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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 000-29405
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ORGANIC, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3258989
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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510 THIRD STREET
SAN FRANCISCO, CALIFORNIA 94107
(Address of principal executive offices)
(415) 365-5500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.0001 par value
Series C Preferred Stock Purchase Rights
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 31, 2000, there were 87,553,746 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant was $264,014,976. The aggregate market value
was based on the closing price for the Common Stock on the Nasdaq National
Market on March 31, 2000.
Documents incorporated by reference: None
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ORGANIC, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business.................................................... 3
2. Properties.................................................. 21
3. Legal Proceedings........................................... 21
4. Submission of Matters to a Vote of Security Holders......... 21
4A. Executive Officers of the Registrant........................ 22
PART II
Market for Registrant's Common Equity and Related
5. Stockholder Matters......................................... 23
6. Selected Consolidated Financial Data........................ 25
Management's Discussion and Analysis of Financial Condition
7. and Results of Operations................................... 27
Quantitative and Qualitative Disclosures About Market
7A. Risk........................................................ 33
8. Financial Statements and Supplementary Data................. 33
Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure.................................... 58
PART III
10. Directors and Executive Officers of the Registrant.......... 58
11. Executive Compensation...................................... 60
Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 63
13. Certain Relationships and Related Transactions.............. 64
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
14. 8-K......................................................... 65
SIGNATURES......................................................... 67
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PART I
ITEM 1. BUSINESS
The information in this report contains forward-looking statements that are
based on management's current expectations. These forward-looking statements are
subject to a number of risks and uncertainties that could cause actual results
to differ significantly from those described in this report. Any statements that
are not statements of historical facts may be deemed to be forward-looking
statements. These forward-looking statements include statements regarding, among
other things, our business strategy and operations, future expansion plans,
future prospects, financial position, anticipated revenues or losses and
projected costs, and objectives of management. For example, words such as "may",
"will", "should", "believes", "anticipates", "intends", "estimates", "expects",
"projects", "plans", "predicts", "potential", "continue", "strategy" and similar
expressions are intended to identify forward-looking statements. Factors that
might cause or contribute to such a discrepancy include, but are not limited to,
those discussed in the section entitled "Risk Factors" and the risks discussed
in our other Securities and Exchange Commission filing, Registration Statement
on Form S-1 declared effective on February 9, 2000 by the Securities and
Exchange Commission (File No. 333-91627).
OVERVIEW
Organic is an international Internet professional services firm. We provide
various services to build and operate our clients' online businesses. These
services include iBusiness, media, communications and logistics.
- iBusiness, which refers to our consulting, Web site design and software
engineering services through which we develop online business plans and
create Web sites;
- Media, which refers to our services through which we plan and manage
online advertising campaigns including electronic mail promotions and
affiliate program management;
- Communications, which refers to our public relations services through
which we plan and manage our clients' press and publication relationships
as well as product and company launches; and
- Logistics, which refers to our customer service and fulfillment
consulting and transaction management services through which we evaluate,
assist and manage our clients' warehouse and customer call center
facilities.
We believe that the Internet has shifted the balance of power from
businesses to customers and has created the first truly global marketplace. We
also believe that the ultimate customer, whether a business or consumer, is the
central and most influential participant in a commercial relationship. We
believe that the key to our business is our complete focus on our clients'
customers -- the customer-to-business market. We have designed our services in
recognition of the challenges our business clients face due to this shift. To
become the leading Internet professional services firm, our strategy revolves
primarily around leveraging our existing business processes and infrastructure
to facilitate our growth globally, expanding our relationships with our existing
clients, targeting and soliciting new clients, and retaining our key
professionals.
We have performed work for over 250 clients and have gained significant
experience by working with both major offline and emerging Internet companies,
including DaimlerChrysler, British Telecommunications, Tommy Hilfiger,
Blockbuster, Washington Mutual and Federated Department Stores, Inc.
We were founded in 1993 as a sole proprietorship and incorporated in
Delaware in January 1995. On January 29, 1997, Organic Online, Inc. was renamed
Organic Holdings, Inc. and we were formed as a subsidiary under the name Organic
Online, Inc. We exchanged 18,323,712 shares of Series A convertible preferred
stock and nine shares of common stock for substantially all of the assets and
liabilities of Organic Holdings, Inc. Because this reorganization did not result
in a change in control, there was no change in the basis of accounting at the
time of the reorganization. We changed our name from Organic Online, Inc. to
Organic, Inc. on January 28, 1999.
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We were incorporated in Delaware in January 1997. Our principal executive
offices are located at 510 Third Street, San Francisco, California 94107.
INDUSTRY BACKGROUND
CUSTOMER EMPOWERMENT
The Internet has created an environment for businesses where the
competition is only "one click away". Online customers can reach a large number
of vendors and can compare pricing and product information in order to obtain
higher levels of service and lower prices. 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 142 million in 1998 to 502 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 growth in both the number of users and
the value of electronic commerce creates significant opportunities and
challenges for businesses on the Internet.
BUSINESSES FACE SIGNIFICANT OPPORTUNITIES AND CHALLENGES ONLINE
With the Internet removing traditional geographic boundaries, the resulting
increase in competition for customers forces both traditional and online
businesses to create or redefine themselves in this Internet space. Companies
that have never had direct relationships with their end customers can establish
them, in some cases bypassing traditional intermediaries. In addition, companies
now have the opportunity to form lasting relationships directly with new
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 diverse groups of customers, define and
develop sustainable online business models, and evaluate their online success
may improve their performance.
CREATING A POSITIVE CUSTOMER EXPERIENCE. Companies must create online
businesses that deliver consistent, engaging and responsive customer
experiences. If done effectively, the foundation for a long-term relationship
between the business and the customer 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.
MANAGING INTERNET TECHNOLOGY. Internet technology differs from traditional
information technology. Therefore, many businesses do not possess the technical
skills required to design, build and maintain a functional and reliable online
business. Internet technology requires the expertise to select and build
platforms that can handle high volumes of transactions.
EFFECTIVELY UTILIZING CUSTOMER DATA. Businesses can collect, store and
analyze significant quantities of customer information. This information, if
properly analyzed, can be used to improve the total customer experience and
increase loyalty.
MEETING CUSTOMER SERVICE AND FULFILLMENT EXPECTATIONS. Often overlooked,
customer service and fulfillment services can create long-lasting, positive or
negative, impressions with customers. Businesses that can distinguish themselves
by offering quality customer service and fulfillment will maximize the value of
their customer relationships.
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To capitalize on these opportunities and overcome these challenges, online
businesses need to focus on delivering a positive 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
purchase, or plan to purchase, Internet professional services solutions such as
those we provide. 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 services with a focus on establishing,
maintaining and enhancing customer relationships with the appropriate
technology. We believe that such firms must have the 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
customer experience.
THE ORGANIC SOLUTION
We have developed an integrated solution to address the evolving needs of
the ultimate customer and our clients. The key elements of the Organic solution
are:
CUSTOMER-TO-BUSINESS MARKET FOCUS
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 the commercial relationship.
We recognize that a complete focus on the customer has become important to
our clients as the Internet allows every customer to demand positive online
experiences. We help our clients transform their businesses by building them
from their customer's perspective, enhancing their ability to create and
maintain a direct relationship with their customers and effectively incorporate
customer feedback into their business. We believe that we provide a unique value
proposition to our clients because we approach our solutions as integrated
components in the delivery of customer satisfaction rather than as isolated
assignments. This approach requires comprehensive knowledge and skills.
Therefore, our projects are typically of substantial size.
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. These contact points
include advertising and communicating with customers as well as selling and
delivering goods or services to them. Since our inception, we have sought to
provide an integrated solution by expanding our service offering to meet our
clients' evolving needs, including:
- iBusiness, which refers to our consulting, Web site design and software
engineering services through which we develop online business plans and
create Web sites;
- Media, which refers to our services through which we plan and manage
online advertising campaigns including electronic mail promotions and
affiliate program management;
- Communications, which refers to our public relations services through
which we plan and manage our clients' press and publication relationships
as well as product and company launches; and
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- Logistics, which refers to our customer service and fulfillment
consulting and transaction management services through which we evaluate,
assist and manage our clients' warehouse and customer call center
facilities.
We believe that these disciplines are highly inter-dependent and therefore
must be well integrated to create a positive customer experience. Our approach
helps us maintain long-term relationships with our clients. 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 a tailored customer experience,
which often requires localized content and specific knowledge about local
practices and customs. We believe that establishing a global presence is
critical to our clients' and ultimately to our success. Therefore, we will
continue to expand internationally, as well as in the United States. As of
December 31, 1999, we had offices in three international locations: Sao Paulo,
London, and Singapore. During the first quarter of 2000, we opened an additional
office in Toronto. As of December 31, 1999, we were serving 21 clients
internationally. 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 our service offerings and influences
our solutions. We combine custom software with third party software and
integrate them into the existing technical infrastructure of our clients. Using
this approach, we create systems that can handle a high volume of transactions
from the Internet as well as the changing demands of customers over time. For
example, we obtain information from clients about their potential business and
customer needs and recommend various hardware and software.
In addition to managing the implementation of Internet solutions, we also
introduce new technology to our clients. Examples include:
- We provide rich media online, including Web audio and video;
- We develop online, transaction-enabled advertising banners, which allow
an entire electronic commerce transaction to occur through the banner;
and
- We develop customer service and fulfillment solutions, which use
transaction management software to connect our clients' Web sites
seamlessly to fulfillment centers.
These innovations use technology as a strategic tool to deliver a unique
and positive customer experience.
COLLABORATIVE AND BALANCED TEAM APPROACH
Our client teams work together to design, build and maintain online
businesses. Client teams contain individuals from each discipline required by
the engagement and are managed by a multi-disciplinary group of team leaders.
The team leaders, consisting of a client service representative, known as a
client partner, an interactive strategist, a creative leader, a technical leader
and a project manager, 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, 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 corporate culture promotes the open discussion of
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strategic, design, creative and technical challenges. We believe that this
culture allows us to solve problems efficiently and effectively, helping 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 and commitment to professional development to be an
asset in attracting and retaining our professionals. We have a group of
recruiters that identify and hire outstanding professionals, an extensive
training and development program to foster employee satisfaction and competitive
compensation and benefits programs. Given our growth we also provide our
employees with the opportunity for professional mobility by focusing 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 business model that can accommodate our growth and
serve our expanding client base. To support this model, we continue to improve
our internal processes by which we manage our business and corporate knowledge
including our proprietary workflow methods, our 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 strategy for office
expansion, known as office-in-a-box, is designed to provide both a systematic
approach and a blueprint of the processes necessary to efficiently and
effectively implement critical business functions in a new office on a global
basis. We believe that the development and evolution of these processes and our
infrastructure will allow us to continue to effectively manage our growing
business operations.
CONTINUE OUR TRACK RECORD OF INNOVATION
Our ability to innovate will continue to be an important factor to our
business. We have demonstrated a track record of innovation. We led the
development of the Apache Web server and initiated the development of
network-based tools for measuring Web site performance that led to the
establishment of Accrue Software (Nasdaq: ACRU). In addition, we continue to
identify and address the changing needs of our clients and their customers
through the creation of new service offerings. Our logistics customer service
and fulfillment consulting and transaction management services and our practice
known as Value Optimization through Improved Customer Engagements, or VOICE(SM),
an offering that helps businesses incorporate the needs of the customer into
online business operations, are two more such examples. We will continue to
develop additional service offerings as we anticipate new customer needs.
EXPAND OUR RELATIONSHIPS WITH OUR EXISTING CLIENT BASE
We use our service offerings to 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 targeting new clients we will improve our long-term
prospect for success. We target new clients that understand the Internet and
that will benefit from using more than one of our service offerings; however,
they may use just one of our services. We also pursue engagements that enhance
our overall franchise in the Internet professional services industry by allowing
us to implement Internet solutions
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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.
CONTINUE OUR GLOBAL EXPANSION
To be a global business, we believe that we need to expand into non-U.S.
markets that we anticipate will have an increasing number of Internet customers.
To meet our global growth objectives we intend to open new offices, both
domestically and internationally, to expand our base of clients and to deepen
our relationships with our existing clients. 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 five offices since
1998. The corporate development team led the design of 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. As
of December 31, 1999, we had domestic offices in San Francisco, New York,
Chicago and Detroit, and international offices in London, Sao Paulo, and
Singapore. During the first quarter of 2000, we opened an additional office in
Toronto, Canada.
ORGANIC SERVICES
We provide 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. Each of our services is implemented through a team, which consists of
interdisciplinary team members. Our current service offerings include:
IBUSINESS CONSULTING SERVICES
The value of our iBusiness consulting offering lies in our ability to
understand our clients' business objectives, collaborate with our creative and
engineering teams and make recommendations that clients can use to create online
businesses. Our ability to deliver prototypes provides our clients with the
opportunity to have a time-to-market advantage.
SERVICES PROVIDED. Our iBusiness 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 competitive differentiation,
identify, analyze and segment online target markets, develop compelling online
brand strategies and evaluate 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 use surveys, usability testing, one-on-one interviews and focus
groups during the development of online businesses.
IMPLEMENTATION. Our iBusiness consulting teams work with our clients and
other specialists within Organic. These teams create a plan, test multiple
scenarios and refine that plan based on the rapid prototyping of potential
strategies. In addition, our teams share ideas and best practices through
education and brainstorming sessions, summits and workshops.
IBUSINESS WEB SITE DESIGN SERVICES
Our Web site design teams design a 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 Web site design 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 to attract and retain customers. At the simplest level, our services
involve Web site
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design, but they also include the design and implementation of the other
creative elements of a customer interface, such as online banner advertisements.
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 Web site design services through experts
in four key areas, including:
- visual design, which focuses on the visual appearance of a Web site to
the customer;
- editorial, which focuses on making interesting text-based content;
- information architecture, which focuses on site navigation; and
- interactive art production, which focuses on transforming visual images
into an electronic format.
Our Web site design staff has expertise and training as animators,
cinematographers, editors and sound, 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 new uses for applications, technologies and platforms including
broadband and interactive television.
IBUSINESS SOFTWARE ENGINEERING SERVICES
Our engineering teams combine traditional software engineering and new
technologies to implement technical infrastructure recommendations and software
that can be adapted for the growth of our clients' businesses.
SERVICES PROVIDED. We combine custom software with third party software and
integrate them 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 also
incorporate the ability to measure site performance and track customer behavior
information allowing our clients to calculate their return on investment.
IMPLEMENTATION. Our software engineering teams analyze a problem and
recommend, design and deploy a solution. Our software 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. These technologies allow us to create Web sites that
include interactive content, audio and video versus traditional text-based Web
sites. Throughout all phases of development, a group of quality assurance
specialists work in conjunction with our development teams to ensure that our
solutions meet our client's needs.
MEDIA SERVICES
Our media services build brands, generate awareness and drive traffic and
transactions for our clients' online businesses. We believe we are a significant
buyer and manager of online media, and that our accumulated purchasing power and
analysis of customer behavior data delivers measurable results for our clients
through lower customer acquisition costs, higher customer retention rates and
increased revenues.
SERVICES PROVIDED. Our media teams use their knowledge of customer behavior
to design online marketing campaigns and also offer services including direct
response, electronic mail 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 in completing 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.
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IMPLEMENTATION. Creating an online advertising program begins with research
and strategic planning from a 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 team analyzes the success of the
campaign by reviewing response rates, traffic and transaction volumes and then
uses this feedback to refine the campaign or future campaigns.
COMMUNICATIONS PUBLIC RELATIONS SERVICES
Our public relations services assist our clients with the management of
their ongoing press and publication relationships.
SERVICES PROVIDED. Our public relations services include:
- strategic message and identity development, which helps clients position
themselves in their markets and differentiate themselves from their
competitors in the eyes of current and potential customers;
- product and company launch or re-launch services, which aim to create
awareness of and position a product or company with customers; and
- broadcast, online and print media and analyst relations services, which
help clients enhance their brand recognition.
IMPLEMENTATION. We work with our clients to assess their public
communication objectives, formulate short-term and long-term public relations
plans and utilize our industry knowledge and expertise to implement these plans.
LOGISTICS CUSTOMER SERVICE AND FULFILLMENT CONSULTING SERVICES
Our customer service and fulfillment consulting offering includes both
consulting and transaction management services. We deliver a complete electronic
commerce experience to our clients' customers. We provide advice on best
practices based on facility visits and audits of 20 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, electronic mail
and collaborative filtering.
SERVICES PROVIDED. Our consulting services include a needs and capabilities
assessment, consulting 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.
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,
electronic mail 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.
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INNOVATIVE SERVICE OFFERINGS
Driven by the needs of our clients and their customers, we continue to
develop innovative service offerings. We are developing a service offering
called VOICE(SM). We believe that if a company can effectively collect, analyze
and use customer information it will improve its business. We developed our
VOICE(SM) service to gather information from customers, understand customer
behavior and generate useful recommendations for our clients. We believe that
VOICE's innovation is based on its use of both behavioral psychology and
statistical modeling. We will continue to develop innovative service offerings
as we anticipate new customer needs.
SALES AND MARKETING
Our local business development professionals and client partners market and
sell our services. Opportunities are prioritized by client engagement type,
vertical industry and the opportunity to innovate. Our marketing efforts are
focused on assignments that may use more than one service offering and/or
include large, multi-national clients. Extended engagements, defined as
multi-year and recurring revenue opportunities with the potential to evolve into
relationships that use all of our service offerings 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.
We target vertical industries based on the size of the market opportunity
and the influence of the Internet. Current industry verticals include apparel,
automotive, consumer electronics, education, entertainment and content,
financial services, healthcare, travel and home categories.
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 our other 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 marketing designed to
generate demand and strengthen our brand. We have built our reputation through
client references, industry conferences, trade publications and our Web site. To
promote our brand, we will continue to pursue a marketing strategy through both
Internet and traditional media-based channels to increase our visibility with
potential clients 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.
RESEARCH AND DEVELOPMENT
Our research and development team is focused on assisting local teams with
solving problems. Our research and development team also maintains relationships
with companies that provide knowledge and recommendations on software, hardware
and training that will speed team problem solving.
We focus on three service lines: engineering, creative and strategy. Our
engineering research and development efforts involve investigating new
technologies, products and 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 research and development supports our
teams with the knowledge to quickly select the best technology solution, and if
necessary, provide the support to implement it.
Our creative research and development 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 research and development team also
collaborates with local creative teams, as well as our strategic consulting and
VOICE(SM) teams to increase our understanding of the patterns and interfaces
that allow our solutions to connect with their intended audience. Behavioral
knowledge
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and communication expertise is intrinsic to success on any interactive platform;
therefore, creative research, analysis and invention are all methodically
gathered and shared with our teams.
Our research and development team also works 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. The amounts spent on research and development for the years ended
December 31, 1999, 1998 and 1997 have not been material.
SUBSIDIARIES AND INTERNATIONAL OPERATIONS
We have established three wholly owned subsidiaries, namely Organic Media,
Inc., Organic Online, Ltd., and Organic.com Private Ltd., which are located in
the United States, England and Singapore, respectively. In addition, we have a
70% owned subsidiary, Organic Brasil Comunicacao Interativa Limitada, which is
located in Brazil. Our international operations generated revenues of $4.6
million for the year ended December 31, 1999. During the first quarter of 2000,
we established Organic Online Canada, Inc., a wholly owned subsidiary in Canada.
SIGNIFICANT CLIENTS
We derive a significant portion of our revenues from large projects for a
limited number of clients. For the year ended December 31, 1999, our five
largest clients accounted for approximately 44% of our revenues, with
DaimlerChrysler and Blockbuster accounting for approximately 15% and 12%,
respectively, of our revenues.
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. Competitors vary in
size and in the scope and breadth of the services offered. Currently, our
principal competitors include other providers of Internet professional services,
such as AGENCY.COM, Lante, iXL, Proxicom, Razorfish, Scient, MarchFirst, Viant
and Avenue A. We also encounter competition from several large information
technology consulting services providers, such as Andersen Consulting, Cambridge
Technology Partners, Cap Gemini, CSC, EDS, IBM and Sapient, and from strategic
consulting firms, such as Bain & Company, Booz Allen & Hamilton and Boston
Consulting Group. In addition, because there are relatively low barriers to
entry in the Internet professional services industry, we anticipate facing
additional competition from other established and emerging companies as this
market continues to develop and expand.
We believe that the principal competitive factors affecting our market
include 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 through development or by
acquiring other companies which provide additional services. 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, results of operations
and cash flows.
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,
including filing for trademark registration on foreign registries and enforcing
our rights against potential infringement. We have
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obtained trademark registrations in the United States for the "Organic" and
"Organic Online" marks and 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.
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.
EMPLOYEES
As of December 31, 1999, we had 821 full-time employees. Of these, 749 were
located in the United States and 72 were located outside the United States. None
of our employees is represented by a labor union, nor have we experienced any
work stoppages. We consider our relations with our employees to be good.
RISK FACTORS
In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be read carefully when evaluating us and our
business because such factors currently may have a significant impact on our
business, operating results, financial condition and cash flows. Our actual
results could differ materially from those projected in any forward-looking
statements as a result of the risk factors set forth below and elsewhere in this
Annual Report on Form 10-K and the risks discussed in our Registration Statement
on Form S-1 declared effective on February 9, 2000 by the Securities and
Exchange Commission (File No. 333-91627).
RISKS RELATED TO ORGANIC
WE MAY BE UNABLE TO RECRUIT AND RETAIN THE TALENTED PERSONNEL WHO ARE
ESSENTIAL FOR COMPLETING CLIENT PROJECTS, WHICH COULD HARM OUR PERFORMANCE ON
EXISTING PROJECTS AND REDUCE OUR ABILITY TO OBTAIN NEW PROJECTS, AND THEREFORE
REDUCE OUR REVENUES AND PROFITS
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 December 31, 1999, we
had 821 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,
results of operations and cash flows.
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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 began expanding our operations both domestically and internationally in
the past year. We believe further expansion will be required to address the
anticipated growth in our client base and market opportunities. We also believe
expansion into new geographic areas is important because we believe we can
better serve clients with resources and professionals located near the client.
Our current expansion has placed, and any future expansion may continue to
place, a significant strain on our managerial, operational, financial and other
resources.
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, results of operations and cash flows.
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 year ended December 31, 1999, our five
largest clients accounted for approximately 44% of our revenues, with
DaimlerChrysler and Blockbuster accounting for approximately 15% and 12% of our
revenues, respectively.
WE MAY HAVE MORE DIFFICULTY COLLECTING OUR ACCOUNTS RECEIVABLE FROM EMERGING
GROWTH AND START-UP CLIENTS THAN OTHER CLIENTS, WHICH MAY AFFECT OUR REVENUES
AND DAMAGE OUR POTENTIAL PROFITABILITY
Approximately 25% of our revenues are currently derived from services
provided to emerging growth and start-up companies. We believe that we may face
certain risks in doing business with emerging growth and start-up clients that
we may not face with our mature or established "brick and mortar" clients.
Unless we are diligent in invoicing and collecting amounts during the beginning
stages of our engagements, we believe we may experience longer payment cycles
and problems in collecting accounts receivable with respect to emerging growth
and start-up clients.
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. In
addition, generally our contract provides for termination by either party after
notice and a transition period of up to 180 days. 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 revenues 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, results of operations and cash
flows.
IF WE FAIL TO ACCURATELY PREDICT COSTS RELATED TO OUR FIXED-FEE PROJECTS, WE
MAY LOSE MONEY
Most of our current projects are on a fixed-fee basis, rather than on a
time and materials basis. Often, we fix the fee and 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.
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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 domestic operations, we have operations in Sao
Paulo, Brazil, which opened in February 1999; London, England, which opened in
April 1999; Singapore, which opened in September 1999; and Toronto, Canada,
which opened in January 2000. Our international offices provide the same or
similar services as our domestic offices, sometimes in conjunction with our
domestic offices. 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:
- success in finding and acquiring suitable strategic acquisition
candidates;
- difficulties arising from staffing and managing foreign operations;
- legal and regulatory requirements of different countries, including
different tax or labor laws;
- difficulties in using equity incentives for employees;
- international currency issues, including fluctuations in currency
exchange rates;
- 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; and
- potential political or economic instability.
If any of these risks should materialize, our international and domestic
businesses, financial conditions, results of operations and cash flows could be
harmed. Our revenues derived from international operations were 5.9% of our
total revenues for the year ended December 31, 1999.
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
Some of our 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 re-deploy billable employees to other
engagements, to minimize under-utilization of those employees. This
under-utilization could reduce our revenues and gross margins and damage our
potential profitability.
For example, if DaimlerChrysler, the sole client of our Detroit, Michigan
office during 1999, chose not to retain our services, the billable employees in
our Detroit office could be underutilized.
HISTORICALLY WE HAVE GRANTED OPTIONS TO PURCHASE COMMON STOCK AT LOW EXERCISE
PRICES, WHICH WILL RESULT IN ADDITIONAL COMPENSATION EXPENSE IN THE FUTURE AND
REDUCE OUR REPORTED EARNINGS
Historically we have granted employees options to purchase our common stock
at exercise prices less than the initial public offering price. During the year
ended December 31, 1999, we granted options to purchase 15,309,525 shares of
common stock to employees and non-employee directors with exercise prices
ranging from $0.39 to $2.67 per share. We recognized stock-based compensation
expense of $27.4 million for the year ended December 31, 1999 relating to the
difference between the exercise price of the options and the offering price of
our common stock. As of December 31, 1999, we had an aggregate of $83.4 million
of related deferred compensation that will be recognized as the options vest
over the next four years which will dilute any future earnings that we may
achieve.
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WE ARE LIKELY TO EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY
OPERATING RESULTS THAT 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 our revenues and operating results
from quarter to quarter, in order of their relative magnitude are:
- changes in our operating expenses as we expand operations;
- 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;
- our ability to develop, market and introduce new and significant online
business solutions on a timely basis;
- our success in obtaining suitable locations for expansion;
- client budgetary cycles;
- pricing changes in the industry;
- demand for our Internet professional services;
- economic conditions in the Internet professional services market; and
- legal or regulatory developments regarding the Internet.
Furthermore, we are subject to employer payroll taxes when our employees
exercise their non-qualified stock options. The employer payroll taxes are
assessed on each employee's gain, which is the difference between the price of
our common stock on the date of exercise and the exercise price. These employer
payroll taxes will be recorded as operating expenses in the period those options
are exercised based on the aggregate gains realized by employees. During a
particular quarter, these payroll taxes could be material. However, because we
are unable to predict our future stock price and the number of optionees who may
exercise during any particular quarter, we cannot predict what, if any, expense
will be recorded in a future quarter and the impact on our future operating
results. Our quarterly revenues and operating results are volatile and difficult
to predict. Our revenues for the fourth, third, second and first quarters of
1999 were 33.4%, 31.4%, 22.2% and 13.0%, respectively, of our total revenues for
the year ended December 31, 1999. Our revenues for the fourth, third, second and
first quarters of 1998 were 25.2%, 27.3%, 29.3% and 18.2%, respectively, of our
total revenues for the year ended December 31, 1998. 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.
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.
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WE HAVE 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 have experienced operating losses as well as net losses during the years
ended December 31, 1999, 1998 and 1997. For the years ended December 31, 1999,
1998 and 1997, our net losses were $38.9 million, $2.8 million and $1.8 million,
respectively. For the years ended December 31, 1999, 1998 and 1997, our net
losses were 50.0%, 10.0%, and 26.3% of total revenues, respectively. We may not
be able to sustain the revenue growth we have experienced or the levels of
revenues obtained previously. 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 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.
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. 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. We also anticipate facing additional
competition from new entrants into our markets due to the low barriers of entry.
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
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, results of operations and cash flows.
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 investments in
some of our clients. As of December 31, 1999, we had $2.0 million of such
investments accounted for on our balance sheet. We may continue to invest in our
clients as opportunities arise. 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.
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
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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 reuse some software code developed by us
for a client for competitors of the client and, in the case of DaimlerChrysler,
not to perform work for some competitors. 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 for negligence in performing our services or errors in
the software code provided by 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, trade secrets and other proprietary rights in
our intellectual property, including our trademark name, Organic, software code
and Internet business processes we have developed, are important to our success
and competitive position. In particular, our trademarks help establish our brand
identity and, we believe, enhance the marketability of our services. Our trade
secrets, including the Internet business processes we have developed, are a
significant aspect of the services we provide. If we are unable to protect our
trademarks, trade secrets and other intellectual property 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 intellectual property. Despite these precautions, our management
cannot ensure that these strategies will be adequate to deter misappropriation
of our proprietary intellectual property.
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 intellectual property 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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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.
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.
