise, other than ones in which
you are a passive investor unless such undertaking will not be a competitive
business to the Company's business and it does not impede on your abilities to
meet to your obligations and responsibilities as Executive Vice President and
Chief Financial Officer of the Company. You may engage in civic and
not-for-profit activities so long as such activities do not materially interfere
with the performance of your duties hereunder.
4.2 INVESTMENTS. Except as permitted by Section 4.3, you will
not acquire, assume or participate in, directly or indirectly, any position,
investment or interest known by you to be adverse or antagonistic to the
Company, its business or prospects, financial or otherwise.
4.3 NON-COMPETITION. During the term of your employment by the
Company except on behalf of the Company, you will not directly or indirectly,
whether as an officer, director, stockholder, partner, proprietor, associate,
representative, consultant, or in any capacity whatsoever engage in, become
financially interested in, be employed by or have any business connection with
any other person, corporation, firm, partnership or other entity whatsoever
which were known by you to directly compete with the Company, throughout the
world, in any line of business engaged in (or planned to be engaged in) by the
Company; provided, however, that anything above to the contrary notwithstanding,
you may own, as a passive investor, securities of any competitor corporation, so
long as your direct holdings in any one such corporation shall not in the
aggregate constitute more than 1% of the voting stock of such corporation.
5. TERMINATION OF EMPLOYMENT.
5.1 AT-WILL EMPLOYMENT. Your employment relationship with the
Company is at-will. Both you and the Company shall have the right to terminate
your employment with the Company at any time with or without Cause (defined
below) and with of without notice.
5.2 TERMINATION BY COMPANY FOR CAUSE. The Company shall have the
right to terminate your employment for Cause if (a) you are convicted of any
felony or of any crime involving dishonesty or moral turpitude; (b) you
participate in any fraud against the Company; (c) you willfully breach your
duties to the Company, including persistent unsatisfactory performance of your
job duties; (d) you breach any provision of Section 4 of this Agreement or any
provision of the Employee Proprietary Information and Invention Agreement,
between you and the Company; or (e) you engage in conduct which in the good
faith and reasonable determination of the Board of Directors demonstrates gross
unfitness to serve. In the event your employment is terminated for Cause, you
will not be entitled to severance pay, pay in lieu of notice or any other such
compensation or benefits, other than payment of accrued salary and vacation.
5.3 VOLUNTARY RESIGNATION. You may terminate your employment
with the Company at any time, with or without reason, and with or without
notice. In the event that you
<PAGE> 4
voluntarily terminate your employment, you will not be entitled to severance
pay, pay in lieu of notice, or any other compensation or benefits, other than
payment of accrued salary and vacation.
5.4 TERMINATION FOR DEATH OR DISABILITY. Your employment with
the Company will be terminated in the event of your death, or any illness,
disability or other incapacity in such a manner that you are physically rendered
unable regularly to perform your duties hereunder for a period in excess of one
hundred twenty (120) consecutive days or more than one hundred eighty (180) days
in any consecutive twelve (12) month period. The determination regarding whether
you are physically unable regularly to perform your duties shall be made by the
Board of Directors. Your inability to be physically present on the Company's
premises shall not constitute a presumption that you are unable to perform such
duties. In the event that your employment with the Company is terminated for any
such reason, you or your heirs, successors and assigns shall not receive
severance pay, pay in lieu of notice, or any compensation or benefits other than
payment of accrued salary and vacation and other benefits as expressly required
in such event by applicable law or the terms of applicable benefit plans.
5.5 TERMINATION WITHOUT CAUSE. The Company reserves the right
to terminate your employment at any time without cause or advance notice. In
event that your employment is terminated without cause, the Company shall
provide to you as the only severance compensation and benefits the following:
(1) amount of three months of your base compensation, less standard
withholdings and deductions; and (2) an accelerated vesting of one year from
your termination date of First Options and Second Options.
6. GENERAL PROVISIONS.
6.1 NOTICES. Any notices provided hereunder must be in writing
and shall be deemed effective upon the earlier of personal delivery (including
personal delivery by fax) or the fifth day after mailing by first class mail, to
the Company at its primary office location and to you at your address as listed
on the Company payroll.
6.2 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law and consistent with the general intent of the parties insofar as
possible, but if any provision of this Agreement is held to be invalid, illegal
or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
6.3 WAIVER. If either party should waive any breach of any
provisions of this Agreement, she or he shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.
6.4 COMPLETE AGREEMENT. The foregoing, together with the
Proprietary Information and Inventions Agreement, is the entire agreement of the
parties with respect to the subject matter hereof and thereof and may not be
amended, supplemented, canceled or discharged except by written instrument
executed by both parties hereto.
6.5 COUNTERPARTS. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
6.6 HEADINGS. The headings of the sections hereof are inserted
for convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
and inure to the benefit of and be enforceable by you and the Company, and their
respective successors, assigns, heirs, executors and administrators, except that
you may not assign any of your duties
<PAGE> 5
hereunder and you may not assign any of your rights hereunder without the
written consent of the Company, which shall not be withheld unreasonably.
6.8 ATTORNEY FEES. If either party hereto brings any action to
enforce his or its rights hereunder, the prevailing party in any such action
shall be entitled to recover his or its reasonable attorneys' fees and expenses
incurred in connection with such action.
6.9 CHOICE OF LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the law of the
State of California.
ORGANIC, INC.
By: /s/ MICHAEL HUDES
------------------------------------
Date: 6/22/99
----------------------------------
Accepted and agreed this
22 day of June, 1999.
/s/ SUSAN FIELD
- --------------------------------
Susan Field
<PAGE> 1
EXHIBIT 10.7
LOAN AGREEMENT
BETWEEN
ORGANIC, INC.,
AND
OMNICOM GROUP INC.
DATED AS OF AUGUST 27, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 1. DEFINITIONS.......................................................................1
1.1 Defined Terms..................................................................1
1.2 Accounting Terms..............................................................11
1.3 Singular And Plural...........................................................11
1.4 Other Definitional Provisions.................................................11
SECTION 2. COMMITMENTS, INTEREST AND FEES...................................................12
2.1 Revolving Commitment And Guaranty Commitment..................................12
2.1.1 Revolving Commitment...................................................12
2.1.2 Reduction and Partial Termination of Revolving Commitment..............12
2.1.3 Guaranty Commitment....................................................12
2.2 Borrowing Procedures For Revolving Loans......................................15
2.2.1 Notice.................................................................15
2.2.2 Lender's Obligations...................................................15
2.2.3 Reaffirmation..........................................................15
2.3 Interest......................................................................15
2.3.1 Prior To IPO Closing...................................................15
2.3.2 Following IPO Closing..................................................16
2.4 Principal Repayment...........................................................16
2.5 Books And Records.............................................................16
2.6 Default Interest..............................................................16
2.7 Maximum Rate..................................................................16
2.8 Repayments....................................................................16
2.8.1 Mandatory Repayments Of Overadvances...................................16
2.8.2 Optional Repayments; Termination And Reduction Of Commitments..........17
2.9 Payment Mechanics.............................................................17
2.10 Security; Single Loan.........................................................17
SECTION 3. CONDITIONS PRECEDENT TO OBLIGATIONS OF LENDER....................................18
3.1 Conditions To Initial Revolving Loan Or Issuance Of A Letter Of Credit Or Lease
Guaranty......................................................................18
3.1.1 Documents Executed And Filed...........................................18
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
3.1.2 Warrant................................................................18
3.1.3 Secretary's Certificate................................................18
3.1.4 UCC and Patent and Trademark Office Lien Search........................18
3.1.5 Casualty Insurance.....................................................19
3.1.6 Approvals..............................................................19
3.1.7 Legal Opinion..........................................................19
3.1.8 Pledged Stock; Stock Powers; Pledged Notes.............................19
3.1.9 Intercreditor Agreement................................................19
3.1.10 U.K. Subsidiary Guarantee And Indemnity................................19
3.2 Conditions To All Revolving Loans, Letters of Credit and Lease Guaranties.....19
SECTION 4. REPRESENTATIONS AND WARRANTIES...................................................20
4.1 Due Organization And Qualification............................................20
4.2 Due Authorization; No Conflict................................................20
4.3 Valid And Binding Agreement...................................................21
4.4 Actions, Suits Or Proceedings.................................................21
4.5 No Liens, Pledges, Mortgages, Security Interests Or Negotiable Documents......21
4.6 Financial Statements..........................................................21
4.7 Financial Condition...........................................................22
4.8 Taxes.........................................................................22
4.9 Compliance With Laws..........................................................22
4.10 Indebtedness..................................................................22
4.11 Government Consents...........................................................22
4.12 Full Disclosure...............................................................22
4.13 Ownership Of Property; Liens..................................................22
4.14 No Default....................................................................23
4.15 Intellectual Property.........................................................23
4.16 ERISA.........................................................................23
4.17 Investment Company Act........................................................23
4.18 Subsidiaries..................................................................23
4.19 Security Documents............................................................23
4.20 Year 2000 Matters.............................................................24
4.21 Federal Regulations...........................................................24
4.22 Environmental Matters.........................................................24
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 5. AFFIRMATIVE COVENANTS............................................................25
5.1 Financial And Other Information...............................................25
5.1.1 Financial Statements...................................................25
5.1.2 Adverse Events.........................................................26
5.1.3 Shareholder Reports....................................................26
5.1.4 Tax Notices............................................................26
5.1.5 Books And Records......................................................26
5.2 Insurance.....................................................................27
5.3 Taxes.........................................................................27
5.4 Maintain Corporation And Business.............................................27
5.5 Additional Warrants...........................................................27
5.6 Use Of Loan Proceeds..........................................................28
5.7 Payment Of Obligations........................................................28
5.8 Environmental Laws............................................................28
5.9 Additional Collateral, Etc....................................................28
SECTION 6. NEGATIVE COVENANTS...............................................................30
6.1 Distributions.................................................................30
6.2 Stock Acquisition.............................................................30
6.3 Liens And Encumbrances........................................................30
6.4 Indebtedness..................................................................30
6.5 Investments And Extensions Of Credit..........................................31
6.6 Guarantee Obligations.........................................................31
6.7 Mergers Or Acquisitions.......................................................32
6.8 Transactions With Affiliates..................................................32
6.9 Disposition Of Property.......................................................32
6.10 Capital Expenditures..........................................................32
6.11 Lines Of Business.............................................................33
6.12 Consolidated Revenues.........................................................33
6.13 Executive Compensation........................................................33
SECTION 7. EVENTS OF DEFAULT - ENFORCEMENT - APPLICATION OF PROCEEDS........................33
7.1 Events Of Default.............................................................33
7.1.1 Failure To Pay Monies Due..............................................33
7.1.2 Misrepresentation......................................................33
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
7.1.3 Noncompliance With Agreement...........................................34
7.1.4 Other Defaults.........................................................34
7.1.5 Judgments..............................................................34
7.1.6 Bankruptcy, Etc........................................................34
7.1.7 Change Of Control......................................................35
7.1.8 Security Documents.....................................................35
7.1.9 Acceleration Of Obligations; Remedies..................................35
7.1.10 Application Of Proceeds................................................35
7.1.11 Cumulative Remedies....................................................36
SECTION 8. MISCELLANEOUS....................................................................36
8.1 Independent Rights............................................................36
8.2 Covenant Independence.........................................................36
8.3 Entire Agreement; Waivers And Amendments......................................36
8.4 Governing Law.................................................................36
8.5 Further Assurances............................................................36
8.6 Survival Of Warranties, Etc...................................................37
8.7 Costs And Expenses............................................................37
8.8 Binding Effect................................................................37
8.9 Maintenance Of Records........................................................38
8.10 Notices.......................................................................38
8.11 Counterparts..................................................................39
8.12 Headings......................................................................39
8.13 Release And Discharge.........................................................39
8.14 Time Of The Essence...........................................................39
8.15 Confidentiality...............................................................39
8.16 Waiver Of Jury Trial..........................................................39
8.17 Indemnity.....................................................................40
8.18 Integration...................................................................40
8.19 Foreign Restricted Subsidiary Guaranties......................................40
8.20 Submission To Jurisdiction; Waivers...........................................41
</TABLE>
iv
<PAGE> 6
LIST OF EXHIBITS
Exhibit A - Form of Revolving Note
Exhibit B - Form of Warrant to Purchase Stock
Exhibit C - Form of Guaranty and Security Agreement
Exhibit D - Form of Borrowing Notice
LIST OF SCHEDULES
Schedule 4.5 - Existing Liens
Schedule 4.10 - Existing Indebtedness
Schedule 4.18 - Subsidiaries
Schedule 4.19 - Financing Statements; Filing Offices
<PAGE> 7
LOAN AGREEMENT
THIS LOAN AGREEMENT (as amended, supplemented or otherwise modified from
time to time, the "AGREEMENT") made and delivered as of August 27, 1999, by and
between ORGANIC, Inc., a Delaware corporation ("BORROWER") and OMNICOM GROUP
INC., a New York corporation ("LENDER").
WITNESSETH
A. Borrower desires to obtain from Lender a revolving credit facility in
the aggregate principal amount of up to Thirty Million Dollars ($30,000,000.00)
outstanding at any time, for the purposes of financing working capital, general
corporate purposes, and to fund certain investments and acquisitions, and to
reimburse Lender for any payments made under lease guaranties or letters of
credit, all as more particularly described below;
B. Borrower further desires to obtain from Lender a guaranty credit
facility in the aggregate amount of up to Ten Million Dollars ($10,000,000.00)
in the form of lease guaranties and letters of credit made by or for the account
of the Lender;
C. Lender is willing to supply such financing subject to the terms and
conditions and in reliance on the representations and warranties set forth in
this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein contained, Borrower and Lender agree as follows:
SECTION 1. DEFINITIONS.
1.1 DEFINED TERMS. As used in this Agreement, the following terms shall
have the following respective meanings:
"AFFILIATE" means, at any time, and with respect to any Person, (a) any
other Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person, (b) any Person beneficially owning or holding, directly or
indirectly, five percent (5%) or more of any class of voting or equity interests
of such first Person, or (c) any Person of which such first Person beneficially
owns or holds, in the aggregate, directly or indirectly, more than fifty percent
(50%) of any class of voting or equity interests. As used in this definition,
"Control" means the power, directly or indirectly, either to (a) vote 10% or
more of the securities having ordinary voting power for the election of
directors (or persons performing similar functions) of such Person or (b) direct
or cause the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise.
"BANKRUPTCY CODE" means Title 11 of the United States Code, as amended,
or any successor act or code.
"BOARD APPROVAL" means the due authorization and approval by the Board
of Directors of the Lender to enter into this Agreement and the other Loan
Documents to which the Lender is a party and to the transactions contemplated
hereby and thereby.
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"BRAZILIAN SUBSIDIARY" means Organic Brasil Comunicacao Interativa S.A.
"BUSINESS DAY" means any other than a Saturday, Sunday or other day on
which banking institutions in the States of California or New York are
authorized or required by law or other governmental action to close.
"CAPITAL EXPENDITURES" means, with respect to any Person for any period,
expenditures that are or should be capitalized in accordance with GAAP.
"CAPITAL LEASE" means a lease that has been or should be capitalized on
the books of the subject lessee in accordance with GAAP.
"CAPITAL STOCK" means any and all shares, interests, or other
participations (however designated) of capital stock of a corporation, any and
all equivalent ownership interests in a Person (other than a corporation) and
any and all warrants, rights or options to purchase any of the foregoing.
"CHANGE OF CONTROL" means (i) any "person" or "group" (as such terms are
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), excluding the Permitted Investors, shall become,
or obtain rights (whether by means of options, warrants or otherwise) to become,
the "beneficial owner" (as defined in Rules l3d-3 and l3d-5 of the Securities
and Exchange Commission under the Exchange Act), directly or indirectly, of the
outstanding Capital Stock of Borrower representing more than 25% of the combined
voting power of all Capital Stock of Borrower entitled to vote in the election
of directors and (ii) beneficial ownership, directly or indirectly, by Jonathan
Nelson, his spouse and lineal descendants and any trust solely for the benefit
of his spouse and/or lineal descendants of less than 5 1 % of the aggregate
ordinary voting power represented by the issued and outstanding Capital Stock of
Holdings.
"CLOSING" means the time at which each of the conditions precedent set
forth in SECTIONS 3.1 AND 3.2 of this Agreement to the making of the first Loan
hereunder shall have been duly fulfilled or satisfied by Borrower or waived by
Lender.
"CLOSING DATE" means the date on which the Closing occurs.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLATERAL" means all property of Borrower and/or its Domestic
Restricted Subsidiaries in which Lender is granted a lien or security interest
pursuant to the Guaranty and Security Agreement or any other Security Document
or otherwise.
"COMMITMENT TERMINATION DATE" means the earlier of- (x) August 27, 2002
or (y) the date on which Borrower terminates the Commitments pursuant to SECTION
2.8.2.
"COMMITMENTS" means collectively the Revolving Commitment and the
Guaranty Commitment.
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"COMMONLY CONTROLLED ENTITY" means an entity, whether or not
incorporated, that is under common control with Borrower within the meaning of
Section 4001 of ERISA or is part of a group that includes Borrower and that is
treated as a single employer under SECTION 414 of the Code.
"CONTRACT RATE" means, as of any applicable date of determination, the
interest rate applicable to the Loans determined in accordance with SECTION 2 of
this Agreement.
"CONTRACTUAL OBLIGATION" means, as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or undertaking to
which such Person is a party or by which it or any of its Property is bound.
"CP RATE" means the offered price on the relevant date of Lender's newly
issued commercial paper as determined by Omnicon Finance, Inc. ("OFI") generally
for purposes of loans by OFI to subsidiaries of Lender.
"DEFAULT" means a condition or event, which, with the giving of notice
or the passage of time, or both, would become an Event of Default.
"DISBURSEMENT DATE" means each date upon which Lender makes a Revolving
Loan under SECTION 2.1.1 of this Agreement.
"DOMESTIC RESTRICTED SUBSIDIARY" means a Restricted Subsidiary
incorporated or organized under the laws of one of the States or other
jurisdictions of the United States.
"ENVIRONMENTAL LAWS" means any and all foreign, federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements of Law
(including common law) regulating, relating to or imposing liability or
standards of conduct concerning protection of human health or the environment,
as now or may at any time hereafter be in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and regulations promulgated thereunder.
"EVENT OF DEFAULT" means any of those conditions or events listed in
SECTION 7.1 of this Agreement.
"EXECUTIVE OFFICER" means, on the date hereof, any of the five executive
officers listed and designated as such in a letter dated the date hereof and
delivered by Borrower to Lender, and on or about each anniversary date hereof,
any of the five executive officers of Borrower designated as such in a letter
dated such date and delivered by Borrower to Lender (subject to Lender's
reasonable approval).
"FINANCIAL STATEMENTS" means the consolidated financial statements of
Borrower and its Subsidiaries described in SECTION 4.6 and SECTION 5.1.1 of this
Agreement.
"FINANCING STATEMENTS" means UCC financing statements and fixture
filings describing Lender as secured party and Borrower and/or the applicable
Domestic Restricted Subsidiary as
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<PAGE> 10
debtor covering the Collateral and otherwise in such form, for filing or
recording in such jurisdictions and with such filing offices, as Lender shall
reasonably deem necessary or advisable.
"FOREIGN RESTRICTED SUBSIDIARY" means any Restricted Subsidiary that is
not a Domestic Restricted Subsidiary.
"FOREIGN RESTRICTED SUBSIDIARY GUARANTY" means collectively (i) the
Guarantee and Indemnity executed and delivered by the U.K. Subsidiary on the
Closing Date in accordance with SECTION 3.1.10 below and (ii) the guaranty
executed and delivered by each Foreign Restricted Subsidiary created or acquired
after the Closing Date in accordance with SECTION 5.9(f) below.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other Person as may be approved by the significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination except that for purposes of SECTION 6.12, GAAP shall be determined
on the basis of such principles in effect on the date hereof and consistent with
those used in the preparation of the audited Financial Statements delivered
pursuant to SECTION 4.6. In the event that any "Accounting Change" (as defined
below) shall occur and such change results in a change in the method of
calculation of financial covenants, standards or terms in this Agreement, then
the Borrower and the Lender agree to enter into negotiations in order to amend
such provisions of this Agreement so as to equitably reflect such Accounting
Changes with the desired result that the criteria for evaluating the Borrower's
financial condition shall be the same after such Accounting Changes as if such
Accounting Changes had not been made. Until such time as such an amendment shall
have been executed and delivered by the Borrower and the Lender, all financial
covenants, standards and terms in this Agreement shall continue to be calculated
or construed as if such Accounting Changes had not occurred. "Accounting
Changes" refers to changes in accounting principles required by the promulgation
of any rule, regulation, pronouncement or opinion by the Financial Accounting
Standards Board of the American Institute of Certified Public Accountants or, if
applicable, the Securities and Exchange Commission.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
other political subdivision thereof, any agency, authority, instrumentality,
regulatory body, court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administrative functions of or
pertaining to government, any securities exchange and any self-regulatory
organization.
"GUARANTEE OBLIGATION" means, as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another Person
(including any bank under any letter of credit) to induce the creation of which
the guaranteeing person has issued a reimbursement, counterindemnity or similar
obligation, in either case guaranteeing or in effect guaranteeing any
Indebtedness, leases, dividends or other obligations (the "primary obligations")
of any other third Person (the "primary obligor") in any manner, whether
directly or indirectly,
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<PAGE> 11
including any obligation of the guaranteeing person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (1) for the
purchase or payment of any such primary obligation or (2) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation or (iv) otherwise to assure or hold harmless the owner
of any such primary obligation against loss in respect thereof, provided,
however, that the term Guarantee Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of business. The
amount of any Guarantee Obligation of any guaranteeing person shall be deemed to
be the lower of (a) an amount equal to the stated or determinable amount of the
primary obligation in respect of which such Guarantee Obligation is made and (b)
the maximum amount for which such guaranteeing person may be liable pursuant to
the terms of the instrument embodying such Guarantee Obligation, unless such
primary obligation and the maximum amount for which such guaranteeing person may
be liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by the Borrower in good
faith.
"GUARANTY AND SECURITY AGREEMENT" means the Guaranty and Security
Agreement dated of even date herewith, in substantially the form of EXHIBIT C
attached hereto, executed by Borrower and the Domestic Restricted Subsidiaries
in favor of Lender, including all appendices, exhibits and schedules thereto and
shall refer to such Guaranty and Security Agreement, as the same may be in
effect from time to time and as amended, supplemented or otherwise modified from
time to time.
"GUARANTY COMMITMENT" means the obligation of the Lender to make or
cause to be issued Lease Guaranties and/or Letters of Credit not to exceed Ten
Million Dollars ($ 10,000,000.00) in the aggregate (calculated in accordance
with SECTION 2.1.3(b)), provided that the Guaranty Commitment shall be
$5,000,000 until Board Approval is obtained.
"GUARANTY FACILITY" means the Ten Million Dollar ($10,000,000.00)
guaranty credit facility in respect of L/C and Guaranty Obligations described in
SECTION 2.1.3 of this Agreement to be provided by Lender to Borrower.
"INDEBTEDNESS" of any Person means, at any date, without duplication,
(a) all indebtedness of such Person for borrowed money, (b) all obligations of
such Person for the deferred purchase price of property or services (other than
current trade payables incurred in the ordinary course of such Person's
business), (c) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (d) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person (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), (e) all obligations under Capital Leases
of such Person, (f) all obligations of such Person, contingent or otherwise, as
an account party under acceptance, letter of credit or similar facilities, (g)
Preferred Stock of such Person, (h) all Guarantee Obligations of such Person in
respect of obligations of the kind referred to in clauses (a) through (g), and
(i) all obligations of the kind referred to in clauses (a) through
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<PAGE> 12
(h) above secured by (or for which the holder of such obligation has an existing
right, contingent or otherwise, to be secured by) any Lien on property
(including accounts and contract rights) owned by such Person, whether or not
such Person has assumed or become liable for the payment of such obligation.
"INSOLVENCY" means, with respect to any Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of Section 4245 of
ERISA.
"INSOLVENT" means pertaining to a condition of Insolvency.
"INTELLECTUAL PROPERTY" means the collective reference to all rights,
priorities and privileges relating to intellectual property, whether arising
under United States, multinational or foreign laws or otherwise, including
copyrights, copyright licenses, patents, patent licenses, trademarks, trademark
licenses, technology, know-how and processes, and all rights to sue at law or in
equity for any infringement or other impairment thereof, including the right to
receive all proceeds and damages therefrom.
"INTERCREDITOR AGREEMENT" means the Intercreditor Agreement dated as of
August 27, 1999 between Silicon Valley Bank and Lender, with respect to a Loan
and Security Agreement dated as of July 29, 1996, as amended from time to time,
between Borrower and Silicon Valley Bank.
"IPO CLOSING" means the closing of Borrower's first firm commitment
underwritten public offering of its common stock registered under the Securities
Act of 1933, as amended (the "IPO") either (a) representing 10% or more of all
the common stock of the Borrower or (b) with gross cash proceeds therefrom equal
to at least $75,000,000.
"LAWS" means, collectively, all international, foreign, federal, state
and local statutes, treaties, codes, ordinances, rules, regulations and
precedents of any court or other governmental agency.
"LEGAL RATE" means the maximum interest rate permitted to be paid by
Borrower or received by Lender with respect to the Obligations under applicable
law.
"LEASE GUARANTY" shall have the meaning set forth in SECTION 2.1.3(b) of
this Agreement.
