<PAGE>
As filed with the Securities and Exchange Commission on March 13, 2000
Registration No. 333-95895
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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DIGITALWORK.COM, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 7389 52-2089673
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification or Code Number) Identification Number)
incorporation or
organization)
230 West Monroe Street, Suite 1950
Chicago, Illinois 60606
(312) 261-4000
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's principal executive offices)
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Robert A. Schultz
Craig A. Terrill
DigitalWork.com, Inc.
230 West Monroe Street, Suite 1950
Chicago, Illinois 60606
(312) 261-4000
(Name, Address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
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Copies To:
Craig C. Bradley, Esq. Stephen P. Farrell, Esq.
Freeborn & Peters Stephanie M. Gulkin, Esq.
311 South Wacker Drive, Suite 3000 Morgan, Lewis & Bockius LLP
Chicago, IL 60606 101 Park Avenue
(312) 360-6000 New York, NY 10178
(312) 360-6570 (fax) (212) 309-6000
(212) 309-6273 (fax)
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed maximum
Title of each class of aggregate Amount of
securities to be registered offering price registration fee
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<S> <C> <C>
Common Stock, par value $0.005 per
share(1).................................. $90,000,000.00(2) $23,760.00(3)
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</TABLE>
(1) Includes certain associated preferred stock purchase rights that will be
issued to each stockholder pursuant to a rights agreement by and between
DigitalWork.com, Inc. and Chase Mellon Shareholder Services, L.L.C., as
Rights Agent.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(3) Previously filed.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities in any state where such an offer or sale is not permitted or +
+legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated March 13, 2000
PROSPECTUS
6,250,000 Shares
Common Stock
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This is our initial public offering of shares of common stock. We are
offering 6,250,000 shares. No public market currently exists for our shares of
common stock.
We propose to list the shares on the Nasdaq National Market under the symbol
"DWRK." We estimate that the initial public offering price will be between
$11.00 and $13.00 per share.
Investing in the shares involves risks. Risk Factors begin on page 5.
<TABLE>
<CAPTION>
Per Share Total
--------- ----------
<S> <C> <C>
Initial public offering price.................. $ $
Underwriting discounts and commissions......... $ $
Proceeds, before expenses, to us............... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 937,500
additional shares of our common stock on the same terms and conditions set
forth above, solely to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved of these securities, or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about , 2000.
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Lehman Brothers
U.S. Bancorp Piper Jaffray
Prudential Volpe Technology
a unit of Prudential Securities
, 2000
<PAGE>
DESCRIPTION OF ARTWORK ON THE INSIDE FRONT COVER
Inside Cover
The artwork at the top of the page is the DigitalWork.com logo. There are a
series of faded concentric ovals in white surrounding the logo. Text
accompanying the logo reads: "The Best Way To Do Business. Our e-services are
designed to help small businesses grow by simplifying the execution of over 30
critical business functions online."
Artwork below the logo and corresponding text is a graphic depicting the
steps of a hypothetical DigitalWork.com user executing our press release
service. Highlighted are the steps and actions within the process as listed
below.
Text accompanying this case study:
"An Example: How to publicize your business."
"Monday, 9:45am: Learn About ItTM.
Paul learns about the power of press releases at DigitalWork.com. He reviews
testimonials from past users, gets a pricing list and checks out available
media outlets."
"Monday, 10:15am: Get It DoneTM.
Paul copies his story into DigitalWork.com's PR template. He targets media
outlets by geography and industry category. Paul reviews the information and
pays for the service online."
"Tuesday, 8:00am: Get Results.
DigitalWork.com sends Paul's press release across the wire and into the
hands of journalists at more than 500 media outlets worldwide."
Across the bottom of the page are five partner logos in a white box with
rounded corners and a red border. Text across bottom of page accompanying six
partner logos: "Some of our visionary partners" Logos are: America Online,
Inc., Bank of America, Mail Boxes Etc. USA, Inc., Office Depot and Dell
Computer Corporation.
Foldout
The artwork consists of the DigitalWork.com logo on a white background.
There are a series of faded concentric ovals surrounding the DigitalWork.com
logo. A black bar with rounded ends runs across the top of the page. Placed on
top of the concentric ovals are several logos of our distribution partners.
These logos and partners are: "Dell Computer Corporation, Office.com, Mail
Boxes Etc. USA, Inc., Bank of America, America Online, Inc., Lycos, Inc.,
Prodigy Communications Corporation, iVillage, Inc., Bloomberg.com,
PurchasePro.com, Inc., How2.com and Wells Fargo."
Copy contained within the black bar at the top of the page reads: "We have
created a pervasive distribution network targeted at the small business
market." At the bottom of the page there is additional text that reads: "These
. . . plus 40 other business portals and growing."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 5
Special Note Regarding Forward-
Looking Statements................. 13
Use of Proceeds..................... 13
Dividend Policy..................... 13
Capitalization...................... 14
Dilution............................ 15
Selected Financial Data............. 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 23
Management....................... 33
Certain Transactions............. 40
Principal Stockholders........... 42
Description of Capital Stock..... 45
Shares Eligible for Future Sale.. 51
Underwriting..................... 53
Legal Matters.................... 55
Experts.......................... 55
Where You Can Find More
Information..................... 55
Financial Statements............. F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell and seeking offers to buy
shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Until , 2000, all dealers selling shares of our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and the financial statements and notes to those statements appearing
elsewhere in this prospectus. Except as otherwise indicated, all information in
this prospectus assumes that the underwriters do not exercise the option
granted by us to purchase additional shares in this offering and assumes the
conversion of all of our currently outstanding preferred stock into common
stock that will occur upon the completion of this offering. In addition, the
share information reflects a 4-for-1 stock split that occurred in October 1999.
Our Business
We are a leading provider of Web-based business services to the small
business market. We have developed an integrated suite of business-to-business
services that enables small businesses to execute critical business functions
online, which we refer to as our e-services platform. This platform connects a
network of small businesses, service suppliers, and companies with destination
Web sites directed toward the business market, which we refer to as business
portals. Our e-services help small businesses grow by simplifying the execution
of over 30 business functions online, such as launching an integrated marketing
campaign, recruiting new employees and generating sales leads. We enable
business service suppliers to efficiently reach the under-served small business
market by providing them with a Web-based channel to distribute their services.
Our e-services platform offers business portals the ability to enhance their
product offerings with a customized suite of business services. We power the
business services offerings for over 55 business portals, including Dell, Mail
Boxes Etc. and PurchasePro.com. We also recently signed an agreement to provide
our e-services platform to AOL. As of December 31, 1999, over 100,000 small
businesses have registered to use our e-services platform, either through one
of our business portal partners or directly at our Web site.
Our Market Opportunity
The widespread adoption and interactive nature of the Internet have created
new opportunities for conducting business online. As the number of Internet
users has grown, businesses have increasingly recognized the power of the
Internet to streamline complex processes, lower costs and improve efficiency.
Given the resource and time constraints of most small businesses, which we
define as businesses with less than 100 employees, managers in this environment
are constantly seeking ways to complete critical business functions more
efficiently. In most cases, these functions span all aspects of a business. To
effectively compete in today's markets, small businesses need access to the
same breadth and depth of business services that have traditionally been
accessible only to larger business organizations. Likewise, business service
suppliers have not been able to reach and serve the large, highly fragmented
small business market efficiently. We believe a significant opportunity exists
to connect small business buyers with quality business service providers using
the Internet.
According to International Data Corporation, or IDC, small businesses will
increase their spending on e-commerce transactions from $6.2 billion in 1998 to
$106.8 billion in 2002, representing a compound annual growth rate of 104%.
Furthermore, IDC estimates that the number of small businesses today, 29.6
million, will grow to 38.5 million by 2002.
The DigitalWork.com Solution
We believe we have created a new way for small businesses to execute
critical business functions. Through our e-services network, we facilitate
business-to-business e-commerce transactions among small businesses, service
suppliers and business portals.
Small Businesses. Our e-services platform provides small businesses with
online access to business services that have not previously been readily
available to them. Our integrated Web-based solution allows
1
<PAGE>
time- and resource-constrained small businesses to complete over 30 critical
business functions more efficiently than with traditional offline methods.
Furthermore, our platform enables small businesses to learn about and execute
each business function in an efficient step-by-step manner. Each e-service has
a uniform appearance and execution process, and all of our services utilize our
customer care center. Together, these factors make it easier for small
businesses to complete multiple functions using our e-services platform.
Business Service Suppliers. We carefully select each of the business service
providers within our e-services network and act as the electronic channel for
them to effectively reach the small business market. We customize and enhance
the offerings of service suppliers specifically for the small business market
and rapidly integrate the offerings into our e-services platform.
Business Portals. There are thousands of companies with existing small
business customers that have created or will create Internet portals to better
reach and serve their small business customers. We syndicate our e-services
platform to these portals by allowing them to integrate our e-services into
their offerings. By expanding the depth and breadth of services business
portals offer to their customers, we provide them the benefits of increased
customer traffic, improved customer retention and new revenue streams. Our
services are co-branded with each portal's logo and Web design and are hosted
by our servers in order to maintain a consistent work environment for our
users.
We generate revenue from selling e-services to small business customers and
earn fees from business portals and service suppliers for allowing them access
to our e-services platform.
Our Services
We provide our customers with over 30 business services that we categorize
into the following eleven primary workshops:
Public Relations Sales Training
Online Advertising Market Research Business Software
Direct Mail Tech Support Travel
Recruiting Credit
Our Growth Strategy
Our goal is to become the dominant provider of Web-based business services
to the small business market. The key elements of our strategy are to:
. Capitalize on the broad reach of our existing global distribution
network;
. Grow our customer base by adding new business portals as our distribution
partners;
. Expand the depth and breadth of the e-services we offer;
. Tailor our e-services to meet the industry-specific needs of targeted
vertical markets, such as the real estate and retail industries;
. Leverage our network to generate new revenue streams;
. Strengthen our relationships with our small business users by continuing
to provide high quality customer service and promoting specific services
based on their requirements and usage; and
. Pursue strategic relationships and acquisitions.
To implement our growth strategy, we will be making significant expenditures
before our revenues increase to cover these additional costs. We incurred a net
loss of $15.4 million in the year ended December 31, 1999. Among other things,
the success of our business will be tied to the ability of our distribution
partnerships to attract registered users and the acceptance of our e-services
by small businesses.
Additional Information About Our Company
Our principal executive offices are located at 230 West Monroe Street, Suite
2050, Chicago, Illinois 60606, and our telephone number is (312) 261-4000. Our
Web site is located at www.digitalwork.com. The information contained at our
Web site is not a part of this prospectus.
2
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The Offering
<TABLE>
<S> <C>
Common stock offered by us........ 6,250,000 shares
Common stock to be outstanding 30,341,293 shares, excluding the shares
after this offering.............. that may be issued after this offering upon
the exercise of warrants and options as
described below.
Use of proceeds................... For general corporate purposes, including
working capital to fund operating losses
and capital expenditures. See "Use of
Proceeds" on page 13.
Risk factors ..................... For a discussion of certain risks you
should consider before investing in our
common stock, see "Risk Factors" beginning
on page 5.
Proposed Nasdaq National Market DWRK
symbol...........................
</TABLE>
Shares that May Be Issued After this Offering Upon the Exercise of Options and
Warrants
You should be aware that we are permitted, and in some cases obligated, to
issue shares of common stock in addition to the common stock to be outstanding
immediately after this offering. If and when we issue these shares, the
percentage of common stock you own will be diluted. The following is a summary
of additional shares of common stock that we have currently approved for
issuance upon the exercise of options and warrants after this offering:
. 2,375,425 shares of common stock that may be issued upon exercise of
outstanding options as of December 31, 1999, at a weighted average
exercise price of $0.44 per share;
. 3,212,335 shares of common stock reserved for future awards under our
stock option plan;
. 750,000 shares of common stock reserved for future purchase under our
stock purchase plan;
. 235,192 shares of our common stock issuable upon exercise of warrants
outstanding as of December 31, 1999, at a weighted average exercise price
of $1.09 per share;
. a number of shares equal to 10% of the shares of common stock we are
selling in this offering issuable upon exercise of warrants outstanding
as of December 31, 1999, at the initial public offering price; and
. 618,261 shares of our common stock issuable upon exercise of warrants
outstanding as of December 31, 1999, at an exercise price of $8.36 per
share.
3
<PAGE>
Summary Financial Data
The following table summarizes financial and other information for our
business. You should read this information together with our financial
statements and the notes to those statements beginning on page F-1 and the
information under "Selected Financial Data" beginning on page 16 and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" beginning on page 18.
<TABLE>
<CAPTION>
March 18,
1998
(inception) Three Months Ended
through ----------------------------------------------- Year Ended
December 31, March 31, June 30, September 30, December 31, December 31,
1998 1999 1999 1999 1999 1999
------------ --------- -------- ------------- ------------ ------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenues ............... $ 33 $ 112 $ 166 $ 561 $ 1,078 $ 1,917
Gross (loss) profit..... (28) (28) (64) 64 358 330
Operating expenses...... 1,455 1,097 1,855 3,849 9,254 16,055
-------- -------- -------- -------- ---------- -----------
Operating loss.......... (1,483) (1,125) (1,919) (3,785) (8,896) (15,725)
Interest income, net.... 16 12 62 114 140 328
-------- -------- -------- -------- ---------- -----------
Net loss................ $ (1,467) $ (1,113) $ (1,857) $ (3,671) $ (8,756) $ (15,397)
======== ======== ======== ======== ========== ===========
Basic and diluted net
loss per share......... $ (6.13) $ (2.36) $ (3.15) $ (4.05) $ (4.43) $ (15.62)
Weighted average shares
of common stock--basic
and diluted............ 239,370 471,282 590,032 906,608 1,975,564 985,871
Pro forma basic and
diluted net loss per
share.................. $ (1.22)
Pro forma weighted
average shares of
common stock-- basic
and diluted............ 12,659,847
</TABLE>
The pro forma basic and diluted net loss per share is computed by dividing
the net loss by the sum of the weighted average number of shares of common
stock outstanding plus the number of shares of common stock that will be
outstanding upon the automatic conversion of all shares of preferred stock
actually outstanding as of December 31, 1999 and after giving effect to a 4-
for-1 stock split that occurred in October 1999. The assumed conversion of the
preferred stock has an antidilutive effect on the pro forma basic and diluted
net loss per share.