If our cash flows from operations and existing liquidity resources are
insufficient to fund our operations, we may need to obtain additional equity or
debt financing. In this case, 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 AN INTERNET BUSINESS
MODEL 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 the
Internet remain unresolved and may affect the use of these technologies to solve
business problems. Critical issues that influence a client to adopt an Internet
business model or expand its business on the Internet include:
- security of Internet technologies and client information;
- reliability of the technology and services;
- cost of development of an electronic business Web site; and
- administration and bandwidth of the Internet itself.
The process of implementing or expanding a business on the Internet can be
difficult. The difficulty expected or experienced by clients in utilizing the
Internet and the expected costs of outsourcing compared to the expected costs of
internal development will affect their decisions on hiring and retaining
Internet professional services providers. Many entities may choose not to
outsource their Internet needs.
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 adopt an Internet
business model.
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
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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, results of operations and cash flows 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.
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, financial
condition, results of operations and cash flows could be harmed.
THE APPLICATION OR ADOPTION OF GOVERNMENT REGULATIONS AND THE EXISTENCE OF
LEGAL UNCERTAINTIES MAY HARM OUR BUSINESS
We, as well as 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
20
<PAGE> 21
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.
ITEM 2. PROPERTIES
Our headquarters are located in two leased facilities in San Francisco,
California consisting of an aggregate of approximately 82,000 square feet of
office space. The primary lease consisting of approximately 52,000 square feet
expires in September 2002. The secondary lease consisting of approximately
30,000 square feet expires in December 2000. We also have entered into a lease
for a new headquarters location in San Francisco consisting of approximately
212,000 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.
ITEM 3. LEGAL PROCEEDINGS
On February 17, 2000, a former employee filed an action against Organic
Holdings, Inc., Organic, Inc., and Jonathan Nelson, the Company's Chief
Executive Officer and Chairman of the Board, in the California Superior Court in
San Francisco. (Haig v. Organic Holdings, Inc., et al.) An amended complaint was
filed on March 22, 2000. The amended complaint asserts several claims based on
allegations that the former employee was prevented from exercising his stock
options in Organic Holdings. The amended complaint seeks substantial actual and
exemplary damages apparently based on the increase in the value of Organic
Holdings stock after the initial public offering of two companies in which it
owns substantial stakes, including Organic, Inc. The case is in its earliest
stages, no response to the complaint has been filed, and no discovery has been
taken. Our co-defendants and us believe that these claims lack any merit, and
intend to contest them vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
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<PAGE> 22
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our executive officers
as of December 31, 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
Arthur I. Williams.................... 32 Executive Vice President, Global Operations
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
Shelly A. Saunders.................... 38 Vice President, Corporate Controller and Treasurer
Janis M. Nakano Spivack............... 36 Vice President, Chief Creative Officer
Lynda Ward Pierce..................... 36 Vice President, Human Resources
</TABLE>
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 also served as Chairman of the Board of Accrue from
February 1996 to November 1999.
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.
ARTHUR I. WILLIAMS has served as our Executive Vice President, Global
Operations since December 1999. From June 1998 to December 1999, Mr. Williams
was the Executive Vice President North America Operations of AGENCY.COM, Ltd.,
an online marketing and advertising agency, specializing in the development of
Web sites. From June 1994 to June 1998, Mr. Williams was the Chief Executive
Officer and President of Spiral Media, Inc., a designer of digital media and
developer of original content.
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.
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
22
<PAGE> 23
solutions. From September 1984 to January 1998, Ms. Zagel served as General
Counsel of Grant Thornton LLP, an international 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
PricewaterhouseCoopers, an accounting and management services firm.
SHELLY A. SAUNDERS has served as our Vice President, Corporate Controller
and Treasurer since January 2000. From December 1998 to October 1999, Ms.
Saunders was the Corporate Controller at Thoratec Laboratories Corporation, a
developer, manufacturer and marketer of medical devices. From July 1998 to
December 1998, Ms. Saunders was the Life Science Group Controller at Bio-Rad
Laboratories, Inc., a multinational manufacturer and distributor of life science
research products. From July 1994 to July 1998, Ms. Saunders was the Corporate
Controller at American Protective Services, Inc., a provider of security guard
and patrol services.
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.
From October 1993 to January 1997, Ms. Spivack was also the President of
GoFISH!, a private interactive, online directory of production 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"OGNC". Prior to February 10, 2000, there was no established public trading
market for any of our securities. The following table sets forth for the periods
indicated the high and low sales price per share of our common stock as reported
on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
First quarter (from February 10, 2000 through March 31,
2000)..................................................... $59.02 $20.50
</TABLE>
The above information has been restated to give retroactive effect to the
3-for-1 common stock split on February 8, 2000. On March 31, 2000, the last
reported sales price per share of our common stock as reported on the Nasdaq
National Market was $21.63.
23
<PAGE> 24
HOLDERS
As of March 31, 2000, we estimate that there were 447 stockholders of
record of our common stock. This does not include the number of persons whose
stock in a nominee or "street name" accounts through brokers.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance operations and
the expansion of our business. We do not anticipate paying any cash dividends in
the foreseeable future. Any future determination to pay cash dividends will be
at the discretion of our Board of Directors and will be dependent upon our
financial condition, operating results, cash flows, capital requirements and
such other factors as our Board of Directors deem relevant.
USE OF PROCEEDS SOLD IN INITIAL PUBLIC OFFERING
On February 18, 2000, we completed the initial public offering of our
common stock. The managing underwriters in the offering were Goldman Sachs &
Company, Donaldson, Lufkin & Jenrette, and Thomas Weisel Partners LLC. Our
shares of the common stock sold in the offering were registered under the
Securities Act of 1933 in a Registration Statement on Form S-1 (File No.
333-91627). The Securities and Exchange Commission declared the Registration
Statement effective on February 9, 2000.
We commenced our offering on February 10, 2000 and consummated our offering
on February 18, 2000 after we had sold all of the 6,325,000 shares of common
stock registered under the Registration Statement (including 825,000 shares sold
in connection with the exercise of the underwriters' over-allotment option). The
initial public offering price was $20.00 per share for an aggregate sales price
of $126.5 million.
We paid a total of approximately $8.9 million in underwriting discounts and
commissions and approximately $1.7 million in offering expenses. None of the
expenses related to the offering were paid directly or indirectly to any of our
directors, officers, general partners or their associates, or to any persons
owning 10% or more of any class of our equity securities, or to any of our
affiliates.
We received net proceeds from the offering of approximately $115.9 million
after deducting the underwriting discounts and commissions and the offering
expenses. The net offering proceeds have been used for general working capital
purposes, to expand our corporate infrastructure, for capital expenditures and
for the repayment of our outstanding debt to Omnicom Group under our revolving
credit facility.
SALES OF UNREGISTERED SECURITIES
From our incorporation to December 31, 1999, we have granted or issued and
sold the following unregistered securities:
1. We have issued stock options to employees, officers, directors and
consultants under our 1997 stock option plan to purchase an aggregate of
33,217,950 shares of our common stock, with exercise prices ranging from
$0.0011 to $2.6667. Options to purchase an aggregate of 2,867,133 shares
have been exercised for an aggregate consideration of $270,096.
2. On January 29, 1997, we issued nine shares of our common stock and
18,323,712 shares of our Series A preferred stock to Organic Holdings,
Inc. for substantially all of the assets and liabilities of Organic
Holdings, Inc. Organic Holdings, Inc. retained some of their
non-operating assets and liabilities. Concurrent with our initial public
offering on February 10, 2000, each preferred share was converted into
three common shares.
3. On January 29, 1997, we issued 3,351,288 shares of our Series A
preferred stock at $2.9833 per share to Omnicom Group, Inc. for an
aggregate cash consideration of $10,000,000. Concurrent with our initial
public offering on February 10, 2000, each preferred share was converted
into three common shares.
24
<PAGE> 25
4. On February 7, 1999, we issued 1,488,000 shares of our Series B
preferred stock at $7.2067 per share to Omnicom Group, Inc. for cash
consideration of $7,723,520 plus the settlement of a $3,000,000
short-term bridge loan.
5. On September 13, 1999, we issued a warrant for 2,249,076 shares of our
common stock to Omnicom Group in connection with the revolving credit
facility that was entered into on August 27, 1999. This warrant has an
exercise price of $0.0033 and remained outstanding as of December 31,
1999. Concurrent with our initial public offering, this warrant was
exercised for cash consideration of $7,497.
No underwriters were employed in connection with any of the transactions
set forth above.
The issuances of securities described in item (1) were deemed to be exempt
from registration in reliance on Rule 701 promulgated under the Securities Act
of 1993 as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The issuances of securities described in items (2)
through (5) were deemed to be exempt from registration in reliance on Section
4(2) of the Securities Act of 1933 as transactions by an issuer not involving a
public offering. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to distribute and received or had access to adequate information
about the Registrant.
ITEM 6. 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 the consolidated financial statements and the
notes to the consolidated financial statements, which are included elsewhere in
this report. The consolidated statement of operations and cash flow data for the
years ended December 31, 1999, 1998 and 1997 and the consolidated balance sheet
data as of December 31, 1999 and 1998 are derived from our audited consolidated
financial statements included elsewhere in this report. The consolidated
statement of operations and cash flow data for the year ended December 31, 1996
and for the period ended December 31, 1995 and the selected balance sheet data
as of December 31, 1997, 1996 and 1995 are derived from our audited consolidated
financial statements that are not included in this report. The historical
results presented below should not be considered indicative of results for any
future period. If the amortization of stock-based compensation was not presented
separately in operating expenses and was included in the specific components of
operating expenses, it would increase professional services expense by
approximately $8.4 million and $183,000 for the years ended December 31, 1999
and 1998, respectively, and increase selling, general and administrative expense
by approximately $21.0 million, $511,000, $87,000 and $53,000 for the years
ended December 31, 1999, 1998, 1997 and 1996, respectively, and approximately
$14,000 for the period ended December 31, 1995.
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<PAGE> 26
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31, 1995
YEARS ENDED DECEMBER 31, (INCEPTION)
----------------------------------------------------- THROUGH
1999 1998 1997 1996 DECEMBER 31, 1995
----------- ----------- ----------- ----------- -----------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................... $ 77,800 $ 27,734 $ 6,780 $ 4,294 $ 1,895
Operating expenses:
Professional services................ 46,254 16,801 4,285 1,889 530
Selling, general and
administrative..................... 40,513 12,068 5,473 2,104 655
Stock compensation and other
stock-based charges................ 29,381 694 87 53 14
----------- ----------- ----------- ----------- -----------
Total operating expenses...... 116,148 29,563 9,845 4,046 1,199
Operating (loss) income................ (38,348) (1,829) (3,065) 248 696
Minority interest in operations of
consolidated subsidiary.............. (68) -- -- (106) --
Interest (expense) income, net......... (278) 73 283 4 --
----------- ----------- ----------- ----------- -----------
Net (loss) income before
taxes....................... (38,694) (1,756) (2,782) 146 696
Income tax expense (benefit)........... 181 1,010 (997) (91) 284
----------- ----------- ----------- ----------- -----------
Net (loss) income............. $ (38,875) $ (2,766) $ (1,785) $ 237 $ 412
=========== =========== =========== =========== ===========
Net (loss) income per share:(1)(2)
Basic................................ $ (28.03) $ (10.81) $ (668) $ 26,286 $ 45,768
=========== =========== =========== =========== ===========
Diluted.............................. $ (28.03) $ (10.81) $ (668) $ 0.00 $ 0.01
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding:(1)(2)
Basic................................ 1,386,745 255,888 2,671 9 9
=========== =========== =========== =========== ===========
Diluted.............................. 1,386,745 255,888 2,671 65,025,009 65,025,009
=========== =========== =========== =========== ===========
Pro forma basic and diluted net (loss)
income per share(1)(3)............... $ (0.55) $ (0.04) $ (0.03) $ 0.00 $ 0.01
=========== =========== =========== =========== ===========
Shares used in computing pro forma
basic and diluted net (loss) income
per share(1)(3)...................... 71,211,105 65,280,888 65,027,671 65,025,009 65,025,009
=========== =========== =========== =========== ===========
</TABLE>
- ---------------
(1) Amounts have been restated to give retroactive effect to the 3-for-1 common
stock split on February 8, 2000.
(2) See Note 1 of Notes to Consolidated Financial Statements for explanation of
the determination of the number of weighted average shares used in computing
per share data.
(3) The pro forma weighted average number of common shares outstanding includes
the pro forma effects of our preferred stock, which automatically converted
into common stock upon the closing of our initial public offering, and the
warrant, which was exercised into common stock upon the closing of our
initial public offering, as if such conversion had occurred at the beginning
of each of the periods presented, or at the date of original issuance, if
later.
The unaudited pro forma consolidated balance sheet data reflects our
capitalization subsequent to the initial public offering closing in February
2000, which gives effect to the following:
- the sale of 6,325,000 shares of common stock (including the exercise of
the underwriters' over-allotment option) at $20.00 per share, resulting
in approximately $115.9 million of net proceeds;
- the automatic conversion of all of the then outstanding shares of our
convertible preferred stock into 69,489,000 shares of common stock; and
- the exercise of a warrant for 2,249,076 shares of common stock.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
PRO FORMA
1999 1998 1997 1996 1995 1999
------- ------- ------- ------ ---- -----------
(AMOUNTS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 8,385 $ 2,067 $ 6,135 $ 243 $ 66 $125,241
Working (deficit) capital................................ (4,680) 339 8,290 307 36 112,176
Total assets............................................. 64,264 17,605 11,426 1,677 979 180,181
Long-term obligations, less current portion.............. 478 661 604 -- -- 478
Total stockholders' equity............................... 24,778 7,190 9,225 923 338 140,695
</TABLE>
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<PAGE> 27
ITEM 7. 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 related notes appearing elsewhere in this report. 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 Part I, Item 1, "Business -- Risk
Factors" and elsewhere in this report.
OVERVIEW
Since our founding in 1993 as a sole proprietorship and incorporation in
January 1995, 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 consulting, Web site design and software engineering
implementation services; media services; communication public relations
services; and logistics customer service and fulfillment consulting services.
These services provide 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 major offline and online companies to
establish or enhance brands and have introduced several new service lines to
address particular client needs.
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. 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 in more of our service offerings over
time. For the year ended December 31, 1999, five clients accounted for
approximately 44% of our revenues, with DaimlerChrysler and Blockbuster
accounting for approximately 15% and 12%, 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.
A significant amount of our revenues are derived from providing
professional services on a fixed-fee, retainer or time and materials basis. 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 in accordance
with Statement of Position 81-1, "Accounting for Performance of Construction
Type and Certain Production Type Contracts", 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 remains accurate 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. For the
year ended December 31, 1999, we opened permanent offices in Detroit, Sao Paulo,
London and Singapore. Our international operations collectively accounted for
5.9% of our total revenues for the year ended December 31, 1999. As we continue
to expand internationally, we expect to generate a greater percentage of our
revenues outside of the United States.
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.
Professional services margins reflect revenues less professional services
expenses which are incurred
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<PAGE> 28
regardless of whether or not a billable employee's time is billed to a client.
Historically our professional services expenses have increased and we expect
these expenses will continue to increase in the foreseeable future due to
increased hiring, wage increases and inflation. Our professional services
margins are affected by many factors, including the efficiency with which we
utilize our employees and the continuation of our clients in retaining our
services. Any significant decline in fees billed to clients or the loss of a
significant client would adversely affect our professional services margins. If
a client defers, modifies or cancels an engagement or chooses not to retain our
services for additional phases of a project as expected, we must rapidly
re-deploy professional services personnel to other engagements in order to
minimize under-utilization which, in turn, would adversely affect professional
services margins.
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. As our business continues to grow and expand
globally, we expect these expenses will continue to increase in absolute dollars
as we continue to hire additional personnel, invest in our knowledge management
initiatives, and incur additional infrastructure costs.
Although revenues have consistently increased from year to year, we have
incurred significant investment costs in order to create a leadership position
in the highly competitive market in which we operate. As a result, we have
incurred significant losses since inception, and, as of December 31, 1999, had
an accumulated deficit of $43.6 million. We believe our success is primarily
contingent on increasing our customer base, hiring and retaining professionals,
and continuing our global expansion. Accordingly, we expect associated headcount
and infrastructure costs to continue to increase. We therefore expect to
continue to incur substantial operating losses for the foreseeable future.
Our clients tend to spend proportionally more during the second and third
quarters. We expect this seasonality trend to continue in the near term future.
Therefore, our operating results have fluctuated significantly from quarter to
quarter and thus make the prediction of future operating results very difficult.
Our expansion places significant demands on our management and operational
resources. We may be unable to manage our growth effectively and as a result,
our expenses could increase more quickly than our revenues. To the extent that
future revenues do not increase significantly in the same periods in which
operating expenses increase, our operating results would be adversely affected.
In addition, although we have experienced significant percentage growth in
annual revenues to date, we do not believe that prior growth rates are
sustainable or indicative of future operating results. Please refer to the
section entitled "Risk Factors" for additional information.
On January 29, 1997, Organic Online, Inc., a S corporation that contained
our operating assets and liabilities at the time, was renamed Organic Holdings,
Inc. and we were formed as a subsidiary under the name Organic Online, Inc., a C
corporation. We performed this reorganization in connection with an investment
by Omnicom Group in our business which, if made directly in Organic Holdings,
Inc., would have resulted in the termination of its S corporation status because
S corporations may not have owners that are corporate entities. The stockholders
of Organic Holdings, Inc. consist of a group of individuals including Jonathan
Nelson, the majority owner. We exchanged 18,323,712 shares of Series A preferred
stock and nine shares of common stock for substantially all of the assets and
liabilities of Organic Holdings, Inc., having a book value of approximately $0.7
million. Certain non-operating assets and liabilities (approximately $0.3
million, net) were retained by Organic Holdings, Inc. and have been excluded
from the consolidated financial statements. We also issued a total of 3,351,288
shares of Series A convertible preferred stock to Omnicom Group for an aggregate
purchase price of approximately $10.0 million. Because this reorganization did
not result in a change in control, there was no change in the basis of
accounting at the time of the reorganization. We changed our name from Organic
Online, Inc. to Organic, Inc. on January 28, 1999.
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<PAGE> 29
RESULTS OF OPERATIONS
The following table presents our consolidated statement of operations as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Operating expenses:
Professional services..................................... 59.4 60.6 63.2
Selling, general and administrative....................... 52.1 43.5 80.7
Stock compensation and other stock-based charges.......... 37.8 2.5 1.3
----- ----- -----
Total operating expenses.......................... 149.3 106.6 145.2
Operating loss.............................................. (49.3) (6.6) (45.2)
Minority interest in operations of consolidated
subsidiary................................................ (0.1) 0.0 0.0
Interest (expense) income, net.............................. (0.4) 0.3 4.2
----- ----- -----
Net loss before taxes............................. (49.8) (6.3) (41.0)
Income tax expense (benefit)................................ 0.2 3.7 (14.7)
----- ----- -----
Net loss.......................................... (50.0)% (10.0)% (26.3)%
===== ===== =====
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES
Our revenues were $77.8 million for the year ended December 31, 1999, an
increase of 181% over $27.7 million for the year ended December 31, 1998. This
increase 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, most notably DaimlerChrysler and Blockbuster, which
represented 15% and 12%, respectively, of our total revenues for the year ended
December 31, 1999. In addition, we began our international expansion by opening
permanent offices in Sao Paulo, London and Singapore. These international
locations generated 5.9% of our total revenues for the year ended December 31,
1999. To a lesser extent, existing clients also increased the breadth and scope
of their engagements with us, attributable, in part, to the addition of customer
service and fulfillment consulting services to our service offerings. Our
revenues were $27.7 million for the year ended December 31, 1998, an increase of
309% over $6.8 million for the year ended December 31, 1997. 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.
PROFESSIONAL SERVICES
Our professional services expenses were $46.3 million for the year ended
December 31, 1999, an increase of 175% over $16.8 million for the year ended
December 31, 1998. This increase was primarily due to an increase of 377 in
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 and the three
international locations mentioned previously and continued growth in our San
Francisco, New York, and Chicago offices in order to accommodate the increase in
the size and number of our projects. Our professional services expenses were
$16.8 million for the year ended December 31, 1998, an increase of 292% over
$4.3 million for the year ended December 31, 1997. This increase was primarily
due to an increase of 132 in our professional services personnel resulting 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. As a percentage of revenues, professional services expenses were 59%,
61% and 63% for the years ended December 31, 1999, 1998 and 1997, respectively.
29
<PAGE> 30
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses were $40.5 million for the
year ended December 31, 1999, an increase of 236% over $12.1 million for the
year ended December 31, 1998. This increase was primarily due to an increase of
166 in non-billable personnel to support our growth, increased costs associated
with the addition of our new offices and improvements in our office
infrastructure and increased consulting fees associated with several internal
software implementations. Our selling, general and administrative expenses were
$12.1 million for the year ended December 31, 1998, an increase of 121% over
$5.5 million for the year ended December 31, 1997. This increase reflected an
increase of 39 in non-billable personnel, increased costs associated with
opening our Chicago office and improving our office infrastructure to
accommodate growth, and increased consulting fees associated with several
internal software implementations. As a percentage of revenues, selling, general
and administrative expenses were 52%, 44% and 81% for the years ended December
31, 1999, 1998 and 1997, respectively.
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 a
warrant to Omnicom Group. For the years ended December 31, 1999 and 1998, we
recorded aggregate deferred stock-based compensation of $113.9 million 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. This
amount is included as a component of stockholders' equity and is being amortized
on an accelerated basis by charges to operations over the vesting period of the
related options, generally 4 years, consistent with the method described in
Financial Accounting Standards Board Interpretation No. 28. During the years
ended December 31, 1999, 1998 and 1997, we recognized stock-based compensation
expense of approximately $27.4 million, $694,000 and $87,000, respectively. As
of December 31, 1999, we had an aggregate of $83.4 million of related deferred
compensation to be amortized. An additional $34.8 million in deferred
stock-based compensation was recorded for grants made subsequent to 1999, but
prior to our initial public offering. The amortization of stock-based
compensation will result in additional charges to operations through fiscal
2003.
In connection with the $30.0 million revolving credit facility obtained on
August 27, 1999, we issued a warrant on September 13, 1999 that entitled Omnicom
Group to purchase 2,249,076 shares of common stock and recorded a deferred bank
facility charge of approximately $18.2 million. This amount is being amortized
on a straight-line basis over the longer of 36 months, the term of the credit
facility, or until the credit facility is terminated. For the year ended
December 31, 1999, we recognized bank facility expense of $2.0 million.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net is the net of interest income generated from
our cash and cash equivalents and short-term investments and interest expense
related to our financing obligations. We incurred interest expense, net of
approximately $278,000 for the year ended December 31, 1999 and interest income,
net of approximately $73,000 and $283,000 for the years ended December 31, 1998
and 1997. We invested our cash balances in money market funds as of December 31,
1999. We expect interest income to increase, as we intend to invest the proceeds
from our initial public offering in interest-bearing securities.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense in the year ended December 31, 1998 reflects the
establishment of a valuation allowance against our net deferred tax asset
recorded in the year ended December 31, 1997 due to projections that we would
incur a net operating loss for 1998 and the foreseeable future. As of December
31, 1999, we had net operating loss carry-forwards of approximately $8.0 million
for federal and state income tax purposes to offset future taxable income. Our
federal net operating loss carry-forwards expire in the years 2012, 2013 and
2019 and our state net operating loss carry-forwards expire in the years 2002
through 2004. Under the provisions of the Internal Revenue Code, certain
substantial changes in our ownership may limit the amount of net operating loss
carry-forwards that could be utilized annually in the future to offset taxable
income.
30
<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have primarily financed our operations through the
issuance of convertible preferred stock, borrowings under equipment lines of
credit, and borrowings under a revolving credit facility. As of December 31,
1999, we had $8.4 million in cash and cash equivalents.
Net cash used in operating activities was $5.7 million, $159,000 and $3.6
million for the years ended December 31, 1999, 1998 and 1997, respectively. Net
cash flows used in operating activities in each year reflect increasing net
losses and, to a lesser extent, increases in accounts receivable, partially
offset by increases in deferred revenues, accounts payable and accrued expenses,
and amortization of stock-based compensation.
Net cash used in investing activities was $8.9 million, $4.0 million and
$3.0 million for the years ended December 31, 1999, 1998 and 1997, respectively.
Net cash flows used in investing activities in each year primarily reflect
purchases of property and equipment and, to a lesser extent, short-term
investments. These purchases were partially offset by the proceeds from sales of
investments.
Net cash provided by financing activities was $21.3 million, $1.6 million
and $10.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Net cash provided by financing activities for the year ended
December 31, 1999 was due to the issuance of Series B convertible preferred
stock and borrowings under the revolving credit facility as described below. Net
cash provided by financing activities for the year ended December 31, 1998
primarily reflects borrowings from the second credit agreement for the purchase
of equipment as described below. Net cash provided by financing activities for
the year ended December 31, 1997 was primarily attributable to the issuance of
Series A convertible preferred stock as described below.
Capital expenditures, excluding capital leases, were $9.1 million, $5.6
million, and $1.1 million for the years ended December 31, 1999, 1998 and 1997.
Our capital expenditures consisted of purchases of operating resources to manage
our operations, including computer equipment, computer software, other internal
software implementations and leasehold improvements. Since inception, we have
generally funded capital expenditures through the use of capital leases,
equipment lines of credit and software financing agreements. We expect that our
capital expenditures will continue to increase in the future, in part due to the
relocation of our headquarters in San Francisco, and that these expenditures
will be primarily for the purchase of computer equipment, computer software,
internal software implementations and leasehold improvements.
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. 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 1996, we entered into two lines of credit with a commercial lending
institution, Silicon Valley Bank. The first agreement allowed us to borrow up to
$2.5 million at the bank's prime lending rate plus 1.5% through July 1999,
limited by 75% of our accounts receivable and $1.0 million in outstanding
letters of credit. The second agreement, as amended in July 1998, allowed us to
borrow up to $1.5 million more for equipment purchases at the bank's prime
lending rate plus 0.50%. As of December 31, 1999, there were no amounts
outstanding under these agreements.
On August 27, 1999, we entered into a revolving credit facility with
Omnicom Group that allows us to borrow up to $30.0 million at the lender's
commercial paper rate plus 3.0% until the closing of our initial public
offering. The revolving credit facility is primarily used for working capital
purposes. This credit facility contains some restrictions and any borrowings
under the credit facility require us to comply with financial covenants and are
secured by some of our investments. These financial covenants include minimum
revenue targets and limitations on capital equipment purchases. As of December
31, 1999, we had $13.2 million outstanding under this revolving credit facility.
Upon the completion of our initial public offering in February 2000, the
borrowing limit available under the revolving credit facility was reduced to
$15.0 million at the lender's commercial paper rate plus 1.25% through September
30, 2002 and the amount outstanding including interest was repaid.
31
<PAGE> 32
We have several capital leases with various vendors for equipment used in
our operations with lease terms ranging from four to six years. In aggregate,
the leases carry an implicit interest rate of 8.25% and the monthly payments
range from $1,000 to $5,000 under the terms of these leases. As of December 31,
1999, the remaining aggregate obligation under these capital leases was
approximately $141,000.
On February 10, 2000, we completed an initial public offering of 6,325,000
shares of our common stock (including the exercise of the underwriters'
over-allotment option) at $20.00 per share and realized net proceeds of
approximately $115.9 million. We believe that the net proceeds from the
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, we may find it necessary to obtain
additional equity or debt financing. We cannot be certain that such additional
financing will be readily available or can be obtained, if at all, on terms that
is favorable to us. In the near term, we do not have any current plans for
further equity offerings, including a follow-on public offering which could
cause significant dilution for our existing shareholders.
IMPACT OF YEAR 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
The year 2000 problem existed because many computer systems and software
products use only the last two digits to refer to a year, creating the potential
for computerized programs to treat "00" as the year 1900, rather than as the
year 2000, in date-sensitive calculations. In our Registration Statement on Form
S-1 declared effective on February 9, 2000 by the Securities and Exchange
Commission (File No. 333-91627), we discussed the nature and progress of our
plans to prepare for any system or processing failures that could occur as a
result of this problem. In late 1999, we completed 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. As a result of
our planning and implementation efforts, we have experienced to date no
significant disruptions in either our internal operations or in our client
deliverables. The few issues that have been noted were dealt with at the time
they arose. Our costs to date concerning the year 2000 problem have not been
material. We are not aware of any material problems resulting from year 2000
issues, either with our internal systems, our software products, or the products
and services we deliver to our clients. We will continue to monitor both our
internal operations and those of our vendors and clients throughout the year
2000 to ensure that any latent year 2000 matters that may arise are addressed
promptly.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement will require us to recognize all
derivatives on the balance sheet at fair value. The Statement 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. We believe that the adoption of this Statement will not have a material
effect on our consolidated financial position, results of operations or cash
flows.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This Statement 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. We adopted Statement of
Position 98-1 as of January 1, 1999. The adoption of this Statement did not have
a material effect on our consolidated financial position, results of operations
or cash flows.
