<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 2000
REGISTRATION NO. 333-91627
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ORGANIC, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7379 94-3258989
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code No.) Identification No.)
</TABLE>
510 THIRD STREET
SAN FRANCISCO, CALIFORNIA 94107
(415) 365-5500
(Address and telephone number of principal executive offices and principal place
of business)
------------------------
JONATHAN NELSON
CHIEF EXECUTIVE OFFICER
ORGANIC, INC.
510 THIRD STREET
SAN FRANCISCO, CALIFORNIA 94107
(415) 365-5500
(Name, address, and telephone number of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
BRUCE ALAN MANN, ESQ. KENNETH M. SIEGEL, ESQ.
KRISTIAN E. WIGGERT, ESQ. RICHARD S. ARNOLD, JR., ESQ.
VALERIE A. VILLANUEVA, ESQ. ROBERT E. DAWSON, ESQ.
PAMELA TY, ESQ. EFFIE TOSHAV, ESQ.
MORRISON & FOERSTER LLP WILSON SONSINI GOODRICH & ROSATI, P.C.
425 MARKET STREET 650 PAGE MILL ROAD
SAN FRANCISCO, CALIFORNIA 94105 PALO ALTO, CALIFORNIA 94304
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES
IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED JANUARY 28, 2000.
5,500,000 Shares
ORGANIC LOGO ORGANIC, INC.
Common Stock
----------------------
This is an initial public offering of shares of common stock of Organic,
Inc. All of the 5,500,000 shares of common stock are being sold by Organic.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $12.00 and $14.00. Application has been made for quotation
of the common stock on the Nasdaq National Market under the symbol "OGNC". After
the offering, affiliates will own 89.6% of our common stock, of which Organic
Holdings, Inc. will own 64.9% and Omnicom Group Inc. will own 24.7%.
See "Risk Factors" beginning on page 8 to read about risks you should
consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Organic....................... $ $
</TABLE>
To the extent that the underwriters sell more than 5,500,000 shares of
common stock, the underwriters have the option to purchase up to an additional
825,000 shares from Organic at the initial public offering price, less the
underwriting discount.
----------------------
The underwriters expect to deliver the shares on .
GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
----------------------
Prospectus dated
<PAGE> 3
INSIDE FRONT COVER:
ORGANIC LOGO
INSIDE GATEFOLD:
ORGANIC LOGO
HEADLINE: Connecting Customers to Businesses Through Our Service Lines
SUB HEAD: Services for Online Business Needs
COPY: ORGANIC
SERVICES FOR ONLINE BUSINESS NEEDS
We believe there has been a fundamental shift in the relationship between
businesses and their customers. Customers now determine the final information
and products delivered, requiring businesses to provide increasingly
sophisticated choices and interactions. Our services are focused on solving the
various issues that a business encounters with customers.
Services:
- iBusiness: consulting, Web site design and software engineering
services through which we develop online business plans and create
Web sites;
- Media: we plan and manage online advertising campaigns including
electronic mail promotions and affiliate program management;
- Communications: public relations services through which we plan and
manage our clients' press and publication relationships as well as
product and company launches; and
- Logistics: customer service and fulfillment consulting services through
which we evaluate, assist and manage for our clients warehouse and
customer call center facilities.
We help our clients build online businessesfrom national and international
offices.
IMAGE1: map of Organic office locations
COPY: none
detroit
chicago
london
new york
san francisco
singapore
sao paulo
toronto
THE DIAGRAM
DIAGRAM:
(each of the four services shown below are integrated, but responsible for
specific specializations)
SERVICE: Media;
SERVICE: Communications;
SERVICE: iBusiness;
SERVICE: Logistics;
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our consolidated financial
statements before making an investment decision.
OUR BUSINESS
Organic is an international Internet professional services firm. We provide
our clients various services to build and operate online businesses. These
services include iBusiness, media, communications and logistics.
- iBusiness refers to our consulting, Web site design and software
engineering services through which we develop online business plans and
create Web sites;
- Media refers to our services through which we plan and manage online
advertising campaigns including electronic mail promotions and
affiliate program management;
- Communications 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 refers to our customer service and fulfillment consulting and
transaction management services through which we evaluate, assist and
manage for 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 the ultimate customer, whether a business or consumer, is the
central and most influential participant in a commercial relationship. We
believe the key to our business is our complete focus on our clients'
customers -- the customer-to-business market. We designed our services in
recognition of the challenges our clients face due to this shift.
Founded in 1993 as a sole proprietorship and incorporated in January 1995,
we have a history as an innovator in the Internet professional services
industry. We have designed and developed a number of Web sites that were the
first in their industry category. We led the development of the Apache Web
server, a computer software program that delivers Web pages for customers to
view. We have performed work for over 250 clients and have gained significant
experience by working with both major offline and emerging Internet companies.
We have organically grown our business, creating one of the largest independent
Internet professional services organizations with nearly 700 employees in eight
offices worldwide including Asia, Europe and Latin America.
We have experienced significant losses, with a total loss of $20.5 million
since inception largely due to a cumulative stock compensation charge of $12.3
million. We expect to continue to have operating losses in the future, mostly
due to increased operating expenses from stock compensation and other
stock-based charges and increased capital expenses incurred to create a
leadership position in the highly competitive market in which we operate. In
addition, we derive a significant portion of our revenues from a limited number
of clients. For example, DaimlerChrysler and Blockbuster accounted for
approximately 12% and 10% of our total revenues during the nine months ended
September 30, 1999.
OUR MARKET OPPORTUNITY
Few businesses have the internal capabilities to address the opportunities
and challenges of the Internet. The complexity of conducting business online,
the rapidly changing technological environment, the need to improve
time-to-market and the limited supply of technically proficient internal
personnel creates significant demand for Internet professional services.
According to a 1998 Dataquest survey, 83% of Fortune 1000 companies currently
purchase, or plan to purchase, Internet professional services solutions such as
those we provide. Furthermore, International Data Corporation estimates the
worldwide market for
3
<PAGE> 5
Internet professional services will grow from $7.8 billion in 1998 to $78.6
billion in 2003, which represents a compound annual growth rate of more than
58%.
OUR OFFICES
Our headquarters are located at 510 Third Street, San Francisco, California
94107 and our telephone number is (415) 365-5500. Our Web site is
www.organic.com. This reference to our Web site does not constitute
incorporation by reference of the information contained at our site.
CONTROL OF OUR COMPANY BY INSIDERS
Immediately following the offering, Organic Holdings, Inc. will own 64.9%
of our outstanding common stock, and Omnicom Group will own 24.7% of our
outstanding common stock. Jonathan Nelson, through his ownership in Organic
Holdings, Inc., after the offering will beneficially own 64.9% of our common
stock. Jonathan Nelson, through his ownership in Organic Holdings, Inc., will
have the power to control the election of our directors, the appointment of new
management and the approval of any other action requiring the approval of our
stockholders, including any amendments to our certificate of incorporation and
mergers or sales of any or all of our assets.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Organic................... 5,500,000 shares
Common stock to be outstanding after
this offering................................... 78,857,200 shares
Use of proceeds................................... To expand our corporate infrastructure, reduce
outstanding debt of $4 million to Omnicom Group,
which will own 24.7% of our common stock after the
offering, and for general corporate purposes,
including working capital and capital
expenditures.
Proposed Nasdaq National Market symbol............ "OGNC"
</TABLE>
------------------------
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 1999 and does
not include the following:
- 15,712,932 shares of common stock issuable upon exercise of stock
options outstanding at a weighted average exercise price of $0.72 per
share granted under our 1997 stock option plan and 5,392,953 shares
available for future issuance under our 1997 stock option plan;
- 10,500,000 shares of common stock reserved for future issuance under
our 1999 long-term stock incentive plan; or
- 10,000,000 shares of common stock reserved for future issuance under
our 2000 employee stock purchase plan.
Please see "Capitalization" for a more complete description regarding the
outstanding shares of our common stock and options to purchase our common stock
and other related matters.
------------------------
Unless otherwise noted, all information in this prospectus assumes that:
- the underwriters will not exercise their option to purchase additional
shares of common stock to cover over-allotments, if any;
- each outstanding share of our preferred stock will convert into three
shares of common stock prior to the closing of this offering;
- our outstanding warrant issued to Omnicom Group for 2,249,076 shares of
common stock at $0.0033 per share, which expires on the closing of this
offering, will be exercised prior to or upon the closing of this
offering;
- we will complete a 3-for-1 split of our common stock before our
preferred stock converts into common stock and before this offering is
completed; and
- the public offering price will be $13.00 per share.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The following table is a summary of our consolidated statement of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The financial results for the nine months ended
September 30, 1998 are unaudited.
<TABLE>
<CAPTION>
JANUARY 31, FOR THE
1995 NINE MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------------------------- -------------------------
1995 1996 1997 1998 1998 1999
-------------- ----------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 1,895 $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781
Operating expenses:
Professional services (exclusive of $0, $0,
$0, $183, $57 and $3,355 reported below
of stock-based compensation for the years
ended 1995, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998
and 1999, respectively).................. 530 1,889 4,285 16,801 11,191 29,929
Selling, general and administrative
(exclusive of $14, $53, $87, $511, $234
and $8,102 reported below of stock-based
compensation for the years ended 1995,
1996, 1997 and 1998 and for the nine
months ended September 30, 1998 and 1999,
respectively)............................ 655 2,104 5,473 12,068 7,276 26,018
Stock compensation and other stock-based
charges.................................. 14 53 87 694 291 11,457
Total operating expenses................. 1,199 4,046 9,845 29,563 18,758 67,404
Operating income (loss)...................... 696 248 (3,065) (1,829) 1,986 (15,623)
Net income (loss)............................ $ 412 $ 237 $(1,785) $ (2,766) $ 1,146 $ (15,737)
Net income (loss) per share:(1)
Basic...................................... $ 45,768 $ 26,286 $ (668) $ (10.81) $ 8.41 $ (13.01)
Diluted.................................... $ 0.01 $ 0.00 $ (668) $ (10.81) $ 0.02 $ (13.01)
Weighted average common shares
outstanding:(1)
Basic...................................... 9 9 2,671 255,888 136,259 1,209,591
Diluted.................................... 65,025,009 65,025,009 2,671 255,888 65,424,719 1,209,591
Unaudited pro forma basic and diluted net
loss per share(2).......................... $ (0.04) $ (0.22)
Unaudited pro forma weighted average common
shares outstanding(2)...................... 65,280,888 70,389,036
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of weighted average shares used in
computing per share data.
(2) Unaudited pro forma net loss per share has been computed by dividing net
loss by the pro forma weighted average number of shares outstanding. The pro
forma weighted average number of common shares outstanding includes the pro
forma effects of the automatic conversion on a weighted average basis of our
preferred stock, and the exercise of a warrant for 2,249,076 shares of
common stock as if such conversion had occurred on January 1, 1998 for the
year ended December 31, 1998 and on January 1, 1999 for the nine months
ended September 30, 1999, or at the date of original issuance, if later.
The following table provides a summary of our consolidated balance sheet as
of September 30, 1999. The pro forma column gives effect to the conversion of
all outstanding preferred stock and the exercise of a warrant for 2,249,076
shares of common stock upon the closing of the offering. The pro forma as
adjusted column reflects the receipt of the net proceeds from the sale in this
offering of 5,500,000 shares of common stock at an assumed initial public
offering price of $13.00 per share, after deducting the
6
<PAGE> 8
estimated underwriting discounts and commissions and estimated offering
expenses. See "Use of Proceeds" and "Capitalization".
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,204 $ 3,211 $ 68,641
Working capital............................................. 3,108 3,115 68,545
Total assets................................................ 60,077 60,084 125,514
Long-term obligations, less current portion................. 538 538 538
Total stockholders' equity.................................. 31,342 31,349 96,779
</TABLE>
7
<PAGE> 9
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus,
including our consolidated financial statements and the related notes, before
you purchase any shares of our common stock.
The information in this prospectus includes forward-looking statements
which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of factors including those set forth under the "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections and elsewhere in this prospectus.
RISKS RELATED TO ORGANIC
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 September 30, 1999, we
had 681 employees. We believe that we need to hire additional personnel to
support our business. The failure to retain or attract the necessary personnel
would reduce our capacity to handle new client engagements and therefore our
revenue growth, which would seriously harm our business, financial condition and
results of operations.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR RAPID GROWTH, WHICH COULD RESULT IN
OUR BEING UNABLE TO EFFECTIVELY CONTROL OUR COSTS AND IMPLEMENT OUR BUSINESS
STRATEGIES
We began expanding our operations both in the U.S. 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 and results of operations.
OUR REVENUES COULD BE SIGNIFICANTLY REDUCED BY THE LOSS OF A MAJOR CLIENT
We derive a significant portion of our revenues from a limited number of
clients. The loss of any major client, if not replaced, could dramatically
reduce our revenues. For example, for the nine months ended September 30, 1999,
our five largest clients accounted for 41% of our revenues. During this period,
DaimlerChrysler accounted for approximately 12% of our revenues and Blockbuster
accounted for approximately 10% of our revenues.
8
<PAGE> 10
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 revenue from future
engagements, our failure to predict our revenues accurately may cause the
increase in our expenses to substantially outpace our revenue growth, which
would seriously harm our financial condition and results of operations.
IF WE FAIL TO ACCURATELY PREDICT COSTS RELATED TO OUR FIXED-PRICE PROJECTS, WE
MAY LOSE MONEY
Most of our current projects are on a fixed-price, fixed-timeframe basis,
rather than on a time and materials basis. For the nine month period ended
September 30, 1999, management estimates revenues from fixed price projects were
approximately 75% of total revenues. Often, we fix the price or timeframe before
we finalize the design specifications. If we miscalculate the resources or time
necessary to complete these projects, to meet client expectations about the
services to be performed or to complete projects within budget, we could have
cost overruns and we could lose money on these projects, which could seriously
harm our operating results. The risk of miscalculations in pricing is high
because we work with complex technologies in compressed timeframes, and
therefore it can be difficult to judge the time and resources necessary to
complete a project.
WE MAY HAVE DIFFICULTY IN MANAGING OUR INTERNATIONAL EXPANSION AND OPERATIONS,
WHICH COULD HARM OUR BUSINESS AND FINANCIAL CONDITION
A key element of our strategy is to expand our business into international
markets. In addition to our U.S. operations, we have operations in Sao Paulo,
Brazil 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 U.S. offices, sometimes in conjunction with our U.S. 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 U.S.
businesses, financial conditions and results of operations could be harmed. Our
revenues derived from international operations were 4.6% of our total revenues
for the nine months ended September 30, 1999.
9
<PAGE> 11
OUR BILLABLE EMPLOYEES MAY BE UNDERUTILIZED IF CLIENTS DO NOT RETAIN OUR
SERVICES, WHICH COULD REDUCE OUR REVENUES AND MARGINS AND DAMAGE OUR POTENTIAL
PROFITABILITY
Many of our current or potential clients that are in the early stages of
development may be unable to continue to retain our services because of
financial constraints. In addition, some of our large clients who utilize our
services for multiple engagements or in stages may choose not to retain our
services for additional stages of a project or may choose to cancel or delay
additionally planned projects. Such cancellations or delays could result from
factors unrelated to our work product or the progress of the project, but could
be related to general business or financial condition of the client. If a client
defers, modifies or cancels an engagement or chooses not to retain our services
for additional phases of a project, we may be unable to rapidly redeploy
billable employees to other engagements, to minimize underutilization of those
employees. This underutilization could reduce our revenues and gross margins and
damage our potential profitability.
For example, if DaimlerChrysler, the sole client of our Detroit, Michigan
office at the present time, chooses not to retain our services, the billable
employees in our Detroit office could be underutilized.
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 offering price. During the nine months ended
September 30, 1999, we granted options to purchase 9,528,150 shares of common
stock to employees and non-employee directors with exercise prices ranging from
$1.1667 to $2.00 per share. We recognized stock-based compensation expense of
$11.0 million for the nine months ended September 30, 1999 relating to the
difference between the exercise price of the options and the offering price of
our common stock. Based on grants made through December 31, 1999, we will
recognize in the aggregate additional stock-based compensation expense of $85.5
million as the options vest over the next four years which will dilute any
future earnings that we may achieve.
WE ARE LIKELY TO EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS WHICH MAY MAKE THE PRICE OF OUR COMMON STOCK DIFFICULT TO PREDICT
Our quarterly operating results have varied in the past and we expect that
our revenues and operating results will continue to fluctuate significantly from
quarter to quarter due to a variety of factors, many of which are outside of our
control. Some important factors affecting 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;
10
<PAGE> 12
- demand for our Internet professional services;
- economic conditions in the Internet professional services market; and
- legal or regulatory developments regarding the Internet.
Our quarterly revenues and operating results are volatile and difficult to
predict. Our revenues for the first, second, third and fourth quarters of 1998
were 18.2%, 29.3%, 27.3% and 25.2%, respectively, of our total revenues for the
year ended December 31, 1998. Our revenues for the first, second and third
quarters of 1999 were 19.5%, 33.3% and 47.2%, respectively, of our total
revenues for the nine months ended September 30, 1999. 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.
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 fiscal
1997 and 1998 and the nine months ended September 30, 1999. For the fiscal years
1997, 1998 and the nine months ended September 30, 1999, our net losses were
$1.8 million, $2.8 million, and $15.7 million, respectively. For the fiscal
years 1997, 1998 and the nine months ended September 30, 1999, our net losses
were 26.3%, 10.0%, and 30.4% 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.
IF WE ARE NOT SUCCESSFUL IN OPENING AND GROWING NEW OFFICES, OUR FINANCIAL
RESULTS MAY SUFFER
An important component of our growth strategy is to open offices in new
geographic locations. Once we select a new location, we typically devote
substantial financial and
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management resources to properly launch and grow that office. We cannot assure
you that we will select appropriate markets to enter, open new offices
efficiently or manage new offices profitably. Our failure to accurately assess
these issues could negatively affect our business.
IF NEW SERVICES WE DEVELOP ARE NOT SUCCESSFUL, OUR BUSINESS COULD BE HARMED
Clients may not favorably receive any new services that we launch, which
could damage our reputation and brand name. We also cannot be certain that we
will generate satisfactory revenues from any expanded services to offset the
costs we incur to expand those services. Any expansion of our operations also
would require significant additional expenses, and these efforts may strain our
management, financial and operational resources.
WE WILL LIKELY CONTINUE TO FACE INTENSE COMPETITION WHICH COULD HARM OUR
OPERATING RESULTS
The market for Internet professional services is relatively new, intensely
competitive, quickly evolving and subject to rapid technological change. In
addition, our industry is experiencing rapid consolidation. Our current national
and international competitors include the following:
- other providers of Internet professional services, including
AGENCY.COM, iXL, Proxicom, Razorfish, Scient, USWeb/CKS and Viant;
- large information technology consulting services providers, including
Andersen Consulting, Cambridge Technology Partners, Cap Gemini, CSC,
EDS, IBM and Sapient;
- strategic consulting firms, including Bain & Company, Booz Allen &
Hamilton and Boston Consulting Group; and
- internal information technology, marketing and other departments of
current and potential clients.
We also anticipate facing additional competition from new entrants into our
markets due to the low barriers of entry.
Moreover, many of our competitors have longer operating histories, larger
client bases, greater brand recognition, greater financial, marketing, service,
support, technical, intellectual property and other resources than we do. As a
result, our competitors may be able to devote greater resources to marketing
campaigns, adopt more aggressive pricing policies or devote substantially more
resources to client and business development than us. This increased competition
may result in reduced operating margins, loss of market share and a diminished
brand. In addition, we may from time to time make pricing, service or marketing
decisions or acquisitions as a strategic response to changes in the competitive
environment. These actions could reduce our profits and harm our financial
condition and results of operation.
OUR INVESTMENTS IN CLIENT COMPANIES INVOLVE RISK, INCLUDING LOSING SOME OR ALL
OF OUR INVESTMENT, WHICH COULD HARM OUR OPERATING RESULTS
In exchange for our services we have from time to time made investments in
some of our clients. As of September 30, 1999, we have $1.2 million of such
investments accounted for in 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.
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OUR BUSINESS OPPORTUNITIES MAY BE RESTRAINED BY CONFLICTS BETWEEN POTENTIAL
CLIENTS, WHICH COULD REDUCE OUR POTENTIAL PROFITABILITY
Conflicts between potential clients are inherent in aspects of our
business. We have in the past, and will likely in the future, be unable to
pursue potential opportunities because they would result in offering similar
services to direct competitors of existing clients. Additionally, we risk
alienating existing clients if we provide services to even indirect competitors.
Because these potential conflicts may jeopardize revenues generated from
existing clients and preclude access to business prospects, these conflicts
could cause our operating results to suffer. Furthermore, in limited
circumstances, we have agreed not to 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.
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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.
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.
We anticipate that the net proceeds of this proposed initial public
offering, together with our existing resources and expected cash flow from
operations, will be sufficient to meet our present growth strategies and capital
expenditure requirements for at least the next 12 months. If the offering is not
completed, or 12 months from the date of the offering have passed, and 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
both of these cases, 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 which 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.
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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 practices. The evolving nature of
the Internet could render our existing proprietary technology, as well as the
skills of our employees, obsolete. Our success will depend, in part, on our
ability to:
- effectively use leading technologies critical to our business;
- enhance our existing solutions;
- continue to develop new solutions and technology that address the
increasingly sophisticated and varied needs of our current and
prospective clients and their customers; and
- influence and respond to technological advances, emerging industry and
regulatory standards and practices and competitive service offerings.
Our ability to remain technologically competitive may require substantial
expenditures and lead-time. If we are unable to adapt in a timely manner to
changing market conditions or customer requirements, our business, financial
condition and results of operations could be seriously harmed.
OUR REVENUES COULD BE HARMED IF GROWTH IN THE USE OF THE INTERNET OR GROWTH OF
ELECTRONIC COMMERCE DOES NOT OCCUR
Our future success is substantially dependent upon continued growth in the
use of the Internet, particularly growth in commerce over the Internet. However,
consumer use of the Internet for commerce may not grow as quickly as projected.
If the number of users on the Internet does not increase or commerce over the
Internet does not become more accepted and widespread, demand for our services
may decrease and, as a result, our revenues would decline. Capacity constraints
caused by growth in Internet usage may, unless resolved, impede further growth
in Internet use. Other factors that may affect Internet usage or electronic
commerce adoption include:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- congestion of Internet traffic;
- inconsistent quality or availability of Internet or customer service;
- possible outages due to difficulties or other damage to the Internet;
- excessive governmental regulation;
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- 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, results of
operations and financial condition could be harmed.
THE APPLICATION OR ADOPTION OF GOVERNMENT REGULATIONS AND THE EXISTENCE OF LEGAL
UNCERTAINTIES MAY HARM OUR BUSINESS
We, and our clients, are subject to regulations applicable to businesses
generally, and laws and regulations directly applicable to electronic commerce.
However, laws and regulations may be modified or adopted with respect to the
Internet relating to user privacy, pricing, content, copyrights, distribution
and characteristics and quality of products and services. The modification or
adoption of any additional laws or regulations may decrease the expansion of the
Internet, which could increase our cost of doing business or decrease demand for
our online business solutions.
In addition, the applicability of existing laws to the Internet remains
uncertain with regard to many issues including property ownership, export of
encryption technology, sales tax, libel and personal privacy. Any new
legislation or regulation in these areas could seriously harm our business,
financial condition and results of operations.
Finally, the application of laws and regulations of jurisdictions where we
plan to offer our Internet services could also harm our business. Other states
or foreign countries may:
- require us to qualify to do business as a foreign corporation in each
state or foreign country, or otherwise subject us to taxes and
penalties;
- attempt to regulate our Internet solutions;
- prosecute us for unintentional violations of their laws; or
- modify or enact new laws in the near future.
YEAR 2000 RISKS MAY HARM OUR BUSINESS BECAUSE OF DAMAGE TO OUR INTERNAL SYSTEMS
OR LIABILITY ARISING FROM NON-YEAR 2000 COMPLIANT SOLUTIONS THAT WE PROVIDE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. As a result, many of
these systems could fail or malfunction because they may not be able to
distinguish between 20th century dates and 21st century dates. Accordingly, many
companies, including our clients, potential customers, vendors and strategic
partners, may need to upgrade their systems or change their software to comply
with applicable year 2000 requirements. We currently rely on the following
computer systems to conduct our business:
- programming software;
- graphics design software;
- accounting and billing software;
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- word processing, spreadsheet, project management and presentation
software;
- communications software; and
- network, server and personal computing hardware.
Because we and our clients are extremely dependent upon the proper
functioning of our and their computer systems, a failure of our or their systems
to correctly recognize dates beyond December 31, 1999 could materially disrupt
our operations, which could harm our business, financial condition and results
of operations.
We monitored our internal systems and the work that we have done for
clients during December 1999 and through the first days of January 2000. The few
issues noted were dealt with at the time they arose. We believe there were no
significant disruptions of either client or internal operations. We continue to
monitor both our internal systems and client work.
We have warranted in the past, and expect to continue to warrant, to
clients that our work will be year 2000 compliant. In these cases, we do not
warrant the compliance of third party software; rather, we warrant only that
software created by us will be year 2000 compliant. However, even absent a
specific year 2000 warranty, there is a risk that clients for whom we have
created or implemented software will attempt to hold us liable for any damages
that result in connection with year 2000 problems. Furthermore, if the clients
change or update their software, then their change or upgrade may not interact
properly with our previously established services.
Additionally, our failure to make our online business solutions year 2000
compliant could result in a decrease in sales of our services, or an increase in
the allocation of resources to address year 2000 problems of our clients without
additional revenue for such invested resources. Also, year 2000 issues may
affect purchasing patterns of our clients or potential clients as they may
expend significant resources to correct their current systems. These
expenditures may result in reduced funds available to use our services, which
could harm our business, operating results and financial condition.
RISKS RELATED TO THIS OFFERING
BECAUSE THERE IS NO PRIOR MARKET FOR OUR COMMON STOCK, THE PRICE OF OUR COMMON
STOCK MAY BE VOLATILE, WHICH MAY LEAD TO LOSSES BY INVESTORS AND SECURITIES
LITIGATION
There is currently no public market for our common stock. The initial
public offering price of our stock will be determined through negotiations
between us and representatives of the underwriters, and may not be
representative of the price that will prevail in the open market. You may not be
able to resell your shares at or above the initial public offering price. See
"Underwriting" for a description of factors evaluated in determining the initial
public offering price and of the arrangement between us and the underwriters.
We have filed an application for the quotation of the common stock on the
Nasdaq National Market. We do not know the extent to which investor interest
will lead to the development of a trading market or how liquid it may be. The
market price for the common stock could be highly volatile and could be subject
to wide fluctuations in response to the following factors:
- quarterly variations in our operating results;
- investor perception about us and the Internet professional services
market in general;
- announcements of technological innovations that affect the demand for
our services;
- announcements of new products or services by us or our competitors; and
- changes in financial estimates for us or our industry by securities
analysts.
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The common stock of many Internet professional services companies has
experienced significant fluctuations in trading price and volume. It is possible
that our common stock will experience similar fluctuations. Often these
fluctuations have been unrelated to operating performance. In the past,
following periods of market volatility, security holders of these companies have
instituted class action litigation. If we were involved in such litigation, we
could incur substantial costs and diversion of management's attention, which
could harm our business, results of operations and financial condition. Declines
in the trading price of our common stock could also harm employee morale and
retention, our access to capital and other aspects of our business.
ORGANIC HOLDINGS AND OMNICOM GROUP OWN ENOUGH OF OUR SHARES TO CONTROL US WHICH
WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE MATTERS, AND COULD PREVENT
MERGERS OR OTHER BUSINESS COMBINATIONS THAT YOU MAY BELIEVE ARE DESIRABLE
Immediately following the offering, the stockholders set forth below
collectively will own approximately 89.6% of the outstanding shares of our
common stock and will own individually the percentage set forth opposite their
respective names:
<TABLE>
<S> <C>
Organic Holdings, Inc. ..................................... 64.9%
Omnicom Group Inc. ......................................... 24.7%
</TABLE>
Jonathan Nelson, through his majority ownership in Organic Holdings, Inc.,
after the offering will beneficially own 64.9% of our common stock.
Jonathan Nelson, through his majority ownership in Organic Holdings, Inc.,
will have the power to control the election of our directors, the appointment of
new management and the approval of any other action requiring the approval of
our stockholders, including any amendments to our certificate of incorporation
and mergers or sales of any or all of our assets. In addition, without the
consent of Organic Holdings, Inc., we could be prevented from entering into
transactions that could be beneficial to us. Conversely, third parties could be
discouraged from making a tender offer or bid to acquire us at a price per share
that is above the price at which the common stock will trade on the Nasdaq
National Market.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price for our common stock
to decline. Upon completion of the offering, there will be 78,857,200
outstanding shares of common stock, of which 5,500,000 shares sold in the
offering plus any shares issued upon exercise of the underwriters' over-
allotment option, if any, will be immediately available for sale. In addition,
the remaining 73,357,200 shares will be available for sale 180 days after the
date of this prospectus subject to restrictions set forth in Rules 144 and 701
under the Securities Act of 1933.
OUR RECENT INCREASE IN THE NUMBER OF EMPLOYEES MAY DECREASE FUTURE EARNINGS
For the nine months ended September 30, 1999, we paid to our employees a
significant amount of compensation, which included stock-based compensation
expense of $11.0 million. This increase in employee compensation resulted from
our efforts to rapidly expand our operations. Based on grants made through
December 31, 1999, we will recognize in aggregate additional stock-based
compensation expense of $85.5 million as the options vest over the next four
years. This substantial investment in our employees will dilute any future
earnings that we may achieve.
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WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS OF THIS OFFERING AND WE MAY
NOT USE THE PROCEEDS EFFECTIVELY
Our management could spend most of the proceeds from this offering in ways
with which you may not agree or that do not yield a favorable return. Our
primary purpose in conducting this offering is to create a public market for our
common stock. As of the date of this prospectus, we intend to use a majority of
the proceeds from this offering for working capital and general corporate
purposes. Because of the number and variability of factors that determine our
use of the net proceeds from this offering, we cannot assure you that you will
agree with our use of the proceeds. Pending their use, we intend to invest the
net proceeds of this offering in short-term, investment-grade, interest-bearing
investments or accounts.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE DILUTION AND DISPARITY IN STOCK
PURCHASE PRICE
The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after the offering. Accordingly, purchasers of common stock in
this offering will experience immediate and substantial dilution of
approximately $12.00 in net tangible book value per share, or approximately
92.3% of the assumed offering price of $13.00 per share. In contrast,
stockholders as of September 30, 1999 paid an average price of $0.28 per share.
Investors will incur additional dilution upon the exercise of outstanding stock
options. Furthermore, any additional equity financing may be dilutive to
stockholders and debt financing, if available, may involve restrictive
covenants, which may limit our operating flexibility with respect to business
matters. If additional funds are raised through the issuance of equity
securities, the percentage ownership of our stockholders will be reduced.
Stockholders may experience additional dilution in net book value per share and
newly-issued equity securities may have rights, preferences and privileges
senior to those of the holders of our common stock.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND SOME OF OUR CONTRACTS
COULD DETER POTENTIAL ACQUISITION BIDS THAT A STOCKHOLDER MAY BELIEVE ARE
DESIRABLE, AND THE MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER AS A RESULT
Upon completion of this offering, our board of directors will have the
authority to issue up to 25,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges and restrictions of
the preferred stock without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a change in control
transaction. As a result, the market price of our common stock and the voting
and other rights of our stockholders may be adversely affected. The issuance of
preferred stock may result in the loss of voting control to other stockholders.
We have no current plans to issue any shares of preferred stock.
Other provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These provisions include:
- authorizing our board of directors to issue additional preferred stock;
- limiting the persons who can call special meetings of stockholders;
- prohibiting stockholder actions by written consent;
- creating a classified board of directors under which our directors will
serve staggered three-year terms;
- establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings;
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- limiting the ability of stockholders to remove directors without cause;
and
- adopting a stockholder rights plan, which would cause substantial
dilution to any person or group that attempts to acquire our company on
terms not approved in advance by our board of directors.
Further, some of our existing contracts may require a notice of assignment.
Since our contracts generally provide for termination by either party after
notice and a transition period of up to 180 days, a client may choose to
terminate our contract if the client does not like the assignment.
OUR STOCKHOLDER RIGHTS PLAN MAY DISCOURAGE ACQUISITION BIDS
Our board of directors has adopted a stockholder rights plan. Under this
plan, we have issued Series C preferred stock purchase rights as a dividend on
our outstanding common stock and on any other common stock issued after adoption
of the plan. This will include the shares issued by us in this offering. These
rights are not currently exercisable. They would become exercisable, however, if
someone acquired or offered to acquire specified amounts of common stock, in
which case holders of our common stock other than such acquiror or offeror would
have the right to acquire our common stock, or the common stock of a surviving
company, at one half the market price of the stock. Exercise of this right would
substantially dilute a person or group seeking to acquire us without approval of
our board of directors, making such an acquisition prohibitively expensive.
DELAWARE LAW MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS MAY ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK, DISCOURAGE MERGER OFFERS AND PREVENT
CHANGES IN OUR MANAGEMENT
Section 203 of the Delaware General Corporation Law may inhibit potential
acquisition bids for our company. Upon completion of this offering, we will be
subject to the antitakeover provision of the Delaware General Corporation Law,
which regulates corporate acquisitions. See "Description of Capital Stock" for a
discussion of how Section 203 operates. Under Delaware law, a corporation may
opt out of the antitakeover provisions. We do not intend to opt out of the
antitakeover provisions of Delaware Law.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are subject to a
number of risks and uncertainties, many of which are beyond our control, which
may include statements about our:
- plans for and ability to hire additional personnel;
- business strategy;
- expectations for future expansion both in the U.S. and internationally;
- anticipated growth in revenue from our various service offerings;
- uncertainty regarding our future operating results;
- anticipated sources of funds, including the proceeds from this
offering, to fund our operations for the 12 months following the date
of this prospectus; and
- plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
All statements, other than statements of historical facts included in this
prospectus, regarding our strategy, future operations, financial position,
estimated revenues or losses, projected costs, prospects, plans and objectives
of management are forward-looking statements. When used in this prospectus, the
words "will", "believe", "anticipate", "intend", "estimate", "expect", "project"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this prospectus. You
should not place undue reliance on these forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in or suggested by
the forward-looking statements we make in this prospectus are reasonable, we can
give no assurance that these plans, intentions or expectations will be achieved.
We disclose important factors that could cause our actual results to differ
materially from our expectations under "Risk Factors" and elsewhere in this
prospectus. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $65.4
million from the sale of the shares of common stock in this offering
(approximately $75.4 million if the underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $13.00 per
share and after deducting the estimated underwriting discounts and offering
expenses.
While we cannot predict with certainty how the proceeds of this offering
will be used, we currently intend to use them as follows:
- to expand our corporate infrastructure;
- to repay $4.0 million of outstanding debt as of September 30, 1999
under our revolving credit facility with Omnicom Group, which will own
24.7% of our common stock after the offering; and
- for general corporate purposes, including capital expenditures and
working capital.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses or obtain the right to use complementary technologies.
However, we have no current commitments or agreements with respect to any of
these types of investments. Pending these uses, the net proceeds of this
offering will be invested in short-term, investment-grade, interest-bearing
investments or accounts.
Our revolving credit facility with Omnicom Group bears interest at a rate
equal to the lender's commercial paper rate, based on the published 30 day
commercial lending rate in The Wall Street Journal at the last day of the month,
plus 3.0% on borrowings up to $30.0 million until the closing of this offering.
After the offering, we may borrow up to $15.0 million at the lender's commercial
paper rate plus 1.25% through September 30, 2002. The interest rate on our
borrowings under this facility as of September 30, 1999 was 6.4%.
The amounts we actually spend for the above purposes may vary significantly
and will depend on a number of factors, including our future revenues and cash
generated by operations and the other factors described under "Risk Factors".
Therefore, we will have broad discretion in the way we use the net proceeds. See
"Risk Factors -- We have broad discretion in how we use the proceeds of this
offering and we may not use the proceeds effectively" for more information.
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our common
stock. We intend to retain any future earnings for future growth and do not
anticipate paying any cash dividends in the foreseeable future.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth our:
- actual capitalization at September 30, 1999;
- pro forma capitalization after giving effect to the conversion of all
outstanding shares of preferred stock into 69,489,000 shares of common
stock and the exercise of a warrant for 2,249,076 shares of common
stock immediately prior to the completion of this offering; and
- pro forma as adjusted capitalization, which gives effect to the sale in
this offering of 5,500,000 shares of common stock at an assumed initial
public offering price of $13.00 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current
portion................................... $ 538 $ 538 $ 538
-------- -------- --------
Stockholders' equity:
Convertible Preferred stock, $.0001 par
value; 25,000,000 shares authorized,
23,163,000 shares issued and outstanding,
actual; no shares issued or outstanding,
pro forma and pro forma as adjusted....... 2 -- --
Common stock, $.0001 par value; 200,000,000
shares authorized, 1,619,124 shares issued
and outstanding, actual; 73,357,200 shares
issued and outstanding, pro forma;
78,857,200 shares issued and outstanding,
pro forma as adjusted..................... -- 7 8
Additional paid-in capital.................. 89,816 89,818 155,247
Deferred compensation....................... (37,993) (37,993) (37,993)
Accumulated deficit......................... (20,469) (20,469) (20,469)
Accumulated other comprehensive income...... (14) (14) (14)
-------- -------- --------
Total stockholders' equity............. 31,342 31,349 96,779
-------- -------- --------
Total capitalization................. $ 31,880 $ 31,887 $ 97,317
======== ======== ========
</TABLE>
This table excludes the following shares:
- 15,712,932 shares of common stock issuable upon exercise of stock
options outstanding as of September 30, 1999 at a weighted average
exercise price of $0.72 per share;
- 5,392,953 shares of common stock available for future grant or issuance
under our 1997 stock option plan as of September 30, 1999;
- 10,500,000 shares of common stock available for future grant or
issuance under our 1999 long-term stock incentive plan; and
- 10,000,000 shares of common stock available for future issuance under
our 2000 employee stock purchase plan.
23
<PAGE> 25
DILUTION
Our pro forma net tangible book value as of September 30, 1999, giving
effect to the conversion of all shares of preferred stock outstanding as of
September 30, 1999 into common stock and the exercise of a warrant for 2,249,076
shares of common stock upon completion of this offering, was approximately $13.7
million, or approximately $0.19 per share of common stock. Pro forma net
tangible book value per share represents the amount of tangible assets less
total liabilities, divided by 73,357,200 shares of common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock in
this offering and the pro forma net tangible book value per share of our common
stock immediately after the offering. After giving effect to our sale of
5,500,000 shares of common stock in this offering at an assumed initial public
offering price of $13.00 per share and after deduction of the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value as of September 30, 1999 would have
been approximately $79.1 million, or $1.00 per share. This represents an
immediate increase in pro forma net tangible book value of $0.81 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $12.00 per share to purchasers of common stock in this offering.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share before
offering............................................... $0.19
Increase per share attributable to new investors.......... 0.81
-----
Pro forma net tangible book value per share after the
offering.................................................. 1.00
------
Net tangible book value dilution per share to new
investors................................................. $12.00
======
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1999, after giving effect to the conversion of all outstanding shares of
preferred stock into common stock and the exercise of a warrant for 2,249,076
shares of common stock upon completion of this offering, the total consideration
paid and the average price per share paid by our existing stockholders and by
new investors, before deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us, at an assumed initial public
offering price of $13.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 73,357,200 93.0% $20,849,281 22.6% $ 0.28
New investors...................... 5,500,000 7.0 $71,500,000 77.4 13.00
---------- ----- ----------- -----
Total.................... 78,857,200 100.0% $92,349,281 100.0%
========== ===== =========== =====
</TABLE>
This table assumes that no options were exercised after September 30, 1999.
As of September 30, 1999, there were outstanding options to purchase a total of
15,712,932 shares of common stock at a weighted average exercise price of
approximately $0.72 per share; 5,392,953 shares of common stock reserved for
issuance under our 1997 stock option plan; 10,500,000 shares of common stock
available for issuance under our 1999 long-term stock incentive plan; and
10,000,000 shares of common stock available for issuance under our 2000 employee
stock purchase plan.