The following table is a summary of our balance sheet data:
. on an actual basis; and
. on an unaudited as adjusted basis to reflect the sale of 6,250,000 shares
of common stock in this offering at an assumed initial public offering
price of $12.00 per share, after deducting estimated underwriting
discounts and commissions and offering expenses. For more information,
refer to "Use of Proceeds" on page 13 and "Capitalization" on page 14.
<TABLE>
<CAPTION>
As of December 31,
1999
-------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents............................... $33,751 $102,001
Working capital......................................... 31,788 100,038
Total assets............................................ 36,918 105,168
Total stockholders' equity ............................. 33,182 101,432
</TABLE>
4
<PAGE>
RISK FACTORS
You should consider carefully the following risk factors before purchasing
our common stock. Investing in our common stock involves a high degree of risk.
Additional risks and uncertainties that we have not yet identified or that we
currently think are immaterial may also materially adversely affect our
business and financial condition in the future. If any of the following risks
occur, our business, operating results and financial condition could be harmed.
In such case, the trading price of our common stock could decline and you could
lose all or part of your investment. You should also refer to the other
information set forth in this prospectus, including our financial statements.
Risks Related to Our Business
The limited operating history of our company and our industry makes financial
forecasting and evaluation of our business difficult.
We began operating our company in March 1998. We have entered into the
majority of our contracts and significant relationships within the last 12
months. Our limited operating history and the absence of other established
companies in our industry make it difficult to evaluate our business and
forecast our future performance. Our business is subject to risks and
uncertainties frequently encountered by companies in new and rapidly evolving
markets such as the business-to-business e-services market. Our failure to
identify and meet the challenges and risks inherent in a new business and a new
industry could cause our business to fail.
We have a history of losses, anticipate losses for the foreseeable future and
may never achieve profitability.
We have incurred net losses in each accounting period since our organization
in March 1998, and expect to continue to incur operating losses on both a
quarterly and annual basis for at least the foreseeable future. We may never
achieve profitability. As of December 31, 1999, we had an accumulated deficit
of approximately $16.8 million. We expect to continue to make significant
expenditures for sales and marketing, customer acquisition, development and
general and administrative functions. Specifically, in 2000 we intend to
increase our workforce, expand our facilities and increase the amounts we spend
on marketing programs. In each case, we will be making very significant
expenditures well before our revenues increase to cover these additional costs.
As a result, we will continue to incur significant losses for the foreseeable
future. We cannot assure you that our revenue will grow in the future or that
we will ever achieve profitability.
Because we depend heavily on relationships with business portals for our
growth, if these relationships do not contribute to increased use of our e-
services or help us add new customers, our revenue may not increase.
We have entered into agreements, and intend to enter into additional
agreements, with business portals as our primary means to sell our services to
small business customers. For the three months ended December 31, 1999, we
received approximately 75% of our registered users from our relationships with
business portals. We expect this percentage to increase in the future. This
distribution strategy subjects us to a number of risks:
. Our distribution partners may not attract significant registered users to
our e-services. We depend on these business portals to attract registered
users to our e-services. We cannot assure you that these business portals
will be able to attract significant numbers of small business users or
that their customers will use our e-services.
. Some of our agreements with significant distribution partners are new. We
have recently entered into significant agreements with AOL and Dell and
the co-branded sites related to these agreements are currently being
developed. As a result, we cannot assure you that these companies will
successfully integrate our services into their offerings or that these
relationships will significantly enhance our business.
5
<PAGE>
. Some of our distribution partners require us to pay significant fees. We
have agreed to pay significant fees to a few of these business portals to
include our e-services platform in their offerings. We cannot assure you
that we will be able to recover our costs associated with these
agreements. For more information regarding these fees, please refer to
"Business--Distribution Partners" beginning on page 28.
. Our agreements with our distribution partners have termination provisions
and most do not have non-compete provisions. Our agreements with business
portals typically have terms that range between one and two years and in
some cases have termination provisions that allow the parties to
terminate for reasons beyond our control. In addition, most of these
agreements do not restrict the business portals from offering services
that compete with ours.
. Our distribution partners may not meet their obligations to us. If our
distribution partners fail to maintain their sites or do not meet their
obligations with respect to displaying our services and service marks, we
could lose customers.
We depend on agreements with business service providers to fulfill the e-
services we offer and if they fail to provide our customers quality service we
may lose customers.
We have agreements with business service providers to fulfill the e-services
we offer to our customers. If these business service providers do not perform
consistently well, we may lose customers and relationships with our
distribution partners. In addition, if we lose one or more of these service
providers, even for a short period of time, we may not be able to offer our
customers and distribution partners the e-services they expect.
Our strategy of providing e-services over the Internet is novel and may not be
successful.
Our business strategy is to sell e-services to small businesses over the
Internet. As of December 31, 1999, approximately 4,200 of our registered users
had purchased services from us. If this business strategy proves to be flawed,
or if we are unable to execute our strategy effectively, our business,
operating results and financial condition will materially suffer. Sales of our
e-services could be adversely affected by a number of factors including the
following:
. Small businesses may be unfamiliar with some of the services we offer,
since these services have not been readily accessible by them in the
past; and
. Electronic commerce, particularly business-to-business e-services, is
still at an early stage of development and small businesses may not be
willing to shift their purchasing from traditional vendors to online
vendors.
We expect to face intense competition in the small business e-services market
for small business customers and strategic partners and, as a result, our
market share and financial performance may suffer.
The small business e-services market is new, rapidly evolving and intensely
competitive, and we expect this competition to intensify in the future.
Barriers to entry are minimal, and competitors may develop and offer similar
services in the future. Although we believe that there may be opportunities for
several providers of services similar to ours, a single provider may dominate
the market. Our business, financial condition and operating results could be
severely harmed if we are not able to compete successfully against current or
future competitors.
In addition to the competition for small business customers, we face
competition in entering into strategic alliances with business portals and
business service providers. This competition may decrease the amount of revenue
we receive from our strategic relationships with business portals and service
providers. Also, most of the agreements with our distribution partners and our
business service providers do not have exclusivity provisions that would
preclude them from partnering with our competitors or offering their own
services in competition with us.
6
<PAGE>
Some of our current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition in business and
Internet markets and significantly greater financial, marketing, technical and
other resources. Our competitors may be able to devote significantly greater
resources to marketing and promotional campaigns, may adopt more aggressive
pricing polices or may try to attract users by offering products or services
for free or below their cost, and may devote substantially more resources to
develop new services.
Our quarterly results are subject to significant fluctuations, and our stock
price may decline if we do not meet expectations of investors and analysts.
Our quarterly operating results may fluctuate significantly for a variety of
potential reasons including:
. uncertain demand for and market acceptance of our e-services;
. inconsistent growth, if any, of our customer base;
. loss of a substantial number of distribution partners or business service
providers;
. intense and increased competition;
. introductions of new services or enhancements, or changes in pricing
policies, by us or our competitors;
. increases in operating costs due to the growth of our company; and
. system or Internet disruptions.
We believe that quarterly revenues, expenses and operating results are
likely to vary significantly in the future, therefore period-to-period
comparisons of results of operations are not necessarily meaningful and those
comparisons should not be relied upon as indications of future performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations" beginning on page 18. Due to these
and other factors, it is possible that our operating results will be below
securities analysts' expectations in some future quarters, which could cause
the market price of our stock to decline.
If we cannot continuously enhance our e-services, we may not be able to meet
customer demands and our business will suffer.
Our future success will depend in part on our ability to continue to develop
and introduce new services that keep pace with competitive introductions and
technological developments, satisfy diverse and evolving small business
customer requirements and otherwise achieve market acceptance. If we fail to
anticipate or respond adequately to changes in technology and customer
preferences, or there are any significant delays in our development efforts,
our services may become unmarketable or obsolete and our business will be
harmed.
If we fail to effectively manage our expected growth, our management and
resources could be strained and our business could be negatively impacted.
Successful implementation of our business plan requires an effective
planning and management process. Our business could be negatively impacted if
we do not effectively manage our expected growth. We expect that we will need
to continue to improve our financial and managerial controls and reporting
systems and procedures. We continue to increase the scope of our operations
domestically and plan to expand internationally. This growth and integration,
even if successful, may take a significant period of time and expense, and may
place a significant strain on our resources.
The loss of our key personnel, including our senior management team, or any
inability to attract and retain additional personnel, could greatly increase
our operating costs and affect our ability to grow our business.
We believe that our success will depend on the continued employment of our
senior management team and other key personnel. If any of these individuals are
unable or unwilling to continue in their present positions, we could face
difficulties in growing our business.
7
<PAGE>
We have grown from four full-time employees in March 1998 to 68 full-time
employees as of December 31, 1999 and we intend to continue to rapidly increase
our workforce. The market for employees in technology businesses is very tight
and we may not be able to meet our hiring goals. To meet our need to grow our
workforce, we may be forced to pay higher compensation than we would otherwise
desire.
If our intellectual property protection is inadequate, competitors may
undermine our competitive position.
Our copyrights, service marks, trade secrets and similar intellectual
property are important to our success. We rely on trademark and copyright law,
trade secret protection and confidentiality or license agreements with our
employees, customers and business partners to protect our proprietary rights.
Despite our precautions, third parties may infringe or misappropriate our
copyrights, service marks and similar proprietary rights.
If we infringe the intellectual property rights of others, we could be exposed
to substantial liabilities that would severely harm our business.
We cannot be certain that our services do not infringe patents, patent
applications or other intellectual property rights. As a result, other parties
may assert infringement claims against us. As patent applications are not
publicly disclosed until the patent license is issued, applications may have
been filed which relate to our services. We may be subject to legal proceedings
and claims from time to time in the ordinary course of our business, including
claims of alleged infringement of intellectual property rights. We cannot
assure you that we would be able to obtain licenses to continue offering such
services on commercially reasonable terms, or at all. Any claims against us
relating to the infringement of third-party proprietary rights, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources and in injunctions preventing us from distributing these
services. These claims could severely harm our business.
We may not be able to accurately predict the rate of increase in the usage of
our e-services, which may affect our timing and ability to expand and upgrade
our systems.
We may not be able to accurately predict the rate of increase in the usage
of our e-services. This may affect our timing and ability to expand and upgrade
our systems and hardware and software capabilities to accommodate increased use
of our network. If we do not upgrade our systems and hardware and software
appropriately, we may experience downgraded service, which could damage our
business reputation, relationship with customers and our operating results.
We intend to develop international sales and marketing activities, which will
expose our business to numerous risks associated with international operations.
We intend to have operations in a number of international markets. To date,
we have limited experience in developing localized versions of our services and
in marketing, selling and distributing our solutions internationally.
International operations are subject to many risks, including:
. the impact of recessions in economies outside the United States;
. varying business practices as well as language and cultural barriers that
make doing business significantly different than in the United States;
. changes in regulatory requirements;
. reduced protection for intellectual property rights;
. potentially unfavorable tax rules;
. difficulties and costs of staffing and managing foreign operations;
8
<PAGE>
. political and economic instability;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
In the event that one or more of these risks adversely affects us, we may
not be successful in our expected international expansion.
We may pursue the acquisition of, or investment in, new and complementary
businesses, which may be costly and difficult to integrate.
We may acquire, or invest in, businesses that complement or augment our
existing businesses and services. If we are unable to integrate any newly
acquired entities effectively, our operating results, business and growth could
be harmed. Integrating any newly acquired businesses or services may be
expensive and time consuming. To finance any acquisitions, we may need to raise
additional funds. We may not be able to find additional financing, if required,
on favorable terms or at all and, in the case of equity financings, dilution to
our stockholders may result. We may not be able to conduct any acquired
business profitability.
Risks Related to the Internet and Electronic Commerce
Our success depends on the Internet's ability to accommodate growth in e-
services.
The use of the Internet for retrieving, sharing and transferring information
among businesses, buyers, suppliers and partners has only recently begun to
develop. If the Internet is not able to accommodate growth in electronic
commerce, particularly e-services, our business will suffer. The recent growth
in the use of the Internet has caused frequent periods of performance
degradation. Our ability to sustain and improve our services is limited, in
part, by the speed and reliability of the networks operated by third parties.
Consequently, the emergence and growth of the market for our services is
dependent on improvements being made to the Internet infrastructure to
alleviate overloading and congestion.
Because we are dependent upon the growth of the Internet as a means of
commerce, our business may be harmed if its growth is slower than expected.
If the e-services market does not grow or grows more slowly than expected,
our business will suffer. The possible slow adoption of the Internet as a means
of commerce by businesses may harm our prospects. A number of factors could
prevent the acceptance and growth of electronic commerce, including the
following:
. electronic commerce is at an early stage and buyers may be unwilling to
shift their traditional means of obtaining business services;
. increased government regulations or taxation may adversely affect the
viability of electronic commerce;
. insufficient availability of telecommunications services or changes in
telecommunication services may result in slower response times; and
. adverse publicity and consumer concern about the reliability, cost, ease
of access, quality of service, capacity, performance and security of
electronic commerce transactions could discourage its acceptance and
growth.
Security risks of electronic commerce may deter use of our products and
services.
A fundamental requirement to conduct business-to-business electronic
commerce is the secure transmission of information over public networks,
including credit card billing information. If our customers are not confident
in the security of electronic commerce, they may not effect transactions on our
platform,
9
<PAGE>
which would severely harm our business. We cannot be certain that advances in
computer capabilities, new discoveries in the field of cryptography, or other
developments will not result in the compromise or breach of the algorithms we
use to protect content and transactions on our Web sites or proprietary
information in our databases. Anyone who is able to circumvent our security
measures could misappropriate proprietary, confidential member information,
place false orders or cause interruptions in our operations. We may be required
to incur significant costs to rectify breaches. Further, a well-publicized
compromise of Internet security could deter people from using the Internet to
conduct transactions that involve transmitting confidential information. Our
failure to prevent security breaches, or well-publicized security breaches
affecting the Internet in general, could adversely affect our business.