"LESSOR" shall have the meaning set forth in SECTION 2.1.3(b) of this
Agreement.
"LETTER OF CREDIT" shall have the meaning set forth in SECTION 2.1.3(b)
of this Agreement.
"LIEN" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including any conditional sale or
other title retention agreement and any capital lease having substantially the
same economic effect as any of the foregoing).
"LOAN OR LOANS" means any Revolving Loan, or collectively, the Revolving
Loans.
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"LOAN DOCUMENTS" means any and all of this Agreement, the Revolving
Note, the Guaranty and Security Agreement, the Foreign Restricted Subsidiary
Guaranties, the other Security Documents, the Warrants, and any and all other
agreements, guaranties, documents and instruments executed and delivered by and
on behalf or support of Borrower to Lender evidencing or otherwise relating to
the Loans and other extensions of credit and the Liens granted to Lender with
respect to the Loans, as the same may from time to time be amended, modified,
supplemented, restated or renewed.
"LOAN PARTIES" means the Borrower and each Restricted Subsidiary of the
Borrower that is a party to a Loan Document.
"MATERIAL ADVERSE EFFECT" means any set of circumstances or events which
in Lender's reasonable judgment has a material adverse effect upon (a) the
validity or enforceability of any provision of this Agreement or any other Loan
Document, (b) the business, operations, condition (financial or otherwise), or
prospects of the Borrower and its Restricted Subsidiaries taken as a whole, (c)
the ability of Borrower to perform its Obligations or (d) the ability of Lender
to enforce any of its rights and remedies hereunder or under the other Loan
Documents.
"MATERIALS OF ENVIRONMENTAL CONCERN" means any gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products or any
hazardous or toxic substances, materials or wastes, defined or regulated as such
in or under any Environmental Law, including asbestos, polychlorinated biphenyls
and urea-formaldehyde insulation.
"MULTIEMPLOYER PLAN" means a Plan that is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"OBLIGATIONS" means the unpaid principal of and interest on (including
interest accruing after the maturity of the Loans and interest accruing after
the filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Borrower, whether or not a
claim for post-filing or post-petition interest is allowed in such proceeding)
the Loans and all other obligations and liabilities of the Borrower to the
Lender whether direct or indirect, absolute or contingent, due or to become due,
or now existing or hereafter incurred, which may arise under, out of, or in
connection with, this Agreement or any other Loan Document, or any other
document made, delivered or given in connection herewith or therewith, whether
on account of principal, interest, reimbursement obligations, fees, indemnities,
costs, expenses (including all fees, charges and disbursements of counsel to the
Lender that are required to be paid by the Borrower pursuant hereto) or
otherwise; provided that, Obligations shall not include any L/C and Guaranty
Obligations so long as Borrower has performed each of its obligations under the
last two sentences of SECTION 2.1.3(b) of this Agreement.
"OVERADVANCE" has the meaning set forth in SECTION 2.8.1 of this
Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA (or any successor).
"PERMITTED INVESTMENTS" means: (i) marketable direct obligations issued
or unconditionally guaranteed by the United States of America or any agency
thereof backed by the
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<PAGE> 14
full faith and credit of the United States government or any State thereof and
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently. having the highest rating obtainable from either Standard
& Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc. or
Moody's Investors Service, Inc., (iii) certificates of deposit maturing no more
than one (1) year from the date of investment therein issued by a bank, and (iv)
money market funds with Morgan Stanley & Co. Incorporated or another securities
intermediary of nationally recognized standing.
"PERMITTED INVESTORS" means collectively (i) Jonathan Nelson, his spouse
and lineal descendants and any trust solely for the benefit of his spouse and/or
lineal descendants, whether directly or indirectly through Organic Holdings,
Inc., a California corporation ("Holdings"), (ii) Holdings, and (iii) -Lender or
any permitted transferee of Lender.
"PERMITTED LIENS" means:
(a) Liens and encumbrances in favor of Lender;
(b) Liens for taxes, assessments or other governmental charges
incurred in the ordinary course of business not yet due and for which no
interest, late charge or penalty is attaching or which is being contested in
good faith by appropriate proceedings provided that adequate reserves with
respect thereto are maintained on the books of Borrower in conformity with GAAP;
(c) Liens, not delinquent, created by statute in connection with
worker's compensation, unemployment insurance, social security, and similar
statutory obligations;
(d) Liens of mechanics, materialmen, carriers, warehousemen or
other like statutory or common law liens securing obligations up to $500,000 in
the aggregate outstanding at any time incurred in good faith in the ordinary
course of business that are not yet due and payable;
(e) Encumbrances consisting of existing or future zoning
restrictions, existing recorded rights-of-way, existing recorded easements,
existing recorded private restrictions or existing or future public restrictions
on the use of real property, none of which is substantial in amount and
materially impairs the use of such property in the operation of the business for
which it is used and none of which is violated in any material respect by any
existing or proposed structure or land use and which have been approved in
writing by Lender;
(f) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under SECTION 7.1.5 below;
(g) Liens in respect of any purchase money obligations or
obligations under Capital Leases for fixed or capital assets used in Borrower's
or any Restricted Subsidiary's business; provided, however, that any such liens
shall not extend to property and assets of Borrower or such Restricted
Subsidiary not financed by such purchase money or Capital Lease obligation, and
in no event shall the aggregate amount owing under such purchase money or
Capital Lease obligations exceed in the aggregate $1,250,000 per year;
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(h) Liens in favor of a securities intermediary (as defined in
Article 8 of the UCC) pursuant to such securities intermediary's customary
customer account agreement; provided that any such Liens shall at no time secure
any Indebtedness or obligations other than customary fees and charges payable to
such securities intermediary;
(i) Any interest or title of a licensor in any property licensed
to Borrower or any Restricted Subsidiary in the ordinary course of its business,
and any interest of a licensee in any property licensed by Borrower or any
Restricted Subsidiary in the ordinary course of business, in each case covering
only the assets so licensed;
(j) Any interest or title of a lessor in any property leased to
Borrower or any Restricted Subsidiary pursuant to an operating lease entered
into in the ordinary course of business, and any interest of a lessee in any
property leased by Borrower or any Restricted Subsidiary pursuant to an
operating lease entered into in the ordinary course of business, in each case
covering only the assets so leased;
(k) Liens securing Indebtedness permitted under SECTION 6.4(x) of
this Agreement;
(1) Liens securing earn out and royalty obligations of the
Borrower or any Restricted Subsidiary entered into in connection with an
acquisition permitted hereunder, covering only the assets so acquired; and
(m) Existing Liens described on SCHEDULE 4.5 attached hereto.
"PERSON" or "PERSON" means any individual, corporation, partnership,
limited liability company, limited liability partnership, joint venture,
association, trust, unincorporated association, joint stock company, government,
municipality, political subdivision or agency, or other entity.
"PLAN" means, at any particular time, any employee benefit plan that is
covered by ERISA and in respect of which Borrower or a Commonly Controlled
Entity is (or, if such plan were terminated at such time, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"PREFERRED STOCK" means any class of capital stock (or other equity
interests) of a Person that is preferred over any other class of capital stock
(or other equity interests) of such Person as to the payment of dividends or the
payment of any amount upon liquidation or dissolution of such Person.
"PROPERTY" means any interest in any kind of property or asset, whether
real, personal or mixed and whether tangible or intangible.
"REAL PROPERTY LEASE" shall have the meaning set forth in SECTION
2.1.3(b) of this Agreement.
"REORGANIZATION" means, with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of SECTION 4241
of ERISA.
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"REPORTABLE EVENT" means any of the events set forth in SECTION 4043(b)
of ERISA, other than those events as to which the thirty day notice period is
waived under subsections .27, .28, .29, .30, .31, .32, .34, or .35 of PBGC Reg.
Section 4043.
"REQUIREMENTS OF LAW" means, as to any Person, the certificate or
articles of incorporation and bylaws or other organizational or governing
documents of such Person, and any Law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable to or binding upon such Person or any of its Property or to
which or by which such Person or any of its Property is subject.
"RESPONSIBLE OFFICER" means the Chief Executive Officer, the President,
the Chief Financial Officer, or the Vice President-Finance of Borrower.
"RESTRICTED SUBSIDIARY" means any Subsidiary that is not an Unrestricted
Subsidiary.
"REVOLVING COMMITMENT" means the obligation of the Lender to make
Revolving Loans in an aggregate principal amount, initially equal to Thirty
Million Dollars ($30,000,000.00), as such amount may be reduced to Fifteen
Million Dollars ($15,000,000.00) pursuant to SECTION 2.1.2 of this Agreement or
otherwise reduced pursuant to this Agreement, provided that the aggregate
Revolving Commitment shall not exceed $10,000,000 prior to Board Approval.
"REVOLVING FACILITY" means the Thirty Million Dollar ($30,000,000.00)
(original amount) revolving credit facility described in SECTION 2.1.1 of this
Agreement to be provided by Lender to Borrower evidenced by the Revolving Note.
"REVOLVING LOAN OR REVOLVING LOANS" has the meaning set forth in SECTION
2.1.1 of this Agreement.
"REVOLVING NOTE" has the meaning set forth in SECTION 2.1.1 of this
Agreement.
"SECURITY DOCUMENTS" means collectively the Guaranty and Security
Agreement and any other security agreement, equitable charge, mortgage, or
similar instrument entered into between Borrower or any Domestic Restricted
Subsidiary and Lender granting a Lien on its property to secure the Obligations
and any other obligations owing to Lender under any Loan Document, as the same
may be in effect from time to time and as amended, supplemented or otherwise
modified from time to time.
"SINGLE EMPLOYER PLAN" means any Plan that is covered by Title IV of
ERISA, but that is not. a Multiemployer Plan.
"SUBSIDIARY" means as to any Person, a corporation, partnership, limited
liability company or other entity of which shares of stock or other ownership
interests having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by such Person. Unless otherwise qualified, all
references to a
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"Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary
or Subsidiaries of the Borrower.
"UCC"' means the Uniform Commercial Code in effect from time to time in
the State of New York.
"U.K. SUBSIDIARY" means Organic Online Limited.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary designated by Borrower as
an "Unrestricted Subsidiary" at the time of creation or acquisition of such
Subsidiary; provided that, Borrower shall not at any time designate any
Restricted Subsidiary as an Unrestricted Subsidiary.
"VENTURE INVESTMENTS" has the meaning set forth in SECTION 6.5(d) of
this Agreement.
"WARRANT" means a Warrant substantially in the form of EXHIBIT B hereto.
1.2 ACCOUNTING TERMS. Any accounting term used in this Agreement shall
have, unless otherwise specifically provided herein, the meaning customarily
given such term in accordance with GAAP, and all financial data required to be
submitted by this Agreement shall be prepared and computed, unless otherwise
specifically provided herein, in accordance with GAAP. The certain terms or
computations that are explicitly modified by the phrase "in accordance with
GAAP" shall in no way be construed to limit the foregoing.
1.3 SINGULAR AND PLURAL. Where the context herein requires, the singular
number shall be deemed to include the plural, the masculine gender shall include
the feminine and neuter genders, and vice versa.
1.4 OTHER DEFINITIONAL PROVISIONS.
(a) Unless otherwise specified therein, all terms defined in this
Agreement shall have the defined meanings when used in the other Loan Documents
or any certificate or other document made or delivered pursuant hereto or
thereto.
(b) As used herein and in the other Loan Documents, and any
certificate or other document made or delivered pursuant hereto or thereto, (i)
the words "include," "includes" and "including" shall be deemed to be followed
by the phrase "without limitation," (ii) the word "incur" shall be construed to
mean incur, create, issue, assume, become liable in respect of or suffer to
exist (and the words "incurred" and "incurrence" shall have correlative
meanings), and (iii) the words "asset" and "property" shall be construed to have
the same meaning and effect and to refer to any and all tangible and intangible
assets and properties, including cash, Capital Stock, securities, revenues,
accounts, leasehold interests and contract rights.
(c) The words "hereof," "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Section,
Schedule and Exhibit references are to this Agreement unless otherwise
specified.
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SECTION 2. COMMITMENTS, INTEREST AND FEES.
2.1 REVOLVING COMMITMENT AND GUARANTY COMMITMENT.
2.1.1 REVOLVING COMMITMENT. Subject to the terms and conditions
of this Agreement and in reliance upon the representations and warranties of
Borrower set forth herein, Lender shall make advances in lawful money of the
United States and immediately available funds (each a "REVOLVING LOAN" and
collectively, "REVOLVING LOANS") to Borrower on a revolving basis in such
amounts as Borrower shall request pursuant to SECTION 2.2 of this Agreement at
any time on or after the Closing Date and prior to the Commitment Termination
Date, up to an aggregate principal amount outstanding at any time not to exceed
the Revolving Commitment; provided, however, that nothing contained in this
Agreement shall, under any circumstance, be deemed to require Lender to make any
Revolving Loan in an aggregate principal amount, taking into account the making
of such Revolving Loan, which when added to the outstanding principal amount of
all Revolving Loans would cause the aggregate outstanding amount to exceed the
Revolving Commitment. The Revolving Loans shall be evidenced by the revolving
promissory note (the "REVOLVING NOTE"), substantially in the form of EXHIBIT A
attached hereto. Any amounts borrowed by Borrower under the Revolving Facility
may be repaid in whole or in part without penalty and reborrowed, subject to
this SECTION 2 and the applicable terms and conditions precedent to advances set
forth in SECTION 3 of this Agreement.
2.1.2 REDUCTION AND PARTIAL TERMINATION OF REVOLVING COMMITMENT.
Upon the IPO Closing, the Revolving Commitment shall be reduced to Fifteen
Million Dollars ($15,000,000.00) and Lender shall cause Fifteen Million Dollars
($15,000,000.00) of the total Revolving Commitment to be terminated. If at such
time the outstanding aggregate principal amount of the Revolving Loans exceeds
such reduced Revolving Commitment, Borrower shall immediately repay to Lender
the full amount of such excess, without penalty or premium, together with all
unpaid interest accrued thereon to the date of repayment.
2.1.3 GUARANTY COMMITMENT.
(a) ISSUANCE OF LETTERS OF CREDIT AND LEASE GUARANTIES. In
connection with certain real property leases into which Borrower may enter from
time to time (each a "REAL PROPERTY Lease"), and upon the request of Borrower
made at any time and from time to time on or after the Closing Date and prior to
the Commitment Termination Date, and subject to the availability of the Guaranty
Commitment and the satisfaction by Borrower or waiver by Lender of the
conditions precedent in SECTION 3 of this Agreement, Lender shall, in accordance
with the requirements of the lessor (the "LESSOR") under any such Real Property
Lease, (i) execute and deliver a guaranty agreement in favor of the Lessor (a
"LEASE GUARANTY"), or (ii) cause standby letters of credit to be issued by a
bank or other legally authorized Person for the account of Lender and the
benefit of the Lessor (a "LETTER OF CREDIT"), in each case to support Borrower's
obligations in favor of the Lessor under such Real Property Lease. Such Lease
Guaranty and/or Letter of Credit shall be satisfactory to Lender in its
reasonable discretion.
(b) AMOUNT AND TERM. All obligations incurred by the Lender
pursuant to SECTION 2.1.3(a) in respect of the issuance of Letters of Credit
shall be referred to as the "LETTER OF CREDIT OBLIGATIONS." All obligations
incurred by the Lender pursuant to SECTION 2.1.3(a) in
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respect of the issuance of Lease Guaranties shall be referred to as the "LEASE
GUARANTY OBLIGATIONS." The Letter of Credit Obligations and the Lease
Obligations shall collectively be referred to as the "L/C AND GUARANTY
OBLIGATIONS." The aggregate amount of the L/C and Guaranty Obligations shall not
at any time exceed the Guaranty Commitment. The aggregate amount of the Lease
Guaranty Obligations shall, as of any date, be calculated individually with
respect to each Real Property Lease as the lesser of: (x) the aggregate stated
amount of the Lease Guaranty issued in respect of such Lease, or (y) the net
present value of all of the payments then due under such Lease during the
remaining term of such Lease at the time of any such determination using a
discount rate of six percent (6%). The Letter of Credit Obligations shall be
calculated as the aggregate face amount of the outstanding Letters of Credit
issued and unexpired at any time. If any Letter of Credit Obligations, whether
or not then due and payable, shall for any reason be outstanding on the
Commitment Termination Date, Borrower, at its option, shall either (i) provide
cash collateral therefor in an amount equal to such Letter of Credit
Obligations, (ii) cause all outstanding Letters of Credit to be canceled and
returned, or (iii) deliver a standby letter of credit in guaranty of such Letter
of Credit Obligations, which standby letter of credit shall be of like tenor and
duration, as and in an amount equal to such Letter of Credit Obligations, and
shall be issued by a Person, and shall be subject to such terms and conditions,
as are satisfactory to Lender in its reasonable discretion. If any Lease
Guaranty Obligations, whether or not then due and payable, shall for any reason
be outstanding on the Commitment Termination Date, Borrower, at its option,
shall either (i) provide cash collateral therefor in an amount equal to such
Lease Guaranty Obligations, (ii) cause all outstanding Lease Guaranties to be
canceled and returned, or (iii) deliver a standby letter of credit in guaranty
of such Lease Guaranty Obligations, which standby letter of credit shall be of
like tenor and duration, as and in an amount equal to such Lease Guaranty
Obligations, and shall be issued by a Person, and shall be subject to such terms
and conditions, as are satisfactory to Lender in its reasonable discretion.
(c) FEES. Borrower agrees to pay to Lender, (i) as compensation
for L/C and Guaranty Obligations incurred hereunder, on the last day of each
calendar quarter in arrears, for each quarter or portion thereof during which
any L/C and Guaranty Obligation shall remain outstanding, (x) with respect to
the Letter of Credit Obligations, a fee in an amount equal to 2.00% per annum
multiplied by the aggregate outstanding amount of such Letters of Credit
Obligations and (y) with respect to the Lease Guaranty Obligations, a fee in an
amount equal to 0.50% per annum multiplied by the aggregate outstanding amount
of such Lease Guaranty Obligations, in each case adjusted daily based on the
total outstanding amount of the respective obligations, and (ii) as
reimbursement for all reasonable out-of-pocket costs, taxes, fees, and expenses
incurred by Lender on account of such L/C and Guaranty Obligations, the amount
of all such costs, taxes, fees, and expenses so incurred promptly, but in no
event later than five (5) days after demand therefor.
(d) REQUEST FOR ISSUANCE OF A LEASE GUARANTY OR LETTER OF CREDIT.
Borrower shall give Lender at least two weeks prior notice requesting a Lease
Guaranty, and at least three weeks prior notice requesting a Letter of Credit,
specifying the date such Lease Guaranty or Letter of Credit is to be issued,
identifying the beneficiary to which such instrument relates, and summarizing
the terms and conditions of the Real Property Lease proposed to be supported
thereby. Borrower shall also provide a copy of the Real Property Lease to
Lender.
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Lender will promptly cause such Lease Guaranty or Letter of Credit, as the case
may be, to be issued but in no event later than the last day of the applicable
notice period.
(e) L/C AND GUARANTY OBLIGATIONS UNDER REVOLVING COMMITMENT. In
the event that the Lender shall make any payment on or pursuant to any Letter of
Credit or Lease Guaranty, the corresponding L/C and Guaranty Obligation shall
then be deemed automatically to be reduced by the amount of such payment and
such payment shall then be deemed automatically to constitute a Revolving Loan
under the Revolving Facility regardless of whether a Default or Event of Default
shall have occurred and be continuing and notwithstanding Borrower's failure to
satisfy the conditions precedent set forth in SECTION 3 of this Agreement. The
proceeds of such Revolving Loan shall be applied to reimburse Lender for the
payment made by the Lender under the Letter of Credit or Lease Guaranty, as
applicable. In the event that a Revolving Loan shall be made to Borrower
hereunder, such Revolving Loan shall be deemed to have been made as of the date
of the payment by Lender with respect to the applicable Letter of Credit or
Lease Guaranty and interest shall accrue thereon at the rate as provided for
under this Agreement.
(f) OBLIGATIONS ABSOLUTE. The obligation of Borrower to reimburse
the Lender for payments made under the Letters of Credit and Lease Guaranties
shall be absolute, unconditional and irrevocable, and shall be performed
strictly in accordance with the terms of this Agreement and such Letters of
Credit and Lease Guaranties, under all circumstances whatsoever, including,
without limitation, the following circumstances:
(i) Any lack of validity or enforceability of the Letter
of Credit or the Lease Guaranty, the obligation supported by the Letter of
Credit, Lease Guaranty or any other agreement or instrument relating thereto
(collectively, the "RELATED DOCUMENTS");
(ii) Any amendment or waiver of or any consent to or
departure from all or any of the Related Documents;
(iii) The existence of any claim, set-off, defense or
other rights which Borrower may have at any time against any beneficiary or any
transferee of the Letter of Credit or Lease Guaranty (or any persons or entities
for whom any such beneficiary or any such transferee may be acting), the Lender,
the Letter of Credit issuer or any other Person, whether in connection with the
Loan Documents, the Related Documents or any unrelated transaction;
(iv) Any breach of contract or other dispute between
Borrower and any beneficiary or any transferee of the Letter of Credit or the
Lease Guaranty (or any persons or entities for whom such beneficiary or any such
transferee may be acting), the Lenders or any other Person;
(v) Any draft, statement or any other document presented
under the Letter of Credit or the Lease Guaranty proving to be forged,
fraudulent, invalid or insufficient in any respect or any statement therein
being untrue or inaccurate in any respect whatsoever;
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(vi) Any delay, extension of time, renewal, compromise or
other indulgence or modification granted or agreed to by the Letter of Credit
issuer or Lender with or without notice to or approval by Borrower in respect of
any of Borrower's indebtedness under this Agreement; or
(vii) any error, omission, interruption or delay in
transmission, dispatch or delivery of any advice or message, however
transmitted, in connection with any Letter of Credit.
2.2 BORROWING PROCEDURES FOR REVOLVING LOANS.
2.2.1 NOTICE. Except as otherwise provided under Section 2.1.3(e)
Borrower shall by e-mail, telephone, or facsimile give Lender notice of
Borrower's desire for a Revolving Loan no later than 2:00 p.m., New York City
time, one Business Day prior to the requested Disbursement Date. Any notice by
telephone shall be promptly followed by a written notice by e-mail or facsimile.
Such written notice shall be in substantially the form of the Borrowing Notice
attached hereto as EXHIBIT D and shall specify the principal amount of the
proposed advance for such Revolving Loan.
2.2.2 LENDER'S OBLIGATIONS. Lender agrees to make the Revolving
Loan on the Disbursement Date established by notice to Lender from Borrower as
set forth in SECTION 2.2.1 of this Agreement by transferring such amount in
immediately available funds by wire transfer or as otherwise provided under
SECTION 2.1.3(e) pursuant to wire instructions previously provided in writing by
Borrower to Lender; provided, however, that, subject to SECTION 2.1.3(e), Lender
shall not be obligated to make such Revolving Loan if
(a) Any of the conditions precedent set forth in SECTION 3 of
this Agreement shall not have been satisfied or waived by Lender in accordance
with SECTION 8.3 of this Agreement, or
(b) Such proposed Revolving Loan would cause the aggregate unpaid
principal amount of the Revolving Loans outstanding under this Agreement to
exceed the Revolving Commitment on the Disbursement Date.
2.2.3 REAFFIRMATION. Each request for a Revolving Loan under this
SECTION 2.2 shall constitute a reaffirmation by Borrower that (i) no Default or
Event of Default shall have occurred and be continuing, and (ii) the
representations and warranties contained in this Agreement are true, correct and
complete in all material respects to the same extent as though made on and as of
the date of the request, except to the extent such representations and
warranties specifically relate to an earlier date, in which event they shall be
true, correct and complete in all material respects as of such earlier date.
2.3 INTEREST.
2.3.1 PRIOR TO IPO CLOSING. Prior to the IPO Closing, the
principal amount of the Loans outstanding from time to time shall bear interest
on the outstanding principal balance until payment in full, at a rate of
interest per annum equal to the CP Rate plus three percent (3.0%). Interest on
each Loan shall be due and payable quarterly in arrears (i)
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commencing on October 1, 1999 and (ii) on the first day of each quarter
thereafter until repayment of the Loans in full. Interest shall be computed at
the above rate (as it may be adjusted from time to time) for the actual number
of days elapsed on the basis of a year consisting of three hundred sixty (360)
days. If any such interest payment date is not a Business Day, such payment
shall be due on the next succeeding Business Day. The rate of interest
applicable to the Loans shall change effective at the opening of business on the
Business Day when the CP Rate changes.
2.3.2 FOLLOWING IPO CLOSING. Commencing on the date of the IPO
Closing and continuing thereafter, the principal amount of the Loans outstanding
from time to time shall bear interest on the outstanding principal balance until
payment in full, at a rate of interest per annum equal to the CP Rate plus one
and one quarter percent (1.25%). Interest shall be due and payable and computed
in accordance with SECTION 2.3.1 of this Agreement.
2.4 PRINCIPAL REPAYMENT. The aggregate principal amount of all Revolving
Loans outstanding hereunder shall be due and payable in full on the Commitment
Termination Date.