24
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes to the consolidated financial statements, appearing elsewhere in this
prospectus. The selected balance sheet data as of December 31, 1997 and 1998 and
September 30, 1999 and the statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and for the nine months ended September 30,
1999 are derived from our consolidated financial statements included elsewhere
in this prospectus, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected balance sheet data as of December 31, 1995
and 1996 and the statement of operations data for the period ended December 31,
1995 are derived from our consolidated financial statements that are not
included in this prospectus, which have been audited by PricewaterhouseCoopers
LLP. The statement of operations data for the nine months ended September 30,
1998 are derived from our unaudited consolidated financial statements included
elsewhere in this prospectus, which, in the opinion of our management, include
all adjustments necessary to fairly present the results of our operations for
such interim period. The historical results presented below are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31, 1995 FOR THE NINE MONTHS
(INCEPTION) YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
THROUGH ----------------------------------- -------------------------
DECEMBER 31, 1995 1996 1997 1998 1998 1999
----------------- ----------- ------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 1,895 $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781
Operating expenses:
Professional services (exclusive of
$0, $0, $0, $183, $57, and $3,355
reported below of stock-based
compensation for the years ended
1995, 1996, 1997, 1998 and for the
nine months ended September 30,
1998 and 1999, respectively)....... 530 1,889 4,285 16,801 11,191 29,929
Selling, general and administrative
(exclusive of $14, $53, $87, $511,
$234, and $8,102 reported below of
stock-based compensation for the
years ended 1995, 1996, 1997, 1998
and for the nine months ended
September 30, 1998 and 1999,
respectively)...................... 655 2,104 5,473 12,068 7,276 26,018
Stock compensation and other stock-
based charges...................... 14 53 87 694 291 11,457
----------- ----------- ------- ----------- ----------- -----------
Total operating expenses........... 1,199 4,046 9,845 29,563 18,758 67,404
----------- ----------- ------- ----------- ----------- -----------
Operating income (loss)................ 696 248 (3,065) (1,829) 1,986 (15,623)
Minority interest in operations of
consolidated subsidiary.............. -- (106) -- -- -- (39)
Interest and other income, net......... -- 4 283 73 73 (11)
----------- ----------- ------- ----------- ----------- -----------
Net income (loss) before taxes..... 696 146 (2,782) (1,756) 2,059 (15,673)
Income tax expense (benefit)........... 284 (91) (997) 1,010 913 64
----------- ----------- ------- ----------- ----------- -----------
Net income (loss).................. $ 412 $ 237 $(1,785) $ (2,766) $ 1,146 $ (15,737)
=========== =========== ======= =========== =========== ===========
Net income (loss) per share:
Basic................................ $ 45,768 $ 26,286 $ (668) $ (10.81) $ 8.41 $ (13.01)
=========== =========== ======= =========== =========== ===========
Diluted.............................. $ 0.01 $ 0.00 $ (668) $ (10.81) $ 0.02 $ (13.01)
=========== =========== ======= =========== =========== ===========
Weighted average common shares
outstanding:
Basic................................ 9 9 2,671 255,888 136,259 1,209,591
=========== =========== ======= =========== =========== ===========
Diluted.............................. 65,025,009 65,025,009 2,671 255,888 65,424,719 1,209,591
=========== =========== ======= =========== =========== ===========
Unaudited pro forma basic and diluted
net loss per share................... $ (0.04) $ (0.22)
=========== ===========
Weighted average common shares
outstanding -- unaudited pro forma
basic and diluted.................... 65,280,888 70,389,036
=========== ===========
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ SEPTEMBER 30,
1995 1996 1997 1998 1999
---- ------ ------- ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 66 $ 243 $ 6,135 $ 2,067 $ 3,204
Working capital............................................. 36 307 8,290 339 3,108
Total assets................................................ 979 1,677 11,426 17,605 60,077
Long-term obligations, less current portion................. -- -- 604 661 538
Total stockholders' equity.................................. 338 923 9,225 7,190 31,342
</TABLE>
Unaudited pro forma basic and diluted net loss per share for the year ended
December 31, 1998 and nine months ended September 30, 1999 has been computed
using the weighted average number of common shares outstanding, adjusted to
include the pro forma effects of the conversion of Series A and Series B
convertible preferred stock and the exercise of a warrant for shares of common
stock as if such conversion had occurred on January 1, 1998 for the year ended
December 31, 1998 and on January 1, 1999 for the nine months ended September 30,
1999, or at the date of original issuance, if later.
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our consolidated
financial position and the results of our operations in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and the notes to those financial statements appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of factors including, but not limited to, those set forth under "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
Since our founding in 1993 as a sole proprietorship and incorporation in
January 1995, we have been an innovator in the Internet professional services
industry. We focus on providing 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 serve particular client needs.
We expect that our revenues will be driven primarily by the number, size
and scope of our client engagements and by our professional services headcount,
all of which have been increasing. For the nine months ended September 30, 1999,
five clients accounted for approximately 41% of our revenues, with
DaimlerChrysler and Blockbuster accounting for approximately 12% and 10%,
respectively, of our revenues. Revenues from any given client will vary from
period to period; however, we expect that significant customer concentration
will continue for the foreseeable future as we have had customer concentration
in the past. To the extent that any significant client reduces its use of our
services or terminates its relationship with us, our revenues could decline
substantially. As a result, the loss of any significant client could negatively
impact our business and results of operations.
Substantially all of our revenues are derived from providing professional
services on a fixed-fee, retainer or time and materials basis. For the nine
month period ended September 30, 1999 we estimate revenues from fixed-fee,
retainer or time and materials basis engagements were approximately 75%, 20% and
5%, respectively, of total revenues. Media and public relations services are
typically provided under long-term relationships. Customer service and
fulfillment consulting services are typically provided under contracts that
range from a few months to over a year. We generally enter into a service
agreement with our clients, which establishes the legal and general business
terms of our relationship. Our engagements vary depending on what type of
services we provide and they range from a few months to more than a year.
Generally our client relationships span several years. Revenues from fixed-fee
contracts are generally recognized as services are rendered using the
percentage-of-completion method of accounting in accordance with Statement of
Position ("SOP") 81-1 based on the percentage of costs incurred to date to total
estimated project costs. We periodically evaluate the actual status of each
project to ensure that the estimated cost to complete each contract and
provisions for estimated losses, if necessary, are made in the period in which
such losses are determined. To date, such losses have not been significant.
Revenues pursuant to retainer contracts are generally recognized over the life
of the contract on a straight-line basis. Revenues pursuant to time and
materials contracts are generally recognized as services are provided. Revenues
exclude reimbursable expenses charged to clients.
27
<PAGE> 29
Our professional services expenses include the direct costs associated with
employees and contractors in billable departments. These expenses include
salaries, bonuses, benefits, vacation, travel and entertainment expenses.
Historically our professional services expenses have increased and we expect
these expenses to continue to increase in the foreseeable future.
Our selling, general and administrative expenses primarily consist of our
investment in our corporate support services, our employee recruitment, training
and retention programs and our research and development and knowledge management
initiatives. Our selling, general and administrative expenses also include the
direct costs associated with employees and contractors in non-billable
departments, real estate costs and other investments in our corporate support
services.
Our net losses primarily consist of the increase in operating expenses
mostly due to stock compensation and other stock-based charges. Management
foresees future net losses mostly due to increased operating expenses from stock
compensation and other stock-based charges and increased capital expenses
incurred to create a leadership position in the highly competitive market in
which we operate.
Our clients tend to spend proportionally more during the second and third
quarters. We expect this seasonality to continue in the near term future.
Therefore, our financial results may fluctuate from quarter to quarter.
Fluctuations also can result from such factors as the number, size and scope of
our engagements, the efficiency with which we utilize our employees and the
ability to complete our projects within the estimated timeframe.
We are rapidly growing to accommodate the increasing need for Internet
professional service offerings and to better serve our existing clients in their
various domestic and international locations. For the nine months ended
September 30, 1999, we opened permanent offices in Detroit, Sao Paulo, London
and Singapore. Our international operations collectively accounted for 4.6% of
total revenues for the nine months ended September 30, 1999. Our headcount
increased from 278 as of December 31, 1998 to 681 as of September 30, 1999. We
intend to open additional offices in the U.S. and internationally during 2000
and accordingly, we expect associated headcount and infrastructure costs to
continue to increase. Personnel-related compensation represents a high
percentage of our operating expenses and accordingly, if revenues do not
increase at a rate proportionally equal to expenses, our business, consolidated
financial position or results of operations could be harmed.
On January 29, 1997, Organic Online, Inc., an S corporation that contained
our operating assets and liabilities at the time, was renamed Organic Holdings,
Inc. and we were formed as a subsidiary C corporation under the name Organic
Online, Inc. This reorganization was performed 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
convertible 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 accompanying financial statements. We also issued a
total of 3,351,288 shares of our Series A 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.
28
<PAGE> 30
RESULTS OF OPERATIONS
The following table presents our consolidated statement of operations as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1996 1997 1998 1998 1999
----- ----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Professional services.................... 44.0 63.2 60.6 53.9 57.8
Selling, general and administrative...... 49.0 80.7 43.5 35.1 50.3
Stock compensation and other stock-based
charges............................... 1.2 1.3 2.5 1.4 22.1
----- ----- ----- ----- -----
Total operating expenses.............. 94.2 145.2 106.6 90.4 130.2
----- ----- ----- ----- -----
Operating income (loss).................... 5.8 (45.2) (6.6) 9.6 (30.2)
Minority interest in operations of
consolidated subsidiary.................. (2.5) 0.0 0.0 0.0 (0.1)
Interest and other income, net............. 0.1 4.2 0.3 0.3 0.0
----- ----- ----- ----- -----
Net income (loss) before taxes........ 3.4 (41.0) (6.3) 9.9 (30.3)
Income tax expense (benefit)............... (2.1) (14.7) 3.7 4.4 0.1
----- ----- ----- ----- -----
Net income (loss)..................... 5.5% (26.3)% (10.0)% 5.5% (30.4)%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES
Our revenues were $20.7 million for the nine months ended September 30,
1998, compared to $51.8 million for the nine months ended September 30, 1999.
This increase of 150% was primarily due to increases in the number of clients
and size of our engagements. Our increased sales and marketing efforts resulted
in the addition of several large accounts such as DaimlerChrysler and
Blockbuster, which represented 12% and 10% of our total revenues, respectively,
for the nine months ended September 30, 1999. Our revenues from international
operations for the nine months ended September 30, 1999 was 4.6% of total
revenues. To a lesser extent, existing clients also increased the breadth and
scope of their engagements with us, attributable, in part, to the additions of
marketing and public relations services and customer service and fulfillment
consulting and transaction management services to our service offerings.
PROFESSIONAL SERVICES
Our professional services expenses were $11.2 million for the nine months
ended September 30, 1998, compared to $29.9 million for the nine months ended
September 30, 1999. This increase of 167% was primarily attributable to an
increase of 324 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,
London, Sao Paulo and Singapore and continued growth in our San Francisco,
Chicago and New York offices and an increase in the size and number of our
projects. As a percentage of revenues, professional services expenses were 54%
and 58% for the nine months ended September 30, 1998 and 1999, respectively.
This increase was primarily due to increased costs in San Francisco engineering
contractors.
29
<PAGE> 31
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $7.3 million for the nine
months ended September 30, 1998, compared to $26.0 million for the nine months
ended September 30, 1999. This increase of 258% was primarily due to the
increase of 116 in non-billable personnel to support our growth, increased costs
associated with the addition of new offices and improvements in our office
infrastructure and increased consulting fees associated with several internal
software implementations. As a percentage of revenues, selling, general and
administrative expenses were 35% and 50% for the nine months ended September 30,
1998 and 1999, respectively. This increase reflects costs associated with hiring
of executive management and personnel to fill open positions within the
corporate services departments. We anticipate significant additional investment
throughout 2000.
STOCK COMPENSATION AND OTHER STOCK-BASED CHARGES
Stock compensation and other stock-based charges consist of non-cash
compensation expenses arising from stock option grants and the issuance of
detachable warrants to Omnicom Group. For the nine months ended September 30,
1998 and 1999, we recorded aggregate deferred stock-based compensation of $1.1
million and $49.0 million, respectively. This increase was primarily due to an
increase in the number of option grants associated with increased hiring of
personnel. Additional deferred stock-based compensation will be recorded for
future grants made prior to our initial public offering. Stock-based
compensation expense is being amortized over the vesting period of the related
options, generally four years, and is expected to be significant through 2004.
For the nine months ended September 30, 1998 and 1999, we recognized stock-based
compensation expense of $0.3 million and $11.0 million, respectively. See Note 7
of Notes to Financial Statements.
In connection with the $30.0 million revolving credit facility obtained on
August 27, 1999, we issued a warrant that entitles 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 36 months, the term of the credit facility. For the
nine months ended September 30, 1999, we recognized bank facility expense of
$0.5 million. We expect to terminate the revolving credit facility in the first
quarter of year 2000, which will result in the recognition of a one-time bank
facility expense charge of $16.1 million.
INCOME TAX EXPENSE
Income tax expense for the nine months ended September 30, 1998 reflects
the establishment of a valuation allowance against our net deferred tax asset
recorded in the year ended December 31, 1997.
NET INCOME (LOSS)
Net income was $1.1 million for the nine months ended September 30, 1998,
compared to the net loss of $15.7 million for the nine months ended September
30, 1999. The decrease of $16.9 million was primarily due to the increase in
operating expenses of $48.6 million from the 1998 period to the 1999 period. In
particular, stock compensation and other stock-based charges increased $11.2
million during this period.
COMPARISON OF FISCAL YEARS 1996, 1997 AND 1998
REVENUES
Our revenues increased 58% from $4.3 million for the year ended December
31, 1996 to $6.8 million for the year ended December 31, 1997. This increase was
primarily due to increases in the number of new clients in New York. Our
revenues increased 309% from $6.8 million for the
30
<PAGE> 32
year ended December 31, 1997 to $27.7 million for the year ended December 31,
1998. This increase was primarily due to increases in the number of clients and
the average size of our engagements as a result of increased sales and marketing
efforts. This increase also was attributable, in part, to additional revenues
generated from our new office in Chicago and from our new marketing and public
relations service lines.
PROFESSIONAL SERVICES
Our professional services expenses increased 127% from $1.9 million for the
year ended December 31, 1996 to $4.3 million for the year ended December 31,
1997. As a percentage of revenues, professional services expenses were 44%, 63%
and 61% for the years ended December 31, 1996, 1997 and 1998, respectively. The
increase from 1996 to 1997 was attributable to an increase of 36 in professional
services personnel resulting from opening our New York office and continued
growth in our San Francisco office to accommodate revenue growth. Our
professional services expenses increased 292% from $4.3 million for the year
ended December 31, 1997 to $16.8 million for the year ended December 31, 1998,
primarily due to 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.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses increased 160% from $2.1
million for the year ended December 31, 1996 to $5.5 million for the year ended
December 31, 1997. As a percentage of revenues, selling, general and
administrative expenses were 49%, 81% and 44% for the years ended December 31,
1996, 1997 and 1998, respectively. This increase from 1996 to 1997 reflected an
increase of 15 in non-billable personnel and increased costs associated with
opening our New York office and improving our office infrastructure to
accommodate growth. Our selling, general and administrative expenses increased
121% from $5.5 million for the year ended December 31, 1997 to $12.1 million for
the year ended December 31, 1998. This increase reflected the increase of 39 in
non-billable personnel, costs associated with opening our Chicago office and
improving our office infrastructure to accommodate growth, and consulting fees
associated with several internal software implementations.
STOCK COMPENSATION AND OTHER STOCK-BASED CHARGES
Stock compensation and other stock-based charges consist of non-cash
compensation expenses arising from stock option grants. For the years ended
December 31, 1996, 1997 and 1998, we recorded aggregate deferred stock-based
compensation of $0.4 million, $0, and $2.3 million, respectively. This increase
was primarily due to an increase in the number of option grants associated with
increased hiring of personnel. During the years ended December 31, 1996, 1997
and 1998, we recognized stock-based compensation expense of $0.1 million, $0.1
million and $0.7 million, respectively.
NET INCOME (LOSS)
Net income was $0.2 million for the year ended December 31, 1996, compared
to the net loss of $1.8 million for the year ended December 31, 1997. The
decrease of $2.0 million was due to a $5.8 million increase in operating
expenses, partially offset by a $2.5 million increase in revenues and the
establishment of a valuation allowance in 1997 against our deferred tax asset.
Our net loss increased from $1.8 million for the year ended December 31, 1997 to
$2.8 million for the year ended December 31, 1998. The increase in the net loss
of $1.0 million from 1997 to 1998 is primarily due to the establishment of a
valuation allowance against our net deferred tax asset recorded in 1997.
31
<PAGE> 33
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly
financial information for the periods indicated. We derived this data from our
unaudited interim financial statements and, in our opinion, included all
adjustments necessary to fairly present the results of operations for the
periods shown. These unaudited quarterly results should be read in conjunction
with our consolidated financial statements and notes to those financial
statements included elsewhere in this prospectus. The operating results in any
quarter are not necessarily indicative of the results that may be expected for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
---------- ---------- --------- -------- --------- -------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 5,051 $ 8,114 $ 7,579 $ 6,990 $10,087 $17,267 $ 24,427
Operating expenses:
Professional services(1)............ 2,172 3,562 5,457 5,610 5,568 8,263 16,098
Selling, general and
administrative(1)................. 1,677 2,688 2,911 4,792 4,649 8,325 13,044
Stock compensation and other stock-
based charges..................... 16 79 196 403 723 2,176 8,558
---------- ---------- ------- ------- ------- ------- --------
Total operating expenses.......... 3,865 6,329 8,564 10,805 10,940 18,764 37,700
---------- ---------- ------- ------- ------- ------- --------
Operating income (loss)............... 1,186 1,785 (985) (3,815) (853) (1,497) (13,273)
Minority interest in operations of
consolidated subsidiary............. -- -- -- -- 23 4 (66)
Other income (expense), net........... 44 35 (6) -- (21) 36 (26)
---------- ---------- ------- ------- ------- ------- --------
Net income (loss) before taxes.... 1,230 1,820 (991) (3,815) (851) (1,457) (13,365)
Income tax expense (benefit).......... 12 100 801 97 15 23 26
---------- ---------- ------- ------- ------- ------- --------
Net income (loss)................. $ 1,218 $ 1,720 $(1,792) $(3,912) $ (866) $(1,480) $(13,391)
========== ========== ======= ======= ======= ======= ========
</TABLE>
- -------------------------
(1) Amounts are exclusive of reported below stock-based compensation for the
quarters ended:
<TABLE>
<CAPTION>
PROFESSIONAL SELLING, GENERAL AND
SERVICES ADMINISTRATIVE
------------ --------------------
<S> <C> <C>
March 31, 1998.............................................. $ 8 $ 8
June 30, 1998............................................... 19 60
Sept. 30, 1998.............................................. 30 166
Dec. 31, 1998............................................... 126 277
March 31, 1999.............................................. 301 422
June 30, 1999............................................... 800 1,376
Sept. 30, 1999.............................................. 2,254 6,304
</TABLE>
COMPARISON OF QUARTERS ENDED JUNE 30, 1998, SEPTEMBER 30, 1998 AND DECEMBER
31, 1998
Revenues decreased 7% from $8.1 million in the second quarter of 1998 to
$7.6 million in the third quarter of 1998 due to a $1.3 million decrease in
revenues from our San Francisco office related to reduced work on Formica, Nike
and Nortel. This decrease was partially offset by an increase in revenues from
our New York office during the third quarter. Revenues decreased 8% from $7.6
million in the third quarter of 1998 to $7.0 million in the fourth quarter of
1998 due to most projects in the San Francisco office being completed by early
fourth quarter that was partially offset by continued revenue growth from our
New York office during the fourth quarter.
Selling, general and administrative expenses increased 8% from $2.7 million
in the second quarter of 1998 to $2.9 million in the third quarter of 1998 due
to the opening of our Chicago office and increased infrastructure costs incurred
to support our New York office. Selling, general and administrative expenses
increased 65% from $2.9 million in the third quarter of 1998 to $4.8 million in
the fourth quarter of 1998 due to hiring of non-billable personnel, especially
middle level managers, to support our growth.
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<PAGE> 34
COMPARISON OF QUARTERS ENDED MARCH 31, 1999, JUNE 30, 1999 AND SEPTEMBER 30,
1999
Revenues increased 71% from $10.1 million in the first quarter of 1999 to
$17.3 million in the second quarter of 1999 due to the addition of the
DaimlerChrysler account and the opening of our Detroit office. In addition, we
recognized revenues from several of our large clients, including Blockbuster,
Global Sports Interactive and Tommy Hilfiger. Revenues increased 41% from $17.3
million in the second quarter of 1999 to $24.4 million in the third quarter of
1999 as a result of the addition of our London office as well as the seasonality
of our business.
Selling, general and administrative expenses increased 79% from $4.6
million in the first quarter of 1999 to $8.3 million in the second quarter of
1999 due to continued hiring of corporate support services personnel and the
hiring of our Chief Information Officer and the promotion of our Chief
Technology Officer. Selling, general and administrative expenses increased 57%
from $8.3 million in the second quarter of 1999 to $13.0 million in the third
quarter of 1999 as we hired a Chief Financial Officer, Chief Legal and
Administrative Officer, Chief Operating Officer and Vice President of Human
Resources. We hired additional corporate personnel for a number of our support
services including human resources, finance, information services and legal.
INCOME TAX EXPENSE
Income tax expense in the year ended December 31, 1998 reflect the
establishment of a valuation allowance against our net deferred tax asset
recorded in the year ended December 31, 1997 due to projections that the Company
would incur a net operating loss for 1998 and the foreseeable future. In 1999,
taxes reflect actual payments made for state, local and foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
operating cash flows, the issuance of Series A and Series B convertible
preferred stock and bank borrowings.
OPERATING CASH FLOWS
Cash and cash equivalents increased from $1.7 million as of December 31,
1998 to $3.2 million as of September 30, 1999. Net cash used in operating
activities of $0.2 million and net cash used in investing activities of $4.0
million for the year ended December 31, 1998 was offset with borrowings of $1.9
million during 1998 from the second credit agreement for the purchase of
equipment and the $10.0 million investment by Omnicom Group in 1997 as described
below. Net cash used in operating activities of $4.7 million and net cash used
in investing activities of $5.8 million for the nine months ended September 30,
1999 was more than offset by the issuance of Series B convertible preferred
stock and borrowings under the revolving credit facility as described below.
Capital expenditures were as follows (in millions):
<TABLE>
<S> <C>
For the years ended December 31,
1996...................................................... $0.5
1997...................................................... 1.1
1998...................................................... 5.6
Nine months ended September 30, 1999........................ 6.2
</TABLE>
Capital expenditures were used primarily for computer equipment, computer
software, other internal software implementations and leasehold improvements.
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<PAGE> 35
PREFERRED STOCK FINANCING
We raised $10.0 million through the issuance of 3,351,288 shares of Series
A convertible preferred stock to Omnicom Group in January 1997. In February
1999, we issued 1,488,000 shares of Series B convertible preferred stock to
Omnicom Group for net cash proceeds of $7.7 million plus the settlement of a
$3.0 million short-term bridge loan that was obtained in January 1999. For the
nine months ended September 30, 1999, we paid $38,000 in interest on this loan.
BANK AND OTHER BORROWINGS
In 1996, we had two credit agreements with a commercial lending
institution, Silicon Valley Bank, that allowed us to borrow against the purchase
of equipment and against our accounts receivable. As of September 30, 1999 we
had no amounts outstanding against these agreements. On August 27, 1999, we
entered into a revolving credit facility with Omnicom Group to be used for
working capital purposes. This credit facility allows us to borrow up to $30.0
million at the lender's commercial paper rate, based on the published 30 day
commercial lending rate in The Wall Street Journal at the last day of the month,
plus 3.0% until the closing of our proposed initial public offering. Thereafter,
we may borrow up to $15.0 million at the lender's commercial paper rate plus
1.25% through September 30, 2002. The revolving credit facility expires on
September 30, 2002. This credit facility contains some restrictions and any
borrowings pursuant to this agreement require us to comply with financial
covenants and are collateralized by some of our investments. These financial
covenants include minimum revenue targets and limitations on capital equipment
purchases. As of September 30, 1999, we had approximately $4.7 million in
outstanding debt, of which $4.0 million relates to this revolving credit
facility. For the nine months ended September 30, 1999, we accrued $12,000 in
interest on this loan. See Note 5 of Notes to Financial Statements.
We anticipate that the net proceeds of this proposed initial public
offering, together with our existing liquidity sources and expected cash flows
from operations, if any, will be sufficient to meet our present growth
strategies and related working capital and capital expenditure requirements for
at least the next 12 months. If the offering is not completed, or 12 months from
the date of the offering have passed, and 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. We cannot be certain that
such additional financing will be readily available or can be obtained, if at
all, on terms, which are favorable to us.
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 United States dollars for consolidation. As
exchange rates vary, these results, when translated,
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<PAGE> 36
may vary from expectations and adversely impact net income (loss) and overall
profitability. The effect of foreign exchange rate fluctuation for the nine
months ended September 30, 1999 was not material.
YEAR 2000 READINESS
The year 2000 problem exists because many computer systems and software
products use only the last two digits to refer to a year. This convention could
affect date-sensitive calculations that treat "00" as the year 1900, rather than
as the year 2000. As a result, computer systems and software used by many
companies, including us, our vendors, our clients and our potential clients, may
need to be upgraded to comply with such year 2000 requirements.
We have identified all of the major systems and software products and have
sought external and internal resources to renovate and test the systems and
products. Although we believe that our principal internal systems are year 2000
compliant, some of our systems are not yet certified. We have received year 2000
compliance statements from the suppliers of some of our principal internal
systems, and have sought similar statements from other vendors. In particular,
we have received a compliance statement from Peoplesoft, the supplier of our
enterprise resource planning software. 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, has been completed.
The year 2000 problem may also affect software or code that we develop or
third party software products that are incorporated into the services that we
provide for our clients. Although our clients license software directly from
third parties, we generally discuss year 2000 issues with these suppliers and
sometimes perform internal testing on their products, but we do not guarantee
that the software licensed by these suppliers is year 2000 compliant. Any
failure on our part to provide year 2000 compliant services to our clients could
result in a re-deployment of internal resources to remediate these problems and,
as a result, hamper our ability to work or take on additional projects. This may
result in financial loss, harm to our reputation and potential liability to
others and could harm our business, financial condition and results of
operations. In addition, our current or potential clients may incur significant
expenses to achieve year 2000 compliance. If our clients are not year 2000
compliant, they may experience material costs to remedy problems, or they may
face litigation costs. In either case, year 2000 issues could reduce or
eliminate the budgets that current or potential clients could have for purchases
of our services. As a result, our business, financial condition and results of
operations could be materially affected.
We have funded our year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. At this time, we cannot
estimate the costs associated with remediating the year 2000 problem. However,
we may experience unexpected problems associated with year 2000 compliance that
may adversely affect our costs and as a result, our results of operations. In
addition, we expect that additional costs will be incurred for personnel to
monitor the results of the year 2000 project to ensure client satisfaction. For
example, we may experience material problems and costs with year 2000 compliance
that could seriously harm our business, financial condition and results of
operations, including:
- operational disruptions and inefficiencies for us, our clients and
vendors that provide us with internal systems that will divert
management's time and attention and financial and human resources from
ordinary business activities;
- business disputes and claims for pricing adjustments by our clients,
some of which could result in litigation or contract termination; and
- harm to our reputation to the extent that our client deliverables
experience errors or interruptions of service.
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<PAGE> 37
The principal risks associated with the year 2000 problem can be grouped
into three categories:
- failure to successfully ready our operations for the next century;
- disruption of our operations due to operational failures of our
significant vendors; and
- inability of our customers to adequately prepare their operations for
the next century.
The only risk largely under our control is preparing our internal
operations for the year 2000.
Operational failures among our significant vendors could jeopardize our
operations, but the seriousness of this risk depends on the nature and duration
of the failures. Despite our continuing assessment, we are unable, however, to
estimate the likelihood of significant disruptions during the year 2000 among
our basic infrastructure suppliers.
We monitored our internal systems and the work that we have done for
clients during December 1999 and through the first days of January 2000. The few
issues noted were dealt with at the time they arose. We believe there were no
significant disruptions of either client or internal operations. We continue to
monitor both our internal systems and client work.
Operational failures during the year 2000 among our current or potential
clients could result in losses of expected or potential revenue streams. If our
clients are not year 2000 compliant, they may experience material costs to
remedy problems, or they may face litigation costs. In either case, year 2000
issues could reduce or eliminate the budgets that current or potential clients
could have for purchases of our services. The year 2000 problem may also affect
software or code that we have developed or third party software products that
are incorporated into the services that we provide for our clients. Any failure
on our part to provide year 2000 compliant services to our clients could result
in a re-deployment of internal resources to remediate these problems and, as a
result, hamper our ability to work or take on additional projects. As a result,
these failures could have a material adverse effect on our business, financial
condition and results of operations.
In view of this unknown probability of occurrence and impact on operations,
we consider the need to cease normal operations for an indefinite period of time
while we attempt to respond to our significant vendors' year 2000 problems to be
our worst case scenario.
We have developed year 2000 contingency plans to address situations that
did or may continue to result if we were unable to successfully ready our
operations for the next century. We cannot, however, guarantee that our
contingency plans will shield operations from potential failures that may occur.
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<PAGE> 38
BUSINESS
OVERVIEW
Organic is an international Internet professional services firm. We believe
that the Internet has shifted the balance of power from businesses to customers
and has created the first truly global market. We 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 designed our services in recognition of the
challenges our clients face due to this shift. Our services are:
- iBusiness refers to our consulting, Web site design and software
engineering services through which we develop online business plans and
create Web sites;
- Media refers to our services through which we plan and manage online
advertising campaigns including electronic mail promotions and
affiliate program management;
- Communications 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 refers to our customer service and fulfillment consulting
services through which we evaluate, assist and manage for our clients'
warehouse and customer call center facilities.
Clients that use our services tend to spend proportionally more during the
second and third quarters due to their requirements that their projects be
completed in time for commercial holidays.
Founded in 1993 as a sole proprietorship and incorporated in January 1995,
we have a history as an innovator in the Internet professional services
industry. We have designed and developed a number of Web sites that were the
first in their industry category. We led the development of the Apache Web
server, a computer software program that delivers Web pages for customers to
view.
We have performed work for over 250 clients and have gained significant
experience by working with both major offline and emerging Internet companies.
We have organically grown our business, creating one of the largest independent
Internet professional services organizations with nearly 700 employees in eight
offices worldwide. By expanding our business into Asia, Europe, Latin America,
and Canada, we believe we have established the presence to deliver our services
globally.
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.
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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
Increased competition for customers forces both traditional and online
businesses to create or redefine themselves as the global reach of the Internet
removes traditional geographic boundaries. 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.
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
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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 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 a 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 the customer's perspective, enhancing their ability to create and maintain
a direct relationship with their customers and effectively incorporate customer
feedback into their business. We believe that we provide a unique value
proposition to our clients because we approach our solutions as potential
drivers of growth in overall customer satisfaction rather than as isolated
assignments. This approach requires a comprehensive and integrated skill set.
Therefore, our projects are typically of substantial size. For the nine months
ended September 30, 1999, 66% of our revenues were generated from engagements
with a value of more than $1.0 million.
COMPREHENSIVE AND INTEGRATED SERVICE OFFERING
We deliver value to our clients and their ultimate customers by addressing
all of the points of contact in the customer experience. 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 refers to our consulting, Web site design and software
engineering services through which we develop online business plans and
create Web sites;
- Media refers to our services through which we plan and manage online
advertising campaigns including electronic mail promotions and
affiliate program management;
- Communications 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 refers to our customer service and fulfillment consulting
services through which we evaluate, assist and manage for our clients'
warehouse and customer call center facilities.
We believe that these disciplines are highly dependent and must be
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
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<PAGE> 41
enables us to assist our clients with the implementation of their online
businesses and the refinement of their strategies. Furthermore, the opportunity
to have an ongoing role in our clients' online businesses provides us with a
recurring revenue base.
GLOBAL PRESENCE
The Internet has removed geographic barriers. Many of our multi-national
clients demand a consistent brand image and tailored customer experience, which
often requires localized content and specific knowledge about local practices
and customs. We believe that establishing a global presence is critical to our
clients' and ultimately to our success. Therefore, we will continue to expand
internationally, as well as in the U.S. We currently have offices in four
international locations including London, Sao Paulo, Singapore and Toronto.
Currently we serve 23 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 multidisciplinary group of team leaders
including a client service representative, known as a client partner, an
interactive strategist, a creative leader, a technical leader and a project
manager that work in close coordination to ensure successful execution of an
engagement. Marketing and public relations and customer service and fulfillment
leaders round out each team depending on the scope of the engagement. These team
leaders work together as peers to actively manage and monitor each client
engagement through the use of milestones, 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
strategic, design, creative and technical challenges. We believe
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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 and focus on developing
our managers from within the organization. We have invested in local human
resources teams for our offices that monitor employee morale and daily human
resources operations.
LEVERAGE OUR BUSINESS PROCESSES AND INFRASTRUCTURE
We have developed a 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, the reuse of common programming
elements and our use of prototypes. We will continue to invest in our
infrastructure including our management information systems, our financial
planning processes and controls and our Intranet. Our strategy for office
expansion, known as office-in-a-box, is designed to provide both a systematic
approach and 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 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. 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 services and our practice known as Value Optimization
through Improved Customer Engagements, or VOICE, 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 intend to 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.
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EFFECTIVELY TARGET AND SOLICIT NEW CLIENTS
We believe that by targeting new clients we will improve our long-term
prospect for success. We will 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 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 in the
U.S. 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 four 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. We
currently have U.S. offices in San Francisco, New York, Chicago and Detroit, and
international offices in London, Sao Paulo, Singapore and Toronto.
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
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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 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 software 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.
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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 to complete a transaction. This innovation also delivers a consistent
branding message and effectively shares information between the Web site and the
advertisement. As appropriate, we also extend our media expertise offline either
directly or through arrangements with offline agencies.
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 communications public relations services assist our clients with the
management of their ongoing press and publication relationships.
SERVICES PROVIDED. Our communications 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 relaunch 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 logistics 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.
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SERVICES PROVIDED. Our logistics 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 logistics 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.
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 Value Optimization through Improved Customer Engagements, or VOICE. We
believe that if a company can effectively collect, analyze and use customer
information it will improve its business. We developed our VOICE 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
continue to develop innovative service offerings as we anticipate new customer
needs.
CLIENTS
We believe that to succeed we need to maintain a broad client base of both
large, established companies and emerging Internet companies. For the nine
months ended September 30, 1999, approximately 75% of our revenues were derived
from established, offline companies either extending their businesses or
creating a new presence or identity online. Since our founding in 1993, we have
performed work for over 250 clients. Consistent with our strategy, we have
derived approximately one-third of our revenues for the nine months ended
September 30, 1999 from clients who have used more than one of our service
offerings.
The following is a list of our clients that generated over $100,000 in
revenues for us during the nine months ended September 30, 1999, which we
believe is representative of our overall client base:
ESTABLISHED COMPANIES
American Century
Avis
Barnes & Noble
Blockbuster
Brahma Beer
British Telecom
Chase Manhattan Bank
Compaq
DaimlerChrysler
Day Timers
Gap
Garnet Hill
Global Sport Interactive
Hambrecht & Quist
Hewlett-Packard
Home Depot
Iomega
Knowledge Universe
Lucent
Nature Conservancy
Nickelodeon
Payless Shoe Source
Prodigy
RCN Corp.
Seagate
Starbucks
Tommy Hilfiger
United Missouri Bank
Washington Mutual
Waterhouse Securities
Zagat
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EMERGING INTERNET COMPANIES
Adauction
Awards.com
Accent Health
Boo.com
CDNOW
Career Mosaic
CTC
Deja.com
Digital River
E-Negatives
E/Town
eToys
Fragrance Counter
FTD.com
Haystock Toys
Guild.com
iWare
JPKids
Lucy.com
Next Planet Over.com
Seagate
Starbucks
Stan Lee Media
Party Host.com
Pseudo
Rx.com
Textbooks.com
Tomorrow Lab
Worldly Information Networks
Zip.Net
We currently derive a significant portion of our revenues from a limited
number of clients. For the nine months ended September 30, 1999, our five
largest clients accounted for approximately 41% of our revenues. During this
period DaimlerChrysler and Blockbuster accounted for approximately 12% and 10%
of our total revenues, respectively.
In exchange for our services we have from time to time made investments in
some of our Internet clients. Our venture catalyst investment strategy has been
focused on select early stage clients with attractive business models seeking
alternative forms of payment and/or who are interested in more closely aligning
our goals through equity-based compensation. In general, these equity
investments are structured so our clients pay for all of the costs related to
their engagement in cash and use equity incentives to compensate us for a
portion of our profit margin. As of September 30, 1999, we made equity
investments in the following clients: Stan Lee Media, HomeGrocer.com, Worldly
Information Networks and Next Planet Over.com.
CLIENT CASE STUDIES
Each of the case studies that follow demonstrate our ability to deliver
global, integrated solutions with complex technologies. Tommy Hilfiger,
DaimlerChrysler and Compaq accounted for approximately 4%, 12% and 6% of our
total revenues for the nine months ended September 30, 1999.
TOMMY.COM
The work that we are performing for Tommy.com, Inc., a subsidiary of Tommy
Hilfiger Corporation, illustrates the value that our service offerings can
deliver to our customers. Our services include design, content creation,
branding, site construction and establishing a framework for broadband
technologies. We are also managing the call centers that customers who visit
Tommy.com are directed to contact. We believe that all of these services are
critical to delivering a customer experience that fulfills the promise regarding
brand and product that are presented on the Tommy.com Web site.
CLIENT CHALLENGE. In launching its online efforts, Tommy.com faced the
challenge of building an online presence that would further define and extend
its brand through a deeper interaction with customers. We were asked to help
Tommy.com convey the meaning and extend the consistent message of the existing
brand onto the Internet.
ORGANIC SOLUTION. We are delivering a solution that uses a number of our
service offerings in order to ensure the success of Tommy.com's online
initiative. We are building Tommy.com's new online presence on a solid
technological foundation consisting of custom developed software that is
integrated with Tommy.com's existing systems creating a unified platform. Using
this architecture, we are creating a rich media interface to communicate the
Tommy Hilfiger brand to customers through audio, video, text and other visuals.
We are also assisting
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Tommy.com to create original audio, video and editorial online content to
augment existing content and to build an interactive forum. The platform we are
building is able to handle a high volume of transactions and allows for
broadband delivery in the future.
DAIMLERCHRYSLER
The work that we are performing for DaimlerChrysler demonstrates our
ability to create a successful strategic relationship and to deliver services on
a global basis to large international clients.
CLIENT CHALLENGE. In creating its online initiative, DaimlerChrysler needed
to broaden its mission to include interactive strategies and to address its
growing technical needs in the global marketplace. It had a variety of Web sites
in different countries that were controlled locally. To implement its global
strategy, DaimlerChrysler needed to create a unifying image for all of its
Internet properties. This required a global team approach to interact and build
consensus with both local and corporate constituencies within DaimlerChrysler.
ORGANIC SOLUTION. We have begun to deliver a solution that is designed to
create a unified Web strategy that presents DaimlerChrysler brands consistently
worldwide in a way that appeals to local customers. We focused our initial
efforts on Europe. A team comprised of personnel from our London, New York and
Detroit offices collaborated to:
- conduct audits of the Web sites in each local market to develop a
cohesive long-term European strategy;
- develop Web sites to incorporate both the corporate and local market
customer messages; and
- leverage technology and information across the organization.
We developed the content and copy for branded Web sites and implemented
multi-lingual functionality for global audiences, a process commonly referred to
as localization.
To transition from locally to centrally controlled Web sites, we developed
a phased approach to conform all Web sites with our recommended global
architecture, while allowing local design input. The first phase included
transforming the content of each local Web site from 10 pages with limited
functionality and product information to 300 pages using a template with
multiple car information and expanded functionality that could be easily
replicated to add other countries. We leveraged technologies created in the
U.S., including electronic mail fulfillment and user data capture for use across
Europe. In the second phase, we plan to redesign the application infrastructure
to create a dynamic, personalized experience and extensively use Shockwave and
Flash technology to enable rich media experiences for new vehicle introductions.
Recently the scope of our efforts for DaimlerChrysler has expanded to include
the Asia-Pacific region, South America and the Middle East.
COMPAQ
The work we performed for Compaq Computer Corporation illustrates our
skills with cutting-edge Internet technology. In working with Compaq, we
developed a dynamic, highly technical Web site, to connect Compaq, a Fortune 500
company, with consumers in the online world.
CLIENT CHALLENGE. Compaq wanted to build a Web site to showcase the Sting
World Tour and enhance Compaq's position as an Internet savvy company. Compaq
wanted to create a Web site that would have a life span of 18 months, the length
of the tour, and would be able to take advantage of broadband technologies as
they become more available.
ORGANIC SOLUTION. Our solution was to create a dynamic Web site featuring
tour information, information about Sting and a behind the scenes section to
showcase the Compaq technology
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supporting the Web site. We performed the systems integration and database
design using Compaq ProLiant servers and Microsoft software technology. Repeat
visits to the Web site are enhanced through the use of the community tools and
the Songline Engine -- a real time tool to create and compose original audio,
video and text based on rich media available throughout the Web site. It
encourages word of mouth marketing by giving users the ability to invite others
to view a Songline creation on the site. In addition to the Songline Engine, we
developed a rich media interface using Flash and other technologies and also
created a registration engine to capture potential customer information,
allowing for targeted marketing efforts.
Our solution makes use of some of the latest Internet technologies. We
employed Flash extensively to enable the user to experience a true next
generation Web site sponsored by Compaq. We also designed the Web site's
architecture to allow for a long life span and eventual integration of materials
for broadband delivery. In addition, we developed custom publishing and content
management tools to allow geographically diverse teams to manage the Web site
and update rich media portions of the system through a Web-based interface.
These tools reduce the overall operating costs and resources necessary to
maintain the Web site.
SALES AND MARKETING
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 which 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 other Organic services
could be beneficial. All members of the client team meet on a monthly basis to
review business development plans with respect to each client and evaluate our
progress on earlier initiatives.
Our business development group is complemented by a variety of marketing
programs designed to generate demand 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.