32
<PAGE> 33
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". This Statement requires that entities expense start-up costs and
organization costs as they are incurred. We adopted Statement of Position 98-5
as of January 1, 1999. As we have expensed these costs historically, the
adoption of this Statement did not have a material effect on our consolidated
financial position, results of operations or cash flows.
In November 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 100, "Restructuring and Impairment Charges". In December
1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements". Staff Accounting
Bulletin No. 100 expresses the views of the Securities and Exchange Commission
staff regarding the accounting for and disclosure of certain expenses not
commonly reported in connection with exit activities and business combinations.
This includes the accrual of exit and employee termination costs and the
recognition of impairment charges. Staff Accounting Bulletin No. 101 expresses
the views of the Securities and Exchange Commission staff in applying accounting
principles generally accepted in the United States to certain revenue
recognition issues. We do not anticipate that these Staff Accounting Bulletins
will have a material impact on our financial position, results of operations or
cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We invest our cash in money market funds,
which are subject to minimal credit and market risk. We believe the market risks
associated with these financial instruments are immaterial.
FOREIGN CURRENCY RISK
We face foreign currency risks primarily as a result of the revenues we
receive from services delivered through our foreign subsidiaries. These
subsidiaries incur most of their expenses in the local currency. Accordingly,
our foreign subsidiaries use the local currency as their functional currency.
We are also exposed to foreign exchange rate fluctuations, primarily with
respect to the British Pound and the Euro, as the financial results of foreign
subsidiaries are translated into U.S. dollars for consolidation. As exchange
rates vary, these results, when translated, may vary from expectations and
adversely impact net income (loss) and overall profitability. The effect of
foreign exchange rate fluctuation for the year ended December 31, 1999 was not
material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, and the related notes
thereto, of Organic, Inc. and the Report of Independent Accountants are filed as
a part of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 34
Consolidated Balance Sheets at December 31, 1999 and 1998... 35
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... 36
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 38
Notes to Consolidated Financial Statements.................. 39
Report of Independent Accountants on Financial Statement
Schedule.................................................. 56
Financial Statement Schedule II -- Valuation and Qualifying
Accounts for the years ended December 31, 1999, 1998 and
1997...................................................... 57
</TABLE>
33
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Organic, Inc.
In our opinion, the accompanying consolidated balance sheets 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. and its subsidiaries, at December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the three years
ended December 31, 1999, 1998 and 1997, in conformity with accounting principles
generally accepted in the United States. These consolidated financial statements
are the responsibility of Organic, Inc.'s management; our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We conducted our audits of these financial statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 1, 2000,
except for Note 11 for which
the date is May 6, 2000
34
<PAGE> 35
ORGANIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------- DECEMBER 31,
1999 1998 1999
-------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,385 $ 1,667 $125,241
Short-term investments.................................... -- 400 --
Accounts receivable, net of allowance of $1,078 and $283
at December 31, 1999 and 1998, respectively............. 15,487 5,447 15,487
Accounts receivable -- media spending..................... 3,282 1,472 3,282
Costs in excess of billings............................... 5,248 574 5,248
Deposits and prepaid expenses............................. 1,327 287 1,327
Other assets.............................................. 265 108 265
-------- ------- --------
Total current assets................................ 33,994 9,955 150,850
Property and equipment, net............................... 10,759 6,570 10,759
Long-term investments..................................... 1,990 602 1,990
Deferred bank facility charge, net of accumulated
amortization of $2,017 at
December 31, 1999....................................... 16,134 -- 16,134
Other assets.............................................. 1,387 478 448
-------- ------- --------
Total assets........................................ $ 64,264 $17,605 $180,181
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,232 $ 3,899 $ 3,232
Current portion of long-term debt......................... 13,450 2,735 13,450
Current portion of obligations under capital leases....... 44 36 44
Accrued expenses.......................................... 5,245 674 5,245
Accrued employee costs.................................... 4,206 187 4,206
Deferred rent............................................. 345 -- 345
Deferred revenue.......................................... 6,357 1,013 6,357
Deferred revenue -- media spending........................ 5,795 1,072 5,795
-------- ------- --------
Total current liabilities........................... 38,674 9,616 38,674
Long-term debt, net of current portion.................... 381 553 381
Obligations under capital leases, net of current
portion................................................. 97 108 97
Deferred rent............................................. -- 138 --
-------- ------- --------
Total liabilities................................... 39,152 10,415 39,152
-------- ------- --------
Commitments and contingencies (Note 8)
Minority interest in consolidated subsidiary................ 334 -- 334
Stockholders' equity:
Series A convertible preferred stock, $.0001 par value,
21,675,000 shares authorized, issued and outstanding at
December 31, 1999 and 1998 (none pro forma) (aggregate
liquidation preference $64,664)......................... 2 2 --
Series B convertible preferred stock, $.0001 par value,
1,488,000 shares authorized,
issued and outstanding at December 31, 1999 (none pro
forma) (aggregate liquidation
preference $10,724)..................................... -- -- --
Common stock, $.0001 par value, 200,000,000 shares
authorized, 2,844,642 and
902,817 shares issued and outstanding at December 31,
1999 and 1998, respectively
(80,907,718 pro forma).................................. -- -- 8
Additional paid-in capital................................ 151,743 13,584 267,654
Deferred compensation..................................... (83,370) (1,664) (83,370)
Accumulated deficit....................................... (43,607) (4,732) (43,607)
Accumulated other comprehensive income.................... 10 -- 10
-------- ------- --------
Total stockholders' equity.......................... 24,778 7,190 140,695
-------- ------- --------
Total liabilities and stockholders' equity.......... $ 64,264 $17,605 $180,181
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 36
ORGANIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues.................................................... $ 77,800 $ 27,734 $ 6,780
Operating expenses:
Professional services (exclusive of $8,415, $183 and $0
reported below of stock-based compensation for the years
ended 1999, 1998 and 1997).............................. 46,254 16,801 4,285
Selling, general and administrative (exclusive of $20,966,
$511 and $87 reported below of stock-based compensation
for the years ended 1999, 1998 and 1997)................ 40,513 12,068 5,473
Stock compensation and other stock-based charges.......... 29,381 694 87
----------- ----------- -----------
Total operating expenses............................ 116,148 29,563 9,845
----------- ----------- -----------
Operating loss.............................................. (38,348) (1,829) (3,065)
Minority interest in operations of consolidated
subsidiary................................................ (68) -- --
Interest (expense) income, net.............................. (278) 73 283
----------- ----------- -----------
Net loss before taxes............................... (38,694) (1,756) (2,782)
Income tax expense (benefit)................................ 181 1,010 (997)
----------- ----------- -----------
Net loss............................................ $ (38,875) $ (2,766) $ (1,785)
=========== =========== ===========
Basic and diluted net loss per share........................ $ (28.03) $ (10.81) $ (668)
=========== =========== ===========
Weighted average common shares outstanding -- basic and
diluted................................................... 1,386,745 255,888 2,671
=========== =========== ===========
Unaudited pro forma basic and diluted net loss per share.... $ (0.55) $ (0.04) $ (0.03)
=========== =========== ===========
Unaudited pro forma weighted average common shares
outstanding -- basic and diluted.......................... 71,211,105 65,280,888 65,027,671
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 37
ORGANIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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, 1996...... -- $-- -- $-- $ 1,621 $ (518) $ (181)
Issuance of Series A convertible
preferred stock on
reorganization.................. 18,323,712 2 9 -- (2) -- --
Issuance of Series A convertible
preferred stock................. 3,351,288 -- -- -- 10,000 -- --
Common stock options exercised.... -- -- 6,993 -- 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 2 7,002 -- 11,250 (61) (1,966)
Common stock options exercised.... -- -- 895,815 -- 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 2 902,817 -- 13,584 (1,664) (4,732)
Issuance of Series B convertible
preferred stock, net of issuance
costs of $6..................... 1,488,000 -- -- -- 10,718 -- --
Common stock options exercised.... -- -- 1,964,325 -- 233 -- --
Common stock options
repurchased..................... -- -- (22,500) -- (13) -- --
Deferred stock-based
compensation.................... -- -- -- -- 113,937 (113,937) --
Amortization of deferred stock-
based compensation.............. -- -- -- -- -- 27,364 --
Reduction in deferred stock-based
compensation expense related to
stock options cancelled......... -- -- -- -- (4,867) 4,867 --
Issuance of common stock
warrants........................ -- -- -- -- 18,151 -- --
Net loss........................ -- -- -- -- -- -- (38,875)
Foreign currency translation
adjustment...................... -- -- -- -- -- -- --
Comprehensive loss................
---------- ------- --------- ------- -------- --------- --------
BALANCE AT DECEMBER 31, 1999...... 23,163,000 $ 2 2,844,642 $-- $151,743 $ (83,370) $(43,607)
========== ======= ========= ======= ======== ========= ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
------------- -------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1996...... $-- $ 922
Issuance of Series A convertible
preferred stock on
reorganization.................. -- --
Issuance of Series A convertible
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
Issuance of Series B convertible
preferred stock, net of issuance
costs of $6..................... -- 10,718
Common stock options exercised.... -- 233
Common stock options
repurchased..................... -- (13)
Deferred stock-based
compensation.................... -- --
Amortization of deferred stock-
based compensation.............. -- 27,364
Reduction in deferred stock-based
compensation expense related to
stock options cancelled......... -- --
Issuance of common stock
warrants........................ -- 18,151
Net loss........................ -- (38,875)
Foreign currency translation
adjustment...................... 10 10
--------
Comprehensive loss................ (38,865)
------------ --------
BALANCE AT DECEMBER 31, 1999...... $10 $ 24,778
============ ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE> 38
ORGANIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(38,875) $(2,766) $(1,785)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 3,975 1,248 432
Stock-based compensation and other stock-based
charges................................................ 29,381 694 87
Provision for doubtful accounts and sales returns....... 1,120 280 --
Write-off of fixed assets............................... 1,247 12 --
Minority interest in operations of consolidated
subsidiary............................................. 334 -- --
Provision (benefit) for deferred income taxes........... -- 1,000 (1,000)
Revenue recognized in exchange for investments.......... (1,187) (577) (100)
Changes in assets and liabilities:
Increase in accounts receivable....................... (13,170) (4,622) (1,911)
(Increase) decrease in costs in excess of billings.... (4,674) (571) 34
Increase in deposits and prepaid expenses............. (1,044) (127) (138)
Increase in other assets.............................. (984) (480) (76)
Increase in accounts payable and accrued expenses..... 7,830 3,878 603
Increase in deferred revenue.......................... 10,067 1,734 235
Increase in deferred rent............................. 207 138 --
Increase in income taxes payable...................... 93 -- --
-------- ------- -------
Net cash used in operating activities............... (5,680) (159) (3,619)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (9,137) (5,579) (1,099)
Purchase of long-term investments......................... (200) -- --
Purchase of short-term investments........................ (2,005) (1,865) (2,271)
Proceeds from the sale and maturity of short-term
investments............................................. 2,405 3,336 400
Proceeds from the sale of long-term investments........... -- 75 --
-------- ------- -------
Net cash used in investing activities............... (8,937) (4,033) (2,970)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A and B convertible
preferred stock, net.................................... 7,718 -- 10,000
Proceeds from exercises of common stock options........... 233 37 1
Proceeds from long-term debt.............................. 26,230 1,938 757
Payments for repurchase of common stock options........... (13) -- --
Payments on notes payable -- related party................ -- -- (8)
Payments on capital leases................................ (39) (25) --
Payments on long-term debt................................ (12,804) (355) (140)
-------- ------- -------
Net cash provided by financing activities........... 21,325 1,595 10,610
Effect of exchange rate changes on cash and cash
equivalents......................................... 10 -- --
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents......................................... 6,718 (2,597) 4,021
Cash and cash equivalents at beginning of period............ 1,667 4,264 243
-------- ------- -------
Cash and cash equivalents at end of period.................. $ 8,385 $ 1,667 $ 4,264
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest.................................... $ 571 $ 138 $ 44
======== ======= =======
Cash paid for income taxes................................ $ 110 $ 90 $ 5
======== ======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under financing
obligations............................................. $ 153 $ 906 $ --
======== ======= =======
Conversion of debt into preferred stock................... $ 3,000 $ -- $ --
======== ======= =======
Issuance of common stock warrants......................... $ 18,151 $ -- $ --
======== ======= =======
Deferred stock-based compensation......................... $113,937 $ 2,348 $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE> 39
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Organic Inc. ("Organic" or "the Company") is an international Internet
professional services firm focused on the customer-to-business market. The
Company provides services to its clients including management consulting;
creative design and engineering implementation services; marketing services;
public relations services; and customer service and fulfillment consulting and
transaction management services. The marketing and public relations 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 nine 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.
INITIAL PUBLIC OFFERING
In February 2000, the Company completed its initial public offering ("IPO")
of 6,325,000 shares of its common stock (including the exercise of the
underwriters' over-allotment option) at $20.00 per share. The Company sold all
of the shares of common stock and realized proceeds, after deducting
underwriting discounts, commissions and offering expenses, of approximately
$115.9 million. Upon the closing date of the IPO, all of the convertible
preferred stock outstanding prior to the IPO was converted into 69,489,000
shares of common stock. In addition, a warrant issued to Omnicom Group was
exercised for 2,249,076 shares of common stock.
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
Brasil 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. On February 8, 2000,
the Company effected a 3-for-1 split of its outstanding shares of common stock.
All share and per share information included in these financial statements have
been retroactively adjusted to reflect these stock splits.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
39
<PAGE> 40
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 classifies its investments in certain debt and equity
securities as available for sale securities. Accordingly, these investments are
carried at fair value with the unrealized gains and losses, net of tax, reported
as a component of other comprehensive income. The Company recognizes gains and
losses when securities are sold using the specific identification method. For
the years ended December 31, 1999, 1998 and 1997, the Company did not recognize
any material gains or losses upon the sale of securities.
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. Revenues derived from customers outside the United States have not
been significant. At December 31, 1999 and 1998, one customer and two customers
accounted for 11% and 24% of total accounts receivable, respectively. For the
years ended December 31, 1999 and 1998, two customers and one customer accounted
for 27% and 12% of the Company's revenues, respectively. For the year ended
December 31, 1997, no customers accounted for more than 10% of the Company's
revenues.
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, accounts payable, accrued expenses and accrued
employee costs 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.
DEFERRED OFFERING COSTS
At December 31, 1999, specific incremental costs directly attributable to
the planned IPO process have been deferred. These deferred costs, totaling
approximately $939,000, are included in other assets on the consolidated balance
sheet. These costs were charged against additional paid-in capital in connection
with the consummation of the IPO in February 2000.
40
<PAGE> 41
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Revenues on contracts are recorded using the percentage-of-completion
method, retainer basis, or on a time and materials basis. Under the
percentage-of-completion method, revenues on contracts are recognized based on
the percentage of costs incurred to date to total estimated project costs in
accordance with Statement of Position ("SOP") 81-1. Earned but unbilled project
revenues are classified under current assets as costs in excess of billings.
Deferred revenues include 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, revenues on
contracts are recognized over the life of the contracts on a straight-line
basis. Under the time and materials basis, revenues on contracts are 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 revenues when these services
are rendered. Revenues exclude reimbursable expenses charged to clients.
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. Advertising expense was approximately $568,000, $52,000
and $42,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
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 expense items 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 LOSS PER SHARE
The Company computes basic net loss per share by dividing net loss
available to common stockholders for the period by the weighted average number
of common shares outstanding during the period. Diluted net loss per share is
computed by dividing net loss available to common stockholders for the period by
the
41
<PAGE> 42
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
weighted average number of common and, when dilutive, common equivalent shares
outstanding during the period. Common equivalent shares consist of common stock
subject to repurchase rights, the incremental common shares issuable upon the
exercise of the stock options and warrant (using the treasury stock method), and
the incremental common shares issuable upon the conversion of the convertible
preferred stock (using the if-converted method).
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Unaudited pro forma net loss per share for the years ended December 31,
1999, 1998 and 1997 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 Series A and Series B convertible preferred stock,
which automatically converted into common stock upon the closing of the IPO, and
the warrant, which was exercised into common stock upon the completion of the
IPO, as if such conversion had occurred at the beginning of each of the periods
presented, or at the date of original issuance, if later.
PRO FORMA BALANCE SHEET (UNAUDITED)
The unaudited pro forma balance sheet at December 31, 1999 reflects the
Company's capitalization subsequent to the IPO closing, which gives effect to
the following: i) the sale of 6,325,000 shares of common stock, resulting in net
proceeds of approximately $115.9 million, ii) the automatic conversion of all of
the then outstanding shares of Series A and Series B convertible preferred stock
into 69,489,000 shares of common stock and iii) the exercise of a warrant for
2,249,076 shares of common stock.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
("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 a significant impact on the Company's
consolidated financial position, results of operations or cash flows.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
under the intrinsic value method and complies with the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". Under the intrinsic
value method, compensation cost is recognized based on the difference, if any,
on the date of grant between the fair value of the Company's common stock and
the amount an employee must pay to purchase the stock.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
No. 96-18, "Accounting for Equity Instruments that are Issued to Employees for
Acquiring, or in Conjunction with Selling, Goods or Services".
The Company amortizes deferred stock-based compensation recorded in
connection with certain stock option grants over the vesting periods of the
related options.
42
<PAGE> 43
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
Although the Company offers various services such as ibusiness, media,
communications and logistics to its customers, management does not manage its
operations by these service lines, but instead views the Company as one
operating segment when making business decisions. The Company does manage its
operations on a geographical basis and, to date, has provided services primarily
in the United States. Through December 31, 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".
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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, results of operations or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued 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, results of operations or cash flows.
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. As the Company has expensed these costs historically, the
adoption of this SOP did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
In November 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 100, "Restructuring and Impairment
Charges". In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements". SAB No. 100 expresses the views of the SEC staff
regarding the accounting for and disclosure of certain expenses not commonly
reported in connection with exit activities and business combinations. This
includes the accrual of exit and employee termination costs and the recognition
of impairment charges. SAB No. 101 expresses the views of the SEC staff in
applying accounting principles generally accepted in the United States to
certain revenue recognition issues. The Company does not anticipate that these
SABs will have a material impact on its financial position, results of
operations or cash flows.
43
<PAGE> 44
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 2 -- BALANCE SHEET COMPONENTS
ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------ ------- ------
<S> <C> <C>
Accounts receivable......................................... $16,565 $5,730
Less: allowance for doubtful accounts....................... (828) (283)
Less: allowance for sales credits........................... (250) --
------- ------
$15,487 $5,447
======= ======
</TABLE>
Bad debt expense was $870,000, $280,000 and $0 for the years ended December
31, 1999, 1998 and 1997, respectively. Sales credits expense was $250,000, $0
and $0 for the years ended December 31, 1999, 1998 and 1997, respectively.
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 write-down for any declines in value that are judged to be other than
temporary. During the years ended December 31, 1999, 1998 and 1997, the Company
received common stock that was recorded at $1.2 million, $577,000 and $100,000,
respectively. In addition, the Company made a cash investment of $200,000 in a
privately held company for the year ended December 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation
and amortization. At December 31, 1999 and 1998, the amounts were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
Computer hardware........................................... $ 9,137 $ 4,354
Computer software........................................... 2,718 1,461
Equipment................................................... 959 721
Furniture................................................... 263 243
Leasehold improvements...................................... 2,866 1,638
------- -------
$15,943 $ 8,417
Less: accumulated depreciation and amortization............. (5,184) (1,847)
------- -------
$10,759 $ 6,570
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was approximately $3.9 million, $1.2 million, and $401,000, respectively.
Included in the above is equipment acquired under capital leases of
approximately $204,000 and $169,000 at December 31, 1999 and 1998, respectively.
Accumulated amortization on equipment acquired under capital leases was
approximately $78,000 and $28,000 at December 31, 1999 and 1998, respectively.
44
<PAGE> 45
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 2 -- BALANCE SHEET COMPONENTS (CONTINUED)
ACCRUED EMPLOYEE COSTS
Accrued employee costs as of December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------ ------ ----
<S> <C> <C>
Accrued bonuses............................................. $3,244 $ --
Other accrued employee costs................................ 962 187
------ ----
$4,206 $187
====== ====
</TABLE>
NOTE 3 -- DEBT
The Company had the following debt outstanding at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------ -------- -------
<S> <C> <C>
Revolving credit facility................................... $ 13,200 $ --
Amounts borrowed under equipment line of credit............. -- 2,551
Amounts borrowed under software financing agreements........ 601 737
Client deposits............................................. 30 --
-------- -------
13,831 3,288
Less: current portion....................................... (13,450) (2,735)
-------- -------
Total long-term debt........................................ $ 381 $ 553
======== =======
</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 IPO.
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.
Borrowings under the revolving credit facility are secured 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 December 31, 1999, the Company was in compliance with
these covenants. Shortly after the completion of the IPO in February 2000, the
amounts borrowed including interest were fully repaid.
In connection with this agreement, the Company issued a warrant to purchase
2,249,076 shares of its common stock at $0.0033 per share (Note 4).
The equipment line of credit, together with an additional credit agreement
permitting borrowings through September 30, 1999 with the same financial
institution, allowed the Company to borrow up to $1.5 million for equipment
purchases and an additional $2.5 million that was limited to 75% of eligible
accounts receivable and any outstanding letters of credit up to $1.0 million.
Amounts borrowed under the equipment line of credit incurred interest at the
bank's prime lending rate plus 0.50%.
The amounts borrowed under the two software financing agreements bear
interest rates of 6.89% and 8.25%, respectively, and require principal payments
of approximately $250,000, $329,000, and $22,000 during the years ended December
31, 2000, 2001 and 2002, respectively.
45
<PAGE> 46
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 4 -- COMMON AND CONVERTIBLE PREFERRED STOCK
COMMON AND CONVERTIBLE PREFERRED STOCK
At December 31, 1999, the Company had authorized 25,000,000 shares of
preferred stock. Of the 25,000,000 authorized shares of preferred stock, the
Company has designated 21,675,000 shares as Series A convertible preferred stock
and 1,488,000 shares as Series B convertible preferred stock. Upon the closing
of the IPO, 3,000,000 shares of the Company's preferred stock was designated as
Series C convertible preferred stock.
At December 31, 1999, the Company had authorized 80,000,000 shares of
common stock. In January 2000, the Company's Board of Directors approved an
amendment to the Articles of Incorporation to increase the number of authorized
common shares to 200,000,000.
VOTING RIGHTS
Convertible 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 convertible 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 convertible preferred stock are entitled to
receive non-cumulative 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 convertible 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 declared no dividends through December
31, 1999.
CONVERSION
At December 31, 1999, at the option of the holder, each share of Series A
and B convertible preferred stock was 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. Following the 3-for-1
split of the Company's outstanding common stock on February 8, 2000, the
conversion rate became one share of convertible preferred stock for three shares
of common stock. Each share of Series A and B convertible preferred stock
automatically converts into common stock upon the earlier of i) a vote or
written consent by at least a majority of such shares when fewer than 2,100,000
shares of Series A convertible 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 $1.11 per share with aggregate proceeds of at least $7.5
million.
In connection with the closing of the Company's IPO in February 2000, all
of the convertible preferred stock converted into 69,489,000 shares of common
stock.
46
<PAGE> 47
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 4 -- COMMON AND CONVERTIBLE PREFERRED STOCK (CONTINUED)
WARRANTS
In connection with the revolving credit facility (Note 3), the Company
issued a warrant that entitles Omnicom Group to purchase 2,249,076 shares of the
Company's common stock at an exercise price of $0.0033 per share. The fair value
of the warrant was estimated at $8.07 per share using the Black-Scholes pricing
model with the following assumptions: a risk-free interest rate of 6.77%, life
of six months, expected dividend rate of 0%, and volatility of 110%. The Company
recorded approximately $18,151,000 as a deferred bank facility charge that is
being amortized on a straight-line basis over the longer of three years, the
life of the revolving credit facility, or until the credit facility is
terminated.
Upon the closing of the Company's IPO, the Company received approximately
$7,000 in cash proceeds from Omnicom Group for its exercise of the warrant into
2,249,076 shares of common stock.
NOTE 5 -- STOCK OPTIONS
1997 STOCK PLAN
In April 1997, the Company adopted the 1997 Stock Option Plan ("the 1997
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 22,725,000 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. The 1997 Plan also allows for the
exercise of unvested options. Shares of common stock issued to employees upon
exercise of unvested options are subject to repurchase by the Company at the
original exercise price. As of December 31, 1999, 144,735 shares of common stock
were issued upon the exercise of unvested options subject to repurchase under
the 1997 Plan. The Company's ability to repurchase these shares expires at a
rate consistent with the vesting schedule of each option or lapses entirely
after 90 days from an employee's termination date. 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 1997 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 any ISO or 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.
47
<PAGE> 48
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5 -- STOCK OPTIONS (CONTINUED)
The following table summarizes the transactions under the 1997 Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year....... 10,649,958 $0.13 8,230,005 $0.09 -- $ --
Granted................. 15,309,525 1.71 7,543,575 0.14 10,364,850 0.09
Exercised............... (1,964,325) 0.12 (895,815) 0.04 (6,993) 0.10
Expired or cancelled.... (5,076,834) 0.37 (4,227,807) 0.10 (2,127,852) 0.10
---------- ---------- ----------
Options outstanding, end
of year................. 18,918,324 $1.34 10,649,958 $0.13 8,230,005 $0.09
========== ========== ==========
Options outstanding and
vested, end of year..... 2,046,888 $0.31 1,451,949 $0.10 1,870,734 $0.08
========== ========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
under the 1997 Plan.
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1999 DECEMBER 31, 1999
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <S> <C> <C> <C>
$ 0.00 149,202 7.22 years $0.00 37,640 $0.00
0.10 - 0.56 5,931,927 8.49 0.20 1,860,008 0.13
0.67 - 1.33 4,497,525 9.48 0.99 2,638 0.67
1.67 - 2.00 2,581,845 9.67 1.74 -- --
2.33 - 2.67 5,757,825 9.89 2.65 146,602 2.67
---------- ---- ----- --------- -----
18,918,324 9.30 $1.34 2,046,888 $0.31
========== ==== ===== ========= =====
</TABLE>
At December 31, 1999, 1998 and 1997, 962,043, 11,172,234, and 14,488,002
shares, respectively, were available for future stock option grants under the
1997 Plan.
The Company recognized deferred compensation in connection with certain
stock grants that is being amortized over the vesting period of the options.
Total stock-based compensation expense for the years ended December 31, 1999,
1998 and 1997 was approximately $27.4 million, $694,000 and $87,000,
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.
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 loss and net loss per share would have
increased to the pro forma amounts indicated in the following table. Since no
options were granted prior to 1997 under this 1997 Plan, the pro forma results
indicated for those periods presented in the following
48
<PAGE> 49
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5 -- STOCK OPTIONS (CONTINUED)
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>
YEARS ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
- ----------------------------------------------------------- -------- ------- -------
<S> <C> <C> <C>
Net loss:
As reported.............................................. $(38,875) $(2,766) $(1,785)
SFAS No. 123 adjusted.................................... (41,058) (2,883) (1,808)
Basic and diluted net loss per share:
As reported.............................................. $ (28.03) $(10.81) $ (668)
SFAS No. 123 adjusted.................................... (29.61) (11.27) (677)
</TABLE>
The weighted-average fair value of 1997 Plan options granted was $7.77,
$0.34 and $0.02 for the years ended December 31, 1999, 1998, and 1997,
respectively. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates.................................... 5.52% 5.12% 5.72%
Expected lives (years)...................................... 4 4 4
Expected dividend yields.................................... 0% 0% 0%
Expected volatility......................................... 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 above may not be representative of future
periods.
Prior to the adoption of the 1997 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, 1999, 1998 and 1997, the
employees and directors were granted 225,409, 5,000, and 24,000 options,
respectively, under this arrangement. At December 31, 1999, the number of
options outstanding under this arrangement was 358,017.