2.5 BOOKS AND RECORDS. All Loans permitted under SECTION 2.1 of this
Agreement and all repayments of principal and payments of interest with respect
to the Loans shall be evidenced by notations made by Lender on the books and
records of Lender; provided, however, that the failure by Lender to make such
notations shall not limit or otherwise affect the obligations of Borrower with
respect to the repayments of principal or payments of interest on the Loans. The
aggregate unpaid amount of the Loans set forth on the books and records of
Lender shall be conclusive in the absence of manifest error.
2.6 DEFAULT INTEREST. If all or any portion of any principal amount of
any Revolving Loan or any interest payable on any Revolving Loan or any fee or
any other amount payable hereunder shall not be paid when due, whether at the
stated maturity, by acceleration or otherwise, such overdue amount shall bear
interest at a rate per annum equal to the rate otherwise applicable to the
Revolving Loans plus two percent, but in no event shall the rate exceed the
Legal Rate, from the due date of such non-payment until such amount is paid in
full (as well after as before judgment).
2.7 MAXIMUM RATE. At no time shall the Contract Rate payable on the
Loans exceed the Legal Rate. In the event any interest is charged or received by
Lender in excess of the Legal Rate, Borrower acknowledges that any such excess
interest shall be the result of an accidental and bona fide error, and such
excess shall first be applied to reduce the principal then unpaid on the Loans;
second, applied to reduce any obligation for other indebtedness of Borrower to
Lender; and third, any remaining excess shall be returned to Borrower.
2.8 REPAYMENTS.
2.8.1 MANDATORY REPAYMENTS OF OVERADVANCES. If at any time and
for any reason the aggregate principal outstanding on the Revolving Loans
exceeds the Revolving Commitment, or the aggregate outstanding L/C and Guaranty
Obligations exceeds the Guaranty Commitment (the amount of such excess, if any,
in either case, being an "OVERADVANCE"), Borrower shall immediately repay to
Lender the full amount of such Overadvance, without
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penalty or premium, together with all unpaid interest accrued thereon to the
date of repayment; provided that the Borrower shall repay to Lender any
Overadvances resulting from any payment by the Lender pursuant to any Letter of
Credit or Lease Guaranty under SECTION 2.1.3(e) within thirty (30) days of such
Overadvance. Any such payments shall be immediately due and owing upon notice or
demand from Lender of the occurrence of any such Overadvance. The Revolving
Loans are also subject to mandatory prepayment under the circumstances described
in SECTION 5.9(d)(iii) of the Security Agreement.
2.8.2 OPTIONAL REPAYMENTS; TERMINATION AND REDUCTION OF
COMMITMENTS. Borrower, at any time and from time to time, upon at least one (1)
Business Day's prior notice to Lender, may prepay in whole or in part without
penalty or premium, the unpaid principal amount of the Loans. In addition, upon
at least three Business Days' prior notice to Lender, Borrower may terminate at
any time the Commitments in whole or in part. The Revolving Commitment is also
subject to reduction under the circumstances described in SECTION 5.9(D)(III) of
the Security Agreement.
2.9 PAYMENT MECHANICS. All sums payable by Borrower to Lender under this
Agreement or the other Loan Documents contemplated hereby shall be paid directly
to Lender on the due date thereof in immediately available funds by wire
transfer pursuant to wire instructions previously provided in writing by Lender
to Borrower; provided that, Lender may automatically debit Borrower's account
with respect to the quarterly interest payments on the Revolving Loans and the
fees payable with respect to the L/C and Guaranty Obligations as the parties may
agree. Lender shall submit an invoice to Borrower with respect to each such
quarterly interest payment and fee, which invoice shall set forth (i) the
average daily balance of the Revolving Loans, the Letter of Credit Obligations,
and the Lease Guaranty Obligations, as the case may be, (ii) the applicable
interest rate or fee percentage, and (iii) the calculation of the amount due
(separated by Revolving Loans, Letter of Credit Obligations, and Lease Guaranty
Obligations). In addition, upon Borrower's request, Lender shall deliver to
Borrower information that reasonably establishes and verifies the CP Rate in
existence at any particular time. Lender will also afford Borrower audit rights
at Borrower's expense upon reasonable notice and during normal business hours to
further establish and verify the CP Rate.
2.10 SECURITY; SINGLE LOAN. To secure the full, prompt and complete
performance of Borrower's covenants set out in this Agreement and to secure the
repayment of the Loans and all other Obligations, Borrower agrees to, and will
cause its Domestic Restricted Subsidiaries to, grant and assign a lien upon, and
security interest in, the Collateral pursuant to the Guaranty and Security
Agreement, any other Security Document, the Financing Statements and such other
agreements as Lender shall from time to time reasonably require and Borrower or
such Domestic Restricted Subsidiaries shall have caused to be executed and
delivered to Lender. All of the obligations of the Loan Parties to Lender
arising under or in connection with this Agreement or any of the other Loan
Documents shall constitute one general obligation of the Loan Parties secured by
Lender's security interest in the Collateral and by all other security
interests, mortgages, liens, claims, and encumbrances now and from time to time
hereafter granted from the Loan Parties to Lender. Collateral for any Loan shall
be collateral for all Loans and any and all of the obligations of the Loan
Parties hereunder or under any other Loan Document.
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SECTION 3. CONDITIONS PRECEDENT TO OBLIGATIONS OF LENDER.
3.1 CONDITIONS TO INITIAL REVOLVING LOAN OR ISSUANCE OF A LETTER OF
CREDIT OR LEASE GUARANTY. The obligations of Lender under this Agreement to make
the initial Revolving Loan, or to issue the initial Letter of Credit or Lease
Guaranty, are subject to the occurrence, prior to or simultaneously with the
making of such Loan or the issuance of such Letter of Credit or Lease Guaranty,
whichever happens first, of each of the following conditions:
3.1.1 DOCUMENTS EXECUTED AND FILED. Borrower and each Domestic
Restricted Subsidiary which is a party thereto shall have executed (or caused to
be executed) and delivered to Lender with appropriate insertions and attachments
as Lender shall approve, in its reasonable discretion, and, as appropriate,
there shall have been filed or recorded with such filing or recording offices as
Lender shall reasonably deem appropriate, the following:
(a) This Agreement;
(b) The Revolving Note;
(c) The Guaranty and Security Agreement; and
(d) The Financing Statements and all other agreements, documents
or instruments necessary or reasonably advisable to create or perfect a prior
security interest in the Collateral.
3.1.2 WARRANT. Borrower shall have issued to Lender a Warrant to
purchase 749,692 shares of Common Stock of Borrower, provided that if Board
Approval shall not have been obtained, the Warrant shall be issued at such time
as Board Approval shall have been obtained unless the Obligations have been paid
in full or otherwise satisfied, Borrower has performed all of its other
obligations hereunder, and the Commitments have been terminated prior to that
date.
3.1.3 SECRETARY'S CERTIFICATE. Borrower and each Domestic
Restricted Subsidiary shall have furnished to Lender a certificate of the
Secretary of Borrower and each Domestic Restricted Subsidiary attaching and
certifying as to (1) resolutions of its Board of Directors authorizing the
execution, delivery and performance of this Agreement, the borrowing hereunder,
the Revolving Note, and the other Loan Documents and any other documents
contemplated by this Agreement, (2) a complete and accurate copy of its
Certificate of Incorporation including all amendments thereto and restatements
thereof as certified by the Delaware Secretary of State, (3) a complete and
accurate copy of the Bylaws of Borrower and each Domestic Restricted Subsidiary,
including all amendments thereto and restatements thereof, (4) incumbency and
signatures of the officers of Borrower signing this Agreement, the Revolving
Note, the other Loan Documents and any other documents contemplated or delivered
under this Agreement to which such Borrower is a party and (5) a certificate of
status with respect to Borrower and each Domestic Restricted Subsidiary which
shall have been certified by the Delaware Secretary of State.
3.1.4 UCC AND PATENT AND TRADEMARK OFFICE LIEN SEARCH. Lender
shall have received UCC and U.S. Patent and Trademark Office record and copy
searches disclosing
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no notice of any liens or encumbrances filed against any of the Collateral other
than the Permitted Liens and such liens as shall be released concurrently with
the first Loan hereunder.
3.1.5 CASUALTY INSURANCE. In accordance with SECTION 5.2 of this
Agreement, Borrower shall have furnished to Lender a Certificate of Insurance
evidencing Borrower's casualty insurance policies with loss payable clauses in
favor of Lender, relating to the assets and properties (including, but not
limited to, the Collateral) of Borrower and the Domestic Restricted
Subsidiaries.
3.1.6 APPROVALS. All governmental and third party approvals
(including landlords' and other consents where required under the applicable
real estate lease or contract but not landlords' estoppel letters) necessary in
connection with the Borrower and its Subsidiaries and the transactions
contemplated hereby shall have been obtained and be in full force and effect.
3.1.7 LEGAL OPINION. The Lender shall have received an executed
legal opinion of Cooley Godward LLP, counsel to the Borrower and its Domestic
Restricted Subsidiaries, in form and substance satisfactory to Lender and its
counsel. Such legal opinion shall cover such other matters incident to the
transactions contemplated by this Agreement as the Lender may reasonably
require.
3.1.8 PLEDGED STOCK; STOCK POWERS; PLEDGED NOTES. The Lender
shall have received (i) the certificates representing the shares of Capital
Stock of the Domestic Restricted Subsidiaries pledged pursuant to the Guaranty
and Security Agreement, together with an undated stock power for each such
certificate executed in blank by a duly authorized officer of the pledgor
thereof and (ii) each promissory note payable to Borrower or any Domestic
Restricted Subsidiary with a stated principal amount of $200,000 or more pledged
pursuant to the Guaranty and Security Agreement, endorsed (without recourse) in
blank (or accompanied by an executed transfer form in blank) by the pledgor
thereof
3.1.9 INTERCREDITOR AGREEMENT. Each of Silicon Valley Bank and
Borrower shall have executed and delivered the Intercreditor Agreement.
3.1.10 U.K. SUBSIDIARY GUARANTEE AND INDEMNITY. The Lender shall
have received (i) a Guarantee and Indemnity executed and delivered by the U.K.
Subsidiary in form and substance satisfactory to Lender and its counsel and (ii)
(1) a complete and accurate copy of resolutions of its Board of Directors
authorizing the execution, delivery and performance of the Guarantee and
Indemnity, (2) a complete and accurate copy of its Articles of Association and
Memorandum of Association, including all amendments thereto and restatements
thereof, and (3) documentation evidencing the incumbency and signatures of the
officers of the U.K. Subsidiary signing the Guarantee and Indemnity.
3.2 CONDITIONS TO ALL REVOLVING LOANS, LETTERS OF CREDIT AND LEASE
GUARANTIES. The obligations of Lender to make any Revolving Loan on any
Disbursement Date, including, but not limited to, the Disbursement Date first
occurring, or to issue a Letter of Credit or Lease Guaranty, including but not
limited to, the initial Letter of Credit or Lease Guaranty, are subject to the
occurrence, prior to or on the Disbursement Date related to such Revolving Loan,
or the
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date of issuance of such Letter of Credit or Lease Guaranty, of each of the
following further conditions:
3.2.1 Lender shall have received, in form and content
satisfactory to Lender, the following:
(a) The notice set forth in SECTION 2.2.1. of this Agreement in
the case of a Revolving Loan.
(b) The notice set forth in SECTION 2.1.3(d) of this Agreement in
the case of a Letter of Credit or Lease Guaranty.
3.2.2 As of such date both before and after giving effect to the
requested extension of credit:
(a) No Default or Event of Default shall have occurred and be
continuing;
(b) All warranties or representations set forth in SECTION 4 of
this Agreement shall be true and correct in all material respects (except for
any warranties or representations stated to relate to a specific earlier date,
which shall be true and correct in all material respects as of such earlier
date) as though such warranties or representations had been made on and as of
such date; and
(c) No provision of law, any order of any court or other agency
of government or any regulation, rule or interpretation thereof shall have had
any Material Adverse Effect.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
On a continuing basis from the date of this Agreement until the
Obligations are paid in full or otherwise satisfied, Borrower has performed all
of its other obligations hereunder, and the Commitments have been terminated,
Borrower represents and warrants to Lender that:
4.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Restricted
Subsidiary (a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (b) has the
power and authority to own its properties and assets and to carry out its
business as now being conducted and is qualified to do business and is in good
standing in every jurisdiction wherein such qualification is necessary except
where failure to be so qualified would not have a Material Adverse Effect and
(c) has the power and authority to execute, deliver and perform this Agreement,
to borrow money in accordance with its terms, to execute, deliver and perform
the Revolving Note and the other Loan Documents to which it is a party, to grant
to Lender liens and security interests in the Collateral as hereby contemplated,
and to do any and all other things required of it hereunder.
4.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery and
performance by Borrower of this Agreement, the borrowings hereunder and the
execution, delivery and performance by Borrower and each other Loan Party of the
Revolving Note, the Guaranty and Security Agreement and other Loan Documents to
which it is a party (a) have been duly authorized by all requisite corporate
action of Borrower and each other Loan Party, (b) are not in
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conflict with nor constitute a breach of any provision contained in the
Certificate of Incorporation or Bylaws of Borrower or the charter documents of
each other Loan Party, (c) will not be in conflict with, result in a breach of
or constitute (with or without notice or passage of time) a default under any
indenture, note, agreement or other instrument to which Borrower or any
Restricted Subsidiary, or by which it or any of its properties or assets are
bound except such as have been obtained, and (d) will not result in the creation
or imposition of any lien, charge or encumbrance of any nature whatsoever upon
any of the properties or assets of Borrower or any Restricted Subsidiary other
than in favor of Lender and as contemplated or permitted thereby.
4.3 VALID AND BINDING AGREEMENT. This Agreement is, and the Revolving
Note and each of the other Loan Documents will be, when delivered, valid,
binding and enforceable obligations of Borrower and each other Loan Party which
is a party thereto.
4.4 ACTIONS, SUITS OR PROCEEDINGS. There are no actions, suits or
proceedings, at law or in equity, and no proceedings before any arbitrator or by
or before any governmental commission, board, bureau, or other administrative
agency, pending, or, to the best of Borrower's knowledge, threatened against or
affecting Borrower or any Restricted Subsidiary or any properties or rights of
Borrower or any Restricted Subsidiary, which, if adversely determined, would
have a Material Adverse Effect.
4.5 NO LIENS, PLEDGES, MORTGAGES, SECURITY INTERESTS OR NEGOTIABLE
DOCUMENTS. Borrower's and each Restricted Subsidiary's assets and properties,
including, without limitation, the Collateral, are not subject to any mortgage,
pledge, lien, security interest or other encumbrance of any kind or character,
except for Permitted Liens. Borrower and each Domestic Restricted Subsidiary is,
and at the time the Collateral becomes subject to Lender's security interest
will be, the true and lawful owner of and has, and at the time the Collateral
becomes subject to Lender's security interest will have, good and clear title to
the Collateral, subject only to Lender's rights therein and to Permitted Liens.
4.6 FINANCIAL STATEMENTS. The audited consolidated balance sheets of the
Borrower and its Subsidiaries as at December 31, 1998 and the related
consolidated statements of income for the fiscal year ended on such date,
reported on by and accompanied by an unqualified report from
PricewaterhouseCoopers LLP, present fairly the consolidated financial condition
of the Borrower and its Subsidiaries as at such date, and the consolidated
results of its operations for the fiscal year then ended. The unaudited
consolidated balance sheet of the Borrower and its Subsidiaries as at June 30,
1999, and the related unaudited consolidated statements of income for the
six-month period ended on such date, present fairly the consolidated financial
condition of the Borrower and its Subsidiaries as at such date, and the
consolidated results of its operations for the six-month period then ended
(subject to normal year-end audit adjustments and the omission of footnotes).
All such financial statements, including the related schedules and notes
thereto, have been prepared in accordance with GAAP applied consistently
throughout the periods involved (except as approved by the aforementioned firm
of accountants and disclosed therein). The Borrower and its Restricted
Subsidiaries do not have any material Guarantee Obligations, other contingent
liabilities, or liabilities for taxes or any long-term leases or unusual
long-term commitments that are not reflected in the most recent Financial
Statements or otherwise permitted hereby. During the period from June 30, 1999
to and including the date
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hereof, there has been no disposition of a material part of the business or
property of the Borrower or any of its Restricted Subsidiaries.
4.7 FINANCIAL CONDITION. Each Loan Party is solvent, able to pay its
debts as they mature, has capital sufficient to carry on its business and has
assets the fair market value of which exceed its liabilities, and each Loan
Party will not be rendered insolvent, under-capitalized or unable to pay
maturing debts by the execution or performance of this Agreement or the other
Loan Documents, as the case may be. There has been no development or condition
that has had or could reasonably be expected to have a Material Adverse Effect
since the date of the most recently delivered audited Financial Statements.
4.8 TAXES. Each of Borrower and each Restricted Subsidiary has filed by
the due date therefor all federal, state and local tax returns and other reports
it is required by law to file, has paid or caused to be paid all taxes,
assessments and other governmental charges that are shown to be due and payable
under such returns, and has made adequate provision for the payment of such
taxes, assessments or other governmental charges which have accrued but are not
yet payable, except those contested in good faith. Borrower has no knowledge of
any deficiency or assessment in connection with any taxes, assessments or other
governmental charges not adequately disclosed in the most recently delivered
audited Financial Statements.
4.9 COMPLIANCE WITH LAWS. Each of Borrower and each Restricted
Subsidiary has complied with all applicable laws, to the extent that failure to
comply would have a Material Adverse Effect.
4.10 INDEBTEDNESS. Except (a) as disclosed on SCHEDULE 4.10 attached
hereto, (b) Capital Leases in existence on the date hereof for tangible property
used in Borrower's or any Restricted Subsidiary's business to the extent
permitted under this Agreement, (c) with respect to Indebtedness incurred- after
the Closing Date in accordance with and permitted under SECTION 6.4, and (d)
with respect to Guarantee Obligations issued after the Closing Date in
accordance with and permitted under SECTION 6.6, Borrower and the Restricted
Subsidiaries have no Indebtedness.
4.11 GOVERNMENT CONSENTS. Each of Borrower and each Restricted
Subsidiary has obtained all consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all Governmental
Authorities that are necessary for the continued operation of Borrower's and
each Restricted Subsidiary's business as currently conducted, other than those
consents, approvals or authorizations the failure of which to obtain would not
have a Material Adverse Effect.
4.12 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower or any Subsidiary in any certificate or written statement
furnished to Lender contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the representations, warranties
or statements contained in such certificates or statements, in light of the
circumstances under which they were made, not misleading.
4.13 OWNERSHIP OF PROPERTY; LIENS. Each of Borrower and each Restricted
Subsidiary has title in fee simple to, or a valid leasehold interest in, all of
its real property, and
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good title to, or a valid leasehold interest in, all of its other property, and
none of such property is subject to any Lien except for Permitted Liens.
4.14 NO DEFAULT. Neither the Borrower nor any Restricted Subsidiary is
in default under or with respect to any of its Contractual Obligations in any
respect that could reasonably be expected to have a Material Adverse Effect. No
Default or Event of Default has occurred and is continuing.
4.15 INTELLECTUAL PROPERTY. Each of Borrower and each Restricted
Subsidiary owns, or is licensed to use, all Intellectual Property necessary for
the conduct of its business as currently conducted. No material claim has been
asserted and is pending by any Person challenging or questioning the use of any
such Intellectual Property or the validity or effectiveness of any such
Intellectual Property, nor does the Borrower know of any valid basis for any
such claim. The use of such Intellectual Property by the Borrower and each other
Loan Party does not infringe on the rights of any Person in any material
respect.
4.16 ERISA. Neither a Reportable Event nor an "accumulated funding
deficiency" (within the meaning of Section 4.12 of the Code or Section 302 of
ERISA) has occurred during the, five-year period prior to the date on which this
representation is made or deemed made with respect to any Plan, and each Plan
has complied in all material respects with the applicable provisions of ERISA
and the Code. No termination of a Single Employer Plan has occurred, and no Lien
in favor of the PBGC or a Plan has arisen, during such five-year period. The
present value of all accrued benefits under each Single Employer Plan (based on
those assumptions used to fund such Plans) did not, as of the last annual
valuation date prior to the date on which this representation is made or deemed
made, exceed the value of the assets of such Plan allocable to such accrued
benefits by a material amount. Neither the Borrower nor any Commonly Controlled
Entity has had a complete or partial withdrawal from any Multiemployer Plan that
has resulted or could reasonably be expected to result in a material liability
under ERISA, and neither the Borrower nor any Commonly Controlled Entity would
become subject to any material liability under ERISA if the Borrower or any such
Commonly Controlled Entity were to withdraw completely from all Multiemployer
Plans as of the valuation date most closely preceding the date on which this
representation is made or deemed made. No such Multiemployer Plan is in
Reorganization or Insolvent.
4.17 INVESTMENT COMPANY ACT. No Loan Party is an "investment company,"
or a company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
4.18 SUBSIDIARIES. As of the date hereof, SCHEDULE 4.18 sets forth the
name and jurisdiction of incorporation of each Subsidiary and, as to each such
Subsidiary, the percentage of each class of Capital Stock owned by the Borrower
or any other Subsidiary.
4.19 SECURITY DOCUMENTS. The Guaranty and Security Agreement is
effective to create in favor of the Lender a legal, valid and enforceable
security interest in the Collateral described therein and the proceeds thereof.
In the case of the Pledged Stock described in the Guaranty and Security
Agreement, when stock certificates representing such Pledged Stock and stock
powers in blank are delivered to the Lender, and in the case of the other
Collateral
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described in the Guaranty and Security Agreement, when the Required Actions (as
defined in Section 4(b) of the Guaranty and Security Agreement) have been taken
(including the filing of the financing statements specified on SCHEDULE 4.19 in
appropriate form in the offices specified on SCHEDULE 4.19), the Guaranty and
Security Agreement shall constitute a fully perfected Lien on, and security
interest in, all right, title and interest of the Borrower and each other Loan
Party in such Collateral and the proceeds thereof, to the extent a security
interest can be perfected by the taking of the Required Actions, as security for
the Obligations (as defined in the Guaranty and Security Agreement), in each
case, to such extent, prior and superior in right to any other Person (except,
in the case of Collateral other than Pledged Stock, Permitted Liens).
4.20 YEAR 2000 MATTERS. Borrower and its Domestic Restricted
Subsidiaries are in the process of developing and budgeting for a comprehensive
program that Borrower believes will address adequately the "Year 2000 problem"
(that is, the inability of computers, as well as embedded microchips in
non-computing devices, to perform properly date-sensitive functions with respect
to certain dates prior to and after December 31, 1999). Based upon such program
and the Borrower's review of the Year 2000 problem performed to date, Borrower
believes that (i) Borrower and its Domestic Restricted Subsidiaries will
substantially avoid the Year 2000 problem as to all computers, as well as
embedded microchips in non-computing devices, that are material to Borrower's
and its Domestic Restricted Subsidiaries' business and financial condition taken
as a whole and (ii) the failure of its (or its Domestic Restricted
Subsidiaries') own or a third party's systems or equipment due to the Year 2000
problem, including those of vendors, customers, and suppliers, as well as a
general failure of or interruption in its communications and delivery
infrastructure, will not have a Material Adverse Effect.
4.21 FEDERAL REGULATIONS. Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U issued by the Board of Governors of the Federal
Reserve System), and no proceeds of any Revolving Loan will be used to purchase
or carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock. If requested by Lender, Borrower will
furnish to Lender a statement to the foregoing effect in conformity with the
requirements of Form FR G-3 or Form FR U-1, as applicable, referred to in
Regulation U.
4.22 ENVIRONMENTAL MATTERS. Except as, in the aggregate, could not
reasonably be expected to have a Material Adverse Effect:
(a) the facilities and properties owned, leased or operated by
the Borrower or any of its Restricted Subsidiaries (the "Properties") do not
contain, and have not previously contained, any Materials of Environmental
Concern in amounts or concentrations or under circumstances that constitute or
constituted a violation of, or could give rise to liability under, any
Environmental Law;
(b) neither the Borrower nor any of its Restricted Subsidiaries
has received or is aware of any notice of violation, alleged violation,
non-compliance, liability or potential liability regarding environmental matters
or compliance with Environmental Laws with regard to any of the Properties or
the business operated by the Borrower or any of its Restricted Subsidiaries (the
"Business") nor does the Borrower have knowledge or reason to believe that any
such notice will be received or is being threatened;
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(c) Materials of Environmental Concern have not been transported
or disposed of from the Properties in violation of, or in a manner or to a
location that could give rise to liability under, any Environmental Law, nor
have any Materials of Environmental Concern been generated, treated, stored or
disposed of at, on or under any of the Properties in violation of, or in a
manner that could give rise to liability under, any applicable Environmental
Law;
(d) no judicial proceeding or governmental or administrative
action is pending or, to the knowledge of the Borrower, threatened, under any
Environmental Law to which the Borrower or any Restricted Subsidiary is or will
be named as a party with respect to the Properties or the Business, nor are
there any consent decrees or other decrees, consent orders, administrative
orders or other orders, or other administrative or judicial requirements
outstanding under any Environmental Law with respect to the Properties or the
Business;
(e) there has been no release or threat of release of Materials
of Environmental Concern at or from the Properties, or arising from or related
to the operations of Borrower or any Restricted Subsidiary in connection with
the Properties or otherwise in connection with the Business, in violation of or
in amounts or in a manner that could give rise to liability under Environmental
Laws;
(f) neither the Borrower nor any of its Restricted Subsidiaries
has assumed any liability of any other Person under Environmental Laws.
SECTION 5. AFFIRMATIVE COVENANTS.