MAINTAINING THE ORGANIC CULTURE
OUR CULTURE AND EMPLOYEES
We view the Organic culture as one of our most strategic assets. We have
built a creative and adaptive environment that inspires individuals to excel.
The influence of our culture extends to the design of our office space, which
has an open plan with few offices or cubicles to promote a barrier-free
environment. Our organization is centered on people, and espouses the core
values of collaboration, innovation and learning. We are committed to recruiting
outstanding
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professionals, providing ongoing, role specific and general management training
and development and offering competitive compensation and benefits packages. Our
learning transfer occurs both through structured, moderated sessions and
informal employee gatherings. Examples of structured sessions include our
specialized summits, new hire orientation seminars and local all hands meetings.
Unstructured employee gatherings include Wednesday bagel mornings and Friday
afternoon socials during which employees from all disciplines and functions
within an Organic office can come together in a supportive setting to share and
generate ideas, or just to relax and have fun.
As of September 30, 1999, we had 681 full-time employees. Of these,
approximately 30 were strategy consultants, 41 were media and communications
specialists, 117 were Web site design specialists and 152 were software
engineers and technical professionals. Experts in other functional groups
included 11 in business development, 58 in client services and 79 in project
management. None of our employees is represented by a labor union. We have not
experienced any work stoppages and believe our relationship with our employees
is good.
RECRUITING
Given our historical and anticipated growth, identifying and hiring
outstanding professionals that fit within the Organic culture is one of the most
important functions within Organic. Our recruiting department consists of 15
professionals domestically and internationally, and includes 10 full-time
recruiters. The recruiting department is organized along geographic lines so
that we can develop an in-depth knowledge of the local market and scale in
accordance with our expansion strategy. As we open and expand new offices, they
will usually be supported by the recruiting department of an existing office
until the new office reaches sufficient size, at which point a dedicated
recruiting professional is assigned.
We recruit through a broad array of channels, including:
- general and job specific advertising;
- internal hires;
- job fairs;
- open houses; and
- trade shows.
We are currently implementing a number of key recruiting initiatives
including:
- an enterprise-wide, Web-based hiring automation system with a
PeopleSoft interface;
- an internal sourcing team focused on proactive identification of key
talent; and
- a college relations program to target highly qualified students and
promote our image at colleges and universities around the world.
Our new recruiting system is designed to enhance our ability to maintain
detailed performance metrics to monitor and control open positions, time to fill
open positions, cost per hire, source of hire and quality of hire.
TRAINING AND DEVELOPMENT
We have an extensive training and development program, which is designed to
increase employee productivity, complement our recruiting and retention efforts
by enhancing employee job satisfaction and promote knowledge sharing. Our
training and development initiatives include new hire orientation, ongoing
management and professional skills training and annual summits for a number of
functions including:
- Web site design;
- project management;
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- software engineering;
- media;
- business development;
- strategy; and
- client services personnel.
Training and development also complements our office expansion strategy by
promoting consistency across all of our offices, service lines and departments.
As we continue to open new offices and expand existing offices, we can deploy
existing employees who have mastered the skills required and understand the
Organic culture.
RESEARCH AND DEVELOPMENT
Our research and development, or R&D team, is focused on assisting local
teams with solving problems. Our R&D 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 R&D 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 R&D supports our teams with the knowledge to
quickly select the best technology solution, and if necessary, provide the
support to implement it.
Our creative R&D focuses on both extending and enabling our engineering
team efforts. Three areas of particular emphasis are exploratory prototypes,
re-use strategies for information design and strategic creative partnerships.
Our creative R&D team also collaborates with local creative teams, as well as
our strategic consulting and VOICE teams to increase our understanding of the
patterns and interfaces that allow our solutions to connect with their intended
audience. Behavioral knowledge and communication expertise are intrinsic to
success on any interactive platform; therefore, creative research, analysis and
invention are all methodically gathered and shared with our teams.
Our R&D 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. For the
years ended December 31, 1997 and 1998 and for the nine months ended September
30, 1999, we estimate that we spent $0.1 million, $0.2 million and $0.5 million
on R&D, respectively.
KNOWLEDGE MANAGEMENT
We capture and share knowledge through our Intranet, training and
development classes, discipline summits, off-site management meetings and our
office-in-a-box tools and processes. We re-use technology when appropriate
through the development of standard software platforms, centrally-managed
software licensing, software re-use and strategic technology partnerships. We
also share best practice creative design solutions across our teams for use with
our clients.
INTRANET
The mission of our Intranet is to create a sense of community, enhance
communication and simplify processes. Our workflow processes are accessible
through the Intranet, and teams are expected to follow them as standard
procedure on client engagements. We encourage constant improvement in these
processes, which are discussed at our various discipline summits.
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Although every solution created for a client is unique, many of the underlying
functional elements can either be re-used for a period of time or share common
building blocks that serve as a base for other engagements.
LEARNING AND SUMMITS
In recognition of the need to create and maintain relationships with our
employees, we have a number of initiatives that focus on participatory learning,
culture sharing and knowledge transfer. We provide general training and
development classes through our human resources department to both new hires and
current employees. In addition, each of the discipline heads is responsible for
the development and communication of best practices and tools throughout the
organization. We share ideas at various summits that are held each year within
the strategic consulting, creative, project management, engineering, media and
business development disciplines. Our senior executives also participate twice a
year in off-site management sessions.
OFFICE-IN-A-BOX
The corporate development team has created our office-in-a-box program to
systematize the process of opening new offices. The program provides a plan for
new office initiation, including process documents, monitoring and control tools
and training plans. The office-in-a-box information exists in centralized
hardcopy form as well as electronically on our Intranet. It includes manuals on
departmental descriptions, organization charts, job descriptions, roles and
responsibilities, contact lists, workflows, policies and procedures and
templates, formats and example documents.
COMPETITION
The market for Internet professional services is relatively new, intensely
competitive, quickly evolving and subject to rapid technological change.
Further, our industry is experiencing rapid consolidation. Our principal current
national and international competitors include the following:
- other providers of Internet professional services, including
AGENCY.COM, iXL, Proxicom, Razorfish, Scient, USWeb/CKS and Viant;
- large information technology consulting services providers, including
Andersen Consulting, Cambridge Technology Partners, Cap Gemini, CSC,
EDS, IBM and Sapient;
- strategic consulting firms, including Bain & Company, Booz Allen &
Hamilton and Boston Consulting Group; and
- internal information technology, marketing and other departments of
current and potential clients.
We anticipate facing additional competition from new entrants into our
markets due to low barriers to entry.
We believe that the principal factors upon which we compete are the ability
to offer a comprehensive suite of services, the ability to handle large, complex
projects, the ability to attract and retain the best professionals through our
culture, the blending of strategy, creative and engineering expertise, brand
recognition and reputation, client service and price. Although we believe that
few of our competitors currently offer as comprehensive a suite of services as
we offer, many competitors have announced an intention to expand their service
offerings. Many of our competitors have longer operating histories, larger
client bases, longer relationships with clients, greater brand or name
recognition and significantly greater financial, technical, marketing and public
relations resources than we have. These competitors, as well as new competitors,
could develop or offer services that are comparable to or superior to ours, or
are less expensive. The entry of new competitors or changes in the service
offerings of existing competitors would harm our business, financial condition
and results of operations.
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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 obtained trademark
registrations in the U.S. for the "Organic" and "Organic Online" marks and have
applied for registration of the "Organic Media" mark and some of our other
trademarks and service marks. We are pursuing expanded international trademark
and service mark protection. In addition, although we do not currently pursue
patent protection for our intellectual property, we may do so in the future, as
appropriate.
If we fail to adequately protect our intellectual property rights and
proprietary information or if we become involved in litigation relating to our
intellectual property rights and proprietary technology, our business could be
harmed. Any actions we take may not be adequate to protect our proprietary
rights and other companies may develop technologies that are similar or superior
to our proprietary technology. In addition, the legal status of intellectual
property on the Internet is currently subject to various uncertainties.
Although we believe that our products and services do not infringe on the
intellectual property rights of others and that we have all rights needed to use
the intellectual property employed in our business, it is possible that we could
in the future become subject to claims alleging infringement of third party
intellectual property rights. Any claims could subject us to costly litigation,
and may require us to pay damages and develop non-infringing intellectual
property or acquire licenses to the intellectual property that is the subject of
the alleged infringement.
FACILITIES
Our headquarters are located in 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
210,000 square feet of office space, commencing September 2000 and expiring in
September 2010. We also lease office space in Chicago, Detroit, New York,
London, Sao Paulo and Singapore. We are currently exploring real estate options
consistent with our future growth plans. We do not anticipate acquiring property
or buildings in the foreseeable future.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation incidental to the
conduct of our business. We are not currently party to any material legal
proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors as of 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
Janis M. Nakano Spivack.......... 36 Vice President, Chief Creative Officer
Lynda Ward Pierce................ 36 Vice President, Human Resources
Gary F. Hromadko................. 47 Director
Gerald Bruce Redditt............. 48 Director
</TABLE>
Biographies of our executive officers and directors are as follows:
JONATHAN NELSON co-founded our company in 1993 and has served as our Chief
Executive Officer and Chairman of the Board since January 1995. From February
1996 to May 1996, Mr. Nelson served as President and Chief Executive Officer of
Accrue Software, a developer of network based tools for measuring Web site
performance. Mr. Nelson 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
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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
solutions. From September 1984 to January 1998, Ms. Zagel served as General
Counsel of Grant Thornton LLP, an accounting and management consulting firm.
MATTHEW BERNARDINI has served as our Vice President, Chief Technology
Officer since July 1999, and prior to that, from October 1997 to July 1999, he
served as our Director of Engineering. From January 1996 to August 1997, Mr.
Bernardini was Vice President, Technology of Meta4Digital Design, an interactive
marketing company. From May 1995 to January 1996, Mr. Bernardini was an
independent consultant, working as a programmer and developer.
MARITA C. SCARFI has served as our Vice President, Finance since January
1998. She served as our Director of Finance from January 1997 to January 1998
and as our Controller from July 1996 to July 1997. From August 1988 to July
1996, Ms. Scarfi served as a Manager of Business Assurance for Coopers &
Lybrand, an accounting firm.
JANIS M. NAKANO SPIVACK has served as our Vice President, Chief Creative
Officer since November 1996. From October 1993 to October 1996, Ms. Spivack was
a partner of leftBrain-rightBrain, a provider of consulting, technical and
design production expertise to both Web site builders and individual companies.
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.
GARY F. HROMADKO has served as one of our directors since January 1997 and
has served as a director of Organic United Kingdom, one of our wholly-owned
subsidiaries, since February 1999. Since 1993, Mr. Hromadko has been a private
venture investor in early stage technology companies.
GERALD BRUCE REDDITT has served as a member of our board of directors since
October 1998. Since May 1998, Mr. Redditt has served as an Executive Vice
President of Omnicom Group Inc., a strategic and financial holding company. From
July 1995 to May 1998, Mr. Redditt served as an Executive Vice President of Sony
Pictures Entertainment, a creator and distributor of entertainment products,
services and technology. From March 1991 to July 1995, Mr. Redditt served as a
Corporate Vice President of GTE Corporation, a telecommunications company. Since
January 1999, Mr. Redditt has served as a director of AGENCY.COM, Ltd.
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BOARD COMPOSITION
Our bylaws authorize the number of directors to be not less than five nor
more than nine. The number of directors on the Board is currently fixed at six.
Our bylaws provide that following the completion of this offering our board of
directors will be divided into three classes of directors designated Class I,
Class II and Class III. Each class will have a three-year term. Initially, two
directors will serve in Class I, two directors will serve in Class II and two
directors will serve in Class III. The initial directors in each class will hold
office for terms of one year, two years or three years. Thereafter each class
will serve a three-year term. Executive officers are elected by and serve at the
direction of the board of directors.
BOARD COMMITTEES
The board of directors has established a compensation committee and an
audit committee. The compensation committee, consisting of Mr. Hromadko and Mr.
Redditt, reviews and approves the salaries, bonuses and other compensation
payable to our executive officers and administers and makes recommendations
concerning our employee benefit plans.
The audit committee, currently consisting of Mr. Hromadko, Mr. Redditt and
Mr. Hudes, recommends the selection of independent public accountants to the
board of directors, reviews the scope and results of the audit and other
services provided by our independent accounts, and reviews our accounting
practices and systems of internal accounting controls.
DIRECTOR COMPENSATION
Our directors currently are not compensated for their services. However, in
the future we intend to compensate our non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
There are no family relationships among any of our directors or executive
officers other than between Michael Hudes and Daniel Lynch, who are
brothers-in-law.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table contains information in summary form concerning the
compensation paid to our chief executive officer and each of our four most
highly compensated executive officers whose total salary, bonus and other
compensation exceeded $100,000 during the fiscal year ended December 31, 1999.
In accordance with the rules of the SEC, the compensation described in this
table does not include perquisites and other personal benefits received by the
executive officers named in the table below which do not exceed the lesser of
$50,000 or 10% of the total salary and bonus reported for these officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER 1999
1999 ANNUAL COMPENSATION
COMPENSATION --------------
------------------- TOTAL HEALTH
NAME AND PRINCIPAL POSITION SALARY BONUS INSURANCE
- --------------------------- -------- -------- --------------
<S> <C> <C> <C>
Jonathan Nelson
Chief Executive Officer and Chairman of the Board...... $180,000 54,922 $3,072
Michael Hudes
President and Director............................... 212,755 75,000 5,792
Janis Nakano Spivack
Vice President, Chief Creative Officer............... 171,250 47,500 --
Susan Field
Executive Vice President, Chief Financial Officer.... 130,773 150,000 --
Matthew Bernardini
Vice President, Chief Technology Officer............. 166,967 45,000 --
</TABLE>
OPTION GRANTS DURING FISCAL 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during the
fiscal year ended December 31, 1999. All options granted to these executive
officers in the last fiscal year were granted under our 1997 stock option plan.
Each option vests and becomes exercisable over a period of four years. The
percentage of total options set forth below is based on an aggregate of
15,294,525 options granted to employees in fiscal 1999. All options were granted
at a fair market value as determined by the board of directors on the date of
grant. The board of directors determined the fair market value based on our
financial results and prospects and the share price in arms-length transactions.
The exercise price may in some cases be paid by delivery of other shares or by
offset of the shares subject to options. The deemed value for the date of grant
has been adjusted solely for financial accounting purposes. Potential realizable
values are net of exercise price, but before taxes associated with exercise.
Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock
price appreciation are based on the exercise price of the options and are
provided
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in accordance with the rules of the SEC and do not represent our estimate or
projection of the future common stock price.
OPTIONS GRANTED IN FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM
OPTIONS FISCAL YEAR PRICE PER EXPIRATION ----------------------
NAME GRANTED 1999 SHARE 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>
OPTION EXERCISES
The following table sets forth information concerning exercisable and
unexercisable stock options held by each of the executive officers named in the
summary compensation table at December 31, 1999. The value of unexercised
in-the-money options represents the positive spread between the exercise price
of the stock options and the deemed fair market value of our common stock as of
December 31, 1999, which our board of directors determined was $2.6667 per
share. All options were granted under our 1997 stock option plan. These options
vest over four years and otherwise generally conform to the terms of our 1997
stock option plan.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1999
AND OPTION VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
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... -- -- 60,938 456,562 $ 152,994 $ 690,706
</TABLE>
EMPLOYMENT AGREEMENTS
JONATHAN NELSON
On January 29, 1997, Jonathan Nelson entered into an employment agreement
with us to serve as our Chief Executive Officer. Mr. Nelson currently serves as
our Chief Executive Officer and as a member of our board of directors. As
amended on February 24, 1997, the employment agreement provides Mr. Nelson with
an annual base salary of $90,000. In addition, Mr. Nelson is eligible to receive
discretionary bonus compensation in an amount determined by the board of
directors.
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Under the terms of his agreement, Mr. Nelson's employment shall continue
until either party gives the other party 90 days advance written notice of the
expiration of the employment agreement. Should we terminate Mr. Nelson's
employment for cause, we must pay Mr. Nelson all compensation due on the date of
termination. Cause is defined as:
- repeated failure or refusal by Mr. Nelson to materially perform his
duties and responsibilities, or his failure to devote substantially all
of his business time and attention exclusively to our business and
affairs;
- willful misappropriation of our funds or property;
- use of alcohol or illegal drugs, which interferes with his performance
and which continues after written warning;
- conviction in a court of law of, or entering a plea of guilty or no
contest to, any felony or any crime involving moral turpitude,
dishonesty or theft;
- any commission in bad faith of any act which injures or could
reasonably injure our reputation, business or business relationships;
or
- any material breach of his employment agreement, which is not cured
within 30 days of our written notice.
Should we terminate Mr. Nelson's employment without cause and without 90
days advance written notice, Mr. Nelson is entitled to receive from us, so long
as Mr. Nelson is not in breach of the non-competition and protection of
confidential information provisions of his employment agreement,
- 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.
Under the terms of his employment agreement, Mr. Nelson agrees that while
he is employed by us and for a period of two years after the date of his
termination, he shall not, except on our behalf:
- solicit any client business;
- solicit any of our employees or exclusive consultants; or
- render to or for any client any services that we provide.
Additionally, Mr. Nelson also agrees that he will not at any time
- disclose any confidential information or trade secret of ours or our
clients; or
- use any confidential information or trade secret for his own benefit,
or for the benefit of third parties.
MICHAEL HUDES
On January 29, 1997, Michael Hudes entered into an employment agreement
with us to serve as our President. Mr. 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.
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Under the terms of his agreement, Mr. Hudes' employment shall continue
until either party gives the other party 90 days advance written notice of the
expiration of the employment agreement. Should we terminate Mr. Hudes'
employment for cause, we must pay Mr. Hudes all compensation due on the date of
termination. Cause is defined as:
- repeated failure or refusal by Mr. Hudes to materially perform his
duties and responsibilities, or his failure to devote substantially all
of his business time and attention exclusively to our business and
affairs;
- willful misappropriation of our funds or property;
- use of alcohol or illegal drugs, which interferes with his performance
and which continues after written warning;
- conviction in a court of law of, or entering a plea of guilty or no
contest to, any felony or any crime involving moral turpitude,
dishonesty or theft;
- any commission in bad faith of any act which injures or could
reasonably injure our reputation, business or business relationships;
or
- any material breach of his employment agreement, which is not cured
within 30 days of our written notice.
Should we terminate Mr. Hudes' employment without cause and without 90 days
advance written notice, Mr. Hudes is entitled to receive from us, so long as Mr.
Hudes is not in breach of the non-competition and protection of confidential
information provisions of his employment agreement,
- 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.
Under the terms of his employment agreement, Mr. Hudes agrees that while he
is employed by us and for a period of two years after the date of his
termination, he shall not, except on our behalf:
- solicit any client business;
- solicit any of our employees or exclusive consultants; or
- render to or for any client any services that we provide.
Additionally, Mr. Hudes also agrees that he will not at any time
- disclose any confidential information or trade secret of ours or our
clients; or
- use any confidential information or trade secret for his own benefit,
or for the benefit of third parties.
SUSAN L. FIELD
On June 22, 1999, Susan L. Field entered into an employment agreement with
us to serve as our Executive Vice President and Chief Financial Officer. The
employment agreement provides Ms. Field with an annual base salary of $250,000
and a bonus of up to 40% of her base salary upon achievement of specific goals
and objectives. Additionally, Ms. Field was paid a signing bonus of $50,000 in
connection with her entering the employment agreement.
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
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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 will
vest upon the closing of this offering and 75,000 of the shares will vest upon
our hiring employees to fill at least two key management positions and our
retaining these employees for nine continuous months of employment.
Under the terms of her agreement, Ms. Field's employment may be terminated
by either party at any time with or without cause and with or without notice.
Should we terminate Ms. Field's employment for cause or should she voluntarily
resign, she will not be entitled to severance pay, pay in lieu of notice, or any
other compensation or benefits, other than payment of accrued salary and
vacation. Cause is defined as:
- conviction of any felony or of any crime against us;
- participation of any fraud against us;
- willful breach of any duties to us, including persistent unsatisfactory
job performance;
- breach of provisions in the employment agreement or of her proprietary
information and invention agreement; or
- engagement of conduct determined by our board of directors to
demonstrate gross unfitness to serve.
In the event Ms. Field's employment is terminated without cause, we will
provide her with
- a 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.
Under the terms of her employment agreement, Ms. Field agrees that while
she is employed by us, she will not in any capacity whatsoever engage in, become
financially interested in, be employed by or have any business connection with
any of our competitors.
In connection with her employment agreement, Ms. Field entered into a
proprietary information and invention agreement, which provides that she:
- will not use any of our proprietary information without our prior
written authorization;
- will assign to us in the future her interest in any and all inventions,
subject to a limited exclusion; and
- will not, for a period of one year after the termination of her
employment, solicit any of our employees or clients.
BENEFIT PLANS
1997 STOCK OPTION PLAN
Our 1997 stock option plan was approved by our board of directors and our
stockholders in April 1997 and was amended in November 1998, February 1999,
September 1999 and November 1999. Our 1997 stock option plan provides for the
grant to our employees, including officers and employee directors, of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code and
for the grant of nonstatutory stock options to our employees, outside directors
and consultants. Our 1997 stock option plan is currently administered by our
board of
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directors which selects the optionees, determines the number of shares to be
subject to each option and determines the exercise price of each option. Our
1997 stock option plan authorizes the issuance of an aggregate of up to
22,725,000 shares of common stock. The maximum number of shares that may be
granted to any individual under our 1997 stock option plan in any year is
956,250. As of September 30, 1999, options to purchase an aggregate of
15,712,932 shares of common stock were outstanding under the 1997 stock option
plan, and an aggregate of 5,392,953 shares of common stock remained available
for future grants.
The exercise price of all incentive stock options granted under our 1997
stock option plan must be at least equal to the fair market value of the common
stock on the date of grant. The exercise price of all nonstatutory stock options
granted under our 1997 stock option plan shall be determined by the
administrator, but in no event may be less than 85% of the fair market value on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all our classes of stock, the exercise
price of any incentive or nonstatutory option granted must equal at least 110%
of the fair market value on the grant date and the maximum term of any these
options must not exceed five years. The term of all other options granted under
our 1997 stock option plan may not exceed ten years.
In the event a participant in our 1997 stock option plan ceases to be an
employee, director or consultant, other than upon the participant's death or
disability, the participant may exercise his or her vested options for a period
of three months following termination, unless a different exercise period is
specified in his or her option agreement.
In the event of our merger with or into another corporation or a sale of
substantially all of our assets, our 1997 stock option plan requires that each
outstanding option be assumed or an equivalent option substituted by the
successor corporation; provided, however, that in the event the successor
corporation refuses to assume or substitute for the outstanding options, the
vesting of these options and the time during which these options may be
exercised shall be accelerated prior to such event and the options terminated if
not exercised after such acceleration and at or prior to such event.
In the event of a change of control, all participants shall receive two
additional years of vesting for all outstanding options and all stock acquired
through the exercise of an option. In addition, if a participant is employed by
us or a subsidiary at the time of the change of control and, prior to the
one-year anniversary of the change of control, the participant is either
terminated for reasons other than for cause or terminates employment for good
reason, the participant shall have the greater of 90 days from the date of
termination or the period otherwise specified for exercise after termination to
exercise any vested options. Under the 1997 stock option plan, a change of
control is defined as:
- acquisition of 25% or more of our stock by any individual or entity;
- a change of a majority of the members on our board of directors;
- consummation of our reorganization, merger or consolidation or the sale
or disposition of more than 50% of our operating assets;
- a tender offer made for our stock; or
- approval of a plan of complete liquidation by our stockholders.
Our 1997 stock option plan will terminate in 2007. Our board of directors
has authority to amend or terminate our 1997 stock option plan, provided that
such action will not impair the rights of the holder of any outstanding options
without the written consent of that holder.
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1999 LONG-TERM STOCK INCENTIVE PLAN
Our 1999 long-term stock incentive plan was approved by our board of
directors and our stockholders in November 1999. Our 1999 long-term stock
incentive plan provides for the grant to our employees, including officers and
employee directors, of incentive stock options within the meaning of Section 422
of the Internal Revenue Code and for the grant of nonstatutory stock options to
our employees, directors and consultants, stock appreciation rights and other
types of awards. Our 1999 long-term stock incentive plan will be administered by
our compensation committee which selects the optionees, determines the number of
shares to be subject to each option, determines the exercise price of each
option and determines the vesting and exercise periods of each option. Our 1999
long-term stock incentive plan authorizes the issuance of an aggregate of up to
10,500,000 shares of common stock. No options to purchase shares of common stock
have yet been granted under this plan, therefore options to purchase 10,500,000
shares of common stock remain available for grant.
The exercise price of all incentive stock options granted under our 1999
long-term stock incentive plan must be at least equal to the fair market value
of the common stock on the date of grant. The exercise price of all nonstatutory
stock options granted under our 1999 long-term stock incentive plan shall be
determined by the compensation committee, but in no event may be less than 85%
of the fair market value on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all our classes
of stock, the exercise price of any incentive or nonstatutory option granted
must equal at least 110% of the fair market value on the grant date and the
maximum term of any these options must not exceed five years. The term of all
other options granted under our 1999 long-term stock incentive plan may not
exceed ten years.
In the event a participant in our 1999 long-term stock incentive plan
terminates employment, or is terminated by us for any reason other than cause,
any options which have become exercisable prior to the time of termination,
shall remain exercisable for six months from the date of termination if
termination was caused by death or disability, or 30 days from the date of
termination if termination was caused by reasons other than death or disability.
In the event of a change of control, all participants shall receive two
additional years of vesting for all outstanding options and share appreciation
rights, all stock acquired through the exercise of an option or a share
appreciation right, and all other awards. In addition, if a participant is
employed by us or a subsidiary at the time of the change of control and, prior
to the one-year anniversary of the change of control, the participant is either
terminated for reasons other than for cause or terminates employment for good
reason, the participant shall have the greater of 90 days from the date of
termination or the period otherwise specified for exercise after termination to
exercise any vested options. Under the 1999 long-term stock incentive plan, a
change of control is defined as:
- acquisition of 25% or more of our stock by any individual or entity;
- a change of a majority of the members on our board of directors;
- consummation of our reorganization, merger or consolidation or the sale
or disposition of more than 50% of our operating assets;
- a tender offer made for our stock; or
- a plan of complete liquidation by our stockholders.
Unless terminated sooner, our 1999 long-term stock incentive plan will
terminate in 2009. Our board of directors has authority to amend or terminate
our 1999 long-term stock incentive plan, provided that this action will not
impair the rights of any participant without the written consent of that
participant.
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2000 EMPLOYEE STOCK PURCHASE PLAN
Our stock purchase plan was approved by the board of directors on January
7, 2000 and has been approved by a majority of our stockholders.
The stock purchase plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code in order to
provide our employees with an opportunity to purchase common stock through
payroll deductions. An aggregate of 10,000,000 shares of common stock has been
reserved for issuance and are available for purchase under the stock purchase
plan during the 10 year term of the plan, subject to adjustment in the event of
a stock split, stock dividend or other similar change in our common stock or our
capital structure. All Organic 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 in the stock purchase plan. Employees hired after the
consummation of our initial public offering are eligible to participate in the
stock purchase plan at the beginning of the next offering period.
The stock purchase plan designates offering periods and purchase periods.
Offering periods are generally overlapping periods of 24 months. The initial
offering period begins on the effective date of the stock purchase plan, which
is the first trading day on or after this registration statement is declared
effective and ends on the last trading day in the period ending June 30, 2000.
Purchase periods are generally six month periods, with the initial purchase
period commencing on the first trading day on or after this registration
statement is declared effective and ending on June 30, 2000.
Each employee who is eligible to and wishes to participate chooses a
percentage of his or her compensation, not exceeding 15%, that will be used to
purchase Organic stock. 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. The percentage designated by the employee will be deducted from
each paycheck of the employee and credited to an account. At the end of a six
month purchase period the amount in the account will be used to purchase Organic
stock. The price of the Organic stock purchased will be the lesser of 85% of the
market price on that date or 85% of the market price, or the case of the initial
offering period, the offering price, on the first day of the offering period
which will begin from six to twenty-four months prior to the purchase date. If
the value of the stock at the end of any purchase period is lower than the value
of the stock on the first day of the next offering period, then all participants
will be automatically withdrawn from the prior offering period immediately after
the exercise of their option and automatically reenrolled in the immediately
following offering period.
The stock purchase plan will be administered by our board of directors or
compensation committee, which will have the authority to terminate or amend the
stock purchase plan, subject to specified restrictions, and otherwise to
administer the stock purchase plan and to resolve all questions relating to the
administration of the stock purchase plan.
401(k) PLAN
In January 1997, we established a 401(k) Plan. All employees with at least
one month of service are eligible to participate in the plan. Employees may
contribute up to 20% of their pre-tax covered compensation through salary
deductions. In 1999, we began contributing 25% of every pre-tax dollar an
employee contributes up to the first 5% of the employee's pre-tax covered
compensation. Employees are 50% vested in the employer's contributions after one
year of service and fully vested after two years. The 401(k) Plan is intended to
qualify under Section 401 of the Internal Revenue Code so that all contributions
and income earned in the plan are not taxable to employees until withdrawn and
our contributions will be deductible by us when made. Our matching contribution
expense was not material for the nine months ended September 30, 1999. In
addition, we may make a discretionary profit-sharing contribution to all
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eligible employees, regardless of whether an employee is participating in the
401(k) Plan. However, no such contributions have been made through September 30,
1999.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation and bylaws provide that we will indemnify
all of our directors and officers to the fullest extent permitted by Delaware
law. Our certificate of incorporation and bylaws also authorize us to indemnify
our employees and other agents, at our option, to the fullest extent permitted
by Delaware. We intend to enter into agreements to indemnify our directors and
officers, in addition to indemnification provided for in our charter documents.
These agreements, among other things, will provide for the indemnification of
our directors and officers for some types of expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of Organic,
arising out of such person's services as one of our directors or officers or any
other company or enterprise to which such person provides services at our
request to the fullest extent permitted by applicable law. We believe that these
provisions and agreements will assist us in attracting and retaining qualified
persons to serve as directors and officers.
Delaware law permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for any breach of the
director's duty of loyalty to the corporation or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, under Section 174 of the General Corporation Law of the State
of Delaware, or for any transaction from which the director derived an improper
personal benefit. Our certificate of incorporation provides for the elimination
of personal liability of a director for breach of fiduciary duty, as permitted
by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the provisions contained in our charter documents, Delaware law or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by one of
our directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of this issue.
We intend to purchase and maintain insurance on behalf of the officers and
directors insuring them against liabilities that they may incur in such
capacities or arising out of such status.
There is no pending litigation or proceeding involving one of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
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RELATED PARTY TRANSACTIONS
ORGANIC HOLDINGS, INC.
On January 29, 1997, our predecessor company changed its name from Organic
Online, Inc. to Organic Holdings, Inc., and we were formed as a subsidiary under
the name Organic Online, Inc. At that time, we exchanged 18,323,712 shares of
our Series A preferred stock and nine shares of our common stock for
substantially all of the assets and liabilities of Organic Holdings, Inc.
Organic Holdings, Inc. retained some of our non-operating assets and
liabilities.
Our directors Jonathan Nelson, Michael Hudes and Gary Hromadko are also
directors of Organic Holdings, Inc.
OMNICOM GROUP
In January 1997, we issued 3,351,288 shares of our Series A preferred stock
at $2.9833 per share to Omnicom Group for net cash proceeds of $10.0 million.
In February 1999, we issued 1,488,000 shares of our Series B preferred
stock at $7.2067 per share to Omnicom Group for net cash proceeds of $7.7
million plus the settlement of a $3.0 million short-term bridge loan that we
obtained from Omnicom Group in January 1999.
On August 27, 1999, we entered into a revolving credit facility with
Omnicom Group, which allows us to borrow up to $30.0 million at the lender's
commercial paper rate plus 3.0% until the closing of this offering. Thereafter,
we may borrow up to $15.0 million from Omnicom Group at the lender's commercial
paper rate plus 1.25% through September 30, 2002. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for further information. Additionally, in connection with the
revolving credit facility, we issued a warrant to purchase 2,249,076 shares of
our common stock to Omnicom Group at an exercise price of $0.0033 per share.
One of our directors, Bruce Redditt, has served as Executive Vice President
of Omnicom Group since 1998.
OFFICER LOAN
On March 31, 1999, we loaned $200,000 to Michael Hudes at an interest rate
of 7%. This loan was secured by a pledge by Mr. Hudes to us of his shares of our
common stock, with principal and interest payments due upon the second, fourth,
sixth, eighth and tenth anniversaries of the loan. The amount becomes payable
upon the expiration of the lock-up period as long as the offering price is at
least $10.00 per share and the aggregate proceeds are at least $75.0 million.
STOCK OPTION GRANTS TO OFFICERS
On March 20, 1997, we issued to Marita Scarfi options to purchase 765,000
shares of our common stock at an exercise price of $0.0011 per share which
became exercisable on July 15, 1997.
On December 8, 1997, we issued to Janis Nakano Spivack options to purchase
382,500 shares of our common stock at an exercise price of $0.0978 per share
which became exercisable on November 17, 1998. On the same date, we issued to
Matthew Bernardini options to purchase 90,000 shares of our common stock at the
same exercise price which became exercisable on October 15, 1998.
On June 24, 1998, we issued to Michael Hudes options to purchase 1,476,000
shares of our common stock at an exercise price of $0.0978 per share which
became exercisable on June 1, 1999.
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On November 25, 1998, we issued to Matthew Bernardini options to purchase
45,000 shares of our common stock at an exercise price of $0.3889 per share
which became exercisable on November 1, 1999.
On June 23, 1999, we issued to Susan Field options to purchase 1,755,000
shares of our common stock at an exercise price of $0.8333 per share which
become exercisable on June 23, 2000.
On July 13, 1999, we issued to Matthew Bernardini options to purchase
382,500 shares of our common stock at an exercise price of $1.3333 per share
which become exercisable on July 13, 2000.
On August 26, 1999, we issued to (a) Margaret Maxwell Zagel options to
purchase 225,000 shares of our common stock which become exercisable on August
26, 2000, (b) Lynda Ward Pierce options to purchase 90,000 shares of our common
stock which become exercisable on July 21, 2000, and (c) Larry Geisel options to
purchase 1,200,000 shares of our common stock which become exercisable on
September 8, 2000. Each of these officers were issued these options at an
exercise price of $1.6667 per share.
On November 22, 1999, we issued to (a) Daniel Lynch options to purchase
845,070 shares of our common stock which became exercisable on January 1, 1999,
(b) Janis Nakano Spivack options to purchase 67,500 shares of our common stock
which become exercisable on November 22, 2000, (c) Lynda Ward Pierce options to
purchase 90,000 shares of our common stock which become exercisable on November
22, 2000, and (d) Arthur Williams options to purchase 690,000 shares of our
common stock which become exercisable on December 14, 2000. Each of these
officers were issued these options at an exercise price of $2.6667 per share.
We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require us to
indemnify these individuals to the fullest extent permitted by Delaware law.
We also have entered into various employment agreements with our officers.
See "Management -- Employment Agreements" for a more detailed description.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of December 31, 1999 and as adjusted to reflect the sale of the shares of
common stock in this offering by:
- each person or entity known by us to own beneficially more than five
percent of our common stock;
- our chief executive officer, each of the executive officers named in
the summary compensation table and each of our directors; and
- all of our executive officers and directors as a group.
The beneficial ownership is calculated based on 74,578,218 shares of our
common stock outstanding as of December 31, 1999 and 80,078,218 shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Unless otherwise
indicated, each person or entity named in the table has sole voting power and
investment power, or shares voting and investment power with his or her spouse,
with respect to all shares of capital stock listed as owned by such person.
Shares issuable upon the exercise of options that are currently exercisable or
become exercisable within sixty days of December 31, 1999 are considered
outstanding for the purpose of calculating the percentage of outstanding shares
of our common stock held by the individual, but not for the purpose of
calculating the percentage of outstanding shares of our common stock held by
another individual.
The address of each of the executive officers and directors is c/o Organic,
Inc., 510 Third Street, San Francisco, California 94107.
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
SHARES ISSUABLE BENEFICIALLY OWNED
UPON EXERCISE --------------------
NUMBER OF SHARES OF STOCK OPTIONS PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OR WARRANTS OFFERING OFFERING
---------------- ------------------ ---------------- -------- --------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS
Omnicom Group Inc.
437 Madison Avenue
New York, New York 10022......... 17,534,025 2,249,076 26.5% 24.7%
Organic Holdings, Inc.
c/o Organic, Inc.
510 Third Street
San Francisco, California
94107.......................... 51,954,975 -- 69.7% 64.9%
NAMED EXECUTIVE OFFICERS AND
DIRECTORS
Jonathan Nelson.................. 51,954,975 -- 69.7% 64.9%
Michael Hudes.................... -- 553,500 * *
Janis Nakano Spivack............. 183,282 15,937 * *
Susan Field...................... -- -- * *
Matthew Bernardini............... -- 60,938 * *
Gary F. Hromadko................. -- -- * *
Bruce Redditt.................... -- -- * *
All executive officers and
directors as a group (12
persons)....................... 52,138,257 630,375 70.8% 65.9%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent of the common stock.
Shares beneficially owned by Jonathan Nelson consist of 51,954,975 shares owned
by Organic Holdings, Inc., of which Mr. Nelson is the majority stockholder.
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DESCRIPTION OF CAPITAL STOCK
Following the closing of this offering, our authorized capital stock will
consist of 200,000,000 shares of common stock and 25,000,000 shares of
undesignated preferred stock. The following description of our capital stock
does not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of our certificate of incorporation and bylaws, which are
included as exhibits to the registration statement of which this prospectus is a
part, and by the provisions of applicable law.
COMMON STOCK
As of September 30, 1999, after giving effect to the conversion of all
outstanding shares of our Series A and Series B preferred stock prior to the
closing of this offering, 71,108,124 shares of common stock were issued and
outstanding and held by approximately 50 stockholders. The holders of our common
stock are entitled to one vote for each share held of record upon such matters
and in such manner as may be provided by law. Subject to preferences applicable
to any outstanding shares of preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared by the board
of directors out of funds legally available for dividend payments. In the event
we liquidate, dissolve or wind up, the holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and
liquidation preferences of any outstanding shares of the preferred stock.
Holders of common stock have no preemptive rights or rights to convert their
common stock into any other securities. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable.
PREFERRED STOCK
As of September 30, 1999, there were 23,163,000 shares of preferred stock
outstanding and held of record by two stockholders. In connection with the
closing of this offering, all outstanding shares of our Series A and Series B
preferred stock will automatically be converted into common stock on a
one-for-three basis. Upon the closing of this offering, our board of directors
will be authorized, absent any limitations prescribed by law, without
stockholder approval, to issue up to an aggregate of 25,000,000 shares of
preferred stock, in one or more series, each of the series to have rights and
preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
board of directors.
Following the closing of the offering, 3,000,000 shares of our preferred
stock will be designated as Series C preferred stock. The Series C preferred
stock will be issuable under the terms of our stockholder rights plan. Each one
one-hundredth of a share of Series C preferred stock will have voting rights
equivalent to one share of our common stock and shall have a right to a
preferential quarterly dividend of $0.01 or any higher dividend that is declared
on one share of common stock.
The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of Series C preferred stock and any
other preferred stock that may be issued in the future. Issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a majority of our outstanding voting stock. We have
no present plans to issue any shares of preferred stock or rights to purchase
shares of preferred stock other than rights to purchase shares of Series C
preferred stock issuable under our stockholder rights plan.
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WARRANTS
As of September 30, 1999, a warrant to purchase an aggregate of 2,249,076
shares of our common stock issued to Omnicom Group was outstanding at an
exercise price of $0.0033 per share. This warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon the exercise of the warrant in the event of stock dividends, stock splits,
reorganizations and reclassifications and consolidations. Upon the closing of
this offering, this warrant to purchase common stock will expire.
DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make our acquisition by means of a tender offer, a proxy contest, or
otherwise, and the removal of incumbent officers and directors more difficult.
These provisions are expected to discourage types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire control
to first negotiate with us. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweighs the disadvantages of
discouraging proposals, including proposals that are priced above the then
current market value of our common stock, because, among other things,
negotiation of these proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder, unless:
- prior to that date the board of directors approved either the business
combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
began; or
- on or following that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines a business combination to include:
- any merger or consolidation involving the corporation and the
interested stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to some exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
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Our bylaws provide that following the completion of this offering our board
of directors will be divided into three classes of directors designated Class I,
Class II and Class III. Each class will have a three-year term. Initially, two
directors will serve in Class I, two directors will serve in Class II and two
directors will serve in Class III. The initial directors in each class will hold
office for terms of one year, two years or three years. Thereafter each class
will serve a three-year term.
We believe that a classified board of directors will help to assure the
continuity and stability of the board of directors and our business strategies
and policies as determined by the board of directors, since a majority of the
directors at any given time will have had prior experience as our directors. We
believe that this, in turn, will permit the board of directors to more
effectively represent the interest of our stockholders. With a classified board
of directors, at least two annual meetings of our stockholders, instead of one,
will generally be required to effect a change in the majority of the board of
directors. As a result, a provision relating to a classified board of directors
may discourage proxy contests for the election of directors or purchases of a
substantial block of our common stock because its provisions could operate to
prevent obtaining control of the board of directors in a relatively short period
of time. The classification provision and the prohibition on stockholder action
by written consent also could have the effect of discouraging a third party from
making a tender offer or otherwise attempting to obtain control of us. Under
Delaware law, a director on a classified board may be removed by the
stockholders of the corporation only for cause.