If we encounter system failures, the e-services we provide to our customers
could be delayed or interrupted, which could severely harm our business and
result in a loss of customers.
Our ability to successfully maintain our platform and provide acceptable
levels of customer service largely depends on the efficient and uninterrupted
operations of our computer and our communications hardware and network systems.
Any interruptions could severely harm our business and result in a loss of
customers. Our systems and operations are vulnerable to damage or interruption
from human error, sabotage, fire, flood, earthquake, power loss,
telecommunications failure and similar events. Although we have taken certain
steps to prevent a system failure, we cannot assure you that our measures will
be successful and that we will not experience system failures in the future.
Furthermore, we do not have a formal disaster recovery plan and do not carry
sufficient business interruption insurance to compensate us for losses that may
occur as a result of any system failure. The occurrence of any system failure
or similar event could harm our business dramatically.
Governmental regulation, legal and tax uncertainties could impair the growth of
the Internet and decrease demand for our services and increase our costs of
doing business.
The laws governing Internet transactions remain largely unsettled, even in
areas where there has been some legislative action. The adoption or
modification of laws or regulations relating to the Internet could increase our
costs and administrative burdens. It may take years to determine whether and
how existing laws such as those governing intellectual property, privacy,
libel, consumer protection and taxation apply to the Internet.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. We must comply with new regulations
in the United States and other countries where we conduct business. The growth
and development of the business-to-business electronic commerce market may
prompt more stringent laws governing consumer protections and the taxation of
electronic commerce. Our non-compliance with any newly adopted laws and
regulations could expose us to significant liabilities.
Risks Related to this Offering
You will experience immediate dilution with respect to your shares.
You will incur immediate and substantial dilution of $8.66 per share in the
net tangible book value of your shares as a result of this offering. See
"Dilution" on page 15. In addition, we expect to grant a large number of
options to purchase our common stock in order to attract new employees, which
may be dilutive and may affect per share calculations.
We may need additional capital, which may not be available and any financing
may dilute existing stockholders.
We believe that the net proceeds from this offering will enable us to
maintain our current and planned operations for at least the next 18 months.
However, we may need to raise additional capital in the future to meet our
requirements. If our requirements vary materially from those currently planned,
we may require additional financing sooner than anticipated. Such financing may
not be available in sufficient amounts or on favorable terms, or at all, and
may be dilutive to existing stockholders.
10
<PAGE>
Our stock has not been publicly traded before this offering and our stock price
may be volatile.
Our stock has not been publicly traded, and an active trading market may not
develop or be sustained after this offering. Together with the representatives
of the underwriters, we have determined the initial public offering price. The
price at which our common stock will trade after this offering is likely to be
highly volatile and may fluctuate substantially due to factors such as:
. actual or anticipated fluctuations in our results of operations;
. changes in or failure by us to meet securities analysts' expectations;
. announcements of technological innovations;
. introduction of new services by us or our competitors;
. developments with respect to intellectual property rights;
. conditions and trends in the Internet and other technology industries;
and
. general market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stock of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of our common stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has often been brought against that company. We may become involved in this
type of litigation in the future. Litigation is often expensive and diverts
management's attention and resources which is needed to successfully run our
business.
Shares eligible for future sale by our existing stockholders may adversely
affect our stock price.
The market price of our common stock could drop due to the sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 30,341,293 shares of common stock will be outstanding.
Of these shares, the 6,250,000 shares sold in this offering will be freely
tradable without restrictions under the Securities Act of 1933, except for any
shares purchased by our "affiliates," as defined in Rule 144 under the
Securities Act. The number of shares of common stock outstanding would increase
to 31,278,293 and the number of freely tradable shares would increase to
7,187,500 if the underwriters exercise their over-allotment option in full. Our
officers and directors and all stockholders who beneficially own more than one
percent of our capital stock have entered into lock-up agreements under which
they have agreed not to offer or sell any shares of common stock for a period
of 180 days after the date of this prospectus without the prior written consent
of Lehman Brothers Inc., which it may grant in its sole unconditional
discretion. Upon expiration of this 180-day lock-up period, the shares owned by
these persons prior to completion of this offering may be sold into the public
market without registration under the Securities Act in compliance with the
volume limitations and other applicable restrictions of Rule 144 under the
Securities Act. In addition, some of our stockholders have the right to require
us to register up to 15.8 million shares of common stock for public resale
beginning approximately in October 2000. After the date of this prospectus, we
intend to register the shares issuable upon the exercise of outstanding stock
options and reserved for issuance under our stock option plans. Once we
register these shares, they can be sold in the public market upon issuance. See
"Shares Eligible for Future Sale" beginning on page 51.
Our management will have broad discretion over the net proceeds from this
offering and may not use the funds in a manner that is in your best interest.
We have no specific plans for the use of the net proceeds from this
offering. Generally, we intend to use the net proceeds from this offering to
expand our marketing activities, enter into new strategic alliances and fund
general corporate expenditures, including working capital and acquisitions. We
have not yet determined
11
<PAGE>
the actual expected expenditures and thus cannot estimate the amounts to be
used for each specified purpose. The actual amounts and timing of these
expenditures will vary significantly depending on a number of factors,
including, but not limited to, the amount of cash generated by our operations
and the market response to the introduction of any new service offerings.
Depending on future developments and circumstances, we may use some of the
proceeds for uses other than those described above. Our management will,
therefore, have significant flexibility in applying the net proceeds of this
offering. Our success and growth depends on the beneficial use of the net
proceeds. We cannot assure you that management will use these funds in a manner
of which you approve or that allocations will be in the best interest of
stockholders.
Risks Related to Our Corporate Structure
Our charter documents and Delaware law contain provisions that may discourage
takeover attempts that could preclude our stockholders from receiving a change
of control premium.
Elements of our corporate structure contain anti-takeover mechanisms that
could have the effect of delaying or preventing changes in control that a
stockholder may consider favorable. These elements include the following:
. a stockholder rights plan;
. a classified board of directors with three-year staggered terms;
. the ability of our board, without stockholder approval, to issue
preferred stock with currently unrestricted terms and provisions;
. restriction of stockholder action to voting only at a special or regular
meetings;
. advance notice procedures for nominating candidates to our board of
directors;
. employment agreements that entitle our executives to severance payments
in the event of a change of control; and
. anti-takeover provisions of Delaware law.
The foregoing could have the effect of delaying, deferring or preventing a
change in control of our company, discourage bids for our common stock at a
premium over the market price, or harm the market price of, and the voting and
other rights of the holders of, our common stock. For more information refer to
"Description of Capital Stock--Delaware Anti-Takeover and Certain Certificate
of Incorporation and By-law Provisions" beginning on page 48.
Because our executive officers, directors and principal stockholders will
exercise significant voting control over our company, the market price of our
common stock may be adversely affected.
We anticipate that our executive officers, directors and principal
stockholders will, in the aggregate, beneficially own approximately 56.2% of
our outstanding common stock following the completion of this offering, 54.5%
if the underwriters' over-allotment option is exercised in full. These
stockholders will be able to exercise substantial influence over all matters
requiring approval of our stockholders, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying or preventing a change in control of our
company. See "Principal Stockholders" beginning on page 42.
12
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," or "continue" or the negative of
such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, our affiliates do not assume
responsibility for the accuracy and completeness of such statements.
USE OF PROCEEDS
We estimate that we will receive net proceeds of $68,250,000 from the sale
of 6,250,000 shares of common stock in this offering, after deducting estimated
offering expenses of $1,500,000 and estimated underwriting discounts and
commissions at an assumed initial public offering price of $12.00 per share. If
the underwriters exercise their over-allotment option in full, we will receive
net proceeds of $78,712,500, after deducting estimated expenses of $1,500,000
and estimated underwriting discounts and commissions.
We have no specific plan for the application or use of the net proceeds of
this offering. Generally, we intend to use the net proceeds, over time, for
general corporate purposes, including working capital to fund operating losses
and capital expenditures. We may also use a portion of the net proceeds,
currently intended for general corporate purposes, to acquire or invest in
businesses, technologies, products or services, although no specific
acquisitions are planned and no portion of the net proceeds has been allocated
for any such acquisition. The amounts we actually expend for such purposes may
vary significantly and will depend on a number of factors, including the amount
of our future revenues. Pending such uses, we intend to invest the net proceeds
of this offering in investment-grade, interest-bearing securities.
Accordingly, we will have broad discretion in the application of the net
proceeds of this offering. For more information, please refer to "Risk
Factors--Our management will have broad discretion over the net proceeds from
this offering and may not use the funds in a manner that is in your best
interest" beginning on page 11.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not intend nor expect to pay any cash dividends in the foreseeable future.
We intend to retain future earnings, if any, to finance the expansion of our
business.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis;
. on an unaudited pro forma basis to reflect the conversion of all of our
outstanding shares of preferred stock into common stock, which will occur
upon the completion of this offering; and
. on an unaudited pro forma as adjusted basis to reflect our receipt of the
estimated net proceeds from the sale of the shares of common stock in
this offering at an assumed initial public offering price of $12.00 per
share after deducting the estimated offering expenses and underwriting
discounts and commissions.
This information is derived from, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" beginning on page 18, and our financial statements and related notes
appearing at the end of this prospectus beginning on page F-1.
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 33,751 $ 33,751 $102,001
======== ======== ========
Long-term portion of capital lease
obligations................................... $ 263 $ 263 $ 263
Stockholders' equity:
Convertible preferred stock, $.005 par value
per share, 20,895,360 shares authorized,
20,071,253 shares issued and outstanding,
actual; 10,000,000 shares authorized, no
shares issued or outstanding, pro forma and
pro forma as adjusted....................... 100 0 0
Common stock, $.005 par value per share;
41,633,786 shares authorized, 4,020,040
shares issued and outstanding, actual;
41,633,786 shares authorized, 24,091,293
shares issued and outstanding, pro forma;
100,000,000 shares authorized, 30,341,293
shares issued and outstanding, pro forma as
adjusted.................................... 20 120 152
Additional paid-in capital................... 61,008 61,008 129,226
Stockholders' receivables.................... (5,960) (5,960) (5,960)
Deferred stock compensation.................. (5,123) (5,123) (5,123)
Accumulated deficit.......................... (16,863) (16,863) (16,863)
-------- -------- --------
Total stockholders' equity................. 33,182 33,182 101,432
-------- -------- --------
Total capitalization....................... $ 33,445 $ 33,445 $101,695
======== ======== ========
</TABLE>
The outstanding stock information above excludes:
. 2,375,425 shares of common stock that may be issued upon exercise of
outstanding options as of December 31, 1999, at a weighted average
exercise price of $0.44 per share;
. 3,212,335 shares of common stock reserved for future awards under our
stock option plan;
. 750,000 shares of common stock reserved for future purchase under our
stock purchase plan;
. 235,192 shares of our common stock issuable upon exercise of warrants
outstanding as of December 31, 1999, at a weighted average exercise price
of $1.09 per share;
. a number of shares equal to 10% of the number of shares of common stock
we are selling in this offering issuable upon exercise of warrants
outstanding as of December 31, 1999, at the initial public offering
price; and
. 618,261 shares of our common stock issuable upon exercise of warrants
outstanding as of December 31, 1999, at an exercise price of $8.36 per
share.
For further information, please refer to "Management--Stock-Based Plans" on
page 38 and "Description of Capital Stock--Warrants" on page 47 and note 5 to
our financial statements.
14
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999 was approximately $33.2
million, or $1.38 per share. We determined net tangible book value per share by
dividing the number of outstanding shares of our common stock into our net
tangible book value (total tangible assets less total liabilities). Dilution in
net tangible book value per share represents the difference between the amount
per share paid by purchasers of shares of common stock in this offering and the
net tangible book value per share of common stock immediately after completion
of this offering. Assuming our sale of the shares of common stock in this
offering at an assumed initial public offering price of $12.00 per share and
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses, the net tangible book value of our company as of
December 31, 1999 would have been approximately $101.4 million, or $3.34 per
share. This represents an immediate increase in net tangible book value of
$1.96 per share to existing stockholders and an immediate dilution of $8.66 per
share to new investors purchasing shares at the initial public offering price.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.................... $12.00
Net tangible book value per share before this offering... $1.38
Increase in net tangible book value attributable to new
investors............................................... 1.96
------
Net tangible book value per share after offering........... 3.34
------
Dilution in net tangible book value per share to new
investors................................................. $ 8.66
======
</TABLE>
The following table summarizes as of December 31, 1999, on a pro forma
basis, the differences between the number of shares of capital stock purchased
from us, the total consideration paid to us and the average price per share
paid by existing stockholders and by investors purchasing shares of common
stock in this offering at an assumed initial public offering price of $12.00
(before deducting the estimated underwriting discounts and commissions and
estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 24,091,293 79.4% 52,306,000 41.1% $ 2.17
New investors........... 6,250,000 20.6% 75,000,000 58.9% 12.00
---------- ------ ----------- ------ ------
Total............... 30,341,293 100.0% 127,306,000 100.0% $ 4.20
========== ====== =========== ====== ======
</TABLE>
The information above does not reflect the following:
. 2,375,425 shares of common stock that may be issued upon exercise of
outstanding options as of December 31, 1999, at a weighted average
exercise price of $0.44 per share;
. 3,212,335 shares of common stock reserved for future awards under our
stock option plan;
. 750,000 shares of common stock reserved for future purchase under our
stock purchase plan;
. 235,192 shares of our common stock issuable upon exercise of warrants
outstanding as of December 31, 1999, at a weighted average exercise price
of $1.09 per share;
. a number of shares equal to 10% of the number of shares of common stock
we are selling in this offering issuable upon exercise of warrants
outstanding as of December 31, 1999, at the initial public offering
price; and
. 618,261 shares of our common stock issuable upon exercise of warrants
outstanding as of December 31, 1999, at an exercise price of $8.36 per
share.