On a continuing basis from the date of this Agreement until the
Obligations are paid in full or otherwise satisfied, Borrower has performed all
of its other obligations hereunder, and the Commitments have been terminated,
Borrower covenants and agrees, and will cause each Restricted Subsidiary to
agree, that it will:
5.1 FINANCIAL AND OTHER INFORMATION.
5.1.1 FINANCIAL STATEMENTS. Furnish to Lender:
(a) as soon as available, but in any event within ninety (90)
days after the end of each fiscal year of the Borrower, (i) a copy of the
audited consolidated balance sheet of the Borrower and its Subsidiaries as at
the end of such year and the related audited consolidated statements of income
for such year, setting forth in each case in comparative form the figures for
the previous year, reported on without a "going concern" or like qualification
or exception, or qualification arising out of the scope of the audit, by
PricewaterhouseCoopers LLP or other independent certified public accountants of
nationally recognized standing, and (ii) a compliance certificate containing all
information and calculations necessary for determining compliance with the
financial covenant contained in SECTION 6.12 hereof as of the last day of such
fiscal year;
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal year
of the Borrower, (i) the unaudited consolidated balance sheet of the Borrower
and its Subsidiaries as at the end of such quarter and the related unaudited
consolidated statements of income for such quarter and the portion of the fiscal
year through the end of such quarter, setting forth in each case in comparative
form the
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figures for the previous year, certified by a Responsible Officer as being
fairly stated in all material respects (subject to normal year-end audit
adjustments and the omission of footnotes); provided that, commencing with the
unaudited financial statements for the quarter ending March 31, 2000, such
financial statements shall also include consolidated statements of cash flows
for the applicable periods, and (ii) a compliance certificate containing all
information and calculations necessary for determining compliance with the
financial covenant contained in SECTION 6.12 hereof as of the last day of such
fiscal quarter; and
(c) as soon as available, but in any event not later than
forty-five (45) days after the end of each month occurring during each fiscal
year of the Borrower (other than the third, sixth, ninth and twelfth such
month), the unaudited consolidated balance sheets of the Borrower and its
Subsidiaries as at the end of such month and the related unaudited consolidated
statements of income for such month and the portion of the fiscal year through
the end of such month, setting forth in each case in comparative form the
figures for the previous year, certified by a Responsible Officer as being
fairly stated in all material respects (subject to normal yearend audit
adjustments and the omission of footnotes); provided that, commencing with the
unaudited financial statements for the month ending April 30, 2000, such
financial statements shall also include consolidated statements of cash flows
for the applicable periods.
All such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein).
5.1.2 ADVERSE EVENTS. Promptly inform Lender of the occurrence of
any Default or Event of Default, or of any other occurrence which could
reasonably be expected to have a Material Adverse Effect or any litigation,
investigation or proceeding that may exist at any time between such Person and
any Governmental Authority. Each notice shall set forth details of the event and
what action the Borrower proposes to take with respect thereto.
5.1.3 SHAREHOLDER REPORTS. Promptly furnish to Lender upon
becoming available a copy of all financial statements, reports, notices, proxy
statements and other communications sent generally by such Person to its
respective stockholders, and all regular and periodic reports filed by such
Person with any securities exchange, the Securities and Exchange Commission, or
any governmental authorities succeeding to any or all of the functions of said
agencies and such additional information as the Lender may from time to time
reasonably request.
5.1.4 TAX NOTICES. Promptly furnish to Lender a copy of all
notices from all tax authorities asserting against Borrower or any Restricted
Subsidiary due and unpaid taxes in any material amount.
5.1.5 BOOKS AND RECORDS. Keep proper books and records of account
in which full, true and correct entries in conformity with GAAP and all
Requirements of Law shall be made of all dealings and transactions in relation
to its business and activities and make available the books and records of
Borrower and each Restricted Subsidiary during normal business hours upon
reasonable advance notice at the principal office of Borrower, to Lender and
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its representatives (including its auditors). Borrower and each Restricted
Subsidiary shall also permit Lender (in its capacity as lender) to visit and
inspect any of its properties during normal business hours upon reasonable
advance notice provided that the purpose of the visit is reasonably related to
the credit facilities provided hereunder. Borrower and each Restricted
Subsidiary shall also make available to Lender and its representatives
(including its auditors) any back-up materials generated with respect to any
adjustments made by it to the most recently delivered Financial Statements in
the process of completing its audits and Lender shall be able to discuss the
business and financial condition of the Borrower and its Restricted Subsidiaries
with officers of the Borrower or such Restricted Subsidiaries and its
independent accountants. The books and records and other materials made
available to Lender pursuant to this Section shall be subject to the
confidentiality provisions contained in SECTION 8.15 below.
5.2 INSURANCE. Keep its insurable properties (including, but not limited
to, the Collateral) adequately insured and maintain (a) insurance against fire
and other risks customarily insured against under an "all-risk" policy and such
additional risks customarily insured against by companies engaged in the same or
a similar business to that of Borrower and each Domestic Restricted Subsidiary,
(b) necessary worker's compensation insurance and (c) public liability and
product liability insurance. All such policies shall name Lender as additional
insured and loss payee, as appropriate, and shall specify that the insurer must
give at least thirty (30) days notice to Lender before canceling its policy for
any reason. Borrower will promptly deliver to Lender, at Lender's request,
evidence satisfactory to Lender that such insurance has been so procured,
including the delivery to Lender of a Certificate of Insurance. Borrower hereby
appoints Lender or any employee or agent of Lender as Borrower's
attorney-in-fact, which appointment is coupled with an interest and irrevocable,
and authorizes Lender or any employee or agent of Lender, on behalf of Borrower
and each Domestic Restricted Subsidiary, upon the occurrence and during the
continuance of an Event of Default, to adjust and compromise any loss under said
insurance and to endorse any check or draft payable to Borrower and each
Domestic Restricted Subsidiary in connection with returned or unearned premiums
on said insurance or the proceeds of said insurance, and any amount so collected
may be applied toward satisfaction of the Obligations; provided, however, that
Lender shall not be required hereunder so to act.
5.3 TAXES. Pay promptly and within the time that they can be paid
without late charge, penalty or interest all taxes, assessments and similar
imposts and charges of every kind and nature lawfully levied, assessed or
imposed upon Borrower or any Restricted Subsidiary, and its property, except to
the extent being contested in good faith.
5.4 MAINTAIN CORPORATION AND BUSINESS. Do or cause to be done all things
necessary to preserve, maintain and keep in full force and effect Borrower's or
any Restricted Subsidiary's corporate existence, privileges, rights and
franchises and comply with all applicable laws and Contractual Obligations; at
all times maintain, preserve and protect all franchises and trade names and
preserve all the remainder of its property and keep the same in good repair,
working order and condition, ordinary wear and tear excepted; and from time to
time make, or cause to be made, all needed and customary repairs, renewals,
replacements, betterment's and improvements thereto, ordinary wear and tear
excepted.
5.5 ADDITIONAL WARRANTS. Issue to Lender additional Warrants to purchase
(i) 302,906 shares of Common Stock of Borrower on October 1, 2000, (ii) 305,966
shares of
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Common Stock of Borrower on January 1, 2001, (iii) 309,056 shares of Common
Stock of Borrower on April 1, 2001, and (iv) 312,178 shares of Common Stock of
Borrower on July 1, 2001, if the IPO Closing shall have failed to occur on or
before each such date; provided, that if the Obligations have been paid in full
or otherwise satisfied, Borrower has performed all of its other obligations
hereunder, and the Commitments have been terminated before any such date,
Borrower shall not be obligated to issue any Warrants on any date following such
termination; provided further that, if Board Approval shall not have been
obtained on or before any such date, the additional Warrants shall be issued at
such time as Board Approval shall have been obtained subject to the foregoing
proviso.
5.6 USE OF LOAN PROCEEDS. Use the proceeds of the Revolving Loans
hereunder only for working capital and general corporate purposes and to fund
acquisitions, and for reimbursement to Lender for any payment made under a
Letter of Credit or Lease Guaranty. Extensions of credit under the Guaranty
Commitment shall be used only in respect of the Real Property Leases.
5.7 PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy at or
before maturity or before they become delinquent, as the case may be, all its
material obligations (other than obligations constituting Indebtedness) of
whatever nature, except where the amount or validity thereof is currently being
contested in good faith by appropriate proceedings and reserves in conformity
with GAAP with respect thereto have been provided on the books of the Borrower
or its Restricted Subsidiaries, as the case may be.
5.8 ENVIRONMENTAL LAWS.
(a) Comply in all material respects with, and ensure compliance
in all material respects by all of its tenants and subtenants, if any, with, all
applicable Environmental Laws, and obtain and comply in all material respects
with and maintain, and ensure that all tenants and subtenants obtain and comply
in all material respects with and maintain, any and all licenses, approvals,
notifications, registrations or pen-nits required by applicable Environmental
Laws.
(b) Conduct and complete all investigations, studies, sampling
and testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with all lawful
orders and directives of all Governmental Authorities regarding Environmental
Laws.
5.9 ADDITIONAL COLLATERAL, ETC.
(a) With respect to the shares of stock held by Borrower in the
U.K. Subsidiary, promptly but in no event later than September 13, 1999 execute
and deliver to Lender a Security Document in form and substance satisfactory to
Lender providing for the pledge of all of the issued share capital held by
Borrower in the U.K. Subsidiary (provided that no more than 66% of the total
combined voting power of all classes of stock entitled to vote of the U.K.
Subsidiary shall be required to be pledged) and the certificates evidencing such
shares, together with blank stock transfer forms in respect thereof duly
executed and delivered by a duly authorized officer of the Borrower, and to take
such other actions necessary or advisable to grant to Lender a perfected first
priority fixed charge security interest in such shares.
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(b) With respect to the shares of stock held by Borrower in the
Brazilian Subsidiary, promptly but in no event later than February 27, 2000
execute and deliver to Lender a Security Document in form and substance
satisfactory to Lender providing for the pledge of all of the shares of stock
held by Borrower in the Brazilian Subsidiary (provided that no more than 66% of
the total combined voting power of all classes of stock entitled to vote of the
Brazilian Subsidiary shall be required to be pledged) and the certificates
representing such shares, together with undated stock powers in blank, executed
and delivered by a duly authorized officer of the Borrower, and to take such
other actions necessary or advisable to grant to Lender a perfected first
priority security interest in such shares.
(c) With respect to any property acquired after the Closing Date
by the Borrower or any of its Domestic Restricted Subsidiaries (other than (x)
any property described in paragraphs (d), (e) or (f) below, or (y) any property
subject to a Lien permitted by clause (g) of the definition of Permitted Liens)
as to which Lender does not have a perfected security interest, promptly (i)
execute and deliver to the Lender such amendments to the Guaranty and Security
Agreement or such other documents as the Lender deems necessary or advisable to
grant to the Lender a security interest in such property and (ii) take all
actions necessary or advisable to grant to the Lender a perfected first priority
security interest in such property (except for Permitted Liens), including the
filing of Uniform Commercial Code financing statements in such jurisdictions as
may be required by the Guaranty and Security Agreement or by law or as may be
reasonably requested by the Lender.
(d) With respect to shares of stock held by the Borrower in
HomeGrocer.Com, Inc., a Delaware corporation, Stan Lee Media, Inc., a Delaware
corporation, and Worldly Information Network, Inc., a Delaware corporation,
promptly but in no event later than October 1, 1999 (i) execute and deliver to
Lender such amendments to the Guaranty and Security Agreement as the Lender
deems necessary or advisable to grant to the Lender a perfected first priority
security interest in such shares and (ii) deliver to Lender the certificates
representing such shares, together with undated stock powers, in blank, executed
and delivered by a duly authorized officer of the Borrower and to take such
other actions necessary or advisable to grant to Lender a perfected first
priority security interest in such shares.
(e) With respect to any new Domestic Restricted Subsidiary
created or acquired after the Closing Date, promptly (A) (i) execute and deliver
to the Lender such amendments to the Guaranty and Security Agreement as the
Lender deems necessary or advisable to grant to the Lender a perfected first
priority security interest in the Capital Stock of such new Subsidiary that is
owned by the Borrower or any of its Restricted Subsidiaries and (ii) deliver to
Lender the certificates representing such Capital Stock, together with undated
stock powers, in blank, executed and delivered by a duly authorized officer of
the Borrower or such Restricted Subsidiary, as the case may be, (B) cause such
new Subsidiary (i) to become a party to the Guaranty and Security Agreement and
(ii) to take such actions necessary or advisable to grant to the Lender a
perfected first priority security interest in the Collateral described in the
Guarantee and Collateral Agreement with respect to such new Subsidiary (except
for Permitted Liens), including the filing of Uniform Commercial Code financing
statements in such jurisdictions as may be required by the Guaranty and Security
Agreement or by law or as may be reasonably requested by the Lender, and (C) if
requested by Lender, deliver to the Lender resolutions, incumbency certificates,
and legal opinions relating to the matters described above,
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which opinions shall be in form and substance, and from counsel, reasonably
satisfactory to the Lender.
(f) With respect to any new Foreign Restricted Subsidiary created
or acquired after the Closing Date, promptly (A) (i) execute and deliver to the
Lender a Security Document in form and substance satisfactory to Lender
providing for the pledge of all of the shares of Capital Stock held by Borrower
or any Restricted Subsidiary in such Foreign Restricted Subsidiary (provided
that no more than 66% of the total combined voting power of all classes of stock
entitled to vote of such Foreign Restricted Subsidiary shall be required to be
pledged), (ii) deliver to Lender the certificates evidencing such Capital Stock,
together with undated stock powers, in blank, executed and delivered by a duly
authorized officer of the Borrower or such Restricted Subsidiary, as the case
may be, and (iii) to take such other actions necessary or advisable to grant to
the Lender a perfected first priority security interest in such shares and (B)
subject to SECTION 8.19 below, cause such Foreign Restricted Subsidiary (i) to
execute and deliver a Foreign Restricted Subsidiary Guaranty in form and
substance satisfactory to Lender and its counsel and (ii) if requested by
Lender, to deliver to Lender resolutions and incumbency certificates relating to
the matters described above.
SECTION 6. NEGATIVE COVENANTS.
On a continuing basis from the date of this Agreement until the
Obligations are paid in full or otherwise satisfied, Borrower has performed all
of its other obligations hereunder, and the Commitments have been terminated,
Borrower covenants and agrees, and will cause each Restricted Subsidiary to
agree, that it will not:
6.1 DISTRIBUTIONS. In any fiscal year, declare or pay any dividends on,
or make any other distribution (whether by reduction of capital or otherwise)
with respect to any shares of its Capital Stock other than (i) stock dividends,
(ii) dividends or distributions made by a Restricted Subsidiary to Borrower, and
(iii) repurchases of stock from former employees of Borrower in accordance with
the terms of repurchase or similar agreements between Borrower and such
employees not to exceed $250,000 in the aggregate.
6.2 STOCK ACQUISITION. Purchase, redeem, retire or otherwise acquire for
value any of the shares of its Capital Stock, or make any commitment to do so.
6.3 LIENS AND ENCUMBRANCES. Create, incur, assume or suffer to exist any
Lien upon any of its property or assets, whether now owned or hereafter
acquired, other than Permitted Liens.
6.4 INDEBTEDNESS. Incur, create, assume or permit to exist any
Indebtedness except for (i) the Obligations, (ii) the assumed Indebtedness
described in clause (ii) of the proviso contained in the second sentence of
SECTION 6.7 below and Indebtedness (other than Preferred Stock) maturing after
the Commitment Termination Date and which provides that all interest thereon
will be capitalized as principal or will continue to accrue and not be payable
in cash until after the Commitment Termination Date and which is otherwise
subordinated to the Obligations upon terms and conditions reasonably approved in
writing by Lender, (iii) Preferred Stock which is mandatorily redeemable at the
option of the holder thereof or otherwise after the Commitment
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Termination Date and which provides that all dividends thereon will be payable
in additional Common or Preferred Stock or will continue to accrue and not be
payable in cash until after the Commitment Termination Date, (iv) existing
Indebtedness to the extent set forth on SCHEDULE 4.10 attached hereto, (v)
Capital Leases in existence on the date hereof for tangible property used in
Borrower's business to the extent permitted under this Agreement; (vi) trade
indebtedness incurred and paid in the ordinary course of business, (vii)
Guarantee Obligations to the extent permitted by SECTION 6.6 of this Agreement,
(viii) Indebtedness secured by Permitted Liens under clause (g) of the
definition of Permitted Liens not to exceed $1,250,000 at any time outstanding,
(ix) Indebtedness of Borrower to any Subsidiary and of any Restricted Subsidiary
to Borrower or any other Subsidiary, and (x) extensions, refinancings,
modifications, amendments, and restatements of any of the items described in
clauses (iv) and (v) above, provided that the principal amount thereof is not
increased, the maturity is not shortened, or the terms thereof are not modified
to impose more burdensome terms on the obligor thereunder.
6.5 INVESTMENTS AND EXTENSIONS OF CREDIT. Make any investment in or any
loans, advances or extensions of credit to any Person, except for (a) loans to
officers, directors, employees and shareholders of Borrower which shall be on
arm's-length terms and do not in the aggregate at any time exceed $1,000,000 in
principal amount outstanding, (b) sales on open account and otherwise in the
ordinary course of business, (c) Permitted Investments, (d) subject to the
approval of Borrower's board of directors, venture investments in clients of
Borrower or any Subsidiary whereby, in lieu of payment for goods or services,
Borrower receives an equity position in and/or a debt security issued by the
client ("VENTURE INVESTMENTS") so long as such Venture Investments are pledged
to the Lender under the Guaranty and Security Agreement, (e) investments in and
advances to Borrower or any Subsidiary (including the creation or acquisition of
Subsidiaries after the date hereof); provided that cash investments in and
advances to Unrestricted Subsidiaries shall not exceed $2,000,000 in the
aggregate at any one time outstanding; provided further that, with respect to
any advances to Borrower or any Restricted Subsidiary permitted under this
clause (e), the corresponding Indebtedness shall be permitted by SECTION 6.4
above, (f) investments made in unrelated Persons by Borrower and/or its
Restricted Subsidiaries not constituting the acquisition of all or substantially
all of the Capital Stock or property of such Person through joint ventures,
partnerships, strategic alliances and other similar arrangements or otherwise,
provided that, not more than ten percent (10%) of the assets of such Person are
comprised of marketable securities at the time of the investment, and (g)
investments resulting from Merger and Acquisition Activities, to the extent
permitted under SECTION 6.7 below.
6.6 GUARANTEE OBLIGATIONS. Guarantee or otherwise, directly or
indirectly, in any way be or become responsible for obligations of any other
Person, whether by agreement to purchase the indebtedness of any other Person,
agreement for the furnishing of funds to any other Person through the furnishing
of goods, supplies or services, by way of stock purchase, capital contribution,
advance or loan, in each case for the purpose of paying or discharging (or
causing the payment or discharge of) the indebtedness of any other Person,
except for (i) obligations of a Restricted Subsidiary under the Guaranty and
Security Agreement or any Foreign Restricted Subsidiary Guaranty, as applicable,
and (ii) the endorsement of negotiable instruments by Borrower or any Restricted
Subsidiary in the ordinary course of business for deposit or collection.
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<PAGE> 38
6.7 MERGERS OR ACQUISITIONS. Merge or consolidate with or into any other
business organization, or acquire all or substantially all of the Capital Stock
or property of another Person (individually "MERGER AND ACQUISITION ACTIVITY"
and collectively, "MERGER AND ACQUISITION ACTIVITIES"). Notwithstanding the
foregoing, Borrower or any Restricted Subsidiary may engage in Merger and
Acquisition Activities in which Borrower or any Restricted Subsidiary is the
surviving entity as a result of such transaction; provided, that neither
Borrower nor any Restricted Subsidiary shall engage in any such permitted Merger
and Acquisition Activity unless (i) no Event of Default has occurred and is
continuing at the time of such proposed transaction and no Event of Default
would exist after giving effect to such transaction, (ii) any assumed
Indebtedness of a disappearing or acquired Person is subordinated to the
Obligations on terms reasonably satisfactory to Lender, (iii) any cash
consideration for an acquired Person that is an Unrestricted Subsidiary does not
exceed $2,000,000 in the aggregate, and (iv) not more than ten percent (10%) of
the assets of the disappearing or acquired Person are comprised of marketable
securities at the time of the acquisition.
6.8 TRANSACTIONS WITH AFFILIATES. Enter into or be a party to any
agreement or transaction with any Affiliate of Borrower, except (a) with respect
to the raising of new equity for Borrower, provided that, in the case of new
Preferred Stock of Borrower issued to any Affiliate of Borrower, the terms are
reasonably satisfactory to Lender, (b) with respect to investments in and
advances to Subsidiaries of Borrower, whether now existing or hereafter created,
if otherwise permitted under this Agreement, and (c) in the ordinary course of
and pursuant to the reasonable requirements of Borrower's business and upon fair
and reasonable terms that are approved by Borrower's board of directors, fully
disclosed to Lender and no less favorable to Borrower than would obtain in a
comparable arm's length transaction with a Person not an Affiliate of Borrower.
6.9 DISPOSITION OF PROPERTY. Dispose of any of its property, whether now
owned or hereafter acquired, except:
(a) the disposition of obsolete or worn out property in the
ordinary course of business resulting in net proceeds from the disposition not
to exceed $2,000,000 in the aggregate (provided that, if such property is
replaced by other comparable property within 12 months of such disposition, the
net proceeds from such disposition shall not be counted toward such $2,000,000
limit; provided further that, the cost of such replacement shall be deemed to be
a Capital Expenditure);
(b) the sale or other disposition of inventory and source code in
the ordinary course of business;
(c) property leased or licensed by Borrower or any Restricted
Subsidiary in the ordinary course of business; or
(d) with respect to Venture Investments, to the extent permitted
by the Guaranty and Security Agreement.
6.10 CAPITAL EXPENDITURES. Make or commit to make any Capital
Expenditure, except Capital Expenditures of the Borrower and its Restricted
Subsidiaries in the ordinary
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course of business not exceeding $15,000,000 (calendar year 1999), $20,000,000
(calendar year 2000), $30,000,000 (calendar year 2001), and $40,000,000
(calendar year 2002).
6.11 LINES OF BUSINESS. Discontinue to engage in those businesses in
which the Borrower and its Subsidiaries are engaged on the date of this
Agreement.
6.12 CONSOLIDATED REVENUES. Permit consolidated total revenue of the
Borrower and its Subsidiaries for the twelve-month period ending on any date set
forth below to be less than the amount set forth below opposite each date;
<TABLE>
<CAPTION>
Twelve-Month Period Ending Amount (000)
<S> <C>
9/30/99 $44,300
12/31/99 46,515
3/31/00 48,841
6/30/00 51,283
9/30/00 53,847
12/31/00 56,540
3/31/01 59,367
6/30/01 62,335
9/30/01 65,452
12/31/01 68,724
3/31/02 72,160
6/30/02 75,768
9/30/02 79,557
</TABLE>
6.13 EXECUTIVE COMPENSATION. Increase the aggregate cash compensation
(salary and bonus) paid to any individual Executive Officer (exclusive of
Venture Investments and options or other equity in Borrower) by more than thirty
percent (30%) per year (commencing with the Closing Date).
SECTION 7. EVENTS OF DEFAULT - ENFORCEMENT - APPLICATION OF PROCEEDS.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an Event of Default hereunder:
7.1.1 FAILURE TO PAY MONIES DUE. If any Loan Party shall fail to
pay, when due, (a) any principal of any Loan, or (b) any interest or other
amount payable by any Loan Party to Lender under this Agreement or any other
Loan Document, and, in the case of (b), such failure shall not have been cured
within five (5) days after notice from Lender to such Loan Party of such
Default.
7.1.2 MISREPRESENTATION. If any warranty or representation of
Borrower or any other Loan Party in connection with or contained in this
Agreement or any other Loan Document, or if any financial data or other
information now or hereafter furnished to Lender by or on behalf of Borrower or
any Subsidiary, shall prove to be false or misleading in any material respect
when made or deemed made.
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<PAGE> 40
7.1.3 NONCOMPLIANCE WITH AGREEMENT. If Borrower or any Restricted
Subsidiary shall fail to perform, in the time and manner required, any of its
obligations or covenants under, or shall fail to comply with any of the
provisions of, this Agreement or any other Loan Document, which does not involve
the failure to make a payment when due (be it principal, interest or otherwise)
and which is not cured by Borrower or such Restricted Subsidiary within thirty
(30) days after the earlier of the date of notice to Borrower or such Restricted
Subsidiary by Lender of such Default or the date Lender is notified pursuant to
Borrower's or such Restricted Subsidiary's obligation under SECTION 5.1.3 of
this Agreement, of such Default.
7.1.4 OTHER DEFAULTS. If Borrower or any Restricted Subsidiary
shall default in the payment when due of any of its Indebtedness in an amount in
excess of $50,000 (other than to Lender) or in the observance or performance of
any term, covenant or condition in any agreement or instrument evidencing,
securing or relating to such Indebtedness, and such default shall continue after
the applicable grace period, if any, specified in such agreement or instrument,
if the effect of such default is to accelerate the maturity of such
Indebtedness.