1999 LONG-TERM STOCK INCENTIVE PLAN
In November 1999, the Company's Board of Directors approved the 1999
Long-Term Stock Incentive Plan ("the 1999 Plan") under which 10,500,000 shares
of common stock have been reserved for issuance. The number of shares reserved
under the 1999 Plan will automatically increase annually beginning on January 1,
2000 by the lesser of 3,000,000 shares or 4% of the total amount of common
shares outstanding as of the last day of the immediately preceding year. Under
the 1999 Plan, the Board of Directors is authorized to issue to eligible
employees stock options, stock appreciation rights ("SAR"), restricted shares
and stock units. 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 grant. In accordance with the
1999 Plan, the stated exercise price for ISO's may not be less than 100% of the
fair value of common stock at the option grant date. The exercise price for
NSO's and SAR's may not be less than 85% of the fair value of common stock at
the option grant date. The exercise price of any stock option or SAR granted to
a 10% shareholder shall not be less than 110% of the
49
<PAGE> 50
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5 -- STOCK OPTIONS (CONTINUED)
estimated fair value of the shares on the date of grant. At December 31, 1999,
10,500,000 shares remain available for future stock option grants.
NOTE 6 -- 401(k) SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN
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. All employer contributions are tax deductible
by the Company. The Company's matching contribution expense was approximately
$139,000 for the year ended December 31, 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 December 31, 1999.
EMPLOYEE STOCK PURCHASE PLAN
In January 2000, the Company's Board of Directors adopted the 2000 Employee
Stock Purchase Plan ("ESPP") under which 10,000,000 shares of common stock have
been reserved for issuance. The ESPP was implemented upon the effectiveness of
the IPO. All employees whose customary employment is for more than five months
in any calendar year and more than 20 hours per week are eligible to
participate. The ESPP was implemented with overlapping offering periods of 24
months and six-month purchase periods, with the first such purchase period
commencing upon the effectiveness of the IPO and ending June 30, 2000.
Thereafter, purchase periods will begin on each January 1 and July 1. Eligible
employees may contribute up to 15% of their cash compensation through salary
deductions during each six-month purchase period. At the end of the purchase
period, the amount contributed will be used to purchase the Company's common
stock. The purchase price per share will be the lesser of 85% of the fair market
value on the first day of an offering period and 85% of the fair market value on
the last day of a purchase period, except that the purchase price for the first
purchase period will be equal to the lesser of 85% of the IPO price of the
common stock offered and 85% of the fair market value on June 30, 2000. In no
event may an employee purchase more than $25,000 worth of stock in a 12 month
period or more than 1,250 shares in any six month purchase period.
50
<PAGE> 51
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 7 -- INCOME TAXES
The tax effects of temporary differences that give rise to the significant
portions of the deferred tax assets as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
Depreciation................................................ $ 73 $ (26)
Compensation costs.......................................... 4,070 --
Organizational costs........................................ 10 6
Tax credits................................................. 179 9
Accruals and reserves....................................... 957 243
Net operating loss carryforward............................. 3,721 1,240
------- -------
Gross deferred tax asset.................................. 9,010 1,472
Valuation allowance......................................... (9,010) (1,472)
------- -------
Net deferred tax asset.................................... $ -- $ --
======= =======
</TABLE>
The valuation allowance increased by approximately $7.5 million in 1999.
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its deferred tax assets. At such time as it is determined that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
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, compensation relating to stock options, and
the valuation allowance.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $8.0 million for federal and state income tax purposes arising
from the taxable loss in the years ended December 31, 1999, 1998 and 1997.
Deferred tax assets and the related valuation allowance include approximately
$7.5 million related to certain U.S. operating loss carryforwards resulting from
the exercise of stock options, the tax benefit, of which when recognized, will
be accounted for as a credit to additional paid-in capital rather than as a
reduction of its income tax provision.
The federal net operating loss carryforwards expire in the years 2012, 2013
and 2019, respectively. The state net operating loss carryforwards expire in the
years 2002 through 2004.
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.
51
<PAGE> 52
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 7 -- INCOME TAXES (CONTINUED)
Upon the formation of the Company into Organic Online (Note 1) in January
1997, the Company operated as a C-Corporation. Prior to that, the Company was a
S-Corporation and, accordingly, was not subject to income tax. The components of
income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
(IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------ ---- ------ -------
<S> <C> <C> <C>
Current
State..................................................... $ 12 $ 10 $ 3
Foreign................................................... 169 -- --
---- ------ -------
Total currently payable........................... 181 10 3
---- ------ -------
Deferred
Federal................................................... -- 753 (753)
State..................................................... -- 247 (247)
---- ------ -------
Total deferred.................................... -- 1,000 (1,000)
---- ------ -------
Total income tax expense (benefit)................ $181 $1,010 $ (997)
==== ====== =======
</TABLE>
NOTE 8 -- 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 approximately
$2.7 million, $876,000 and $207,000 for the years ended December 31, 1999, 1998
and 1997, respectively. At December 31, 1999, the future minimum lease payments
under all lease arrangements were as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
(IN THOUSANDS) LEASES LEASES
- ------------------------------------------------------------ --------- -------
<S> <C> <C>
Years ending December 31,
2000................................................. $ 5,853 $ 62
2001................................................. 14,696 49
2002................................................. 14,993 46
2003................................................. 15,158 26
2004................................................. 15,097 1
Thereafter................................................ 117,713 --
-------- ----
Total minimum lease payments...................... $183,510 $184
========
Less: amount representing interest........................ (43)
----
Present value of net minimum payments..................... $141
Less: current portion of obligations under capital
leases................................................. (44)
----
Obligations under capital leases.......................... $ 97
====
</TABLE>
Several of the leases contain an escalation clause and there are no
restrictions on paying dividends, incurring additional debt or negotiating
additional leases under the terms of the present lease agreements.
From time to time, the Company may be involved in litigation incidental to
the conduct of its business. As of December 31, 1999, the Company was not
involved with any material legal proceedings. See Note 11 for discussion of a
legal proceeding that arose subsequent to December 31, 1999.
52
<PAGE> 53
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 9 -- NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1999 1998 1997
- --------------------------------------------------------- ---------- -------- -------
<S> <C> <C> <C>
Numerator:
Net loss attributable to common stockholders............. $ (38,875) $ (2,766) $(1,785)
========== ======== =======
Denominator:
Weighted average common shares outstanding............... 1,459,888 255,888 2,671
Less: weighted average unvested common shares subject to
repurchase............................................. (73,143) -- --
---------- -------- -------
Weighted average common shares used in computing basic
and diluted net loss per share......................... 1,386,745 255,888 2,671
========== ======== =======
Basic and diluted net loss per share..................... $ (28.03) $ (10.81) $ (668)
========== ======== =======
</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,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average effect of common stock equivalents:
Series A convertible preferred stock................. 65,025,000 65,025,000 65,025,000
Series B convertible preferred stock................. 4,121,556 -- --
Unvested common shares subject to repurchase......... 73,143 -- --
Common stock options................................. 8,243,198 2,057,823 --
Common stock warrants................................ 677,804 -- --
</TABLE>
NOTE 10 -- RELATED PARTY TRANSACTIONS
On March 31, 1999, the Company entered into a promissory note agreement for
$200,000 with an Executive Officer of the Company. This loan was secured by a
pledge of the Executive's shares of common stock. This note bears an annual
interest rate of 7% with interest payments due every other year beginning on
March 31, 2001. The principal of the note was repaid on April 11, 2000.
The Company has had, and expects to have in the future, transactions in the
ordinary course of business with Omnicom Group. 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 February 1999, the Company issued 1,488,000 shares of Series B convertible
preferred stock to Omnicom Group for net cash proceeds of approximately $7.7
million plus the settlement of a $3.0 million short-term bridge loan that was
obtained from Omnicom Group in January 1999. See Note 3 and 4 for detailed
information on the Company's revolving credit facility agreement with Omnicom
Group and issuance of related warrants.
In November 1999, the Company entered into two new leases for office space
in New York and San Francisco. The lease in San Francisco was secured with a
$10.0 million letter of credit from Silicon Valley Bank that was guaranteed by
Omnicom Group and the lease in New York was guaranteed for up to $4.5 million by
Omnicom Group.
53
<PAGE> 54
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 10 -- RELATED PARTY TRANSACTIONS (CONTINUED)
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties.
NOTE 11 -- SUBSEQUENT EVENTS
In January 2000, the Company formed Organic Online Canada, Inc., a wholly
owned subsidiary in Toronto, Canada.
On February 17, 2000, a former employee filed an action against Organic
Holdings, Inc., Organic, Inc., and Jonathan Nelson, the Company's Chief
Executive Officer and Chairman of the Board, in the California Superior Court in
San Francisco. (Haig v. Organic Holdings, Inc., et al.) An amended complaint was
filed on March 22, 2000. The amended complaint asserts several claims based on
allegations that the former employee was prevented from exercising his stock
options in Organic Holdings. The amended complaint seeks substantial actual and
exemplary damages apparently based on the increase in the value of Organic
Holdings stock after the IPO of two companies in which it owns substantial
stakes, including Organic, Inc. The case is in its earliest stages, no response
to the complaint has been filed, and no discovery has been taken. The Company
and its co-defendants believe that these claims lack any merit, and intend to
contest them vigorously.
On April 27, 2000, the Company entered into a promissory note agreement for
$3.0 million bearing an annual interest rate of 9% with an Executive Officer of
the Company. The amount due including interest was repaid in full on May 5,
2000.
54
<PAGE> 55
ORGANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE 12 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth a summary of our unaudited quarterly
financial information for the periods indicated. This information was derived
from our unaudited interim financial statements and, in management's opinion,
include all adjustments necessary to fairly present the results of operations
for the periods shown.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1999 1999 1999 1999 1998
- ----------------------------------------------- ------------ ------------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 26,019 $ 24,427 $ 17,267 $ 10,087 $ 6,990
Operating expenses:
Professional services.................. 16,325 16,098 8,263 5,568 5,610
Selling, general and
administrative....................... 14,495 13,044 8,325 4,649 4,792
Stock compensation and other stock-based
charges.............................. 17,924 8,558 2,176 723 403
---------- ---------- ---------- -------- --------
Total operating expenses......... 48,744 37,700 18,764 10,940 10,805
Operating (loss) income.................. (22,725) (13,273) (1,497) (853) (3,815)
Minority interest in operations of consolidated
subsidiary............................. (29) (66) 4 23 --
Interest (expense) income, net........... (267) (26) 36 (21) --
---------- ---------- ---------- -------- --------
Net (loss) income before taxes... (23,021) (13,365) (1,457) (851) (3,815)
Income tax expense....................... 117 26 23 15 97
---------- ---------- ---------- -------- --------
Net (loss) income................ $ (23,138) $ (13,391) $ (1,480) $ (866) $ (3,912)
========== ========== ========== ======== ========
Basic net (loss) income per share........ $ (10.97) $ (9.36) $ (1.35) $ (0.96) $ (6.64)
========== ========== ========== ======== ========
Diluted net (loss) income per share...... $ (10.97) $ (9.36) $ (1.35) $ (0.96) $ (6.64)
========== ========== ========== ======== ========
Weighted average common shares
outstanding -- basic................... 2,108,762 1,429,928 1,093,883 900,656 589,398
========== ========== ========== ======== ========
Weighted average common shares
outstanding -- diluted................. 2,108,762 1,429,928 1,093,883 900,656 589,398
========== ========== ========== ======== ========
<CAPTION>
QUARTER ENDED
-----------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1998 1998 1998
- ----------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
Revenues................................. $ 7,579 $ 8,114 $ 5,051
Operating expenses:
Professional services.................. 5,457 3,562 2,172
Selling, general and
administrative....................... 2,911 2,688 1,677
Stock compensation and other stock-based
charges.............................. 196 79 16
-------- ----------- -----------
Total operating expenses......... 8,564 6,329 3,865
Operating (loss) income.................. (985) 1,785 1,186
Minority interest in operations of consolidated
subsidiary............................. -- -- --
Interest (expense) income, net........... (6) 35 44
-------- ----------- -----------
Net (loss) income before taxes... (991) 1,820 1,230
Income tax expense....................... 801 100 12
-------- ----------- -----------
Net (loss) income................ $ (1,792) $ 1,720 $ 1,218
======== =========== ===========
Basic net (loss) income per share........ $ (5.76) $ 20.06 $ 140
======== =========== ===========
Diluted net (loss) income per share...... $ (5.76) $ 0.03 $ 0.02
======== =========== ===========
Weighted average common shares
outstanding -- basic................... 311,025 85,740 8,691
======== =========== ===========
Weighted average common shares
outstanding -- diluted................. 311,025 65,373,576 65,240,094
======== =========== ===========
</TABLE>
55
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Organic, Inc.
Our report on the financial statements of Organic, Inc. and its
subsidiaries is included on page 34 of this Annual Report on Form 10-K. In
connection with our audits of such financial statements, we have also audited
the financial statement schedule listed on page 57 of this Annual Report on Form
10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 1, 2000
56
<PAGE> 57
ORGANIC, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
THE BEGINNING COSTS AND THE END
CLASSIFICATION OF THE YEAR EXPENSES WRITE-OFFS OF THE YEAR
- ----------------------------------------------------------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1999:
Allowance deducted from accounts receivable
Allowance for doubtful accounts.......................... $ 283 $ 870 $ (325) $ 828
Allowance for sales credits.............................. -- 250 -- 250
------------- ---------- ----------- -----------
$ 283 $ 1,120 $ (325) $ 1,078
============= ========== =========== ===========
1998:
Allowance deducted from accounts receivable
Allowance for doubtful accounts.......................... $ 96 $ 280 $ (93) $ 283
============= ========== =========== ===========
1997:
Allowance deducted from accounts receivable
Allowance for doubtful accounts.......................... $ 96 $ -- $ -- $ 96
============= ========== =========== ===========
</TABLE>
57
<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain required information about our executive officers is contained in
Part I, Item 4A of this Annual Report on Form 10-K under the heading "Executive
Officers of the Registrant".
BOARD OF DIRECTORS
Our Board of Directors is currently comprised of five directors. Our Board
of Directors is divided into three classes: Class I, whose term will expire at
the 2001 annual meeting of stockholders; Class II, whose term will expire at the
2002 annual meeting of stockholders; and Class III, whose term will expire at
the 2003 annual meeting of stockholders. Our Board of Directors has initially
designated Jonathan Nelson as a Class I director; Michael Hudes and Gerald Bruce
Redditt as Class II directors; and Gary F. Hromadko as a Class III director.
There is currently one Class III vacancy on our Board of Directors.
At each annual meeting of stockholders after the initial classification,
the successors to the directors whose terms have expired will be elected to
serve from the time of election and qualification until the third annual meeting
following their election, or until their successors have been duly elected and
qualified, or until their earlier resignation or removal, if any. Our bylaws
authorized the number of directors to be not fewer than five or more than nine.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of an equal number of directors. The
classification of our Board of Directors could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of us.
Each executive officer is elected by, and serves at the discretion of, our
Board of Directors until his or her successor has been duly elected and
qualified. Each of our executive officers and directors, other than non-
employee directors, devotes his or her full time to our affairs. Our
non-employee directors devote the amount of time necessary to discharge their
duties to us. Mr. Hudes, our President, is the brother-in-law of Daniel J.
Lynch, our President of Logistics. There are otherwise no family relationships
among any of our directors, officers or key employees.
INFORMATION REGARDING DIRECTORS
Set forth below is certain information regarding each of our current
directors.
JONATHAN NELSON, age 32, 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 also served as Chairman of the Board of Accrue from
February 1996 to November 1999.
MICHAEL HUDES, age 38, 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.
GARY F. HROMADKO, age 47, has served as a member of our Board of Directors
since January 1997 and has served as a director of Organic Online, Ltd., one of
our wholly owned subsidiaries, since February 1999. Since 1993, Mr. Hromadko has
been a private venture investor in early stage technology companies.
58
<PAGE> 59
GERALD BRUCE REDDITT, age 48, 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, Ltd.
BOARD COMMITTEES
Our Board of Directors recently established an audit committee and a
compensation committee. The audit committee meets with and considers suggestions
from members of management and our internal accounting personnel, as well as our
independent accountants, concerning our financial operations. The audit
committee also has the responsibility to review our audited financial statements
and consider and recommend the employment of, and approve the fee arrangements
with, our independent accountants for both audit functions and advisory and
other consulting services. The audit committee is currently comprised of Messrs.
Hromadko, Redditt and Hudes, all of whom were elected to the committee in
November 1999. The compensation committee reviews and approves the compensation
and benefits payable to our key executive officers, administers our equity
incentive plans and makes recommendations to our Board of Directors regarding
such matters. The compensation committee is currently comprised of Messrs.
Hromadko and Redditt, both of whom were elected to the committee in February
2000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors, executive officers and holders of more
than 10% of a registered class of our equity securities to file reports of
ownership on a Form 3 and changes in ownership on a Form 4 or a Form 5 with the
Securities and Exchange Commission ("SEC") and the Nasdaq National Market. Such
persons are also required by the SEC regulations to furnish us with copies of
all Section 16(a) forms that they file. Because we were not a reporting company
during fiscal year 1999, no reports were required during that year. Accordingly,
we believe that our directors, officers and holders of more than 10% of our
common stock fully complied with any reporting requirements of the Exchange Act.
59
<PAGE> 60
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table contains information in summary form concerning the
compensation paid to our chief executive officer and each of our four most
highly compensated executive officers whose total salary, bonus and other
compensation exceeded $100,000 during the fiscal years ended December 31, 1997,
1998 and 1999. In accordance with the rules of the SEC, the compensation
described below 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.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OPTIONS COMPENSATION(2)
- --------------------------------------------- ---- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Jonathan Nelson.............................. 1999 $183,072 $ 54,922 -- $2,520
Chief Executive Officer and Chairman of 1998 94,947 -- -- 2,520
the Board 1997 87,484 -- -- 2,730
Michael Hudes................................ 1999 225,352 75,000 -- --
President and Director 1998 165,792 65,000 1,476,000 --
1997 137,086 -- -- --
Janis Nakano Spivack(3)...................... 1999 171,250 47,500 67,500 --
Vice President, Chief Creative Officer 1998 132,500 11,000 -- --
1997 15,875 -- 382,500 --
Susan Field(4)............................... 1999 130,773 150,000 1,755,000 --
Executive Vice President and Chief
Financial 1998 -- -- -- --
Officer 1997 -- -- -- --
Matthew Bernardini(5)........................ 1999 166,967 40,000 382,500 --
Vice President, Chief Technology Officer 1998 110,417 15,000 45,000 --
1997 22,529 -- 90,000 --
</TABLE>
- ---------------
(1) Salary includes amounts deferred under our 401(k) Plan.
(2) Represents term life insurance premiums paid by us on Mr. Nelson's behalf.
(3) Ms. Spivack commenced employment with us in November 1997.
(4) Ms. Field commenced employment with us in June 1999.
(5) Mr. Bernardini commenced employment with us in October 1997.
OPTION GRANTS DURING FISCAL YEAR 1999
The following table sets forth certain information concerning grants of
stock options to each of the executive officers named in the table above during
the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR 1999(2) SHARE(3) DATE 5% 10%
- --------------------------------- ---------- ------------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Nelson.................. -- -- -- -- -- --
Michael Hudes.................... -- -- -- -- -- --
Janis Nakano Spivack............. 67,500 0.4% $ 2.6667 11/22/09 $113,202 $ 286,877
Susan Field...................... 1,755,000 11.5% $ 0.8333 6/23/09 $919,722 $2,330,755
Matthew Bernardini............... 382,500 2.5% $ 1.3333 7/13/09 $320,736 $ 812,809
</TABLE>
- ---------------
(1) 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. These
gains are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. These numbers are calculated based on SEC
requirements and do not reflect our estimate or projection of the future
common stock price.
(2) The percentage of total options is based on an aggregate of 15,309,525
options granted to employees during fiscal 1999.
(3) All options were granted at a fair market value as determined by our Board
of Directors on the date of grant.
60
<PAGE> 61
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the executive officers named in
the table above the shares acquired and the value realized on each exercise of
stock options during the year ended December 31, 1999 and the year-end number
and value of exercisable and unexercisable options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1999(1) AT DECEMBER 31, 1999(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Nelson.................. -- -- -- -- -- --
Michael Hudes.................... -- -- 553,500 922,500 $1,421,880 $2,369,800
Janis Nakano Spivack............. 183,282 $409,737 15,937 250,781 $ 40,940 $ 470,829
Susan Field...................... -- -- -- 1,755,000 $ -- $3,217,500
Matthew Bernardini............... 16,989 $ 40,095 43,949 456,562 $ 112,899 $ 690,706
</TABLE>
- ---------------
(1) Although options are immediately exercisable for all the option shares, any
shares purchased under such an option are subject to repurchase by us, at
the exercise price paid per share, in the event the optionee ceases to
provide services to us prior to vesting in those shares. Accordingly, the
table reflects such option shares as to which the repurchase right has
lapsed under the "exercisable" column and such option shares subject to the
repurchase right under the "unexercisable" column.
(2) Value of exercised in-the-money options represents the positive spread
between the option exercise price and the deemed fair market value of our
common stock at December 31, 1999, which our Board of Directors determined
was $2.6667 per share.
EMPLOYMENT AGREEMENTS
JONATHAN NELSON
On January 29, 1997, Mr. 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 Chairman 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. If 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, the following:
- his applicable salary compensation less any income earned from subsequent
employment, limited to 90 days once written notice is given; and
- any unpaid reimbursable expenses outstanding, and any unused accrued
vacation, as of the date of termination.
MICHAEL HUDES
On January 29, 1997, Mr. Hudes entered into an employment agreement with us
to serve as our President. Mr. Hudes 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. If 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, the following:
61
<PAGE> 62
- his applicable salary compensation less any income earned from subsequent
employment, limited to 90 days once written notice is given; and
- any unpaid reimbursable expenses outstanding, and any unused accrued
vacation, as of the date of termination.
SUSAN L. FIELD
On June 22, 1999, Ms. 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.
Ms. Field's employment agreement also provides her with an incentive stock
option for the purchase of 480,000 shares of our common stock pursuant to our
1997 stock option plan at an exercise price of $0.8333 per share, and a
nonstatutory stock option for the purchase of 1,125,000 shares of our common
stock pursuant to our 1997 stock option plan, at an exercise price of $0.8333
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 150,000 shares of
common stock pursuant to our 1997 stock option plan, at an exercise price of
$0.8333 per share. Of these shares, 75,000 vested upon the closing of the
initial public offering on February 18, 2000 and 75,000 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. In the event Ms. Field's employment is terminated without cause, we
will provide her with the following:
- a payment equal to three months of her salary, less standard withholdings
and deductions; and
- 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.
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
The compensation committee makes all compensation decisions. Gary F.
Hromadko and Gerald Bruce Redditt have served as the only members of the
compensation committee since we formed the committee in February 2000. No member
of our compensation committee has served 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. No
member of our compensation committee is or was one of our officers or employees.
62
<PAGE> 63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our common stock
as of March 31, 2000 by each person or entity known by us to own beneficially
more than five percent of our common stock; by each of our executive officers
named in the Summary Compensation Table; by each of our directors; and by our
executive officers and directors as a group.
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 subject to options which are exercisable within sixty
days of March 31, 2000 are deemed to be outstanding and to be beneficially owned
by the person holding such options for the purpose of computing the percentage
ownership of such person, but are not deemed to be outstanding and to be
beneficially owned for the purpose of computing the percentage ownership of any
other person.
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
NUMBER OF SHARES BENEFICIALLY
NAME AND ADDRESS BENEFICIALLY OWNED OWNED(1)
- -------------------------------------------------- ------------------ --------------------
<S> <C> <C>
Organic Holdings, Inc. ........................... 51,954,975 59.3%
c/o Organic, Inc.
510 Third Street
San Francisco, CA 94107
Omnicom Group, Inc. .............................. 14,983,101 17.1%
437 Madison Avenue
New York, NY 10022
Jonathan Nelson(2)................................ 51,954,975 59.3%
Michael Hudes(3).................................. 1,014,750 1.2%
Janis Nakano Spivack(4)........................... 239,063 *
Susan Field(5).................................... 75,000 *
Matthew Bernardini(6)............................. 154,164 *
Gary F. Hromadko.................................. -- *
Bruce Redditt..................................... -- *
All executive officers and directors as a group
(14 persons)(7)................................. 55,721,040 63.5%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent of the common
stock.
(1) Computed on the basis of 87,553,746 shares outstanding as of March 31, 2000
and, with respect to each officer and director, shares subject to options
exercisable within 60 days of March 31, 2000.
(2) Shares beneficially owned by Mr. Nelson consist of 51,974,975 shares owned
by Organic Holdings, Inc., of which Mr. Nelson is the majority stockholder.
(3) As of March 31, 2000, 369,000 shares held by Mr. Hudes were subject to a
right of repurchase by us which lapses over time.
(4) Includes 55,781 shares subject to options exercisable within 60 days of
March 31, 2000, of which 39,843 shares were vested and 15,938 shares were
unvested as of March 31, 2000.
(5) Includes 75,000 shares subject to options exercisable within 60 days of
March 31, 2000, of which 75,000 were vested as of March 31, 2000.
(6) Includes 10,311 shares subject to options exercisable within 60 days of
March 31, 2000, of which 4,686 shares were vested and 5,625 shares were
unvested as of March 31, 2000. As of March 31, 2000, 74,478 shares held by
Mr. Bernardini were subject to a right of repurchase by us which lapses over
time.
(7) Includes 159,180 shares subject to options exercisable within 60 days of
March 31, 2000, of which 131,367 shares were vested and 27,813 shares were
unvested as of March 31, 2000. As of March 31, 2000, 1,549,480 shares held
by such persons were subject to a right of repurchase by us which lapses
over time.
63
<PAGE> 64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1999, the beginning of our fiscal year, we have never been
party to, and have no plan to be a party to, any transaction or series of
similar transactions in which the amount included exceeded or will exceed
$60,000 and in which any director, executive officer or holder of more than five
percent of our common stock had or will have an interest, other than as
described under "Executive Compensation" and the transactions described below.
OMNICOM GROUP
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. Omnicom Group beneficially owns
more than five percent of our common stock.
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 our initial public
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.
Additionally, in connection with the revolving credit facility, we issued a
warrant to purchase 2,249,076 shares of our common stock to Omnicom Group at an
exercise price of $0.0033 per share.
One of our directors, Gerald Bruce Redditt, has served as Executive Vice
President of Omnicom Group since 1998.
OFFICER LOAN
On March 31, 1999, we entered into a promissory note agreement for $200,000
with Michael Hudes. This loan was secured by a pledge of Mr. Hudes' shares of
common stock. This note bears an annual interest rate of 7% with principal and
interest payments due every other year beginning on March 31, 2001. The
principal of the note was repaid on April 11, 2000.
On April 27, 2000, we entered into a promissory note agreement for $3.0
million bearing an annual interest rate of 9% with Michael Hudes. The amount due
including interest was repaid in full on May 5, 2000.
REGISTRATION RIGHTS
We have entered into an investor's rights agreement with Organic Holdings,
Inc., which beneficially owns more than five percent of our common stock, and
Omnicom Group. This agreement provides that, subject to specified limitations,
if we propose to register any of our common stock under the Securities Act,
Organic Holdings, Inc., Omnicom Group and their permitted transferees have the
right to include their shares of common stock in the registration. Furthermore,
subject to specified limitations, Organic Holdings, Inc., Omnicom Group and
their permitted transferees may require us to register all or part of the common
stock they hold. These demand rights apply during the period commencing on
August 10, 2000 and ending on August 10, 2005. The number of shares included in
any underwritten offering can be limited by the underwriters of that offering.
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.
64
<PAGE> 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Part II, Item 8 of this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
See Part II, Item 8 of this Annual Report on Form 10-K.
3. EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits that were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is the same as those set forth
below.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of
Registrant(1)
3.2 Amended and Restated Bylaws of Registrant(1)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen Certificate of the Registrant's common stock(1)
4.3 Rights Agreement between Registrant and EquiServe Trust
Company, N.A., as Rights Agent(2)
4.4 Investors' Rights Agreement by and among Registrant, Organic
Holdings, Inc. and Omnicom Group, Inc., dated February 8,
2000(1)
10.1 Form of Indemnification Agreement between Registrant and
each of its executive officers and Directors(1)
10.2 Registrant's 1997 Stock Option Plan, as amended and
restated, including forms of agreements thereunder(1)(3)
10.3 Registrant's 1999 Long-Term Stock Incentive Plan, including
forms of agreements thereunder(1)(3)
10.4 Employment Agreement between Registrant and Jonathan Nelson,
dated January 29, 1997 and amended February 24, 1997(1)(3)
10.5 Employment Agreement between Registrant and Michael Hudes,
dated January 29, 1997 and amended February 24, 1997(1)(3)
10.6 Employment Agreement between Registrant and Susan L. Field,
dated June 22, 1999(1)(3)
10.7 Loan Agreement between Registrant and Omnicom Group, Inc.,
dated August 27, 1999(1)
10.8 Guaranty and Security Agreement by and among Registrant,
Organic Media, Inc. and Omnicom Group, Inc., dated August
27, 1999(1)
10.9 Revolving Note of Registrant payable to Omnicom Group, Inc.,
dated August 27, 1999(1)
10.10 Lease between 500 Third Street Associates and Registrant,
dated July 22, 1996(1)
10.11 Lease between 500 Third Street Associates and Registrant,
dated July 22, 1996(1)
10.12 Lease between 500 Third Street Associates and Registrant,
dated December 5, 1996(1)
10.13 Lease between Trustees of the Masonic Hall and Asylum Fund
and Registrant, dated June 1998(1)
10.14 Lease between Trustees of the Masonic Hall and Asylum Fund
and Registrant, dated September 15, 1999(1)
10.15 Lease between Baker Hamilton Properties, LLC and Registrant,
dated November 8, 1999(1)
10.16 Lease between 233 Broadway Owners LLC and Registrant, dated
November 4, 1999(1)
10.17 Registrant's 2000 Employee Stock Purchase Plan(1)
</TABLE>
65
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
10.18 Sublease between Looksmart, Ltd. and Registrant, dated
January 14, 2000(1)
10.19 Omnibus Service Agreement between Registrant and
Blockbuster, Inc., dated February 1, 1999(1)
10.20 DaimlerChrysler Corporation Agreement with Registrant, dated
March 15, 1999(1)
21.1 Subsidiaries of the Registrant(1)
24.1 Power of Attorney (contained in the signature page to this
Report)
27.1 Financial Data Schedule(2)
</TABLE>
- ---------------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 333-91627).
(2) Filed herewith.
(3) Management contract or compensatory plan, contract or arrangement.
(b) REPORTS ON FORM 8-K
None.
66
<PAGE> 67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Organic, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORGANIC, INC. (Registrant)
By: /s/ JONATHAN NELSON
------------------------------------
Jonathan Nelson
Chief Executive Officer and
Chairman of the Board
Date: May 8, 2000
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jonathan Nelson, Michael Hudes, Susan L.
Field and Margaret M. Zagel, and each of them, his or her true and lawful
attorneys-in-fact, each with the power of substitution, for him or her in any
and all capacities, to sign any amendments to this Report on Form 10-K, and to
file the same, with Exhibits thereto and other documents in connection therewith
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Organic, Inc.
and in the capacities and on the date indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JONATHAN NELSON Chief Executive Officer and Chairman of the Board
--------------------------------------------- (Principal Executive Officer)
Jonathan Nelson
/s/ MICHAEL HUDES President and Director
---------------------------------------------
Michael Hudes
/s/ SUSAN L. FIELD Executive Vice President and Chief Financial
--------------------------------------------- Officer (Principal Financial Officer)
Susan L. Field
/s/ SHELLY A. SAUNDERS Vice President, Corporate Controller and Treasurer
--------------------------------------------- (Principal Accounting Officer)
Shelly A. Saunders
/s/ GARY F. HROMADKO Director
---------------------------------------------
Gary F. Hromadko
/s/ GERALD BRUCE REDDITT Director
---------------------------------------------
Gerald Bruce Redditt
</TABLE>
Dated: May 8, 2000
67
<PAGE> 1
EXHIBIT 4.3
ORGANIC, INC.
and
EquiServe Trust Company, N.A.
as Rights Agent
RIGHTS AGREEMENT
Dated as of February 9, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
Section 1. Certain Definitions........................................................1
Section 2. Appointment of Rights Agent................................................6
Section 3. Issue of Rights Certificates...............................................6
Section 4. Form of Rights Certificates................................................7
Section 5. Countersignature and Registration..........................................8
Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates...................8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights..............9
Section 8. Cancellation and Destruction of Rights Certificates.......................11
Section 9. Reservation and Availability of Capital Stock.............................11
Section 10. Preferred Stock Record Date...............................................13
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights..........................................................13
Section 12. Certificate of Adjusted Purchase Price or Number of Shares................22
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power......22
Section 14. Fractional Rights and Fractional Shares...................................25
Section 15. Rights of Action..........................................................26
Section 16. Agreement of Rights Holders...............................................26
Section 17. Rights Certificate Holder Not Deemed a Stockholder........................27
Section 18. Concerning the Rights Agent...............................................27
Section 19. Merger or Consolidation or Change of Name of Rights Agent.................28
Section 20. Duties of Rights Agent....................................................28
Section 21. Change of Rights Agent....................................................31
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
Section 22. Issuance of New Rights Certificates.......................................31
Section 23. Redemption and Termination................................................32
Section 24. Notice of Certain Events..................................................33
Section 25. Notices...................................................................33
Section 26. Supplements and Amendments................................................34
Section 27. Successors................................................................35
Section 28. Determinations and Actions by the Board of Directors, etc.................35
Section 29. Benefits of this Agreement................................................35
Section 30. Severability..............................................................35
Section 31. Governing Law.............................................................36
Section 32. Counterparts..............................................................36
Section 33. Descriptive Headings......................................................36
Section 34. Exchange..................................................................36
Exhibit A Form of Rights Certificate ...............................................A-1
Exhibit B Form of Summary of Rights ................................................B-1
Exhibit C Certificate of Designation ...............................................C-1
</TABLE>
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<PAGE> 4
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of February 9, 2000 (the "Agreement"),
between Organic, Inc., a Delaware corporation (the "Company"), and EquiServe
Trust Company, a Delaware corporation (the "Rights Agent").
WHEREAS, effective February 9, 2000 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company (the "Board of Directors") (i)
authorized and declared a dividend distribution of one Right for each share of
Common Stock, par value $.0001 per share, of the Company (the "Company Common
Stock") outstanding at the Close of Business on February 9, 2000 (the "Record
Date"), and (ii) authorized the issuance of one Right (as such number may
hereinafter be adjusted pursuant hereto) for each share of Company Common Stock
issued between the Record Date (whether originally issued or delivered from the
Company's treasury) and, except as otherwise provided in Section 22, the
Distribution Date, each Right initially representing the right to purchase upon
the terms and subject to the conditions hereinafter set forth one Unit of Series
C Preferred Stock (the "Rights"); and
WHEREAS, the Board of Directors of the Company has determined that it is
in the best interest of the Company and the holders of the Company Common Stock
to amend the Agreement with respect to the provisions governing supplements and
amendments to the Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates or Associates of such Person, shall be the
Beneficial Owner of 15% or more of the shares of Company Common Stock
then outstanding. Notwithstanding the foregoing: (i) an "Acquiring
Person" shall not include: (A) the Company; (B) any Subsidiary of the
Company; (C) any employee benefit plan maintained by the Company or any
of its Subsidiaries; (D) any trustee or fiduciary with respect to such
employee benefit plan acting in such capacity or a trustee or fiduciary
holding shares of Company Common Stock for the purpose of funding any
such plan or employee benefits; (E) Organic Holdings, Inc./Omnicom Group
Inc. ("Holdings/Omnicom"), not including any of its transferees or
assignees, but only so long as (x) Holdings/Omnicom is not required to
report such ownership on Schedule 13(D) under the Exchange Act (or any
comparable or successor report), and (y) Holdings/Omnicom's Beneficial
Ownership of the shares of Company Common Stock does not exceed the sum
of Holdings/Omnicom's Beneficial Ownership of Company Common Stock on
the date of this Agreement plus 1% of the shares of Company Common Stock
outstanding on such date; (F) any Person if the Board of Directors of
the Company determines in good faith that such Person who would
otherwise be an "Acquiring Person" became such inadvertently (including,
without limitation, because (x) such Person was unaware that it
beneficially owned a percentage
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<PAGE> 5
of Company Common Stock that would otherwise cause such Person to be an
"Acquiring Person" or (y) such Person was aware of the extent of its
Beneficial Ownership of Company Common Stock but had no actual knowledge
of the consequences of such Beneficial Ownership under this Agreement)
and without any intention of changing or influencing control of the
Company, and if such Person does not acquire any additional shares of
Company Common Stock and as promptly as practicable divested or divests
itself of Beneficial Ownership of a sufficient number of shares of
Company Common Stock so that such Person would no longer be an
"Acquiring Person;" or (G) any Person who becomes the Beneficial Owner
of 15% or more of the then outstanding shares of Company Common Stock as
a result of the acquisition of shares of Company Common Stock directly
from the Company in one or more transactions approved by a majority of
the Board of Directors, and (ii) no Person shall be deemed an "Acquiring
Person" as a result of the acquisition of shares of Company Common Stock
by the Company which, by reducing the number of shares of Company Common
Stock outstanding, increases the proportional number of shares
beneficially owned by such Person; provided, however, that if (A) a
Person would become an Acquiring Person (but for the operation of this
subclause (ii)) as a result of the acquisition of shares of Company
Common Stock by the Company and (B) after such share acquisition by the
Company, such Person becomes the Beneficial Owner of any additional
shares of Company Common Stock, then such Person shall be deemed an
Acquiring Person unless upon becoming the Beneficial Owner of such
additional shares such Person is the Beneficial Owner of less than 15%
of the then outstanding shares of Company Common Stock. Each Person
identified in subclauses (A), (B), (C) and (D) of this Section (1)(a) is
individually an "Exempt Person" and collectively "Exempt Persons."
(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as in effect on the date hereof.
(c) A Person shall be deemed the "Beneficial Owner" of, and
shall be deemed to have "Beneficial Ownership" of and to "beneficially
own", any securities:
(i) of which such Person or any of such Person's
Affiliates or Associates is considered to be a "beneficial
owner" under Rule 13d-3 of the General Rules and Regulations
under the Exchange Act (the "Exchange Act Regulations") as in
effect on the date hereof; provided, however, that a Person
shall not be deemed the "Beneficial Owner" of, or to
"beneficially own", any securities under this subparagraph (i)
as a result of an agreement, arrangement or understanding to
vote such securities if such agreement, arrangement or
understanding (A) arises solely from a revocable proxy or
consent given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the
applicable provisions of the Exchange Act and the Exchange Act
Regulations, and (B) is not reportable by such Person on
Schedule 13D under the Exchange Act (or any comparable or
successor report);
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<PAGE> 6
(ii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
of such other Person) with which such Person (or any of such
Person's Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing), for
the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy or consent as described in the proviso to
subparagraph (i) of this paragraph (c)) or disposing of such
securities; or
(iii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the right
to acquire (whether such right is exercisable immediately or
only after the passage of time or upon the satisfaction of
conditions) pursuant to any agreement, arrangement or
understanding (whether or not in writing) or upon the exercise
of conversion rights, exchange rights, rights, warrants or
options, or otherwise;
provided, however, that under this paragraph (c) a Person shall not be
deemed the "Beneficial Owner" of, to have "Beneficial Ownership" of, or
to "beneficially own", (A) securities tendered pursuant to a tender or
exchange offer made in accordance with Exchange Act Regulations by such
Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange, (B)
securities that may be issued upon exercise of Rights at any time prior
to the occurrence of a Triggering Event, or (C) securities that may be
issued upon exercise of Rights from and after the occurrence of a
Triggering Event, which Rights were acquired by such Person or any of
such Person's Affiliates or Associates prior to the Distribution Date or
pursuant to Section 3(c) or Section 22 hereof (the "Original Rights") or
pursuant to Section 11(i) hereof in connection with an adjustment made
with respect to any Original Rights; and further provided, however, that
(x) nothing in this paragraph (c) shall cause a Person engaged in
business as an underwriter of securities to be the "Beneficial Owner"
of, or to "beneficially own," any securities acquired through such
Person's participation in good faith in a firm commitment underwriting
until the expiration of forty days after the date of such acquisition,
(y) no decision reached, or action taken, by the Board of Directors of
the Company or any committee thereof shall cause any Person (or any
Affiliate or Associate of such Person) who is a member of the Board of
Directors of the Company or such committee to be deemed, for the
purposes of this Agreement, to be a Beneficial Owner of any securities
beneficially owned by any other Person (or any Affiliate or Associate of
such Person) who is a member of the Board of Directors of the Company or
any committee thereof solely by reason of such membership of the Board
of Directors or any committee thereof or participation in the decisions
or actions thereof on the part of either or both of such Persons and (z)
no Person who is an officer, director or employee of an Exempt Person
shall be deemed, solely by reason of such Person's status or authority
as such, to be the "Beneficial Owner" of, to have "Beneficial Ownership"
of or to "beneficially own" any securities that are "beneficially owned"
(as defined in this paragraph (c)), including, without limitation, in a
fiduciary capacity, by an Exempt Person or by any other such officer,
director or employee of an Exempt Person.
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<PAGE> 7
(d) "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the city of San
Francisco, California is authorized or obligated by law or executive
order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M.,
California time, on such date; provided, however, that if such date is
not a Business Day it shall mean 5:00 P.M., California time, on the next
succeeding Business Day.
(f) "Common Stock" of any Person other than the Company shall
mean the capital stock of such Person with the greatest voting power,
or, if such Person shall have no capital stock, the equity securities or
other equity interest having power to control or direct the management
of such Person.
(g) "Company" means Organic, Inc., a Delaware corporation, and
also means a Principal Party to the extent provided in Section 13(a).
(h) "Company Common Stock" has the meaning set forth in the
Whereas Clause.
(i) "Distribution Date" has the meaning set forth in Section
3(a).
(j) "Expiration Date" has the meaning set forth in Section 7(a).
(k) "Person" shall mean any individual, partnership, firm,
corporation, association, trust, unincorporated organization or other
entity, as well as any syndicate or group deemed to be a person under
Section 14(d)(2) of the Exchange Act as in effect on the date hereof.
(l) "Preferred Stock" shall mean the Series C Preferred Stock,
par value $.0001 per share, of the Company having the voting powers,
designation, preferences and relative, participating, optional or other
special rights and qualifications, limitations and restrictions
described in the Certificate of Designation set forth as Exhibit C
hereto and as amended from time to time.
(m) "Purchase Price" has the meaning set forth in Section 7(b).
(n) "Record Date" has the meaning set forth in the Whereas
Clause.
(o) "Right" has the meaning set forth in the Whereas Clause.
(p) "Rights Certificate" has the meaning set forth in Section
3(a).
(q) "Rights Dividend Declaration Date" has the meaning set forth
in the Whereas Clause.
(r) "Section 11(a)(ii) Event" shall mean the event described in
Section 11(a)(ii) hereof.
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<PAGE> 8
(s) "Section 13 Event" shall mean any event described in clause
(x), (y) or (z) of Section 13(a) hereof.
(t) "Stock Acquisition Date" shall mean the first date of public
announcement (including, without limitation, the filing of any report
pursuant to Section 13(d) of the Exchange Act (or any comparable or
successor report)) by the Company or an Acquiring Person that an
Acquiring Person has become such.
(u) "Subsidiary" shall mean, with reference to any Person, any
other Person of which an amount of voting securities or equity interests
sufficient to elect at least a majority of the directors or equivalent
governing body of such other Person is beneficially owned, directly or
indirectly, by such Person, or otherwise controlled by such
first-mentioned Person.
(v) "Summary of Rights" has the meaning set forth in Section
3(b).
(w) "Triggering Event" shall mean any Section 11(a)(ii) Event or
any Section 13 Event.
(x) "Unit" has the meaning set forth in Section 7(b).
In addition, the following terms are defined in the Sections
indicated below:
<TABLE>
<CAPTION>
Defined Term Section Number
------------ --------------
<S> <C>
Adjustment Shares 11(a)(ii)
Adjustment Spread 34(a)
common stock equivalents 11(a)(iii)
Current Value 11(a)(iii)
Depositary Agent 7(c)
Distribution Date 3(a)
Equivalent Preferred Stock 11(b)
Exchange Act 1(b)
Exchange Act Regulations 1(c)
Exchange Ratio 34(a)
Exempt Person 1(a)
Expiration Date 7(a)
Final Expiration Date 7(a)
Nasdaq 11(d)(i)
Original Rights 1(c)
Purchase Price 7(b)
Redemption Price 23(a)
Registered Common Stock 13(b)(ii)
Registration Date 9(c)
Registration Statement 9(c)
Rights Certificates 3(a)
Section 11(a)(ii) Event 11(a)(ii)(C)
Section 11(a)(iii) Trigger Date 11(a)(iii)
Section 13 Event 13(a)
Securities Act 9(c)
</TABLE>
5
<PAGE> 9
<TABLE>
<S> <C>
Spread 11(a)(iii)
Summary of Rights 3(b)
Trading Day 11(d)(i)
Unit 7(b)
</TABLE>
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable upon ten (10) days' prior written notice to the Rights
Agent. The Rights Agent shall have no duty to supervise, and shall in no event
be liable for, the acts or omissions of any such co-Rights Agent.
Section 3. Issue of Rights Certificates. (a) Until the earlier of (i)
the Close of Business on the tenth Business Day after the Stock Acquisition
Date, and (ii) the Close of Business on the tenth Business Day (or such later
date as may be determined by action of a majority of the Board of Directors of
the Company prior to the occurrence of a Section 11(a)(ii) Event) after the date
that a tender or exchange offer by any Person (other than an Exempt Person) is
first published or sent or given within the meaning of Rule 14d-4(a) of the
Exchange Act Regulations or any successor rule, if upon consummation thereof
such Person would be an Acquiring Person (including, in the case of both clause
(i) and (ii), any such date which is after the date of this Agreement and prior
to the issuance of the Rights)(the earlier of (i) and (ii) above being the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of paragraph (b) of this Section 3) by the certificates for shares of
Company Common Stock registered in the names of the holders of shares of Company
Common Stock as of and subsequent to the Record Date (which certificates for
shares of Company Common Stock shall be deemed also to be certificates for
Rights) and not by separate certificates, and (y) the Rights will be
transferable only in connection with the transfer of the underlying shares of
Company Common Stock including a transfer to the Company; provided, however,
that if a tender or exchange offer is terminated prior to the occurrence of a
Distribution Date, then no Distribution Date shall occur as a result of such
tender or exchange offer. As soon as practicable after the Distribution Date,
the Rights Agent will send by first-class, insured, postage prepaid mail, to
each record holder of shares of Company Common Stock as of the Close of Business
on the Distribution Date, at the address of such holder shown on the records of
the Company, one or more rights certificates, in substantially the form of
Exhibit A hereto (the "Rights Certificates"), evidencing one Right for each
share of Company Common Stock so held, subject to adjustment as provided herein.
In the event that an adjustment in the number of Rights per share of
Company Common Stock has been made pursuant to Section 11(p) hereof, at the time
of distribution of the Rights Certificates, the Company may make the necessary
and appropriate rounding adjustments (in accordance with Section 14(a) hereof)
so that Rights Certificates representing only whole numbers of Rights are
distributed and cash is paid in lieu of any fractional Rights. As of and after
the Distribution Date, the Rights will be evidenced solely by such Rights
Certificates.
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<PAGE> 10
(b) As promptly as practicable following the Record Date, the
Company will send a copy of a Summary of Rights to Purchase Preferred Stock, in
substantially the form attached hereto as Exhibit B (the "Summary of Rights"),
by first-class, postage prepaid mail, to each record holder of shares of Company
Common Stock as of the Close of Business on the Record Date, at the address of
such holder shown on the records of the Company. With respect to certificates
for Company Common Stock outstanding as of the Record Date, until the
Distribution Date, the Rights will be evidenced by such certificates registered
in the names of the holders thereof together with the Summary of Rights. Until
the Distribution Date (or, if earlier, the Expiration Date), the surrender for
transfer of any such certificate for Company Common Stock outstanding as of the
Record Date, with or without a copy of the Summary of Rights, shall also
constitute the transfer of the Rights associated with the Company Common Stock
represented thereby.
(c) Rights shall, without any further action, be issued in
respect of all shares of Company Common Stock which are issued (including any
shares of Company Common Stock held in treasury) after the Record Date but prior
to the earlier of the Distribution Date and the Expiration Date. Certificates,
representing such shares of Company Common Stock, issued after the Record Date
shall bear the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Rights Agreement between Organic,
Inc. (the "Company") and Equiserve Trust Company, N.A. (the "Rights
Agent") dated as of February 9, 2000, as amended from time to time (the
"Rights Agreement"), the terms of which are hereby incorporated herein
by reference and a copy of which is on file at the principal office of
the stock transfer administration office of the Rights Agent. Under
certain circumstances, as set forth in the Rights Agreement, such Rights
will be evidenced by separate certificates and will no longer be
evidenced by this certificate. The Company will mail to the holder of
this certificate a copy of the Rights Agreement, as in effect on the
date of mailing, without charge promptly after receipt of a written
request therefor. UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS
AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY PERSON WHO IS, WAS OR
BECOMES AN ACQUIRING PERSON OR ANY AFFILIATE OR ASSOCIATE THEREOF (AS
SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD
BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BECOME
NULL AND VOID.
With respect to certificates representing shares of Company Common Stock that
bear the foregoing legend until the earlier of the Distribution Date and the
Expiration Date, the Rights associated with the shares of Company Common Stock
represented by such certificates shall be evidenced by such certificates alone
and registered holders of the shares of Company Common Stock shall also be the
registered holders of the associated Rights, and the transfer of any of such
certificates shall also constitute the transfer of the Rights associated with
the shares of Company Common Stock represented by such certificates.
Section 4. Form of Rights Certificates. (a) The Rights Certificates (and
the forms of election to purchase, assignment and certificate to be printed on
the reverse thereof) shall each be
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<PAGE> 11
substantially in the form set forth in Exhibit A hereto and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or any rule or regulation thereunder or with any rule or
regulation of any stock exchange or automated quotation system on which the
Rights may from time to time be listed or to conform to usage. Subject to the
provisions of Section 11 and Section 22 hereof, the Rights Certificates,
whenever distributed, shall be dated as of the Record Date and on their face
shall entitle the holders thereof to purchase such number of Units of Preferred
Stock as shall be set forth therein at the price set forth therein, but the
amount and type of securities, cash or other assets that may be acquired upon
the exercise of each Right and the Purchase Price thereof shall be subject to
adjustment as provided herein.
Section 5. Countersignature and Registration . (a) Rights Certificates
shall be executed on behalf of the Company by its Chairman, the President or one
of its Vice Presidents under its corporate seal reproduced thereon attested by
its Secretary, Treasurer or one of its Assistant Secretaries. The signature of
any of these officers on the Rights Certificates may be manual or facsimile.
Rights Certificates bearing the manual or facsimile signatures of the
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the countersignature of such Rights Certificates or
did not hold such offices at the date of such Rights Certificates. No Rights
Certificate shall be entitled to any benefit under this Agreement or be valid
for any purpose unless there appears on such Rights Certificate a
countersignature duly executed by the Rights Agent by manual signature of an
authorized signatory, and such countersignature upon any Rights Certificate
shall be conclusive evidence, and the only evidence, that such Rights
Certificate has been duly countersigned as required hereunder.
(b) Following the Distribution Date, the Rights Agent will keep
or cause to be kept, at its office designated for surrender of Rights
Certificates upon exercise or transfer, books for registration and transfer of
the Rights Certificates issued hereunder. Such books shall show the name and
address of each holder of the Rights Certificates, the number of Rights
evidenced on its face by each Rights Certificate and the date of each Rights
Certificate.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. (a)
Subject to the provisions of Sections 4, 7(e) and 14 hereof, at any time after
the Close of Business on the Distribution Date, and at or prior to the Close of
Business on the Expiration Date, any Rights Certificate or Certificates may be
transferred, split up, combined or exchanged for another Rights Certificate or
Certificates, entitling the registered holder to purchase a like number of Units
of Preferred Stock (or, following a Triggering Event, other securities, cash or
other assets, as the case may be) as the Rights Certificate or Certificates
surrendered then entitled such holder to purchase. Any registered holder
desiring to transfer, split up, combine or exchange any Rights Certificate or
Certificates shall make such request in writing delivered to the Rights Agent,
and shall surrender the Rights Certificate or Certificates to be transferred,
split up, combined or exchanged at the office of the Rights Agent designated for
such purpose. Neither the Rights Agent nor the Company shall be obligated to
take any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have completed and executed
the
8
<PAGE> 12
certificate set forth in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) of the Rights
represented by such Rights Certificate or Affiliates or Associates thereof as
the Company shall reasonably request; whereupon the Rights Agent shall, subject
to the provisions of Section 7(e) and Section 14 hereof, countersign and deliver
to the Person entitled thereto a Rights Certificate or Rights Certificates, as
the case may be, as so requested. The Company may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, split up, combination or exchange of Rights
Certificates.
(b) Subject to Section 7(e) hereof, if a Rights Certificate
shall be mutilated, lost, stolen or destroyed, upon request by the registered
holder of the Rights represented thereby and upon payment to the Company and the
Rights Agent of all reasonable expenses incident thereto, there shall be issued,
in exchange for and upon cancellation of the mutilated Rights Certificate, or in
substitution for the lost, stolen or destroyed Rights Certificate, a new Rights
Certificate, in substantially the form of the prior Rights Certificate, of like
tenor and representing the equivalent number of Rights, but, in the case of
loss, theft or destruction, only upon receipt of evidence satisfactory to the
Company and the Rights Agent of such loss, theft or destruction of such Rights
Certificate and, if requested by the Company or the Rights Agent, indemnity also
satisfactory to it.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights. (a) Prior to the earlier of (i) the Close of Business on the tenth
anniversary hereof (the "Final Expiration Date"), (ii) the time at which the
Rights are redeemed as provided in Section 23 hereof and (iii) the time at which
the Rights are exchanged as provided in Section 34 hereof (the earlier of (i),
(ii) and (iii) being the "Expiration Date"), the registered holder of any Rights
Certificate may, subject to the provisions of Sections 7(e) and 9(c) hereof,
exercise the Rights evidenced thereby, in whole or in part, at any time after
the Distribution Date upon surrender of the Rights Certificate, with the form of
election to purchase and the certificate on the reverse side thereof duly
executed, to the Rights Agent at the office of the Rights Agent designated for
such purpose, together with payment of the aggregate Purchase Price (as
hereinafter defined) for the number of Units of Preferred Stock (or, following a
Triggering Event, other securities, cash or other assets, as the case may be)
for which such surrendered Rights are then exercisable.
(b) The purchase price for each one one-hundredth of a share
(each such one one-hundredth of a share being a "Unit") of Preferred Stock upon
exercise of Rights shall be $300, subject to adjustment from time to time as
provided in Sections 11 and 13(a) hereof (such purchase price, as so adjusted,
being the "Purchase Price"), and shall be payable in accordance with paragraph
(c) below.
(c) As promptly as practicable following the occurrence of the
Distribution Date, the Company shall deposit with the Rights Agent or other
corporation in good standing organized under the laws of the United States or
any State of the United States, which is authorized under such laws to exercise
corporate trust or stock transfer powers and is subject to supervision or
examination by federal or state authority (such institution being the
"Depositary Agent"), certificates representing the shares of Preferred Stock
that may be acquired upon exercise of the
9
<PAGE> 13
Rights and shall cause such Depositary Agent to enter into an agreement pursuant
to which the Depositary Agent shall issue receipts representing interests in the
shares of Preferred Stock so deposited. Upon receipt of a Rights Certificate
representing exercisable Rights, with the form of election to purchase and the
certificate duly executed, accompanied by payment, with respect to each Right so
exercised, of the Purchase Price for the Units of Preferred Stock (or, following
a Triggering Event, other securities, cash or other assets, as the case may be)
to be purchased thereby as set forth below and an amount equal to any applicable
transfer tax or evidence satisfactory to the Company of payment of such tax, the
Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i)
requisition from the Depositary Agent depositary receipts representing such
number of Units of Preferred Stock as are to be purchased and the Company will
direct the Depositary Agent to comply with such request, (ii) requisition from
the Company the amount of cash, if any, to be paid in lieu of fractional shares
in accordance with Section 14 hereof, (iii) after receipt of such depositary
receipts, cause the same to be delivered to or upon the order of the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, and (iv) after receipt thereof, deliver such cash, if
any, to or upon the order of the registered holder of such Rights Certificate.
In the event that the Company is obligated to issue Company Common Stock, other
securities of the Company, pay cash and/or distribute other property pursuant to
Section 11(a) hereof, the Company will make all arrangements necessary so that
such Company Common Stock, other securities, cash and/or other property are
available for distribution by the Rights Agent, if and when appropriate. The
payment of the Purchase Price (as such amount may be reduced pursuant to Section
11(a)(iii) hereof) may be made in cash or by certified or bank check or money
order payable to the order of the Company.