Our bylaws provide that special meetings of the stockholders may be called
only by our President or at the direction of the board of directors, by our
Secretary. Our bylaws require advance written notice, which generally must be
received by our Secretary not less than 30 days prior to the meeting, by a
stockholder of a proposal or director nomination which a stockholder desires to
present at a meeting of stockholders. Our certificate of incorporation does not
include a provision for cumulative voting in the election of directors. Under
cumulative voting, a minority stockholder holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence of
cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in the board of directors and, as a result, may
have the effect of deterring hostile takeover or delaying or preventing changes
in control or our management.
STOCKHOLDER RIGHTS PLAN
We have adopted a stockholder rights plan under which all outstanding
shares of common stock as of the effective date of the offering and each share
of common stock issued between the effective date of the offering and the
distribution date (as described below) will be coupled with a stockholder right.
Initially, the stockholder rights will be attached to the certificates
representing outstanding shares of common stock, and no separate rights
certificates will be distributed. Each right will entitle the holder to purchase
one one-hundredth of a share of our Series C preferred stock. Until the right is
exercised, the holder of a stockholder right, as such, will not have any rights
as a stockholder, including the right to receive dividends or to vote at
stockholder meetings.
Stockholder rights are not exercisable until the "distribution date," and
will expire at the close of business on the tenth anniversary of the date of
this prospectus, unless earlier redeemed or exchanged by us. Unless an
acquisition or offer has been previously approved by our board of directors, a
distribution date would occur upon the earlier of:
- the tenth day after the date of the first public announcement (referred
to as the "stock acquisition date") that a person or group of
affiliated or associated persons has acquired beneficial ownership of
15% or more of our outstanding common stock (referred to as an
"acquiring person"); or
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- the tenth business day after the commencement or announcement of a
tender offer or exchange offer that would result in a person or group
becoming an acquiring person.
If any person becomes an acquiring person, each holder of a stockholder
right will be entitled to exercise the right and receive, instead of Series C
preferred stock, common stock (or, in some circumstances, cash, property or
other securities of an acquiror) having a value equal to two times the exercise
price of the stockholder right. All stockholder rights that are beneficially
owned by an acquiring person or its transferee will become null and void.
If at any time following a stock acquisition date (1) we are acquired in a
merger or other business combination, or (2) 50% or more of our assets, cash
flow or earning power is sold or transferred, each holder of a stockholder right
(except rights which previously have been voided as set forth above) shall have
the right to receive, upon exercise, common stock of the acquiring company
having a value equal to two times the exercise price of the right.
The purchase price payable, the number of one one-hundredth of a share of
Series C preferred stock or other securities or property issuable upon exercise
of rights and the number of rights outstanding are subject to adjustment from
time to time to prevent dilution. With certain exceptions, no adjustment in the
purchase price or the number of shares of Series C preferred stock issuable upon
exercise of a stockholder right will be required until the cumulative adjustment
would require an increase or decrease of at least one percent in the purchase
price or number of shares for which a right is exercisable.
At any time until the earlier of (1) 10 days (or longer if extended
pursuant to the terms of the Stockholders Rights Plan) after a stock acquisition
date and (2) the termination of the Stockholders Rights Plan, we may redeem the
stockholder rights at a price of $0.01 per right. At any time after a public
announcement that a person has become an acquiring person, we may exchange the
stockholder rights at an exchange ratio of one share of common stock, or one
one-hundredth of a share of Series C preferred stock per right.
The stockholder rights plan is designed to protect stockholders of Organic
in the event of unsolicited offers to acquire Organic and other coercive
takeover tactics that, in the opinion of our board of directors, could impair
its ability to represent stockholder interests. The provisions of the
stockholder rights plan may render an unsolicited takeover of Organic more
difficult or less likely to occur or might prevent such a takeover, even if such
takeover may offer our stockholders the opportunity to sell their stock at a
price above the prevailing market price and may be favored by the majority of
our stockholders, because the provisions of the plan would substantially dilute
a person or group seeking to acquire us without approval of our board of
directors, making such an acquisition prohibitively expensive.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe. Its
address is 150 Royall Street, Canton, Massachusetts 02021, and its telephone
number is (781) 575-3400.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse or are
released could adversely affect the prevailing market price and impair our
ability to raise equity capital in the future.
Upon completion of the offering, we will have 78,857,200 outstanding shares
of common stock. Of these shares, the 5,500,000 shares sold in the offering,
plus any shares issued upon exercise of the underwriters' over-allotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors or 10%
stockholders.
The remaining 73,357,200 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and stockholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock without the prior written consent of Goldman, Sachs & Co.
The lock-up restrictions will expire on the date which is 180 days after the
date of this prospectus. Notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not be salable until these agreements expire or are waived by
Goldman, Sachs & Co. Taking into account the lock-up agreements, and assuming
Goldman, Sachs & Co. does not release stockholders from these agreements, the
following shares will be eligible for sale in the public market at the following
times:
- Beginning on the date of this prospectus, only the shares sold in the
offering will be immediately available for sale in the public market.
- Beginning 180 days after the date of this prospectus, shares
will be freely tradable pursuant to Rule 144(k), and an additional
shares will be eligible for sale subject to volume
limitations, as explained below, pursuant to Rules 144 and 701.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding
which will equal approximately 788,572 shares immediately after the
offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice, and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate and
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
these shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
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Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell these shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file a registration statement on Form S-8 under
the Securities Act within 180 days following the date of this prospectus to
register shares to be issued pursuant to our employee benefit plans. As a
result, any options or rights exercised under the 1997 stock option plan, the
1999 long-term stock incentive plan, the 2000 employee stock purchase plan we
intend to adopt or any other benefit plan after the effectiveness of the
registration statement will also be freely tradable in the public market.
However, these shares held by affiliates will still be subject to the volume
limitation, manner of sale, notice and public information requirements of Rule
144 unless otherwise resaleable under Rule 701. As of September 30, 1999, there
were outstanding options for the purchase of 15,712,932 shares of common stock,
of which options to purchase 2,525,502 shares were vested and exercisable.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Morrison & Foerster LLP, San Francisco, California. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Wilson
Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
EXPERTS
The audited financial statements included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed with Securities and Exchange Commission in Washington, D.C. a
Registration Statement on Form S-1 under the Securities Act with respect to the
common stock offered in this prospectus. This prospectus, filed as part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and its exhibits and schedules, certain portions of which
have been omitted as permitted by the rules and regulations of the SEC. For
further information about us and the common stock, we refer you to the
Registration Statement and to its exhibits and schedules. Statements in this
prospectus about the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, we refer you to the copy of such
contract, agreement or document filed as an exhibit to the Registration
Statement, and each such statement being qualified in all respects by reference
to the document to which it refers. Anyone may inspect the Registration
Statement and its exhibits and schedules without charge at the public reference
facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661. You may obtain copies of all or any part of these materials
from the SEC upon the payment of certain fees prescribed by the SEC. You may
also inspect these reports and other information without charge at a Web site
maintained by the SEC. The address of this site is http://www.sec.gov.
73
<PAGE> 75
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act and will be required to file
reports, proxy statements and other information with the SEC. You will be able
to inspect and copy these reports, proxy statements and other information at the
public reference facilities maintained by the SEC and at the SEC's regional
offices at the addresses noted above. You also will be able to obtain copies of
this material from the Public Reference Section of the SEC as described above,
or inspect them without charge at the SEC's Web site. We have applied for
quotation of our common stock on the Nasdaq National Market. If we receive
approval for quotation on the Nasdaq National Market, then you will be able to
inspect reports, proxy and information statements and other information
concerning us at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
74
<PAGE> 76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-2
Consolidated Balance Sheet.................................. F-3
Consolidated Statement of Operations........................ F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Consolidated Statement of Cash Flows........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 77
REPORT OF PRICEWATERHOUSECOOPERS LLP,
INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Organic, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Organic,
Inc. ("the Company") at December 31, 1997, 1998 and September 30, 1999, and the
results of its operations and its cash flows for the years ended December 31,
1996, 1997, and 1998 and the nine months ended September 30, 1999, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
November 22, 1999
San Francisco, California
To the Board of Directors and Stockholders of Organic, Inc.
- ---------------
The above report will be signed upon completion of the stock split described in
Note 1 to the financial statements, assuming that from January 10, 2000, no
other events shall have occurred that would affect the accompanying financial
statements and notes thereto.
PricewaterhouseCoopers LLP
January 10, 2000
San Francisco, California
F-2
<PAGE> 78
ORGANIC, INC.
CONSOLIDATED BALANCE SHEET
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
----------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
------- ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 4,264 $ 1,667 $ 3,204
Short-term investments...................................... 1,871 400 --
Accounts receivable, net of allowance of $96 at December 31,
1997, $283 at December 31, 1998, and $564 at September 30,
1999...................................................... 2,597 5,447 18,084
Accounts receivable -- media spending....................... -- 1,472 2,762
Costs in excess of billings................................. 3 574 5,707
Deposits and prepaid expenses............................... 160 287 612
Other assets................................................ 4 108 318
Deferred tax asset, current................................. 988 -- --
------- ------- --------
Total current assets.................................... 9,887 9,955 30,687
Property and equipment, net................................. 1,313 6,570 9,604
Long-term investments....................................... 100 602 1,289
Deferred bank facility charge, net of accumulated
amortization of $504...................................... -- -- 17,647
Other assets................................................ 126 478 850
------- ------- --------
Total assets............................................ $11,426 $17,605 $ 60,077
======= ======= ========
LIABILITIES
Accounts payable............................................ $ 722 $ 3,899 $ 5,996
Current portion of long-term debt........................... 364 2,735 4,302
Current portion of obligations under capital leases......... -- 36 42
Accrued expenses............................................ 67 674 4,182
Accrued employee costs...................................... 93 187 3,157
Deferred revenue............................................ 351 1,013 3,106
Deferred revenue -- media spending.......................... -- 1,072 6,794
------- ------- --------
Total current liabilities............................... 1,597 9,616 27,579
Long-term debt, net of current portion...................... 604 553 430
Obligations under capital leases, net of current portion.... -- 108 108
Deferred rent............................................... -- 138 338
------- ------- --------
Total liabilities....................................... 2,201 10,415 28,455
------- ------- --------
Commitments and contingencies (Note 10)
Minority interest in consolidated subsidiary................ -- -- 280
STOCKHOLDERS' EQUITY
Convertible Series A preferred stock, $.0001 par value,
21,675,000 shares authorized, issued and outstanding at
December 31, 1997 and 1998 and September 30, 1999
(aggregate liquidation preference $64,664) (none pro
forma).................................................... 2 2 2 $ --
Convertible Series B preferred stock, $.0001 par value,
1,488,000 shares authorized, issued and outstanding at
September 30, 1999 (aggregate liquidation preference
$10,724) (none pro forma)................................. -- -- -- --
Common stock, $.0001 par value, 200,000,000 shares
authorized, 7,002, 902,817 and 1,619,124 shares issued and
outstanding at December 31, 1997, December 31, 1998 and
September 30, 1999, respectively (73,357,200 pro forma)... -- -- -- 7
Additional paid-in capital.................................. 11,250 13,584 89,816 89,818
Deferred compensation....................................... (61) (1,664) (37,993) (37,993)
Accumulated deficit......................................... (1,966) (4,732) (20,469) (20,469)
Accumulated other comprehensive income...................... -- -- (14) (14)
------- ------- -------- --------
Total stockholders' equity.............................. 9,225 7,190 31,342 $ 31,349
------- ------- -------- ========
Total liabilities and stockholders' equity.............. $11,426 $17,605 $ 60,077
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 79
ORGANIC, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781
Operating expenses:
Professional services (exclusive of $0,
$0, $183, $57 and $3,355 reported
below of stock-based compensation for
the years ended 1996, 1997 and 1998
and for the nine months ended
September 30, 1998 and 1999,
respectively)........................ 1,889 4,285 16,801 11,191 29,929
Selling, general and administrative
(exclusive of $53, $87, $511, $234
and $8,102 reported below of
stock-based compensation for the
years ended 1996, 1997 and 1998 and
for the nine months ended September
30, 1998 and 1999, respectively)..... 2,104 5,473 12,068 7,276 26,018
Stock compensation and other stock-
based charges........................ 53 87 694 291 11,457
----------- ------- ----------- ----------- -----------
Total operating expenses............. 4,046 9,845 29,563 18,758 67,404
----------- ------- ----------- ----------- -----------
Operating income (loss).................. 248 (3,065) (1,829) 1,986 (15,623)
Minority interest in operations of
consolidated subsidiary................ (106) -- -- -- (39)
Interest and other income, net........... 4 283 73 73 (11)
----------- ------- ----------- ----------- -----------
Net income (loss) before taxes....... 146 (2,782) (1,756) 2,059 (15,673)
Income tax expense (benefit)............. (91) (997) 1,010 913 64
----------- ------- ----------- ----------- -----------
Net income (loss).................... $ 237 $(1,785) $ (2,766) $ 1,146 $ (15,737)
=========== ======= =========== =========== ===========
Basic net income (loss) per share........ $ 26,286 $ (668) $ (10.81) $ 8.41 $ (13.01)
=========== ======= =========== =========== ===========
Diluted net income (loss) per share...... $ 0.00 $ (668) $ (10.81) $ 0.02 $ (13.01)
=========== ======= =========== =========== ===========
Weighted average common shares
outstanding:
Basic.................................. 9 2,671 255,888 136,259 1,209,591
=========== ======= =========== =========== ===========
Diluted................................ 65,025,009 2,671 255,888 65,424,719 1,209,591
=========== ======= =========== =========== ===========
Unaudited pro forma basic and diluted net
loss per share......................... $ (0.04) $ (0.22)
=========== ===========
Weighted average common shares
outstanding -- unaudited pro forma
basic and diluted...................... 65,280,888 70,389,036
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 80
ORGANIC, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
---------- ------ --------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995................ -- $-- -- $-- $ 900 $ (145) $ (418)
Deferred stock-based compensation........... -- -- -- -- 426 (426) --
Amortization of deferred stock-based
compensation.............................. -- -- -- -- -- 53 --
Cash received in connection with investments
in Organic Holdings prior to
reorganization............................ -- -- -- -- 400 -- --
Adjustments related to certain assets and
liabilities retained by Organic
Holdings.................................. -- -- -- -- (105) -- --
Net income.................................. -- -- -- -- -- -- 237
---------- -- --------- -- ------- -------- --------
BALANCE AT DECEMBER 31, 1996................ -- -- -- -- 1,621 (518) (181)
Issuance of Series A preferred stock on
reorganization............................ 18,323,712 2 9 -- (2) -- --
Issuance of Series A 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)
Net loss.................................... -- -- -- -- -- -- (15,737)
Foreign currency translation adjustment..... -- -- -- -- -- -- --
Comprehensive loss..........................
Issuance of Series B preferred stock, net of
issuance costs of $6...................... 1,488,000 -- -- -- 10,718 -- --
Common stock options exercised.............. -- -- 716,307 -- 81 -- --
Deferred stock-based compensation........... -- -- -- -- 49,011 (49,011) --
Amortization of deferred stock-based
compensation.............................. -- -- -- -- -- 10,953 --
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- -- -- -- (1,729) 1,729 --
Issuance of common stock warrants........... -- -- -- -- 18,151 -- --
---------- -- --------- -- ------- -------- --------
BALANCE AT SEPTEMBER 30, 1999............... 23,163,000 $2 1,619,124 $-- $89,816 $(37,993) $(20,469)
========== == ========= == ======= ======== ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
------------- -------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995................ $ -- $ 337
Deferred stock-based compensation........... -- --
Amortization of deferred stock-based
compensation.............................. -- 53
Cash received in connection with investments
in Organic Holdings prior to
reorganization............................ -- 400
Adjustments related to certain assets and
liabilities retained by Organic
Holdings.................................. -- (105)
Net income.................................. -- 237
---- --------
BALANCE AT DECEMBER 31, 1996................ -- 922
Issuance of Series A preferred stock on
reorganization............................ -- --
Issuance of Series A preferred stock........ -- 10,000
Common stock options exercised.............. -- 1
Amortization of deferred stock-based
compensation.............................. -- 87
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- --
Net loss.................................... -- (1,785)
---- --------
BALANCE AT DECEMBER 31, 1997................ -- 9,225
Common stock options exercised.............. -- 37
Deferred stock-based compensation........... -- --
Amortization of deferred stock-based
compensation.............................. -- 694
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- --
Net loss.................................... -- (2,766)
---- --------
BALANCE AT DECEMBER 31, 1998................ -- 7,190
--------
Net loss.................................... -- (15,737)
Foreign currency translation adjustment..... (14) (14)
--------
Comprehensive loss.......................... (15,751)
Issuance of Series B preferred stock, net of
issuance costs of $6...................... -- 10,718
Common stock options exercised.............. -- 81
Deferred stock-based compensation........... -- --
Amortization of deferred stock-based
compensation.............................. -- 10,953
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- --
Issuance of common stock warrants........... -- 18,151
---- --------
BALANCE AT SEPTEMBER 30, 1999............... $(14) $ 31,342
==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 81
ORGANIC, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------------
1996 1997 1998 1998 1999
----- ------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 237 $(1,785) $(2,766) $ 1,146 $(15,737)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................. 203 432 1,248 765 2,226
Stock-based compensation and other stock-based charges.... 53 87 694 291 11,457
Provision for doubtful accounts........................... -- -- 280 180 637
Write-off of fixed assets................................. -- -- 12 -- 1,171
Minority interest in operations of consolidated
subsidiary.............................................. -- -- -- -- 280
Provision (benefit) for deferred income taxes............. (91) (1,000) 1,000 830 --
Revenue recognized in exchange for investments............ (90) (100) (577) (252) (687)
Changes in assets and liabilities:
Increase in accounts receivable......................... (159) (1,911) (4,622) (6,651) (14,763)
(Increase) decrease in costs in excess of billings...... 40 34 (571) (355) (5,133)
Increase in deposits and prepaid expenses............... (22) (138) (127) (58) (325)
Increase in other assets................................ (72) (76) (480) (405) (465)
Increase in accounts payable and accrued expenses....... 87 603 3,878 1,406 8,576
Increase (decrease) in deferred revenue................. (139) 235 1,734 2,132 7,814
Increase in deferred rent............................... -- -- 138 19 200
Decrease in income taxes payable........................ (111) -- -- -- --
----- ------- ------- ------- --------
Net cash used in operating activities................. (64) (3,619) (159) (952) (4,749)
----- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (509) (1,099) (5,579) (3,143) (6,195)
Purchase of short-term investments.......................... -- (2,271) (1,865) (1,865) (2,005)
Proceeds from the sale and maturity of short-term
investments............................................... -- 400 3,336 1,880 2,405
Proceeds from the sale of long-term investments............. -- -- 75 75 --
----- ------- ------- ------- --------
Net cash used in investing activities................. (509) (2,970) (4,033) (3,053) (5,795)
----- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from investment in Organic Holdings................ 400 -- -- -- --
Proceeds from issuance of convertible preferred stock,
net....................................................... -- 10,000 -- -- 7,718
Proceeds from exercises of common stock options............. -- 1 37 34 81
Proceeds from long-term debt................................ 350 757 1,938 1,100 7,000
Payments on notes payable -- related party.................. -- (8) -- -- --
Payments on capital leases.................................. -- -- (25) (16) (29)
Payments on long-term debt.................................. -- (140) (355) (212) (2,675)
----- ------- ------- ------- --------
Net cash provided by financing activities............. 750 10,610 1,595 906 12,095
Effect of exchange rate changes on cash and cash
equivalents......................................... -- -- -- -- (14)
----- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 177 4,021 (2,597) (3,099) 1,537
Cash and cash equivalents at beginning of period............ 66 243 4,264 4,264 1,667
----- ------- ------- ------- --------
Cash and cash equivalents at end of period.................. $ 243 $ 4,264 $ 1,667 $ 1,165 $ 3,204
===== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest...................................... $ 13 $ 44 $ 138 $ 81 $ 231
===== ======= ======= ======= ========
Cash paid for income taxes.................................. $ 115 $ 5 $ 90 $ 90 $ 86
===== ======= ======= ======= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under financing
obligations............................................... $ -- $ -- $ 906 $ 906 $ 153
===== ======= ======= ======= ========
Conversion of debt into preferred stock..................... $ -- $ -- $ -- $ -- $ 3,000
===== ======= ======= ======= ========
Issuance of common stock warrants........................... $ -- $ -- $ -- $ -- $ 18,151
===== ======= ======= ======= ========
Notes payable issued for investment......................... $ 8 $ -- $ -- $ -- $ --
===== ======= ======= ======= ========
Deferred stock-based compensation........................... $ 426 $ -- $ 2,348 $ 1,058 $ 49,011
===== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 82
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Organic, Inc. ("Organic" or "the Company") is an international Internet
professional services firm focused on the customer-to-business market. Organic
provides services to our 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.
CONSOLIDATION AND BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements include the accounts of the Company's
wholly owned subsidiaries, Organic Media, Inc., Organic Online, Ltd., and
Organic.com Private Ltd. and its share of a 70% owned subsidiary, Organic Brazil
Comunicacao Interativa Limitada. All intercompany transactions have been
eliminated in consolidation.
On May 25, 1999 the Company's Board of Directors effected a 3-for-1 split of its
outstanding shares of common and preferred stock. Prior to this offering, the
Company intends to effect 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.
INTERIM FINANCIAL STATEMENTS
The accompanying interim consolidated financial statements and related footnote
information as of and for the nine months ended September 30, 1998 are unaudited
but include, in management's opinion, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly, in all material respects,
the consolidated financial position, results of operations and cash flows.
Results for the nine months ended September 30, 1998 and 1999 are not
necessarily indicative of results for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of
F-7
<PAGE> 83
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash and investments in a money
market fund. The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts that, at times, may exceed federally
insured limits.
SHORT-TERM INVESTMENTS
The Company's investments in certain debt and equity securities are categorized
as available for sale securities, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". At December 31, 1997 and 1998, the fair value of
the investments approximated their cost.
CONCENTRATION OF CREDIT RISK
The Company extends credit to customers based on an evaluation of their
financial condition and collateral is not required. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for doubtful
accounts. Revenue derived from customers outside the United States has not been
significant. At December 31, 1997 and 1998, and September 30, 1999, three
customers, two customers and one customer accounted for 48%, 24%, and 21% of
total accounts receivable, respectively. In the year ended 1996, three customers
accounted for 30% of the Company's revenues. In the year ended 1997, no
customers accounted for more than 10% of the Company's revenues. In the year
ended 1998, one customer accounted for 12% of the Company's revenues. For the
nine months ended September 30, 1998 and 1999, one customer and two customers
accounted for 16% and 22% of the Company's revenues, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the related assets
ranging from three to five years. Leasehold improvements and equipment under
capital leases are amortized over the lease term or estimated useful lives,
whichever is shorter. Repairs and maintenance costs are charged to expense when
incurred. When assets are sold or retired, the cost and the related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
included in operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable approximate fair value
because of the short-term maturity of these instruments. Fair values are based
on quoted market prices and assumptions concerning the amount and timing of
estimated future cash flows and assumed discount rates reflecting varying
degrees of perceived risk. Based upon borrowing rates currently available to the
Company with similar terms, the carrying value of long-term debt and capital
lease obligations approximate fair value.
F-8
<PAGE> 84
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of foreign subsidiaries are
measured using the currency of the respective countries as the functional
currency. Assets and liabilities are translated into the reporting currency
(U.S. dollars) at the foreign exchange rate in effect at the balance sheet date,
while revenues and expenses for the year are translated at the average exchange
rate in effect during the year. Translation gains and losses are not included in
determining net income or loss but are accumulated and reported in stockholders'
equity, as a component of other comprehensive income, on a net of tax basis. The
Company has not entered into hedging contracts during any of the periods
presented.
REVENUE RECOGNITION
Revenue on contracts is recorded using the percentage-of-completion method,
retainer basis, or on a time and materials basis. Under the
percentage-of-completion method, revenue on contracts is recognized based on the
percentage of costs incurred to date to total estimated project costs. Earned
but unbilled project revenues are classified under current assets as costs in
excess of billings. Deferred revenue includes billings in excess of project
revenues earned, amounts payable on behalf of and billed to customers, and cash
received and other amounts billed in advance for services to be performed. The
Company periodically evaluates the estimated costs to complete its contracts.
Provisions for losses are recognized on uncompleted contracts when they become
known. Under the retainer basis, which relates primarily to media and
communications, revenue on contracts is recognized over the life of the contract
on a straight-line basis. Under the time and materials basis, revenue on
contracts is recognized based on agreed-upon hourly rates for the positions that
recorded time on the project during the period plus any materials used and
charged against the project. Sales of other services are recorded as revenue
when services are rendered.
ADVERTISING EXPENSES
The Company expenses the cost of advertising and promoting its services as
incurred. These costs are included in selling, general and administrative on the
statement of operations.
INCOME TAXES
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred taxes, which arise principally from temporary
differences between the period in which certain income and expenses are
recognized for financial reporting purposes and the period in which they affect
taxable income, are included in the amounts provided for income taxes. Under
this method, the computation of deferred tax assets and liabilities give
recognition to enacted tax rates in effect in the year the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts that the Company expects to
realize.
NET INCOME (LOSS) PER SHARE
The Company computes basic and diluted net income (loss) per share in accordance
with SFAS No. 128, "Earnings Per Share", and SEC Staff Accounting Bulletin
("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net
income (loss) per share is computed by dividing net income (loss) available to
common stockholders for the period by the weighted
F-9
<PAGE> 85
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing net income available to common
stockholders for the period by the weighted average number of common and common
equivalent shares outstanding during the period. For those periods in which the
Company has incurred a net loss, diluted net loss per share is equivalent to
basic net loss per share since the assumed exercise of the Company's stock
options and a warrant and the assumed conversion of the Company's preferred
stock would be anti-dilutive and, accordingly, have been excluded from the
calculation.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Unaudited pro forma net loss per share for the year ended December 31, 1998 and
nine months ended September 30, 1999 included in the statement of operations is
computed using the weighted average number of common shares outstanding,
adjusted to include the pro forma effects of the conversion of Series A and
Series B convertible preferred stock and the exercise of a warrant for common
stock as if such conversion had occurred on January 1, 1998 for the year ended
December 31, 1998 and on January 1, 1999 for the nine months ended September 30,
1999, or at the date of original issuance, if later.
PRO FORMA BALANCE SHEET (UNAUDITED)
Effective upon the closing of the Company's proposed initial public offering,
subject to certain conditions as described in Note 6, the outstanding shares of
Series A and Series B convertible preferred stock will automatically convert
into 65,025,000 and 4,464,000 shares of common stock, respectively, and a
warrant is exercisable for 2,249,076 shares of common stock. The unaudited pro
forma amounts included on the balance sheet reflect these conversions and the
assumed exercise, as if they had occurred on September 30, 1999.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires that an enterprise report and display, by major components and as a
single total, the change in its net assets during the period from non-owner
sources. The adoption of this Statement did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", and complies with the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". Under APB No. 25,
compensation expense is based on the difference, if any, on the date of grant
between the fair value of the Company's common stock and the exercise price of
the options to purchase that stock.
SEGMENT REPORTING
The Company manages its operations on a geographical basis and, to date, has
provided services primarily in the United States. Through September 30, 1999,
foreign operations have not been significant in either revenue or investment in
long-lived assets. Revenues from major customers are disclosed above in
"Concentration of Credit Risk".
F-10
<PAGE> 86
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. SFAS No. 133 requires that derivative instruments used to
hedge be identified specifically to assets, liabilities, unrecognized firm
commitments or forecasted transactions. The gains or losses resulting from
changes in the fair value of derivative instruments will either be recognized in
current earnings or in other comprehensive income, depending on the use of the
derivative and whether the hedging instrument is effective or ineffective when
hedging changes in fair value or cash flows. This Statement, as amended, is
effective for fiscal years beginning after June 15, 2000. Management believes
that the adoption of this Statement will not have a material effect on the
Company's consolidated financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP provides guidance on
accounting for certain costs in connection with obtaining or developing computer
software for internal use and requires that entities capitalize such costs once
certain criteria are met. The Company adopted SOP 98-1 as of January 1, 1999.
The adoption of this SOP did not have a material effect on the Company's
consolidated financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". This SOP requires that entities expense start-up costs and
organization costs as they are incurred. The Company adopted SOP 98-5 as of
January 1, 1999. The adoption of this SOP did not have a material effect on the
Company's consolidated financial position or results of operations.
NOTE 2 -- PROPERTY AND EQUIPMENT, NET
Property and equipment are carried at cost, less accumulated depreciation and
amortization. As of December 31, 1997 and 1998, and September 30, 1999, the
amounts were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Computer hardware..................................... $1,322 $ 4,354 $ 7,780
Computer software..................................... 208 1,461 1,707
Equipment............................................. 159 721 986
Furniture............................................. 40 243 278
Leasehold improvements................................ 214 1,638 2,432
------ ------- -------
$1,943 $ 8,417 $13,183
Less: accumulated depreciation and amortization....... (630) (1,847) (3,579)
------ ------- -------
$1,313 $ 6,570 $ 9,604
====== ======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998, and
for the nine months ended September 30, 1998 and 1999 were $196, $401, $1,220,
$744 and $2,144, respectively.
F-11
<PAGE> 87
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
Included in the above is equipment acquired under capital leases of $169 at
December 31, 1998 and $204 at September 30, 1999. Accumulated amortization on
equipment acquired under capital leases was $28 and $66 at December 31, 1998 and
September 30, 1999 respectively.
NOTE 3 -- INVESTMENTS
The Company's investments comprise of common stock received from its customers
in exchange for services. The common stock, all of which is from privately held
companies, has been recorded on the financial statements based on the estimated
fair value of the services provided to the customers. The Company records a
writedown for any declines in value that are judged to be other than temporary.
During the years ended December 31, 1996, 1997 and 1998, and nine months ended
September 30, 1998 and 1999, the Company received common stock that was recorded
at $90, $100, $577, $252 and $687, respectively.
NOTE 4 -- ACCRUED EXPENSES AND EMPLOYEE COSTS
The following table presents the detailed categories of the Company's accrued
expenses and employee costs that, on an individual basis, exceed five percent of
total current liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
---- ---- -------------
<S> <C> <C> <C>
Accrued vacation....................................... $ 92 $183 $ 639
Accrued bonuses........................................ -- -- 2,407
Other.................................................. 68 678 4,293
---- ---- ------
$160 $861 $7,339
==== ==== ======
</TABLE>
NOTE 5 -- DEBT
The Company had the following debt outstanding at December 31, 1998 and 1999 and
September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
----- ------- -------------
<S> <C> <C> <C>
Revolving credit facility.............................. $ -- $ -- $ 4,000
Amounts borrowed under equipment line of credit........ 968 2,551 --
Amounts borrowed under software financing agreements... -- 737 732
----- ------- -------
968 3,288 4,732
Less: current portion.................................. (364) (2,735) (4,302)
----- ------- -------
Total long-term debt................................... $ 604 $ 553 $ 430
===== ======= =======
</TABLE>
The revolving credit facility was established in August 1999 with Omnicom Group
and allows the Company to borrow up to $30.0 million at the lender's commercial
paper rate, based on the published 30 day commercial lending rate in The Wall
Street Journal at the last day of the month, plus 3.0% until the closing of the
Company's proposed initial public offering. Thereafter, the Company may borrow
up to $15.0 million at the lender's commercial paper rate plus 1.25%
F-12
<PAGE> 88
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
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 loan agreement are collateralized by certain
long-term investments of the Company and are subject to certain financial
covenants, including minimum revenue targets and limitations on capital
equipment purchases. At September 30, 1999, the Company was in compliance with
these covenants.
In connection with this agreement, the Company issued warrants to purchase
2,249,076 shares of its common stock at $0.0033 per share (Note 6).
The equipment line of credit, together with an additional credit agreement
permitting borrowings through September 30, 1999 with the same financial
institution, allows the Company to borrow up to $1.5 million for equipment
purchases and $2.5 million limited to 75% of eligible accounts receivable and
any outstanding letters of credit up to $1.0 million. At September 30, 1999, the
Company had $144 in outstanding letters of credit under this agreement. Interest
for amounts borrowed under the equipment line of credit was at the bank's prime
lending rate plus 0.50%.
The amounts borrowed under the software financing agreements bear interest at
rates of 6.89% and 8.25% and are repayable $73, $307, $329, and $22, during the
three months ended December 31, 1999 and for each of the years through 2002,
respectively.
NOTE 6 -- COMMON AND CONVERTIBLE PREFERRED STOCK
COMMON AND CONVERTIBLE PREFERRED STOCK
At September 30, 1999, the Company had authorized 35,000,000 shares and
25,000,000 shares of common stock and preferred stock, respectively. Of the
25,000,000 authorized shares of preferred stock, the Company has designated
21,675,000 shares as Series A preferred stock and 1,488,000 shares as Series B
preferred stock. In November 1999, 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
Preferred stockholders receive one vote for each share of common stock into
which the preferred shares are convertible.
LIQUIDATION PREFERENCE
In the event of liquidation, Series A and B preferred stockholders are entitled
to receive $2.9833 and $7.2067 per share, respectively, plus any declared but
unpaid dividends prior to and in preference to any distribution to the holders
of the Company's common stock. If assets remain upon completion of this
liquidation distribution, the remaining assets of the Company would be
distributed ratably among the holders of the Company's common stock.
DIVIDENDS
Holders of Series A and B preferred stock are entitled to receive noncumulative
dividends at an annual rate of $0.1667 per share, payable when and if declared
by the Company's Board of Directors. The Company may not pay a dividend on its
common stock until Series A and B preferred stock dividends have been paid. The
Company may not pay a dividend if the resulting
F-13
<PAGE> 89
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
aggregate stockholders' equity of the Company falls below $14.0 million. The
Company's Board of Directors through September 30, 1999 has declared no
dividends.
CONVERSION
Currently, at the option of the holder, each share of Series A and B preferred
stock is convertible into one share of the Company's common stock, subject to
adjustments under certain conditions as provided for in the Company's Articles
of Incorporation. Following the 3-for-1 split of the Company's outstanding
common stock, the conversion rate will be one share of preferred stock for three
shares of common stock. Each share of Series A and B preferred stock will be
automatically converted 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 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.
WARRANTS
In connection with the revolving credit facility (Note 5), the Company issued a
warrant that entitles the lender to purchase 2,249,076 shares of the Company's
common stock at an exercise price of $0.0033 per share. The warrant is
exercisable until the earlier of an initial public offering of the Company's
common stock or the expiration of the credit facility on September 30, 2002. The
fair value of the warrant of $8.07 per share was estimated using the
Black-Scholes pricing model with the following weighted average assumptions:
risk-free interest rate of 6.77%, expected life of six months, expected dividend
rate of 0%, and volatility of 110%. The Company recorded $18,151 as a deferred
bank facility charge that is being amortized on a straight-line basis over the
life of the revolving credit facility of three years.
NOTE 7 -- STOCK OPTIONS
In April 1997, the Company adopted the 1997 Stock Option Plan ("the Plan") which
authorizes the Board of Directors to grant incentive stock options and
nonstatutory stock options. Incentive stock options ("ISO") may be granted only
to Company employees (including officers and directors who are also employees).
Nonstatutory stock options ("NSO") may be granted to employees, outside
directors and consultants. The maximum number of options, as amended, cannot
exceed 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. Options generally expire ten years from the date
of grant; however, in the case of a stock option granted to a person owning more
than 10% of the combined voting power of all classes of the Company's stock, the
term of the option will be five years from the date of the grant. All cancelled
or expired options become available for future grants.
In accordance with the Plan, the stated exercise price shall not be less than
85% of the estimated fair value of the shares on the date of grant as determined
by the Board of Directors, provided, however, that (i) the exercise price of an
ISO and NSO shall not be less than 100% and 85% of the estimated fair value of
the shares on the date of grant, respectively, and (ii) the exercise price of an
ISO and NSO granted to a 10% shareholder shall not be less than 110% of the
estimated fair value of the shares on the date of grant, respectively.
F-14
<PAGE> 90
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
The Company accounts for the Plan in accordance with APB No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations. In connection with
certain stock grants, the Company recognized deferred compensation that is being
amortized over the vesting period of the options. Total stock-based compensation
expense for the years ended December 31, 1996, 1997 and 1998 and nine months
ended September 30, 1998 and 1999 was $53, $87, $694, $291, and $10,953,
respectively, for options granted to employees where the deemed fair value of
the stock for accounting purposes exceeded the exercise price of the option at
the grant date.
The following table summarizes the transactions under the Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------- -----------------------------------------------
1997 1998 1998 1999
---------------------- ---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period.... -- $ -- 8,230,005 $0.09 8,230,005 $0.09 10,649,958 $0.13
Granted.............. 10,364,850 0.09 7,543,575 0.14 4,005,450 0.10 9,528,150 1.14
Exercised............ (6,993) 0.10 (895,815) 0.04 (348,606) 0.10 (716,307) 0.11
Expired or
cancelled.......... (2,127,852) 0.10 (4,227,807) 0.10 (2,935,179) 0.10 (3,748,869) 0.19
---------- ---------- ---------- ----------
Options outstanding,
end of period........ 8,230,005 $0.09 10,649,958 $0.13 8,951,670 $0.09 15,712,932 $0.72
========== ========== ========== ==========
Options exercisable,
end of period........ 1,870,734 $0.08 1,451,949 $0.10 1,879,107 $0.08 2,525,502 $0.09
========== ========== ========== ==========
</TABLE>
The following table summarizes information about stock options outstanding under
the Plan.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.00...................... 239,202 10.79 years $0.00 79,827 $0.00
0.10 - 0.56...................... 7,732,080 10.08 0.20 2,445,675 0.10
0.67 - 1.33...................... 5,050,650 9.73 1.02 -- --
1.67 - 2.00...................... 2,691,000 9.92 1.75 -- --
---------- ---------
15,712,932 9.95 $0.72 2,525,502 $0.09
========== =========
</TABLE>
At December 31, 1997 and 1998, and September 30, 1998 and 1999, 14,488,002,
11,172,234, 13,417,731, and 5,392,953 shares, respectively, were available for
future stock option grants under the Plan.
F-15
<PAGE> 91
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
The weighted-average fair value of Plan options granted was $0.02 and $0.34 for
the years ended December 31, 1997 and 1998, respectively, and $0.28 and $5.38
for the nine months ended September 30, 1998 and 1999. The fair value of each
option grant has been estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Risk-free interest rates.......................... 6.09% 5.72% 5.12% 5.12% 5.78%
Expected lives (years)............................ 4 4 4 4 4
Expected dividend yields.......................... 0% 0% 0% 0% 0%
Expected volatility............................... 0% 0% 0% 0% 0%
</TABLE>
Because the determination of fair value of all options granted after such time
as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described above and because additional grants
are made each year, the results below may not be representative of future
periods.
Had the Company accounted for compensation expense on stock options granted to
employees according to SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company's net income (loss) and net income (loss) per share would have
decreased (increased) to the pro forma amounts indicated in the following table.
Since no options were granted prior to 1997 under this Plan, the pro forma
results indicated for those periods presented in the following table do not
reflect the full effect of amortization over the entire vesting period, and
thus, may not be representative of future periods.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------------
1997 1998 1998 1999
------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) -- as reported.......... $(1,785) $(2,766) $1,146 $(15,737)
Net income (loss) -- pro forma............ (1,808) (2,883) 1,079 (16,614)
Basic net income per common share -- as
reported................................ $ (668) $(10.81) $ 8.41 $ (13.01)
Basic net income per common share -- pro
forma................................... (677) (11.27) 7.92 (13.73)
Diluted net income (loss) per common
share -- as reported.................... $ (668) $(10.81) $ 0.02 $ (13.01)
Diluted net income (loss) per common
share -- pro forma...................... (677) (11.27) 0.02 (13.73)
</TABLE>
F-16
<PAGE> 92
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
Prior to the adoption of the 1997 Stock Plan, the Company did not have a formal
stock option plan and options were granted to employees and directors to
purchase shares of the Company's predecessor, Organic Online Inc., at various
exercise prices. For the years ended December 31, 1996, 1997 and 1998, and nine
months ended September 30, 1998 and 1999, the employees and directors were
granted 58,000, 24,000, 5,000, 5,000, and 225,409 options, respectively, under
this arrangement. As of September 30, 1999, the number of options outstanding
under this arrangement was 364,517.
NOTE 8 -- INCOME TAXES
As of September 30, 1999, the Company had net operating loss carryforwards of
approximately $2.7 million for federal and state income tax purposes arising
from the taxable loss in the years ended December 31, 1997 and 1998. The federal
net operating loss carryforwards expire in the years 2012 and 2018,
respectively. The state net operating loss carryforwards expire in the years
2005. Valuation allowances have been provided against the net deferred tax
assets due to the uncertainty of their realization.
The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income may be subject to restrictions attributable to equity
transactions that result in changes in ownership as defined in the Tax Reform
Act of 1986. These restrictions may limit, on an annual basis, the Company's
future use of its net operating loss carryforwards.