7.1.5 JUDGMENTS. If there shall be rendered against Borrower or
any Restricted Subsidiary one or more judgments or decrees involving an
aggregate liability of $500,000 or more, which has or have become non-appealable
and shall remain undischarged, unsatisfied by insurance and unstayed for more
than forty-five (45) days, whether or not consecutive; or if a writ of
attachment or garnishment against the property of Borrower or any Restricted
Subsidiary shall be issued and levied in an action claiming $500,000 or more and
not released or appealed and bonded in an amount and manner satisfactory to
Lender within forty-five (45) days after such issuance and levy.
7.1.6 BANKRUPTCY, ETC. (i) If the Borrower or any of its
Restricted Subsidiaries shall commence any case, proceeding or other action (A)
under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking
to have an order for relief entered with respect to it, or seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to it or its debts, or (B) seeking appointment of a receiver, trustee,
custodian, conservator or other similar official for it or for all or any
substantial part of its assets, the Borrower or any of its Restricted
Subsidiaries shall make a general assignment for the benefit of its creditors;
or (ii) there shall be commenced against the Borrower or any of its Restricted
Subsidiaries any case, proceeding or other action of a nature referred to in
clause (i) above that (A) results in the entry of an order for relief or any
such adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of forty-five (45) days; or (iii) there shall be commenced
against the Borrower or any of its Restricted Subsidiaries any case, proceeding
or other action seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or any substantial part of its assets
that results in the entry of an order for any such relief that shall not have
been vacated, discharged, or stayed or bonded pending appeal within forty-five
(45) days from the entry thereof, or (iv) the Borrower or any of its Restricted
Subsidiaries shall take any action in furtherance of, or indicating its consent
to, approval of, or acquiescence in, any of the acts set forth in clause (i)
(ii) or (iii) above; or (v) the Borrower or any of its Restricted
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<PAGE> 41
Subsidiaries shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due.
7.1.7 CHANGE OF CONTROL. If a Change of Control shall have
occurred.
7.1.8 SECURITY DOCUMENTS. Any Security Document shall cease, for
any reason, to be in full force and effect, or the Borrower or any other Loan
Party shall so asset, or any Lien created by any Security Document shall cease
to be enforceable and of the same effect and priority purported to be created
thereby (subject to Permitted Liens).
7.1.9 ACCELERATION OF OBLIGATIONS; REMEDIES. Upon the occurrence
and during the continuance of an Event of Default, all Obligations (including
all L/C and Guaranty Obligations, whether or not the beneficiaries thereof shall
have made a claim thereunder) shall be due and payable in full immediately at
the option of Lender without presentation, demand, protest, notice of dishonor
or other notice of any kind, all of which are hereby expressly waived. Unless
all of the Obligations are then immediately fully paid, Lender shall have and
may exercise any one or more of the rights and remedies for which provision is
made for a secured party under the UCC, the Guaranty and Security Agreement, any
other Security Document, or any other document contemplated hereby or for which
provision is made by law or in equity, including, without limitation, the right
to take possession and sell, lease or otherwise dispose of any or all of the
Collateral and to set off against the Obligations any amount owing by Lender to
Borrower and/or any property of Borrower in possession of Lender. Borrower
agrees, upon request of Lender, to assemble the Collateral and make it available
to Lender at any place designated by Lender. With respect to all Lease
Guaranties and Letters of Credit with respect to which presentment for honor
shall not have occurred at the time of an acceleration pursuant to this
paragraph, the Borrower shall at such time deposit in a cash collateral account
opened by the Lender an amount equal to the aggregate then undrawn and unexpired
amount of such Lease Guaranties and Letters of Credit. Amounts held in such cash
collateral account shall be applied by the Lender to the payment of drafts drawn
under such Lease Guaranties and Letters of Credit, and the unused portion
thereof after all such Lease Guaranties and Letters of Credit shall have expired
or been fully drawn upon, if any, shall be applied to repay other Obligations of
the Borrower hereunder and under the other Loan Documents. After all such Lease
Guaranties and Letters of Credit shall have expired or been fully drawn upon,
all L/C and Guaranty Obligations shall have been satisfied, and all other
Obligations of the Borrower hereunder and under the other Loan Documents shall
have been paid in full, the balance, if any, in such cash collateral account
shall be returned to the Borrower (or such other Person as may be lawfully
entitled thereto).
7.1.10 APPLICATION OF PROCEEDS. Upon the occurrence and during
the continuance of an Event of Default that is not cured within the applicable
cure period, if any, provided under SECTION 7.1 of this Agreement, Lender may in
its sole discretion apply the Collateral to any portion of the Obligations. The
proceeds of any sale or other disposition of the Collateral authorized by this
Agreement shall be applied by Lender, first to all expenses authorized by the
UCC or otherwise in connection with the sale and all reasonable attorneys' fees
and legal expenses incurred by Lender in connection therewith; the balance of
the proceeds of such sale or other disposition shall be applied to the payment
of the Obligations, first to interest, then to principal, then to other
Obligations and the surplus, if any, shall be paid over to
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<PAGE> 42
Borrower or to such other Person or Persons as may be entitled thereto under
applicable law, including other creditors and shareholders as their interests
may appear. Borrower shall remain liable for any deficiency, which Borrower
shall pay to Lender immediately upon demand.
7.1.11 CUMULATIVE REMEDIES. The remedies provided for herein are
cumulative to the remedies for collection of the Obligations as provided by law,
in equity or by any mortgage, trust deed, security agreement or other document
contemplated hereby. Nothing herein contained is intended, nor shall it be
construed, to preclude Lender from pursuing any other remedy for the recovery of
any other sum to which Lender may be or become entitled for the breach of this
Agreement by Borrower.
SECTION 8. MISCELLANEOUS.
8.1 INDEPENDENT RIGHTS. No single or partial exercise of any right,
power or privilege hereunder, or under any of the Loan Documents, or any delay
in the exercise thereof, shall preclude other or further exercise of the rights
of the parties to this Agreement or to such other Loan Documents.
8.2 COVENANT INDEPENDENCE. Each covenant in this Agreement shall be
deemed to be independent of any other covenant and an exception or illegality in
one covenant shall not create an exception or illegality in another covenant.
8.3 ENTIRE AGREEMENT; WAIVERS AND AMENDMENTS. This Agreement and the
other Loan Documents constitute the entire agreement between the parties
relating to the subject matter hereof and thereof. Any prior agreements,
promises, negotiations, or representations regarding the subject matter hereof
or thereof not expressly set forth in this Agreement and/or the other Loan
Documents are of no force and effect with respect to the terms hereof, except as
provided herein or therein. No forbearance on the part of Lender in enforcing
any of its rights under this Agreement, nor any renewal, extension or
rearrangement of any payment or covenant to be made or performed by Borrower
hereunder, shall constitute a waiver of any of the terms of this Agreement or of
any such right. No Default or Event of Default shall be waived by Lender except
in a writing signed and delivered by an officer of Lender, and no waiver of any
Default or Event of Default shall operate as a waiver of any other Default or
Event of Default or of the same Default or Event of Default on a future
occasion. No other amendment, modification or waiver of, or consent with respect
to, any provision of this Agreement, the Revolving Note, or any other Loan
Document shall be effective unless the same shall be in writing and signed and
delivered by an officer of Lender.
8.4 GOVERNING LAW. This Agreement, and each and every term and provision
hereof, shall be governed by and construed in accordance with the internal law
of the State of New York. If any provisions of this Agreement shall for any
reason be held invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provision hereof, but this Agreement shall be
construed as if such invalid or unenforceable provisions had never been
contained herein.
8.5 FURTHER ASSURANCES. Immediately following any request by Lender,
Borrower shall provide to Lender such further documents, instruments, opinions
and assurances as may be
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reasonably requested from time to time by Lender in connection with this
Agreement and the other Loan Documents, including (at Lender's expense) opinions
reasonably requested in connection with an assignment of the Loan Documents by
Lender pursuant to SECTION 8.8 below. In addition, upon request of Lender made
from time to time, Borrower will provide updated information to Lender with
respect to its program for addressing the "Year 2000 problem."
8.6 SURVIVAL OF WARRANTIES, ETC. All of Borrower's and other Loan
Parties' covenants, agreements, representations and warranties made in
connection with this Agreement and any other Loan Document shall survive the
borrowing and the delivery of the Revolving Note hereunder and shall be deemed
to have been relied upon by Lender, notwithstanding any investigation heretofore
or hereafter made by Lender. All statements contained in any certificate or
other document delivered to Lender at any time by or on behalf of Borrower
pursuant hereto or in connection with the transactions contemplated hereby shall
constitute representations and warranties by Borrower and the other Loan Parties
in connection with this Agreement and the other Loan Documents.
8.7 COSTS AND EXPENSES. Borrower agrees that it will reimburse Lender,
upon demand, for all reasonable costs and expenses incurred by Lender in
connection with (a) the preparation, negotiation, execution and delivery of this
Agreement and the other Loan Documents, (b) collecting or attempting to collect
the Obligations or any part thereof, (c) maintaining or defending Lender's
security interests or liens (or the priority thereof), (d) the enforcement of
Lender's rights or remedies under this Agreement or the other Loan Documents,
(e) the preparation or making of any amendments, modifications, waivers or
consents with respect to this Agreement or the other Loan Documents, and/or (f)
any other matters or proceedings arising out of or in connection with any
lending arrangement between Lender and Borrower, which costs and expenses
include, without limitation, payments made by Lender for taxes, insurance,
assessments, or other reasonable costs or expenses which Borrower is required to
pay under this Agreement or the other Loan Documents; reasonable expenses
related to the examination or maintenance of the Collateral; court costs and
reasonable attorneys' fees (whether in-house or outside counsel is used, whether
legal assistants are used, and whether such costs are incurred in formal or
informal collection actions, federal Bankruptcy proceedings, probate
proceedings, on appeal or otherwise); and all other reasonable costs and
expenses of Lender incurred in connection with any of the foregoing.
8.8 BINDING EFFECT. This Agreement shall inure to the benefit of and
shall be binding upon the parties hereto and their respective successors and
assigns; provided, however, that Borrower may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of the Lender;
provided, further however, that Lender may not assign or transfer any of its
rights or obligations hereunder or under any other Loan Document without the
prior written consent of Borrower unless (i) Lender gives Borrower at least 15
days prior written notice of the proposed transfer or assignment, (ii) the
proposed assignee or transferee is not a competitor or an affiliate of a
competitor of Borrower or any of its Subsidiaries, (iii) the proposed assignee
or transferee is a financial institution, and (iv) Lender agrees to provide
credit support (which may be in the form of a guaranty) to such proposed
assignee or transferee until the Obligations are paid or otherwise satisfied in
full and the Commitments are terminated. Lender agrees to consider making a
request to the proposed assignee or transferee to lower the fee payable with
respect to the Letter of Credit Obligations upon the effectiveness of such
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<PAGE> 44
assignment or transfer. Notwithstanding the foregoing, Lender may sell
participation interests in all or any part of its interests under this Agreement
and the other Loan Documents; provided that (i) the participant is not a
competitor of Borrower or any of its Subsidiaries, (ii) in the case of any such
participation, the participant shall not have any rights under this Agreement or
any other Loan Document (the participant's rights against Lender in respect of
such participation to be those set forth in the agreement executed by such
Lender in favor of the participant relating thereto) and all amounts payable by
Borrower hereunder shall be determined as if Lender had not sold such
participation, and (iii) Lender shall not transfer or grant any participating
interest under which the participant shall have rights to approve any amendment,
consent or waiver with respect to this Agreement or any other Loan Document.
8.9 MAINTENANCE OF RECORDS. Borrower will keep all of its records
concerning its business operations and accounting at its principal place of
business. Borrower will give Lender prompt written notice of any change in its
principal place of business, or in the location of its records.
8.10 NOTICES. All notices and communications provided for herein or in
any document contemplated hereby or required by law to be given shall be in
writing (unless expressly provided to the contrary) and, if personally
delivered, effective when delivered at the address below or, in the case of
mailing, effective two (2) Business Days after sending by first class mail,
postage prepaid, addressed as follows:
If to Borrower, to:
Organic, Inc.
510 3rd Street, Suite 540
San Francisco, California 94107
Telecopy No.: (415) 284-6891
Attn: Susan Field
With a copy to:
Cooley Godward LLP
One Maritime Plaza, Suite 2000
San Francisco, California 94111
Telecopy No.: (415) 951-3699
Attn: Barry A. Graynor, Esq.
If to Lender, to:
Omnicom Group Inc.
437 Madison Avenue
New York, New York 10022
Telecopy No.: (212) 415-3530
Attn: Randall J. Weisenburger
With a copy to:
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<PAGE> 45
Jones, Day, Reavis & Pogue
599 Lexington Avenue
New York, New York 10022
Telecopy No.: (212) 755-7306
Attn: Robert A. Profusek, Esq.
or to such other address as a party shall have designated to the other in
writing in accordance with this section.
8.11 COUNTERPARTS. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures were upon the same
instrument.
8.12 HEADINGS. Article and section headings in this Agreement are
included for the convenience of reference only and shall not constitute a part
of this Agreement for any purpose.
8.13 RELEASE AND DISCHARGE. Upon full payment of the Obligations and
performance by Borrower of all its other obligations hereunder, the parties
shall thereupon automatically each be fully, finally and forever released and
discharged from any claim, liability or obligation in connection with this
Agreement and the other Loan Documents.
8.14 TIME OF THE ESSENCE. Time is of the essence with respect to this
Agreement and the other Loan Documents.
8.15 CONFIDENTIALITY. Lender agrees that, except with the prior written
consent of Borrower, it shall at all times keep confidential and not divulge,
furnish or make accessible to anyone any confidential information, knowledge or
data concerning or relating to the business or financial affairs of Borrower to
which Lender has been or shall become privy by reason of this Agreement or any
other Loan Document, discussions or negotiations relating to this Agreement and
the other Loan Documents, or the performance of any Loan Party's obligations
hereunder or under any other Loan Document; provided that nothing herein shall
prevent the Lender from disclosing any such information (a) to any assignee or
prospective assignee that agrees to comply with the provisions of this Section,
(b) to its employees, directors, agents, attorneys, accountants and other
professional advisors or those of any of its affiliates (other than affiliates
that are competitors of Borrower or any of its Subsidiaries) (it being
understood that the Persons to whom such disclosure is made will be informed of
the confidential nature of such information and instructed to keep such
information confidential), (c) upon the request or demand of any governmental
authority, (d) in response to any order of any court or other governmental
authority or as may otherwise be required pursuant to any Requirements of Law,
(e) if requested or required to do so in connection with any litigation or
similar proceeding, (f) that has been publicly disclosed other than as a result
of a breach of this Section, or (g) in connection with the exercise of any
remedy hereunder or under any other Loan Document. The provisions of this
SECTION 8.15 shall be in addition to, and not in substitution for, the
provisions of any separate nondisclosure agreement executed by the parties
hereto.
8.16 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY IRREVOCABLY WAIVE
THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY AND ALL ACTIONS OR PROCEEDINGS AT
ANY TIME IN WHICH BORROWER AND
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<PAGE> 46
LENDER ARE PARTIES ARISING OUT OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS.
8.17 INDEMNITY. The Borrower agrees to pay, indemnify, and hold the
Lender and its officers, directors, employees, affiliates, agents and
controlling persons (each, an "indemnitee") harmless from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever with
respect to the execution, delivery, enforcement, performance and administration
of this Agreement, the other Loan Documents and any such other documents,
including any of the foregoing relating to the use of proceeds of the Loans or
the violation of, noncompliance with or liability under, any Environmental Law
applicable to the operations of the Borrower, any of its Subsidiaries or any of
its properties and the reasonable fees and expenses of legal counsel in
connection with claims, actions or proceedings by any Indemnitee against any
Loan Party under any Loan Document (all the foregoing collectively, the
"Indemnified Liabilities"), provided that the Borrower shall have no obligation
hereunder to any Indemnitee with respect to Indemnified Liabilities to the
extent such Indemnified Liabilities are found by a final and nonappealable
decision of a court of competent jurisdiction to have resulted from the gross
negligence or willful misconduct of such Indemnitee. Without limiting the
foregoing, and to the extent permitted by applicable law, the Borrower agrees
not to assert and to cause its Subsidiaries not to assert, and hereby waives and
agrees to cause its Subsidiaries to so waive, all rights for contribution or any
other rights of recovery with respect to all claims, demands, penalties, fines,
liabilities, settlements, damages, costs and expenses of whatever kind or
nature, under or related to Environmental Laws, that any of them might have by
statute or otherwise against any Indemnitee. The agreements in this SECTION 8.17
shall survive repayment of the Loans and all other amounts payable hereunder.
8.18 INTEGRATION. This Agreement and the other Loan Documents represent
the entire agreement of the Borrower, the other Loan Parties, and the Lender
with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Lender relative to the
subject matter hereof not expressly set forth or referred to herein or in the
other Loan Documents.
8.19 FOREIGN RESTRICTED SUBSIDIARY GUARANTIES. Within one month after
the issuance of a Foreign Restricted Subsidiary Guaranty in accordance with the
terms of this Agreement by the U.K. Subsidiary and at or about the time of the
creation or acquisition of any future Foreign Restricted Subsidiary, and within
45 days prior to each fiscal year end of the Borrower (other than December 1999)
thereafter, at the request of the Borrower, Lender agrees to jointly evaluate
with the Borrower the risk of adverse tax consequences, if any, (after taking
into account any foreign tax credits) resulting from the issuance (or
maintenance) of each respective Foreign Restricted Subsidiary Guaranty existing
or to be issued in accordance with the terms hereof, based on the documents and
materials described below, and the extent to which such adverse tax
consequences, if any, to Borrower would outweigh the benefits to Lender of
having such Foreign Restricted Subsidiary Guaranties. If in Lender's reasonable
judgment, such adverse tax consequences, if any, would outweigh such benefits,
in respect of (i) any existing Foreign Restricted Subsidiary Guaranty or (ii)
any Foreign Restricted Subsidiary Guaranty to be issued, Lender will promptly
execute and deliver to Borrower such documents and instruments as are necessary
or desirable (i) to release and terminate such existing Foreign Restricted
Subsidiary Guaranty and (ii) to waive the issuance of such to-be-issued Foreign
Restricted
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Subsidiary Guaranty. In connection with performing such evaluation, Borrower
agrees to provide Lender, upon Lender's request, with supporting documents and
materials (including any analyses and projections prepared by
PricewaterhouseCoopers LLP or other independent certified public accountants of
nationally recognized standing (it being understood that Borrower shall not be
obligated to have such analyses or projection prepared)) demonstrating such
adverse tax consequences.
8.20 SUBMISSION TO JURISDICTION; WAIVERS. The Borrower hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which it
is a party, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the courts of the State of
New York, the courts of the United States for the Southern District of New York,
and appellate courts from any thereof,
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to the
Borrower, at its address set forth in SECTION 8.10 or at such other address of
which the Lender shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any
right it may have to claim or recover in any legal action or proceeding referred
to in this Section any special, exemplary, punitive or consequential damages.
IN WITNESS WHEREOF, Borrower and Lender have caused this Agreement to be
executed by their duly authorized officers as of the day and year first written
above.
BORROWER: ORGANIC, INC.,
a Delaware corporation
By: /s/ SUSAN FIELD
----------------------------------
Printed Name: Susan Field
-----------------------
Title: Executive Vice President and
------------------------------
Chief Financial Officer
------------------------------
LENDER: OMNICOM GROUP INC.,
a New York corporation
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By: /s/ BARRY J. WAGNER
---------------------------------
Printed Name: Barry J. Wagner
-----------------------
Title: Secretary
------------------------------
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EXHIBIT 10.8
GUARANTY AND SECURITY AGREEMENT
THIS GUARANTY AND SECURITY AGREEMENT dated as of August 27, 1999, is
made by each of the signatories hereto (the "GRANTORS"), in favor of OMNICOM
GROUP, INC., a New York corporation ("LENDER").
RECITALS
A. Concurrently herewith, Organic, Inc., a Delaware corporation
("BORROWER") is entering into a Loan Agreement dated of even date herewith (as
the same from time to time hereafter may be amended, modified, supplemented or
restated, the "LOAN AGREEMENT"), by and between Borrower and Lender, pursuant to
which Lender has agreed to lend certain funds (the "LOANS") to Borrower for the
purposes, on the terms and subject to the conditions set forth in the Loan
Agreement.
B. Lender is willing to make and maintain the Loans to Borrower on and
after the date of the Loan Agreement, but only upon the condition, among others,
that Grantors shall have executed and delivered this Guaranty and Security
Agreement to Lender.
AGREEMENT
NOW, THEREFORE, in order to induce Lender to enter into the Loan
Agreement and to make the Loans available thereunder, and for other good and
valuable consideration, and intending to be legally bound, each Grantor hereby
represents, warrants, covenants and agrees as follows:
SECTION 1. DEFINED TERMS.
1.1 DEFINED TERMS. Unless otherwise defined herein, (a) the
capitalized terms defined in the Loan Agreement are used herein as therein
defined and (b) the following capitalized terms shall have the following
meanings (such meanings being equally applicable to both the singular and plural
forms of the terms defined):
"ACCOUNT" means any "account," as such term is defined in Section 9106
of the UCC, now owned or hereafter acquired by any Grantor or in which any
Grantor now holds or hereafter acquires any interest and, in any event, shall
include, without limitation, all accounts receivable, book debts and other forms
of obligations (other than forms of obligations evidenced by Chattel Paper,
Documents or Instruments) now owned or hereafter received or acquired by or
belonging or owing to any Grantor (including, without limitation, under any
trade name, style or division thereof) whether arising out of goods sold or
services rendered by any Grantor or from any other transaction, whether or not
the same involves the sale of goods or services by any Grantor (including,
without limitation, any such obligation which may be characterized as an account
or contract right under the UCC) and all of any Grantor's rights in, to and
under all purchase orders or receipts now owned or hereafter acquired by it for
goods or services, and all of any Grantor's rights to any goods represented by
any of the foregoing (including, without limitation, unpaid seller's rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods), and all monies due or to become due
to any Grantor under all purchase orders and contracts for the sale of goods or
the performance of services or both by any Grantor (whether or not yet earned by
performance on the part of any Grantor or in connection with any other
transaction), now in existence or hereafter occurring, including, without
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limitation, the right to receive the proceeds of said purchase orders and
contracts, and all collateral security and guarantees of any kind given by any
Person with respect to any of the foregoing.
"ACCOUNT DEBTOR" means any "account debtor," as such term is defined in
Section 9105(1)(a) of the UCC.
"BORROWER OBLIGATIONS" means the unpaid principal of and interest on
(including interest accruing after the maturity of the Loans and interest
accruing after the filing of any petition in bankruptcy, or the commencement of
any insolvency, reorganization or like proceeding, relating to the Borrower,
whether or not a claim for post-filing or post-petition interest is allowed in
such proceeding) the Loans and all other obligations and liabilities of the
Borrower to the Lender whether direct or indirect, absolute or contingent, due
or to become due, or now existing or hereafter incurred, which may arise under,
out of, or in connection with, the Loan Agreement, this Guaranty and Security
Agreement, or any other Loan Document, or any other document made, delivered or
given in connection herewith or therewith, whether on account of principal,
interest, reimbursement obligations, fees, indemnities, costs, expenses
(including all fees, charges and disbursements of counsel to the Lender that are
required to be paid by the Borrower pursuant thereto) or otherwise; provided
that, Borrower Obligations shall not include any L/C and Guaranty Obligations so
long as Borrower has performed each of its obligations under the last two
sentences of Section 2.1.3(b) of the Loan Agreement.
"CHATTEL PAPER" means any "chattel paper," as such term is defined in
Section 9105(1)(b) of the UCC, now owned or hereafter acquired by any Grantor or
in which any Grantor now holds or hereafter acquires any interest.
"COLLATERAL" shall have the meaning assigned to such term in Section 2
of this Guaranty and Security Agreement.
"CONTRACTS" means all contracts, undertakings, franchise agreements or
other agreements (other than rights evidenced by Chattel Paper, Documents or
Instruments) in or under which any Grantor may now or hereafter have any right,
title or interest, including, without limitation, with respect to an Account,
any agreement relating to the terms of payment or the terms of performance
thereof.
"COPYRIGHT LICENSES" means any written agreement naming any Grantor as
licensor or licensee, granting any right under any Copyright, including, without
limitation, the grant of rights to manufacture, distribute, exploit and sell
materials derived from any Copyright.
"COPYRIGHTS" means (i) all copyrights arising under the laws of the
United States, any other country or any political subdivision thereof, whether
registered or unregistered and whether published or unpublished (including,,
without limitation, those listed in SCHEDULE 3), all registrations and
recordings thereof, and all applications in connection therewith, including,
without limitation, all registrations, recordings and applications in the United
States Copyright Office, and (ii) the right to obtain all renewals thereof.
"DEPOSIT ACCOUNT" means any "deposit account" as such term is defined in
Section 9105(1)(e) of the UCC, and shall include, without limitation, any
demand, time, savings passbook or like account, now or hereafter maintained by
or for the benefit of any Grantor, or in which any Grantor now holds or
hereafter acquires any interest, with a bank, savings and loan
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association, credit union or like organization (including Lender) and all funds
and amounts therein, whether or not restricted or designated for a particular
purpose; provided, that the definition of "deposit account" shall not include
any account for which such Grantor is acting solely as a trustee or fiduciary on
behalf of a third-party, including without limitation a 401(k) account.
"DOCUMENTS" means any "documents," as such term is defined in Section
9105(1)(f) of the UCC, now owned or hereafter acquired by any Grantor or in
which any Grantor now holds or hereafter acquires any interest.