For further information, please refer to "Management--Stock-Based Plans" on
page 38 and "Description of Capital Stock--Warrants" on page 47 and note 5 to
our financial statements.
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with,
and are qualified by reference to, the financial statements and related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The statement of operations
data for the period from March 18, 1998 (inception) through December 31, 1998
and the year ended December 31, 1999 and the balance sheet data at December 31,
1998 and 1999 are derived from our financial statements, which have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
in this prospectus. The statement of operations data for the three months ended
March 31, 1999, June 30, 1999, September 30, 1999, and December 31, 1999 are
derived from unaudited financial statements, and, in the opinion of our
management, include all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of the results of
operations for these periods. The historical results are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
March 18, 1998
(inception) Three Months Ended
through ------------------------------------------------- Year Ended
December 31, March 31, June 30, September 30, December 31, December 31,
1998 1999 1999 1999 1999 1999
-------------- --------- ---------- ------------- ------------ ------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenues................ $ 33 $ 112 $ 166 $ 561 $ 1,078 $ 1,917
Cost of revenues........ 61 140 230 497 720 1,587
--------- --------- ---------- ---------- ---------- ----------
Gross (loss) profit..... (28) (28) (64) 64 358 330
Operating expenses:
Marketing and
strategic alliances.. 504 502 822 2,455 3,253 7,032
Technical and product
development.......... 207 231 700 737 1,184 2,852
General and
administrative....... 661 364 275 602 1,201 2,442
Non-cash charges...... 83 0 58 55 3,616 3,729
--------- --------- ---------- ---------- ---------- ----------
Total operating
expenses........... 1,455 1,097 1,855 3,849 9,254 16,055
--------- --------- ---------- ---------- ---------- ----------
Operating loss.......... (1,483) (1,125) (1,919) (3,785) (8,896) (15,725)
Interest income, net.... 16 12 62 114 140 328
--------- --------- ---------- ---------- ---------- ----------
Net loss................ $ (1,467) $ (1,113) $ (1,857) $ (3,671) $ (8,756) $ (15,397)
========= ========= ========== ========== ========== ==========
Basic and diluted net
loss per share......... $ (6.13) $ (2.36) $ (3.15) $ (4.05) $ (4.43) $ (15.62)
Weighted average shares
of common stock
outstanding used in
computing basic and
diluted net loss per
share.................. 239,370 471,282 590,032 906,608 1,975,564 985,871
Pro forma basic and
diluted net loss per
share ................. $ (1.22)
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share..... 12,659,847
</TABLE>
The pro forma basic and diluted net loss per share is computed by dividing
the net loss by the sum of the weighted average number of shares of common
stock outstanding plus the number of shares of common stock that will be
outstanding upon the automatic conversion of all shares of preferred stock
actually outstanding as of December 31, 1999 and after giving effect to a 4-
for-1 stock split that occurred in October 1999. The assumed conversion of the
preferred stock has an antidilutive effect on the pro forma basic and diluted
net loss per share.
16
<PAGE>
The following table is a summary of our balance sheet data:
. on an actual basis;
. on an unaudited as adjusted basis to reflect the sale of 6,250,000 shares
of common stock in this offering at an assumed initial public offering
price of $12.00 per share, after deducting estimated underwriting
discounts and commissions and offering expenses. For more information,
refer to "Use of Proceeds" on page 13 and "Capitalization" on page 14.
<TABLE>
<CAPTION>
As of
December 31, 1999
-------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data
Cash and cash equivalents................................... $33,751 $102,001
Working capital............................................. 31,788 100,038
Total assets................................................ 36,918 105,168
Total stockholders' equity.................................. 33,182 101,432
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes beginning on page F-1 and the other financial information
appearing elsewhere in this prospectus. In addition to historical information,
the following discussion and other parts of this prospectus contain forward-
looking information that involves risks and uncertainties. Our actual results
could differ materially from those anticipated by such forward-looking
information due to factors discussed under "Risk Factors" beginning on page 5,
"Special Note Regarding Forward-Looking Statements" on page 13 and elsewhere in
this prospectus.
Overview
We are a leading provider of Web-based business services to the small
business market. We have developed an integrated suite of business-to-business
services that enable small businesses to execute critical business functions
online, which we refer to as our e-services platform. This platform connects a
network of small businesses service suppliers, and companies with destination
Web sites directed toward the business market, which we refer to as business
portals. Our e-services help small businesses grow by simplifying the execution
of over 30 critical business functions online, such as launching an integrated
marketing campaign, recruiting new employees and generating sales leads. We
currently offer our services primarily in the United States, but we plan to
expand our international presence.
We were founded in March 1998 and devoted the balance of 1998 principally to
organizational activities, including the initial establishment of our e-
services network. While we began offering our business-to-business services in
August 1998, we did not generate significant revenue until 1999. As a result,
comparisons of our financial results between 1998 and 1999 are not meaningful
or indicative of our future growth or financial performance.
Quarterly Results of Operations
We are providing a discussion and analysis of our results of operations that
is focused on the seven quarters from our inception to December 31, 1999. You
should read this table along with our consolidated financial statements and
related notes. The information provided below has been derived from our
unaudited financial statements, and, in the opinion of management, it includes
all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of our financial position and
operating results for the quarters presented. You must consider our prospects
in light of the risks, expenses and difficulties encountered by companies in
new and rapidly evolving markets. We may not be successful in addressing these
risks and difficulties. Although we have experienced significant percentage
growth in revenues in recent periods, we may not be able to sustain our prior
growth rate. Our prior growth may not be indicative of future operating
results.
<TABLE>
<CAPTION>
Three Months Ended
Unaudited
------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenues................ $ 0 $ 5 $ 28 $ 112 $ 166 $ 561 $ 1,078
Cost of revenues........ 2 5 54 140 230 497 720
----- ----- ----- ------- ------- ------- -------
Gross (loss) profit..... (2) 0 (26) (28) (64) 64 358
Operating expenses:
Marketing and
strategic alliances... 31 122 351 502 822 2,455 3,253
Technical and product
development........... 1 55 151 231 700 737 1,184
General and
administrative........ 161 238 262 364 275 602 1,201
Non-cash charges....... 0 0 83 0 58 55 3,616
----- ----- ----- ------- ------- ------- -------
Total operating
expenses............ 193 415 847 1,097 1,855 3,849 9,254
----- ----- ----- ------- ------- ------- -------
Net operating loss...... (195) (415) (873) (1,125) (1,919) (3,785) (8,896)
Interest income, net ... 1 3 12 12 62 114 140
----- ----- ----- ------- ------- ------- -------
Net loss................ $(194) $(412) $(861) $(1,113) $(1,857) $(3,671) $(8,756)
===== ===== ===== ======= ======= ======= =======
</TABLE>
18
<PAGE>
Results of Operations
Revenues
We generate revenue from two sources: e-services transactions and network
fees earned from business portals and service suppliers. The increases in
revenues since our inception are attributable to increases in both the number
of e-services purchased as well as increases in network fees. For the twelve
months ended December 31, 1999, e-services transactions represented
approximately 81% of our total revenues, while network fees represented
approximately 19% of total revenues.
E-services Transactions. Small businesses utilize our Web-based e-services
platform to access and execute essential business services. We then work with
our business service suppliers in completing the transaction and delivering the
service to the customer. Since we assume the economic risk related to
collections, customer service and fulfillment and we determine the price of the
service, we recognize revenue from e-services transactions as the total price
of the service a small business customer purchases. We recognize revenue when
the service is delivered to our small business customer.
Network Fees. Small businesses access our platform through our business-to-
business network of leading business portals as well as through our own site at
www.digitalwork.com. We typically earn initial content licensing fees from
business portals for the integration of a co-branded version of our e-services
platform into their Web sites. In addition to this licensing fee, we also
typically earn ongoing maintenance fees. We recognize revenue from the initial
licensing fees and the ongoing maintenance fees on a straight line basis over
the terms of the respective agreements. In addition to fees paid by business
portals, we also, in some cases, will earn slotting fees from our business
service suppliers which will entitle them to be a provider of a particular
service to our network. The revenue related to these fees will be recognized
over the term of the agreement. The term of our agreements typically ranges
from one to two years and the agreements are subject to renewal. Finally, we
earn revenue from the sale of advertising on our e-services platform.
Advertising revenue is recognized in the period in which the advertising is
displayed.
In addition, we have entered into agreements with third parties which will
act as both a service supplier and distribution partner, resulting in complex
sales and purchase arrangements. We recognize the revenue and expense of the
arrangement based on the objective evidence of fair value of the elements.
Objective evidence of fair value is determined by reference to our history of
other comparable and relevant third party cash transactions for each element in
the arrangement. In the year ended December 31, 1999, revenue and expense
elements of the arrangements we have entered into have been netted and will be
recognized over the terms of the agreements. This treatment resulted in a
reduction of revenue of approximately $443,000 and a corresponding amount of
expenses in the year ended December 31, 1999. No service arrangements were
entered into during the period from March 18, 1998 (inception) through December
31, 1998.
Cost of Revenues
Cost of revenues consists of fees paid to business service suppliers for e-
services fulfillment, revenue sharing with business portals from e-services
transaction fees, credit card processing fees and personnel and other costs
related to our customer service group. Cost of revenues has increased since our
inception due to the increase in revenues. Our gross margins vary from quarter
to quarter based on the volume and mix of e-services fulfilled and the network
fees generated during the quarter and the costs of customer service levels
maintained in the quarter.
Operating Costs
We classify our operating costs into four categories: marketing and
strategic alliances; technical and product development; general and
administrative; and non-cash charges.
Marketing and Strategic Alliances. Marketing and strategic alliances expense
consists primarily of employee compensation, advertising, customer acquisition
costs, amortization of strategic marketing payments,
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<PAGE>
and other marketing programs. Our marketing and strategic alliances expenses
have increased each quarter since inception as we have expanded our marketing
and strategic alliance development efforts. We expect these expenses to
continue to increase in absolute dollars as we increase the number of business
services suppliers and business portals in our network, and as we promote our
brand and the brand of our e-services network.
Technical and Product Development. Technical and product development expense
relates to the development and enhancement of our e-services platform. These
expenses include related employee compensation and third-party contract
development costs. Technical and development costs have increased each quarter
since inception primarily due to increased staffing and associated costs
related to the development of our e-services platform. We expect our technical
and product development expense to increase in absolute dollars as we continue
to enhance and add features and services to our e-services platform.
General and Administrative. General and administrative expense consists
primarily of compensation for personnel, fees for outside professional advisors
and general overhead and facilities costs. General and administrative costs
have increased primarily as a result of personnel additions, the costs of
leasing additional office space to support our growth and increased fees paid
for professional services. We expect these costs will increase in absolute
dollars as we continue to add staff and infrastructure to support our business
growth and incur the costs associated with being a public company.
Non-cash charges. Non-cash charges consist of stock-based compensation
expense, strategic marketing equity instruments expense and other equity
expenses. Stock-based compensation expense consists of expenses related to
employee stock option grants issued with exercise prices lower than the deemed
fair value of the underlying shares at the time of the grant. Stock-based
compensation is amortized over the vesting period of each individual award
using a graded vesting method. We have recorded aggregate deferred stock
compensation of $5.9 million for options granted in 1999. We recognized a total
of $780,682 in stock compensation expense in 1999. We anticipate that the total
charges we will recognize in future periods from amortization of deferred stock
compensation as of December 31, 1999, are $2.7 million in 2000, $1.4 million in
2001, $750,521 in 2002 and $264,177 in 2003.
Strategic marketing equity instruments expense of $2.9 million consists of
expenses associated with the value of warrants issued under our agreements with
certain distribution partners. Other equity expense consists of warrants
granted with respect to services rendered, or financing provided to us. These
expenses are based on the estimated fair value of the warrants as determined by
the Black-Scholes option pricing model and the provisions of EITF 96-18. Non-
cash charges increased in the quarter ended December 31, 1999 as a result of
the issuance of warrants to purchase shares of our stock related to two key
strategic partner agreements and the recording of expenses related to the
issuance of stock options.
Interest Income, Net
Interest income, net consists primarily of interest income received from the
investment of proceeds from our financing activities offset by interest expense
under leasing arrangements and bank fees.
Income Taxes
We have incurred net losses since inception for tax purposes and have not
recognized any tax provision or benefit. As of December 31, 1999, we had
approximately $12.9 million of net operating loss carryforwards to offset
against future taxable income. The related net deferred tax assets have been
fully reserved through December 31, 1999. The net operating loss carryforwards
expire beginning in 2013, if not used. Utilization of net operating losses may
be subject to a substantial annual limitation due to the change in ownership
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses
before utilization.
Liquidity and Capital Resources
We have historically satisfied our cash requirements primarily through
private equity financing transactions. Through December 31, 1999, we raised
cumulative net proceeds of $51.6 million through private
20
<PAGE>
equity offerings of which approximately $5.1 million was received in January
2000. As of December 31, 1999, we had cash and cash equivalents of $33.8
million and working capital of $32.8 million.
Net cash used in operating activities totaled $1.1 million in 1998 and $10.8
million in 1999. Our use of cash since inception was primarily attributable to
operating losses, partially offset by non-cash charges of depreciation and
amortization, amortization of deferred stock compensation and the expenses
associated with the value of warrants issued under our agreements with certain
distribution partners.
Net cash used in investing activities totaled $79,153 in 1998 and $351,289
in 1999. We have made substantial investments in computer equipment and
software, office furniture and leasehold improvements.
Net cash provided by financing activities was $2.6 million in 1998 and $43.5
million in 1999, primarily from the sale of preferred stock.
We expect to experience significant growth in our operating costs for the
foreseeable future in order to execute our business plan, particularly in the
areas of marketing, strategic alliances, hiring additional employees and
expanding the e-services we offer. For more information, please refer to
"Business--Our Growth Strategy" beginning on page 25. In addition, we may use
cash resources to fund acquisitions of complementary businesses and
technologies; however, we currently have no commitments or agreements and are
not involved in any negotiations regarding any of these transactions. We
believe that the net proceeds from this offering, combined with current cash
resources, will be sufficient to meet our working capital and capital
expenditures for at least the next 18 months. Thereafter, we may find it
necessary to obtain additional equity or debt financing. In the event that we
require additional financing, we may not be able to raise it on terms
acceptable to us, if at all. Currently, we do not have any specific plans for
further equity offerings in the future.