The difference between the income tax expense (benefit) at the federal statutory
rate of 34% and the Company's effective tax rate is due primarily to net
operating loss carryforwards and the valuation allowance.
Effective January 1, 1996, the Company became an S-Corporation and accordingly,
was not subject to income tax in 1996. The tax benefit in 1996 represents the
reversal of the net deferred tax liabilities at the date the Company changed
from a C-Corporation to an S-Corporation. Upon the formation of the Company into
Organic Online (see Note 1), in January 1997, the Company operated as a
C-Corporation.
F-17
<PAGE> 93
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
The components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- --------------------
1997 1998 1998 1999
------- ------ ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal........................................ $ -- $ -- $ 60 $--
State........................................ 3 10 23 9
Foreign...................................... -- -- -- 55
------- ------ ---- ---
Total currently payable................... 3 10 83 64
------- ------ ---- ---
Deferred
Federal...................................... (753) 753 629 --
State........................................ (247) 247 201 --
------- ------ ---- ---
Total deferred............................ (1,000) 1,000 830 --
------- ------ ---- ---
Total income tax expense (benefit)........ $ (997) $1,010 $913 $64
======= ====== ==== ===
</TABLE>
The components of the deferred tax assets of the Company were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Accumulated depreciation.............................. $ 12 $ (26) $ 203
Compensation costs.................................... -- -- 1,365
Organizational costs.................................. -- 6 11
Tax credits........................................... -- 9 66
Accruals and reserves................................. 132 243 2,028
Net operating loss carryforward....................... 856 1,240 1,371
------ ------- -------
Gross deferred tax asset......................... 1,000 1,472 5,044
Valuation allowance................................... -- (1,472) (5,044)
------ ------- -------
Net deferred tax asset........................... $1,000 $ -- $ --
====== ======= =======
</TABLE>
NOTE 9 -- 401(k) SAVINGS PLAN
In January 1997, the Company established a defined contribution plan authorized
under Section 401(k) of the Internal Revenue Code. All benefits-eligible
employees with at least one month of service are eligible to participate in the
plan. Employees may contribute up to 20 percent of their pre-tax covered
compensation through salary deductions. In 1999, the Company began contributing
25 percent of every pre-tax dollar an employee contributes up to the first 5
percent of the employee's pre-tax covered compensation. Employees are 50 percent
vested in the employer's contributions after one year of service and fully
vested after two years.
F-18
<PAGE> 94
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
All employer contributions are tax deductible by the Company. The Company's
matching contribution expense was $57 for the nine months ended September 30,
1999. In addition, the Company may make a discretionary profit-sharing
contribution to all eligible employees, regardless of whether an employee is
participating in the 401(k) plan. However, no such contributions have been made
through September 30, 1999.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company leases various office space and office equipment under
non-cancelable operating and capital leases with initial or remaining terms of
one year or more. Total rent expense under operating leases was $70, $207, and
$876 for the years ended December 31, 1996, 1997 and 1998, respectively, and
$526 and $1,815 for the nine months ended September 30, 1998 and 1999,
respectively. At September 30, 1999, the future minimum lease payments under all
lease arrangements are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Three months ending December 31, 1999....................... $ 546 $ 15
Years ending December 31, 2000.............................. 2,050 62
2001...................................................... 1,607 49
2002...................................................... 1,553 46
2003...................................................... 1,354 26
2004...................................................... 1,118 1
Thereafter.................................................. 4,368 --
------- ----
Total minimum lease payments................................ $12,596 199
=======
Less: amount representing interest.......................... 49
----
Present value of net minimum payments....................... 150
Less: current portion of obligations under capital leases... 42
----
Long-term obligations under capital leases.................. $108
====
</TABLE>
The Company has one lease in San Francisco, California that contains an
escalation clause that will become effective upon the consummation of the
proposed initial public offering. There are no restrictions on paying dividends,
incurring additional debt or negotiating additional leases under the terms of
the present lease agreements.
F-19
<PAGE> 95
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
NOTE 11 -- EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted net income
per share for the year ended December 31, 1996 and nine months ended September
30, 1998.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, 1996 1998
---------------------- -----------------------
BASIC DILUTED BASIC DILUTED
------- ----------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income applicable to common stock... $ 237 $ 237 $ 1,146 $ 1,146
======= =========== ======== ===========
Weighted average common shares
outstanding............................. 9 9 136,259 136,259
Additional shares due to:
Assumed conversion of dilutive stock
options............................ -- -- -- 263,460
Assumed conversion of Series A
convertible preferred stock........ -- 65,025,000 -- 65,025,000
------- ----------- -------- -----------
Adjusted weighted average common shares
outstanding........................... 9 65,025,009 136,259 65,424,719
======= =========== ======== ===========
Net income per share.................... $26,286 $ 0.00 $ 8.41 $ 0.02
======= =========== ======== ===========
</TABLE>
The following table sets forth common stock equivalents that were not included
in the calculation of diluted net loss per share because to do so would be
anti-dilutive for those periods presented.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, FOR THE NINE MONTHS
------------------------ ENDED SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------------
<S> <C> <C> <C>
Weighted average effect of common stock
equivalents:
Series A convertible preferred stock... 65,025,000 65,025,000 65,025,000
Series B convertible preferred
stock............................. -- -- 4,006,154
Common stock options................. 2,671 2,313,711 9,056,148
Common stock warrants................ -- -- 148,291
</TABLE>
NOTE 12 -- RELATED PARTY TRANSACTIONS
On March 31, 1999, the Company entered into a promissory note agreement for $200
with an Executive of the Company. This note bears an annual interest rate of 7%
with interest payments due every other year beginning on March 31, 2001. Under
the terms of this agreement, the entire principal amount will become payable
upon the consummation of the Company's proposed initial public offering, as long
as the offering price is at least $10 per share and the aggregate proceeds are
at least $75.0 million.
Concurrent with the reorganization in January 1997, the Company issued 3,351,288
shares of Series A convertible preferred stock to Omnicom Group for cash
proceeds of $10.0 million. In
F-20
<PAGE> 96
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
February 1999, the Company issued 1,488,000 shares of Series B convertible
preferred stock to Omnicom Group for net cash proceeds of $7,718 plus the
settlement of a $3.0 million short-term bridge loan that was obtained from
Omnicom Group in January 1999. See Note 5 and 6 for detailed information on the
Company's revolving credit facility agreement with Omnicom Group and related
warrants. In the future, the Company expects to have transactions in the
ordinary course of business with Omnicom Group.
NOTE 13 -- SUBSEQUENT EVENTS
On November 4, 1999, the Company entered into a lease for office space in New
York. The office space consists of approximately 110,000 square feet and has a
lease term of 15 years, with a projected commencement date of June 1, 2000. The
monthly lease payment will be approximately $275, $298, and $321 during the
first five years, subsequent five years and last five years, respectively. The
lease has been guaranteed by Omnicom Group for up to $4.5 million.
On November 8, 1999, the Company entered into a lease for new headquarters
office space in San Francisco. In accordance with this lease agreement, the
Company provided a $10.0 million letter of credit to the landlord to secure this
space. The office space consists of approximately 212,000 square feet and has a
lease term of 10 years, with a projected commencement date of September 1, 2000.
The anticipated monthly lease payment during the first year will be
approximately $705 with an annual escalation clause of approximately 4%. The
Company expects to sublease a portion of the office space.
In October 1999, the Company's Board of Directors approved 360,000 options at
$2.33 per share. In November 1999 the Company's Board of Directors approved
5,406,375 stock options at $2.67 per share, an increase in the number of
authorized common shares to 200,000,000, adopted the 1999 long-term stock
incentive plan of 10,500,000 authorized shares, and the 2000 employee stock
purchase plan of 10,000,000 authorized shares.
F-21
<PAGE> 97
UNDERWRITING
Organic and the underwriters named below (the "Underwriters") have entered
into an underwriting agreement with respect to the shares being offered. Subject
to the conditions in the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares indicated in the following table.
Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and
Thomas Weisel Partners LLC are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Thomas Weisel Partners LLC..................................
---------
Total............................................. 5,500,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 825,000
shares from us to cover such sales. They may exercise that option for 30 days.
If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to Organic per share of
common stock. The underwriting fee is expected to be 7% of the initial public
offering price.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Organic. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid By Organic No Exercise Full Exercise
--------------- ----------- -------------
<S> <C> <C>
Per share............................................... $ $
Total................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per
share from the initial public offering price. If all the shares are not sold at
the initial public offering price, the representatives may change the offering
price and the other selling terms.
Each officer, director and shareholder of Organic has agreed with the
underwriters not to dispose of or hedge any of the common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent of Goldman, Sachs
& Co. This agreement does not apply to any existing employee benefit plan and
does not apply to any of the shares offered and sold pursuant to the directed
share program described below. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
Prior to the offering, there has been no public market for the shares. The
initial public offering price for the common stock will be negotiated among us
and the representatives of the underwriters. The primary factors to be
considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, will be Organic's historical
performance,
U-1
<PAGE> 98
estimates of the business potential and earnings prospects of Organic, an
assessment of Organic's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Organic has applied to have the common stock listed on the Nasdaq National
Market under the symbol "OGNC".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect that market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered. Organic currently
anticipates that it will undertake a directed share program, pursuant to which
it will direct the underwriters to reserve up to fifteen percent of the shares
of its common stock for sale at the initial public offering price to directors,
officers and friends of Organic. In addition, Organic has requested that the
underwriters reserve 385,000 shares of its common stock for sale at the initial
public offering price to DaimlerChrysler, one of Organic's clients. The number
of shares of common stock available for sale to the general public will be
reduced to the extent such persons purchase any reserved shares. Any shares not
so purchased will be offered by the underwriters to the general public on the
same basis as other shares offered hereby.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998 Thomas Weisel Partners has been named as a lead or co-manager of 106 filed
public offerings of equity securities, of which 79 have been completed, and has
acted as a syndicate member in an additional 54 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except for
our contractual relationship with us under the terms of the underwriting
agreement entered into in connection with this offering.
Organic estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$ .
Organic has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE> 99
INSIDE BACK COVER:
ORGANIC LOGO
SUBHEAD: Key Areas of Focus
IMAGE 1: photo of Organic employees
SUBHEAD 1: Expand Client Engagements
SUBHEAD 2: Attaction & Retention
IMAGE 2: photo of Organic employees
SUBHEAD 3: Understaning & Innovation
SUBHEAD 4: Knowledge Management
IMAGE 3: photo of Organic employees
<PAGE> 100
- ----------------------------------------------------------
- ----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 8
Special Note Regarding Forward-Looking
Statements............................ 21
Use of Proceeds......................... 22
Dividend Policy......................... 22
Capitalization.......................... 23
Dilution................................ 24
Selected Consolidated Financial Data.... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 27
Business................................ 37
Management.............................. 53
Related Party Transactions.............. 65
Principal Stockholders.................. 67
Description of Capital Stock............ 68
Shares Eligible for Future Sale......... 72
Legal Matters........................... 73
Experts................................. 73
Available Information................... 73
Index to Consolidated Financial
Statements............................ F-1
Underwriting............................ U-1
</TABLE>
-------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as underwriter and with respect to an unsold allotment or
subscription.
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
5,500,000 Shares
ORGANIC, INC.
Common Stock
-------------------------
Organic logo
-------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
Representatives of the Underwriters
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be paid by the Registrant in connection with the distribution of
the securities being registered, other than underwriting discounts and
commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Filing Fee............... $ 24,428
NASD Filing Fee............................................. 8,000
Nasdaq National Market Listing Fee.......................... 95,000
Accounting Fees and Expenses................................ 345,000
Blue Sky Fees and Expenses.................................. 3,000
Legal Fees and Expenses..................................... 300,000
Transfer Agent and Registrar Fees and Expenses.............. 15,000
Printing Expenses........................................... 225,000
Miscellaneous Expenses...................................... 50,000
----------
Total.................................................. $1,065,428
==========
</TABLE>
- ---------------
* All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to award,
or a corporation's board of directors to grant, indemnity to officers, directors
and other corporate agents under certain circumstances and subject to certain
limitations. Our certificate of incorporation and bylaws provide that we shall
indemnify our directors, officers, employees and agents to the full extent
permitted by Delaware General Corporation Law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. In
addition, we intend to enter into separate indemnification agreements with our
directors, officers and certain employees which would require us, among other
things, to indemnify them against certain liabilities which may arise by reason
of their status as directors, officers or certain other employees. We also
intend to maintain director and officer liability insurance, if available on
reasonable terms.
These indemnification provisions and the indemnification agreement to be entered
into between us and our officers and directors may be sufficiently broad to
permit indemnification of our officers and directors for liabilities, including
reimbursement of expenses incurred, arising under the Securities Act.
The underwriting agreement filed as Exhibit 1.1 to this registration statement
provides for indemnification by the underwriters of us and our officers and
directors for certain liabilities arising under the Securities Act, or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From our incorporation to September 30, 1999, we have granted or issued and sold
the following unregistered securities:
1. Stock options to employees, officers, directors and consultants under our
1997 stock option plan exercisable for up to an aggregate of 15,712,932 shares
of our common stock, with a weighted average exercise price of $0.72 per share.
II-1
<PAGE> 102
2. An aggregate of 1,619,115 shares exercised under our 1997 stock option plan,
with a weighted average exercise price of $.07 per share.
3. On January 29, 1997, we sold to Organic Holdings, Inc. 9 shares of our common
stock at $0.3333 per share for $1.00, and 18,323,712 shares of our Series A
preferred stock at $2.9833 per share for a total of $54,663,751.
4. On January 29, 1997, we sold to Omnicom Group Inc. 3,351,288 shares of our
Series A preferred stock at $2.9833 per share for an aggregate total of
approximately $10,000,000.
5. On January 7, 1999, we sold to Omnicom Group Inc. 1,488,000 shares of our
Series B preferred stock at $7.2067 per share for a total of $10,723,520.
6. On September 13, 1999, we issued a warrant to Omnicom Group Inc. to purchase
2,249,076 shares of common stock at $0.0033 per share for a total of $7,497.
The issuances of the securities in the transactions described in paragraphs 3
through 6 above were deemed to be exempt from registration under the Securities
Act in reliance on Section 4(2) of the Securities Act by an issuer not involving
a public offering, where the purchasers represented their intention to acquire
the securities for investment only and not with a view to distribution and
received or had access to adequate information about the Registrant. The
issuance of options and shares of common stock pursuant to the exercise of
options described in paragraphs 1 and 2 above were deemed to be exempted in
reliance on Rule 701 promulgated under the Securities Act as transactions
pursuant to a compensatory benefit plan or written compensation contract.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The exhibits are as set forth in the Exhibit Index.
(b) Financial Statement Schedules
All schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriters at the closing specified in
the underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by one of our directors, officers
or controlling persons in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
We hereby undertake that:
(1) For purposes of any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and
II-2
<PAGE> 103
contained in a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Organic, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California on the 28th day of January, 2000.
ORGANIC, INC.
By: /s/ JONATHAN NELSON
-----------------------------------
Jonathan Nelson
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JONATHAN NELSON Chief Executive Officer January 28, 2000
- ----------------------------------------------------- and Chairman of the
Jonathan Nelson Board (Principal
Executive Officer)
/s/ MICHAEL HUDES* President and Director January 28, 2000
- -----------------------------------------------------
Michael Hudes
/s/ SUSAN L. FIELD Executive Vice President January 28, 2000
- ----------------------------------------------------- and Chief Financial
Susan L. Field Officer (Principal
Financial and Accounting
Officer)
/s/ GARY F. HROMADKO* Director January 28, 2000
- -----------------------------------------------------
Gary F. Hromadko
/s/ GERALD BRUCE REDDITT* Director January 28, 2000
- -----------------------------------------------------
Gerald Bruce Redditt
*By: /s/ SUSAN L. FIELD
------------------------------------------------
Attorney-in-fact
</TABLE>
II-4
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant*
3.2 Bylaws of Registrant*
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen Stock Certificate of Registrant**
4.3 Form of Rights Agreement between Registrant and EquiServe
Trust Company, as Rights Agent
5.1 Opinion of Morrison & Foerster LLP as to the legality of the
common stock
10.1 Form of Indemnification Agreement between Registrant and
each of its executive officers and directors**
10.2 Registrant's 1997 Stock Option Plan, as amended and
restated, including forms of agreements thereunder
10.3 Registrant's 1999 Long-Term Stock Incentive Plan, including
forms of agreements thereunder
10.4 Employment Agreement between Registrant and Jonathan Nelson,
dated January 29, 1997, and amendment on February 24,
1997**
10.5 Employment Agreement between Registrant and Michael Hudes,
dated January 29, 1997, and amendment on February 24,
1997**
10.6 Employment Agreement between Registrant and Susan L. Field,
dated June 22, 1999**
10.7 Loan Agreement between Registrant and Omnicom Group Inc.
dated as of August 27, 1999**
10.8 Guaranty and Security Agreement by and among Registrant,
Organic Media, Inc. and Omnicom Group Inc., dated August
27, 1999**
10.9 Revolving Note of Registrant payable to Omnicom Group Inc.,
dated August 27, 1999**
10.10 Lease between 500 Third Street Associates and Registrant,
dated July 22, 1996**
10.11 Lease between 500 Third Street Associates and Registrant,
dated July 22, 1996**
10.12 Lease between 500 Third Street Associates and Registrant,
dated December 5, 1996**
10.13 Lease between Trustees of the Masonic Hall and Asylum Fund
and Registrant, dated June 1998**
10.14 Lease between Trustees of the Masonic Hall and Asylum Fund
and Registrant, dated September 15, 1999*
10.15 Lease between Baker Hamilton Properties, LLC and Registrant,
dated November 8, 1999**
10.16 Lease between 233 Broadway Owners LLC and Registrant, dated
November 4, 1999*
10.17 Registrant's 2000 Employee Stock Purchase Plan**
10.18 Sublease between Looksmart, Ltd. and Registrant, dated
January 14, 2000*
10.19 Omnibus Service Agreement between Registrant and Blockbuster
Inc., dated February 1, 1999*
10.20 DaimlerChrysler Corporation Agreement with Registrant, dated
March 15, 1999*
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<C> <S>
21.1 Subsidiaries of Registrant**
23.1 Consent of Morrison & Foerster LLP. Reference is made to
Exhibit 5.1
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1 Power of Attorney of Gerald Bruce Redditt**
27.1 Financial Data Schedule as of and for the year ended
December 31, 1997**
27.2 Financial Data Schedule as of and for the year ended
December 31, 1998**
27.3 Financial Data Schedule as of and for the nine months ended
September 30, 1999**
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
<PAGE> 1
EXHIBIT 1.1
ORGANIC, INC.
COMMON STOCK
---------------------
UNDERWRITING AGREEMENT
............... , 2000
Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette
Thomas Weisel Partners LLC
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Organic, Inc., a Delaware corporation (the "Company"), proposes, subject
to the terms and conditions stated herein, to issue and sell to the Underwriters
named in Schedule I hereto (the "Underwriters") an aggregate of 5,500,000 shares
(the "Firm Shares") and, at the election of the Underwriters, up to 825,000
additional shares (the "Optional Shares") of Common Stock ("Stock") of the
Company (the Firm Shares and the Optional Shares that the Underwriters elect to
purchase pursuant to Section 2 hereof being collectively called the "Shares")
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 33-91627) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act is hereinafter called
a "Preliminary Prospectus"); the
<PAGE> 2
various parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and
deemed by virtue of Rule 430A under the Act to be part of the Initial
Registration Statement at the time it was declared effective , each as amended
at the time such part of the Initial Registration Statement became effective or
such part of the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the "Registration
Statement"; such final prospectus, in the form first filed pursuant to Rule
424(b) under the Act, is hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(d) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree that, individually or
in the aggregate, would have a material adverse effect on the general affairs,
management, the current or future consolidated financial position, business
prospects, stockholders' equity or results of operations of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect"), otherwise than as
set forth or contemplated in the Prospectus; and, taken as a whole since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there has not been any change in the capital stock (except
for the grant of stock options or issuances of stock upon the exercise of stock
options, each pursuant to stock plans that have been described in the
Prospectus, and except for issuances of stock upon the exercise of warrants
that have been described in the Prospectus) or long-term debt of the Company or
any of its subsidiaries or any Material Adverse Effect, or any development
(other than a development affecting business generally) involving a prospective
Material Adverse Effect, otherwise than as set forth or contemplated in the
Prospectus;
(e) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them, in each case free and
2
<PAGE> 3
clear of all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries;
(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, except for those
failures to be so qualified or in good standing that will not in the aggregate
have a Material Adverse Effect; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus; and all
of the issued shares of capital stock of each subsidiary of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and (except for directors' qualifying shares) are owned directly or indirectly
by the Company, free and clear of all liens, encumbrances, equities or claims;
(h) The Shares have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company and the compliance
by the Company with all of the provisions of this Agreement and the consummation
of the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or, to the Company's
knowledge, any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the Shares or
the consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares and such
consents, approvals, authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(j) Neither the Company nor any of its subsidiaries is in violation of
its Certificate of Incorporation or By-laws or in default in the performance or
observance of any material obligation,
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agreement, covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties may be bound;
(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock and under the caption "Underwriting", insofar as they
purport to describe the provisions of the laws and documents referred to
therein, are accurate and complete;
(l) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material Adverse
Effect; and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others;
(m) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company", as such term is defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act");
(n) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba within the
meaning of Section 517.075, Florida Statutes;
(o) PricewaterhouseCoopers LLP who have certified certain financial
statements of the Company and its subsidiaries, who have certified certain
financial statements of Organic Holdings, Inc. are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder; and
(p) The Company has reviewed its operations and that of its subsidiaries
and any third parties with which the Company or any of its subsidiaries has a
material relationship to evaluate the extent to which the business or operations
of the Company or any of its subsidiaries has been or will be affected by the
Year 2000 Problem. As a result of such review, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem has had or will have a
Material Adverse Effect or has resulted or will result in any material loss or
interference with the Company's business or operations. The "Year 2000 Problem"
as used herein means any significant risk that computer hardware or software
used in the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of mechanical or
electrical systems of any kind is not functioning or will not function, in the
case of dates or time periods occurring after December 31, 1999, at least as
effectively as in the case of dates or time periods occurring prior to January
1, 2000.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $................, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to
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which such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction, the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 825,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering sales of
shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Shares, the
several Underwriters propose to offer the Shares for sale upon the terms and
conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., for the account of such Underwriter, against payment by or
on behalf of such Underwriter of the purchase price therefor by wire transfer of
Federal (same-day) funds to the account specified by the Company to Goldman,
Sachs & Co. at least forty-eight hours in advance. The Company will cause the
certificates representing the Shares to be made available for checking and
packaging at least twenty-four hours prior to the Time of Delivery (as defined
below) with respect thereto at the office of Goldman, Sachs & Co., 85 Broad
Street, New York, New York 10004 (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York City time, on ............., 2000 or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York time, on the date specified
by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of
the Underwriters' election to purchase such Optional Shares, or such other time
and date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such
time and date for delivery of the Firm Shares is herein called the "First Time
of Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at Time of Delivery by or on behalf of
the parties hereto pursuant to Section 7 hereof, including the cross receipt for
the Shares and any additional documents requested by the Underwriters pursuant
to Section 7 hereof, will be delivered at the offices Wilson Sonsini Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304 of (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such Time of Delivery. A meeting will be held at the Closing Location at
.......p.m., New York City time, on the New York Business Day next preceding
such Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
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parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's
close of business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further amendment or any
supplement to the Registration Statement or Prospectus which shall be
disapproved by you promptly after reasonable notice thereof; to advise you,
promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or suspending any
such qualification, promptly to use its best efforts to obtain the withdrawal of
such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities laws of
such jurisdictions as you may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such jurisdictions for
as long as may be necessary to complete the distribution of the Shares, provided
that in connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in any
jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required under the Act at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering or
sale of the Shares and if at such time any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act to notify you and upon
your request to prepare and furnish without charge to each Underwriter and to
any dealer in securities as many copies as you may from time to time reasonably
request of an amended Prospectus or a supplement to the Prospectus which will
correct such statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of any
of the Shares at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter, to prepare
and deliver to such Underwriter as many copies as you may request of an amended
or supplemented Prospectus complying with Section 10(a)(3) of the Act;
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(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to stock plans existing
on, or upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement), without your prior written
consent;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(g) During a period of three years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports, financial
statements or proxy or information statements furnished to or filed with the
Commission or any national securities exchange on which any class of securities
of the Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to time
reasonably request subject to removeable restrictions on the use of such
information (such financial statements to be on a consolidated basis to
the extent the accounts of the Company and its subsidiaries are consolidated in
reports furnished to its stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's
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<PAGE> 8
counsel and accountants in connection with the registration of the Shares under
the Act and all other expenses in connection with the preparation, printing and
filing of the Registration Statement, any Preliminary Prospectus and the
Prospectus and amendments and supplements thereto and the mailing and delivering
of copies thereof to the Underwriters and dealers; (ii) the cost of printing or
producing any Agreement among Underwriters, this Agreement, the Blue Sky
Memorandum, closing documents (including any compilations thereof) and any other
documents in connection with the offering, purchase, sale and delivery of the
Shares; (iii) all expenses in connection with the qualification of the Shares
for offering and sale under state securities laws as provided in Section 5(b)
hereof, including the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey (iv) all fees and expenses in connection with listing the Shares
on the NASDAQ; (v) the filing fees incident to, and the reasonable fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; (viii) the filing
fees incident to, and the fees and disbursements of foreign counsel engaged by
the Company or the underwriters in connection with the Company's directed share
program; and (ix) all other costs and expenses incident to the performance of
its obligations hereunder which are not otherwise specifically provided for in
this Section. It is understood, however, that, except as provided in this
Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their
own costs and expenses, including the fees of their counsel, stock transfer
taxes on resale of any of the Shares by them, and any advertising expenses
connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery shall be subject, in their discretion, to the
condition that all representations and warranties and other statements of the
Company herein are, at and as of such Time of Delivery, true and correct, the
condition that the Company shall have performed all of their obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance
with Section 5(a) hereof; if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have become
effective by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by
the Commission; and all requests for additional information on the part
of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Wilson Sonsini Goodrich & Rosati, P.C., counsel for the
Underwriters, shall have furnished to you such written opinion or
opinions (a draft of each such opinion is attached as Annex II(a)
hereto), dated such Time of Delivery, with respect to the matters
covered in paragraphs (i), (ii), (vi), (x) and (xii) of subsection (c)
below as well as such other related matters as you may reasonably
request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon
such matters;
(c) Morrison & Foerster LLP, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated Time of Delivery, in form and
substance reasonably satisfactory to you, to the effect that:
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(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Delaware, with power and authority (corporate and
other) to own its properties and conduct its business as
described in the Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of
capital stock of the Company (including the Shares being
delivered at such Time of Delivery have been duly and validly
authorized and issued and are fully paid and non-assessable;
and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to
require such qualification, except where the failure to so
qualify and be in good standing would not have a Material
Adverse Effect (such counsel being entitled to rely in respect
of the opinion in this clause upon opinions of local counsel
and in respect of matters of fact upon certificates of officers
of the Company, provided that such counsel shall state that
they believe that both you and they are justified in relying
upon such opinions and certificates);
(iv) Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation,
except where the failure to so qualify and be in good standing
would not have a Material Adverse Effect; and all of the issued
shares of capital stock of each such subsidiary have been duly
and validly authorized and issued, are fully paid and
non-assessable, and (except for directors' qualifying shares
are owned directly or indirectly by the Company, free and clear
of all liens, encumbrances, equities or claims (such counsel
being entitled to rely in respect of the opinion in this clause
upon opinions of local counsel and in respect to matters of
fact upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they
believe that both you and they are justified in relying upon
such opinions and certificates);
(v) To the best of such counsel's knowledge and other than
as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property of the
Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a Material Adverse
Effect; and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the
Company with all of the provisions of
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this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any agreement filed as an exhibit to the
Registration Statement or, except for such breaches or
violations as could not reasonably be expected to have a
Material Adverse Effect, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such action
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or, to such counsel's
knowledge, any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their
properties (such counsel being entitled to rely in respect
of the opinion in this clause upon opinions of local counsel
and in respect of matters of fact upon certificates of officers
of the Company, provided that such counsel shall state that
they believe that both you and they are justified in relying
upon such opinions and certificates);
(viii) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale
of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents,
approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by
the Underwriters;
(ix) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in
default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by
which it or any of its properties may be bound (such counsel
being entitled to rely in respect of the opinion in this clause
upon opinions of local counsel and in respect of matters of
fact upon certificates of officers of the Company, provided
that such counsel shall state that they believe that both you
and they are justified in relying upon such opinions and
certificates);
(x) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport
to constitute a summary of the terms of the Stock, and under
the caption "Underwriting", insofar as they purport to describe
the provisions of the laws and documents referred to therein,
are accurate and complete;
(xi) The Company is not an "investment company", as such
term is defined in the Investment Company Act; and
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company
prior to such Time of Delivery (other than the financial
statements, supporting schedules, footnotes and other financial
information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the requirements of the Act and the rules and regulations
thereunder; although they do not assume any responsibility for
the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (x) of this section
7(c), they have no reason to believe that, as of its effective
date, the Registration Statement or any further amendment
thereto made by the Company prior to such Time of Delivery
(other than the financial statements, supporting schedules,
footnotes and other financial information contained therein, as
to which such counsel need express no opinion)
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contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that, as of its
date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery
(other than the financial statements, supporting schedules,
footnotes and other financial information contained therein, as
to which such counsel need express no opinion) contained an
untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further
amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements,
supporting schedules, footnotes and other financial information
contained therein, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or
omits to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; and they do not know of any amendment to
the Registration Statement required to be filed or of any
contracts or other documents of a character required to be filed
as an exhibit to the Registration Statement or required to be
described in the Registration Statement or the Prospectus which
are not filed or described as required;
(d) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective
date of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of
Delivery, PricewaterhouseCoopers LLP shall have furnished to you a
letter or letters, dated the respective dates of delivery thereof, in
form and substance satisfactory to you, to the effect set forth in Annex
I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft
of the form of letter to be delivered on the effective date of any
post-effective amendment to the Registration Statement and as of each
Time of Delivery is attached as Annex I(b) hereto);
(e) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus, and (ii) since the respective dates as of which information
is given in the Prospectus there shall not have been any change in the
capital stock or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial
position, shareholders' equity or results of operations of the Company
and its subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause
(i) or (ii), is in the judgment of the Representatives so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(f) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term is
defined by the Commission for purposes of Rule 436(g)(2) under
11
<PAGE> 12
the Act, and (ii) no such organization shall have publicly announced
that it has under surveillance or review, with possible negative
implications, its rating of any of the Company's debt securities;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities
on NASDAQ; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the
effect of any such event specified in this clause (iv) in the reasonable
judgment of the Representatives makes it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being
delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each officer, director and
stockholder of the Company, substantially to the effect set forth in
Subsection 5(e) hereof in form and substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New
York Business Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as
to the performance by the Company of all of its obligations hereunder to
be performed at or prior to such Time of Delivery, as to the matters set
forth in subsections (a) and (e) of this Section and as to such other
matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
12
<PAGE> 13
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such
13
<PAGE> 14
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In the event that,
within the respective prescribed periods, you notify the Company that you have
so arranged for the purchase of such Shares, or the Company notifies you that it
has so arranged for the
14
<PAGE> 15
purchase of such Shares, you or the Company shall have the right to postpone
such Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
Anything herein to the contrary notwithstanding, the indemnity agreement
of the Company in subsection (a) of Section 8 hereof, the representations and
warranties in subsections (b) and (c) of Section 1 hereof and any representation
or warranty as to the accuracy of the Registration Statement or the Prospectus
contained in any certificate furnished by the Company pursuant to Section 7
hereof, insofar as they may constitute a basis for indemnification for
liabilities (other than payment by the Company of expenses incurred or paid in
the successful defense of any action, suit or proceeding) arising under the Act,
shall not extend to the extent of any interest therein of a controlling person
or partner of an Underwriter who is a director, officer or controlling person of
the Company
15
<PAGE> 16
when the Registration Statement has become effective or who, with his or her
consent, is named in the Registration Statement as about to become a director of
the Company, except in each case to the extent that an interest of such
character shall have been determined by a court of appropriate jurisdiction as
not against public policy as expressed in the Act. Unless in the opinion of
counsel for the Company the matter has been settled by controlling precedent,
the Company will, if a claim for such indemnification is asserted, submit to a
court of appropriate jurisdiction the question of whether such interest is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any Underwriter except as provided in Sections 6
and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
16
<PAGE> 17
If the foregoing is in accordance with your understanding, please sign
and return to us six counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
Organic, Inc.
By:
----------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
Thomas Weisel Partners, LLC
By:
--------------------------------------
(Goldman, Sachs & Co.)
17
<PAGE> 18
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co...................................
Donaldson, Lufkin & Jenrette..........................
Thomas Weisel Partners LLC............................
Total..................................
--------------- ------------------
=============== ==================
</TABLE>
<PAGE> 19
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company and its subsidiaries within the meaning of the Act and
the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified Public
Accountants of the unaudited consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have been
separately furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which have
been separately furnished to the Representatives and on the basis of
specified procedures including inquiries of officials of the Company who
have responsibility for financial and accounting matters regarding
whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all
material respects with the applicable accounting requirements of the Act
and the related published rules and regulations, nothing came to their
attention that cause them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the Prospectus
agrees with the corresponding amounts (after restatements where
applicable) in the audited consolidated financial statements for such
five fiscal years which were included or incorporated by reference in
the Company's Annual Reports on Form 10-K for such fiscal years;
<PAGE> 20
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and
on the basis of limited procedures specified in such letter nothing came
to their attention as a result of the foregoing procedures that caused
them to believe that this information does not conform in all material
respects with the disclosure requirements of Items 301, 302, 402 and
503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of
the minute books of the Company and its subsidiaries since the date of
the latest audited financial statements included in the Prospectus,
inquiries of officials of the Company and its subsidiaries responsible
for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus do not comply as to form in
all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations, or (ii) any material modifications should be made
to the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus for them to be in conformity
with generally accepted accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements
included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in clause (B)
were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form
in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital
stock upon exercise of options and stock appreciation rights,
2
<PAGE> 21
upon earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt
of the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or
other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter;
and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or
per share amounts of consolidated net income or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
the comparable period of the preceding year and with any other
period of corresponding length specified by the
Representatives, except in each case for decreases or increases
which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraphs
(iii) and (vi) above, they have carried out certain specified
procedures, not constituting an examination in accordance with generally
accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Representatives,
which are derived from the general accounting records of the Company and
its subsidiaries, which appear in the Prospectus, or in Part II of, or
in exhibits and schedules to, the Registration Statement specified by
the Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of the
Company and its subsidiaries and have found them to be in agreement.
3
<PAGE> 1
EXHIBIT 4.3
ORGANIC, INC.
and
EquiServe Trust Company
as Rights Agent
RIGHTS AGREEMENT
Dated as of ______________
<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>
i
<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>
ii
<PAGE> 4
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of ____________ (the "Agreement"), between
Organic, Inc., a Delaware corporation (the "Company"), and EquiServe Trust
Company, a Delaware corporation (the "Rights Agent").
WHEREAS, effective __________ (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 ____________ (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/Omincom is not required to
report such ownership on Schedule 13(D) under the Exchange Act (or any
comparable or successor report), and (y) Holdings/Omincom's Beneficial
Ownership of the shares of Company Common Stock does not exceed the sum
of Holdings/Omincom'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
1
<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 $.001 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 ______________ (the "Rights Agent") dated as of
___________, 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
8
<PAGE> 12
such surrendered Rights Certificate until the registered holder shall have
completed and executed the 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 [___], 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
9
<PAGE> 13
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 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
10
<PAGE> 14
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 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
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<PAGE> 15
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 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.
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<PAGE> 16
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, 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
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<PAGE> 17
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 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
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<PAGE> 18
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), 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 11(d) hereof) per share of Preferred Stock on such
record date, the Purchase Price to be in effect after such record
15
<PAGE> 19
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
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
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<PAGE> 20
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 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
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<PAGE> 21
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 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
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<PAGE> 22
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 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
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<PAGE> 23
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) 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.
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<PAGE> 24
(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 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
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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 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.
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(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 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
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<PAGE> 27
(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
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
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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 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.
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(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 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
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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 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.
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<PAGE> 31
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 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
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<PAGE> 32
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 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
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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.
(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.
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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 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
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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; 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
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<PAGE> 36
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.
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.
--------------------------
--------------------------
--------------------------
Attention:
----------------
and if to the Rights Agent, at its address at:
--------------------------
--------------------------
--------------------------
Attention:
--------------------------------
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.
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<PAGE> 37
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 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
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<PAGE> 38
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 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
35
<PAGE> 39
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 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
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<PAGE> 40
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.
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<PAGE> 41
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: By:
-------------------------- ------------------------------
Name: Name:
---------------- ------------------
Title: Title:
--------------- -----------------
[ ]
------------------------
By: By:
-------------------------- ------------------------------
Name: Name:
---------------- ------------------
Title: Title:
--------------- -----------------
38
<PAGE> 1
EXHIBIT 5.1
January 28, 2000
Organic, Inc.
510 3rd Street, Suite 540
San Francisco, CA 94107
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
of Organic, Inc., a Delaware corporation (the "Company"), filed with the
Securities and Exchange Commission (the "Registration Statement") on November
24, 1999, as amended, relating to the registration under the Securities Act of
1933, as amended, of up to 6,325,000 shares of the Company's common stock,
$0.0001 par value per share (the "Stock"), which are authorized but unissued
stock to be offered and sold by the Company (including up to 825,000 shares
subject to the underwriters' over-allotment option). The Stock is to be sold to
the underwriters named in the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by the
Company in connection with the issuance and sale of the Stock.
We are of the opinion that the up to 6,325,000 shares of Stock to be
offered and sold by the Company have been duly authorized and, when issued and
sold by the Company in the manner described in the Registration Statement, will
be validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the prospectus constituting a part thereof and any amendments
thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
Morrison & Foerster LLP
<PAGE> 1
EXHIBIT 10.2
ORGANIC, INC.
1997 STOCK OPTION PLAN
ADOPTED APRIL 25, 1997
AMENDED NOVEMBER 25, 1998 (TO INCREASE SHARES)
AMENDED FEBRUARY 25, 1999 (TO CHANGE NAME)
AMENDED SEPTEMBER 24, 1999 (TO INCREASE SHARES)
AMENDED NOVEMBER 22, 1999 (TO INCLUDE CHANGE OF CONTROL PROVISIONS)
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall, in
the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either Incentive Stock Options or Nonstatutory Stock Options. All Options shall
be separately designated incentive Stock Options or Nonstatutory Stock Options
at the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance with
subsection 3(c) of the Plan.
(e) "COMMON STOCK" means the Company's common stock, or any stock resulting
from the conversion of such common stock.
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<PAGE> 2
(f) "COMPANY" means Organic, Inc., a Delaware corporation.
(g) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means that
the service of an individual to the Company, whether as an Employee, Director or
Consultant, is not interrupted or terminated. The Board or the chief executive
officer of the Company may determine, in that party's sole discretion, whether
Continuous Status as an Employee, Director or Consultant shall be considered
interrupted in the case of: (i) any leave of absence approved by the Board or
the chief executive officer of the Company, including sick leave, military
leave, or any other personal leave; or (ii) transfers between the Company,
Affiliates or their successors.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board.
(k) "EMPLOYEE" means any person, including Officers and Directors, employed
by the Company or any Affiliate of the Company. Neither service as a Director
nor payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock of the Company determined as follows and in each case in a manner
consistent with Section 260.140.50 of Title 10 of the California Code of
Regulations:
(1) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap, the Fair Market Value of a share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in Common Stock) on the last market trading day prior
to the day of determination, as reported in the Wall Street Journal or such
other source as the Board deems reliable; or
(2) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Board.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock Option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
2
<PAGE> 3
(o) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the Securities Law.
(p) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a
"non-employee director" for purposes of Rule 16b-3.
(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(r) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means a stock option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. Each
Option Agreement shall be subject to the terms and conditions of the Plan.
(u) "OPTIONEE" means a person to whom an Option is granted pursuant to the
Plan or, if applicable, such other person who holds an outstanding Option.
(v) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
the Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(w) "PLAN" means this 1997 Stock Option Plan.
(x) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3 as in effect with respect to the Company at the time discretion is
being exercised regarding the Plan.
(y) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3
<PAGE> 4
(z) "SECURITIES LAW" means the California Corporate Securities Law of 1968.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible under
the Plan shall be granted Options; when and how each Option shall be granted;
whether an Option will be an Incentive Stock Option or a Nonstatutory Stock
Option; the provisions of each Option granted (which need not be identical),
including the time or times such Option may be exercised in whole or in part;
and the number of shares for which an Option shall be granted to each such
person.
(2) To construe and interpret the Plan and Options granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Option Agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective.
(3) To amend the Plan or an Option as provided in Section 11.
(4) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company.