(d) In case the registered holder of any Rights Certificate
shall exercise less than all the Rights evidenced thereby, a new Rights
Certificate evidencing the Rights remaining unexercised shall be issued by the
Rights Agent and delivered to, or upon the order of, the registered holder of
such Rights Certificate, registered in such name or names as may be designated
by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary,
from and after the first occurrence of any Section 11(a)(ii) Event, any Rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) which becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) which becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and which receives such Rights pursuant to
either (A) a transfer (whether or not for consideration) from the Acquiring
Person (or any such Associate or Affiliate) to holders of equity interests in
such Acquiring Person (or any such Associate or Affiliate) or to any Person with
whom the Acquiring Person (or such Associate or Affiliate) has any continuing
agreement, arrangement or understanding regarding the transferred Rights, shares
of Company Common Stock or the Company or (B) a transfer which the Board of
Directors has determined to be part of a plan, arrangement or understanding
which has as a primary purpose or effect the avoidance of this Section 7(e),
shall be null and void without any further action, and no holder of such Rights
shall have any rights whatsoever with respect to such Rights, whether under any
provision of this Agreement or otherwise. The Company shall use all reasonable
efforts to ensure that the
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provisions of this Section 7(e) hereof are complied with, but shall have no
liability to any holder of Rights or any other Person as a result of its failure
to make any determination under this Section 7(e) with respect to an Acquiring
Person or its Affiliates, Associates or transferees.
(f) Notwithstanding anything in this Agreement or any Rights
Certificate to the contrary, neither the Rights Agent nor the Company shall be
obligated to undertake any action with respect to a registered holder upon the
occurrence of any purported exercise by such registered holder unless such
registered holder shall have (i) completed and executed the certificate
following the form of election to purchase set forth on the reverse side of the
Rights Certificate surrendered for such exercise, and (ii) provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) of the Rights represented by such Rights Certificate or
Affiliates or Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
this Agreement. The Company shall deliver to the Rights Agent for cancellation
and retirement, and the Rights Agent shall so cancel and retire, any Rights
Certificates acquired by the Company otherwise than upon the exercise thereof.
The Rights Agent shall deliver all cancelled Rights Certificates to the Company,
or shall, at the written request of the Company, destroy such cancelled Rights
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.
Section 9. Reservation and Availability of Capital Stock. (a) The
Company shall at all times prior to the Expiration Date cause to be reserved and
kept available, out of its authorized and unissued shares of preferred stock,
the number of shares of Preferred Stock that, as provided in this Agreement,
will be sufficient to permit the exercise in full of all outstanding Rights.
Upon the occurrence of any events resulting in an increase in the aggregate
number of shares of Preferred Stock (or other equity securities of the Company)
issuable upon exercise of all outstanding Rights above the number then reserved,
the Company shall make appropriate increases in the number of shares so reserved
to the extent practicable.
(b) If the shares of Preferred Stock to be issued and delivered
upon the exercise of the Rights may be listed on any national securities
exchange or automated quotation system, the Company shall during the period from
the Distribution Date through the Expiration Date use its best efforts to cause
all securities reserved for such issuance to be listed on such exchange upon
official notice of issuance upon such exercise.
(c) The Company shall use its best efforts (i) as soon as
practicable following the occurrence of a Section 11(a)(ii) Event and a
determination by the Company in accordance with Section 11(a)(iii) hereof of the
consideration to be delivered by the Company upon exercise of the Rights or, if
so required by law, as soon as practicable following the Distribution Date (such
date being the "Registration Date"), to file a registration statement on an
appropriate form under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities that
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<PAGE> 15
may be acquired upon exercise of the Rights (the "Registration Statement"), (ii)
to cause the Registration Statement to become effective as soon as practicable
after such filing, (iii) to cause the Registration Statement to continue to be
effective (and to include a prospectus complying with the requirements of the
Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for the securities covered by the Registration Statement, and
(B) the Expiration Date and (iv) to take as soon as practicable following the
Registration Date such action as may be required to ensure that any acquisition
of securities upon exercise of the Rights complies with any applicable state
securities or "blue sky" laws. The Company may temporarily suspend, for a period
of time not to exceed one hundred twenty (120) days after the date set forth in
clause (i) of the first sentence of this Section 9(c), the exercisability of the
Rights in order to prepare and file such registration statement and permit it to
become effective. Upon any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension is no
longer in effect. In addition, if the Company shall determine that a
registration statement is required following the Distribution Date, the Company
may temporarily suspend the exercisability of the Rights until such time as a
registration statement has been declared effective. Notwithstanding any
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction if the requisite qualification in such jurisdiction shall
not have been obtained, the exercise thereof shall not be permitted under
applicable law or a registration statement shall not have been declared
effective.
(d) The Company shall take such action as may be necessary to
ensure that all shares of Preferred Stock (and, following the occurrence of a
Triggering Event, any other securities that may be delivered upon exercise of
Rights) shall be, at the time of delivery of the certificates or depositary
receipts for such securities (subject to payment of the Purchase Price), duly
and validly authorized and issued and fully paid and non-assessable.
(e) The Company shall pay any documentary, stamp or transfer tax
imposed in connection with the issuance or delivery of the Rights Certificates
or upon the exercise of Rights; provided, however, the Company shall not be
required to pay any such tax imposed in connection with the issuance or delivery
of Units of Preferred Stock, or any certificates or depositary receipts for such
Units of Preferred Stock (or, following the occurrence of a Triggering Event,
any other securities, cash or assets, as the case may be) to any person other
than the registered holder of the Rights Certificates evidencing the Rights
surrendered for exercise. The Company shall not be required to issue or deliver
any certificates or depositary receipts for Units of Preferred Stock (or,
following the occurrence of a Triggering Event, any other securities, cash or
assets, as the case may be) to, or in a name other than that of, the registered
holder upon the exercise of any Rights until any such tax shall have been paid
(any such tax being payable by the holder of such Rights Certificate at the time
of surrender) or until it has been established to the Company's satisfaction
that no such tax is due.
Section 10. Preferred Stock Record Date. Each Person in whose name any
certificate or depositary receipt for Units of Preferred Stock (or, following
the occurrence of a Triggering Event, other securities) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of the Units of Preferred Stock (or, following the occurrence of a
Triggering Event, other securities) represented thereby on, and such certificate
shall be dated,
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<PAGE> 16
the date upon which the Rights Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made; provided, however, that if the date of such surrender and
payment is a date upon which the Preferred Stock (or, following the occurrence
of a Triggering Event, other securities) transfer books of the Company are
closed, such Person shall be deemed to have become the record holder of such
securities on, and such certificate shall be dated, the next succeeding Business
Day on which the Preferred Stock (or, following the occurrence of a Triggering
Event, other securities) transfer books of the Company are open and, further
provided, however, that if delivery of Units of Preferred Stock is delayed
pursuant to Section 9(c) hereof, such Persons shall be deemed to have become the
record holders of such Units of Preferred Stock only when such Units first
become deliverable. Prior to the exercise of the Rights evidenced thereby, the
holder of a Rights Certificate shall not be entitled to any rights of a
stockholder of the Company with respect to securities for which the Rights shall
be exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of securities
purchasable upon exercise of each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Stock
payable in shares of Preferred Stock, (B) subdivide the outstanding
Preferred Stock, (C) combine the outstanding Preferred Stock into a
smaller number of shares, or (D) issue any shares of its capital stock
in a reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective
date of such subdivision, combination or reclassification, and the
number and kind of shares of Preferred Stock or capital stock, as the
case may be, issuable on such date upon exercise of the Rights, shall be
proportionately adjusted so that the holder of any Right exercised after
such time shall be entitled to receive, upon payment of the Purchase
Price then in effect, the aggregate number and kind of shares of
Preferred Stock or capital stock, as the case may be, which, if such
Right had been exercised immediately prior to such date, such holder
would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification;
provided, however, that in no event shall the consideration to be paid
upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon the exercise of
one Right. If an event occurs which would require an adjustment under
both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment
provided for in this Section 11(a)(i) shall be in addition to, and shall
be made prior to, any adjustment required pursuant to Section 11(a)(ii)
hereof.
(ii) In the event any Person shall become an Acquiring Person,
other than pursuant to any transaction set forth in Section 13(a)
hereof, then, immediately upon the occurrence
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<PAGE> 17
of such event (a "Section 11(a)(ii) Event"), proper provision shall be
made so that each holder of a Right (except as provided below and in
Section 7(e) hereof) shall, subject to Section 34 hereof, thereafter
have the right to receive, upon exercise of such Right at the then
current Purchase Price in accordance with the terms of this Agreement,
in lieu of the number of Units of Preferred Stock for which a Right was
exercisable immediately prior to the first occurrence of a Section
11(a)(ii) Event (whether or not such Right was then exercisable), such
number of Units of Preferred Stock as shall equal the result obtained by
(x) multiplying the then current Purchase Price by the then number of
Units of Preferred Stock for which a Right was exercisable immediately
prior to the first occurrence of a Section 11(a)(ii) Event (whether or
not such Right was then exercisable) (such product thereafter being, for
all purposes of this Agreement, other than Section 13 hereof, the
"Purchase Price"), and (y) dividing that product by 50% of the then
current market price (determined pursuant to Section 11(d) hereof) per
Unit of Preferred Stock on the date of such first occurrence (such Units
of Preferred Stock being the "Adjustment Shares"); provided, however,
that the Purchase Price and the number of Units of Preferred Stock so
receivable upon exercise of a Right shall, following the Section
11(a)(ii) Event, be subject to further adjustment as appropriate in
accordance with Section 11 hereof. Notwithstanding the foregoing, the
Rights shall not be exercisable pursuant to this Section 11(a)(ii) until
the time period during which the Rights may be redeemed pursuant to
Section 23 hereof shall have expired.
(iii) The Company, by the vote of a majority of the Board of
Directors, may at its option substitute for a Unit of Preferred Stock
issuable upon the exercise of Rights in accordance with the foregoing
subparagraph (ii), shares of Company Common Stock or fractions thereof
having a current market price (as determined by Section 11(d) hereof)
equal to the current market price of a Unit of Preferred Stock on the
date of the Section 11(a)(ii) Event. In the event that the number of
shares of Preferred Stock which are authorized by the Company's Restated
Certificate of Incorporation but not outstanding or reserved for
issuance for purposes other than upon exercise of the Rights is not
sufficient to permit the exercise in full of the Rights in accordance
with the foregoing subparagraph (ii) of this Section 11(a), the Company,
by the vote of a majority of the Board of Directors, shall to the extent
permitted by applicable law and any material agreements then in effect
to which the Company is a party or by which it is bound: (A) determine
the excess of (1) the value of the Adjustment Shares issuable upon the
exercise of a Right (the "Current Value") over (2) the Purchase Price
(such excess being the "Spread"), and (B) with respect to each Right
(other than Rights which have become void pursuant to Section 7(e)),
make adequate provision to substitute, in whole or in part, for such
Adjustment Shares, upon exercise of a Right and payment of the
applicable Purchase Price, (1) cash, (2) a reduction in the Purchase
Price, (3) shares of Company Common Stock or other equity securities of
the Company (including, without limitation, shares, or units of shares,
of preferred stock (such other shares being "common stock
equivalents")), (4) debt securities of the Company, (5) other assets, or
(6) any combination of the foregoing, having an aggregate value which,
when added to the value of the Units of Preferred Stock actually issued
upon exercise of such Right, shall have an aggregate value equal to the
Current Value (less the amount of any reduction in such Purchase Price),
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<PAGE> 18
where such aggregate value has been determined by a majority of the
Board of Directors, after receiving advice from a nationally recognized
investment banking firm; provided, however, that if the Company shall
not have made adequate provision to deliver value pursuant to clause (B)
above within thirty days following the later of (x) the first occurrence
of a Section 11(a)(ii) Event and (y) the date on which the Company's
right of redemption pursuant to Section 23(a) expires (the later of (x)
and (y) being referred to herein as the "Section 11(a)(iii) Trigger
Date"), then, subject to Section 34 hereof, the Company shall be
obligated (to the extent permitted by applicable law and any material
agreements then in effect to which the Company is a party or by which it
is bound) to deliver, upon the surrender for exercise of a Right and
without requiring payment of the Purchase Price, Units of Preferred
Stock (to the extent available) and then, if necessary, shares (or
fractions of shares, at the discretion of the Board of Directors) of
Company Common Stock, cash or a combination thereof, which Units of
Preferred Stock, shares (or fractions of shares) of Company Common Stock
and/or cash shall have an aggregate value equal to the Spread; further
provided, however, that if the Company is unable to comply with the
immediately foregoing provision within such thirty day period, then the
Company shall (to the extent permitted by law) take all such action as
may be necessary to comply with such provision, including the calling of
a meeting of stockholders to authorize additional shares of Preferred
Stock or Company Common Stock. To the extent that the Company determines
that some action need be taken pursuant to the first sentence of this
Section 11(a)(iii), the Company shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all outstanding
Rights. For purposes of this Section 11(a)(iii), the value of a Unit of
Preferred Stock or share of Company Common Stock shall be the current
market price (as determined pursuant to Section 11(d) hereof) per Unit
of Preferred Stock or share of Company Common Stock, as the case may be,
on the Section 11(a)(iii) Trigger Date and the value of any common stock
equivalent shall be deemed to have the same value as the Preferred Stock
on such date.
(b) In case the Company shall fix a record date for the issuance
of rights, options or warrants to all holders of Preferred Stock
entitling them to subscribe for or purchase (for a period expiring
within forty-five calendar days after such record date) shares of
Preferred Stock (or shares having substantially the same rights,
privileges and preferences as shares of Preferred Stock ("Equivalent
Preferred Stock")) or securities convertible into Preferred Stock or
Equivalent Preferred Stock at a price per share of Preferred Stock or
per share of Equivalent Preferred Stock (or having a conversion price
per share, if a security convertible into Preferred Stock or Equivalent
Preferred Stock) less than the current market price (as determined
pursuant to Section l1(d) hereof) per share of Preferred Stock on such
record date, the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of
which shall be the sum of the number of shares of Preferred Stock
outstanding on such record date plus the number of shares of Preferred
Stock which the aggregate offering price of the total number of shares
of Preferred Stock and/or Equivalent Preferred Stock so to be offered
(and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market
price, and the denominator of which shall be the number of shares of
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<PAGE> 19
Preferred Stock outstanding on such record date plus the number of
additional shares of Preferred Stock and/or Equivalent Preferred Stock
to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible). In
case such subscription price may be paid by delivery of consideration
part or all of which may be in a form other than cash, the value of such
consideration shall be as determined in good faith by a majority of the
Board of Directors, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights
Agent and the holders of the Rights. Shares of Preferred Stock owned by
or held for the account of the Company or any Subsidiary shall not be
deemed outstanding for the purpose of any such computation. Such
adjustment shall be made successively whenever such a record date is
fixed, and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price
which would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of shares of Preferred Stock (including any
such distribution made in connection with a consolidation or merger in
which the Company is the continuing or surviving corporation) of
evidences of indebtedness, cash (other than a regular quarterly cash
dividend paid out of funds legally available therefor), assets (other
than a dividend payable in shares of Preferred Stock, but including any
dividend payable in stock other than Preferred Stock) or subscription
rights, options or warrants (excluding those referred to in Section
11(b) hereof), the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of
which shall be the current market price (as determined pursuant to
Section 11(d) hereof) per share of Preferred Stock on such record date
less the fair market value (as determined in good faith by a majority of
the Board of Directors, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights
Agent and the holder of the Rights) of the cash, assets or evidences of
indebtedness so to be distributed or of such subscription rights,
options or warrants distributable in respect of a share of Preferred
Stock and the denominator of which shall be such current market price
(as determined pursuant to Section 11(d) hereof) per share of Preferred
Stock. Such adjustments shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so
made, the Purchase Price shall be adjusted to be the Purchase Price
which would have been in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the
"current market price" per share of Company Common Stock or Common Stock
on any date shall be deemed to be the average of the daily closing
prices per share of such shares for the ten consecutive Trading Days (as
such term is hereinafter defined) immediately prior to such date;
provided, however, if prior to the expiration of such requisite ten
Trading Day period the issuer announces either (A) a dividend or
distribution on such shares payable in such shares or securities
convertible into such shares (other than the Rights), or (B) any
subdivision, combination or reclassification of such shares, then,
following the ex-dividend date for such dividend or the record date for
such subdivision, combination or reclassification, as the case may be,
the "current market price" shall be properly
16
<PAGE> 20
adjusted to take into account such event. The closing price for each day
shall be, if the shares are listed and admitted to trading on a national
securities exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which such shares are listed
or admitted to trading or, if such shares are not listed or admitted to
trading on any national securities exchange, the last quoted price or,
if not so quoted, the average of the high bid and low asked prices in
the over-the-counter market, as reported by the Nasdaq National Market
("Nasdaq") or such other system then in use, or, if on any such date
such shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in such shares selected by a majority of the Board of
Directors. If on any such date no market maker is making a market in
such shares, the fair value of such shares on such date as determined in
good faith by a majority of the Board of Directors shall be used. If
such shares are not publicly held or not so listed or traded, "current
market price" per share shall mean the fair value per share as
determined in good faith by a majority of the Board of Directors, whose
determination shall be described in a statement filed with the Rights
Agent and shall be conclusive for all purposes. The term "Trading Day"
shall mean, if such shares are listed or admitted to trading on any
national securities exchange, a day on which the principal national
securities exchange on which such shares are listed or admitted to
trading is open for the transaction of business or, if such shares are
not so listed or admitted, a Business Day.
(ii) For the purpose of any computation hereunder, the "current
market price" per share of Preferred Stock shall be determined in the
same manner as set forth above for Company Common Stock in clause (i) of
this Section 11(d) (other than the fourth sentence thereof). If the
current market price per share of Preferred Stock cannot be determined
in the manner provided above or if the Preferred Stock is not publicly
held or listed or traded in a manner described in clause (i) of this
Section 11(d), the "current market price" per share of Preferred Stock
shall be conclusively deemed to be an amount equal to 100 (as such
amount may be appropriately adjusted for such events as stock splits,
stock dividends and recapitalizations with respect to Company Common
Stock occurring after the date of this Agreement) multiplied by the
current market price per share of Company Common Stock. If neither
Company Common Stock nor Preferred Stock is publicly held or so listed
or traded, "current market price" per share of the Preferred Stock shall
mean the fair value per share as determined in good faith by a majority
of the Board of Directors whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights
Agent and the holders of the Rights. For all purposes of this Agreement,
the "current market price" of a Unit of Preferred Stock shall be equal
to the "current market price" of one share of Preferred Stock divided by
100.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the
Purchase Price; provided, however, that any adjustments which by reason
of this Section 11(e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this Section
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<PAGE> 21
11 shall be made to the nearest cent or to the nearest one-hundredth of
a share of Company Common Stock or Common Stock or other share or
ten-thousandth of a share of Preferred Stock, as the case may be.
Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of
(i) three years from the date of the transaction which mandates such
adjustment and (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section
11(a)(ii) or 13(a) hereof, the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock other than
Preferred Stock, thereafter the number of such other shares so
receivable upon exercise of any Right and the Purchase Price thereof
shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect
to the Preferred Stock contained in Sections 11(a), (b), (c), (d), (e),
(g), (h), (i), (j), (k), (l) and (m), and the provisions of Sections 7,
9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply
on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the
right to purchase, at the adjusted Purchase Price, the number of Units
of Preferred Stock (or other securities or amount of cash or combination
thereof) that may be acquired from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as
a result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall
thereafter evidence the right to purchase, at the adjusted Purchase
Price, that number of Units of Preferred Stock (calculated to the
nearest one ten-thousandth of a Unit) obtained by (i) multiplying (x)
the number of Units of Preferred Stock covered by a Right immediately
prior to this adjustment by (y) the Purchase Price in effect immediately
prior to such adjustment of the Purchase Price and (ii) dividing the
product so obtained by the Purchase Price in effect immediately after
such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in lieu of any
adjustment in the number of Units of Preferred Stock that may be
acquired upon the exercise of a Right. Each of the Rights outstanding
after the adjustment in the number of Rights shall be exercisable for
the number of Units of Preferred Stock for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to
such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one ten-thousandth) obtained by
dividing the Purchase Price in effect immediately prior to adjustment of
the Purchase Price by the Purchase Price in effect immediately after
adjustment of the Purchase Price. The Company shall make a public
announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on
which the Purchase Price is adjusted or any day thereafter, but, if the
Rights Certificates have
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<PAGE> 22
been issued, shall be at least ten days later than the date of such
public announcement. If Rights Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to
holders of record of Rights Certificates on such record date Rights
Certificates evidencing, subject to Section 14 hereof, the additional
Rights to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Company, shall cause to be
distributed to such holders of record in substitution and replacement
for the Rights Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new
Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates to be so
distributed shall be issued, executed and countersigned in the manner
provided for herein (and may bear, at the option of the Company, the
adjusted Purchase Price) and shall be registered in the names of the
holders of record of Rights Certificates on the record date specified in
the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of Units of Preferred Stock issuable upon the
exercise of the Rights, the Rights Certificates theretofore and
thereafter issued may continue to express the Purchase Price per Unit
and the number of Units of Preferred Stock which were expressed in the
Initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then par value of the number of
Units of Preferred Stock issuable upon exercise of the Rights, the
Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally
issue such fully paid and non-assessable number of Units of Preferred
Stock at such adjusted Purchase Price.
(1) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date
for a specified event, the Company may elect to defer until the
occurrence of such event the issuance to the holder of any Right
exercised after such record date of that number of Units of Preferred
Stock and shares of other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the number of Units of
Preferred Stock and shares of other capital stock or securities of the
Company, if any, issuable upon such exercise on the basis of the
Purchase Price in effect prior to such adjustment; provided, however,
that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such
additional shares (fractional or otherwise) or securities upon the
occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such reductions in the Purchase
Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in their good faith judgment a
majority of the Board of Directors shall determine to be advisable in
order that any (i) consolidation or subdivision of the Preferred Stock,
(ii) issuance wholly for cash of any shares of Preferred Stock at less
than the current market price, (iii)
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<PAGE> 23
issuance wholly for cash of shares of Preferred Stock or securities
which by their terms are convertible into or exchangeable for shares of
Preferred Stock, (iv) stock dividends or (v) issuance of rights, options
or warrants referred to in this Section 11, hereafter made by the
Company to holders of its Preferred Stock, shall not be taxable to such
holders or shall reduce the taxes payable by such holders.
(n) The Company shall not, at any time after the Distribution
Date, (i) consolidate with any other Person (other than a wholly owned
Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), (ii) merge with or into any other Person (other than a
wholly owned Subsidiary of the Company in a transaction which complies
with Section 11(o) hereof), or (iii) sell or transfer (or permit any
Subsidiary to sell or transfer), in one transaction, or a series of
transactions, assets or earning power aggregating more than 50% of the
assets or earning power of the Company and its Subsidiaries (taken as a
whole) to any other Person or Persons (other than the Company and/or any
of its Subsidiaries in one or more transactions each of which complies
with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger or sale there are any rights, warrants or
other instruments or securities outstanding or agreements in effect
which would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (y) prior to, simultaneously
with or immediately after such consolidation, merger or sale, the Person
which constitutes, or would constitute, the "Principal Party" for
purposes of Section 13(a) hereof shall have distributed or otherwise
transferred to its shareholders or other persons holding an equity
interest in such Person Rights previously owned by such Person or any of
its Affiliates and Associates; provided, however, this Section 11(n)
shall not affect the ability of any wholly owned Subsidiary of the
Company to consolidate with, merge with or into, or sell or transfer
assets or earning power to, any other wholly owned Subsidiary of the
Company.
(o) After the Distribution Date, the Company shall not, except
as permitted by Section 23, Section 26 or Section 34 hereof, take (or
permit any Subsidiary to take) any action if at the time such action is
taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be
afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding,
in the event that the Company shall at any time after the Rights
Dividend Declaration Date and prior to the Distribution Date (i) declare
a dividend on the outstanding shares of Company Common Stock payable in
shares of Company Common Stock, (ii) subdivide the outstanding shares of
Company Common Stock, (iii) combine the outstanding shares of Company
Common Stock into a smaller number of shares, or (iv) issue any shares
of its capital stock in a reclassification of Company Common Stock
(including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving
corporation), the number of Rights associated with each share of Company
Common Stock then outstanding, or issued or delivered thereafter prior
to the Distribution Date or in accordance with Section 22 hereof, shall
be proportionately adjusted so that the number of Rights thereafter
associated with each share of Company
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<PAGE> 24
Common Stock following any such event shall equal the result obtained by
multiplying the number of Rights associated with each share of Company
Common Stock immediately prior to such event by a fraction the numerator
of which shall be the total number of shares of Company Common Stock
outstanding immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of Company
Common Stock outstanding immediately following the occurrence of such
event.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Company Common Stock, a copy of such certificate, and
(c) mail a brief summary thereof to each holder of a Rights Certificate (or, if
prior to the Distribution Date, to each holder of a certificate representing
shares of Company Common Stock) in accordance with Section 25 hereof. The Rights
Agent shall be fully protected in relying on any such certificate and on any
adjustment therein contained and shall not be deemed to have knowledge of any
such adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. (a) In the event that, following the first occurrence of a
Section 11(a)(ii) Event, directly or indirectly, either (x) the Company shall
consolidate with, or merge with and into, any other Person (other than a wholly
owned Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), and the Company shall not be the continuing or surviving
corporation of such consolidation or merger, (y) any Person (other than a wholly
owned Subsidiary of the Company in a transaction which compiles with Section
11(o) hereof) shall consolidate with, or merge with or into, the Company, and
the Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such consolidation or merger,
all or part of the outstanding shares of Company Common Stock shall be changed
into or exchanged for stock or other securities of the Company or any other
Person or cash or any other property, or (z) the Company shall sell or otherwise
transfer (or one or more of its Subsidiaries shall sell or otherwise transfer)
to any Person or Persons (other than the Company or any of its wholly owned
Subsidiaries in one or more transactions each of which complies with Section
11(o) hereof), in one or more transactions, assets or earning power aggregating
50% or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) (any such event being a "Section 13 Event"), then, and in
each such case, proper provision shall be made so that: (i) each holder of a
Right, (other than Rights which have become void as provided in Section 7(e)
hereof), shall thereafter have the right to receive, upon the exercise thereof
at the then current Purchase Price, in accordance with this Agreement and in
lieu of Units of Preferred Stock or shares of Company Common Stock, such number
of validly authorized and issued, fully paid, non-assessable and freely
tradeable shares of Common Stock of the Principal Party (as such term is
hereinafter defined), which shares shall not be subject to any liens,
encumbrances, rights of call or first refusal, transfer restrictions or other
adverse claims, as shall be equal to the result obtained by (1) multiplying the
then current Purchase Price by the number of Units of Preferred Stock for which
a Right is exercisable immediately prior to the first occurrence of a Section 13
Event (or, if a Section 11(a)(ii) Event has occurred prior to the first
occurrence of a Section 13
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<PAGE> 25
Event, multiplying the number of such Units for which a Right would be
exercisable hereunder but for the occurrence of such Section 11(a)(ii) Event by
the Purchase Price which would be in effect hereunder but for such first
occurrence) and (2) dividing that product (which, following the first occurrence
of a Section 13 Event, shall be the "Purchase Price" for all purposes of this
Agreement) by 50% of the current market price (determined pursuant to Section
11(d) hereof) per share of the Common Stock of such Principal Party on the date
of consummation of such Section 13 Event, provided, however, that the Purchase
Price (as theretofore adjusted in accordance with Section 11(a)(ii) hereof) and
the number of shares of Common Stock of such Principal Party so receivable upon
exercise of a Right shall be subject to further adjustment as appropriate in
accordance with Section 11(f) hereof to reflect any events occurring in respect
of the Common Stock of such Principal Party after the occurrence of such Section
13 Event; (ii) such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such Section 13 Event, all the obligations and duties of
the Company pursuant to this Agreement; (iii) the term "Company" shall
thereafter be deemed to refer to such Principal Party in all respects; (iv) such
Principal Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common Stock in accordance
with Section 9 hereof) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions of this Agreement
shall thereafter be applicable, as nearly as reasonably may be, in relation to
its shares of Common Stock thereafter deliverable upon the exercise of the
Rights, to its shares of Common Stock; provided, however, that, upon the
subsequent occurrence of any merger, consolidation, sale of all or substantially
all of the assets, recapitalization, reclassification of shares, reorganization
or other extraordinary transaction in respect of such Principal Party, each
holder of a Right shall thereupon be entitled to receive, upon exercise of a
Right and payment of the Purchase Price, such cash, shares, rights, warrants and
other property which such holder would have been entitled to receive had it, at
the time of such transaction, owned the shares of Common Stock of the Principal
Party purchasable upon the exercise of a Right, and such Principal Party shall
take such steps (including, but not limited to, reservation of shares of stock)
as may be necessary to permit the subsequent exercise of the Rights in
accordance with the terms hereof for such cash, shares, rights, warrants and
other property; and (v) the provisions of Section 11(a)(ii) hereof shall be of
no further effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause
(x) or (y) of the first sentence of Section 13(a), (A) the
Person that is the issuer of any securities into which shares of
Company Common Stock are converted in such merger or
consolidation, or, if there is more than one such issuer, the
issuer of Common Stock that has the highest aggregate current
market price (determined pursuant to Section 11(d) hereof) and
(B) if no securities are so issued, the Person that is the other
party to such merger or consolidation, or, if there is more than
one such Person, the Person the Common Stock of which has the
highest aggregate current market price (determined pursuant to
Section 11(d) hereof); and
(ii) in the case of any transaction described in clause
(z) of the first sentence of Section 13(a) hereof, the Person
that is the party receiving the largest
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<PAGE> 26
portion of the assets or earning power transferred pursuant to
such transaction or transactions, or, if each Person that is a
party to such transaction or transactions receives the same
portion of the assets or earning power transferred pursuant to
such transaction or transactions or if the Person receiving the
largest portion of the assets or earning power cannot be
determined, whichever Person the Common Stock of which has the
highest aggregate current market price (determined pursuant to
Section 11(d) hereof); provided, however, that in any such case,
(1) if the Common Stock of such Person is not at such time and
has not been continuously over the preceding twelve-month period
registered under Section 12 of the Exchange Act ("Registered
Common Stock"), or such Person is not a corporation, and such
Person is a direct or indirect Subsidiary of another Person that
has Registered Common Stock outstanding, "Principal Party" shall
refer to such other Person; (2) if the Common Stock of such
Person is not Registered Common Stock or such Person is not a
corporation, and such Person is a direct or indirect Subsidiary
of another Person but is not a direct or indirect Subsidiary of
another Person which has Registered Common Stock outstanding,
"Principal Party" shall refer to the ultimate parent entity of
such first-mentioned Person; (3) if the Common Stock of such
Person is not Registered Common Stock or such Person is not a
corporation, and such Person is directly or indirectly
controlled by more than one Person, and one or more of such
other Persons has Registered Common Stock outstanding,
"Principal Party" shall refer to whichever of such other Persons
is the issuer of the Registered Common Stock having the highest
aggregate current market price (determined pursuant to Section
11(d) hereof); and (4) if the Common Stock of such Person is not
Registered Common Stock or such Person is not a corporation, and
such Person is directly or indirectly controlled by more than
one Person, and none of such other Persons have Registered
Common Stock outstanding, "Principal Party" shall refer to
whichever ultimate parent entity is the corporation having the
greatest shareholders equity or, if no such ultimate parent
entity is a corporation, shall refer to whichever ultimate
parent entity is the entity having the greatest net assets
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a
sufficient number of authorized shares of its Common Stock which have
not been issued or reserved for issuance to permit the exercise in full
of the Rights in accordance with this Section 13, and unless prior
thereto the Company and such Principal Party shall have executed and
delivered to the Rights Agent a supplemental agreement providing for the
terms set forth in paragraphs (a) and (b) of this Section 13 and further
providing that the Principal Party, at its own expense, shall:
(i) (A) file on an appropriate form, as soon as
practicable following the execution of such agreement, a
registration statement under the Securities Act with respect to
the Common Stock that may be acquired upon exercise of the
Rights, (B) cause such registration statement to remain
effective (and to include a prospectus complying with the
requirements of the Securities Act) until the Expiration Date,
and (C) as soon as practicable following the execution of such
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<PAGE> 27
agreement, take such action as may be required to assure that
any acquisition of such Common Stock upon the exercise of the
Rights complies with any applicable state securities or "blue
sky" laws; and
(ii) as soon as practicable following the execution of
such agreement, deliver to holders of the Rights historical
financial statements for the Principal Party and each of its
Affiliates which comply in all respects with the requirements
for registration on Form 10 under the Exchange Act.