"DOMESTIC SUBSIDIARY" means a Subsidiary incorporated or organized under
the laws of one of the States or other jurisdictions of the United States.
"EQUIPMENT" means any "equipment," as such term is defined in Section
9109(2) of the UCC, now or hereafter owned or acquired by any Grantor or in
which any Grantor now holds or hereafter acquires any interest and, in any
event, shall include, without limitation, all machinery, equipment, furnishings,
vehicles, trucks, forklifts, tractors and trailers (whether or not
registerable), mainframe, personal and other computers, terminals and printers
and related components and accessories, all copiers, telephonic, video,
electronic data-processing and data storage equipment -and all packaging,
mailing and other office, production or warehouse equipment of any nature
whatsoever, and any and all additions, substitutions and replacements of any of
the foregoing, wherever located, together with all attachments, components,
parts, equipment and accessories installed thereon or affixed thereto.
"FOREIGN SUBSIDIARY" means any Subsidiary that is not a Domestic
Subsidiary.
"FOREIGN SUBSIDIARY CAPITAL STOCK" means the Capital Stock of any
Foreign Subsidiary.
"GENERAL INTANGIBLES" means any "general intangibles," as such term is
defined in Section 9106 of the UCC, now owned or hereafter acquired by any
Grantor or in which any Grantor now holds or hereafter acquires any interest
and, in any event, shall include, without limitation, all right, title and
interest which any Grantor may now or hereafter have in or under any Contract,
all customer lists, Intellectual Property of any kind or nature, all proprietary
or confidential information, inventions `(whether or not patented or
patentable), interests in partnerships, joint ventures and other business
associations, permits, books and records, goodwill (including, without
limitation, the goodwill associated with any trademark, trademark registration
or trademark licensed under any trademark license), claims in or under insurance
policies, including unearned premiums, uncertificated securities, cash and other
forms of money or currency, rights to sue for past, present and future
infringement of copyrights, trademarks and patents, rights to receive tax
refunds and other payments and rights of indemnification.
"GUARANTOR" means the collective reference to each Grantor other than
the Borrower.
"GUARANTOR OBLIGATIONS" means, with respect to any Guarantor, all
obligations and liabilities of such Guarantor which may arise under or in
connection with this Guaranty and Security Agreement (including, without
limitation, Section 10) or any other Loan Document to which such Guarantor is a
party, in each case whether on account of guarantee obligations, reimbursement
obligations, fees, indemnities, costs, expenses or otherwise (including, without
limitation, all reasonable fees and disbursements of counsel to Lender that are
required to be paid
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by such Guarantor pursuant to the terms of this Guaranty and Security Agreement
or any other Loan Document).
"GUARANTY AND SECURITY AGREEMENT" means this Guaranty and Security
Agreement and all Schedules hereto, as the same may from time to time be
amended, modified, supplemented or restated.
"INSTRUMENTS" means any "instrument," as such term is defined in Section
9105(1)(i) of the UCC now owned or hereafter acquired by any Grantor or in which
any Grantor now holds or hereafter acquires any interest, other than instruments
that constitute, or are a part of a group of writings that constitute, Chattel
Paper, and whether or not constituting "instruments" as so defined, all Pledged
Notes, provided that, "instruments" as so defined shall not include any note
issued by an employee of a Grantor to that Grantor in an original principal
amount, at or prior to Closing, of less than $200,000, or after Closing, of less
than $15,000 ("EXCLUDED EMPLOYEE NOTES").
"INTERCOMPANY NOTE" means any promissory note evidencing loans made by
any Grantor to any of its Subsidiaries.
"INVENTORY" means any "inventory," as such term is defined in Section
9109(4) of the UCC, wherever located, now or hereafter owned or acquired by any
Grantor or in which any Grantor now holds or hereafter acquires any interest,
and, in any event, shall include, without limitation, all inventory, goods and
other personal property which are held by or on behalf of any Grantor for sale
or lease or are furnished or are to be furnished under a contract of service or
which constitute raw materials, work in process or materials used or consumed or
to be used or consumed in any Grantor's business, or the processing, packaging,
promotion, delivery or shipping of the same, and all finished goods whether or
not such inventory is listed on any schedules, assignments or reports furnished
to Lender from time to time and whether or not the same is in transit or in the
constructive, actual or exclusive occupancy or possession of any Grantor or is
held by any Grantor or by others for any Grantor's account, including, without
limitation, all goods covered by purchase orders and contracts with suppliers
and all goods billed and held by suppliers and all inventory of any Grantor
which may be located on premises of any Grantor or of any carriers, forwarding
agents, truckers, warehousemen, vendors, selling agents or other persons.
"INVESTMENT PROPERTY" means (i) any "investment property," as such term
is defined in Section 9115(f) of the UCC, now owned or hereafter acquired by any
Grantor or in which any Grantor now holds or hereafter acquires any interest,
and shall include, without limitation, all certificated securities,
uncertificated securities, security entitlements, security accounts, commodity
contracts and commodity. accounts as each such term is defined in the UCC, and
(ii) whether or not constituting "investment property" as so defined, all
Pledged Stock, provided that, "investment property" as so defined shall not
include (a) any Excluded Employee Notes, (b) any Foreign Subsidiary Capital
Stock, or (c) any shares of stock held by the Borrower in HomeGrocer.Com, Inc.,
a Delaware corporation, Stan Lee Media, Inc., a Delaware corporation, or Worldly
Information Network, Inc., a Delaware corporation.
"ISSUERS" means the collective reference to each issuer of any
Investment Property.
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"LICENSE" means any license of rights or interests now held or hereafter
acquired by any Grantor or in which any Grantor now holds or hereafter acquires
any interest and any renewals or extensions thereof
"PATENT LICENSE" means all agreements, whether written or oral,
providing for the grant by or to any Grantor of any right to manufacture, use or
sell any invention covered in whole or in part by a Patent. "
"PATENTS" means (i) all letters patent of the United States, any other
country or any political subdivision thereof, all reissues and extensions
thereof and all goodwill associated therewith, including, without limitation,
any of the foregoing referred to in SCHEDULE 3, (ii) all applications for
letters patent of the United States or any other country and all divisions,
continuations and continuations-in-part thereof, including, without limitation,
any of the foregoing referred to in SCHEDULE 3, and (iii) all rights to obtain
any reissues or extensions of the foregoing.
"PLEDGED NOTES" means all promissory notes listed on SCHEDULE 2, all
Intercompany Notes at any time issued to any Grantor, and all other promissory
notes issued to or held by any Grantor (other than promissory notes issued in
connection with extensions of trade credit by any Grantor in the ordinary course
of business and Excluded Employee Notes).
"PLEDGED STOCK" means the shares of Capital Stock listed on SCHEDULE 2,
together with any other shares, stock certificates, options or rights of any
nature whatsoever in respect of the Capital Stock of any Person that may be
issued or granted to, or held by, any Grantor while this Guaranty and Security
Agreement is in effect other than Foreign Subsidiary Capital Stock.
"PROCEEDS" means "proceeds," as such term is defined in Section 9306(1)
of the UCC and, in any event, shall include, without limitation, (a) any and all
Accounts, Chattel Paper, Instruments, cash or other forms of money or currency
or other proceeds payable to any Grantor from time to time in respect of the
Collateral, (b) any and all proceeds of any insurance, indemnity, warranty or
guaranty payable to any Grantor from time to time with respect to any of the
Collateral, (c) any and all payments (in any form whatsoever) made or due and
payable to any Grantor from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any governmental authority (or any Person acting under color of
governmental authority), (d) any claim of any Grantor against third parties (i)
for past, present or future infringement of any Intellectual Property or (ii)
for past, present or future infringement or dilution of any trademark or
trademark license or for injury to the goodwill associated with any trademark,
trademark registration or trademark licensed under any trademark license, (e)
all certificates, dividends, cash, Instruments and other property received or
distributed in respect of or in exchange for any Investment Property, and (f)
any and all other amounts from time to time paid or payable under or in
connection with any of the Collateral.
"SECURED OBLIGATIONS" means collectively the Borrower Obligations and
the Guarantor Obligations.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"TRADEMARK LICENSE" means any agreement, whether written or oral,
providing for the grant by or to any Grantor of any right to use any Trademark.
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"TRADEMARKS" means (i) all trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles, service
marks, logos and other source or business identifiers, and all goodwill
associated therewith, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and all applications in connection
therewith, whether in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any State thereof or any other
country or any political subdivision thereof, or otherwise, and all common-law
rights related thereto, including, without limitation, any of the foregoing
referred to in SCHEDULE 3, and (ii) the right to obtain all renewals thereof.
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of New York; provided, however, in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of Lender's security interest in any collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such attachment, perfection of priority and for purposes of
definitions related to such provisions.
1.2 Other Definitional Provisions.
(a) The words "hereof," "herein," "hereto," and
"hereunder" and words of similar import when used in this Guaranty and Security
Agreement shall refer to this Guaranty and Security Agreement as a whole and not
to any particular provision of this Guaranty and Security Agreement, and Section
and Schedule references are to this Guaranty and Security Agreement unless
otherwise specified.
(b) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
(c) Where the context requires, terms relating to the
Collateral or any part thereof, when used in relation to a Grantor, shall refer
to such Grantor's Collateral or the relevant part thereof.
SECTION 2. GRANT OF SECURITY INTEREST. As collateral security for the
prompt, full, complete and final payment and performance when due (whether at
stated maturity, by acceleration or otherwise) of all the Secured Obligations,
and in order to induce Lender to enter into the Loan Agreement and to make the
Loans available to and for the benefit of Borrower upon the terms and subject to
the conditions thereof, each Grantor hereby assigns, conveys, mortgages,
pledges, hypothecates and transfers to Lender a security interest in and to all
of such Grantor's right, title and interest in, to and under each of the
following now owned or at any time hereafter acquired by such Grantor or in
which such Grantor now has or at any time in the future may acquire any right,
title or interest (all of which being hereinafter collectively called the
"COLLATERAL"):
(a) All Accounts;
(b) All Chattel Paper;
(c) All Contracts;
(c) All Deposit Accounts;
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(e) All Documents;
(f) All Equipment;
(g) All General Intangibles;
(h) All Instruments;
(i) All Intellectual Property;
(j) All Inventory;
(k) All Investment Property;
(l) All property of any Grantor held by Lender, or any
other party for whom Lender is acting as agent hereunder, including, without
limitation, all property of every description now or hereafter in the possession
or custody of or in transit to Lender or such other party, for any purpose,
including, without limitation, safekeeping, collection or pledge, for the
account of any Grantor, or as to which any Grantor may have any right or power;
(m) All other "goods," as such term is defined in
Section 9109 of the UCC, of any Grantor, whether now or hereafter owned or
existing, leased, consigned by or to, or acquired by, any Grantor and wherever
located, and all books and records of any Grantor, including ledgers, records
concerning any Grantor's assets or liabilities, the Collateral, business
operations or financial condition, and all computer programs, or tape files, and
the equipment containing such information;
(n) To the extent not otherwise included, all Proceeds
of each of the foregoing and all accessions to, substitutions and replacements
for, and rents, profits and products of each of the foregoing.
Notwithstanding the foregoing provisions of this SECTION 2, the grant of
a security interest as provided herein shall not extend to, and the term
"Collateral" shall not include any agreements, instruments, contracts or
licenses of any Grantor if and to the extent such instrument, agreement,
contract or license contains restrictions on assignments and the creation of
Liens, or under which such an assignment or Lien would cause a default to occur
under such agreement, instrument, contract or license (other than to the extent
that any such term would be rendered ineffective pursuant to Section 9-318(4) of
the Uniform Commercial Code of any relevant jurisdiction or any other applicable
law (including the Bankruptcy Code) or principles of equity), provided, that
immediately upon the ineffectiveness, lapse or termination of any such
provision, the Collateral shall include, and such Grantor shall be deemed to
have granted a security interest in, all such rights and interests as if such
provision had never been in effect.
SECTION 3. RIGHTS OF LENDER; COLLECTION OF ACCOUNTS.
(a) (a) Anything herein to the contrary notwithstanding,
each Grantor shall remain liable under each of the Accounts, Contracts and
Licenses to observe and perform all the conditions and obligations to be
observed and performed by it thereunder, all in accordance with the terms of any
agreement giving rise thereto. Lender shall not have any obligation or liability
under any Account (or any agreement giving rise thereto), Contract, or
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License by reason of or arising out of this Guaranty and Security Agreement or
the granting to Lender of a security interest therein or the receipt by Lender
of any payment relating to any Account (or any agreement giving rise thereto),
Contract, or License pursuant hereto, nor shall Lender be required or obligated
in any manner to perform or fulfill any of the obligations of any Grantor under
or pursuant to any Account (or any agreement giving rise thereto), Contract, or
License, or to make any payment, or to make any inquiry as to the nature or the
sufficiency of any payment received by it or the sufficiency of any performance
by any party thereunder, or to present or file any claim, or to take any action
to collect or enforce any performance or the payment of any amounts which may
have been assigned to it or to which it may be entitled at any time or times.
(b) (b) Lender authorizes each Grantor to collect its
Accounts, provided that Lender may, upon the occurrence and during the
continuation of any Event of Default and without notice, limit or terminate said
authority at any time. If required by Lender at any time upon the occurrence and
during the continuation of any Event of Default, any Proceeds, when first
collected by any Grantor, received in payment of such Account or in payment for
any of its Inventory or on account of any of its Contracts or Licenses shall be
promptly (and, in any event, within two Business Days) deposited by such Grantor
in the exact form received (with all necessary endorsements) in a special bank
account maintained under the sole dominion and control of Lender, subject to
withdrawal by Lender only, as hereinafter provided, and until so turned over
shall be deemed to be held in trust by such Grantor for and as Lender's
property, and shall not be commingled with such Grantor's other funds or
properties. Each such deposit of Proceeds shall be accompanied by a report
identifying in reasonable detail the nature and source of the payments in the
deposit. Such Proceeds, when deposited, shall continue to be collateral security
for all of the Secured Obligations and shall not constitute payment thereof
until applied as hereinafter provided. Upon the occurrence and during the
continuation of any Event of Default, Lender may, in its sole discretion, apply
all or a part of the funds on deposit in said special account to the principal
of or interest on or both in respect of any of the Secured Obligations in
accordance with the Loan Agreement, and any part of such funds which Lender
elects not to so apply and deems not required as collateral security for the
Secured Obligations shall be paid over from time to time by Lender to such
Grantor. If an Event of Default has occurred and is continuing, at the request
of Lender, each Grantor shall deliver to Lender all original and other documents
evidencing, and relating to, the sale and delivery of such Inventory and each
Grantor shall deliver all original and other documents evidencing and relating
to, the performance of labor or service which created such Accounts, including,
without limitation, all original orders, invoices and shipping receipts.
(c) Lender may at any time, upon the occurrence and
during the continuation of any Event of Default, after first notifying each
Grantor of its intention to do so, notify Account Debtors of each Grantor,
parties to the Contracts of each Grantor, obligors in respect of Instruments of
each Grantor and obligors in respect of Chattel Paper of each Grantor that the
Accounts and the right, title and interest of Grantors in and under such
Contracts, Instruments, and `Chattel Paper have been assigned to Lender, and
that payments shall be made directly to Lender. Upon the request of Lender, each
Grantor shall so notify such Account Debtors, parties to such Contracts,
obligors in respect of such Instruments and obligors in respect of such Chattel
Paper. Upon the occurrence and during the continuation of an Event of Default,
Lender may, in its name, or in the name of others communicate with such Account
Debtors, parties to such Contracts, obligors in respect of such Instruments and
obligors in respect of such Chattel Paper to verify with such parties, to
Lender's satisfaction, the existence, amount and terms of any such Accounts,
Contracts, Instruments or Chattel Paper, and each Grantor shall
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furnish all such assistance and information as Lender may reasonably require in
connection with such verification.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Each Grantor hereby represent
and warrant to Lender that:
(a) TITLE; NO OTHER LIENS. Except for the security
interest granted to Lender pursuant to this Guaranty and Security Agreement and
other Permitted Liens, Grantor owns each item of the Collateral free and clear
of any and all Liens or claims of others. No effective security agreement,
financing statement, equivalent security or lien instrument or continuation
statement covering all or any part of the Collateral exists, except such as may
have been filed by any Grantor in favor of Lender pursuant to this Guaranty and
Security Agreement or such as relate to other Permitted Liens.
(b) PERFECTED FIRST PRIORITY LIENS. This Guaranty and
Security Agreement creates a legal and valid security interest on and in all of
the Collateral in which any Grantor now have rights, and upon the taking of the
Required Actions described below, Lender shall have a fully perfected security
interest in all of the Collateral in which any Grantor now have rights, subject
only to the Permitted Liens, to the extent a security interest can be perfected
by the taking of the Required Actions. This Guaranty and Security Agreement will
create a legal and valid and fully perfected security interest in the Collateral
in which any Grantor later acquires rights, when such Grantor acquires those
rights, subject only to the Permitted Liens, to the extent a security interest
can be perfected by the taking of the Required Actions, The security interests
granted pursuant to this Guaranty and Security Agreement are prior to all other
Liens on the Collateral in existence on the date hereof except for Permitted
Liens, to the extent a perfected first priority security interest in the
Collateral can be created by the taking of the Required Actions. For purposes
hereof, "REQUIRED ACTIONS" means (i) the filing of Uniform Commercial Code
financing statements in all jurisdictions in the United States where such
filings are necessary or desirable to perfect and protect the Lender's security
interest in the Collateral, (ii) delivery of notices to each bank, savings and
loan association, credit union or like organization located in California where
a Grantor maintains a Deposit Account, (iii) delivery of certificates (and where
necessary or desirable, stock powers in blank) representing the Pledged Stock to
Lender, (iv) delivery of each Instrument to Lender, (v) execution and delivery
of a control agreement with each securities intermediary where a Grantor
maintains a securities account (as such terms are defined in the UCC), and (vi)
filing of Assignments for Security (Trademarks) with the United States Patent
and Trademark Office. Upon Lender's reasonable request, Grantors will take such
other actions necessary or desirable to perfect and protect such security
interest.
(c) CHIEF EXECUTIVE OFFICE; LOCATION OF COLLATERAL. Each
Grantor's chief executive office , principal place of business, and the place
where each Grantor maintains its records concerning the Collateral are presently
located at the address(es) set forth on SCHEDULE 1. The Collateral, other than
deposit accounts, is presently located at the address(es) set forth on SCHEDULE
1. Grantors shall not change such chief executive office or principal place of
business or remove or cause to be removed, except in the ordinary course of
Grantors' business, the Collateral or the records concerning the Collateral from
those premises without prior written notice to Lender.
(d) LIST OF CERTAIN COLLATERAL. All Collateral existing
on the Closing Date with respect to which a security interest may be perfected
by the secured party's taking
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possession thereof, including, without limitation, all Instruments and
certificated securities, are set forth on SCHEDULE 2. All action necessary to
protect and perfect such security interest in each item set forth on SCHEDULE 2
including, without limitation, the delivery of all originals thereof to Lender
has been duly taken, or shall have been taken as of the Closing Date.
(e) INTELLECTUAL PROPERTY. SCHEDULE 3 lists all
Copyrights, Patents, and Trademarks owned by each Grantor in its own name on the
date hereof. On the date hereof, all material Intellectual Property is valid,
subsisting, unexpired and enforceable, has not been abandoned and, to the best
of such Grantor's knowledge, does not infringe the intellectual property rights
of any other Person. Except as set forth in SCHEDULE 3, on the date hereof, none
of the Intellectual Property is the subject of any licensing or franchise
agreement pursuant to which such Grantor is the licensor or franchisor except
for licenses entered into in the ordinary course of business. No holding,
decision or judgment has been rendered by any Governmental Authority which would
limit, cancel or question the validity of, or such Grantor's rights in, any
Intellectual Property in any respect that could reasonably be expected to have a
Material Adverse Effect. No action or proceeding is pending, or, to the
knowledge of such Grantor, threatened, on the date hereof (i) seeking to limit,
cancel or question the validity of any Intellectual Property or such Grantor's
ownership interest therein, or (ii) which, if adversely determined, would have a
material adverse effect on the value of any Intellectual Property.
(f) CONTRACTS.
(i) Each Contract is in full force and effect
and constitutes a valid and legally enforceable obligation of the parties
thereto, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of good
faith and fair dealing.
(ii) No consent or authorization of, filing with
or other act by or in respect of any Governmental Authority is required in
connection with the execution, delivery, performance, validity, or
enforceability of any of the Contracts by any party thereto other than those
which have been duly obtained, made or performed, are in full force and effect
and do not subject the scope of any such Contract to any material adverse
limitation, either specific or general in nature.
(iii) Neither such Grantor nor (to the best of
such Grantor's knowledge) any *of the other parties to the Contracts is in
default in the performance or observance of any of the terms thereof in any
manner that, in the aggregate, could reasonably be expected to have a Material
Adverse Effect.
(iv) The right, title and interest of such
Grantor in, to and under the Contracts are not subject to any defenses, offsets,
counterclaims or claims that, in the aggregate, could reasonably be expected to
have a Material Adverse Effect.
(v) No amount payable to such Grantor under or
in connection with any Contract is evidenced by any Instrument which has not
been delivered to Lender.
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(g) INVESTMENT PROPERTY.
(i) The shares of Pledged Stock pledged by such
Grantor hereunder constitute all the issued and outstanding shares of all
classes of the capital stock of each Issuer owned by such Grantor.
(ii) All the shares of the Pledged Stock have
been duly and validly issued and are fully paid and nonassessable.
(iii) Each of the Pledged Notes constitutes the
legal, valid and binding obligation of the obligor with respect thereto,
enforceable in accordance with its terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.
(iv) Such Grantor is the record and beneficial
owner of, and has good and marketable title to, the Investment Property pledged
by it hereunder, free of any and all Liens or options in favor of, or claims of,
any other Person, except the security interest created by this Guaranty and
Security Agreement and the Liens described in clause (h) of the definition of
"Permitted Liens."
(h) ACCOUNTS. No amount payable to such Grantor under or
in connection with any Account is evidenced by any Instrument which has not been
delivered to Lender. The amounts represented by such Grantor to Lender from time
to time as owing to such Grantor in respect of the Accounts will at such times
be accurate.
SECTION 5. COVENANTS. Each Grantor covenants and agrees with Lender that
from and after the date of this Guaranty and Security Agreement and until the
Secured Obligations have been completely and finally paid in full:
5.1 FURTHER ASSURANCES; PLEDGE OF INSTRUMENTS. At any time and
from time to time, upon the written request of Lender, and at the sole expense
of Grantors, Grantors shall promptly and duly execute and deliver, and have
recorded, any and all such further instruments and documents and take such
further action as Lender may reasonably deem necessary to preserve and protect
its lien in the Collateral, including, without limitation, (a) filing any
financing or continuation statements under the UCC with respect to the security
interests granted hereby, and (b) transferring Collateral to Lender's possession
(if a security interest in such Collateral can be perfected and free from an
adverse claim only by possession). Grantors also hereby authorize Lender, to the
extent permitted by applicable law, to file any such financing or continuation
statement (including consignment filings) without the signature of Grantors. If
any amount payable under or in connection with any of the Collateral is or shall
become evidenced by any Instrument or certificated security, such Instrument or
certificated security, other than checks and notes received in the ordinary
course of Grantors' business, shall be duly endorsed in a manner satisfactory to
Lender and delivered to Lender promptly upon such Grantor's receipt thereof, to
be held as Collateral pursuant to this Guaranty and Security Agreement. Such
Grantor shall maintain the security interest created by this Guaranty and
Security Agreement as a perfected security interest prior to all other Liens on
the Collateral except for Permitted Liens and shall defend such security
interest against claims and demands of all Persons whomsoever.
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5.2 MAINTENANCE OF RECORDS. Grantors shall keep and maintain at
their own cost and expense satisfactory and complete records of the Collateral.
5.3 ACCOUNTS, CONTRACTS, ETC.
(a) In all material respects, each Grantor shall perform
and comply with all obligations in respect of Accounts, Chattel Paper,
Contracts, Documents, Instruments and Licenses and all other agreements to which
it is a party or by which it is bound; provided, however, that a Grantor may
suspend its performance thereunder in the event of a material breach of any such
obligations by third parties.
(b) Other than in the ordinary course of business
consistent with its past practice, such Grantor shall not (i) grant any
extension of the time of payment of any Account, (ii) compromise or settle any
Account for less than the full amount thereof, (iii) release, wholly or
partially, any party liable for the payment of any Account (iv) allow any credit
or discount whatsoever on any Account or (v) amend, supplement or modify any
Account in any manner that could adversely affect the value thereof.
(c) Such Grantor shall deliver to Lender a copy of each
material demand, notice or document received by it that questions or calls into
doubt the validity or enforceability of more than 10% of the aggregate amount of
the then outstanding Accounts.
(d) Such Grantor shall not amend, modify, terminate or
waive any provision of any Contract in any manner which could reasonably be
expected to materially adversely affect the value of such Contract as
Collateral.
(e) Such Grantor will exercise promptly and diligently
each and every material right which it may have under each Contract (other than
any right of termination).
(f) Such Grantor will deliver to the Lender a copy of
each material demand, notice or document received by it relating in any way to
any Contract that questions the validity or enforceability of such Contract.