(c) The Board may delegate administration of the Plan to a Committee of the
Board composed of not fewer than two (2) members (the "Committee"), all of the
members of which Committee may be, in the discretion of the Board, Non-Employee
Directors and/or Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Non-Employee Directors and/or
Outside Directors any of the administrative powers the Committee is authorized
to exercise (and references in this Plan to the Board shall thereafter be to the
Committee or such a subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest in
the Board the administration of the Plan. Additionally, prior to the Listing
Date, and notwithstanding anything to the contrary contained herein, the Board
may delegate administration of the Plan to any person or persons and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated. Notwithstanding anything in this Section 3 to the contrary, the Board
or the Committee may delegate to a committee of one or more members of the Board
the authority to grant Options to eligible persons who (1) are not then subject
to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered
Employees and are not expected to be Covered Employees at the time of
recognition of income resulting from such Option, or (ii) not persons with
respect to whom the Company wishes to comply with Section 162(m) of the Code.
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4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to Options shall not
exceed in the aggregate Seven Million Five Hundred Seventy Five Thousand
(7,575,000) shares of Common Stock. If any Option shall for any reason expire or
otherwise terminate, in whole or in part, without having been exercised in full,
the stock not purchased under such Option shall revert to and again become
available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees. Nonstatutory
Stock Options may be granted only to Employees, Directors or Consultants.
(b) No person shall be eligible for the grant of an Option if, at the time
of grant, such person owns (or is deemed to own pursuant to Section 424(d) of
the Code) stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or of any of its Affiliates
unless the exercise price of such Option is at least one hundred ten percent
(110%) of the Fair Market Value of such stock at the date of grant and the
Option is not exercisable after the expiration of five (5) years from the date
of grant.
(c) Subject to the provisions of Section 10 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Options covering
more than Three Hundred Eighteen Thousand Seven Hundred Fifty (318,750) shares
of Common Stock in any calendar year. This subsection 5(c) shall not apply prior
to the Listing Date and, following the Listing Date, shall not apply until (i)
the earliest of: (A) the first material modification of the Plan (including any
increase to the number of shares reserved for issuance under the Plan in
accordance with Section 4); (B) the issuance of all of the shares of Common
Stock reserved for issuance under the Plan; (C) the expiration of the Plan; or
(D) the first meeting of stockholders at which directors are to be elected that
occurs after the close of the third calendar year following the calendar year in
which occurred the first registration of an equity security under Section 12 of
the Exchange Act; or (ii) such other date required by Section 162(m) of the Code
and the rules and regulations promulgated thereunder.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
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(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted; the exercise price of
each Nonstatutory Stock Option shall be not less than eighty-five percent (85%)
of the Fair Market Value of the stock subject to the Option on the date the
Option is granted. Notwithstanding the foregoing, an Option (whether an
Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an
exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another Option
in a manner satisfying the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other Common Stock held for the
requisite period to avoid a charge to the Company's earnings, (B) according to a
deferred payment or other arrangement (which may include, without limiting the
generality of the foregoing, the use of other Common Stock) with the person to
whom the Option is granted or to whom the Option is transferred pursuant to
subsection 6(d), or (C) in any other form of legal consideration that may be
acceptable to the Board. In the case of any deferred payment arrangement,
interest shall be compounded at least annually and shall be charged at the
minimum rate of interest necessary to avoid the treatment as interest, under any
applicable provisions of the Code, of any amounts other than amounts stated to
be interest under the deferred payment arrangement. In addition, the "par value"
of the stock will be paid in cash to the extent required by applicable law.
(d) TRANSFERABILITY. An Option shall not be transferable except by will or
by the laws of descent and distribution, and shall be exercisable during the
lifetime of the person to whom the Option is granted only by such person. The
person to whom the Option is granted may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionee, shall thereafter be entitled to exercise
the Option.
(e) VESTING. The total number of shares of stock subject to an Option may,
but need not, be allotted in periodic installments (which may, but need not, be
equal). The Option Agreement may provide that from time to time during each of
such installment periods, the Option may become exercisable ("vest") with
respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual Options may vary but, to the extent necessary under then applicable
law, in each case will provide for vesting of at least twenty percent (20%) per
year of the total number of shares subject to the Option. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
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(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or any
person to whom an Option is transferred under subsection 6(d), as a condition of
exercising any such Option, (1) to give written assurances satisfactory to the
Company as to the Optionee's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone or together with the
purchaser representative, the merits and risks of exercising the Option; and (2)
to give written assurances satisfactory to the Company stating that such person
is acquiring the stock subject to the Option for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise of the Option has been registered under a then currently effective
registration statement under the Securities Act, or (ii) as to any particular
requirement, a determination is made by counsel for the Company that such
requirement need not be met in the circumstances under the then applicable
securities laws. The Company may require the Optionee to provide such other
representations, written assurances or information which the Company shall
determine is necessary, desirable or appropriate to comply with applicable
securities and other laws as a condition of granting an Option to such Optionee
or permitting the Optionee to exercise such Option. The Company may, upon advice
of counsel to the Company, place legends on stock certificates issued under the
Plan as such counsel deems necessary or appropriate in order to comply with
applicable securities laws, including, but not limited to, legends restricting
the transfer of the stock.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability), the
Optionee may exercise his or her Option (to the extent that the Optionee was
entitled to exercise it as of the date of termination) but only within such
period of time ending on the earlier of (i) the date three (3) months following
the termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer period as specified in the Option Agreement), or (ii)
the expiration of the term of the Option as set forth in the Option Agreement.
If, at the date of termination, the Optionee is not entitled to exercise his or
her entire Option, the shares covered by the unexercisable portion of the Option
shall revert to and again become available for issuance under the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified in the Option Agreement, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as
an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer period as specified in the
Option Agreement), or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the
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shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or
within a period specified in the Option Agreement after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the option
as of the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the Option upon the Optionee's death pursuant to subsection 6(d),
but only within the period ending on the earlier of (i) the date twelve (12)
months following the date of death (or such longer or shorter period, which in
no event shall be less than six (6) months, specified in the Option Agreement),
or (ii) the expiration of the term of such Option as set forth in the Option
Agreement. If, at the time of death, the Optionee was not entitled to exercise
his or her entire Option, the shares covered by the unexercisable portion of the
Option shall revert to and again become available for issuance under the Plan.
If, after death, the Option is not exercised within the time specified herein,
the Option shall terminate, and the shares covered by such Option shall revert
to and again become available for issuance under the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased shall be subject to a repurchase right in favor of the Company, with
the repurchase price to be equal to the original purchase price of the stock, or
to any other restriction the Board determines to be appropriate; provided,
however, that (i) the right to repurchase at the original purchase price shall
lapse at a minimum rate of twenty percent (20%) per year over five (5) years
from the date the Option was granted, and (ii) such right shall be exercisable
only within (A) the ninety (90) day period following the termination of
employment or the relationship as a Director or Consultant, or (B) such longer
period as may be agreed to by the Company and the Optionee (for example, for
purposes of satisfying the requirements of Section 1202(c)(3) of the Code
(regarding "qualified small business stock")), and (iii) such right shall be
exercisable only for cash or cancellation of purchase money indebtedness for the
shares. Should the right of repurchase be assigned by the Company, the assignee
shall pay the Company cash equal to the difference between the original purchase
price and the stock's Fair Market Value if the original purchase price is less
than the stock's Fair Market Value.
(k) RIGHT OF REPURCHASE. The Option may, but need not, include a provision
whereby the Company may elect, prior to the Listing Date, to repurchase all or
any part of the vested shares exercised pursuant to the Option; provided,
however, that (i) such repurchase right shall be exercisable only within (A) the
ninety (90) day period following the termination of employment or the
relationship as a Director or Consultant, or (B) such longer period as may be
agreed to by the Company and the Optionee (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code (regarding
"qualified small business stock")), (ii) such repurchase right shall be
exercisable for less than all of the vested shares only with the Optionee's
consent, and (iii) such right shall be exercisable only for cash or cancellation
of purchase money indebtedness for the shares at a repurchase price equal to the
greater of (A) the stock's Fair Market Value at the time of such termination or
(B) the original purchase price paid for such shares by the Optionee. Should the
right of repurchase be assigned by the Company, the
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assignee shall pay the Company cash equal to the difference between the original
purchase price and the stock's Fair Market Value if the original purchase price
is less than the stock's Fair Market Value.
(l) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionee of the
intent to transfer all or any part of the shares exercised pursuant to the
Option.
(m) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such Option by any of the following means
or by a combination of such means: (1) tendering a cash payment; (2) authorizing
the Company to withhold shares from the shares of Common Stock otherwise
issuable to the Optionee as a result of the exercise of the Option; or (3)
delivering to the Company owned and unencumbered shares of Common Stock.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep available at
all times the number of shares of stock required to satisfy such Options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Option or any stock issued or issuable
pursuant to any such Option. If, after reasonable efforts, the Company is unable
to obtain from any such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful issuance and sale of
stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options unless and until
such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
9. MISCELLANEOUS.
(a) Subject to any applicable provisions of the Securities Law and related
regulations relied upon as a condition of issuing securities pursuant to the
Plan, the Board shall have the power to accelerate the time at which an Option
may first be exercised or the time during which an Option or any part thereof
will vest pursuant to subsection 6(e), notwithstanding the provisions in the
Option stating the time at which it may first be exercised or the time during
which it will vest.
(b) Neither an Optionee nor any person to whom an Option is transferred
under subsection 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with
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respect to, any shares subject to such Option unless and until such person has
satisfied all requirements for exercise of the Option pursuant to its terms.
(c) Throughout the term of any Option, the Company shall deliver to the
holder of such Option, not later than one hundred twenty (120) days after the
close of each of the Company's fiscal years during the Option term, a balance
sheet and an income statement. This Section shall not apply (i) after the
Listing Date, or (ii) when issuance is limited to key employees whose duties in
connection with the Company assure them access to equivalent information.
(d) Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee, Director, Consultant or
Optionee any right to continue in the employ of the Company or any Affiliate (or
to continue acting as a Director or Consultant or shall affect the right of the
Company or any Affiliate to terminate the employment of any Employee, with or
without cause, to remove any Director as provided in the Company's Bylaws and
the provisions of the Delaware General Corporation Law, or to terminate the
relationship of any Consultant subject to the terms of that Consultant's
agreement with the Company or Affiliate to which such Consultant is providing
services.
(e) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(f) (1) The Board or the Committee shall have the authority to effect, at
any time and from time to time, and with the consent of the affected holders of
Options, (i) the repricing of any outstanding Options under the Plan and/or (ii)
the cancellation of any outstanding Options and the grant in substitution
therefor of new Options under the Plan covering the same or different numbers of
shares of Common Stock, but having an exercise price per share not less than
eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%)
of the Fair Market Value in the case of an Incentive Stock Option or, in the
case of a ten percent (10%) stockholder (as defined in subsection 5(b)), not
less than one hundred and ten percent (110%) of the Fair Market Value) per share
of Common Stock on the new grant date.
(2) shares subject to an Option canceled under this subsection
9(f) shall continue to be counted, for the applicable period in which it was
granted, against the maximum award of Options permitted to be granted pursuant
to subsection 5(c) of the Plan. The repricing of an Option under this subsection
9(f), resulting in a reduction of the exercise price, shall be deemed to be a
cancellation of the original Option and the grant of a substitute Option; in the
event of such repricing, both the original and the substituted Options shall be
counted for the applicable period against the maximum awards of Options
permitted to be granted pursuant to subsection 5(c) of the Plan. The provisions
of this subsection 9(f)(2) shall be applicable only to the extent required by
Section 162(m) of the Code.
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10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any Option (through merger, consolidation, reorganization, recapitalization,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the type(s) and maximum
number of securities subject to the Plan pursuant to subsection 4(a) and the
maximum number of securities subject to award to any person during any calendar
year pursuant to subsection 5(c), and the outstanding Options will be
appropriately adjusted in the type(s) and number of securities and price per
share of stock subject to such outstanding Options. Such adjustments shall be
made by the Board or Committee, the determination of which shall be final,
binding and conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then: (i) any surviving or acquiring corporation shall assume Options
outstanding under the Plan or shall substitute similar options (including an
option to acquire the same consideration paid to stockholders in the transaction
described in this Subsection 10(b)) for those outstanding under the Plan, or
(ii) in the event any surviving or acquiring corporation refuses to assume such
Options or to substitute similar Options for those outstanding under the Plan,
(A) with respect to Options held by persons then performing services as
Employees, Directors or Consultants and subject to any applicable provisions of
the Securities Law and related regulations relied upon as a condition of issuing
securities pursuant to the Plan, the vesting of such Options and the time during
which such Options may be exercised shall be accelerated prior to such event and
the Options terminated if not exercised after such acceleration and at or prior
to such event, and (B) with respect to any other Options outstanding under the
Plan, such Options shall be terminated if not exercised prior to such event. The
Board shall use its best efforts to provide Optionees with prior notice of such
transaction.
11. AMENDMENT OF THE PLAN AND OPTIONS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 10 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 under the
Exchange Act or any Nasdaq or securities exchange listing requirements.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations promulgated thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
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(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide Optionees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Incentive Stock Options granted under it into
compliance therewith.
(d) Rights and obligations under any Option granted before amendment of the
Plan shall not be impaired by any amendment of the Plan unless (i) the Company
requests the consent of the person to whom the Option was granted and (ii) such
person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Options; provided, however, that the rights and obligations
under any Option shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Option was granted and
(ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on April 24, 2007, which shall be within
ten (10) years from the date the Plan is adopted by the Board or approved by the
stockholders of the Company, whichever is earlier. No Options may be granted
under the Plan while the Plan is suspended or after it is terminated
(b) All nights and obligations under any Option granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the written consent of the person to whom the Option was granted.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
14. CHANGE IN CONTROL.
(a) Subject to the provisions of Section 10 (relating to the adjustment of
shares), and except as otherwise provided in the Plan or the Option Agreement
reflecting the applicable Option, upon the occurrence of a Change in Control:
(1) If an Optionee who is employed by the Company or an Affiliate at
the time of a Change in Control holds one or more outstanding Options, such
Optionee shall be credited with two years of additional vesting service for
purposes of the vesting of Options, and the vesting of any Common Stock
purchased by the Optionee under an Option.
(2) If an Optionee who is employed by the Company or an Affiliate at
the time of a Change in Control holds any Option granted under the Plan and
prior to the one-year anniversary of the Change in Control such Optionee is
either (i) terminated by the Company for
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reasons other than Cause or (ii) terminates employment for Good Reason, such
Optionee shall become fully vested in any Options granted under the Plan and
shall have the greater of (i) 90 days from the date of such termination or (ii)
the period otherwise specified for exercise after termination had the Optionee
been fully vested in the Options on the date of termination to exercise such
Options; provided, however, that in no event shall the Option be exercisable at
a date that is later than the date it would have been exercisable if the
Optionee had remained employed by the Company or an Affiliate.
(b) For purposes of the Plan, the term "Change in Control" means the
occurrence, after an initial public offering of the stock of the Company of the
events described in any of paragraphs (1), (2), (3), (4) or (5) below:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
twenty-five percent (25%) or more of either (i) the then outstanding shares of
common stock of the Company (the "Outstanding Company Common Stock"), or (ii)
the combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that for purposes
of this subsection (i), the following acquisitions shall not constitute a Change
in Control: (A) any acquisition directly from the Company (excluding any
acquisition resulting from the exercise of an exercise, conversion or exchange
privilege unless the security being so exercised, converted or exchanged was
acquired directly from the Company), (B) any acquisition by the Company, (C) any
acquisition by an employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company (a
"Company Plan"), (D) any acquisition by an underwriter temporarily holding
securities pursuant to an offering of such securities; or (E) any acquisition by
any corporation pursuant to a transaction which complies with subsections
(b)(3)(A), (b)(3)(B), and (b)(3)(C) of this definition; provided further, that
for purposes of clause (B), if any Person (other than the Company or any Company
Plan) shall become the beneficial owner of twenty-five percent (25%) or more of
the Outstanding Company Common Stock or twenty-five percent (25%) or more of the
Outstanding Company Voting Securities by reason of an acquisition by the
Company, and such Person shall, after such acquisition by the Company, become
the beneficial owner of any additional shares of the Outstanding Company Common
Stock or any additional Outstanding Company Voting Securities (other than
pursuant to any dividend reinvestment plan or arrangement maintained by the
Company) and such beneficial ownership is publicly announced, such additional
beneficial ownership shall constitute a Change in Control.
(2) Individuals who, as of the date hereof, constitute the
Board of Directors of the Company (for purposes of this subsection (b), the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Incumbent Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company shareholders, was approved by a vote of a least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest (as such terms
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are used in Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors of the Company.
(3) Consummation, including receipt of any necessary regulatory
approval, of (i) a reorganization, merger or consolidation involving the Company
or (ii) the sale or other disposition of more than 50% of the operating assets
of the Company (determined on a consolidated basis), other than in connection
with a sale-leaseback or other arrangement resulting in the continued
utilization of such assets (or the operating products of such assets) by the
Company (any transaction described in part (i) or (ii) being referred to as a
"Corporate Transaction"); excluding, however, a Corporate Transaction pursuant
to which all of paragraphs (A), (B), and (C) below are applicable:
(A) All or substantially of the individuals and entities who are
the beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such Corporate
Transaction beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Corporate Transaction (including, without limitation, a
corporation which, as a result of such transaction, owns the Company or all or
substantially all of the assets of the Company either directly or through one or
more subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Corporate Transaction, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be.
(B) No Person (other than the Company, any Company Plan or
related trust, the corporation resulting from such Corporate Transaction, and
any Person which beneficially owned, immediately prior to such Corporate
Transaction, directly or indirectly, twenty-five percent (25%) or more than the
Outstanding Company Common Stock or the Outstanding Company Voting Securities,
as the case may be) will beneficially own, directly or indirectly, twenty-five
percent (25%) or more of, respectively, the then outstanding common stock of the
corporation resulting from such Corporate Transaction or the combined voting
power of the then outstanding voting securities of such corporation.
(C) Individuals who were members of the Incumbent Board will
constitute at least a majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction.
(4) A tender offer (for which a filing has been made with the
Securities and Exchange Commission (the "SEC") which purports to comply with the
requirements of Section 14(d) of the Exchange Act and the corresponding SEC
rules) is made for the stock of the Company, which has not been negotiated and
approved by the Board, provided that in case of a tender offer described in this
subsection (b)(4), the Change in Control will be deemed to have occurred upon
the first to occur of (A) any time during the offer period when the Person (as
defined in subsection (b)(1), above) making the offer beneficially owns or has
accepted for payment stock of the Company with 25% or more of the combined
voting power of the then
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<PAGE> 15
Outstanding Company Voting Securities or (B) 3 business days before the offer is
to terminate, unless the offer is withdrawn first, if the Person making the
offer could own, by the terms of the offer plus any shares beneficially owned by
that Person, stock with 50% or more of the combined voting power of the then
Outstanding Company Voting Securities when the offer terminates.
(5) Approval by the shareholders of the Company of a plan of
complete liquidation or dissolution of the Company.
(c) For purposes of the Plan the term "Cause" shall mean any of the
following: (1) the willful and continued failure by the Optionee to
substantially perform his duties, other than by reason of his being Disabled (as
defined below), (2) the willful engaging by the Optionee in conduct which is
demonstrably and materially injurious to the Company or its affiliates, (3)
conduct by the Optionee that involves theft or fraud or, dishonesty in
connection with his duties, (4) Optionee's violation of a non-compete or
confidentiality agreement, or (5) conviction of a felony involving moral
turpitude.
(d) For purposes of the Plan, the term "Good Reason" shall mean any of the
following which occur without the Optionee's consent and which are not corrected
by the Company within 10 days of written notice to the Company by the Optionee:
(1) a diminution of the Optionee's duties or the assignment to him of duties
that are inconsistent in any substantial respect with the position, authority or
responsibilities associated with his position, (2) a reduction in the Optionee's
salary rate or bonus potential; or (3) a relocation of the Optionee, that occurs
after a Change of Control and without the Optionee's consent, of over 100 miles
from the Optionee's primary employment location as of the date of the Change of
Control, except for required travel on Company business to an extent
substantially consistent with the Optionee's business travel obligations prior
to the date of the Change of Control.
(e) The term "Disability" shall mean the inability of the Optionee, after
reasonable accommodation, to continue to perform his duties on a full-time basis
as a result of mental or physical illness, sickness or injury and the Company
determines that such disability is of a long-term nature.
15. POTENTIAL CHANGE IN CONTROL.
If the Optionee's employment is terminated by the Company without Cause
during a Potential Change in Control, and such date of termination occurs not
more than 60 days prior to the occurrence of a Change in Control, then the
Optionee shall be entitled to receive the benefits that he would have received
under Section 14, determined as though his employment was terminated by the
Company without Cause immediately after the Change in Control. A "Potential
Change in Control" shall exist during any period in which the circumstances
described in subsections (a), (b), or (c) below exist (provided, however, that a
Potential Change in Control shall cease to exist not later than the occurrence
of a Change in Control):
(a) The Company enters into an agreement, the consummation of which would
result in the occurrence of a Change in Control, provided that a Potential
Change in Control described
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<PAGE> 16
in this subsection 15(a) shall cease to exist upon the expiration or other
termination of all such agreements.
(b) Any person (including the Company) publicly announces an intention to
take or to consider taking actions the consummation of which would constitute a
Change in Control; provided that a Potential Change in Control described in this
subsection 15(b) shall cease to exist upon the withdrawal of such intention, or
upon a reasonable determination by the Board that there is no reasonable chance
that such actions would be consummated.
(c) The Board adopts a resolution to the effect that, for purposes of the
Plan, a Potential Change in Control exists; provided that a Potential Change in
Control described in this paragraph 15(c) shall cease to exist upon a reasonable
determination by the Board that the reasons that gave rise to the resolution
providing for the existence of a Potential Change in Control have expired or no
longer exist.
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<PAGE> 17
INCENTIVE STOCK OPTION
[[1]], Optionee:
Organic Online, Inc. (the "Company"), pursuant to its 1997 Stock Option
Plan, as amended (the "Plan"), has granted to you, the optionee named above, an
option to purchase shares of the common stock of the Company ("Common Stock").
This option is intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's employees
(including officers), directors or consultants and is intended to comply with
the provisions of (i) Rule 701 promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the
"Securities Act") and (ii) Section 25102(o) of the California Corporate
Securities Law of 1968. Defined terms not explicitly defined in this option but
defined in the Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. Total Number of Shares Subject to this Option. THE TOTAL NUMBER OF SHARES
OF COMMON STOCK SUBJECT TO THIS OPTION IS [[2]].
2. Vesting. SUBJECT TO THE LIMITATIONS CONTAINED HEREIN, TWENTY-FIVE PERCENT
(25%) OF THE SHARES WILL VEST (BECOME EXERCISABLE) ON [[3]] AND THE
REMAINING SHARES WILL VEST IN THIRTY-SIX (36) EQUAL MONTHLY INSTALLMENTS
THEREAFTER UNTIL EITHER (i) YOU CEASE TO PROVIDE SERVICES TO THE COMPANY
FOR ANY REASON, OR (ii) THIS OPTION BECOMES FULLY VESTED.
3. Exercise Price and Method of Payment.
(a) EXERCISE PRICE. The exercise price of this option is $0.88 per share,
being not less than the fair market value of the Common Stock on the date of
grant of this option.
(b) METHOD OF PAYMENT. Payment of the exercise price per share is due in
full upon exercise of all or any part of each installment which has accrued to
you. You may elect, to the extent permitted by applicable statutes and
regulations, to make payment of the exercise price under one of the following
alternatives:
(1) Payment of the exercise price per share in cash (including check)
at the time of exercise;
(2) Payment pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board which, prior to the issuance of Common
Stock, results in either the receipt of cash (or check) by the Company or the
receipt of irrevocable instructions to pay the aggregate exercise price to the
Company from the sales proceeds;
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<PAGE> 18
(3) Provided that at the time of exercise the Company's Common Stock
is publicly traded and quoted regularly in the Wall Street Journal, payment by
delivery of already-owned shares of Common Stock, held for the period required
to avoid a charge to the Company's reported earnings, and owned free and clear
of any liens, claims, encumbrances or security interests, which Common Stock
shall be valued at its fair market value on the date of exercise; or
(4) Provided that the option exercise price for the installment, or
portion thereof, being purchased exceeds $500, payment pursuant to the deferred
payment alternative as described in paragraph 3(c) hereof; or
(5) Payment by a combination of the methods of payment permitted by
subparagraph 3(b)(i) through 3(b)(iv) above.
(c) CONDITIONS OF DEFERRED PAYMENT. In the event that you elect to make
payment of the exercise price pursuant to the deferred payment alternative:
(1) Not less than twenty-five percent (25%) of the aggregate exercise
price shall be due at the time of exercise, not less than twenty-five percent
(25%) of said exercise price, plus accrued interest, shall be due each year
after the date of exercise, and final payment of the remainder of the exercise
price, plus accrued interest, shall be due three (3) years from date of exercise
or, at the Company's election, upon termination of your Continuous Status as an
Employee, Director or Consultant with the Company or an Affiliate of the
Company;
(2) Interest shall be payable at least annually and shall be charged
at the minimum rate of interest necessary to avoid the treatment as interest,
under any applicable provisions of the Code, of any portion of any amounts other
than amounts stated to be interest under the deferred payment arrangement; and
(3) In order to elect the deferred payment alternative, you must, as a
part of your written notice of exercise, give notice of the election of this
payment alternative and, in order to secure the payment of the deferred exercise
price to the Company hereunder, if the Company so requests, you must tender to
the Company a promissory note and a security agreement covering the purchased
shares, both in form and substance satisfactory to the Company, or such other or
additional documentation as the Company may request.
4. Exercise Prior to Vesting Permitted.
(a) CONDITIONS OF EARLY EXERCISE. Subject to the provisions of this option
you may elect, at any time during your Continuous Status as an Employee,
Director or Consultant with the Company or an Affiliate of the Company, to
exercise the option as to any part or all of the shares subject to this option
at any time during the term hereof, including without limitation, a time prior
to the date of earliest exercise ("vesting") stated in paragraph 2 hereof;
provided, however, that:
(1) a partial exercise of this option shall be deemed to cover first
vested shares and then the earliest vesting installment of unvested shares;
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<PAGE> 19
(2) any shares so purchased from installments which have not vested as
of the date of exercise shall be subject to the purchase option in favor of the
Company as described in the Early Exercise Stock Purchase Agreement;
(3) you shall enter into an Early Exercise Stock Purchase Agreement in
the form provided by the Company with a vesting schedule that will result in the
same vesting as if no early exercise had occurred; and
(4) this option shall not be exercisable under this paragraph 4 to the
extent such exercise would cause the aggregate fair market value of any shares
subject to incentive stock options granted you by the Company or any Affiliate
(valued as of their grant date) which would become exercisable for the first
time during any calendar year to exceed $100,000.
(b) EXPIRATION OF EARLY EXERCISE ELECTION. The election provided in this
paragraph 4 to purchase shares upon the exercise of this option prior to the
vesting dates shall cease upon termination of your Continuous Status as an
Employee, Director or Consultant with the Company or an Affiliate of the Company
and may not be exercised after the date thereof.
5. Whole Shares. THIS OPTION MAY ONLY BE EXERCISED FOR WHOLE SHARES.
6. Securities Law Compliance. NOTWITHSTANDING ANYTHING TO THE CONTRARY
CONTAINED HEREIN, THIS OPTION MAY NOT BE EXERCISED UNLESS THE SHARES
ISSUABLE UPON EXERCISE OF THIS OPTION ARE THEN REGISTERED UNDER THE
SECURITIES ACT OR, IF SUCH SHARES ARE NOT THEN SO REGISTERED, THE COMPANY
HAS DETERMINED THAT SUCH EXERCISE AND ISSUANCE WOULD BE EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
7. Term. THE TERM OF THIS OPTION COMMENCES ON JULY 21, 1997, THE DATE OF
GRANT, AND EXPIRES ON JULY 20, 2007 (THE "EXPIRATION DATE"), WHICH DATE
SHALL BE NO MORE THAN TEN (10) YEARS FROM DATE THIS OPTION IS GRANTED,
UNLESS THIS OPTION EXPIRES SOONER AS SET FORTH BELOW OR IN THE PLAN. IN NO
EVENT MAY THIS OPTION BE EXERCISED ON OR AFTER THE EXPIRATION DATE. THIS
OPTION SHALL TERMINATE PRIOR TO THE EXPIRATION DATE AS FOLLOWS: THREE
MONTHS AFTER JANUARY 1, 1998 IF THE TERMINATION OF YOUR CONTINUOUS STATUS
AS AN EMPLOYEE, DIRECTOR OR CONSULTANT WITH THE COMPANY OR AN AFFILIATE OF
THE COMPANY OCCURS PRIOR TO JANUARY 1, 1998, OR THREE MONTHS AFTER THE
TERMINATION OF YOUR CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT WITH THE COMPANY OR AN AFFILIATE OF THE COMPANY IF SUCH
TERMINATION OCCURS AFTER JANUARY 1, 1998, UNLESS ONE OF THE FOLLOWING
CIRCUMSTANCES EXISTS:
(a) Your termination of Continuous Status as an Employee, Director or
Consultant is due to your disability. This option will then expire on the
earlier of the Expiration Date set forth above or twelve (12) months following
such termination of Continuous Status as an Employee, Director or Consultant.
You should be aware that if your disability is not considered a permanent and
total disability within the meaning of Section 422(c)(6) of the Code, and you
exercise this option more than three (3) months following the date of your
termination of employment, your exercise will be treated for tax purposes as the
exercise of a "nonstatutory stock option" instead of an "incentive stock
option."
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<PAGE> 20
(b) Your termination of Continuous Status as an Employee, Director or
Consultant is due to your death or your death occurs within three (3) months
following your termination of Continuous Status as an Employee, Director or
Consultant for any other reason. This option will then expire on the earlier of
the Expiration Date set forth above or twelve (12) months after your death.
(c) If during any part of such three (3)-month period you may not exercise
your option solely because of the condition set forth in paragraph 6 above, then
your option will not expire until the earlier of the Expiration Date set forth
above or until this option shall have been exercisable for an aggregate period
of three (3) months after your termination of Continuous Status as an Employee,
Director or Consultant.
(d) If your exercise of the option within three (3) months after
termination of your Continuous Status as an Employee, Director or Consultant
with the Company or with an Affiliate of the Company would result in liability
under section 16(b) of the Securities Exchange Act of 1934, then your option
will expire on the earlier of (i) the Expiration Date set forth above, (ii) the
tenth (10th) day after the last date upon which exercise would result in such
liability or (iii) six (6) months and ten (10) days after the termination of
your Continuous Status as an Employee, Director or Consultant with the Company
or an Affiliate of the Company.
However, this option may be exercised following termination of Continuous
Status as an Employee, Director or Consultant only as to that number of shares
as to which it was exercisable on the date of termination of Continuous Status
as an Employee, Director or Consultant under the provisions of paragraph 2 of
this option.
In order to obtain the federal income tax advantages associated with an
"incentive stock option," the Code requires that at all times beginning on the
date of grant of the option and ending on the day three (3) months before the
date of the option's exercise, you must be an employee of the Company or an
Affiliate of the Company, except in the event of your death or permanent and
total disability. The Company has provided for continued vesting or extended
exercisability of your option under certain circumstances for your benefit, but
cannot guarantee that your option will necessarily be treated as an "incentive
stock option" if you provide services to the Company or an Affiliate of the
Company as a consultant or exercise your option more than three (3) months after
the date your employment with the Company and all Affiliates of the Company
terminates.
8. Exercise.
(a) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in the form attached hereto or as otherwise
designated by the Company) together with the exercise price to the Secretary of
the Company, or to such other person as the Company may designate, during
regular business hours, together with such additional documents as the Company
may then require pursuant to subsection 6(f) of the Plan.
(b) By exercising this option you agree that:
(1) as a precondition to the completion of any exercise of this
option, the Company may require you to enter an arrangement providing for the
payment by you to the
4
<PAGE> 21
Company of any tax withholding obligation of the Company arising by reason of
(1) the exercise of this option; (2) the lapse of any substantial risk of
forfeiture to which the shares are subject at the time of exercise; or (3) the
disposition of shares acquired upon such exercise;
(2) you will notify the Company in writing within fifteen (15) days
after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of this option that occurs within two (2) years after the
date of this option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of this option; and
(3) the Company (or a representative of the underwriters) may, in
connection with the first underwritten registration of the offering of any
securities of the Company under the Securities Act, require that you not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date of the registration statement of the Company filed
under the Securities Act as may be requested by the Company or the
representative of the underwriters. You further agree that the Company may
impose stoptransfer instructions with respect to securities subject to the
foregoing restrictions until the end of such period.
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<PAGE> 22
9. Transferability. THIS OPTION IS NOT TRANSFERABLE, EXCEPT BY WILL OR BY THE
LAWS OF DESCENT AND DISTRIBUTION, AND IS EXERCISABLE DURING YOUR LIFE ONLY
BY YOU. NOTWITHSTANDING THE FOREGOING, BY DELIVERING WRITTEN NOTICE TO THE
COMPANY, IN A FORM SATISFACTORY TO THE COMPANY, YOU MAY DESIGNATE A THIRD
PARTY WHO, IN THE EVENT OF YOUR DEATH, SHALL THEREAFTER BE ENTITLED TO
EXERCISE THIS OPTION.
10. Option Not a Service Contract. THIS OPTION IS NOT AN EMPLOYMENT CONTRACT
AND NOTHING IN THIS OPTION SHALL BE DEEMED TO CREATE IN ANY WAY WHATSOEVER
ANY OBLIGATION ON YOUR PART TO CONTINUE IN THE EMPLOY OF THE COMPANY, OR OF
THE COMPANY TO CONTINUE YOUR EMPLOYMENT WITH THE COMPANY. IN ADDITION,
NOTHING IN THIS OPTION SHALL OBLIGATE THE COMPANY OR ANY AFFILIATE OF THE
COMPANY, OR THEIR RESPECTIVE STOCKHOLDERS, BOARD OF DIRECTORS, OFFICERS OR
EMPLOYEES TO CONTINUE ANY RELATIONSHIP WHICH YOU MIGHT HAVE AS A DIRECTOR
OR CONSULTANT FOR THE COMPANY OR AFFILIATE OF THE COMPANY.
11. Notices. ANY NOTICES PROVIDED FOR IN THIS OPTION OR THE PLAN SHALL BE GIVEN
IN WRITING AND SHALL BE DEEMED EFFECTIVELY GIVEN UPON RECEIPT OR, IN THE
CASE OF NOTICES DELIVERED BY THE COMPANY TO YOU, FIVE (5) DAYS AFTER
DEPOSIT IN THE UNITED STATES MAIL, POSTAGE PREPAID, ADDRESSED TO YOU AT THE
ADDRESS SPECIFIED BELOW OR AT SUCH OTHER ADDRESS AS YOU HEREAFTER DESIGNATE
BY WRITTEN NOTICE TO THE COMPANY.
12. Governing Plan Document. THIS OPTION IS SUBJECT TO ALL THE PROVISIONS OF
THE PLAN, A COPY OF WHICH IS ATTACHED HERETO AND ITS PROVISIONS ARE HEREBY
MADE A PART OF THIS OPTION, INCLUDING WITHOUT LIMITATION THE PROVISIONS OF
SECTION 6 OF THE PLAN RELATING TO OPTION PROVISIONS, AND IS FURTHER SUBJECT
TO ALL INTERPRETATIONS, AMENDMENTS, RULES AND REGULATIONS WHICH MAY FROM
TIME TO TIME BE PROMULGATED AND ADOPTED PURSUANT TO THE PLAN. IN THE EVENT
OF ANY CONFLICT BETWEEN THE PROVISIONS OF THIS OPTION AND THOSE OF THE
PLAN, THE PROVISIONS OF THE PLAN SHALL CONTROL.
13. Right of First Refusal. NO OPTIONEE SHALL SELL, ASSIGN, PLEDGE, OR IN ANY
MANNER TRANSFER ANY OF THE SHARES OF STOCK OF THE COMPANY OR ANY RIGHT OR
INTEREST THEREIN, WHETHER VOLUNTARILY OR BY OPERATION OF LAW, OR BY GIFT OR
OTHERWISE, EXCEPT BY A TRANSFER WHICH MEETS THE REQUIREMENTS SET FORTH
HEREIN:
(a) If the optionee desires to sell or otherwise transfer any of its shares
of stock acquired upon exercise of this option in an "arms-length" transaction,
then the optionee shall first give written notice thereof to the Company. The
notice shall name the proposed transferee and state the number of shares to be
transferred, the proposed consideration, and all other terms and conditions of
the proposed transfer.
(b) For thirty (30) days following receipt of such notice, the Company
shall have the option to purchase all (by not less than all) of the shares
specified in the notice at the price and upon the terms set forth in such
notice; provided, however, that, with the consent of the optionee, the Company
shall have the option to purchase a lesser portion of the shares specified in
said notice at the price and upon the terms set forth therein. In the event of a
gift, property settlement or other transfer which would not be considered to
have been made on an "arms length" basis and in which the proposed transferee is
not paying the full price for the shares, the price shall be
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<PAGE> 23
deemed to be the Fair Market Value of the stock at such time as determined in
good faith by the Board. In the event the Company elects to purchase all of the
shares or, with consent of the optionee, a lesser portion of the shares, it
shall give written notice to the transferring optionee of its election and
settlement for said shares shall be made as provided below in paragraph (d).
(c) The Company may assign its rights hereunder.
(d) In the event the Company and/or its assignee(s) elect to acquire any of
the shares of the transferring optionee as specified in said transferring
optionee's notice, the Secretary of the Company shall so notify the transferring
optionee and settlement thereof shall be made in cash within thirty (30) days
after the Secretary of the Company receives said transferring optionee's notice;
provided that if the terms of payment set forth in said transferring optionee's
notice were other than cash against delivery, the Company and/or its assignee(s)
shall pay for said shares on the same terms and conditions set forth in said
transferring optionee's notice.
(e) In the event the Company and/or its assignees(s) do not elect to
acquire all of the shares specified in the transferring optionee's notice, said
transferring optionee may, within the sixty (60)-day period following the
expiration of the option rights granted to the Company and/or its assignees(s)
herein, transfer the shares specified in said transferring optionee's notice
which were not acquired by the Company and/or its assignees(s) as specified in
said transferring optionee's notice.
(f) Notwithstanding anything to the contrary contained herein, the
following transaction shall be exempt from the provisions of this paragraph 13:
an optionee's bona fide pledge or mortgage of any shares with a commercial
lending institution, provided that any subsequent transfer of said shares by
said institution shall be conducted in the manner set forth in this paragraph
13.
In any such case, the transferee, assignee, or other recipient shall
receive and hold such stock subject to the provisions of this paragraph 13, and
there shall be no further transfer of such stock except in accord with this
paragraph 13.
(g) The provisions of this paragraph 13 may be waived with respect to any
transfer either by the Company, upon duly authorized action of its Board, or by
the stockholders, upon the express written consent of the owners of a majority
of the voting power of the Company (excluding the votes represented by those
shares to be transferred by the transferring optionee).
(h) Any sale or transfer, or purported sale or transfer, of securities of
the Company shall be null and void unless the terms, conditions, and provisions
of this paragraph 13 are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate upon the date
securities of the Company are first offered to the public pursuant to a
registration statement filed with, and declared effective by, the SEC under the
Securities Act.
(j) The certificates representing shares of stock of the Company shall bear
on their face the following legend so long as the foregoing right of first
refusal remains in effect:
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<PAGE> 24
"The shares represented by this Certificate are subject to a right of first
refusal option in favor of the Corporation and/or its Assignee(s)."
Dated July 21, 1997.
Very truly yours,
Organic Online, Inc.
By:__________________________________
Duly authorized on behalf of the
Board of Directors
ATTACHMENTS:
1997 Stock Option Plan
Notice of Exercise
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<PAGE> 25
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its Affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) the options previously granted and delivered to the undersigned
under stock option plans of the Company, and (ii) the following agreements only:
NONE ____________
(Initial)
OTHER _______________________
_______________________
_______________________
______________________________
OPTIONEE
Address:
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<PAGE> 26
NONSTATUTORY STOCK OPTION
1~, Optionee:
Organic Online, Inc. (the "Company"), pursuant to its 1997 Stock Option
Plan, as amended (the "Plan"), has granted to you, the optionee named above, an
option to purchase shares of the common stock of the Company ("Common Stock").
This option is not intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's employees
(including officers), directors or consultants and is intended to comply with
the provisions of (i) Rule 701 promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the
"Securities Act") and (ii) Section 25102(o) of the California Corporate
Securities Law of 1968. Defined terms not explicitly defined in this agreement
but defined in the Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. THE TOTAL NUMBER OF SHARES
OF COMMON STOCK SUBJECT TO THIS OPTION IS 2~.
2. VESTING. SUBJECT TO THE LIMITATIONS CONTAINED HEREIN, TWENTY-FIVE PERCENT
(25%) OF THE SHARES WILL VEST (BECOME EXERCISABLE) ON 3 ~ AND THE REMAINING
SHARES WILL VEST IN THIRTY-SIX (36) EQUAL MONTHLY INSTALLMENTS THEREAFTER
UNTIL EITHER (i) YOU CEASE TO PROVIDE SERVICES TO THE COMPANY FOR ANY
REASON, OR (ii) THIS OPTION BECOMES FULLY VESTED.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(a) EXERCISE PRICE. The exercise price of this option is $_____ per share,
being not less than eighty-five percent (85%) of the fair market value of the
Common Stock on the date of grant of this option.