(d) In case the Principal Party which is to be a party to a
transaction referred to in this Section 13 has a provision in any of its
authorized securities or in its Certificate of Incorporation or By-laws
or other instrument governing its corporate affairs, which provision
would have the effect of (i) causing such Principal Party to issue, in
connection with, or as a consequence of, the consummation of a
transaction referred to in this Section 13, shares of Common Stock of
such Principal Party at less than the then current market price per
share (determined pursuant to Section 11(d) hereof) or securities
exercisable for, or convertible into, Common Stock of such Principal
Party at less than such then current market price (other than to holders
of Rights pursuant to this Section 13) or (ii) providing for any special
payment, tax or similar provisions in connection with the issuance of
the Common Stock of such Principal Party pursuant to the provisions of
this Section 13; then, in such event, the Company shall not consummate
any such transaction unless prior thereto the Company and such Principal
Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing that the provision in question of such
Principal Party shall have been cancelled, waived or amended, or that
the authorized securities shall be redeemed, so that the applicable
provision will have no effect in connection with, or as a consequence
of, the consummation of the proposed transaction.
(e) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. In the
event that a Section 13 Event shall occur at any time after the
occurrence of a Section 11(a)(ii) Event, the Rights which have not
theretofore been exercised shall thereafter become exercisable, in the
manner and for the securities described in Section 13(a).
(f) Notwithstanding anything contained herein to the contrary,
in the event of any merger or other acquisition transaction involving
the Company pursuant to a merger or other acquisition agreement between
the Company and any Person (or one or more of such Person's Affiliates
or Associates) which agreement has been approved by the Board of
Directors prior to any Person becoming an Acquiring Person, this
Agreement and the rights of holders of Rights hereunder shall be
terminated in accordance with Section 7(a) hereof.
Section 14. Fractional Rights and Fractional Shares. (a) The Company
shall not be required to issue fractions of Rights or to distribute Rights
Certificates which evidence fractional Rights. In lieu of issuing such
fractional Rights, there shall be paid to the Persons to which such fractional
Rights would otherwise be issuable, an amount in cash equal to such fraction of
the market value of a whole Right. For purposes of this Section 14(a), the
market value of a whole
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<PAGE> 28
Right shall be the closing price of the Rights for the Trading Day immediately
prior to the date on which such fractional Rights would have been otherwise
issuable. The closing price of the Rights for any day shall be, if the Rights
are listed or admitted to trading on a national securities exchange, as reported
in the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by Nasdaq or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by a majority of the Board
of Directors. If on any such date no such market maker is making a market in the
Rights, the fair value of the Rights on such date as determined in good faith by
a majority of the Board of Directors shall be used and such determination shall
be described in a statement filed with the Rights Agent and the holders of the
Rights.
(b) The Company shall not be required to issue fractions of
shares of Preferred Stock (other than fractions which are integral multiples of
one one-hundredth of a share of Preferred Stock) upon exercise of the Rights or
to distribute certificates which evidence such fractional shares of Preferred
Stock (other than fractions which are integral multiples of one one-hundredth of
a share of Preferred Stock); provided, however, that in lieu of fractions of
shares of Preferred Stock which are integral multiples of one one-hundredth of a
share of Preferred Stock, the Company may provide for the issuance of depositary
receipts pursuant to Section 7(c) hereof. In lieu of such fractional shares of
Preferred Stock that are not integral multiples of one one-hundredth of a share,
the Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the then current market price of a share of Preferred Stock on the
day of exercise, determined in accordance with Section 11(d) hereof.
(c) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
Agreement, other than rights of action vested in the Rights Agent pursuant to
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of
certificates representing shares of Company Common Stock); and any registered
holder of a Rights Certificate (or, prior to the Distribution Date, of a
certificate representing shares of Company Common Stock), without the consent of
the Rights Agent or of the holder of any other Rights Certificate (or, prior to
the Distribution Date, of a certificate representing shares of Company Common
Stock), may, in his own behalf and for his own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Company or any
other Person to enforce, or otherwise act in respect of, his right to exercise
the Rights evidenced by such Rights Certificate in the manner provided in such
Rights Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of
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<PAGE> 29
the obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Company Common
Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if
surrendered at the office of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of
transfer and with the appropriate forms and certificates duly executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company
and the Rights Agent may deem and treat the person in whose name a
Rights Certificate (or, prior to the Distribution Date, the associated
Company Common Stock certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any
notations of ownership or writing on the Rights Certificates or the
associated Company Common Stock certificate made by anyone other than
the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence
of Section 7 (e) hereof, shall be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any
holder of a Right or any other Person as a result of its inability to
perform any of its obligations under this Agreement by reason of any
preliminary or permanent injunction or other order, decree or ruling
issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission, or any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority, prohibiting or otherwise restraining performance of such
obligation; provided, however, the Company must use its best efforts to
have any such order, decree or ruling lifted or otherwise overturned as
promptly as practicable.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of shares of
Preferred Stock or any other securities of the Company which may at any time be
issuable on the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder of any Rights Certificate, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or, except as provided in Section 24 hereof, to
receive notice of meetings or other actions affecting stockholders, or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Rights Certificate
26
<PAGE> 30
shall have been exercised in accordance with the provisions hereof. This Section
17 shall also apply to holders, as such, of Rights prior to the issuance of
Rights Certificates.
Section 18. Concerning the Rights Agent. (a) The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses, including reasonable fees and disbursements of its counsel, incurred
in connection with the execution and administration of this Agreement and the
exercise and performance of its duties hereunder. The Company shall indemnify
the Rights Agent for any loss, liability, or expenses incurred in connection
with its performance under the Agreement, unless caused by the Rights Agent's
gross negligence, bad faith or willful misconduct.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Rights
Certificate or certificate for Preferred Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement or other
paper or document believed by it to be genuine and to have been signed, executed
and, where necessary, verified or acknowledged by the proper Person or Persons.
(c) The indemnity provided herein shall survive the expiration
of the Rights and the termination of this Agreement. In no case will the Rights
Agent be liable for special, indirect, incidental or consequential loss or
damage of any kind whatsoever (including but not limited to lost profits), even
if the Rights Agent has been advised of the possibility of such loss or damage.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor Rights Agent
may be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Rights Agent or any successor
Rights Agent shall be a party, or any corporation succeeding to the corporate
trust or shareholder services businesses of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any document or any further act on the part
of any of the parties hereto; provided, however, that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement, any of the Rights Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so
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<PAGE> 31
countersigned; and in case at that time any of the Rights Certificates shall not
have been countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and in all such
cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent as to
any action taken or omitted by it in good faith and in accordance with
such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any
fact or matter (including, without limitation, the identity of any
Acquiring Person and the determination of "current market price") be
proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect
thereof be specified herein) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the
Treasurer, any Assistant Treasurer, the Secretary or any Assistant
Secretary of the Company and delivered to the Rights Agent; provided,
however, that so long as any Person is an Acquiring Person hereunder,
such certificate shall be signed and delivered by a majority of the
Board of Directors; and such certificate shall be full authorization to
the Rights Agent for any action taken or suffered in good faith by it
under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall only be liable to the Company in the
event of loss, liability or damages caused by the Rights Agent's gross
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in
the Rights Certificates or be required to verify the same (except as to
its countersignature on such Rights Certificates), but all such
statements and recitals are and shall be deemed to have been made by the
Company only.
(e) The Rights Agent shall not have any responsibility for the
validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or for the validity or
execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of
any covenant or failure by the Company to satisfy conditions contained
in this Agreement or in any Rights Certificate; nor shall it be
responsible for any adjustment required under the provisions of Section
11 or Section 13 hereof or for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would
require any
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<PAGE> 32
such adjustment (except with respect to the exercise of Rights evidenced
by Rights Certificates after receipt by the Rights Agent of the
certificate describing any such adjustment contemplated by Section 12);
nor shall it by any act hereunder be deemed to make any representation
or warranty as to the authorization or reservation of any shares of
Preferred Stock or any other securities to be issued pursuant to this
Agreement or any Rights Certificate or as to whether any shares of
Preferred Stock or any other securities will, when so issued, be validly
authorized and issued, fully paid and non-assessable.
(f) The Company shall perform, execute, acknowledge and deliver
or cause to be performed, executed, acknowledged and delivered all such
further acts, instruments and assurances as may reasonably be required
by the Rights Agent for the performance by the Rights Agent of its
duties under this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder
from the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Secretary, any Assistant Secretary,
the Treasurer or any Assistant Treasurer of the Company, and to apply to
such officers for advice or instructions in connection with its duties,
and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer;
provided, however, that so long as any Person is an Acquiring Person
hereunder, the Rights Agent shall accept such instructions and advice
only from a majority of the Board of Directors and shall not be liable
for any action taken or suffered to be taken by it in good faith in
accordance with such instructions of the majority of the Board of
Directors. Any application by the Rights Agent for written instructions
from the Company may, at the option of the Rights Agent, set forth in
writing any action proposed to be taken or omitted by the Rights Agent
under this Rights Agreement and the date on and/or after which such
action shall be taken or such omission shall be effective. The Rights
Agent shall not be liable for any action taken by, or omission of, the
Rights Agent in accordance with a proposal included in any such
application on or after the date specified in such application (which
date shall not be less than five Business Days after the date any such
officer of the Company actually receives such application, unless any
such officer shall have consented in writing to an earlier date) unless,
prior to taking any such action (or the effective date in the case of an
omission), the Rights Agent shall have received written instructions in
response to such application specifying the action to be taken or
omitted.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights
or other securities of the Company or have a pecuniary interest in any
transaction in which the Company may be interested, or contract with or
lend money to the Company or otherwise act as fully and freely as though
it were not Rights Agent under this Agreement. Nothing herein shall
preclude the Rights Agent from acting in any other capacity for the
Company or for any other legal entity.
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<PAGE> 33
(i) The Rights Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys or agents.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties or in the exercise of
its rights hereunder if the Rights Agent shall have reasonable grounds
for believing that repayment of such funds or adequate indemnification
against such risk or liability is not reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to
the form of assignment or form of election to purchase, as the case may
be, has either not been completed, not signed or indicates an
affirmative response to clause 1 and/or 2 thereof, the Rights Agent
shall not take any further action with respect to such requested
exercise or transfer without first consulting with the Company. If such
certificate has been completed and signed and shows a negative response
to clauses 1 and 2 of such certificate, unless previously instructed
otherwise in writing by the Company (which instructions may impose on
the Rights Agent additional ministerial responsibilities, but no
discretionary responsibilities), the Rights Agent may assume without
further inquiry that the Rights Certificate is not owned by a Person
described in Section 7(e) hereof and shall not be charged with any
knowledge to the contrary.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty days' prior notice in writing mailed to the Company, and to each
transfer agent of the Preferred Stock and the Company Common Stock, by
registered or certified mail, and to the holders of the Rights Certificates by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon thirty days' prior notice in writing, mailed to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer agent
of the Preferred Stock and the Company Common Stock, by registered or certified
mail, and to the holders of the Rights Certificates by first-class mail. If the
Rights Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within a period of thirty days after
giving notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Rights Certificate (who shall, with such notice, submit his
Rights Certificate for inspection by the Company), then any registered holder of
any Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be (a) a corporation organized and
doing business under the laws of the United States or any state of the United
States in good standing, shall be authorized under applicable laws to exercise
corporate trust or stock transfer powers and shall be subject to supervision or
examination by federal or state authorities or (b) an Affiliate of a corporation
described in clause (a). After appointment, the successor Rights Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to
30
<PAGE> 34
the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Preferred Stock and the Company Common Stock, and
mail a notice thereof in writing to the registered holders of the Rights
Certificates. Failure to give any notice provided for in this Section 21,
however, or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Rights Agent or the appointment of the successor
Rights Agent.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of this Agreement or the Rights to the contrary, the Company may,
at its option, issue new Rights Certificates evidencing Rights in such form as
may be approved by a majority of the Board of Directors to reflect any
adjustment or change made in accordance with the provisions of this Agreement in
the Purchase Price or the number or kind or class of shares or other securities
or property that may be acquired under the Rights Certificates. In addition, in
connection with the issuance or sale of shares of Company Common Stock following
the Distribution Date and prior to the Expiration Date, the Company (a) shall,
with respect to shares of Company Common Stock so issued or sold pursuant to the
exercise of stock options or under any employee plan or arrangement, or upon the
exercise, conversion or exchange of securities hereinafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by a
majority of the Board of Directors, issue Rights Certificates representing the
appropriate number of Rights in connection with such issuance or sale; provided,
however, that (i) no such Rights Certificate shall be issued if, and to the
extent that, the Company shall be advised by counsel that such issuance would
create a significant risk of material adverse tax consequences to the Company or
the Person to whom such Rights Certificate would be issued, and (ii) no such
Rights Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination. (a) Subject to Section 30
hereof, the Company may, at its option, by action of a majority of the Board of
Directors, at any time prior to the earlier of (i) the Close of Business on the
tenth Business Day following the Stock Acquisition Date or (ii) the Final
Expiration Date, redeem all but not less than all of the then outstanding Rights
at a redemption price of $.01 per Right, as such amount may be appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such redemption price being the "Redemption
Price"). The Company may, at its option, by action of a majority of the Board of
Directors, pay the Redemption Price either in shares of Company Common Stock
(based on the "current market price", as defined in Section 11(d) hereof, of the
shares of Company Common Stock at the time of redemption) or cash and the
redemption of the Rights shall be effective on the basis and with such
conditions as the Board of Directors may in its sole discretion establish.
(b) Immediately upon the action of a majority of the Board of
Directors ordering the redemption of the Rights, evidence of which shall be
filed with the Rights Agent, and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. The Company shall promptly give public notice of any such
redemption;
31
<PAGE> 35
provided, however, that the failure to give, or any defect in, any such notice
shall not affect the validity of such redemption. Promptly after the action of a
majority of the Board of Directors ordering the redemption of the Rights, the
Company shall give notice of such redemption to the Rights Agent and the holders
of the then outstanding Rights by mailing such notice to all such holders at
each holder's last address as it appears upon the registry books of the Rights
Agent or, prior to the Distribution Date, on the registry books of the transfer
agent for the Company Common Stock. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
Section 24. Notice of Certain Events. (a) In case the Company shall
propose, at any time after the Distribution Date, (i) to pay any dividend
payable in stock of any class to the holders of Preferred Stock or to make any
other distribution to the holders of Preferred Stock (other than a regular
quarterly cash dividend paid out of funds legally available therefor), (ii) to
offer to the holders of Preferred Stock rights or warrants to subscribe for or
to purchase any additional shares of Preferred Stock or shares of stock of any
class or any other securities, rights or options, (iii) to effect any
reclassification of its Preferred Stock (other than a reclassification involving
only the subdivision of outstanding shares of Preferred Stock), (iv) to effect
any consolidation or merger into or with any other Person, or to effect any sale
or other transfer (or to permit one or more of its Subsidiaries to effect any
sale or other transfer), in one or more transactions, of more than 50% of the
assets or earning power of the Company and its Subsidiaries (taken as a whole)
to any other Person or Persons (other than a transfer by the Company and/or any
of its wholly owned Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), or (v) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 25 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of the shares of Preferred
Stock, if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least twenty (20) days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of the shares of Preferred
Stock whichever shall be the earlier; provided, however, no such notice shall be
required pursuant to this Section 24, if any wholly owned Subsidiary of the
Company effects a consolidation or merger with or into, or effects a sale or
other transfer of assets or earnings power to, any other wholly owned Subsidiary
of the Company.
(b) In case any Triggering Event shall occur, then, in any such
case, (i) the Company shall as soon as practicable thereafter give to each
holder of a Rights Certificate, to the extent feasible and in accordance with
Section 25 hereof, a notice of the occurrence of such event, which shall specify
the event and the consequences of the event to holders of Rights under Section
11(a)(ii) or Section 13 hereof, as the case may be.
32
<PAGE> 36
Section 25. Notices. All notices and other communications provided for
hereunder shall, unless otherwise stated herein, be in writing (including by
telex, telegram or cable) and mailed or sent or delivered, if to the Company, at
its address at:
Organic, Inc.
510 Third Street
San Francisco, CA 94107
Attention: Corporate Secretary
and if to the Rights Agent, at its address at:
Equiserve Trust Company, N.A.
150 Royall Street
Canton, Massachusetts 02021-1031
Attention: Andrea Grant
Notices or demands authorized by this Agreement to be given or made by
the Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Company Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 26. Supplements and Amendments. Prior to the Distribution Date
and subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Agreement in any respect without the approval of any holders of
certificates representing shares of Company Common Stock. From and after the
Distribution Date and subject to the penultimate sentence of this Section 26,
the Company and the Rights Agent shall, if the Company so directs, supplement or
amend this Agreement without the approval of any holders of Rights Certificates
in order (i) to cure any ambiguity, (ii) to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, (iii) to shorten or lengthen any time period hereunder, or
(iv) to change or supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Rights Certificates (other than an Acquiring Person
or an Affiliate or Associate of an Acquiring Person); provided, however, that
this Agreement may not be supplemented or amended to lengthen, pursuant to
clause (iii) of this sentence, (A) subject to Section 30 hereof, a time period
relating to when the Rights may be redeemed at such time as the Rights are not
then redeemable, or (B) any other time period unless such lengthening is for the
purpose of protecting, enhancing or clarifying the rights of, and/or the
benefits to, the holders of Rights. Upon the delivery of a certificate from an
appropriate officer of the Company or, so long as any Person is an Acquiring
Person hereunder, from the majority of the Board of Directors which states that
the proposed supplement or amendment is in compliance with the terms of this
Section 26, the Rights Agent shall execute such supplement or amendment.
Notwithstanding anything contained in this Agreement to the contrary, (i) no
supplement or amendment shall be made which changes the Redemption Price, the
Purchase Price, the Expiration Date or the number of Units of
33
<PAGE> 37
Preferred Stock or other securities or assets for which a Right is exercisable
without the approval of a majority of the Board of Directors, and (ii) following
the occurrence of a Section 11(a)(ii) Event, no supplement or amendment
whatsoever shall be made without the approval of the Board of Directors. Prior
to the Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of Company Common Stock.
Section 27. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 28. Determinations and Actions by the Board of Directors, etc.
For all purposes of this Agreement, any calculation of the number of shares of
Company Common Stock outstanding at any particular time, including for purposes
of determining the particular percentage of such outstanding shares of Company
Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(1)(i) of the Exchange Act
Regulations as in effect on the date hereof. Except as otherwise specifically
provided herein, the Board of Directors shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board of Directors or to the Company, or as may be
necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power (i) to interpret the provisions of this
Agreement, and (ii) to make all determinations deemed necessary or advisable for
the administration of this Agreement. All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
of Directors in good faith shall (x) be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties, and
(y) not subject the Board of Directors or any member thereof to any liability to
the holders of the Rights.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of shares of Company Common Stock) any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the Rights
Agent and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of shares of Company Common Stock).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and a majority of the
Board of Directors determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement and the Rights shall not then be redeemable, the right
of redemption set forth in Section 23 hereof shall be reinstated and shall not
expire until the Close
34
<PAGE> 38
of Business on the tenth Business Day following the date of such determination
by a majority of the Board of Directors.
Section 31. Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be governed by, and construed in accordance
with, the laws of the State of Delaware applicable to contracts executed in and
to be performed entirely in such State.
Section 32. Counterparts. This Agreement may be executed (including by
facsimile) in one or more counterparts, and by the different parties hereto in
separate counterparts, each of which when executed shall be deemed to be an
original, but all of which taken together shall constitute one and the same
instrument.
Section 33. Descriptive Headings. The headings contained in this
Agreement are for descriptive purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
Section 34. Exchange. (a) The Company, upon resolution of a majority of
the Board of Directors may, at its option, at any time after the first
occurrence of a Section 11(a)(ii) Event, exchange all or part of the then
outstanding and exercisable Rights (which shall not include Rights that have
become void pursuant to Section 7(e) hereof) for Units of Preferred Stock or
shares of Company Common Stock (at the election of the Board of Directors) at an
exchange ratio of one Unit of Preferred Stock or one share of Company Common
Stock, as the case may be, per Right, as appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such exchange ratio being the "Exchange Ratio"). Notwithstanding the
foregoing, the Board of Directors shall not be empowered to effect such exchange
at any time after any Person (other than an Exempt Person), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of shares
of Company Common Stock aggregating 50% or more of the shares of Company Common
Stock then outstanding. From and after the occurrence of a Section 13(a) Event,
any Rights that theretofore have not been exchanged pursuant to this Section
34(a) shall thereafter be exercisable only in accordance with Section 13 and may
not be exchanged pursuant to this Section 34(a). The exchange of the Rights by
the Board of Directors may be made effective at such time, on such basis and
with such conditions as the Board of Directors in its sole discretion may
establish.
(b) Immediately upon the action of a majority of the Board of
Directors ordering the exchange of any Rights pursuant to Section 34(a) and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of Units of Preferred Stock or shares of Company
Common Stock, as the case may be, equal to the number of such Rights held by
such holder multiplied by the Exchange Ratio. The Company shall promptly give
public notice of any such exchange; provided, however, that the failure to give,
or any defect in, such notice shall not affect the validity of such exchange.
The Company promptly shall mail a notice of any such exchange to all of the
holders of such Rights at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of exchange shall state the method by which the exchange of
Units of Preferred Stock or shares of Company Common
35
<PAGE> 39
Stock, as the case may be, for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become void pursuant to the provisions of Section 7(e) hereof)
held by each holder of Rights.
(c) In the event that the number of shares of Preferred Stock or
Company Common Stock, as the case may be, which are authorized by the Company's
Restated Certificate of Incorporation but not outstanding or reserved for
issuance for purposes other than upon exercise of the Rights are not sufficient
to permit any exchange of Rights as contemplated in accordance with this Section
34, the Company, upon a resolution of a majority of the Board of Directors,
shall take all such action as may be necessary to authorize additional shares of
Preferred Stock or Company Common Stock, as the case may be, for issuance upon
exchange of the Rights or make adequate provision to substitute, in whole or in
part, (1) cash, (2) other equity securities of the Company, (3) debt securities
of the Company, (4) other assets, or (5) any combination of the foregoing,
having an aggregate value for each Right to be exchanged equal to the per share
market price of one Unit of Preferred Stock or share of Company Common Stock, as
the case may be (determined pursuant to Section 11(d) hereof) as of the date of
a Section 11(a)(ii) Event, where such aggregate value has been determined by a
majority of the Board of Directors.
(d) The Company shall not be required to issue fractions of
Units of Preferred Stock or fractions of shares of Company Common Stock or to
distribute certificates which evidence fractional Units or fractional shares. In
lieu of issuing fractional Units or fractional shares, the Company may pay to
the registered holders of Rights Certificates at the time such Rights are
exchanged as herein provided an amount in cash equal to the same fraction of the
current market price (determined pursuant to Section 11(d) hereof) of one Unit
of Preferred Stock or one share of Company Common Stock, as the case may be, on
the Trading Day immediately prior to the date of exchange pursuant to this
Section 34.
36
<PAGE> 40
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the date first above written.
ORGANIC, INC.
By: /s/ Margaret Maxwell Zagel By: /s/ Marita Scarfi
------------------------------- --------------------------------
Name: Margaret Maxwell Zagel Name: Marita Scarfi
---------------------------- -----------------------------
Title: VP, Chief Legal Officer, Title: VP, Finance
---------------------------- -----------------------------
Secretary
-------------------------------
EQUISERVE TRUST COMPANY, N.A.
By: /s/ Christopher P. Richard By: /s/ Andrea Grant
------------------------------- --------------------------------
Name: Christopher P. Richard Name: Andrea Grant
---------------------------- -----------------------------
Title: Director Title: Account Manager
---------------------------- -----------------------------
37
<PAGE> 41
EXHIBIT A
TO RIGHTS AGREEMENT
FORM OF RIGHTS CERTIFICATE
Certificate No. ______ ______ Rights
NOT EXERCISABLE AFTER THE EXPIRATION DATE (AS DEFINED IN THE RIGHTS AGREEMENT
REFERRED TO BELOW). THE RIGHTS ARE SUBJECT TO REDEMPTION OR EXCHANGE, AT THE
OPTION OF THE COMPANY, ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER
CERTAIN CIRCUMSTANCES (SPECIFIED IN THE RIGHTS AGREEMENT), RIGHTS BENEFICIALLY
OWNED BY ACQUIRING PERSONS (AS DEFINED IN THE RIGHTS AGREEMENT) OR ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
Rights Certificate
ORGANIC, INC.