5.4 LIMITATION ON LIENS ON COLLATERAL. Grantors shall not
create, permit or suffer to exist, and shall defend the Collateral against and
take such other action as is necessary to remove, any lien on the Collateral,
except the Permitted Liens. Grantors shall further defend the right, title and
interest of Lender in and to any of Grantors' rights under the Chattel Paper,
Contracts, Documents, General Intangibles, Instruments and Investment Property
and to the Equipment and Inventory and in and to the Proceeds thereof against
the claims and demands of all Persons whomsoever.
5.5 FURTHER IDENTIFICATION OF COLLATERAL. Grantors shall, if so
requested by Lender, furnish to Lender, as often as Lender shall reasonably
request, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as Lender
may reasonably request, all in reasonable detail.
5.6 NOTICES. Grantors shall advise Lender promptly, in
reasonable detail, of (a) any lien, other than Permitted Liens, attaching to or
asserted against any of the Collateral which would adversely affect the ability
of Lender to exercise its remedies hereunder, and (b) the
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occurrence of any other event which might have or result in a Material Adverse
Effect with respect to the Collateral or on the security interest created
hereunder.
5.7 CONTINUOUS PERFECTION. Grantors shall not (a) change their
names, identities or corporate structures in any manner which might make any
financing or continuation statement filed in connection herewith seriously
misleading within the meaning of Section 9402(7) of the UCC (or any other then
applicable provision of the UCC) or (b) permit any of the tangible Collateral to
be kept at a location other than those listed on SCHEDULE 1, other than
Collateral delivered to Lender or sold or disposed of to the extent permitted
under the Loan Agreement or this Guaranty and Security Agreement, unless
Grantors shall have given Lender at least twenty (20) days' prior written notice
thereof and shall have taken all action (or made arrangements to take such
action substantially simultaneously with such change if it is impossible to take
such action in advance) necessary or reasonably requested by Lender including,
without limitation, delivery of all additional executed financing statements or
continuation statements to maintain the validity, perfection and priority of the
security interest provided herein and, if applicable, a written supplement to
Schedule I showing any additional location at which the Collateral shall be
located so that it is not seriously misleading.
5.8 INTELLECTUAL PROPERTY.
(a) Such Grantor (either itself or through licensees)
will (i) continue to use each material Trademark on each and every trademark
class of goods applicable to its current line as reflected in its current
catalogs, brochures and price lists (if any) in order to maintain such Trademark
in full force free from any claim of abandonment for non-use, (ii) maintain as
in the past the quality of products and services offered under such Trademark,
(iii) use such Trademark with the appropriate notice of registration and all
other notices and legends required by applicable Requirements of Law, (iv) not
adopt or use any mark which is confusingly similar or a colorable imitation of
such Trademark unless Lender shall obtain a perfected security interest in such
mark pursuant to this Guaranty and Security Agreement, and (v) not (and not
permit any licensee or sublicensee thereof to) do any act or knowingly omit to
do any act whereby such Trademark may become invalidated or impaired in any way.
(b) Such Grantor (either itself or through licensees)
will not do any act or omit to do any act, whereby any material Patent may
become forfeited, abandoned or dedicated to the public.
(c) Such Grantor (either itself or through licensees)
(i) will employ each material Copyright and (ii) will not (and will not permit
any licensee or sublicensee thereof to) do any act or knowingly omit to do any
act whereby any material portion of the Copyrights may become invalidated or
otherwise impaired. Such Grantor will not (either itself or through licensees)
do any act whereby any material portion of the Copyrights may fall into the
public domain.
(d) Such Grantor (either itself or through licensees)
will not do any act that knowingly uses any material Intellectual Property to
infringe the intellectual property rights of any other Person.
(e) Such Grantor shall notify Lender immediately if it
knows, or has reason to know, that any application or registration relating to
any material Intellectual Property may become forfeited, abandoned or dedicated
to the public, or of any adverse determination or
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development (including, without limitation, the institution of, or any such
determination or development in, any proceeding in the United States Patent and
Trademark Office, the United States Copyright Office or any court or tribunal in
any country) regarding such Grantor's ownership of, or the validity of, any
material Intellectual Property or such Grantor's right to register the same or
to own and maintain the same.
(f) Whenever such Grantor, either by itself or through
any agent, employee, licensee or designee, shall file an application for the
registration of any Intellectual Property with the United States Patent and
Trademark Office, the United States Copyright Office or any similar office or
agency in any other country or any political subdivision thereof such Grantor
shall report such filing to Lender within five Business Days after the last day
of the fiscal quarter in which such filing occurs. Upon request of Lender, such
Grantor shall execute and deliver, and have recorded, any and all agreements,
instruments, documents, and papers as the Lender may reasonably request to
evidence Lender's security interest in any Copyright, Patent or Trademark under
the laws of the United States and the goodwill and general intangibles of such
Grantor relating thereto or represented thereby.
(g) Such Grantor shall take all reasonable and necessary
steps, including, without limitation, in any proceeding before the United States
Patent and Trademark Office, the United States Copyright Office or any similar
office or agency in any other country or any political subdivision thereof, to
maintain and pursue each application (and to obtain the relevant registration)
and to maintain each registration of the material Intellectual Property,
including, without limitation, filing of applications for renewal, affidavits of
use and affidavits of incontestability.
(h) In the event that any material Intellectual Property
is infringed, misappropriated or diluted by a third party, such Grantor shall
(i) take such actions as such Grantor shall reasonably deem appropriate under
the circumstances to protect such Intellectual Property and (ii) if such
Intellectual Property is of material economic value, promptly notify Lender
after it learns thereof and sue for infringement, misappropriation or dilution,
to seek injunctive relief where appropriate and to recover any and all damages
for such infringement, misappropriation or dilution.
5.9 INVESTMENT PROPERTY.
(a) (a) If such Grantor shall become entitled to receive
or shall receive any stock certificate (including, without limitation, any
certificate representing a stock dividend or a distribution in connection with
any reclassification, increase or reduction of capital or any certificate issued
in connection with any reorganization), option or rights in respect of the
capital stock of any Issuer, whether in addition to, in substitution of, as a
conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise
in respect thereof, such Grantor shall accept the same as the agent of Lender,
hold the same in trust for Lender and deliver the same forthwith to Lender in
the exact form received, duly indorsed by such Grantor to Lender, if required,
together with an undated stock power covering such certificate duly executed in
blank by such Grantor and with, if Lender so requests, signature guaranteed, to
be held by Lender, subject to the terms hereof, as additional collateral
security for the Secured Obligations. Except as provided in Section 5.9(d)
below, any sums paid upon or in respect of the Investment Property upon the
liquidation or dissolution of any Issuer, unless otherwise subject to a
perfected security interest in favor of Lender, shall be paid over to Lender to
be held by it hereunder as additional collateral security for the Secured
Obligations, and in case any distribution of capital shall be
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made on or in respect of the Investment Property or any property shall be
distributed upon or with respect to the Investment Property, in each case,
pursuant to the recapitalization or reclassification of the capital of any
Issuer or pursuant to the reorganization thereof, the property so distributed
shall, unless otherwise subject to a perfected security interest in favor of
Lender, be delivered to Lender to be held by it hereunder as additional
collateral security for the Secured Obligations. If any sums of money or
property so paid or distributed in respect of the Investment Property that are
required to be paid over or delivered to Lender pursuant to the foregoing
sentence shall be received by such Grantor, such Grantor shall, until such money
or property is paid or delivered Lender, hold such money or property in trust
for Lender, segregated from other funds of such Grantor, as additional
collateral security for the Secured Obligations.
(b) Without the prior written consent of Lender, such
Grantor will not (i) sell, assign, transfer, exchange, or otherwise dispose of,
or grant any option with respect to, the Investment Property or Proceeds thereof
(except pursuant to a transaction expressly permitted by the Loan Agreement and
except as provided in Section 5.9(d) below), (ii) create, incur or permit to
exist any Lien or option in favor of, or any claim of any Person with respect
to, any of the Investment Property or Proceeds thereof, or any interest therein,
except for the security interests created by this Guarantee and Security
Agreement and as provided in Section 5.9(d) below and except for Liens described
in clause (h) of the definition of "Permitted Liens," or (iii) enter into any
agreement or undertaking restricting the fight or ability of such Grantor or
Lender to sell, assign or transfer any of the Investment Property or Proceeds
thereof except such restrictions as are required by the federal and state
securities laws to obtain an exemption from registration or otherwise and except
such restrictions as are contained in the Loan Agreement, this Guaranty and
Security Agreement, and any other Loan Document.
(c) In the case of each Grantor which is an Issuer, such
Issuer agrees that (i) it will be bound by the terms of this Guaranty and
Security Agreement relating to the Investment Property issued by it and will
comply with such terms insofar as such terms are applicable to it, (ii) it will
notify Lender promptly in writing of the occurrence of any of the events
described in Section 5.9(a) with respect to the Investment Property issued by it
and (iii) the terms of Sections 10(c), (d) and (e) shall apply to it, mutatis
mutandis, with respect to all actions that may be required of it pursuant to
Section 10(c), (d) or (e) with respect to the Investment Property issued by it.
(d) With respect to Venture Investments, Borrower:
(i) may contribute the shares evidencing such
investments, whether or not certificated, into an employee incentive fund;
provided that, notwithstanding such contribution, such shares shall continue to
be subject to the security interests created hereby until such shares are sold
or otherwise disposed of;
(ii) may sell or otherwise dispose of such
shares without notice to or consent of Lender, so long as upon such sale or
disposition, subject to clause (iii) below, Borrower shall either (x)
immediately deposit the proceeds therefrom into a deposit account or a
securities account (and Borrower shall, at Lender's request, take all such
actions necessary or desirable to perfect and protect Lender's lien in such
account and such proceeds) or (y) within twelve months of such sale or
disposition, reinvest such proceeds in Borrower's business (including without
limitation making investments and acquisitions to the extent permitted by the
Loan Agreement), provided that, Borrower may not distribute any portion of such
proceeds to employees until payment and performance in full of all of the
Secured Obligations and
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termination of the Commitments; provided further that, Borrower may not sell or
otherwise dispose of any such shares to Affiliates of Borrower; and
(iii) to the extent the proceeds described in
clause (ii) above (and proceeds from any prior sales or dispositions of such
shares) exceed $5,000,000 in the aggregate, shall immediately repay the
Revolving Loans in an amount equal to such excess amount, without penalty or
premium, together with all unpaid interest accrued thereon to the date of
repayment (and the Revolving Commitment shall be deemed permanently reduced by
the amount of such prepayment).
5.10 PAYMENT OF SECURED OBLIGATIONS. Such Grantor shall pay and
discharge or otherwise satisfy at or before maturity or before they become
delinquent, as the case may be, all taxes, assessments and governmental charges
or levies imposed upon the Collateral or in respect of income or profits
therefrom, as well as all claims of any kind (including, without limitation,
claims for labor, materials and supplies) against or with respect to the
Collateral, except that no such charge need be paid if the amount or validity
thereof is currently being contested in good faith by appropriate proceedings,
reserves in conformity with GAAP with respect thereto have been provided on the
books of such Grantor and such proceedings could not reasonably be expected to
result in the sale, forfeiture or loss of any material portion of the Collateral
or any interest therein.
SECTION 6. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT.
(a) Subject to SECTION 6(b) below, each Grantor hereby
irrevocably constitutes and appoints Lender, and any officer or agent thereof,
with full power of substitution, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead of such Grantor and
in the names of such Grantor or in its own name, from time to time at Lender's
discretion, for the purpose of carrying out the terms of this Guaranty and
Security Agreement, to take any and all appropriate action and to execute and
deliver any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Guaranty and Security Agreement
and, without limiting the generality of the foregoing, hereby gives Lender the
power and right, on behalf of such Grantor, without notice to or assent by
Grantors, to do the following:
(i) to ask, demand, collect, receive and give
acquittances and receipts for any and all monies due or to become due under any
Collateral and, in the name of such Grantor, in its own name or otherwise to
take possession of, endorse and collect any checks, drafts, note, acceptances or
other Instruments for the payment of monies due under any Collateral and to file
any claim or to take or commence any other action or proceeding in any court of
law or equity or otherwise deemed appropriate by Lender for the purpose of
collecting any and all such monies due under any Collateral whenever payable;
(ii) to pay or discharge any liens, including,
without limitation, any tax lien, levied or placed on or threatened against the
Collateral, to effect any repairs or any insurance called for by the terms of
this Guaranty and Security Agreement and to pay all or any part of the premiums
therefor and the costs thereof, which actions shall be for the benefit of Lender
and not Grantors; and
(iii) to (1) direct any person liable for any
payment under or in respect of any of the Collateral to make payment of any and
all monies due or to become due
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thereunder directly to Lender or as Lender shall direct, (2) receive payment of
any and all monies, claims and other amounts due or to become due at any time
arising out of or in respect of any Collateral, (3) sign and endorse any
invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against debtors, assignments, verifications and notices in
connection with Accounts and other Instruments and Documents constituting or
relating to the Collateral, (4) commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Collateral or any part thereof and to enforce any other right in
respect of any Collateral, (5) defend any suit, action or proceeding brought
against Grantors with respect to any Collateral, (6) settle, compromise or
adjust any suit, action or proceeding described above and, in connection
therewith, give such discharges or releases as Lender may deem appropriate, and
(7) sell, transfer, pledge, make any agreement with respect to or otherwise deal
with any of the Collateral as fully and completely as though Lender were the
absolute owner thereof for all purposes, and to do, at Lender's option and
Grantors' expense, at any time, or from time to time, all acts and things which
Lender may reasonably deem necessary to protect, preserve or realize upon the
Collateral and Lender's security interest therein in order to effect the intent
of this Guaranty and Security Agreement, all as fully and effectively as
Grantors might do.
(b) Lender agrees that, except upon the occurrence and
during the continuation of an Event of Default, it shall not exercise the power
of attorney or any rights granted to Lender pursuant to this SECTION 6. Each
Grantor hereby ratifies, to the extent permitted by law, all that said attorney
shall lawfully do or cause to be done by virtue hereof. The power of attorney
granted pursuant to this SECTION 6 is a power coupled with an interest and shall
be irrevocable until the Secured Obligations are completely and indefeasibly
paid and performed in full.
(c) The powers conferred on Lender hereunder are solely
to protect Lender's interests in the Collateral and shall not impose any duty
upon Lender to exercise any such powers. Lender shall have no duty as to any
Collateral, including any responsibility for (a) taking any necessary steps to
preserve rights against prior parties or any other rights pertaining to any
Collateral or (b) ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to any
Investment Property, whether or not Lender has or is deemed to have knowledge of
such matters. Without limiting the generality of the preceding sentence, Lender
shall be deemed to have exercised reasonable care in the custody and
preservation of any of the Collateral if it takes such action for that purpose
as any Grantor reasonably requests in writing at times other than upon the
occurrence and during the continuance of any Event of Default. Failure of Lender
to comply with any such request at any time shall not in itself be deemed a
failure to exercise reasonable care. Lender shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers and
neither it nor any of its officers, directors, employees, agents or
representatives shall be responsible to Grantors for any act or failure to act,
except for its own gross negligence or willful misconduct.
(d) Each Grantor also authorizes Lender, at any time and
from time to time upon the occurrence and during the continuation of any Event
of Default, to (i) communicate in its own name with any party to any Contract
with regard to the assignment of the right, title and interest of such Grantor
in and under the Contracts hereunder and other matters relating thereto and (ii)
execute, in connection with the sale of Collateral provided for in SECTION 7,
below, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
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(e) If any Grantor fails to perform or comply with any
of its agreements contained herein and Lender, as provided for by the terms of
this Guaranty and Security Agreement, shall perform or comply, or otherwise
cause performance or compliance, with such agreement, the reasonable expenses,
including attorneys' fees and costs, of Lender incurred in connection with such
performance or compliance, together with interest thereon at a rate of interest
equal to the per annum rate of interest charged on the Loans, shall be payable
by such Grantor to Lender within five (5) Business Days of demand and shall
constitute Secured Obligations secured hereby.
SECTION 7. RIGHTS AND REMEDIES UPON DEFAULT.
(a) If any Event of Default shall occur and be
continuing, Lender may exercise, in addition to all other rights and remedies
granted to it under this Guaranty and Security Agreement, the Loan Agreement,
the other Loan Documents and under any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the UCC or any other applicable law. Without limiting the
generality of the foregoing, each Grantor expressly agrees that in any such
event Lender, without demand of performance or other demand, presentment,
protest, advertisement or notice of any kind (except the notice specified below
of time and place of public or private sale) to or upon any Grantor or any other
person (all and each of which demands, presentments, protests, advertisements
and notices are hereby expressly waived to the maximum extent permitted by the
UCC and other applicable law), may (i) reclaim, take possession, recover, store,
maintain, finish, repair, prepare for sale or lease, ship, advertise for sale or
lease and sell or lease (in the manner provided for herein) the Collateral, and
in connection with liquidation of the Collateral and collection of the accounts
receivable pledged as Collateral; and (ii) forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or may
forthwith sell, lease, assign, give an option or options to purchase or sell or
otherwise dispose of and deliver said Collateral (or contract to do so), or any
part thereof, in one or more parcels at public or private sale or sales, at any
exchange or broker's board or at any of Lender's offices or elsewhere upon such
terms and conditions as it may deem advisable and at such prices as it may deem
best, for cash or on credit or for future delivery without assumption of any
credit risk. Each Grantor authorizes Lender, on the terms set forth in this
SECTION 7, to enter the premises where the Collateral is located, to take
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or lien which, in the opinion of Lender,
appears to be prior or superior to its security interest. Lender shall have the
right upon any such public sale or sales, and, to the extent permitted by law,
upon any such private sale or sales, to purchase the whole or any part of said
Collateral so sold, free of any right or equity of redemption, which equity of
redemption each Grantor hereby releases. Each Grantor further agrees, at
Lender's request, to assemble the Collateral and make it available to Lender at
places which Lender shall reasonably select, whether at such Grantor's premises
or elsewhere. Lender shall apply the net proceeds of any such collection,
recovery, receipt, appropriation, realization or sale as provided in the Loan
Agreement, and only after so paying over such net proceeds and after the payment
by Lender of any other amount required by any provision of law, including
Section 9504(1)(c) of the UCC, need Lender account for the surplus, if any, to
any Grantor. To the maximum extent permitted by applicable law, each Grantor
waives all claims, damages, and demands against Lender arising out of the
repossession, retention or sale of the Collateral except such as arise out of
the gross negligence or willful misconduct of Lender. Each Grantor agrees that
Lender need not give more than ten (10) days' prior written notice (which
notification shall be deemed given in accordance with the Loan Agreement) of the
time and place of any public sale or of the time after which a private sale may
take place and that such notice is reasonable
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notification of such matters. Grantors shall remain liable for any deficiency if
the proceeds of any sale or disposition of the Collateral are insufficient to
pay all amounts to which Lender is entitled, Grantors also being liable for the
reasonable attorneys' fees or costs of any attorneys employed by Lender to
collect such deficiency.
(b) Each Grantor agrees that in any sale of any of such
Collateral, whether at a foreclosure sale or otherwise, Lender is hereby
authorized to comply with any limitation or restriction in connection with such
sale as it may be advised by counsel is necessary in order to avoid any
violation of applicable law (including compliance with such procedures as may
restrict the number of prospective bidders and purchasers, require that such
prospective bidders and purchasers have certain qualifications and restrict such
prospective bidders and purchasers to persons who will represent and agree that
they are purchasing for their own account for investment and not with a view to
the distribution or resale of such Collateral), or in order to obtain any
required approval of the sale or of the purchaser by any governmental authority,
and each Grantor further agrees that such compliance shall not result in such
sale being considered or deemed not to have been made in a commercially
reasonable manner, nor shall Lender be liable nor accountable to any Grantor for
any discount allowed by the reason of the fact that such Collateral is sold in
compliance with any such limitation or restriction.
(c) Each Grantor also agrees to pay all reasonable fees,
costs and expenses of Lender, including, without limitation, attorneys' fees and
costs, incurred in connection with the enforcement of any of its rights and
remedies hereunder.
(d) Each Grantor hereby waives presentment, demand,
protest or any notice (to the maximum extent permitted by applicable law) of any
kind in connection with this Guaranty and Security Agreement or any Collateral.
(e) Each Grantor agrees that a breach of any covenants
contained in this SECTION 7 will cause irreparable injury to Lender, that in
such event Lender and would have no adequate remedy at law in respect of such
breach and, as a consequence, agrees that in such event each and every covenant
contained in this SECTION 7 shall be specifically enforceable against Grantors,
and each Grantor hereby waives and agrees not to assert any defenses against an
action for specific performance of such covenants except for a defense that the
Secured Obligations are not then due and payable.
SECTION 8. LIMITATION ON LENDER'S DUTY IN RESPECT OF COLLATERAL.
Lender's sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207 of the UCC
or otherwise, shall be to deal with it in the same manner as Lender deals with
similar property for its own account. Neither Lender nor any of its officers,
directors, employees or agents shall be liable for failure to demand, collect or
realize upon any of the Collateral or for any delay in doing so or shall be
under any obligation to sell or otherwise dispose of any Collateral upon the
request of any Grantor or any other Person or to take any other action
whatsoever with regard to the Collateral or any part thereof. The powers
conferred on the Lender hereunder are solely to protect Lender's interests in
the Collateral and shall not impose any duty upon Lender to exercise any such
powers. Lender shall be accountable only for amounts that it actually receives
as a result of the exercise of such powers, and neither Lender nor any of its
officers, directors, employees or agents shall be responsible to any Grantor for
any act or failure to act hereunder, except for their own gross negligence or
willful misconduct.
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SECTION 9. REINSTATEMENT. This Guaranty and Security Agreement shall
remain in full force and effect and continue to be effective should any petition
be filed by or against any Grantor for liquidation or reorganization, should any
Grantor become insolvent or make an assignment. for the benefit of creditors or
should a receiver or trustee be appointed for all or any significant part of any
Grantor's property and assets, and shall continue to be effective or be
reinstated, as the case may be, if at any time payment and performance of the
Secured Obligations, or any part thereof, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by any
obligee -of the Secured Obligations, whether as a "voidable preference,"
"fraudulent conveyance," or otherwise, all as though such payment or performance
had not been made. In the event that any payment, or any part thereof, is
rescinded, reduced, restored or returned, the Secured Obligations shall be
reinstated and deemed reduced only by such amount paid and not so rescinded,
reduced, restored or returned.
SECTION 10. INVESTMENT PROPERTY; PLEDGED NOTES.
(a) Unless an Event of Default shall have occurred and
be continuing and Lender shall have given notice to the relevant Grantor of
Lender's intent to exercise its corresponding rights pursuant to Section 10(b),
each Grantor shall be permitted to receive all cash dividends paid in respect of
the Pledged Stock and all payments made in respect of the Pledged Notes, and to
exercise all voting and corporate rights with respect to the Investment
Property, provided however, that no vote shall be cast or corporate right
exercised or other action taken which would impair the Collateral or which would
be inconsistent with or result in any violation of any provision of the Loan
Agreement, this Guaranty and Security Agreement or any other Loan Document.
(b) If an Event of Default shall occur and be continuing
and Lender shall give notice of its intent to exercise such rights to the
relevant Grantor or Grantors, (i) Lender shall have the right to receive any and
all cash dividends, payments or other Proceeds paid in respect of the Investment
Property and make application thereof to the Secured Obligations in such order
as Lender may determine, and (ii) any or all of the Investment Property shall be
registered in the name of Lender or its nominee, and Lender or its nominee may
thereafter exercise (x) all voting, corporate and other rights pertaining to
such Investment Property at any meeting of shareholders of the relevant Issuer
or Issuers or otherwise and (y) any and all rights of conversion, exchange and
subscription and any other rights, privileges or options pertaining to such
Investment Property as if it were the absolute owner thereof (including, without
limitation, the right to exchange at its discretion any and all of the
Investment Property upon the merger, consolidation, reorganization,
recapitalization or other fundamental change in the corporate structure of any
Issuer, or upon the exercise by any Grantor or Lender of any right, privilege or
option pertaining to such Investment Property, and in connection therewith, the
right to deposit and deliver any and all of the Investment Property with any
committee, depositary, transfer agent, registrar or other designated agency upon
such terms and conditions as Lender may determine), all without liability except
to account for property actually received by it, but Lender shall have no duty
to any Grantor to exercise any such right, privilege or option and shall not be
responsible for any failure to do so or delay in so doing.
(c) Each Grantor hereby authorizes and instructs each
Issuer of any Investment Property pledged by such Grantor hereunder to (i)
comply with any instruction received by it from Lender in writing that (x)
states that an Event of Default has occurred and is continuing and (y) is
otherwise in accordance with the terms of this Guaranty and Security Agreement,
without any other or further instructions from such Grantor, and each Grantor
agrees
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that each Issuer shall be fully protected in so complying, and (ii) if an Event
of Default has occurred and is continuing and Lender has given the notice under
Section 10(b) above, pay any dividends or other payments with respect to the
Investment Property directly to Lender.
(d) Each Grantor recognizes that Lender may be unable to
effect a public sale of any or all the Pledged Stock by reason of certain
prohibitions contained in the Securities Act and applicable state securities
laws or otherwise, and may be compelled to resort to one or more private sales
thereof to a restricted group of purchasers which will be obligated to agree,
among other things, to acquire such securities for their own account for
investment and not with a view to the distribution or resale thereof. Each
Grantor acknowledges and agrees that any such private sale may result in prices
and other terms less favorable than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall be
deemed to have been made in a commercially reasonable manner. Lender shall be
under no obligation to delay a sale of any of the Pledged Stock for the period
of time necessary to permit the Issuer thereof to register such securities for
public sale under the Securities Act, or under applicable state securities laws,
even if such Issuer would agree to do so.