(b) METHOD OF PAYMENT. Payment of the exercise price per share is due in
full upon exercise of all or any part of each installment which has accrued to
you. You may elect, to the extent permitted by applicable statutes and
regulations, to make payment of the exercise price under one of the following
alternatives:
(1) Payment of the exercise price per share in cash (including check)
at the time of exercise;
(2) Payment pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board which, prior to the issuance of Common
Stock, results in either the receipt of cash (or check) by the Company or the
receipt of irrevocable instructions to pay the aggregate exercise price to the
Company from the sales proceeds;
<PAGE> 27
(3) Provided that at the time of exercise the Company's Common Stock
is publicly traded and quoted regularly in the Wall Street Journal, payment by
delivery of already-owned shares of Common Stock, held for the period required
to avoid a charge to the Company's reported earnings, and owned free and clear
of any liens, claims, encumbrances or security interests, which Common Stock
shall be valued at its fair market value on the date of exercise;
(4) Provided that the option exercise price for the installment, or
portion thereof, being purchased exceeds five hundred dollars ($500), payment
pursuant to the deferred payment alternative as described in paragraph 3(c)
hereof; or
(5) Payment by a combination of the methods of payment permitted by
subparagraph 3(b)(i) through 3(b)(iv) above.
(c) CONDITIONS OF DEFERRED PAYMENT. In the event that you elect to make
payment of the exercise price pursuant to the deferred payment alternative:
(1) Not less than twenty-five percent (25%) of the aggregate exercise
price shall be due at the time of exercise, not less than twenty-five percent
(25%) of said exercise price, plus accrued interest, shall be due each year
after the date of exercise, and final payment of the remainder of the exercise
price, plus accrued interest, shall be due three (3) years from date of exercise
or, at the Company's election, upon termination of your Continuous Status as an
Employee, Director or Consultant with the Company or an Affiliate of the
Company;
(2) Interest shall be payable at least annually and shall be charged
at the minimum rate of interest necessary to avoid the treatment as interest,
under any applicable provisions of the Code, of any portion of any amounts other
than amounts stated to be interest under the deferred payment arrangement; and
(3) In order to elect the deferred payment alternative, you must, as a
part of your written notice of exercise, give notice of the election of this
payment alternative and, in order to secure the payment of the deferred exercise
price to the Company hereunder, if the Company so requests, you must tender to
the Company a promissory note and a security agreement covering the purchased
shares, both in form and substance satisfactory to the Company, or such other or
additional documentation as the Company may request.
4. EXERCISE PRIOR TO VESTING PERMITTED.
(a) CONDITIONS OF EARLY EXERCISE. Subject to the provisions of this option
you may elect, at any time during your Continuous Status as an Employee,
Director or Consultant with the Company or an Affiliate of the Company, to
exercise the option as to any part or all of the shares subject to this option
at any time during the term hereof, including without limitation, a time prior
to the date of earliest exercise ("vesting") stated in paragraph 2 hereof;
provided, however, that:
(1) a partial exercise of this option shall be deemed to cover first
vested shares and then the earliest vesting installment of unvested shares;
2
<PAGE> 28
(2) any shares so purchased from installments which have not vested as
of the date of exercise shall be subject to the purchase option in favor of the
Company as described in the Early Exercise Stock Purchase Agreement; and
(3) you shall enter into an Early Exercise Stock Purchase Agreement in
the form provided by the Company with a vesting schedule that will result in the
same vesting as if no early exercise had occurred.
(b) EXPIRATION OF EARLY EXERCISE ELECTION. The election provided in this
paragraph 4 to purchase shares upon the exercise of this option prior to the
vesting dates shall cease upon termination of your Continuous Status as an
Employee, Director or Consultant with the Company or an Affiliate of the Company
and may not be exercised after the date thereof.
5. WHOLE SHARES. THIS OPTION MAY ONLY BE EXERCISED FOR WHOLE SHARES.
6. SECURITIES LAW COMPLIANCE. NOTWITHSTANDING ANYTHING TO THE CONTRARY
CONTAINED HEREIN, THIS OPTION MAY NOT BE EXERCISED UNLESS THE SHARES
ISSUABLE UPON EXERCISE OF THIS OPTION ARE THEN REGISTERED UNDER THE
SECURITIES ACT OR, IF SUCH SHARES ARE NOT THEN SO REGISTERED, THE COMPANY
HAS DETERMINED THAT SUCH EXERCISE AND ISSUANCE WOULD BE EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
7. TERM. THE TERM OF THIS OPTION COMMENCES ON _______________________, THE
DATE OF GRANT, AND EXPIRES ON __________________________ (THE "EXPIRATION
DATE"), WHICH DATE SHALL BE NO MORE THAN TEN (10) YEARS FROM DATE THIS
OPTION IS GRANTED, UNLESS THIS OPTION EXPIRES SOONER AS SET FORTH BELOW OR
IN THE PLAN. IN NO EVENT MAY THIS OPTION BE EXERCISED ON OR AFTER THE
EXPIRATION DATE. THIS OPTION SHALL TERMINATE PRIOR TO THE EXPIRATION DATE
AS FOLLOWS: THREE MONTHS AFTER JANUARY 1, 1998 IF THE TERMINATION OF YOUR
CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT WITH THE COMPANY
OR AN AFFILIATE OF THE COMPANY OCCURS PRIOR TO JANUARY 1, 1998, OR THREE
MONTHS AFTER THE TERMINATION OF YOUR CONTINUOUS STATUS AS AN EMPLOYEE,
DIRECTOR OR CONSULTANT WITH THE COMPANY OR AN AFFILIATE OF THE COMPANY IF
SUCH TERMINATION OCCURS AFTER JANUARY 1, 1998, UNLESS ONE OF THE FOLLOWING
CIRCUMSTANCES EXISTS:
(a) Your termination of Continuous Status as an Employee, Director or
Consultant is due to your disability. This option will then expire on the
earlier of the Expiration Date set forth above or twelve (12) months following
such termination of Continuous Status as an Employee, Director or Consultant.
(b) Your termination of Continuous Status as an Employee, Director or
Consultant is due to your death or your death occurs within three (3) months
following your termination of Continuous Status as an Employee, Director or
Consultant for any other reason. This option will then expire on the earlier of
the Expiration Date set forth above or twelve (12) months after your death.
(c) If during any part of such three (3)-month period you may not exercise
your option solely because of the condition set forth in paragraph 6 above, then
your option will not expire until the earlier of the Expiration Date set forth
above or until this option shall have been
3
<PAGE> 29
exercisable for an aggregate period of three (3) months after your termination
of Continuous Status as an Employee, Director or Consultant.
(d) If your exercise of the option within three (3) months after
termination of your Continuous Status as an Employee, Director or Consultant
with the Company or with an Affiliate of the Company would result in liability
under Section 16(b) of the Securities Exchange Act of 1934, then your option
will expire on the earlier of (i) the Expiration Date set forth above, (ii) the
tenth (10th) day after the last date upon which exercise would result in such
liability or (iii) six (6) months and ten (10) days after the termination of
your Continuous Status as an Employee, Director or Consultant with the Company
or an Affiliate of the Company.
However, this option may be exercised following termination of Continuous
Status as an Employee, Director or Consultant only as to that number of shares
as to which it was exercisable on the date of termination of Continuous Status
as an Employee, Director or Consultant under the provisions of paragraph 2 of
this option.
8. EXERCISE.
(a) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to subsection 6(f)
of the Plan.
(b) By exercising this option you agree that:
(1) as a precondition to the completion of any exercise of this
option, the Company may require you to enter an arrangement providing for the
payment by you to the Company of any tax withholding obligation of the Company
arising by reason of (1) the exercise of this option; (2) the lapse of any
substantial risk of forfeiture to which the shares are subject at the time of
exercise; or (3) the disposition of shares acquired upon such exercise. You also
agree that the exercise of this option has not been completed and that the
Company is under no obligation to issue any shares of Common Stock to you until
such an arrangement is established or the Company's tax withholding obligations
are satisfied, as determined by the Company; and
(2) the Company (or a representative of the underwriters) may, in
connection with the first underwritten registration of the offering of any
securities of the Company under the Securities Act, require that you not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date of the registration statement of the Company filed
under the Securities Act as may be requested by the Company or the
representative of the underwriters. You further agree that the Company may
impose stop transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such period.
9. TRANSFERABILITY. THIS OPTION IS NOT TRANSFERABLE, EXCEPT BY WILL OR BY THE
LAWS OF DESCENT AND DISTRIBUTION, AND IS EXERCISABLE DURING YOUR LIFE ONLY
BY YOU. NOTWITHSTANDING THE FOREGOING, BY DELIVERING WRITTEN NOTICE TO THE
COMPANY, IN A
4
<PAGE> 30
FORM SATISFACTORY TO THE COMPANY, YOU MAY DESIGNATE A THIRD PARTY WHO, IN
THE EVENT OF YOUR DEATH, SHALL THEREAFTER BE ENTITLED TO EXERCISE THIS
OPTION.
10. OPTION NOT A SERVICE CONTRACT. THIS OPTION IS NOT AN EMPLOYMENT CONTRACT
AND NOTHING IN THIS OPTION SHALL BE DEEMED TO CREATE IN ANY WAY WHATSOEVER
ANY OBLIGATION ON YOUR PART TO CONTINUE IN THE EMPLOY OF THE COMPANY, OR OF
THE COMPANY TO CONTINUE YOUR EMPLOYMENT WITH THE COMPANY. IN ADDITION,
NOTHING IN THIS OPTION SHALL OBLIGATE THE COMPANY OR ANY AFFILIATE OF THE
COMPANY, OR THEIR RESPECTIVE STOCKHOLDERS, BOARD OF DIRECTORS, OFFICERS OR
EMPLOYEES TO CONTINUE ANY RELATIONSHIP WHICH YOU MIGHT HAVE AS A DIRECTOR
OR CONSULTANT FOR THE COMPANY OR AFFILIATE OF THE COMPANY.
11. NOTICES. ANY NOTICES PROVIDED FOR IN THIS OPTION OR THE PLAN SHALL BE GIVEN
IN WRITING AND SHALL BE DEEMED EFFECTIVELY GIVEN UPON RECEIPT OR, IN THE
CASE OF NOTICES DELIVERED BY THE COMPANY TO YOU, FIVE (5) DAYS AFTER
DEPOSIT IN THE UNITED STATES MAIL, POSTAGE PREPAID, ADDRESSED TO YOU AT THE
ADDRESS SPECIFIED BELOW OR AT SUCH OTHER ADDRESS AS YOU HEREAFTER DESIGNATE
BY WRITTEN NOTICE TO THE COMPANY.
12. GOVERNING PLAN DOCUMENT. THIS OPTION IS SUBJECT TO ALL THE PROVISIONS OF
THE PLAN, A COPY OF WHICH IS ATTACHED HERETO AND ITS PROVISIONS ARE HEREBY
MADE A PART OF THIS OPTION, INCLUDING WITHOUT LIMITATION THE PROVISIONS OF
SECTION 6 OF THE PLAN RELATING TO OPTION PROVISIONS, AND IS FURTHER SUBJECT
TO ALL INTERPRETATIONS, AMENDMENTS, RULES AND REGULATIONS WHICH MAY FROM
TIME TO TIME BE PROMULGATED AND ADOPTED PURSUANT TO THE PLAN. IN THE EVENT
OF ANY CONFLICT BETWEEN THE PROVISIONS OF THIS OPTION AND THOSE OF THE
PLAN, THE PROVISIONS OF THE PLAN SHALL CONTROL.
13. RIGHT OF FIRST REFUSAL. NO OPTIONEE SHALL SELL, ASSIGN, PLEDGE, OR IN ANY
MANNER TRANSFER ANY OF THE SHARES OF STOCK OF THE COMPANY OR ANY RIGHT OR
INTEREST THEREIN, WHETHER VOLUNTARILY OR BY OPERATION OF LAW, OR BY GIFT OR
OTHERWISE, EXCEPT BY A TRANSFER WHICH MEETS THE REQUIREMENTS SET FORTH
HEREIN:
(a) If the optionee desires to sell or otherwise transfer any of his shares
of stock acquired upon exercise of this option in an "arms-length" transaction,
then the optionee shall first give written notice thereof to the Company. The
notice shall name the proposed transferee and state the number of shares to be
transferred, the proposed consideration, and all other terms and conditions of
the proposed transfer.
(b) For thirty (30) days following receipt of such notice, the Company
shall have the option to purchase all (by not less than all) of the shares
specified in the notice at the price and upon the terms set forth in such
notice; provided, however, that, with the consent of the optionee, the Company
shall have the option to purchase a lesser portion of the shares specified in
said notice at the price and upon the terms set forth therein. In the event of a
gift, property settlement or other transfer which would not be considered to
have been made on an "arms-length" basis and in which the proposed transferee is
not paying the full price for the shares, the price shall be deemed to be the
Fair Market Value of the stock at such time as determined in good faith by the
Board. In the event the Company elects to purchase all of the shares or, with
consent of the
5
<PAGE> 31
optionee, a lesser portion of the shares, it shall give written notice to the
transferring optionee of its election and settlement for said shares shall be
made as provided below in paragraph (d).
(c) The Company may assign its rights hereunder.
(d) In the event the Company and/or its assignee(s) elect to acquire any of
the shares of the transferring optionee as specified in said transferring
optionee's notice, the Secretary of the Company shall so notify the transferring
optionee and settlement thereof shall be made in cash within thirty (30) days
after the Secretary of the Company receives said transferring optionee's notice;
provided that if the terms of payment set forth in said transferring optionee's
notice were other than cash against delivery, the Company and/or its assignee(s)
shall pay for said shares on the same terms and conditions set forth in said
transferring optionee's notice.
(e) In the event the Company and/or its assignees(s) do not elect to
acquire all of the shares specified in the transferring optionee's notice, said
transferring optionee may, within the sixty (60)-day period following the
expiration of the option rights granted to the Company and/or its assignees(s)
herein, transfer the shares specified in said transferring optionee's notice
which were not acquired by the Company and/or its assignees(s) as specified in
said transferring optionee's notice.
(f) Notwithstanding anything to the contrary contained herein, the
following transaction shall be exempt from the provisions of this paragraph 13:
a optionee's bona fide pledge or mortgage of any shares with a commercial
lending institution, provided that any subsequent transfer of said shares by
said institution shall be conducted in the manner set forth in this paragraph
13.
In any such case, the transferee, assignee, or other recipient shall
receive and hold such stock subject to the provisions of this paragraph 13, and
there shall be no further transfer of such stock except in accord with this
paragraph 13.
(g) The provisions of this paragraph 13 may be waived with respect to any
transfer either by the Company, upon duly authorized action of its Board, or by
the stockholders, upon the express written consent of the owners of a majority
of the voting power of the Company (excluding the votes represented by those
shares to be transferred by the transferring optionee).
(h) Any sale or transfer, or purported sale or transfer, of securities of
the Company shall be null and void unless the terms, conditions, and provisions
of this paragraph 13 are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate upon the date
securities of the Company are first offered to the public pursuant to a
registration statement filed with, and declared effective by, the SEC under the
Securities Act.
6
<PAGE> 32
(j) The certificates representing shares of stock of the Company shall bear
on their face the following legend so long as the foregoing right of first
refusal remains in effect:
"The shares represented by this Certificate are subject to a right of
first refusal option in favor of the Corporation and/or its Assignee(s).
Dated _____________.
Very truly yours,
Organic Online, Inc.
By: ___________________________________
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
1997 Stock Option Plan
Amendment No. 1 to 1997 Stock Option Plan
Notice of Exercise
7
<PAGE> 33
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option, it sets forth
the entire understanding between the undersigned optionee and the Company and
its Affiliates regarding the acquisition of stock in the Company and supersedes
all prior oral and written agreements on that subject with the exception of (i)
the options previously granted and delivered to the undersigned under stock
option plans of the Company, and (ii) the following agreements only:
NONE __________
(Initial)
OTHER ______________________________
______________________________
______________________________
________________________________
OPTIONEE
Address:________________________
________________________
8
<PAGE> 34
NOTICE OF EXERCISE
Organic Online, Inc.
510 Third Street, Suite 540
San Francisco, CA 94107
Date of Exercise:_____________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
<TABLE>
<CAPTION>
Type of option: Nonstatutory
<S> <C>
Stock option dated: __________________
Number of shares as
to which option is
exercised: __________________
Certificates to be
issued in name of: __________________
Total exercise price: $__________________
Cash payment delivered
herewith: $__________________
Promissory note delivered
herewith: $__________________
Value of _______ shares
of common stock delivered
herewith(1): $__________________
</TABLE>
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the Company's 1997 Stock Option Plan,
as amended, and (ii) to provide for the payment by me to you (in the mariner
designated by you) of your withholding obligation, if any, relating to the
exercise of this option.
- --------
(1) Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.
1
<PAGE> 35
I hereby make the following certifications and representations with
respect to the number of shares of Common Stock (the "Shares"), which are being
acquired by me for my own account upon exercise of the Option as set forth
above:
I acknowledge that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and are deemed to
constitute "restricted securities" under Rule 701 and Rule 144 promulgated under
the Securities Act. I warrant and represent to the Company that I have no
present intention of distributing or selling said Shares, except as permitted
under the Securities Act and any applicable state securities laws.
I further acknowledge that I will not be able to resell the Shares for
at least ninety (90) days after the stock of the Company becomes publicly traded
(i.e., subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended) under Rule 701 and that more
restrictive conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the
Shares subject to the provisions of the Option shall have endorsed thereon
appropriate legends reflecting the foregoing limitations, as well as any legends
reflecting restrictions pursuant to the Company's Articles of Incorporation,
Bylaws and/or applicable securities laws.
I further agree that, if required by the Company (or a representative
of the underwriters) in connection with the first underwritten registration of
the offering of any securities of the Company under the Securities Act, I will
not sell or otherwise transfer or dispose of any shares of Common Stock or other
securities of the Company during such period (not to exceed one hundred eighty
(180) days following the effective date of the registration statement of the
Company filed under the Securities Act as may be requested by the Company or
representatives of the underwriters. I further agree that the Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such period.
Very truly yours,
__________________________________
1~
2
<PAGE> 1
EXHIBIT 10.3
ORGANIC INC. 1999
LONG-TERM STOCK INCENTIVE PLAN
<PAGE> 2
ORGANIC INC. 1999
LONG-TERM STOCK INCENTIVE PLAN
SECTION 1
GENERAL
1.1. Purpose. The Organic Inc. 1999 Long-Term Stock Incentive Plan (the
"Plan") has been established by Organic Inc. (the "Company") to (i) attract and
retain persons eligible to participate in the Plan; (ii) motivate Participants,
by means of appropriate incentives, to achieve long-range goals; (iii) provide
incentive compensation opportunities that are competitive with those of other
similar companies; and (iv) further identify Participants' interests with those
of the Company's other shareholders through compensation that is based on the
Company's common stock; and thereby promote the long-term financial interest of
the Company and the Subsidiaries, including the growth in value of the Company's
equity and enhancement of long-term shareholder return.
1.2. Participation. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
Eligible Individuals (including transferees of Eligible Individuals to the
extent the transfer is permitted by the Plan and the applicable Award
Agreement), those persons who will be granted one or more Awards under the Plan,
and thereby become "Participants" in the Plan.
1.3. Operation, Administration, and Definitions. The operation and
administration of the Plan, including the Awards made under the Plan, shall be
subject to the provisions of Section 4 (relating to operation and
administration). Capitalized terms in the Plan shall be defined as set forth in
the Plan (including the definition provisions of Section 8 of the Plan).
SECTION 2
OPTIONS AND SARS
2.1. Definitions.
(a) The grant of an "Option" entitles the Participant to purchase shares of
Stock at an Exercise Price established by the Committee. Any Option
granted under this Section 2 may be either an incentive stock option (an
"ISO") or a non-qualified option (an "NQO"), as determined in the
discretion of the Committee. An "ISO" is an Option that is intended to
satisfy the requirements applicable to an "incentive stock option"
described in section 422(b) of the Code. An "NQO" is an Option that is
not intended to be an "incentive stock option" as that term is described
in section 422(b) of the Code.
(b) A stock appreciation right (an "SAR") entitles the Participant to
receive, in cash or Stock (as determined in accordance with subsection
2.5), value equal to (or otherwise based on)
<PAGE> 3
the excess of: (a) the Fair Market Value of a specified number of shares
of Stock at the time of exercise; over (b) an Exercise Price established
by the Committee.
2.2. Exercise Price. The "Exercise Price" of each Option and SAR granted
under this Section 2 shall be established by the Committee or shall be
determined by a method established by the Committee at the time the Option or
SAR is granted; provided that, for NQOs and SARs, the Exercise Price shall not
be less than 85% of the Fair Market Value of a share of Stock on the date of
grant, and for ISOs, the Exercise Price shall not be less than 100% of the Fair
Market Value of a share of Stock on the date of grant; and further provided that
the Exercise Price of for an Option or SAR with respect to a share of Stock
shall not be less than the par value of a share of Stock.
2.3. Exercise. An Option and an SAR shall be exercisable in accordance
with such terms and conditions and during such periods as may be established by
the Committee.
2.4. Payment of Option Exercise Price. The payment of the Exercise Price
of an Option granted under this Section 2 shall be subject to the following:
(a) Subject to the following provisions of this subsection 2.4, the full
Exercise Price for shares of Stock purchased upon the exercise of any
Option shall be paid at the time of such exercise (except that, in the
case of an exercise arrangement approved by the Committee and described
in paragraph 2.4(c), payment may be made as soon as practicable after
the exercise).
(b) The Exercise Price shall be payable in cash or by tendering, by either
actual delivery of shares or by attestation, shares of Stock acceptable
to the Committee, and valued at Fair Market Value as of the day of
exercise, or in any combination thereof, as determined by the Committee.
(c) The Committee may permit a Participant to elect to pay the Exercise
Price upon the exercise of an Option by irrevocably authorizing a third
party to sell shares of Stock (or a sufficient portion of the shares)
acquired upon exercise of the Option and remit to the Company a
sufficient portion of the sale proceeds to pay the entire Exercise Price
and any tax withholding resulting from such exercise.
2.5. Settlement of Award. Settlement of Options and SARs is subject to
subsection 4.7.
SECTION 3
OTHER STOCK AWARDS
3.1. Definitions.
-2-
<PAGE> 4
(a) A "Stock Unit" Award is the grant of a right to receive shares of Stock
in the future.
(b) A "Performance Share" Award is a grant of a right to receive shares of
Stock or Stock Units which is contingent on the achievement of
performance or other objectives during a specified period.
(c) A "Performance Unit" Award is a grant of a right to receive a designated
dollar value amount of Stock which is contingent on the achievement of
performance or other objectives during a specified period.
(d) A "Restricted Stock" Award is a grant of shares of Stock, and a
"Restricted Stock Unit" Award is the grant of a right to receive shares
of Stock in the future, with such shares of Stock or right to future
delivery of such shares of Stock subject to a risk of forfeiture or
other restrictions that will lapse upon the achievement of one or more
goals relating to completion of service by the Participant, or
achievement of performance or other objectives, as determined by the
Committee.
3.2. Restrictions on Awards. Each Stock Unit Award, Restricted Stock
Award, Restricted Stock Unit Award, Performance Share Award , and Performance
Unit Award shall be subject to such conditions, restrictions and contingencies
as the Committee shall determine.
SECTION 4
OPERATION AND ADMINISTRATION
4.1. Effective Date. Subject to the approval of the shareholders of the
Company, the Plan shall be effective as of December 15 (the "Effective Date");
provided, however, that to the extent that Awards are granted under the Plan
prior to its approval by shareholders, the Awards shall be contingent on
approval of the Plan by the shareholders of the Company. The Plan shall only
remain in effect until the 10-year anniversary of the date the Plan is adopted
by the Board or the date the Plan is approved by shareholders, whichever is
earlier.
4.2. Shares Subject to Plan. The shares of Stock for which Awards may be
granted under the Plan shall be subject to the following:
(a) The shares of Stock with respect to which Awards may be made under the
Plan shall be shares currently authorized but unissued or currently held
or subsequently acquired by the Company as treasury shares, including
shares purchased in the open market or in private transactions.
(b) Subject to the following provisions of this subsection 4.2, the maximum
number of shares of Stock that may be delivered to Participants and
their beneficiaries under the Plan shall be 3,500,000 shares of Stock,
plus an annual increase on the first day of each of the Company's fiscal
years beginning in 2000 and ending in 2009, equal to the lesser of (i)
-3-
<PAGE> 5
1,000,000 Shares, (ii) four percent (4%) of the Shares outstanding on
the last day of the immediately preceding fiscal year, or (iii) such
lesser number of shares as is determined by the Board.
(c) To the extent provided by the Committee, any Award may be settled in
cash rather than Stock. To the extent any shares of Stock covered by an
Award are not delivered to a Participant or beneficiary because the
Award is forfeited or canceled, or the shares of Stock are not delivered
because the Award is settled in cash or used to satisfy the applicable
tax withholding obligation, such shares shall not be deemed to have been
delivered for purposes of determining the maximum number of shares of
Stock available for delivery under the Plan.
(d) If the exercise price of any stock option granted under the Plan is
satisfied by tendering shares of Stock to the Company (by either actual
delivery or by attestation), only the number of shares of Stock issued
net of the shares of Stock tendered shall be deemed delivered for
purposes of determining the maximum number of shares of Stock available
for delivery under the Plan.
(e) Subject to paragraph 4.2(f), the maximum number of shares of Stock that
may be issued by Options intended to be ISOs shall be 3,500,000 shares.
(f) In the event of a corporate transaction involving the Company
(including, without limitation, any stock dividend, stock split,
extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination or exchange of shares),
the Committee may adjust Awards to preserve the benefits or potential
benefits of the Awards. Action by the Committee may include: (i)
adjustment of the number and kind of shares which may be delivered under
the Plan; (ii) adjustment of the number and kind of shares subject to
outstanding Awards; (iii) adjustment of the Exercise Price of
outstanding Options and SARs; and (iv) any other adjustments that the
Committee determines to be equitable.
4.3. General Restrictions. Delivery of shares of Stock or other amounts
under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall have
no liability to deliver any shares of Stock under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws (including, without
limitation, the requirements of the Securities Act of 1933), and the
applicable requirements of any securities exchange or similar entity.
-4-
<PAGE> 6
(b) To the extent that the Plan provides for issuance of stock certificates
to reflect the issuance of shares of Stock, the issuance may be effected
on a non-certificated basis, to the extent not prohibited by applicable
law or the applicable rules of any stock exchange.
4.4. Tax Withholding. All distributions under the Plan are subject to
withholding of all applicable taxes, and the Committee may condition the
delivery of any shares or other benefits under the Plan on satisfaction of the
applicable withholding obligations. The Committee, in its discretion, and
subject to such requirements as the Committee may impose prior to the occurrence
of such withholding, may permit such withholding obligations to be satisfied
through cash payment by the Participant, through the surrender of shares of
Stock which the Participant already owns, or through the surrender of shares of
Stock to which the Participant is otherwise entitled under the Plan.
4.5. Grant and Use of Awards. In the discretion of the Committee, a
Participant may be granted any Award permitted under the provisions of the Plan,
and more than one Award may be granted to a Participant. Awards may be granted
as alternatives to or replacement of awards granted or outstanding under the
Plan, or any other plan or arrangement of the Company or a Subsidiary (including
a plan or arrangement of a business or entity, all or a portion of which is
acquired by the Company or a Subsidiary). Subject to the overall limitation on
the number of shares of Stock that may be delivered under the Plan, the
Committee may use available shares of Stock as the form of payment for
compensation, grants or rights earned or due under any other compensation plans
or arrangements of the Company or a Subsidiary, including the plans and
arrangements of the Company or a Subsidiary assumed in business combinations.
4.6. Dividends and Dividend Equivalents. An Award (including without
limitation an Option or SAR Award) may provide the Participant with the right to
receive dividend payments or dividend equivalent payments with respect to Stock
subject to the Award (both before and after the Stock subject to the Award is
earned, vested, or acquired), which payments may be either made currently or
credited to an account for the Participant, and may be settled in cash or Stock,
as determined by the Committee. Any such settlements, and any such crediting of
dividends or dividend equivalents or reinvestment in shares of Stock, may be
subject to such conditions, restrictions and contingencies as the Committee
shall establish, including the reinvestment of such credited amounts in Stock
equivalents.
4.7. Settlement of Awards. The obligation to make payments and
distributions with respect to Awards may be satisfied through cash payments, the
delivery of shares of Stock, the granting of replacement Awards, or combination
thereof as the Committee shall determine. Satisfaction of any such obligations
under an Award, which is sometimes referred to as "settlement" of the Award, may
be subject to such conditions, restrictions and contingencies as the Committee
shall determine. The Committee may permit or require the deferral of any Award
payment, subject to such rules and procedures as it may establish, which may
include provisions for the payment or crediting of interest or dividend
equivalents, and may include converting such
-5-
<PAGE> 7
credits into deferred Stock equivalents. Each Subsidiary shall be liable for
payment of cash due under the Plan with respect to any Participant to the extent
that such benefits are attributable to the services rendered for that Subsidiary
by the Participant. Any disputes relating to liability of a Subsidiary for cash
payments shall be resolved by the Committee.
4.8. Transferability. Awards under the Plan are not transferable except
as designated by the Participant by will or by the laws of descent and
distribution.
4.9. Form and Time of Elections. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification, or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.
4.10. Agreement With Company. An Award under the Plan shall be subject
to such terms and conditions, not inconsistent with the Plan, as the Committee
shall, in its sole discretion, prescribe. The terms and conditions of any Award
to any Participant shall be reflected in such form of written document as is
determined by the Committee. A copy of such document shall be provided to the
Participant, and the Committee may, but need not require that the Participant
sign a copy of such document. Such document is referred to in the Plan as an
"Award Agreement" regardless of whether any Participant signature is required.
4.11. Action by Company or Subsidiary. Any action required or permitted
to be taken by the Company or any Subsidiary shall be by resolution of its board
of directors, or by action of one or more members of the board (including a
committee of the board) who are duly authorized to act for the board, or (except
to the extent prohibited by applicable law or applicable rules of any stock
exchange) by a duly authorized officer of such company.
4.12. Gender and Number. Where the context admits, words in any gender
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.
4.13. Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of
participation in the Plan, acquire any right in or title to any assets,
funds or property of the Company or any Subsidiary whatsoever,
including, without limitation, any specific funds, assets, or other
property which the Company or any Subsidiary, in its sole discretion,
may set aside in anticipation of a liability under the Plan. A
Participant shall have only a contractual right to the Stock or amounts,
if any, payable under the Plan, unsecured by any assets of the Company
or any Subsidiary, and nothing contained in the Plan shall constitute a
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<PAGE> 8
guarantee that the assets of the Company or any Subsidiary shall be
sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection as
a Participant will not give any participating employee or other
individual the right to be retained in the employ of the Company or any
Subsidiary or the right to continue to provide services to the Company
or any Subsidiary, nor any right or claim to any benefit under the Plan,
unless such right or claim has specifically accrued under the terms of
the Plan. Except as otherwise provided in the Plan, no Award under the
Plan shall confer upon the holder thereof any rights as a shareholder of
the Company prior to the date on which the individual fulfills all
conditions for receipt of such rights.
4.14. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
SECTION 5
CHANGE IN CONTROL
5.1. Change in Control. Subject to the provisions of paragraph 4.2(f)
(relating to the adjustment of shares), and except as otherwise provided in the
Plan or the Award Agreement reflecting the applicable Award, upon the occurrence
of a Change in Control:
(a) If a Participant who is employed by the Company or an Affiliate at the
time of a Change in Control holds one or more outstanding Options, such
Participant shall be credited with two years of additional vesting
service for purposes of the vesting of Options (regardless of whether in
tandem with SARs), and the vesting of any Stock purchased by the
Participant under an Option.
(b) If a Participant who is employed by the Company or an Affiliate at the
time of a Change in Control holds one or more outstanding SARs, such
Participant shall be credited with two years of additional vesting
service for purposes of the vesting of SARs (regardless of whether in
tandem with Options), and the vesting of any cash or stock acquired by
the Participant under such SAR.
(c) If a Participant who is employed by the Company or an Affiliate at the
time of a Change in Control holds one or more of the following Awards:
Stock Units, Restricted Stock, Restricted Stock Units, or Performance
Shares, such Participant shall be credited with two years of additional
vesting service for purposes of the vesting of all such awards.
(d) If a Participant who is employed by the Company or an Affiliate at the
time of a Change in Control holds any Option or SAR granted under the
Plan and prior to the one-year
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<PAGE> 9
anniversary of the Change in Control such Participant is either (i)
terminated by the Company for reasons other than Cause or (ii)
terminates employment for Good Reason, such Participant shall become
fully vested in any Awards granted under the Plan and shall have the
greater of (i) 90 days from the date of such termination or (ii) the
period otherwise specified for exercise after termination had the
Participant been fully vested in the Awards on the date of termination
to exercise such Awards; provided, however, that in no event shall the
Option or SAR be exercisable at a date that is later than the date it
would have been exercisable if the Participant had remained employed by
the Company or a Subsidiary.
5.2. Potential Change in Control. If the Participant's employment is
terminated by the Company without Cause during a Potential Change in Control,
and such date of termination occurs not more than 60 days prior to the
occurrence of a Change in Control, then the Participant shall be entitled to
receive the benefits that he would have received under paragraph 5.1(d),
determined as though his employment was terminated by the Company without Cause
immediately after the Change in Control. A "Potential Change in Control" shall
exist during any period in which the circumstances described in paragraphs (a),
(b), or (c) below exist (provided, however, that a Potential Change in Control
shall cease to exist not later than the occurrence of a Change in Control):
(a) The Company enters into an agreement, the consummation of which would
result in the occurrence of a Change in Control, provided that a
Potential Change in Control described in this paragraph 5.2(a) shall
cease to exist upon the expiration or other termination of all such
agreements.
(b) Any person (including the Company) publicly announces an intention to
take or to consider taking actions the consummation of which would
constitute a Change in Control; provided that a Potential Change in
Control described in this paragraph 5.2(b) shall cease to exist upon the
withdrawal of such intention, or upon a reasonable determination by the
Board that there is no reasonable chance that such actions would be
consummated.
(c) The Board adopts a resolution to the effect that, for purposes of the
Plan, a Potential Change in Control exists; provided that a Potential
Change in Control described in this paragraph 5.2(c) shall cease to
exist upon a reasonable determination by the Board that the reasons that
gave rise to the resolution providing for the existence of a Potential
Change in Control have expired or no longer exist.
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<PAGE> 10
SECTION 6
COMMITTEE
6.1. Administration. The authority to control and manage the operation
and administration of the Plan shall be vested in a committee (the "Committee")
in accordance with this Section 6. The Committee shall be selected by the Board.
If the Committee does not exist, or for any other reason determined by the
Board, the Board may take any action under the Plan that would otherwise be the
responsibility of the Committee.
6.2. Powers of Committee. The Committee's administration of the Plan
shall be subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select from among the Eligible Individuals
those persons who shall receive Awards, to determine the time or times
of receipt, to determine the types of Awards and the number of shares
covered by the Awards, to establish the terms, conditions, performance
criteria, restrictions, and other provisions of such Awards, and
(subject to the restrictions imposed by Section 7) to cancel or suspend
Awards.
(b) To the extent that the Committee determines that the restrictions
imposed by the Plan preclude the achievement of the material purposes of
the Awards in jurisdictions outside the United States, the Committee
will have the authority and discretion to modify those restrictions as
the Committee determines to be necessary or appropriate to conform to
applicable requirements or practices of jurisdictions outside of the
United States.
(c) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend, and rescind any rules and regulations
relating to the Plan, to determine the terms and provisions of any Award
Agreement made pursuant to the Plan, and to make all other
determinations that may be necessary or advisable for the administration
of the Plan.
(d) Any interpretation of the Plan by the Committee and any decision made by
it under the Plan is final and binding on all persons.
(e) In controlling and managing the operation and administration of the
Plan, the Committee shall take action in a manner that conforms to the
articles and by-laws of the Company, and applicable state corporate law.
6.3. Delegation by Committee. Except to the extent prohibited by
applicable law or the applicable rules of a stock exchange, the Committee may
allocate all or any portion of its responsibilities and powers to any one or
more of its members and may delegate all or any part of its responsibilities and
powers to any person or persons selected by it. Any such allocation or
delegation may be revoked by the Committee at any time.
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<PAGE> 11
6.4. Information to be Furnished to Committee. The Company and
Subsidiaries shall furnish the Committee with such data and information as it
determines may be required for it to discharge its duties. The records of the
Company and Subsidiaries as to an employee's or Participant's employment (or
other provision of services), termination of employment (or cessation of the
provision of services), leave of absence, reemployment and compensation shall be
conclusive on all persons unless determined to be incorrect. Participants and
other persons entitled to benefits under the Plan must furnish the Committee
such evidence, data or information as the Committee considers desirable to carry
out the terms of the Plan.
SECTION 7
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, provided that
no amendment or termination may, in the absence of written consent to the change
by the affected Participant (or, if the Participant is not then living, the
affected beneficiary), adversely affect the rights of any Participant or
beneficiary under any Award granted under the Plan prior to the date such
amendment is adopted by the Board; and further provided that adjustments
pursuant to paragraph 4.2(f) shall not be subject to the foregoing limitations
of this Section 7.
SECTION 8
DEFINED TERMS
In addition to the other definitions contained herein, the following
definitions shall apply:
(a) Award. The term "Award" shall mean any award or benefit granted under
the Plan, including, without limitation, the grant of Options, SARs,
Stock Unit Awards, Restricted Stock Awards, Restricted Stock Unit
Awards, Performance Unit Awards] and Performance Share Awards.
(b) Board. The term "Board" shall mean the Board of Directors of the
Company.
(c) Cause. The term "Cause" shall mean any of the following: (1) the willful
and continued failure by the Participant to substantially perform his
duties, other than by reason of his being Disabled (as defined below),
(2) the willful engaging by the Participant in conduct which is
demonstrably and materially injurious to the Company or its affiliates,
(3) conduct by the Participant that involves theft or fraud or,
dishonesty in connection with his duties, (4) Participant's violation of
a non-compete or confidentiality agreement, or (5) conviction of felony
involving moral turpitude.
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<PAGE> 12
(d) Change in Control. For purposes of the Plan, the term "Change in
Control" means the occurrence, after an initial public offering of the
stock of the Company of the events described in any of paragraphs (i),
(ii), (iii), (iv) or (v) below:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of twenty-five percent (25%) or more of either (i) the
then outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock"), or (ii) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change in
Control: (A) any acquisition directly from the Company (excluding any
acquisition resulting from the exercise of an exercise, conversion or
exchange privilege unless the security being so exercised, converted or
exchanged was acquired directly from the Company), (B) any acquisition
by the Company, (C) any acquisition by an employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company (a "Company Plan"), (D) any acquisition by an
underwriter temporarily holding securities pursuant to an offering of
such securities; or (E) any acquisition by any corporation pursuant to a
transaction which complies with subsections (b)(iii)(A), (b)(iii)(B),
and (b)(iii)(C) of this definition; provided further, that for purposes
of clause (B), if any Person (other than the Company or any Company
Plan) shall become the beneficial owner of twenty-five percent (25%) or
more of the Outstanding Company Common Stock or twenty-five percent
(25%) or more of the Outstanding Company Voting Securities by reason of
an acquisition by the Company, and such Person shall, after such
acquisition by the Company, become the beneficial owner of any
additional shares of the Outstanding Company Common Stock or any
additional Outstanding Company Voting Securities (other than pursuant to
any dividend reinvestment plan or arrangement maintained by the Company)
and such beneficial ownership is publicly announced, such additional
beneficial ownership shall constitute a Change in Control.
(ii) Individuals who, as of the date hereof, constitute the Board of
Directors of the Company (for purposes of this subsection (b), the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Incumbent Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company shareholders, was approved by a
vote of a least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest (as such terms are used in Rule
14a-11 promulgated
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<PAGE> 13
under the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board of
Directors of the Company.
(iii) Consummation, including receipt of any necessary regulatory
approval, of (i) a reorganization, merger or consolidation involving the
Company or (ii) the sale or other disposition of more than 50% of the
operating assets of the Company (determined on a consolidated basis),
other than in connection with a sale-leaseback or other arrangement
resulting in the continued utilization of such assets (or the operating
products of such assets) by the Company (any transaction described in
part (i) or (ii) being referred to as a "Corporate Transaction");
excluding, however, a Corporate Transaction pursuant to which all of
paragraphs (A), (B), and (C) below are applicable:
(A) All or substantially of the individuals and entities who are the
beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities
immediately prior to such Corporate Transaction beneficially
own, directly or indirectly, more than 60% of, respectively, the
then outstanding shares of common stock and the combined voting
power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of
the corporation resulting from such Corporate Transaction
(including, without limitation, a corporation which, as a result
of such transaction, owns the Company or all or substantially
all of the assets of the Company either directly or through one
or more subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be.
(B) No Person (other than the Company, any Company Plan or related
trust, the corporation resulting from such Corporate
Transaction, and any Person which beneficially owned,
immediately prior to such Corporate Transaction, directly or
indirectly, twenty-five percent (25%) or more than the
Outstanding Company Common Stock or the Outstanding Company
Voting Securities, as the case may be) will beneficially own,
directly or indirectly, twenty-five percent (25%) or more of,
respectively, the then outstanding common stock of the
corporation resulting from such Corporate Transaction or the
combined voting power of the then outstanding voting securities
of such corporation.