Recent Developments
We recently entered into an agreement with America Online, Inc. to provide
sales and marketing services on a customized co-branded site which is
accessible from certain of America Online's properties. For more information
please refer to "Business--Distribution Partners--America Online, Inc." on page
28. As part of this agreement, we will receive all of the e-services revenue
generated from the purchase of our services provided to AOL's users during the
term of the agreement. We paid AOL a $6.0 million fee to enter into this
agreement. We are amortizing the fee we paid to AOL over the 18-month term of
the agreement, and including it as a marketing and strategic alliance expense.
In connection with this agreement, we also issued a three-year warrant to AOL
to purchase 276,000 shares of our common stock at $8.36 per share. We have
included the value of the warrant, as calculated using the Black-Scholes
method, in non-cash charges as of December 31, 1999.
We also recently entered into an agreement with Dell Computer Corporation
under which Dell offers many of our business services to its customers and
prospects. For more information please refer to "Business--Distribution
Partners--Dell Computer Corporation" on page 28. The terms of the agreement
provide that we will share with Dell the e-services revenue generated by Dell
users, and we will pay a fee to Dell for each registered user and e-services
customer generated through this relationship. In addition, we will pay Dell up
to a $2.0 million fee for integrating our co-branded site 12 months after the
launch of the site. If Dell provides us with less than a minimum number of
paying customers during this period, Dell will refund a portion of the fee. We
are amortizing this fee over the two-year term of the agreement, and including
it as a marketing and strategic alliance expense. In connection with this
agreement, we also issued a two-year warrant to Dell to purchase 150,000 shares
of our common stock at $8.36. We have included the value of the warrant, as
calculated using the Black-Scholes method, in non-cash charges as of December
31, 1999.
Year 2000 Impact
We have not experienced any problems with our computer systems relating to
distinguishing twenty-first century dates from twentieth century dates, which
are generally referred to as year 2000 problems. We are also
21
<PAGE>
not aware of any material year 2000 problems with our vendors, business service
providers or distribution partners. Accordingly, we do not anticipate incurring
material expenses or experiencing any material operational disruptions as a
result of any year 2000 problems.
Disclosures About Market Risk
As of December 31, 1999, we had cash and cash equivalents of $33.8 million,
which consisted of cash and highly liquid short-term investments. Our short-
term investments will decline in value by an immaterial amount if market
interest rates increase. Declines of interest rates over time will, however,
reduce our interest income from our short-term investments.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133, which will be effective for us for the fiscal year and quarters
beginning after June 15, 2000, requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. We do not expect the
potential effect of adopting the provisions of SFAS No. 133 to have a
significant impact on our financial position, results of operations, and cash
flows.
22
<PAGE>
BUSINESS
Overview
We are a leading provider of Web-based business services to the small
business market. We have developed an integrated suite of business-to-business
services that enables small businesses to execute critical business functions
online, which we refer to as our e-services platform. This platform connects a
network of small businesses, service suppliers, and companies with destination
Web sites directed toward the business market, which we refer to as business
portals. Our e-services help small businesses grow by simplifying the execution
of over 30 business functions online, such as launching an integrated marketing
campaign, recruiting new employees and generating sales leads. We enable
business service suppliers to efficiently reach the under-served small business
market by providing them a Web-based channel to distribute their services. Our
e-services platform offers business portals the ability to enhance their
product offerings with a customized suite of business services. We power the
business services offerings for over 55 business portals, including Dell, Mail
Boxes Etc. and PurchasePro.com. We also recently signed an agreement to provide
our e-services platform to AOL. As of December 31, 1999, over 100,000 small
businesses have registered to use our e-services platform, either through one
of our business portal partners or directly at our Web site.
Industry Overview
Growth of Business-to-Business Electronic Commerce. The widespread adoption
and interactive nature of the Internet has created new opportunities for
conducting business online. Businesses are utilizing the Internet to improve
the way they reach and transact business with customers and suppliers. The
Internet is one of the fastest-growing means of communication, reaching
consumers and businesses globally. As the number of Internet users has grown,
businesses have increasingly recognized the power of the Internet to streamline
complex processes, lower costs and improve efficiency. Forrester Research
expects business-to-business electronic commerce to grow more rapidly than
business-to-consumer electronic commerce over the next several years. Forrester
Research estimates that business-to-business electronic commerce will grow from
$109 billion in 1999 to $1.3 trillion in 2003, accounting for 90% of the dollar
value of electronic commerce in the United States by 2003.
The Impact of the Internet on the Small Business Market. Small businesses,
which we define as businesses with less than 100 employees, are turning to the
Internet as a productivity tool to achieve access to the expertise, information
and services they require in order to compete more effectively. Given the
resource and time constraints of most small businesses, managers in this
environment are constantly seeking ways to complete critical business functions
efficiently. In most cases, these tasks span all aspects of a business. To
effectively compete in today's markets, small businesses need access to the
same breadth and depth of business services that have traditionally been
accessible only to larger business organizations. Likewise, business service
suppliers have not been able to reach and serve the large, highly fragmented
small business market efficiently.
The Small Business Market in the United States. According to International
Data Corporation, or IDC, small businesses will increase their spending on e-
commerce transactions from $6.2 billion in 1998 to $106.8 billion in 2002,
representing a compound annual growth rate of 104%. Furthermore, IDC estimates
that the number of small businesses today, 29.6 million, will grow to 38.5
million by 2002.
Small businesses are a major force in the United States economy. According
to the Small Business Association, businesses with less than 500 employees:
. employ 53% of the private workforce;
. contribute 47% of all sales; and
. represent 50% of the private gross domestic product.
The Opportunity For An Effective E-Services Network
We believe several converging trends have created a significant opportunity
for a network connecting small businesses, business service providers and
business portals.
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<PAGE>
Small Businesses Lack the Time, Resources and Expertise to Complete Critical
Business Functions. Small businesses need the same quality of services
traditionally accessible only by larger enterprises in order to compete
effectively and enhance their opportunity for success. However, small
businesses have limited resources, time and expertise and often cannot readily
find and establish relationships with suitable service providers.
The Small Business Market is Difficult to Reach and Serve. Business service
providers have not traditionally focused on the needs of small businesses due
to the high cost of targeting and servicing this large, highly fragmented
market. In addition, these service providers have not been able to efficiently
provide the customized products and services required by small businesses.
Business Portals Need E-Services to Attract Users and Enhance Their
Offerings. A wide range of organizations are creating business portals in order
to enhance and retain their relationships with their small business customers.
These organizations want to offer transaction-based business services to their
users to complement their current and future offerings and to generate
additional revenue streams. Competitive pressures are forcing these business
organizations to quickly bring comprehensive e-service offerings to market. As
importantly, these organizations require a customized look, feel and branding
to match their current portal offerings for a consistent user experience.
The DigitalWork.com Solution
We believe we have created a new way for small businesses to execute
critical business functions. Through our e-services network, we facilitate
business-to-business transactions among small businesses, service suppliers and
business portals.
Small Businesses. Our e-services platform provides small businesses with
online access to business services that have not previously been readily
available to them. Our integrated Web-based solution allows time- and resource-
constrained small businesses to complete over 30 critical business functions
more efficiently than with traditional offline methods. Furthermore, our
platform enables small businesses to learn about and execute each business
function in an efficient step-by-step manner, all with a uniform appearance and
execution process. By accessing our e-services network, small businesses can:
. gain functional expertise by using decision-making tools, questionnaires,
testimonials and other educational content through our Learn About ItSM
process;
. streamline the execution of business services by accessing a step-by-
step, template-driven methodology through our Get It DoneSM process;
. gain access to personalized services, such as status of work-in-progress
and recommendations for additional services, through our My WorkspaceSM
feature;
. access new sales opportunities by real time notification of corporate
buying activities through our Lead GeneratorSM service;
. receive consistent online and offline customer support across all of our
services; and
. pay for the range of services through a single payment and billing
system.
Business Service Providers. We carefully select each of the business service
providers within our e-services network and act as the electronic channel for
them to effectively reach the small business market. We customize and enhance
the offerings of service suppliers specifically for the small business market
and integrate them into our e-services platform with common interfaces and a
consistent look and feel. Our platform allows these organizations to make their
services available to small businesses on a large scale, while allowing small
businesses to receive these services on a customized and personalized level.
Business Portals. There are thousands of companies with small business
customers that have created or will create Internet portals to better reach and
serve their small business customers. We syndicate our e-services platform to
these portals by allowing them to integrate our e-services into their
offerings. By expanding the depth and breadth of services business portals
offer to their customers, we provide them the benefits of increased customer
traffic, improved customer
24
<PAGE>
retention and new revenue streams. Our services are co-branded with each
portal's logo and Web design and are hosted by our servers in order to maintain
a consistent work environment for our users and provide the technical support
required to maintain our platform for the portals.
Our Growth Strategy
Our goal is to become the dominant provider of Web-based business services
to the small business market. The key elements of our strategy are:
Capitalize on our Existing Global Distribution Network. Currently, we have
agreements with over 55 business portals that act as our distribution partners.
These distribution partners have extensive customer bases. We will take
advantage of the broad reach of this established distribution network to market
our e-services.
Further Expand our Global Distribution Network. We will leverage our market
position and technology platform to expand the number of our distribution
partners. We will continue to target the thousands of companies with
concentrated small business customer bases and that have Internet portal
strategies. We have built and will expand our business development
infrastructure to service the continuing addition of distribution partners and
to support joint online and offline marketing initiatives.
Continue to Expand the Number of Small Business E-Services We Offer. We
currently have over 30 e-services available through our network and we intend
to continuously add to and enhance our e-services. By adding additional e-
services, we will increase the opportunity to offer our customers services
targeted to their specific needs, which will drive new as well as repeat usage.
We intend to increase the number of services offered by:
. Leveraging our small business knowledge to expand services into new
categories. We will continue to leverage our knowledge of the small
business market captured through customer feedback, usage data, user
groups, demographic data and customer service to expand and modify our
services offering beyond our current categories.
. Enabling business services suppliers to add services to our network
themselves. We are developing technology to enable suppliers to add their
services into our network without significant technical assistance. We
will monitor new service introductions in order to maintain navigational
ease and ensure the quality of services we offer.
. Expanding international service offerings. We will develop services that
are specifically designed for foreign markets to increase our
international registered user base. In addition, we intend to expand our
business service supplier relationships internationally by identifying
partners within specific countries to fulfill certain of our services
locally.
Tailor Our E-Services for Specific Vertical Markets. We will add new
services and tailor existing services to meet the specific needs of small
businesses in selected industry vertical markets, such as the real estate and
retail industries.
Leverage Our Existing Network to Generate New Revenue Streams. Our network
of small businesses, distribution partners and business services suppliers is
an asset that can be utilized in new and powerful ways. For example, we
recently added a service for small businesses to promote and sell their
products and services to other small businesses within our network. Through
this and other initiatives, we can increase the value we add to all parties
using our platform.
Strengthen Our Relationship With Our Small Business Users. We intend to
strengthen our relationships with our small business customers and foster
repeat usage by continuing to provide high quality customer service and
promoting specific services based on customer interest and usage. Our customer
care staff will continue to use e-mail, online chats and tutorials to
facilitate the use of our services and promptly respond to customer requests.
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Enter into New Strategic Relationships and Acquisitions. We anticipate that
we will pursue strategic relationships and acquisitions in order to rapidly
expand the depth and breadth of our e-services, expand our geographic and
industry-specific presence and acquire new, complementary technologies.
Our E-Services
We provide our customers with a wide array of business services that we
categorize into eleven primary workshops:
Workshop E-Service
- ------------------------------------------
Public Relations . Write a Press Release
. Review a Press Release
. Send a Press Release
. Monitor Press Coverage
. Find a Tradeshow
Online Advertising . Banner Ad Campaigns
. Send Direct E-Mail
. Submit to Search
Engines
Direct Mail . Buy Mailing Lists
. Launch a Direct Mail
Campaign
. Web site Postcards
Sales . Lead Generator
. Business Partner
Program
. Company Information
Recruiting . Review Salary Data
. Job Postings
. Search Resumes
. Find Temporary
Employees
Workshop E-Service
Credit . Accept Credit Cards
. Buy a Credit Report
. Collect Bad Debts
Market Research . Company Research
. Monitor Industries
Tech Support . Purchase Business Software
. Online File Storage
. Backup Your Computer
Training . Take Online Tutorials
. Buy Business Books
. Buy Management
Business Planning Software
. Buy Direct Marketing
Software
Travel . Make Travel Reservations
We have designed our workshops to simplify the execution of these critical
business functions. All of these e-services are provided in a user-friendly
format with a consistent user interface and a single payment process. Our Learn
About ItSM and Get It DoneSM approach allows small business customers to gain
expertise and complete these functions in an efficient, step-by-step fashion.
Our My WorkspaceSM feature provides a personalized interface that allows the
small business customers to monitor the progress of tasks underway while
providing additional information on promotions and recommendations that pertain
to workshops that our customers have previously used or in which the customers
have expressed interest. At each step in the process, we provide ongoing
customer support through our highly trained customer care team to guide our
small business customers through the process.
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<PAGE>
An example of this approach is our "Send a Press Release," one of our
services that helps small businesses execute public relations campaigns. The
following is our process to help our customers effectively create and
distribute a press release:
[CUSTOMER SUPPORT LOGO]
Learn About the Service. A small business customer can receive education on
our press release service and the most effective ways of sending press releases
through our "Learn About It" area. A small business customer can find:
. a general overview of the service;
. a list of advantages of using our service versus other, more traditional
methods;
. a description of how our service works;
. a general overview of the press release distribution options;
. a listing of prices;
. customer testimonials; and
. answers to frequently asked questions about press releases.
Compose the Press Release. After learning about the service and making the
decision to proceed with execution of the release, our customer is presented
with the first step of the press release "Get It Done" process. In this step,
our customer composes the release by entering the content of the press release,
company data and the distribution date. For an additional charge to our
customer, one of our product specialists will review the release and provide
guidance to the customer.