This certifies that ______________________, or registered assigns, is
the registered holder of the number of Rights set forth above, each of which
entitles the registered holder thereof, subject to the terms and conditions of
the Rights Agreement dated as of February 9, 2000, as amended from time to time
(the "Rights Agreement"; terms defined therein are used herein with the same
meaning unless otherwise defined herein) between Organic, Inc., a Delaware
corporation (the "Company"), and EquiServe Trust Company, N.A., as Rights Agent
(which term shall include any successor Rights Agent under the Rights
Agreement), to purchase from the Company at any time after the Distribution Date
and prior to the Expiration Date at the office of the Rights Agent, one
one-hundredth of a fully paid and nonassessable share of Series C Preferred
Stock, par value $.0001 per share (the "Preferred Stock"), of the Company at the
Purchase Price initially of $300 per one one-hundredth share of Preferred Stock
(each such one one-hundredth of a share being a "Unit"), upon presentation and
surrender of this Rights Certificate with the Election to Purchase and related
certificate duly executed. The number of Rights evidenced by this Rights
Certificate (and the number of shares which may be purchased upon exercise
thereof) set forth above, and the Purchase Price per Unit set forth above, and
the Purchase Price per share set forth above, are the number and Purchase Price
as of February 9, 2000 based on the Preferred Stock as constituted at such date.
The Company reserves the right to require prior to the occurrence of a
Triggering Event (as such term is defined in the Rights Agreement) that a number
of Rights be exercised so that only whole shares of Preferred Stock will be
issued.
UPON THE OCCURRENCE OF A SECTION 11(a)(ii) EVENT, IF THE RIGHTS
EVIDENCED BY THIS RIGHTS CERTIFICATE ARE BENEFICIALLY OWNED BY AN ACQUIRING
PERSON OR AN AFFILIATE OR ASSOCIATE OF ANY SUCH ACQUIRING PERSON OR, UNDER
CERTAIN CIRCUMSTANCES
A-1
<PAGE> 42
DESCRIBED IN THE RIGHTS AGREEMENT, A TRANSFEREE OF ANY SUCH ACQUIRING PERSON,
ASSOCIATE OR AFFILIATE, SUCH RIGHTS SHALL BECOME NULL AND VOID AND NO HOLDER
HEREOF SHALL HAVE ANY RIGHT WITH RESPECT TO SUCH RIGHTS FROM AND AFTER THE
OCCURRENCE OF SUCH SECTION 11(a)(ii) EVENT.
In certain circumstances described in the Rights Agreement, the Rights
evidenced hereby may entitle the registered holder thereof to purchase capital
stock of an entity other than the Company or receive common stock, cash or other
assets, all as provided in the Rights Agreement.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities, which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including a Triggering Event.
This Rights Certificate is subject to all of the terms and conditions of
the Rights Agreement, which terms and conditions are hereby incorporated herein
by reference and made a part hereof and to which Rights Agreement reference is
hereby made for a full description of the rights, limitations of rights,
obligations, duties and immunities hereunder of the Rights Agent, the Company
and the holders of the Rights Certificates, which limitations of rights include
the temporary suspension of the exercisability of such Rights under the specific
circumstances set forth in the Rights Agreement. Copies of the Rights Agreement
are on file at the principal office of the Rights Agent and are available from
the Rights Agent upon written request.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the office of the Rights Agent designated for such purpose, may be
exchanged for another Rights Certificate or Rights Certificates of like tenor
and date evidencing an aggregate number of Rights equal to the aggregate number
of Rights evidenced by the Rights Certificate or Rights Certificates
surrendered. If this Rights Certificate shall be exercised in part, the
registered holder shall be entitled to receive, upon surrender hereof, another
Rights Certificate or Rights Certificates for the number of whole Rights not
exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Company under certain circumstances
at its option at a redemption price of $.01 per Right, at any time prior to the
earlier of the close of business on (i) the tenth business day following the
Stock Acquisition Date (as such time period may be extended pursuant to the
Rights Agreement), other than a Stock Acquisition Date that occurs as a result
of a Qualifying Offer, and (ii) the Final Expiration Date. In addition, the
Rights may be exchanged, in whole or in part, for shares of the Common Stock of
the Company. Immediately upon the action of the Board of Directors of the
Company authorizing any such exchange, and without any further action or any
notice, the Rights (other than Rights which are not subject to such exchange)
will terminate and the Rights will only enable holders to receive the shares
issuable upon such exchange. Under certain circumstances set forth in the Rights
Agreement, the decision to
A-2
<PAGE> 43
redeem the Rights shall require the concurrence of a majority of the Independent
Directors.
No fractional shares of Preferred Stock will be issued upon the exercise
of any Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a share of Preferred Stock or depositary
receipts representing such fractions), but in lieu thereof a cash payment will
be made, as provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of Preferred Stock
or of any other securities which may at any time be issuable on the exercise
hereof, nor shall anything contained in the Rights Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders (except as provided in the Rights
Agreement), or to receive dividends of subscription rights, or otherwise, until
the Rights evidenced by this Rights Certificate shall have been exercised as
provided in the Rights Agreement.
A-3
<PAGE> 44
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company.
Dated as of _________________, __________
ORGANIC, INC.
By:
---------------------------------
Name: Michael Hudes
Title: President
By:
---------------------------------
Name: Margaret Maxwell Zagel
Title: Secretary
Countersigned:
EquiServe Trust Company, N.A.
as Rights Agent
By:
---------------------------------
Name:
Title:
A-4
<PAGE> 45
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires
to transfer the Rights Certificate.)
FOR VALUE RECEIVED ____________________ hereby sells, assigns and
transfers unto:___________________________________________________________
(Please print name and address of transferee)
___________________________________ this Rights Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint _____________________ Attorney, to transfer the within Rights
Certificate on the books of the within-named Company, with full power of
substitution.
Dated
-------------------------------
------------------------------------
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate boxes in
(1) and (2) that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
pursuant to the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it [
] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated
-------------------------------
------------------------------------
Signature
Signature Guaranteed:
A-5
<PAGE> 46
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
Signatures must be guaranteed by an approved eligible financial
institution acceptable to the Rights Agent in its sole discretion or by a
participant in the Securities Transfer Agents Medallion Program, the Stock
Exchange Medallion Program or the New York Stock Exchange Medallion Program.
In the event the certification set forth above is not completed, the
Company will deem the beneficial owner of the Rights evidenced by this Rights
Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as
defined in the Rights Agreement) and, in the case of an Assignment, will affix a
legend to that effect on any Rights Certificates issued in exchange for this
Rights Certificate.
A-6
<PAGE> 47
FORM OF ELECTION TO PURCHASE
(To be executed if the registered holder desires to exercise
Rights represented by the Rights Certificate.)
To: ORGANIC, INC.
The undersigned hereby irrevocably elects to exercise
____________________ Rights represented by this Rights Certificate to purchase
the Units of Preferred Stock issuable upon the exercise of the Rights (or such
other securities of the Company or of any other person or other property which
may be issuable upon the exercise of the Rights) and requests that certificates
for such Units be issued in the name of and delivered to: _____________________
________________________________________________________________________ (Please
print name and address) _______________________________ (Please insert social
security or other identifying number).
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
__________________________________________________________ (Please print name
and address) ______________________________________________ (Please insert
social security or other identifying number).
Dated
-------------------------------
------------------------------------
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate boxes in
(1) and (2) that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
beneficially owned by an Acquiring Person or an Affiliate or an Associate
thereof (as defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, the
undersigned [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate thereof.
Dated
-------------------------------
------------------------------------
Signature
Signature Guaranteed:
A-7
<PAGE> 48
NOTICE
The signature in the foregoing Election to Purchase and Certificate must
conform to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
Signatures must be guaranteed by an approved eligible financial
institution acceptable to the Rights Agent in its sole discretion or by a
participant in the Securities Transfer Agents Medallion Program, the Stock
Exchange Medallion Program or the New York Stock Exchange Medallion Program.
In the event the certification set forth above is not completed, the
Company will deem the beneficial owner of the Rights evidenced by this Rights
Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as
defined in the Rights Agreement) and, in the case of an Assignment, will affix a
legend to that effect on any Rights Certificates issued in exchange for this
Rights Certificate.
A-8
<PAGE> 49
EXHIBIT B
TO RIGHTS AGREEMENT
UNDER CERTAIN CIRCUMSTANCES
(SPECIFIED IN THE RIGHTS AGREEMENT),
RIGHTS BENEFICIALLY OWNED BY ACQUIRING PERSONS
(AS DEFINED IN THE RIGHTS AGREEMENT)
OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS
MAY BECOME NULL AND VOID.
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK
On January 7, 2000, the Board of Directors of Organic, Inc. (the
"Company") authorized and declared a dividend distribution of one Right for each
outstanding share of its Common Stock, par value $.0001 per share (the "Company
Common Stock"), to stockholders of record at the close of business on February
9, 2000 (the "Record Date"), and authorized the issuance of one Right with each
share of Company Common Stock issued (including shares distributed from
Treasury) by the Company thereafter between the Record Date and the Distribution
Date (as defined below). Each Right entitles the registered holder, subject to
the terms of the Rights Agreement (as defined below), to purchase from the
Company one one-hundredth of a share (a "Unit") of Series C Preferred Stock, par
value $.0001 per share (the "Preferred Stock"), at a purchase price of $300 per
Unit, subject to adjustment. The purchase price is payable in cash or by
certified or bank check or money order payable to the order of the Company. The
description and terms of the Rights are set forth in a Rights Agreement between
the Company and EquiServe Trust Company, N.A., as Rights Agent, dated as of
February 9, 2000, as amended from time to time (the "Rights Agreement").
A copy of the Rights Agreement, with related exhibits including the
Certificate of Designation, has been filed with the Securities and Exchange
Commission as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999. Copies of the Rights Agreement and the
Certificate of Designation are available free of charge from the Company. This
summary description of the Rights and the Preferred Stock does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Rights Agreement and the Certificate of Designation, including the
definitions therein of certain terms, which Rights Agreement and Certificate of
Designation are incorporated herein by reference.
The Rights Agreement
Initially, the Rights will attach to all certificates representing
shares of outstanding Company Common Stock, and no separate Rights Certificates
will be distributed. The Rights will separate from the Company Common Stock and
the "Distribution Date" will occur upon the earlier of (i) ten business days
following a public announcement (the date of such announcement being the "Stock
Acquisition Date") that a person or group of affiliated or associated persons
has acquired or otherwise obtained beneficial ownership
B-1
<PAGE> 50
of 15% or more of the then outstanding shares of Company Common Stock (an
"Acquiring Person"), and (ii) ten business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
becomes an Acquiring Person) following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 15% or
more of the then outstanding shares of Company Common Stock. Until the
Distribution Date, (i) the Rights will be evidenced by Company Common Stock
certificates and will be transferred with and only with such Company Common
Stock certificates, (ii) new Company Common Stock certificates issued after the
Record Date (also including shares distributed from Treasury) will contain a
notation incorporating the Rights Agreement by reference and (iii) the surrender
for transfer of any certificates representing outstanding Company Common Stock
will also constitute the transfer of the Rights associated with the Company
Common Stock represented by such certificates.
An "Acquiring Person" does not include: (A) the Company; (B) any
Subsidiary of the Company; (C) any employee benefit plan maintained by the
Company or any of its Subsidiaries; (D) any trustee or fiduciary with respect to
such employee benefit plan acting in such capacity or a trustee or fiduciary
holding shares of Company Common Stock for the purpose of funding any such plan
or employee benefits; (E) Organic Holdings, Inc./Omnicom Group Inc.
("Holdings/Omnicom"), not including any of its transferees or assignees, but
only so long as (x) Holdings/Omnicom is not required to report such ownership on
Schedule 13(D) under the Exchange Act (or any comparable or successor report),
and (y) Holdings/Omnicom's Beneficial Ownership of the shares of Company Common
Stock does not exceed the sum of Holdings/Omnicom's Beneficial Ownership of
Company Common Stock on the date of this Agreement plus 1% of the shares of
Company Common Stock outstanding on such date; (F) any Person if the Board of
Directors of the Company determines in good faith that such Person who would
otherwise be an "Acquiring Person" became such inadvertently (including, without
limitation, because (x) such Person was unaware that it beneficially owned a
percentage of Company Common Stock that would otherwise cause such Person to be
an "Acquiring Person" or (y) such Person was aware of the extent of its
Beneficial Ownership of Company Common Stock but had no actual knowledge of the
consequences of such Beneficial Ownership under this Agreement) and without any
intention of changing or influencing control of the Company, and if such Person
does not acquire any additional shares of Company Common Stock and as promptly
as practicable divested or divests itself of Beneficial Ownership of a
sufficient number of shares of Company Common Stock so that such Person would no
longer be an "Acquiring Person;" or (G) any Person who becomes the Beneficial
Owner of 15% or more of the then outstanding shares of Company Common Stock as a
result of the acquisition of shares of Company Common Stock directly from the
Company in one or more transactions approved by a majority of the Board of
Directors, and (ii) no Person shall be deemed an "Acquiring Person" as a result
of the acquisition of shares of Company Common Stock by the Company which, by
reducing the number of shares of Company Common Stock outstanding, increases the
proportional number of shares beneficially owned by such Person; provided,
however, that if (A) a Person would become an Acquiring Person (but for the
operation of this
B-2
<PAGE> 51
subclause (ii)) as a result of the acquisition of shares of Company Common Stock
by the Company and (B) after such share acquisition by the Company, such Person
becomes the Beneficial Owner of any additional shares of Company Common Stock,
then such Person shall be deemed an Acquiring Person unless upon becoming the
Beneficial Owner of such additional shares such Person is the Beneficial Owner
of less than 15% of the then outstanding shares of Company Common Stock.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on the tenth anniversary of the Rights Agreement
unless earlier redeemed or exchanged by the Company as described below. Under
certain circumstances the exercisability of the Rights may be suspended. In no
event, however, will the Rights be exercisable prior to the expiration of the
period in which the Rights may be redeemed.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Company Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights.
In the event that a person becomes an Acquiring Person, then, in such
case, each holder of a Right will thereafter have the right to receive, upon
exercise, shares of Company Common Stock (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times
the exercise price of the Right. The exercise price is the purchase price
multiplied by the number of Units of Preferred Stock issuable upon exercise of a
Right prior to the event described in this paragraph. Notwithstanding any of the
foregoing, following the occurrence of the event set forth in this paragraph,
all Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person will be null and
void.
In the event that, at any time following the date that any person
becomes an Acquiring Person, (i) the Company is acquired in a merger or other
business combination transaction and the Company is not the surviving
corporation, (ii) any person merges with the Company and all or part of the
Company Common Stock is converted or exchanged for securities, cash or property
of the Company or any other person or (iii) 50% or more of the Company's assets
or earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as described above) shall thereafter have the
right to receive, upon exercise, common stock of the Acquiring Person having a
value equal to two times the exercise price of the Right.
The purchase price payable, and the number of Units of Preferred Stock
issuable, upon exercise of the Rights are subject to adjustment from time to
time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Stock, (ii) if
holders of the Preferred Stock are granted certain rights or warrants to
subscribe for Preferred Stock or convertible securities at less than the current
market price of the Preferred Stock, or (iii) upon the distribution to the
holders of the Preferred Stock of evidences of indebtedness, cash or assets
(excluding
B-3
<PAGE> 52
regular quarterly cash dividends) or of subscription rights or warrants (other
than those referred to above).
With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments amount to at least 1% of the purchase
price. The Company is not required to issue fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-hundredth of a
share of Preferred Stock which may be evidenced by depositary receipts). In lieu
thereof, an adjustment in cash may be made based on the current market price of
a share of Preferred Stock on the day of exercise.
At any time until the earlier of (i) the tenth business day following
the Stock Acquisition Date (as such time period may be extended pursuant to the
Rights Agreement), other than a Stock Acquisition Date that occurs as a result
of a Qualifying Offer and (ii) the Final Expiration Date, a majority of the
Board of Directors (including, following the date on which there is an Acquiring
Person, the majority of the Independent Directors) may redeem the Rights in
whole, but not in part, at a price of $.01 per Right (subject to adjustment in
certain events) (the "Redemption Price") payable, at the election of the
majority of the Board of Directors (including a majority of the Independent
Directors), in cash or shares of Company Common Stock. Immediately upon the
action of a majority of the Board of Directors (including, following the date on
which there is an Acquiring Person, a majority of the Independent Directors)
ordering the redemption of the Rights, the Rights will terminate and the only
right of the holders of Rights will be to receive the Redemption Price.
The Company may at any time after there is an Acquiring Person, by
action of a majority of the Board of Directors (including a majority of the
Independent Directors), exchange all or part of the then outstanding and
exercisable Rights (other than Rights that shall have become null and void) for
shares of Company Common Stock pursuant to a one-for-one exchange ratio, as
adjusted.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Units of Preferred Stock (or other consideration).
Any of the provisions of the Rights Agreement may be amended without the
approval of the holders of Company Common Stock at any time prior to the
Distribution Date. After the Distribution Date, the provisions of the Rights
Agreement may be amended in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interests of
holders of Rights (excluding the interests of any Acquiring Person), or to
shorten or lengthen any time period under the Rights Agreement; provided,
however, that no amendment to adjust (i) the time period governing redemption
shall be made at such time as the Rights are not redeemable or (ii) any other
time period unless such lengthening is for the purpose of protecting, enhancing
or clarifying the
B-4
<PAGE> 53
Rights of and/or benefiting, the holders of Rights. In addition, after a person
becomes an Acquiring Person, no amendment or supplement may be made without the
approval of a majority of the Board of Directors (including a majority of the
Independent Directors).
Description of Preferred Stock
The Units of Preferred Stock that may be acquired upon exercise of the
Rights will be nonredeemable and subordinate to any other shares of preferred
stock that may be issued by the Company.
Each Unit of Preferred Stock will have a minimum preferential quarterly
dividend of $.01 per Unit or any higher per share dividend declared on the
Company Common Stock.
In the event of liquidation, the holder of a Unit of Preferred Stock
will receive a preferred liquidation payment equal to the greater of $.01 per
Unit and the per share amount paid in respect of a share of the Company Common
Stock.
Each Unit of Preferred Stock will have one vote, voting together with
the Company Common Stock.
In the event of any merger, consolidation or other transaction in which
shares of Company Common Stock are exchanged, each Unit of Preferred Stock will
be entitled to receive the per share amount paid in respect of each share of
Company Common Stock.
The rights of holders of the Preferred Stock with respect to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary antidilution provisions.
Because of the nature of the Preferred Stock's dividend, liquidation and
voting rights, the economic value of one Unit of Preferred Stock that may be
acquired upon the exercise of each Right should approximate the economic value
of one share of Company Common Stock.
B-5
<PAGE> 54
EXHIBIT C
TO RIGHTS AGREEMENT
ORGANIC, INC.
CERTIFICATE OF DESIGNATION
OF THE
SERIES C PREFERRED STOCK
-------------------------------------
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
-------------------------------------
The undersigned officers of Organic, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), in accordance with the provisions of Section 103 thereof, DO
HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of Directors of
the Corporation by its Restated Certificate of Incorporation (the
"Certificate"), the said Board of Directors, at a duly called meeting held on
January 7, 2000, at which a quorum was present and acted throughout, adopted the
following resolution, which resolution remains in full force and effect on the
date hereof creating a series of 3,000,000 shares of Preferred Stock having a
par value of $.0001 per share, designated as Series C Preferred Stock (the
"Series C Preferred Stock") out of the class of 25,000,000 shares of preferred
stock of the par value of $.0001 per share (the "Preferred Stock"):
RESOLVED, that pursuant to the authority vested in the Board of
Directors in accordance with the provisions of its Certificate, the Board of
Directors does hereby create, authorize and provide for 3,000,000 shares of its
authorized Preferred Stock to be designated and issued as the Series C Preferred
Stock, having the voting powers, designation, relative, participating, optional
and other special rights, preferences and qualifications, limitations and
restrictions that are set forth as follows:
1. Dividends and Distributions. (A) Subject to the prior and superior
rights of the holders of any shares of any other series of Preferred Stock or
any other shares of stock of the Corporation ranking prior and superior to the
shares of Series C Preferred Stock with respect to dividends, each holder of one
one-hundredth (1/100) of a share (a "Unit") of Series C Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for that purpose, (i) quarterly dividends payable in
cash on the last day of February, May, August and November in each year (each
such date being a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of such Unit of Series
C Preferred Stock, in an amount per Unit (rounded to the nearest cent) equal to
the greater of (a) $0.01 or (b) subject to the provision for adjustment
hereinafter set forth, the aggregate per share amount of all cash dividends
declared on shares of the Common Stock since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of a Unit of Series C Preferred
C-1
<PAGE> 55
Stock, and (ii) subject to the provision for adjustment hereinafter set forth,
quarterly distributions (payable in kind) on each Quarterly Dividend Payment
Date in an amount per Unit equal to the aggregate per share amount of all
non-cash dividends or other distributions (other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock, by reclassification or otherwise) declared on shares of Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or with respect
to the first Quarterly Dividend Payment Date, since the first issuance of a Unit
of Series C Preferred Stock. In the event that the Corporation shall at any time
after February 9, 2000 (the "Rights Declaration Date") (i) declare any dividend
on outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock or (iii) combine outstanding shares
of Common Stock into a smaller number of shares, then in each such case the
amount to which the holder of a Unit of Series C Preferred Stock was entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction the numerator of which
shall be the number of shares of Common Stock that are outstanding immediately
after such event and the denominator of which shall be the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on Units of
Series C Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on the shares of Common Stock (other than a
dividend payable in shares of Common Stock); provided, however, that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per Unit on the
Series C Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and shall be cumulative on each
outstanding Unit of Series C Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issuance of such Unit of Series C Preferred
Stock, unless the date of issuance of such Unit is prior to the record date for
the first Quarterly Dividend Payment Date, in which case, dividends on such Unit
shall begin to accrue from the date of issuance of such Unit, or unless the date
of issuance is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of Units of Series C Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on Units of Series C Preferred
Stock in an amount less than the aggregate amount of all such dividends at the
time accrued and payable on such Units shall be allocated pro rata on a
unit-by-unit basis among all Units of Series C Preferred Stock at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of Units of Series C Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than thirty (30) days prior to the date fixed for the payment thereof.
2. Voting Rights. The holders of Units of Series C Preferred Stock shall
have the following voting rights:
C-2
<PAGE> 56
(A) Subject to the provision for adjustment hereinafter set forth, each
Unit of Series C Preferred Stock shall entitle the holder thereof to one vote on
all matters submitted to a vote of the stockholders of the Corporation. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on outstanding shares of Common Stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine
the outstanding shares of Common Stock into a smaller number of shares, then in
each such case the number of votes per Unit to which holders of Units of Series
C Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which shall
be the number of shares of Common Stock outstanding immediately after such event
and the denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event; and
(B) Except as otherwise provided herein, in the Certificate or the
Bylaws of the Corporation or as required by law, the holders of Units of Series
C Preferred Stock and the holders of shares of Common Stock shall vote together
as one class on all matters submitted to a vote of stockholders of the
Corporation, and such holders shall have no special voting rights and their
consents shall not be required for taking any corporate action.
3. Certain Restrictions. (A) Whenever quarterly dividends or other
dividends or distributions payable on Units of Series C Preferred Stock as
provided herein are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on outstanding Units of
Series C Preferred Stock shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or redeem or
purchase or otherwise acquire for consideration any shares of junior stock; (ii)
declare or pay dividends on or make any other distributions on any shares of
parity stock, except dividends paid ratably on Units of Series C Preferred Stock
and shares of all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of such Units and all
such shares are then entitled; (iii) redeem or purchase or otherwise acquire for
consideration shares of any parity stock, provided, however, that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any junior stock; (iv) purchase or
otherwise acquire for consideration any Units of Series C Preferred Stock,
except in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such Units.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 3,
purchase or otherwise acquire such shares at such time and in such manner.
4. Reacquired Shares. Any Units of Series C Preferred Stock purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and cancelled promptly after the acquisition thereof. All such Units shall, upon
their cancellation, become authorized but unissued shares (or fractions of
shares) of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
C-3
<PAGE> 57
5. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (i) to the holders of shares of junior stock unless
the holders of Units of Series C Preferred Stock shall have received, subject to
adjustment as hereinafter provided in paragraph (B), the greater of either (a)
$0.01 per Unit plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not earned or declared, to the date of such
payment, or (b) the amount equal to the aggregate per share amount to be
distributed to holders of shares of Common Stock, or (ii) to the holders of
shares of parity stock, unless simultaneously therewith distributions are made
ratably on Units of Series C Preferred Stock and all other shares of such parity
stock in proportion to the total amounts to which the holders of Units of Series
C Preferred Stock are entitled under clause (i)(a) of this sentence and to which
the holders of shares of such parity stock are entitled, in each case upon such
liquidation, dissolution or winding up.
(B) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common Stock
payable in shares of Common Stock, (ii) subdivide outstanding shares of Common
Stock, or (iii) combine outstanding shares of Common Stock into a smaller number
of shares, then in each such case the aggregate amount to which holders of Units
of Series C Preferred Stock were entitled immediately prior to such event
pursuant to clause (i)(b) of paragraph (A) of this Section 5 shall be adjusted
by multiplying such amount by a fraction the numerator of which shall be the
number of shares of Common Stock that are outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.
6. Consolidation, Merger, etc. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or converted into other stock or securities,
cash and/or any other property, then in any such case Units of Series C
Preferred Stock shall at the same time be similarly exchanged for or converted
into an amount per Unit (subject to the provision for adjustment hereinafter set
forth) equal to the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is converted or exchanged. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock, or (iii) combine outstanding
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the immediately preceding sentence with respect to the exchange or
conversion of Units of Series C Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which shall be the number of shares
of Common Stock that are outstanding immediately after such event and the
denominator of which shall be the number of shares of Common Stock that were
outstanding immediately prior to such event.
7. Redemption. The Units of Series C Preferred Stock and shares of
Series C Preferred Stock shall not be redeemable.
8. Ranking. The Units of Series C Preferred Stock and shares of Series C
Preferred Stock shall rank junior to all other series of the Preferred Stock and
to any other class of Preferred
C-4
<PAGE> 58
Stock that hereafter may be issued by the Corporation as to the payment of
dividends and the distribution of assets, unless the terms of any such series or
class shall provide otherwise.
9. Fractional Shares. The Series C Preferred Stock may be issued in
Units or other fractions of a share, which Units or fractions shall entitle the
holder, in proportion to such holder's units or fractional shares, to exercise
voting rights, receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Series C Preferred Stock.
10. Certain Definitions. As used in this resolution with respect to the
Series C Preferred Stock, the following terms shall have the following meanings:
(A) The term "Common Stock" shall mean the class of stock designated as
the common stock, par value $.0001 per share, of the Corporation at the date
hereof or any other class of stock resulting from successive changes or
reclassification of the common stock.
(B) The term "junior stock" (i) as used in Section 3 shall mean the
Common Stock and any other class or series of capital stock of the Corporation
hereafter authorized or issued over which the Series C Preferred Stock has
preference or priority as to the payment of dividends and (ii) as used in
Section 5, shall mean the Common Stock and any other class or series of capital
stock of the Corporation over which the Series C Preferred Stock has preference
or priority in the distribution of assets on any liquidation, dissolution or
winding up of the Corporation.
(C) The term "parity stock" (i) as used in Section 3 shall mean any
class or series of stock of the Corporation hereafter authorized or issued
ranking pari passu with the Series C Preferred Stock as to dividends and (ii) as
used in Section 5, shall mean any class or series of capital stock ranking pari
passu with the Series C Preferred Stock in the distribution of assets on any
liquidation, dissolution or winding up.
C-5
<PAGE> 59
IN WITNESS WHEREOF, Organic, Inc. has caused this Certificate to be
signed by its Chairman and Chief Executive Officer and its Chief Legal and
Administrative Officer and Secretary this __ day of __________, 2000.
ORGANIC, INC.
By:
---------------------------------
Name: Jonathan Nelson
Title: Chairman and Chief
Executive Officer
By:
---------------------------------
Name: Margaret Maxwell Zagel
Title: Chief Legal and
Administrative Officer and
Secretary
C-6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,385
<SECURITIES> 0
<RECEIVABLES> 19,847
<ALLOWANCES> 1,078
<INVENTORY> 0
<CURRENT-ASSETS> 33,994
<PP&E> 15,943
<DEPRECIATION> 5,184
<TOTAL-ASSETS> 64,264
<CURRENT-LIABILITIES> 38,674
<BONDS> 0
0
2
<COMMON> 0
<OTHER-SE> 24,776
<TOTAL-LIABILITY-AND-EQUITY> 64,264
<SALES> 0
<TOTAL-REVENUES> 77,800
<CGS> 0
<TOTAL-COSTS> 116,148
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,120
<INTEREST-EXPENSE> 278
<INCOME-PRETAX> (38,694)
<INCOME-TAX> 181
<INCOME-CONTINUING> (38,875)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,875)
<EPS-BASIC> (28.03)
<EPS-DILUTED> (28.03)
</TABLE>