(e) Each Grantor agrees to use its best efforts to do or
cause to be done all such other acts as may be necessary to make such sale or
sales of all or any portion of the Pledged Stock pursuant to this Section 10
valid and binding and in compliance with any and all other applicable
Requirements of Law. Each Grantor further agrees that a breach of any of the
covenants contained in this Section 10 will cause irreparable injury to Lender,
that Lender has no adequate remedy at law in respect of such breach, and, as a
consequence, that each and every covenant contained in this Section 10 shall be
specifically enforceable against such Grantor, and such Grantor hereby waives
and agrees not to assert any defenses against an action for specific performance
of such covenants except for a defense that no Event of Default has occurred or
is continuing under the Loan Agreement.
SECTION 11. GUARANTEE.
11.1 GUARANTEE.
(a) Each of the Guarantors hereby, jointly and
severally, unconditionally and irrevocably, guarantees to Lender and its
respective successors, indorsees, transferees and assigns, the prompt and
complete payment and performance by the Borrower when due (whether at the stated
maturity, by acceleration or otherwise) of the Borrower Obligations.
(b) Anything herein or in any other Loan Document to the
contrary notwithstanding, the maximum liability of Guarantor hereunder and under
the other Loan Documents shall in no event exceed the amount which can be
guaranteed by Guarantor under applicable federal and state laws relating to the
insolvency of debtors (after giving effect to the right of contribution
established in Section 11.2).
(c) Each Guarantor agrees that the Borrower Obligations
may at any time and from time to time exceed the amount of the liability of such
Guarantor hereunder without impairing the guarantee contained in this Section 11
or affecting the rights and remedies of Lender hereunder.
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(d) The guarantee contained in this Section 11 shall
remain in full force and effect until all the Borrower Obligations and the
obligations of each Guarantor under the guarantee contained in this Section 11
shall have been satisfied by payment or performance in full, notwithstanding
that from time to time during the term of the Loan Agreement the Borrower may be
free from any Borrower Obligations.
(e) No payment made by the Borrower, any of the
Guarantors, any other guarantor or any other Person or received or collected by
Lender from the Borrower, any of the Guarantors, any other guarantor or any
other Person by virtue of any action or proceeding or any set-off or
appropriation or application at any time or from time to time in reduction of or
in payment, of the Borrower Obligations shall be deemed to modify, reduce,
release or otherwise affect the liability of any Guarantor hereunder which
shall, notwithstanding any such payment (other than any payment made by such
Guarantor in respect of the Borrower Obligations or any payment received or
collected from such Guarantor in respect of the Borrower Obligations), remain
liable for the Borrower Obligations up to the maximum liability of such
Guarantor hereunder until the Borrower Obligations are paid or otherwise
satisfied in full.
11.2 RIGHT OF CONTRIBUTION. Each Guarantor hereby agrees that to
the extent that a Guarantor shall have paid more than its proportionate share of
any payment made hereunder, such Guarantor shall be entitled to seek and receive
contribution from and against any other Guarantor hereunder which has not paid
its proportionate share of such payment. Each Guarantor's right of contribution
shall be subject to the terms and conditions of Section 11.3. The provisions of
this Section 11.2 shall in no respect limit the obligations and liabilities of
any Guarantor to Lender, and each Guarantor shall remain liable to Lender for
the full amount guaranteed by such Guarantor hereunder.
11.3 NO SUBROGATION. Notwithstanding any payment made by any
Guarantor hereunder or any set-off or application of funds of any Guarantor by
Lender, no Guarantor shall be entitled to be subrogated to any of the rights of
Lender against the Borrower or any other Guarantor or any collateral security or
guarantee or right of offset held by the Lender for the payment of the Borrower
Obligations, nor shall any Guarantor seek or be entitled to seek any
contribution or reimbursement from the Borrower or any other Guarantor in
respect of payments made by such Guarantor hereunder, until all amounts owing to
Lender by the Borrower on account of the Borrower Obligations are paid or
other-wise satisfied in full. If any amount shall be paid to any Guarantor on
account of such subrogation rights at any time when all of the Borrower
Obligations shall not have been paid in full, such amount shall be held by such
Guarantor in trust for the Lender, segregated from other funds of such
Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over
to Lender in the exact form received by such Guarantor (duly indorsed by such
Guarantor to Lender, if required), to be applied against the Borrower
Obligations, whether matured or unmatured, in such order as Lender may
determine.
11.4 AMENDMENTS, ETC. WITH RESPECT TO THE BORROWER OBLIGATIONS.
Each Guarantor shall remain obligated hereunder notwithstanding that, without
any reservation of fights against any Guarantor and without notice to or further
assent by any Guarantor, any demand for payment of any of the Borrower
Obligations made by Lender may be rescinded by Lender and any of the Borrower
Obligations continued, and the Borrower Obligations, or the liability of any
other Person upon or for any part thereof, or any collateral security or
guarantee therefor or right of offset with respect thereto, may, from time to
time, in whole or in part, be renewed, extended, amended, modified, accelerated,
compromised, waived, surrendered or
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released by Lender, and the Loan Agreement and the other Loan Documents and any
other documents executed and delivered in connection therewith may be amended,
modified, supplemented or terminated, in whole or in part, as Lender may deem
advisable from time to time, and any collateral security, guarantee or fight of
offset at any time held by Lender for the payment of the Borrower Obligations
may be sold, exchanged, waived, surrendered or released. Lender shall not have
any obligation to protect, secure, perfect or insure any Lien at any time held
by it as security for the Borrower Obligations or for the guarantee contained in
this Section 11 or any property subject thereto.
11.5 GUARANTEE ABSOLUTE AND UNCONDITIONAL. Each Guarantor waives
any and all notice of the creation, renewal, extension or accrual of any of the
Borrower Obligations and notice of or proof of reliance by Lender upon the
guarantee contained in this Section 11 or acceptance of the guarantee contained
in this Section 11; the Borrower Obligations, and any of them, shall
conclusively be deemed to have been created, contracted or incurred, or renewed,
extended, amended or waived, in reliance upon the guarantee contained in this
Section 11; and all dealings between the Borrower and any of the Guarantors, on
the one hand, and Lender, on the other hand, likewise shall be conclusively
presumed to have been had or consummated in reliance upon the guarantee
contained in this Section 11. Each Guarantor waives diligence, presentment,
protest, demand for payment and notice of default or nonpayment to or upon the
Borrower or any of the Guarantors with respect to the Borrower Obligations. Each
Guarantor understands and agrees that the guarantee contained in this Section 11
shall be construed as a continuing, absolute and unconditional guarantee of
payment without regard to (a) the validity or enforceability of the Loan
Agreement or any other Loan Document, any of the Borrower Obligations or any
other collateral security therefor or guarantee or fight of offset with respect
thereto at any time or from time to time held by Lender, (b) any defense,
set-off or counterclaim (other than a defense of payment or performance) which
may at any time be available to or be asserted by the Borrower or any other
Person against Lender, or (c) any other circumstance whatsoever (with or without
notice to or knowledge of the Borrower or such Guarantor) which constitutes, or
might be construed to constitute, an equitable or legal discharge of the
Borrower for the Borrower Obligations, or of such Guarantor under the guarantee
contained in this Section 11, in bankruptcy or in any other instance. When
making any demand hereunder or otherwise pursuing its rights and remedies
hereunder against any Guarantor, Lender may, but shall be under no obligation
to, make a similar demand on or otherwise pursue such rights and remedies as it
may have against the Borrower, any other Guarantor or any other Person or
against any collateral security or guarantee for the Borrower Obligations or any
right of offset with respect thereto, and any failure by Lender to make any such
demand, to pursue such other rights or remedies or to collect any payments from
the Borrower, any other Guarantor or any other Person or to realize upon any
collateral security or guarantee or to exercise any such right of offset, or any
release of the Borrower, any other Guarantor or any other Person or any such
collateral security, guarantee or right of offset, shall not relieve any
Guarantor of any obligation or liability hereunder, and shall not impair or
affect the rights and remedies, whether express, implied or available as a
matter of law, of Lender against any Guarantor. For the purposes hereof "demand"
shall include the commencement and continuance of any legal proceedings.
11.6 REINSTATEMENT. The guarantee contained in this Section 11
shall continue to be effective, or be reinstated, as the case may be, if at any
time payment or any part thereof, of any of the Borrower Obligations is
rescinded or must otherwise be restored or returned by Lender upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Borrower or any Guarantor, or upon or as a result of the appointment of a
receiver, intervenor or
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conservator of, or trustee or similar officer for, the Borrower or any Guarantor
or any substantial part of its property, or otherwise, all as though such
payments had not been made.
11.7 PAYMENT. Each Guarantor hereby guarantees that payments
hereunder will be paid to Lender without set-off or counterclaim in Dollars at
the office of Lender set forth in the Loan Agreement.
SECTION 12. MISCELLANEOUS.
12.1 NOTICES. Any notice or other communication hereunder to any
party shall be addressed and delivered (and shall be deemed given) in accordance
with the Loan Agreement.
12.2 SEVERABILITY. Any provision of this Guaranty and Security
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
12.3 HEADINGS. The various headings in this Guaranty and
Security Agreement are inserted for convenience only and shall not affect the
meaning or interpretation of this agreement or any provisions hereof.
12.4 NO WAIVER; CUMULATIVE REMEDIES.
(a) Lender shall not by any act (except by a written
instrument pursuant to Section 12.4(c)), delay, omission or otherwise be deemed
to have waived any of its rights or remedies hereunder or under the Loan
Agreement, nor shall any single or partial exercise of any right, power,
privilege or remedy hereunder or thereunder on any one or more occasions
preclude the further exercise thereof or the exercise of any other right or
remedy under any of the Loan Documents. A waiver by Lender of any night or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Lender would otherwise have on any future occasion.
(b) The rights and remedies hereunder provided or
provided under the Loan Agreement are cumulative and may be exercised singly or
concurrently, and are not exclusive of any rights and remedies provided by law
or by any of the other Loan Documents.
(c) None of the terms or provisions of this Guaranty and
Security Agreement may be waived, altered, modified, supplemented or amended
except by an instrument in writing, duly executed by each Grantor and Lender.
12.5 TIME IS OF THE ESSENCE. Time is of the essence for the
performance of each of the terms and provisions of this Guaranty and Security
Agreement.
12.6 TERMINATION OF THIS GUARANTY AND SECURITY AGREEMENT;
SUBORDINATION OF LIENS.
(a) Subject to SECTION 9, above, this Guaranty and
Security Agreement shall terminate upon the full, complete and final payment or
performance of all of the Secured Obligations and the termination of the
Commitments; provided that, if any item of Collateral is
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sold or otherwise disposed of in accordance with and as permitted under the Loan
Agreement, this Guaranty and Security Agreement, or any other Loan Document, the
security interests created hereby in such item (but not in any Proceeds arising
from such sale or other disposition) shall cease immediately without any further
action on the part of Lender. Upon any such termination of the security
interests or release of Collateral, Lender will, at the Grantors' expense,
execute and deliver to the Grantors such documents as the Grantors shall
reasonably request to evidence such termination or such release, as the case may
be.
(b) Lender agrees that the security interests created
hereby in any Collateral subject to a Lien permitted by clause (g) of the
definition of "Permitted Liens" shall be subordinate to such Lien, to the extent
permitted by applicable-law.
12.7 SUCCESSORS AND ASSIGNS. This Guaranty and Security
Agreement and all obligations of Grantors hereunder shall be binding upon the
successors and assigns of Grantors, and shall, together with the rights and
remedies of Lender hereunder, inure to the benefit of Lender, any future holder
of any Revolving Note and their respective successors and assigns; provided,
however, that no Grantor may assign or transfer any of its rights or obligations
hereunder without the prior written consent of Lender; provided further,
however, that Lender may assign or transfer its rights or obligations hereunder,
and may sell participations herein, only to the extent permitted by Section 8.8
of the Loan Agreement. No sales of participations, other sales, assignments,
transfers or other dispositions of any agreement governing or instrument
evidencing the Secured Obligations or any portion thereof or interest therein
shall in any manner affect the security interest created herein and granted to
Lender hereunder.
12.8 GOVERNING LAW. This Guaranty and Security Agreement has
been delivered to and accepted by Lender in the State of New York. EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT
AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES
THEREOF REGARDING CONFLICT OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED STATES
OF AMERICA.
12.9 COUNTERPARTS. This Guaranty and Security Agreement may be
executed in any number of counterparts, each of which when so delivered shall be
deemed an original, but all such counterparts shall constitute but one and the
same instrument. Each such agreement shall become effective upon the execution
of a counterpart hereof or thereof by each of the parties hereto.
12.10 ENFORCEMENT EXPENSES; INDEMNIFICATION.
(a) Each Guarantor agrees to pay or reimburse Lender for
all its reasonable costs and expenses incurred in collecting against such
Guarantor under the guarantee contained in Section 11 or otherwise enforcing or
preserving any rights under this Guaranty and Security Agreement and the other
Loan Documents to which such Guarantor is a party, including, without
limitation, the reasonable fees and disbursements of counsel (including the
allocated fees and expenses of in-house counsel) to Lender.
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(b) Each Guarantor agrees to pay, and to save Lender
harmless from, any and all liabilities with respect to, or resulting from any
delay in paying, any and all stamp, excise, sales or other taxes which may be
payable or determined to be payable with respect to any of the Collateral or in
connection with any of the transactions contemplated by this Guaranty and
Security Agreement other than taxes measured on Lender's net income.
(c) Each Guarantor agrees to pay, and to save Lender
harmless from, any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of this Guaranty and Security Agreement.
(d) The agreements in this Section 12.10 shall survive
repayment of the Secured Obligations and all other amounts payable under the
Loan Agreement and the other Loan Documents.
12.11 SET-OFF. Each Grantor hereby irrevocably authorizes Lender
at any time and from time to time, without notice to such Grantor or any other
Grantor, any such notice being expressly waived by each Grantor, to set-off and
appropriate and apply any and all deposits (general or special, time or demand,
provisional or final), in any currency, and any other credits, indebtedness or
claims, in any currency, in each case whether direct or indirect, absolute or
contingent, matured or unmatured, at any time held or owing by Lender to or for
the credit or the account of such Grantor, or any part thereof in such amounts
as Lender may elect, against and on account of the obligations and liabilities
of such Grantor to Lender hereunder and claims of every nature and description
of Lender against such Grantor, in any currency, whether arising hereunder,
under the Loan Agreement, any other Loan Document or otherwise, as Lender may
elect whether or not Lender has made any demand for payment and although such
obligations, liabilities and claims may be contingent or unmatured. Lender shall
notify such Grantor promptly of any such set-off and the application made by
Lender of the proceeds thereof, provided that the failure to give such notice
shall not affect the validity of such set-off and application. The rights of the
Lender under this Section 12.11 are in addition to other rights and remedies
(including, without limitation, other rights of set-off) which Lender may have.
12.12 INTEGRATION. This Guaranty and Security Agreement and the
other Loan Documents represent the entire agreement of the Grantors and the
Lender with respect to the subject matter hereof and thereof, and there are no
promises, undertakings, representations or warranties by Lender relative to the
subject matter hereof and thereof not expressly set forth or referred to herein
or in the other Loan Documents.
12.13 SUBMISSION TO JURISDICTION; WAIVERS. Each Grantor hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal
action or proceeding relating to this Guaranty and Security Agreement and the
other Loan Documents to which it is a party, or for recognition and enforcement
of any judgment in respect thereof, to the nonexclusive general jurisdiction of
the Courts of the State of New York, the courts of the United States of America
for the Southern District of New York, and appellate courts from any thereof,
(b) consents that any such action or proceeding may be
brought in such courts and waives any objection that it may now or hereafter
have to the venue of any such
26
<PAGE> 27
action or proceeding in any such court or that such action or proceeding was
brought in an inconvenient court and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to such
Grantor at its address referred to in Section 12.1 or at such other address of
which Lender shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or shall limit
the right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law,
any right it may have to claim or recover in any legal action or proceeding
referred to in this Section any special, exemplary, punitive or consequential
damages.
12.14 ACKNOWLEDGMENT. Each Grantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Guaranty and Security Agreement and the other
Loan Documents to which it is a party,
(b) Lender does not have any fiduciary relationship with
or duty to any Grantor arising out of or in connection with this Guaranty and
Security Agreement or any of the other Loan Documents, and the relationship
between the Grantors, on the one hand, and the Lender, on the other hand, in
connection herewith or therewith is solely that of debtor and creditor, and
(c) no joint venture is created hereby or by the other
Loan Documents or other-wise exists by virtue of the transactions contemplated
hereby among the Grantors and Lender.
12.15 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING
TO THIS GUARANTY AND SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
27
<PAGE> 28
IN WITNESS WHEREOF, each of the parties hereto has caused this Guaranty
and Security Agreement to be executed and delivered by its duly authorized
officer on the date first set forth above.
GRANTORS ORGANIC, INC., a Delaware corporation
By: /s/ SUSAN FIELD
----------------------------------
Printed Name: Susan Field
-----------------------
Title: Executive Vice President and
------------------------------
Chief Financial Officer
------------------------------
ORGANIC MEDIA, INC., a Delaware
corporation
By: /s/ SUSAN FIELD
----------------------------------
Printed Name: Susan Field
-----------------------
Title: Executive Vice President and
------------------------------
Chief Financial Officer
------------------------------
ACCEPTED AND ACKNOWLEDGED BY:
OMNICOM GROUP INC., a New York corporation
By: /s/ BARRY J. WAGNER
---------------------------------
Printed Name: Barry J. Wagner
-----------------------
Title: Secretary
------------------------------
28
<PAGE> 1
EXHIBIT 10.9
REVOLVING NOTE
$30,000,000.00 San Francisco, California
Date: August 27, 1999
ORGANIC, INC., a Delaware corporation ("Borrower"), for value received,
hereby unconditionally promises to pay to OMNICOM GROUP INC., a New York
corporation ("Lender"), in lawful money of the United States of America and in
immediately available funds at the office of the Lender on the Revolving Credit
Termination Date (or such earlier date on which the Revolving Loans (such
Revolving Loans made by Lender being referred to herein as the "Lender
Advances") evidenced hereby become due and payable pursuant to the terms of the
Loan Agreement defined below), the aggregate principal amount of Thirty Million
Dollars ($30,000,000.00) or, if less, the aggregate unpaid principal amount of
all Revolving Loans made or maintained by Lender pursuant to the Loan Agreement
(as defined below).
This revolving note (the "Revolving Note") (a) is the Revolving Note
referred to in that certain Loan Agreement dated as of August 27, 1999 (as the
same may from time to time be amended, modified or supplemented or restated, the
"Loan Agreement"), by and between Borrower and Lender. All capitalized terms
used but not defined herein shall have the meaning given to them in the Loan
Agreement and (b) is subject to the provisions of the Loan Agreement.
1. INTEREST RATE. Borrower further promises to pay interest on the sum
of the daily unpaid principal balance of Lender Advances outstanding on each day
in lawful money of the United States of America, from the date of this Note
until all such principal amounts shall have been repaid in full, which interest
shall be payable at the rates per annum and on the dates determined pursuant to
the Loan Agreement.
2. PLACE OF PAYMENT. All amounts payable hereunder shall be payable by
wire transfer to Lender in the manner set forth in SECTION 2.2.2 of the Loan
Agreement, or in such other manner as may be specified by Lender in writing.
3. APPLICATION OF PAYMENTS; ACCELERATION.
(a) Payments on this Note shall be applied in the manner set
forth in the Loan Agreement. Without limiting the generality of SECTION 1 of
this Note, the Loan Agreement contains provisions for acceleration of the
maturity of the principal amount of Lender Advances upon the occurrence of
certain stated events.
(b) The date and amount of each Lender Advance made by Lender to
Borrower pursuant to the Loan Agreement and the date and amount of each payment
or prepayment of principal thereof shall be recorded by Lender on its books and
records. Each such recordation shall, to the extent permitted by applicable law,
constitute prima facie evidence of the accuracy of information so recorded. The
failure of Lender to make any recordation (or error therein) shall not limit or
otherwise affect the obligation of Borrower under this Note and under the Loan
Agreement to pay the principal, interest and other amounts due and payable
thereunder.
1
<PAGE> 2
(c) Any principal repayment not paid when due or within the
applicable cure period, if any, whether at stated maturity, by acceleration or
otherwise, shall, at the option of Lender, thereafter bear interest at the
default rate determined pursuant to SECTION 2.6 of the Loan Agreement.
4. SECURED NOTE. The full amount of this Revolving Note is secured by
the Collateral identified and described as security therefor and guaranteed as
provided in the Loan Documents executed by and delivered by Borrower. Reference
is hereby made to the Loan Documents for the nature and extent of such security
and guarantees, the terms and conditions upon which the security interests and
each guarantee were granted and the rights of the holder of this Revolving Note
in respect thereof. Borrower shall not, directly or indirectly, suffer or permit
to be created or to remain, and shall promptly discharge, any lien on or in the
Collateral, or in any portion thereof, except as expressly permitted in the Loan
Documents.
5. EVENT OF DEFAULT. Upon the occurrence and during the continuance of
an Event of Default, all unpaid principal, accrued interest and other amounts
owing hereunder shall be collectible by Lender pursuant to the Loan Agreement,
the other Loan Documents and applicable law.
6. WAIVER.
(a) All parties now and hereafter liable with respect to this
Note, whether maker, payor, principal, surety, guarantor, endorser or otherwise,
hereby waives presentment and demand for payment, notice of dishonor, protest
and notice of protest of this Note and all other notices of any kind, and shall
pay all reasonable costs of collection when incurred by or on behalf of Lender,
including, without limitation, reasonable attorneys' costs and expenses.
(b) The right to plead any and all statutes of limitations as a
defense to any demands hereunder is hereby waived to the full extent permitted
by law.
7. GOVERNING LAW. This Revolving Note shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York,
excluding conflict of laws principles that would cause the application of laws
of any other jurisdiction.
8. SUCCESSORS AND ASSIGNS. The provisions of this Revolving Note shall
inure to the benefit of and be binding on any successor to Borrower and shall
extend to any holder hereof.
BORROWER ORGANIC, INC.,
a Delaware corporation
By: /s/ SUSAN FIELD
----------------------------------
Printed Name: Susan Field
-----------------------
Title: Executive Vice President and
------------------------------
Chief Financial Officer
------------------------------
2
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
<S> <C>
Name Jurisdiction
- ---- ------------
Organic Media, Inc. Delaware
Organic.com Pte Ltd. Singapore
Organic Online, Ltd. United Kingdom
Organic Brasil Comunicacao
Interativa Ltda Brazil
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated November 22, 1999 relating to the financial statements of Organic,
Inc. which appear in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
/S/ PRICEWATERHOUSECOOPERS LLP
- -----------------------------------------
San Francisco, California
November 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,264
<SECURITIES> 1,871
<RECEIVABLES> 2,693
<ALLOWANCES> 96
<INVENTORY> 4
<CURRENT-ASSETS> 9,887
<PP&E> 1,943
<DEPRECIATION> 630
<TOTAL-ASSETS> 11,426
<CURRENT-LIABILITIES> 1,597
<BONDS> 0
0
1
<COMMON> 0
<OTHER-SE> 9,224
<TOTAL-LIABILITY-AND-EQUITY> 11,426
<SALES> 0
<TOTAL-REVENUES> 6,780
<CGS> 0
<TOTAL-COSTS> 9,845
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (283)
<INCOME-PRETAX> (2,782)
<INCOME-TAX> (997)
<INCOME-CONTINUING> (1,785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,785)
<EPS-BASIC> (2,006)
<EPS-DILUTED> (2,006)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,667
<SECURITIES> 400
<RECEIVABLES> 7,202
<ALLOWANCES> 283
<INVENTORY> 0
<CURRENT-ASSETS> 9,955
<PP&E> 8,417
<DEPRECIATION> 1,847
<TOTAL-ASSETS> 17,605
<CURRENT-LIABILITIES> 9,616
<BONDS> 0
0
1
<COMMON> 0
<OTHER-SE> 7,189
<TOTAL-LIABILITY-AND-EQUITY> 17,605
<SALES> 0
<TOTAL-REVENUES> 27,734
<CGS> 0
<TOTAL-COSTS> 29,563
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (73)
<INCOME-PRETAX> (1,756)
<INCOME-TAX> 1,010
<INCOME-CONTINUING> (2,766)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,766)
<EPS-BASIC> (32.43)
<EPS-DILUTED> (32.43)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,204
<SECURITIES> 0
<RECEIVABLES> 21,410
<ALLOWANCES> 564
<INVENTORY> 0
<CURRENT-ASSETS> 30,687
<PP&E> 13,183
<DEPRECIATION> 3,579
<TOTAL-ASSETS> 58,519
<CURRENT-LIABILITIES> 27,579
<BONDS> 0
0
1
<COMMON> 0
<OTHER-SE> 29,783
<TOTAL-LIABILITY-AND-EQUITY> 58,519
<SALES> 0
<TOTAL-REVENUES> 51,781
<CGS> 0
<TOTAL-COSTS> 65,595
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 637
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (13,863)
<INCOME-TAX> 64
<INCOME-CONTINUING> (13,927)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,927)
<EPS-BASIC> $(34.54)
<EPS-DILUTED> $(34.54)
</TABLE>