Select the Distribution Options. In this next "Get It Done" step, our
customer is presented with a wide array of distribution options--ranging from
local, state and regional media outlets to broader and more complex national
and international distribution. After selecting the geographic distribution for
the release, our customer can choose up to five industry categories for free
distribution to the trade media for these industries.
Proof and Edit the Order. Once our customer composes the release and selects
the distribution options, the customer enters the third "Get It Done" step.
This step allows the customer to review the provided information and make
changes if necessary.
Execute Payment for the Order. In this "Get It Done" step, we present the
customer with the final order details as well as the final payment price. Our
customer can pay either directly into the site through secured credit card
transaction or a credit card payment via phone.
Distribution of the Release. After we receive approved payment, we submit
the press release for distribution through our selected service provider. Our
customer service department informs the customer as to time of release
distribution as well as the links for viewing the release through the online
media.
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Distribution Partners
Over 55 business portals are distribution partners for our e-services
platform. Currently, these distribution partners include:
About.com
Advancing Women Encanto NewsReal
Fortune Financial Group Office.com
America Online, Inc. Old Kent Bank
AT&T Business Networking FreeAgent.com
FreeDrive Online Inc.
Bank of America Hispanic Business Orbit Commerce
BellSouth How2.com PR Newswire
Bigstep.com IBM Small Business Prodigy
Black Enterprise IBM Business Partners Prodigy Business
Black Stocks (New Visions) InfoUSA Solutions
Bloomberg iVillage.com PurchasePro.com
CCH JIAN Region Online (12
KiraCom regional portals)
ChamberBiz smalloffice.com
Citibank LA Times
ClickAction libertynet.com Spare Time
dbusiness.com Lycos staffleasing.com
Dell Computer Corporation theGlobe.com
EmployeeMatters Mail Boxes Etc.
Wells Fargo
Vicinity Corporation
The following is a summary of the nature of the relationship we have with
some of our significant distribution partners.
America Online, Inc. In January 2000, we signed an agreement to provide
sales and marketing services on a customized co-branded site which is
accessible throughout certain of America Online's properties, including AOL,
CompuServe and Netscape. Through this agreement, America Online users can
access our public relations, online advertising, direct mail, market research
and sales workshops. We paid AOL a $6.0 million fee to enter into this
agreement. Under the terms of the agreement, AOL has committed to provide a
minimum number of page views of the co-branded site over the 18-month term of
the agreement. In addition, AOL has agreed to license a co-branded version of
its AOL Instant Messenger service for us. In connection with this agreement, we
also issued a three-year warrant to AOL to purchase 276,000 shares of our
common stock at $8.36.
Dell Computer Corporation. In December 1999, we entered into an agreement
with Dell, under which Dell offers a majority of our business services to its
customers and prospects. In addition, we will participate in several joint
marketing activities with Dell in order to drive potential and existing
customers to our co-branded Web site. The agreement provides that we will share
with Dell the e-services revenue generated by the Dell users, and will pay a
fee for each registered user and e-services customer generated through this
relationship. In addition, we will pay Dell a $2.0 million fee for integrating
our co-branded site 12 months after the launch of the site. If Dell provides us
less than a minimum number of paying customers during the first 12 months after
launch of the site, Dell will refund a portion of the fee. Either party may
terminate this agreement six months after the launch. In connection with this
agreement, we also issued a two-year warrant to Dell to purchase 150,000 shares
of our common stock at $8.36 per share. In addition, in December 1999, Dell
purchased 598,086 shares of our common stock for $5.0 million.
Mail Boxes Etc. In September 1999, we signed a two year agreement to be the
exclusive business services provider for Mail Boxes Etc. within its online
properties. Mail Boxes Etc. has rolled out a program to encourage franchise
owners to promote our services to their customers. This program includes in-
store promotional materials and Web site promotions. We will also be
customizing our e-service templates to incorporate Mail Boxes Etc. branding and
information so that franchise owners can use our services to manage their
businesses. In December 1999, Mail Boxes Etc. purchased 239,234 shares of our
common stock for $2.0 million.
PurchasePro.com. We signed a one-year distribution agreement with
PurchasePro.com in June 1999. We are the platform for business services on
PurchasePro.com's Web site, and are substantially integrated into its Web site.
In addition, we have co-developed our Lead Generator service with
PurchasePro.com, which allows
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<PAGE>
companies to respond to requests for quotations initiated by other companies
for the purchase of goods and services. In December 1999, PurchasePro.com
purchased 179,425 shares of our common stock for $1.5 million.
Smalloffice.com. Smalloffice.com is one of the leading online providers of a
comprehensive set of proprietary content, community, business tools, and
services for owners and operators of small business and income-producing home
offices. Smalloffice.com has the exclusive digital content rights from Home
Office Computing and Small Business Computing & Communications, two leading
publications in the small business market with a combined monthly circulation
exceeding 650,000 as of June 1999. In December 1999, we signed an agreement
with smalloffice.com to integrate our e-services platform throughout the
content and community areas of the smalloffice.com Web site. Either party may
terminate this agreement by providing written notice 30 days prior to the
termination date. In addition, we are engaged in multiple online and offline
joint marketing initiatives. In December 1999, Smalloffice.com purchased
119,617 shares of our common stock for $1.0 million.
Business Development and Marketing
We attract small business customers through an integrated distribution and
electronic marketing model. Our primary distribution strategy is to syndicate
our services to sites that appeal to small businesses, rather than to incur the
significant costs associated with promoting DigitalWork.com as a destination
site. Once users have been introduced to our services through these
distribution partners, we analyze their usage patterns and their preference,
demographic and other data to develop focused online and offline marketing
programs.
Our business development and marketing strategy is designed to increase the
number of registered users and to convert them into customers. We implement our
strategy as follows:
. We conduct online and offline marketing programs with our distribution
partners that are designed to attract users to our e-services platform
through our co-branded sites. Our online marketing programs include
banner advertising, permission-based e-mail marketing and sponsorships.
Offline marketing programs include direct mail and print advertising
targeting our distribution partners' existing customers.
. We collect demographic and other data from potential small business users
who opt into our database when they register. Periodically, we send these
users targeted promotional messages highlighting various services that
meet their stated preferences and needs. In addition, users receive a bi-
weekly electronic magazine via e-mail. Messages to the users are co-
branded with the respective distribution partner's logo and direct the
potential user back to our co-branded e-services platform for the
advertised services.
. We operate a national advertising and public relations campaign using a
broad range of media to promote our unique e-services platform and our
relationships with leading business portals.
Our Systems and Technology
Since our inception, we have dedicated significant resources to the
development of the technology behind our e-services platform. Rather than
creating a series of hyperlinks to the service providers in our network, we
customize and enhance the providers' offerings specifically for the small
business market and integrate them into our e-services platform. We syndicate
this e-services platform to companies that have Internet portals focused on the
small business customer. Our e-services platform is co-branded with each
portal, but is actually hosted by our servers to maintain a consistent work
environment for our customers.
Our systems, which include Internet servers, database servers, load-
balancing hardware, switches, and routers, are housed at Exodus Communications'
Chicago facility. Exodus Communications is an independent provider of Internet
hosting services. Exodus provides continuous physical security, fully redundant
power supply with generator backup, cooling systems, and connectivity to the
Internet. Our systems are designed to allow rapid expansion, to ensure maximum
network uptime, to support heavy user traffic, and to provide a secure
e-commerce environment. We maintain multiple Internet servers on a web farm and
balance the load delivered to each server using third-party load-balancing
hardware. Additional Internet servers can be added to our system to handle
increased transaction volume without affecting our service.
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<PAGE>
Our systems are designed to be redundant so that no single point of failure
disrupts our system. The systems are comprised of Oracle databases running on
Sun hardware. We have developed monitoring systems to provide continuous
notification and coverage of our technology platform.
Intellectual Property
We rely on a combination of trademark, copyright, trade secret protection
and confidentiality or license agreements with our employees, customers and
business partners to protect our proprietary rights in products, services,
know-how and information. We have submitted applications to the Patent and
Trademark Office to register some of our service marks, including the name of
our company. Currently, the Patent and Trademark Office is reviewing the most
significant of our service marks through an office action. We expect that the
Patent and Trademark Office will submit these service marks for publication in
the near future. While we will diligently work to register our most important
service marks, we cannot assure you that the Patent and Trademark Office will
register any of our service marks.
Our means of protecting our proprietary rights in the United States or
abroad may not be adequate and competitors may independently develop similar
technology. We cannot be certain that our services do not infringe patents or
other intellectual property rights that may relate to our services. Like other
technology and Internet based businesses, we face the risk that we will be
unable to protect our intellectual property and other proprietary rights, and
the risk that we will be found to have infringed the proprietary rights of
others.
Competition
The small business e-services market is new and rapidly evolving.
Competition for small business customers, business service providers and
distribution partners is intense and is expected to increase significantly in
the future. Technological barriers to entry are relatively insubstantial. We
believe that the principal competitive factors for companies seeking to provide
e-services to small businesses include:
. the breadth and depth of services offered;
. the reach of distribution channels through which services are marketed;
. the reliability of transaction fulfillment;
. the quality of customer services offered; and
. the brand awareness with small businesses.
We compete with both Internet-based as well as traditional providers of
business services. Our current and potential competitors include:
. companies offering business services to the small business market, such
as Allbusiness.com;
. companies operating Web sites that principally sell deeply discounted
products to small businesses over the Internet, such as Onvias.com;
. business portals who are not currently partners of ours;
. traditional business service providers that may offer their services
online; and
. companies that offer a broad array of services over the Internet, such as
Microsoft and Yahoo!, which may elect to add businesses services similar
to ours.
In addition to the competition for small business customers, we face
competition in securing strategic alliances with business portals and business
service providers. This competition may prove to decrease the amount of revenue
we receive from our strategic relationships with business portals and service
providers.
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<PAGE>
Also, our agreements with our strategic partners have termination provisions
ranging from termination for convenience to termination for a breach of the
agreement, which may allow one or more of our strategic partners to terminate
their relationships with us and partner with our competitors.
Some of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing, technical and other resources. Some of these
competitors may be able to secure distribution channels and service providers
on more favorable terms than we can. In addition, many of these competitors may
be able to devote significantly greater resources to:
. conduct marketing and promotional campaigns;
. attract traffic to their Web sites;
. attract and retain key employees; and
. develop Web sites and systems.
Increased competition may result in reduced operating margins and loss of
market share and adversely affect our relationships with our distribution
partners and service suppliers. We cannot assure you that we will be able to
compete successfully against current and future competitors or that competition
will not have a material adverse effect on our business, results of operations
and financial condition.
Government Regulation
There is an increasing number of laws and regulations pertaining to the
Internet, including laws or regulations relating to user privacy, liability for
information retrieved from or transmitted over the Internet, online content
regulation, user privacy, taxation and domain name registration. Moreover, the
applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, patent, trademark,
trade secret, obscenity, libel employment and personal privacy is uncertain and
developing.
Privacy Concerns. Legislatures and government agencies have adopted and are
considering adopting laws and regulations restricting the collection and use of
personal information obtained from individuals when accessing Web sites, which
could limit our ability to use our databases to generate revenue.
The Federal Trade Commission, or FTC, adopted regulations effective April
21, 2000 regarding the collection and use of personal identifying information
obtained from individuals when accessing Web sites. These regulations include
requirements that companies establish certain procedures prior to April 21,
2000 to, among other things:
. give adequate notice to consumers regarding information collection and
disclosure practices;
. provide consumers with the ability to have personal identifying
information deleted from a company's database;
. provide consumers with access to their personal information and with the
ability to rectify inaccurate information; and
. clearly identify affiliations or a lack of affiliations with third
parties that may collect information or sponsor activities for a services
membership.
These regulations also include enforcement and redress provisions. We are
currently implementing programs designed to ensure that we comply with these
regulations. We do not believe these regulations will result in significant
additional costs or that they will materially affect our ability to obtain new
customers.
The FTC has also begun investigations into the privacy practices of
companies that collect information on the Internet. One investigation resulted
in a consent decree pursuant to which an Internet company agreed to
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<PAGE>
establish programs to implement the principles noted above. We may become
subject to a similar investigation, or the FTC's regulatory and enforcement
efforts may adversely affect our ability to collect demographic and personal
information from customers. This, in turn, could have an adverse effect on our
ability to provide highly targeted opportunities for advertisers and electronic
commerce marketers.
Internet Taxation. A number of legislative proposals would impose additional
taxes on the sale of goods and services over the Internet, which may
substantially impair the growth of commerce on the Internet and, as a result,
adversely affect our opportunity to derive financial benefit from these
activities.
Domain Names. Domain names are addresses on the Internet, namely the World
Wide Web. The current system for registering, allocating and managing domain
names has been the subject of litigation and proposed regulatory reform.
Although we assert trademark rights in our domain names, third parties may
bring claims for infringement against us for the use of these trademarks. There
can be no assurance that these domain names will not lose their value, or that
we will not have to obtain entirely new domain names in addition to or in lieu
of our current domain names if reform efforts result in a restructuring in the
current system.
Jurisdiction. Due to the global nature of the Internet, it is possible that,
although we principally operate our business in Illinois, the governments of
other states and foreign countries might attempt to regulate our business
activities. In addition, as our service is available over the Internet in
multiple states and foreign countries, these jurisdictions may require us to
qualify to do business as a foreign corporation in each of these states or
foreign countries, which could subject us to taxes and other regulations.
Legal and Regulatory Proceedings
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of business. We are not
aware of any legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition or results of operations.
We received a letter from from CDL Capital Corp., successor-in-interest to
Invest Linc Capital Corp., asserting that it is entitled to receive warrants to
purchase 238,100 shares of our common stock at an exercise price of $1.10 per
share as compensation for consulting services it rendered to us under an
agreement. We believe, based on consultation with counsel, that this entity is
not legally entitled to these warrants and we intend to defend this claim
vigorously. Our counsel has responded to CDL Capital Corp's request for
warrants, but we have not received a response from CDL addressing the issues
surrounding the issuance of warrants. However, due to the uncertainties
surrounding claim resolution we cannot assure you that we will resolve this
issue on favorable terms.