(C) Individuals who were members of the Incumbent Board will
constitute at least a majority of the members of the board of
directors of the corporation resulting from such Corporate
Transaction.
(iv) A tender offer (for which a filing has been made with the
Securities and Exchange Commission (the "SEC") which purports to comply
with the requirements of Section
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<PAGE> 14
14(d) of the Exchange Act and the corresponding SEC rules) is made for
the stock of the Company, which has not been negotiated and approved by
the Board, provided that in case of a tender offer described in this
subsection (iv), the Change in Control will be deemed to have occurred
upon the first to occur of (A) any time during the offer period when the
Person (as defined in subsection (b)(i), above) making the offer
beneficially owns or has accepted for payment stock of the Company with
25% or more of the combined voting power of the then Outstanding Company
Voting Securities or (B) 3 business days before the offer is to
terminate, unless the offer is withdrawn first, if the Person making the
offer could own, by the terms of the offer plus any shares beneficially
owned by that Person, stock with 50% or more of the combined voting
power of the then Outstanding Company Voting Securities when the offer
terminates.
(v) Approval by the shareholders of the Company of a plan of complete
liquidation or dissolution of the Company.
(e) Code. The term "Code" means the Internal Revenue Code of 1986, as
amended. A reference to any provision of the Code shall include
reference to any successor provision of the Code.
(f) Disability. The term "Disability" shall mean the inability of the
Participant, after reasonable accommodation, to continue to perform his
duties on a full-time basis as a result of mental or physical illness,
sickness or injury and the Company determines that such disability is of
a long-term nature.
(g) Eligible Individual. The term "Eligible Individual" shall mean any
employee of the Company or a Subsidiary, and any consultant, director,
or other person providing services to the Company or a Subsidiary. An
Award may be granted to an individual, in connection with hiring,
retention or otherwise, prior to the date the employee first performs
services for the Company or the Subsidiaries, provided that such Awards
shall not become vested prior to the date the employee first performs
such services.
(h) Fair Market Value. For purposes of determining the "Fair Market Value"
of a share of Stock as of any date, the following rules shall apply,
consistent with Section 260.140.50 of Title 10 of the California Code of
Regulations, subject to the following:
(i) If the Common Stock is listed on any established stock exchange or a
national market system, including without limitation the Nasdaq National
Market or the Nasdaq SmallCap, the "Fair Market Value" of a share of
Stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such system or exchange (or
the exchange with the greatest volume of trading in Stock) on the last
market trading day prior to the day of determination, as reported in the
Wall Street Journal or such other source as the Board deems reliable.
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<PAGE> 15
(ii) In the absence of an established market for the Stock, the "Fair
Market Value" shall be determined in good faith by the Board.
(i) Good Reason. The term "Good Reason" shall mean any of the following
which occur without the Participant's consent and which are not
corrected by the Company within 10 days of written notice to the Company
by the Participant: (1) a diminution of the Participant's duties or the
assignment to him of duties that are inconsistent in any substantial
respect with the position, authority or responsibilities associated with
his position, (2) a reduction in the Participant's salary rate or bonus
potential; or (3) a relocation of the Participant, that occurs after a
Change of Control and without the Participant's consent, of over 100
miles from the Participant's primary employment location as of the date
of the Change of Control, except for required travel on Company business
to an extent substantially consistent with the Participant's business
travel obligations prior to the date of the Change of Control.
(j) Subsidiaries. The term "Subsidiary" means any company during any period
in which it is a "subsidiary corporation" (as that term is defined in
Code section 424(f)) with respect to the Company.
(k) Stock. The term "Stock" shall mean shares of common stock of the
Company.
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<PAGE> 16
ORGANIC INC. 1999
LONG-TERM STOCK INCENTIVE PLAN
Appendix A
Notwithstanding any other provision of the Plan to the contrary, the
following provisions shall be applicable to the Plan:
1. Exercise Price. With respect to any Option or SAR granted to any
person who possesses more than 10% of the total combined voting power of all
classes of stock of the Company or any Subsidiary or Parent (as defined in Code
section 424(e)) of the Company such Option or SAR shall have an exercise price
not less than 110% of the Fair Market Value of a share of Stock on the date of
grant.
2. Expiration. All Options granted under the Plan shall expire not later
than the 10-year anniversary of the date of grant.
3. Transferability. Awards granted pursuant to the Plan are not
transferable except by the laws of descent and distribution.
4. Adjustment. In the event of a corporate transaction involving the
Company (including, without limitation, any stock dividend, stock split,
extraordinary cash dividend, recapitalization, reclassification, reorganization,
merger, consolidation, split-up, spin-off, combination or exchange of shares),
the Committee shall adjust Awards to preserve the benefits or potential benefits
of the Awards. Action by the Committee may include: (i) adjustment of the number
and kind of shares which may be delivered under the Plan; (ii) adjustment of the
number and kind of shares subject to outstanding Awards; (iii) adjustment of the
Exercise Price of outstanding Options and SARs; and (iv) any other adjustments
that the Committee determines to be equitable.
5. Exercisability. Any Option granted under the Plan shall become
exercisable at a rate of at least 20% per year over 5 years from the date the
Option is granted, provided the Participant is employed by the Company at such
time. In addition, if the Participant resigns from employment, or is terminated
by the Company for any reason other than cause (as defined by applicable law),
any Options which have become exercisable prior to the time of such termination,
shall remain exercisable for:
(a) 6 months from the date of such termination if such termination was
caused by death or Disability; or
(b) 30 days from the date of such termination if such termination was caused
by reasons other than death or Disability.
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<PAGE> 17
ISO AGREEMENT
THIS AGREEMENT, entered into as of the Grant Date (as defined in
paragraph 1), by and between the Participant and Organic Inc. (the "Company");
WITNESSETH THAT:
WHEREAS, the Company maintains the Organic Inc. 1999 Long-Term Stock
Incentive Plan (the "Plan"), which is incorporated into and forms a part of this
Agreement, and the Participant has been selected by the committee administering
the Plan (the "Committee") to receive an Incentive Stock Option Award under the
Plan;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the
Participant, as follows:
1. Terms of Award. The following terms used in this Agreement shall have
the meanings set forth in this paragraph 1:
(a) The "Participant" is _________________.
(b) The "Grant Date" is _________________.
(c) The number of "Covered Shares" shall be _____________ shares
of Stock.
(d) The "Exercise Price" is $_____________ per share.
Other terms used in this Agreement are defined pursuant to paragraph 13 or
elsewhere in this Agreement.
2. Award and Exercise Price. This Agreement specifies the terms of the
option (the "Option") granted to the Participant to purchase the number of
Covered Shares of Stock at the Exercise Price per share as set forth in
paragraph 1. The Option is intended to constitute an "incentive stock option" as
that term is used in Code section 422. To the extent that the aggregate fair
market value (determined at the time of grant) of Shares with respect to which
incentive stock options are exercisable for the first time by the Participant
during any calendar year under all plans of the Company and its Subsidiaries
exceeds $100,000, the options or portions thereof which exceed such limit
(according to the order in which they were granted) shall be treated as
nonstatutory stock options. It should be understood that there is no assurance
that the Option will, in fact, be treated as an incentive stock option.
3. Date of Exercise. Subject to the limitations of this Agreement, and
unless the Participant chooses to exercise the Option prior to vesting pursuant
to paragraph 4, the Option shall become exercisable with respect to 1/4 of the
Covered Shares on the one-year anniversary of the Grant Date (but only if the
Date of Termination has not occurred before the one-year
<PAGE> 18
anniversary). After such one-year anniversary, the Option shall become
exercisable with respect to an additional 1/48 of the Covered Shares on each
subsequent one-month anniversary of the Grant Date (but only if the Date of
Termination has not occurred before the respective one-month anniversary), until
such time as this Option is fully exercisable. Covered Shares as to which the
Option is exercisable in accordance with this paragraph 3 (regardless of whether
the Option has been exercised with respect to those shares) are sometimes
referred to as "vested shares," and Covered Shares as to which the Option is not
exercisable in accordance with this paragraph 3, until such time as the Option
would have become exercisable with respect to those shares (regardless of
whether the Option has been exercised with respect to those shares in accordance
with paragraph 4) are sometimes referred to as "unnvested shares." If the
Participant is employed by the Company or an Affiliate at the time of a Change
in Control holds one or more outstanding Options, such Participant shall be
credited with two years of additional vesting service for purposes of the
vesting of Options, and the vesting of any Stock purchased by the Participant
under an Option.
Notwithstanding the foregoing provisions of this paragraph 3, the Option shall
become fully vested and exercisable upon the Date of Termination, if the Date of
Termination occurs by reason of the Participant's death or Disability. The
Option may be exercised on or after the Date of Termination only as to that
portion of the Covered Shares for which it was exercisable (or became
exercisable) immediately prior to the Date of Termination.
[Notwithstanding any other provision, if a Change in Control occurs, and the
Participant terminates employment with the Company for any reason during the 30
day period which begins on the one-year anniversary of the Change in Control,
any Awards granted to the Participant shall become fully vested and exercisable
on such date of termination, and the Participant shall have the greater of (i)
90 days from the date of such termination or (ii) the period otherwise specified
for exercise after termination had the Participant been fully vested in the
Awards on the date of termination to exercise such Awards.]
4. Exercise Prior to Vesting. Subject to the provisions of the Option,
the Participant may elect, at any time prior to his Termination Date, to
exercise the Option as to any part or all of the Covered Shares subject to this
Option at any time prior to the Expiration Date, including, without limitation,
a time prior to the date on which the Option would otherwise be exercisable in
accordance with paragraph 3; provided, however, that:
(a) A partial exercise of the Option shall be deemed to cover
first vested shares and then the earliest vesting installment of unvested
shares.
(b) Any shares so purchased from installments which have not
vested as of the date of exercise shall be subject to the purchase option in
favor of the Company as described in the Early Exercise Stock Purchase
Agreement.
<PAGE> 19
(c) The Participant shall be required to enter into an Early
Exercise Stock Purchase Agreement in the form provided by the Company with a
vesting schedule that will result in the same vesting as if no early exercise
had occurred.
(d) The Option shall not be exercisable under this paragraph 4 to
the extent such exercise would cause the aggregate Fair Market Value of any
shares subject to incentive stock options granted by the Company or any
Subsidiary (valued as of their grant date) which would become exercisable for
the first time during any calendar year to exceed $100,000.
The election provided in this paragraph 4 to purchase shares upon the exercise
of the Option prior to the Vesting Date shall cease upon the Participant's
Termination Date.
5. Expiration. The Option shall not be exercisable after the Company's
close of business on the last business day that occurs prior to the Expiration
Date. The "Expiration Date" shall be earliest to occur of:
(a) the ten-year anniversary of the Grant Date;
(b) if the Date of Termination occurs by reason of death,
Disability or Retirement, the one- year anniversary of such Date of Termination;
or
(c) if the Date of Termination occurs for reasons other than
death, Disability, or Retirement, the 90-day anniversary of such Date of
Termination.
6. Method of Option Exercise. Subject to the terms of this Agreement and
the Plan, the Option may be exercised in whole or in part by filing a written
notice with the Secretary of the Company at its corporate headquarters prior to
the Company's close of business on the last business day that occurs prior to
the Expiration Date. Such notice shall specify the number of shares of Stock
which the Participant elects to purchase, and shall be accompanied by payment of
the Exercise Price, or a portion of the Exercise Price as specified below if the
Participant elects to use the deferred payment alternative described below in
paragraph 8, for such shares of Stock indicated by the Participant's election.
The Option shall not be exercisable if and to the extent the Company determines
that such exercise would violate applicable state or Federal securities laws or
the rules and regulations of any securities exchange on which the Stock is
traded. If the Company makes such a determination, it shall use all reasonable
efforts to obtain compliance with such laws, rules and regulations. In making
any determination hereunder, the Company may rely on the opinion of counsel for
the Company.
7. Payment of Exercise Price. Payment of the Exercise Price may be made
by any of the following methods or any combination thereof,
(a) By cash or by check payable to the Company;
(b) Except as otherwise provided by the Committee before the
Option is exercised and provided that the Company's common stock is publicly
traded and quoted regularly in the Wall Street Journal, by delivery of shares of
Stock owned by the Participant and
<PAGE> 20
acceptable to the Committee having an aggregate Fair Market Value (valued as of
the date of exercise) that is equal to the amount of cash that would otherwise
be required; or
(c) By authorizing a third party to sell shares of Stock (or a
sufficient portion of the shares) acquired upon exercise of the Option and remit
to the Company a sufficient portion of the sale proceeds to pay the entire
Exercise Price and any tax withholding resulting from such exercise.
8. Deferral Payment Alternative. Provided that the Exercise Price for
the installment, or portion thereof, being purchased exceeds $500, the
Participant may pay the Exercise Price pursuant to the deferred payment
alternative as follows:
(a) Not less than twenty-five percent (25%) of the aggregate
Exercise Price shall be due at the time of exercise, not less than twenty-five
percent (25%) of said Exercise Price, plus accrued interest, shall be due each
year after the date of exercise, and final payment of the remainder of the
Exercise Price, plus accrued interest, shall be due three (3) years from date of
exercise or, at the Company's election, upon the Participant's Termination Date;
(b) Interest shall be payable at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Code, of any portion of any
amounts other than amounts stated to be interest under the deferred payment
arrangement; and
(c) In order to elect the deferred payment alternative, the
Participant must, as a part of his written notice of exercise, give notice of
the election of this payment alternative and, in order to secure the payment of
the deferred Exercise Price to the Company hereunder, if the Company so
requests, the Participant must tender to the Company a promissory note and a
security agreement covering the purchased shares, both in form and substance
satisfactory to the Company, or such other or additional documentation as the
Company may request.
9. Limit on Stock Sales. Any shares that a Participant acquires as a
result of the exercise of the Option shall be subject to the following
restrictions regarding sale or transfer:
(a) The Participant must notify the Company in writing within
fifteen (15) days after the date of any disposition of any of the shares of the
Stock issued upon exercise of this Option that occurs within two (2) years after
the date of the Grant Date or within one (1) year after such shares of Stock are
transferred upon exercise of the Option; and
(b) The Company (or a representative of the underwriters) may, in
connection with the first underwritten registration of the offering of any
securities of the Company under the Securities Act, require that the Participant
not sell or otherwise transfer or dispose of any shares of Stock or other
securities of the Company during such period (not to exceed one hundred eighty
(180) days) following the effective date of the registration statement of the
Company filed under the Securities Act as may be requested by the Company or the
representative of the underwriters. The Participant further agrees that the
Company may impose stop-transfer
<PAGE> 21
instructions with respect to securities subject to the foregoing restrictions
until the end of such period.
10. Right of First Refusal by the Company. The Participant shall not
sell, assign, pledge or in any manner transfer any of the shares of Stock or any
right or interest therein, whether voluntarily or by operation of law, or by
gift or otherwise, except by a transfer which meets the following requirements:
(a) If the Participant desires to sell or otherwise transfer any
of its shares of stock acquired upon exercise of the Option in an "arms-length"
transaction, then the Participant shall first give written notice thereof to the
Company. The notice shall name the proposed transferee and state the number of
shares to be transferred, the proposed consideration, and all other terms and
conditions of the proposed transfer. (b) For thirty (30) days following receipt
of such notice, the Company shall have the option to purchase all (but not less
than all) of the shares specified in the notice at the price and upon the terms
set forth in such notice; provided, however, that, with the consent of the
Participant, the Company shall have the option to purchase a lesser portion of
the shares of Stock specified in said notice at the price and upon the terms set
forth therein. In the event of a gift, property settlement or other transfer
which would not be considered to have been made on an "arms length" basis and in
which the proposed transferee is not paying the full price for the shares, the
price shall be deemed to be the Fair Market Value of the stock at such time as
determined in good faith by the Board. In the event the Company elects to
purchase all of the shares or, with consent of the Participant, a lesser portion
of the shares, it shall give written notice to the transferring Participant of
its election and settlement for said shares shall be made as provided below in
paragraph (d).
(c) The Company may assign its rights hereunder.
(d) In the event the Company and/or its assignee(s) elect to
acquire any of the shares of the transferring Participant as specified in said
transferring Participant's notice, the Secretary of the Company shall so notify
the transferring Participant and settlement thereof shall be made in cash within
thirty (30) days after the Secretary of the Company receives said transferring
Participant's notice; provided that if the terms of payment set forth in said
transferring Participant's notice were other than cash against delivery, the
Company and/or its assignee(s) shall pay for said shares on the same terms and
conditions set forth in said transferring Participant's notice.
(e) In the event the Company and/or its assignee(s) do not elect
to acquire all of the shares specified in the transferring Participant's notice,
said transferring Participant may, within the sixty (60)-day period following
the expiration of the option rights granted to the Company and/or its
assignee(s) herein, transfer the shares specified in said transferring
Participant's notice which were not acquired by the Company and/or its
assignee(s) as specified in said transferring Participant's notice.
<PAGE> 22
(f) Notwithstanding anything to the contrary contained herein,
the following transaction shall be exempt from the provisions of this paragraph
10: an Participant's bona fide pledge or mortgage of any shares with a
commercial lending institution, provided that any subsequent transfer of said
shares by said institution shall be conducted in the manner set forth in this
paragraph 10. In any such case, the transferee, assignee, or other recipient
shall receive and hold such stock subject to the provisions of this paragraph
10, and there shall be no further transfer of such stock except in accord with
this paragraph 10.
(g) The provisions of this paragraph 10 may be waived with
respect to any transfer either by the Company, upon duly authorized action of
its Board, or by the stockholders, upon the express written consent of the
owners of a majority of the voting power of the Company (excluding the votes
represented by those shares to be transferred by the transferring Participant).
(h) Any sale or transfer, or purported sale or transfer, of
securities of the Company shall be null and void unless the terms, conditions
and provisions of this paragraph 10 are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate upon the
date securities of the Company are first offered to the public pursuant to a
registration statement filed with, and declared effective by, the Securities and
Exchange Commission under the Securities Act of 1933.
(j) The certificates representing shares of stock of the Company
shall bear on their face the following legend so long as the foregoing right of
first refusal remains in effect:
"The shares represented by this Certificate are subject to a
right of first refusal option in favor of the Company and/or its
Assignee(s)."
11. Withholding. All deliveries and distributions under this Agreement
are subject to withholding of all applicable taxes. At the election of the
Participant, and subject to such rules and limitations as may be established by
the Committee from time to time, such withholding obligations may be satisfied
through the surrender of shares of Stock which the Participant already owns, or
to which the Participant is otherwise entitled under the Plan.
12. Transferability. The Option is not transferable other than as
designated by the Participant by will or by the laws of descent and
distribution, and during the Participant's life, may be exercised only by the
Participant.
13. Definitions. For purposes of this Agreement, the terms used in this
Agreement shall be subject to the following:
(a) Change in Control. The term "Change in Control" shall be
defined as that term is defined in the Plan.
(b) Date of Termination. The "Date of Termination" shall be the
first day occurring on or after the Grant Date on which the Participant is not
employed by the Company or any Subsidiary, regardless of the reason for the
termination of employment; provided that a
<PAGE> 23
termination of employment shall not be deemed to occur by reason of a transfer
of the Participant between the Company and a Subsidiary or between two
Subsidiaries; and further provided that the Participant's employment shall not
be considered terminated while the Participant is on a leave of absence from the
Company or a Subsidiary approved by the Participant's employer. If, as a result
of a sale or other transaction, the Participant's employer ceases to be a
Subsidiary (and the Participant's employer is or becomes an entity that is
separate from the Company), and the Participant is not, at the end of the 30-day
period following the transaction, employed by the Company or an entity that is
then a Subsidiary, then the occurrence of such transaction shall be treated as
the Participant's Date of Termination caused by the Participant being discharged
by the employer.
(c) Disability. Except as otherwise provided by the Committee,
the Participant shall be considered to have a "Disability" during the period in
which the Participant is unable, by reason of a medically determinable physical
or mental impairment, to engage in any substantial gainful activity, which
condition, in the opinion of a physician selected by the Committee, is expected
to have a duration of not less than 120 days.
(d) Retirement. "Retirement" of the Participant shall mean, with
the approval of the Committee, the occurrence of the Participant's Date of
Termination on or after the date the Participant attains age 55.
(e) Plan Definitions. Except where the context clearly implies or
indicates the contrary, a word, term, or phrase used in the Plan is similarly
used in this Agreement.
14. Whole Shares. This Option may only be exercised for whole shares. In
lieu of issuing a fraction of a share upon any exercise of the Option, resulting
from an adjustment of the Option pursuant to paragraph 4.2(f) of the Plan or
otherwise, the Company will be entitled to pay to the Participant an amount
equal to the Fair Market Value of such fractional share.
15. Heirs and Successors. This Agreement shall be binding upon, and
inure to the benefit of, the Company and its successors and assigns, and upon
any person acquiring, whether by merger, consolidation, purchase of assets or
otherwise, all or substantially all of the Company's assets and business. If any
rights exercisable by the Participant or benefits deliverable to the Participant
under this Agreement have not been exercised or delivered, respectively, at the
time of the Participant's death, such rights shall be exercisable by the
Designated Beneficiary, and such benefits shall be delivered to the Designated
Beneficiary, in accordance with the provisions of this Agreement and the Plan.
The "Designated Beneficiary" shall be the beneficiary or beneficiaries
designated by the Participant in a writing filed with the Committee in such form
and at such time as the Committee shall require. If a deceased Participant fails
to designate a beneficiary, or if the Designated Beneficiary does not survive
the Participant, any rights that would have been exercisable by the Participant
and any benefits distributable to the Participant shall be exercised by or
distributed to the legal representative of the estate of the Participant. If a
deceased Participant designates a beneficiary and the Designated Beneficiary
survives the Participant but dies before the Designated Beneficiary's exercise
of all rights under this Agreement or before the complete distribution of
benefits to the
<PAGE> 24
Designated Beneficiary under this Agreement, then any rights that would have
been exercisable by the Designated Beneficiary shall be exercised by the legal
representative of the estate of the Designated Beneficiary, and any benefits
distributable to the Designated Beneficiary shall be distributed to the legal
representative of the estate of the Designated Beneficiary.
16. Administration. The authority to manage and control the operation
and administration of this Agreement shall be vested in the Committee, and the
Committee shall have all powers with respect to this Agreement as it has with
respect to the Plan. Any interpretation of the Agreement by the Committee and
any decision made by it with respect to the Agreement is final and binding on
all persons.
17. Plan Governs. Notwithstanding anything in this Agreement to the
contrary, the terms of this Agreement shall be subject to the terms of the Plan,
a copy of which may be obtained by the Participant from the office of the
Secretary of the Company; and this Agreement is subject to all interpretations,
amendments, rules and regulations promulgated by the Committee from time to time
pursuant to the Plan.
18. Not An Employment Contract. The Option will not confer on the
Participant any right with respect to continuance of employment or other service
with the Company or any Subsidiary, nor will it interfere in any way with any
right the Company or any Subsidiary would otherwise have to terminate or modify
the terms of such Participant's employment or other service at any time.
19. Notices. Any written notices provided for in this Agreement or the
Plan shall be in writing and shall be deemed sufficiently given if either hand
delivered or if sent by fax or overnight courier, or by postage paid first class
mail. Notices sent by mail shall be deemed received three business days after
mailing but in no event later than the date of actual receipt. Notices shall be
directed, if to the Participant, at the Participant's address indicated by the
Company's records, or if to the Company, at the Company's principal executive
office.
20. No Rights As Shareholder. The Participant shall not have any rights
of a shareholder with respect to the shares subject to the Option, until a stock
certificate has been duly issued following exercise of the Option as provided
herein.
21. Amendment. This Agreement may be amended by written agreement of the
Participant and the Company, without the consent of any other person.
<PAGE> 25
IN WITNESS WHEREOF, the Participant has executed this Agreement, and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Grant Date.
Participant
------------------------------------
Organic Inc.
By:
---------------------------------
Its:
--------------------------------
<PAGE> 26
NQO AGREEMENT
THIS AGREEMENT, entered into as of the Grant Date (as defined in
paragraph 1), by and between the Participant and Organic Inc. (the "Company");
WITNESSETH THAT:
WHEREAS, the Company maintains the Organic Inc. 1999 Long-Term Stock
Incentive Plan (the "Plan"), which is incorporated into and forms a part of this
Agreement, and the Participant has been selected by the committee administering
the Plan (the "Committee") to receive a Non-Qualified Stock Option Award under
the Plan;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the
Participant, as follows:
1. Terms of Award. The following terms used in this Agreement shall have
the meanings set forth in this paragraph 1:
(a) The "Participant" is ________________.
(b) The "Grant Date" is ________________.
(c) The number of "Covered Shares" shall be _____________ shares
of Stock.
(d) The "Exercise Price" is $_____________ per share.
Other terms used in this Agreement are defined pursuant to paragraph 13 or
elsewhere in this Agreement.
2. Award and Exercise Price. This Agreement specifies the terms of the
option (the "Option") granted to the Participant to purchase the number of
Covered Shares of Stock at the Exercise Price per share as set forth in
paragraph 1. The Option is not intended to constitute an "incentive stock
option" as that term is used in Code section 422.
3. Date of Exercise. Subject to the limitations of this Agreement, and
unless the Participant chooses to exercise the Option prior to vesting pursuant
to paragraph 4, the Option shall become exercisable with respect to 1/4 of the
Covered Shares on the one-year anniversary of the Grant Date (but only if the
Date of Termination has not occurred before the one-year anniversary). After
such one-year anniversary, the Option shall become exercisable with respect to
an additional 1/48 of the Covered Shares on each subsequent one-month
anniversary of the Grant Date (but only if the Date of Termination has not
occurred before the respective one-month anniversary), until such time as this
Option is fully exercisable. Covered Shares as to which the Option is
exercisable in accordance with this paragraph 3 (regardless of whether the
Option has been exercised with respect to those shares) are sometimes referred
to as "vested shares," and
<PAGE> 27
Covered Shares as to which the Option is not exercisable in accordance with this
paragraph 3, until such time as the Option would have become exercisable with
respect to those shares (regardless of whether the Option has been exercised
with respect to those shares in accordance with paragraph 4) are sometimes
referred to as "unnvested shares." If the Participant is employed by the Company
or an Affiliate at the time of a Change in Control holds one or more outstanding
Options, such Participant shall be credited with two years of additional vesting
service for purposes of the vesting of Options, and the vesting of any Stock
purchased by the Participant under an Option.
Notwithstanding the foregoing provisions of this paragraph 3, the Option shall
become fully vested and exercisable upon the Date of Termination, if the Date of
Termination occurs by reason of the Participant's death or Disability. The
Option may be exercised on or after the Date of Termination only as to that
portion of the Covered Shares for which it was exercisable (or became
exercisable) immediately prior to the Date of Termination.
[Notwithstanding any other provision, if a Change in Control occurs, and the
Participant terminates employment with the Company for any reason during the 30
day period which begins on the one-year anniversary of the Change in Control,
any Awards granted to the Participant shall become fully vested and exercisable
on such date of termination, and the Participant shall have the greater of (i)
90 days from the date of such termination or (ii) the period otherwise specified
for exercise after termination had the Participant been fully vested in the
Awards on the date of termination to exercise such Awards.]
4. Exercise Prior to Vesting. Subject to the provisions of the Option,
the Participant may elect, at any time prior to his Termination Date, to
exercise the Option as to any part or all of the Covered Shares subject to this
Option at any time prior to the Expiration Date, including, without limitation,
a time prior to the date on which the Option would otherwise be exercisable in
accordance with paragraph 3; provided, however, that:
(a) A partial exercise of the Option shall be deemed to cover
first vested shares and then the earliest vesting installment of unvested
shares.
(b) Any shares so purchased from installments which have not
vested as of the date of exercise shall be subject to the purchase option in
favor of the Company as described in the Early Exercise Stock Purchase
Agreement.
(c) The Participant shall be required to enter into an Early
Exercise Stock Purchase Agreement in the form provided by the Company with a
vesting schedule that will result in the same vesting as if no early exercise
had occurred.
The election provided in this paragraph 4 to purchase shares upon the exercise
of the Option prior to the Vesting Date shall cease upon the Participant's
Termination Date.
<PAGE> 28
5. Expiration. The Option shall not be exercisable after the Company's
close of business on the last business day that occurs prior to the Expiration
Date. The "Expiration Date" shall be earliest to occur of:
(a) the ten-year anniversary of the Grant Date;
(b) if the Date of Termination occurs by reason of death,
Disability or Retirement, the one- year anniversary of such Date of Termination;
or
(c) if the Date of Termination occurs for reasons other than
death, Disability, or Retirement, the 90-day anniversary of such Date of
Termination.
6. Method of Option Exercise. Subject to the terms of this Agreement and
the Plan, the Option may be exercised in whole or in part by filing a written
notice with the Secretary of the Company at its corporate headquarters prior to
the Company's close of business on the last business day that occurs prior to
the Expiration Date. Such notice shall specify the number of shares of Stock
which the Participant elects to purchase, and shall be accompanied by payment of
the Exercise Price, or a portion of the Exercise Price as specified below if the
Participant elects to use the deferred payment alternative described below in
paragraph 8, for such shares of Stock indicated by the Participant's election.
The Option shall not be exercisable if and to the extent the Company determines
that such exercise would violate applicable state or Federal securities laws or
the rules and regulations of any securities exchange on which the Stock is
traded. If the Company makes such a determination, it shall use all reasonable
efforts to obtain compliance with such laws, rules and regulations. In making
any determination hereunder, the Company may rely on the opinion of counsel for
the Company.
7. Payment of Exercise Price. Payment of the Exercise Price may be made
by any of the following methods or any combination thereof,
(a) By cash or by check payable to the Company;
(b) Except as otherwise provided by the Committee before the
Option is exercised and provided that the Company's common stock is publicly
traded and quoted regularly in the Wall Street Journal, by delivery of shares of
Stock owned by the Participant and acceptable to the Committee having an
aggregate Fair Market Value (valued as of the date of exercise) that is equal to
the amount of cash that would otherwise be required; or
(c) By authorizing a third party to sell shares of Stock (or a
sufficient portion of the shares) acquired upon exercise of the Option and remit
to the Company a sufficient portion of the sale proceeds to pay the entire
Exercise Price and any tax withholding resulting from such exercise.
8. Deferral Payment Alternative. Provided that the Exercise Price for
the installment, or portion thereof, being purchased exceeds $500, the
Participant may pay the Exercise Price pursuant to the deferred payment
alternative as follows:
<PAGE> 29
(a) Not less than twenty-five percent (25%) of the aggregate
Exercise Price shall be due at the time of exercise, not less than twenty-five
percent (25%) of said Exercise Price, plus accrued interest, shall be due each
year after the date of exercise, and final payment of the remainder of the
Exercise Price, plus accrued interest, shall be due three (3) years from date of
exercise or, at the Company's election, upon the Participant's Termination Date;
(b) Interest shall be payable at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Code, of any portion of any
amounts other than amounts stated to be interest under the deferred payment
arrangement; and
(c) In order to elect the deferred payment alternative, the
Participant must, as a part of his written notice of exercise, give notice of
the election of this payment alternative and, in order to secure the payment of
the deferred Exercise Price to the Company hereunder, if the Company so
requests, the Participant must tender to the Company a promissory note and a
security agreement covering the purchased shares, both in form and substance
satisfactory to the Company, or such other or additional documentation as the
Company may request.
9. Limit on Stock Sales. With respect to any shares that a Participant
acquires as a result of the exercise of the Option, the Company (or a
representative of the underwriters) may, in connection with the first
underwritten registration of the offering of any securities of the Company under
the Securities Act, require that the Participant not sell or otherwise transfer
or dispose of any shares of Stock or other securities of the Company during such
period (not to exceed one hundred eighty (180) days) following the effective
date of the registration statement of the Company filed under the Securities Act
as may be requested by the Company or the representative of the underwriters.
The Participant further agrees that the Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such period.
10. Right of First Refusal by the Company. The Participant shall not
sell, assign, pledge or in any manner transfer any of the shares of Stock or any
right or interest therein, whether voluntarily or by operation of law, or by
gift or otherwise, except by a transfer which meets the following requirements:
(a) If the Participant desires to sell or otherwise transfer any
of its shares of stock acquired upon exercise of the Option in an "arms-length"
transaction, then the Participant shall first give written notice thereof to the
Company. The notice shall name the proposed transferee and state the number of
shares to be transferred, the proposed consideration, and all other terms and
conditions of the proposed transfer.
(b) For thirty (30) days following receipt of such notice, the
Company shall have the option to purchase all (but not less than all) of the
shares specified in the notice at the price and upon the terms set forth in such
notice; provided, however, that, with the consent of the Participant, the
Company shall have the option to purchase a lesser portion of the shares of
Stock specified in said notice at the price and upon the terms set forth
therein. In the event of a gift, property settlement or other transfer which
would not be considered to have been made on an
<PAGE> 30
"arms length" basis and in which the proposed transferee is not paying the full
price for the shares, the price shall be deemed to be the Fair Market Value of
the stock at such time as determined in good faith by the Board. In the event
the Company elects to purchase all of the shares or, with consent of the
Participant, a lesser portion of the shares, it shall give written notice to the
transferring Participant of its election and settlement for said shares shall be
made as provided below in paragraph (d).
(c) The Company may assign its rights hereunder.
(d) In the event the Company and/or its assignee(s) elect to
acquire any of the shares of the transferring Participant as specified in said
transferring Participant's notice, the Secretary of the Company shall so notify
the transferring Participant and settlement thereof shall be made in cash within
thirty (30) days after the Secretary of the Company receives said transferring
Participant's notice; provided that if the terms of payment set forth in said
transferring Participant's notice were other than cash against delivery, the
Company and/or its assignee(s) shall pay for said shares on the same terms and
conditions set forth in said transferring Participant's notice.
(e) In the event the Company and/or its assignee(s) do not elect
to acquire all of the shares specified in the transferring Participant's notice,
said transferring Participant may, within the sixty (60)-day period following
the expiration of the option rights granted to the Company and/or its
assignee(s) herein, transfer the shares specified in said transferring
Participant's notice which were not acquired by the Company and/or its
assignee(s) as specified in said transferring Participant's notice.
(f) Notwithstanding anything to the contrary contained herein,
the following transaction shall be exempt from the provisions of this paragraph
10: an Participant's bona fide pledge or mortgage of any shares with a
commercial lending institution, provided that any subsequent transfer of said
shares by said institution shall be conducted in the manner set forth in this
paragraph 10. In any such case, the transferee, assignee, or other recipient
shall receive and hold such stock subject to the provisions of this paragraph
10, and there shall be no further transfer of such stock except in accord with
this paragraph 10.
(g) The provisions of this paragraph 10 may be waived with
respect to any transfer either by the Company, upon duly authorized action of
its Board, or by the stockholders, upon the express written consent of the
owners of a majority of the voting power of the Company (excluding the votes
represented by those shares to be transferred by the transferring Participant).
(h) Any sale or transfer, or purported sale or transfer, of
securities of the Company shall be null and void unless the terms, conditions
and provisions of this paragraph 10 are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate upon the
date securities of the Company are first offered to the public pursuant to a
registration statement filed with, and declared effective by, the Securities and
Exchange Commission under the Securities Act of 1933.
<PAGE> 31
(j) The certificates representing shares of stock of the Company
shall bear on their face the following legend so long as the foregoing right of
first refusal remains in effect:
"The shares represented by this Certificate are subject to a
right of first refusal option in favor of the Company and/or its
Assignee(s)."
11. Withholding. All deliveries and distributions under this Agreement
are subject to withholding of all applicable taxes. At the election of the
Participant, and subject to such rules and limitations as may be established by
the Committee from time to time, such withholding obligations may be satisfied
through the surrender of shares of Stock which the Participant already owns, or
to which the Participant is otherwise entitled under the Plan.
12. Transferability. The Option is not transferable other than as
designated by the Participant by will or by the laws of descent and
distribution, and during the Participant's life, may be exercised only by the
Participant.
13. Definitions. For purposes of this Agreement, the terms used in this
Agreement shall be subject to the following:
(a) Change in Control. The term "Change in Control" shall be
defined as that term is defined in the Plan.
(b) Date of Termination. The "Date of Termination" shall be the
first day occurring on or after the Grant Date on which the Participant is not
employed by the Company or any Subsidiary, regardless of the reason for the
termination of employment; provided that a termination of employment shall not
be deemed to occur by reason of a transfer of the Participant between the
Company and a Subsidiary or between two Subsidiaries; and further provided that
the Participant's employment shall not be considered terminated while the
Participant is on a leave of absence from the Company or a Subsidiary approved
by the Participant's employer. If, as a result of a sale or other transaction,
the Participant's employer ceases to be a Subsidiary (and the Participant's
employer is or becomes an entity that is separate from the Company), and the
Participant is not, at the end of the 30-day period following the transaction,
employed by the Company or an entity that is then a Subsidiary, then the
occurrence of such transaction shall be treated as the Participant's Date of
Termination caused by the Participant being discharged by the employer.
(c) Disability. Except as otherwise provided by the Committee,
the Participant shall be considered to have a "Disability" during the period in
which the Participant is unable, by reason of a medically determinable physical
or mental impairment, to engage in any substantial gainful activity, which
condition, in the opinion of a physician selected by the Committee, is expected
to have a duration of not less than 120 days.
(d) Retirement. "Retirement" of the Participant shall mean, with
the approval of the Committee, the occurrence of the Participant's Date of
Termination on or after the date the Participant attains age 55.
<PAGE> 32
(e) Plan Definitions. Except where the context clearly implies or
indicates the contrary, a word, term, or phrase used in the Plan is similarly
used in this Agreement.
14. Whole Shares. This Option may only be exercised for whole shares. In
lieu of issuing a fraction of a share upon any exercise of the Option, resulting
from an adjustment of the Option pursuant to paragraph 4.2(f) of the Plan or
otherwise, the Company will be entitled to pay to the Participant an amount
equal to the Fair Market Value of such fractional share.
15. Heirs and Successors. This Agreement shall be binding upon, and
inure to the benefit of, the Company and its successors and assigns, and upon
any person acquiring, whether by merger, consolidation, purchase of assets or
otherwise, all or substantially all of the Company's assets and business. If any
rights exercisable by the Participant or benefits deliverable to the Participant
under this Agreement have not been exercised or delivered, respectively, at the
time of the Participant's death, such rights shall be exercisable by the
Designated Beneficiary, and such benefits shall be delivered to the Designated
Beneficiary, in accordance with the provisions of this Agreement and the Plan.
The "Designated Beneficiary" shall be the beneficiary or beneficiaries
designated by the Participant in a writing filed with the Committee in such form
and at such time as the Committee shall require. If a deceased Participant fails
to designate a beneficiary, or if the Designated Beneficiary does not survive
the Participant, any rights that would have been exercisable by the Participant
and any benefits distributable to the Participant shall be exercised by or
distributed to the legal representative of the estate of the Participant. If a
deceased Participant designates a beneficiary and the Designated Beneficiary
survives the Participant but dies before the Designated Beneficiary's exercise
of all rights under this Agreement or before the complete distribution of
benefits to the Designated Beneficiary under this Agreement, then any rights
that would have been exercisable by the Designated Beneficiary shall be
exercised by the legal representative of the estate of the Designated
Beneficiary, and any benefits distributable to the Designated Beneficiary shall
be distributed to the legal representative of the estate of the Designated
Beneficiary.
16. Administration. The authority to manage and control the operation
and administration of this Agreement shall be vested in the Committee, and the
Committee shall have all powers with respect to this Agreement as it has with
respect to the Plan. Any interpretation of the Agreement by the Committee and
any decision made by it with respect to the Agreement is final and binding on
all persons.
17. Plan Governs. Notwithstanding anything in this Agreement to the
contrary, the terms of this Agreement shall be subject to the terms of the Plan,
a copy of which may be obtained by the Participant from the office of the
Secretary of the Company; and this Agreement is subject to all interpretations,
amendments, rules and regulations promulgated by the Committee from time to time
pursuant to the Plan.
18. Not An Employment Contract. The Option will not confer on the
Participant any right with respect to continuance of employment or other service
with the Company or any Subsidiary, nor will it interfere in any way with any
right the Company or any Subsidiary would
<PAGE> 33
otherwise have to terminate or modify the terms of such Participant's employment
or other service at any time.
19. Notices. Any written notices provided for in this Agreement or the
Plan shall be in writing and shall be deemed sufficiently given if either hand
delivered or if sent by fax or overnight courier, or by postage paid first class
mail. Notices sent by mail shall be deemed received three business days after
mailing but in no event later than the date of actual receipt. Notices shall be
directed, if to the Participant, at the Participant's address indicated by the
Company's records, or if to the Company, at the Company's principal executive
office.
20. No Rights As Shareholder. The Participant shall not have any rights
of a shareholder with respect to the shares subject to the Option, until a stock
certificate has been duly issued following exercise of the Option as provided
herein.
21. Amendment. This Agreement may be amended by written agreement of the
Participant and the Company, without the consent of any other person.
IN WITNESS WHEREOF, the Participant has executed this Agreement, and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Grant Date.
Participant
------------------------------------
Organic Inc.
By:
---------------------------------
Its:
--------------------------------
<PAGE> 1
EXHIBIT 23.2
CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated November 22, 1999 relating to the financial statements of Organic,
Inc. which appear in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
/S/ PRICEWATERHOUSECOOPERS LLP
- -----------------------------------------
San Francisco, California
January 28, 2000