Employees
As of December 31, 1999, we had 68 full-time employees. We have never had a
work stoppage. We are not a party to any collective bargaining agreements. We
consider our relations with our employees to be good. Our future success will
depend, in part, on our ability to continue to attract, integrate, retain and
motivate highly qualified technical and managerial personnel, for whom
competition is intense.
Facilities
Our executive, administrative and operating offices are located in
approximately 23,000 square feet of leased office space in Chicago, Illinois
under leases that expire on December 31, 2004. We have entered into a letter of
intent to lease office space in another building in Chicago, Illinois.
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<PAGE>
MANAGEMENT
Executive Officers, and Directors
The following table sets forth information regarding our executive officers,
directors and the individual who has agreed to join our board of directors upon
completion of this offering.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert A. Schultz....... 33 Chief Executive Officer and Chairman of the
Board of Directors
Craig A. Terrill........ 40 President, Chief Operating Officer and Director
David P. Aniol.......... 40 Chief Financial Officer
John Banta.............. 38 Vice President of Strategic Alliances
Randy Grudzinski........ 31 Vice President of Marketing
Doug Mulderink.......... 35 Vice President of Technology and Development
Brian Petula............ 33 Vice President of Business Development
Loreen Sieroslawski..... 34 Vice President of Finance and Business Operations
Raj Atluru(1)........... 30 Director
Warren Packard(2)....... 32 Director
Marc Benioff(1)......... 35 Director
Edward C.
Coppola(1)(2).......... 45 Director Nominee
</TABLE>
- --------
(1) Will become a member of our compensation committee upon the completion of
this offering.
(2) Will become a member of our audit committee upon the completion of this
offering.
Robert A. Schultz has served as our chief executive officer and chairman of
the board since he co-founded our company with Mr. Terrill in March 1998. From
February 1997 to March 1998, Mr. Schultz was president and general manager of
Nequity, a wholly-owned subsidiary of Signet Bank, which was focused on
providing Internet-based services to the small business market. From January
1996 to February 1997, he was a vice president responsible for target marketing
and new product development for the commercial services group of Signet Bank.
From August 1992 to December 1995, he was a consultant with Deloitte & Touche.
From August 1989 to July 1992, Mr. Schultz was a consultant with McKinsey and
Company. Mr. Schultz holds a B.A. degree in economics from Northwestern
University and an M.B.A. in finance from the University of Chicago Graduate
School of Business.
Craig A. Terrill has served as our president and chief operating officer and
as a director since he co-founded the company with Mr. Schultz in March 1998.
From 1997 to 1998, Mr. Terrill was a partner with Intellectual Capital, a
venture consulting firm that works exclusively with early-stage companies,
where he was one of the three senior leaders for Nequity. From 1990 to 1997,
Mr. Terrill was an owner and senior executive at Kuczmarski & Associates, a
strategic marketing and new products consulting firm. Prior to 1990, he was a
manager with Andersen Consulting. He is an adjunct professor of
entrepreneurship at the Graduate School of Business at the University of
Chicago and an adjunct professor of marketing at the J.L. Kellogg Graduate
School of Management at Northwestern University. Mr. Terrill authored a book,
Market Leadership Strategies for Service Companies, that was published in
October 1999. He holds a B.S. degree in business administration from Miami
University (Ohio) and a Masters of Management degree from the J.L. Kellogg
Graduate School of Management at Northwestern University.
David P. Aniol has served as our chief financial officer since October 1999.
From January 1996 to October 1999, Mr. Aniol was chief financial officer of
Open Port Technology, a venture capital-backed developer of Internet messaging
software. From December 1991 to December 1995, he was with McMaster-Carr Supply
Co. in various operational and financial roles. From May 1981 to November 1991,
he was with PricewaterhouseCoopers, most recently as a senior manager, focusing
on the small business and technology industries and mergers and acquisitions.
He is a certified public accountant. Mr. Aniol holds a B.S. in accounting and a
M.S. in taxation from DePaul University.
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<PAGE>
John Banta has served as our vice president of strategic alliances since
February 1999, having been an investor in the company prior to joining. From
September 1994 to February 1999, Mr. Banta served as vice president of
corporate services for PaineWebber Incorporated. He currently serves as a
director of the Investment Management Consultants Association. Mr. Banta also
currently serves as general partner of Maroons Partnerships, a private equity
firm. Mr. Banta holds a B.A. in finance from the University of Illinois College
of Commerce and an M.B.A. in finance and statistics with high honors from the
University of Chicago Graduate School of Business.
Randy Grudzinski has served as our vice president of marketing since March
1998. From September 1997 to March 1998, Mr. Grudzinski was a senior associate
with Intellectual Capital, Inc., a venture consulting firm that works
exclusively with early stage companies. From July 1995 to August 1997, Mr.
Grudzinski was a senior associate with Kuczmarski & Associates, a strategic
marketing and new services consulting firm. At both firms, he developed and
launched new service strategies. Mr. Grudzinski holds a B.A. degree in
economics and mathematics from DePauw University and an M.B.A. with high honors
from the J.L. Kellogg Graduate School of Management at Northwestern University.
Douglas J. Mulderink has served as our vice president of technology and
development since October, 1998. From February 1997 to February 1998, Mr.
Mulderink served as director of customer services for NetDox, a security-
focused Internet start-up company. From February 1996 to January 1997, he was a
manager with Deloitte & Touche Consulting and from January 1988 to December
1995, he was a management consultant and manager for Andersen Consulting. At
both Andersen Consulting and Deloitte & Touche Consulting, Mr. Mulderink
developed and managed enterprise systems. Mr. Mulderink holds a B.A. in
psychology from Beloit College.
Brian Petula has served as our vice president of business development since
November 1998. Prior to this position, Mr. Petula served as our vice president
of publishing from July 1998 to November 1998. From July 1997 to July 1998, Mr.
Petula was a co-partner and president of Entrepreneur Publications, Inc., a
magazine holding company, serving as publisher of NC Entrepreneur and Photo
Imaging. During that time, he served as a director of High Growth Alliance,
L.L.C., a consortium of business consultants. From January 1996 to January
1998, he was director of planning and development for Farr Associates, Inc.
Additionally, Mr. Petula was vice president of iXL from January 1994 to January
1996. He is a member of the bar of the State of North Carolina. Mr. Petula
holds a B.A. in government from Lehigh University and a J.D./M.B.A. from Wake
Forest University.
Loreen Sieroslawski has served as our vice president of finance and business
operations since August 1998. From June 1992 to July 1998, Ms. Sieroslawski was
vice president of finance and operations at the consulting firm of Kuczmarski &
Associates. From September 1987 to May 1992, she was a senior accountant for
the Kenneth Leventhal & Company accounting firm. Ms. Sieroslawski is a
certified public accountant and a member of the American Institute of Certified
Public Accountants and the Illinois CPA Society. She holds a B.A. in accounting
from Iowa State University.
Raj Atluru became one of our directors on May 17, 1999. In January 2000, Mr.
Atluru joined Draper Fisher Jurvetson. From August 1997 to December 1999, Mr.
Atluru was a principal with TL Ventures where he focused on early stage
Internet business-to-business services and applications companies. Prior to
that time, he worked in the leveraged finance group and Asian investment
banking group of Credit Suisse First Boston in New York, Hong Kong and
Singapore. Mr. Atluru also serves as a director for Syncra Systems, an
application services provider in the inter-enterprise supply chain and
collaboration field, and Strategic Weather Services, a company providing long
range weather forecasting data and planning applications for major
manufacturers, retailers and agri-business. Mr. Atluru holds a B.S. and M.S. in
environmental engineering from Stanford University and an M.B.A. from the
Stanford Graduate School of Business.
Warren Packard became one of our directors on May 17, 1999. Since June 1997,
Mr. Packard has been with Draper Fisher Jurvetson, a venture capital firm, most
recently serving as director. From January 1996 until
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<PAGE>
June 1997, Mr. Packard was a co-founder and vice president of business
development of Angara E-Commerce Services, an Internet company focused on
delivering hosted Web site personalization services. From June 1996 to January
1997, Mr. Packard was an associate at Institutional Venture Partners, a venture
capital firm. From 1991 to August 1995, Mr. Packard served as a senior
principal engineer in the new business and advanced product development group
at Baxter International. He currently serves as a director of Digital Impact
and Fogdog Sports. Mr. Packard is a Phi Beta Kappa graduate of Stanford
University and holds a B.S. and M.S. in mechanical engineering. He also holds
an M.B.A. from Stanford University, where he was an Arjay Miller Scholar.
Marc Benioff became one of our directors in August 1999. Mr. Benioff is
currently the chairman of salesforce.com. For the 13 years prior to his service
at salesforce.com, Mr. Benioff was a senior executive with Oracle Corporation.
Mr. Benioff also sits on the board of directors of Notifi.com, an Internet
start-up unifying the telephony industry with the Internet and Yield Dynamics,
a solutions provider for the semiconductor industry. Mr. Benioff hold a B.S. in
business administration from the University of Southern California.
Edward C. Coppola will become one of our directors upon the completion of
this offering. Mr. Coppola is an executive vice president and director of The
Macerich Company where he is responsible for directing acquisition activity and
establishing strategic direction. Mr. Coppola has been with The Macerich
Company since 1977. He is also actively involved in the capital market
activities for Macerich and in developing and maintaining relationships with
joint venture partners. Mr. Coppola holds a B.B.A. in finance from the
University of Notre Dame and a J.D. from Drake University.
Board Composition
Our board of directors is currently comprised of five directors and we
intend to expand the board of directors to seven directors upon the
consummation of this offering. Messrs. Atluru and Packard were elected to the
board of directors through a voting agreement among our company and some of our
stockholders. Each of our current directors will continue to serve on our board
of directors after the completion of this offering.
Following this offering, our board of directors will be divided into three
classes serving staggered three-year terms, except for the first term of Class
I and Class II directors, which will be one- and two-year terms, respectively.
Each year, the directors of one class will stand for election as their terms of
office expire. After this offering, we expect that Messrs. Atluru and Benioff
will be designated as Class I directors, with their terms of office expiring in
2001, Messrs. Coppola and Packard will be designated as Class II directors with
their terms of office expiring in 2002, and Messrs. Schultz and Terrill will be
designated as Class III directors with their terms of office expiring in 2003.
Each officer is elected by, and serves at the discretion of, our board of
directors. Each of our officers and directors, other than non-employee
directors, devotes his full time to our affairs. Our non-employee directors
devote such time to our affairs as is necessary to discharge their duties.
There are no family relationships among our directors, officers or key
employees.
Board Committees
Currently, our board of directors does not have any committees. Upon the
completion of this offering, our board of directors intends to create an audit
committee and a compensation committee.
We expect that the audit committee will consist of Messrs. Atluru, Coppola
and Packard. The audit committee will review our financial statements and
accounting practices, make recommendations to our board of directors regarding
the selection of independent auditors and reviews the results and scope of the
audit and other services provided by our independent auditors.
We expect that the compensation committee will consist of Messrs. Atluru,
Benioff and Coppola. The compensation committee will make recommendations to
the board of directors concerning salaries and incentive compensation for our
executive officers and administers certain of our employee benefit plans.
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<PAGE>
Director Compensation
We do not currently compensate our directors, but they are reimbursed for
out-of-pocket expenses incurred in connection with their duties as a director.
After the completion of this offering, directors who are also employees of
DigitalWork.com will receive no additional compensation for serving on our
board of directors. Outside directors, who are not employees of
DigitalWork.com, will receive an annual stipend of $10,000 per year after the
completion of this offering. We will grant outside directors options to
purchase 20,000 shares of our common stock at the initial public offering
price. These options will be granted under our amended and restated 1998 stock
option plan. In addition, we will continue to reimburse the outside directors
for all travel and other expenses incurred in connection with attending board
and committee meetings. In August 1999, in connection with his appointment as a
director, we granted Mr. Benioff an option to purchase 75,000 shares of our
common stock at a purchase price of $0.70 per share.
Compensation Committee Interlocks and Insider Participation
None of the anticipated members of our compensation committee is an officer
or employee of our company. None of our executive officers serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving on our compensation committee.
During our fiscal year ended December 31, 1999, our board of directors set
the compensation for executive officers. Mr. Schultz, our chief executive
officer and chairman of the board of directors, and Mr. Terrill, our president
and chief operating officer, participated as directors in deliberations and
determinations regarding executive compensation.
Executive Compensation
The following table sets forth information concerning compensation that we
paid to our chief executive officer and each of the four other highest paid
executives that earned more than $100,000 during 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation Awards
---------------- ---------------------
Securities Underlying
Salary Bonus Options
-------- ------- ---------------------
<S> <C> <C> <C>
Robert A. Schultz....................... $141,000 $ 9,500 --
CEO and Chairman
Craig A. Terrill........................ $141,000 $ 9,500 --
President and COO
Douglas J. Mulderink.................... $106,384 -- 170,200
Vice President of Technology and
Development
Randy Grudzinski........................ $102,000 $10,400 25,200
Vice President of Marketing
Loreen J. Sieroslawski.................. $101,000 $ 4,200 125,200
Vice President of Finance and Business
Operations
</TABLE>
In addition, we hired David Aniol as our chief financial officer in October
1999 and John Banta as our vice president of strategic alliances in February
1999. As of December 31, 1999, Mr. Aniol's annual base salary was $135,000 and
Mr. Banta's annual base salary was $108,000.
Options Granted and Restricted Stock Sold During 1999
Options. The following table sets forth information regarding the option
grants made to our chief executive officer and each of our four other most
highly paid executive officers during 1999. We have never granted any stock
appreciation rights. All options granted in 1999 were granted under our 1998
stock option plan. In accordance with the 1998 stock option plan, each grant
had an exercise price equal to the fair market value of our common stock on the
date of grant as determined by our board of directors, and the options have a
ten-year term.
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<PAGE>
The percent of total options granted to employees in 1999 is based on an
aggregate of 1,074,350 options granted to employees in 1999, including options
granted to the individuals listed in the following table. Potential realizable
value is calculated by assuming that the initial public offering price of
$12.00 per share appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price and sold on the
last day of the appreciated price. Potential realizable values are net of
exercise price, but before taxes associated with exercise. The assumed 0%, 5%
and 10% rates of stock appreciation are provided in accordance with the rules
of the SEC and do not represent our estimate or projection of future stock
price.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term
------------------------------------------ --------------------------------
Percent of
Number of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Per Expiration
Name Granted in 1999 Share Date 0% 5% 10%
---- ---------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert A. Schultz....... -- -- -- -- -- -- --
Craig A. Terrill........ -- -- -- -- -- -- --
Douglas J. Mulderink.... 120,000 11% $0.35 1/09 $1,398,000 $2,173,785 $3,299,828
50,000 5% $1.20 10/09 $ 540,000 $ 897,653 $1,435,607
200 0% $2.40 12/09 $ 1,920 $ 3,382 $ 5,598
Randy Grudzinski........ 25,000 2% $1.20 10/09 $ 270,000 $ 448,827 $ 717,803
200 0% $2.40 12/09 $ 1,920 $ 3,382 $ 5,598
Loreen J. Sieroslawski.. 100,000 9% $0.35 1/09 $1,165,000 $1,811,487 $2,749,857
25,000 2% $1.20 10/09 $ 270,000 $ 448,827 $ 717,803
200 0% $2.40 12/09 $ 1,920 $ 3,382 $ 5,598
</TABLE>
Restricted Stock. In October 1999, we sold Mr. Schultz 225,000 shares of our
common stock, Mr. Terrill 200,000 shares of our common stock and Mr. Aniol
230,000 shares of our common stock, at a price of $1.20 per share. These
shares, except for 35,000 shares sold to Mr. Aniol, are subject to our option
to repurchase the shares if the executive leaves his employment with the
company within four years which purchase option will be reduced by 25% each
year. To purchase the shares, Mr. Schultz issued us a $270,000 promissory note,
Mr. Terrill issued us a $240,000 promissory note, and Mr. Aniol issued us a
$276,000 promissory note. Each of the promissory notes has a five-year term
bearing interest at 5.93% per annum.
1999 Option Values
The following table shows the number of shares covered by both exercised and
unexercisable stock options as of December 31, 1999 and the values of these
exercised and unexercisable options for our chief executive officer and each of
our four most highly compensated executive officers. Each of these executive
officers exercised all exercisable options during 1999. To pay for the exercise
of the options, each of the executives issued us a five-year promissory note
bearing interest at 5.93% per annum.
The value of unexercised in-the-money options at December 31, 1999 is based
on a price per share of $8.36 as determined in good faith by the board of
directors, less the exercise price for these options.
1999 Year-End Options
<TABLE>
<CAPTION>
Number of Securities Value of Exercised and
Underlying Options Unexercised Options at
at December 31, 1999 December 31, 1999
----------------------- ------------------------
Name Exercised Unexercisable Exercised Unexercisable
---- --------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Robert A. Schultz............. 350,000 350,000 $2,917,250 $2,917,250
Craig A. Terrill.............. 350,000 350,000 $2,917,250 $2,917,250
Douglas J. Mulderink.......... 50,000 220,200 $ 416,750 $1,737,142
Randy Grudzinski.............. 200,000 225,200 $1,667,000 $1,847,192
Loreen J. Sieroslawski........ 50,000 175,200 $ 416,750 $1,397,942
</TABLE>
37
<PAGE>
Stock-Based Plans
Amended and Restated 1998 Stock Option Plan. We have established a stock
option plan to provide additional incentive to our employees, officers,
directors and consultants. Under the stock option plan, we may grant incentive
stock options to our employees and officers and non-qualified stock options to
our employees, officers, directors and consultants. Our board of directors or a
committee to whom the board has delegated authority, selects the individuals to
whom options are granted, interprets and adopts rules for the operation of the
stock option plan and specifies the vesting, exercise price and other terms of
options. As of December 31, 1999, we had outstanding options to purchase an
aggregate of 2,375,425 shares of our common stock, at a weighted average
exercise price of $0.44 per share. There are an additional 3,212,335 shares
reserved for issuance under the Amended and Restated 1998 Stock Option Plan. On
January 1 of each year beginning in 2001, the number of shares reserved
automatically increases by the lesser of 1.5 million, 4% of the outstanding
shares, or an amount determined by the board of directors.
The maximum term of an incentive stock option granted under the options is
generally limited to ten years. If an optionee terminates his or her service
with our company, the optionee generally may exercise only those options vested
as of the date of termination of service. Unless otherwise specified in the
option agreement, the optionee must effect such exercise within three months of
termination of service for any reason other than death or disability. The
exercise price of incentive stock options granted under the stock option plan
must be at least equal to the fair market value of our common stock on the date
of grant and in the case of 10% shareholders, 110% of the fair market value.
Payment of the exercise price may be made by such methods as determined by the
plan administrator and may include cash, check, a promissory note or shares of
our common stock owned by the holder for six months and valued at the fair
market value on the date of exercise in an amount equal to the exercise price.
In the event we are acquired or merged with another entity or we transfer
all or substantially all of our assets and the entity does not assume all
options, then immediately prior to such change of control all outstanding
options will be deemed to be vested and exercisable.
2000 Employee Stock Purchase Plan. We will initiate our 2000 Employee Stock
Purchase Plan shortly after the completion of this offering. Under this plan a
total of 750,000 shares of common stock will be made available for sale to our
employees. The purchase plan, which is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code of
1986, as amended, will be administered by our Board of Directors or by a
committee appointed by our Board of Directors. Employees are eligible to
participate if they are employed by us for at least 20 hours per week and for
more than five months in any calendar year. The purchase plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 10% of an employee's compensation, subject to certain limitations.
The purchase period will be implemented in a series of consecutive,
overlapping offering periods, each approximately six months in duration.
Purchase periods will begin on the first trading day on or after January 1 and
July 1 of each year and terminate on the last trading day in the period six
months later. However, the first purchase period will begin on the date on
which the registration statement of which this prospectus is a part is declared
effective by the Securities and Exchange Commission and terminate on the last
trading day in the period ending . Each participant will be
entitled through a payroll deduction to purchase stock on the first day of the
six-month purchase period and such election will be automatically exercised on
the last date of each purchase period. The purchase price of each share of
common stock under the purchase plan will be equal to 85% of the lesser of the
fair market value per share of common stock on the start date of that purchase
period or on the last day of the purchase period. Employees may modify or end
their participation in the offering at any time during the offering period.
Participation ends automatically on termination of employment with us. The
purchase plan will terminate in 2010 unless terminated sooner by our board of
directors.
Employment Agreements and Change of Control Arrangements
We will enter into employment agreements with Messrs. Schultz, Terrill,
Aniol, Banta, Grudzinski, Mulderink and Petula and Ms. Sieroslawski that will
become effective upon the completion of this offering.
38
<PAGE>
These agreements set forth each executive's base annual compensation level,
eligibility for salary increases, bonuses and options and level of benefits.
In addition, each of the agreements provides for separation benefits if such
executive is terminated without cause or for a constructive termination upon a
change of control of our company. In this event, each of Messrs. Schultz,
Terrill and Aniol will be entitled to receive a payment equal to six months
compensation and accelerated vesting of 50% of his unvested options and
restricted stock. In the event Mr. Grudzinski is terminated following a change
of control he will be entitled to receive four months compensation and
accelerated vesting of 50% of his unvested options. In the event that Messrs.
Banta, Mulderink and Petula and Ms. Sieroslawski are terminated following a
change of control of our company, the terminated executive will be entitled to
receive three months of compensation and accelerated vesting of 25% of his or
her unvested options.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our amended and restated certificate of incorporation permits us to
indemnify our directors and officers to the fullest extent permitted under
Delaware General Corporation Law. As permitted by Delaware law, our amended and
restated certificate of incorporation includes a provision that eliminates the
personal liability of our directors 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
our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for liability under Section 174 of the Delaware General Corporation Law
regarding unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or recision.
Further, as permitted by Delaware law, our by-laws provide that we are
required to indemnify our directors and officers to the fullest extent
permitted by Delaware law. Our by-laws provide that:
. we are permitted to indemnify our other employees and agents to the
fullest extent permitted by Delaware law;
. we may advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding; and
. the rights conferred in the certificate of incorporation and by-laws are
not exclusive.
In addition to indemnification provided for in our amended and restated
certificate of incorporation and by-laws, we have entered into agreements to
indemnify our directors and executive officers. These agreements, among other
things, provide for indemnification of our directors and executive officers for
certain expenses, including attorneys fees, judgments, fines and settlement
amounts incurred by such person in any action or proceeding, including any
action by or in the right of our company or any other company or enterprise to
which the person provides services at our request. We are also required to
advance expenses in certain circumstances. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons under
the provisions of our amended and restated certificate of incorporation and by-
laws, Delaware law or the agreements described above, we have been informed
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
39
<PAGE>
CERTAIN TRANSACTIONS
Since our inception in March 1998, we have not been a party to, and have no
plan to be a party to, any transaction or series of transactions in which the
amount involved exceeded or will exceed $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock had or will
have an interest, other than as described under "Management" beginning on page
33 and the transactions described below.
Transactions with Founders
In May 1998, in connection with our initial capitalization, we issued an
aggregate of 1.9 million shares of common stock, at $0.025 per share, to our
founders, Robert A. Schultz and Craig A. Terrill, for an aggregate purchase
price of $47,500. We have also granted stock options and sold restricted stock
to Messrs. Schultz and Terrill. For more information, please refer to
"Management--Executive Compensation" beginning on page 35.
Transactions with Management and Others
Private Placements of Preferred Stock. From April 1998 through June 1998, we
sold an aggregate of 1,866,672 shares of Series A preferred stock to investors
for an aggregate purchase price $350,001, or $0.1875 per share. From July 1998
to December 1998, we sold an aggregate of 2,374,000 shares of Series B
preferred stock to investors at an aggregate purchase price of $2.4 million, or
$1.00 per share. In May 1999, we sold an aggregate of 11,471,276 shares of
Series C preferred stock to investors at an aggregate purchase price of $12.4
million, or $1.08 per share. In December 1999, we sold an aggregate of
4,359,305 shares of our Series D preferred stock for an aggregate purchase
price of $36.4 million, or $8.36 per share. Each of the shares of preferred
stock will automatically convert into common stock upon the closing of this
offering.
The investors in the preferred stock included the following entities that
own 5% or more of our voting stock and two of our directors.
<TABLE>
<CAPTION>
Shares Shares Shares
of of of Aggregate
Series Series Shares of Series Purchase
Investor A B Series C D Price
-------- ------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Draper Fisher Jurvetson........ -- -- 5,258,460 508,373 $9,925,059
TL Ventures.................... -- -- 3,706,404 358,851 7,000,038
Attractor Capital Management... -- -- 463,296 897,129 7,999,999
Edward C. Coppola.............. 533,334 500,000 333,572 26,802 1,184,064
Marc Benioff................... -- -- 92,660 7,445 162,240
Raj Atluru..................... -- -- -- 11,961 99,994
</TABLE>
Warren Packard and Raj Atluru, two of our directors, are affiliated with
Draper Fisher Jurvetson.
Attractor Warrants. During December 1999, we issued to affiliates of
Attractor Investment Management, Inc., who together beneficially own more than
5% of our voting stock, warrants to purchase, in the aggregate, 192,261 shares
of our common stock. These warrants are exercisable until December 2, 2004 at a
per share exercise price of $8.36.
Series D Warrants. In December 1999, we issued to each of the purchasers of
our Series D preferred stock, including each of the holders of 5% of our voting
stock and directors listed in the table above, a warrant to purchase shares of
our common stock. The warrants are exercisable from the date the registration
statement of which this prospectus forms a part is declared effective by the
SEC to the one-year anniversary of this effective date. The holder of the
warrant may purchase a number of shares, based upon its pro rata holdings of
our Series D preferred stock, at the same price as the offering price per share
of this offering.
40
<PAGE>
Transactions With 5% Shareholder and Director Nominee. In November 1998, we
issued a warrant to Edward C. Coppola to purchase up to 124,000 shares of our
common stock at $1.10 per share, as compensation for business consulting
services he performed for us. This warrant will expire in November 2008. The
terms of the warrant were based upon the value of our stock at the time and the
amount we would pay an unaffiliated third party for similar services.
In April 1999, we issued Mr. Coppola and one of his affiliates convertible
promissory notes in the aggregate principal amount of $360,000. The notes had
an interest rate of 7% per annum. In May 1999, the entire outstanding balance
on the notes was converted into 333,572 shares of our Series C preferred stock
at a conversion price of $1.08 per share. In connection with this transaction,
we issued Mr. Coppola and one of his affiliates warrants to purchase up to
66,715 shares of our common stock at $1.08 per share. This warrant expires in
April 2004.
Registration Rights Agreement. We entered into an amended and restated
registration rights agreement with certain purchasers of our capital stock.
This agreement provides that these and other stockholders will have
registration rights with respect to the common stock issuable upon conversion
of Series C and Series D preferred stock. For more information, please see
"Description of Capital Stock--Registration Rights" beginning on page 47.
Compensation and Other Arrangements with Executives and Directors. We have
entered into indemnification agreements with our directors and certain officers
for indemnification and advancement of expenses to these persons to the fullest
extent permitted by law. We also intend to enter into similar agreements with
our future officers and directors. See "Management--Indemnification of
Directors and Executive Officers and Limitation of Liability" on page 39.
Our compensation arrangements and stock option grants to our executive
officers are described under the caption "Management--Executive Compensation"
beginning on page 36.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of December 31, 1999, as adjusted
to reflect the sale of shares of common stock in this offering, by:
. each stockholder that is known to us to beneficially own more than 5% of
our common stock;
. each of our directors;
. our chief executive officer and each of our executive officers; and
. all of our executive officers and directors as a group.
Unless otherwise indicated, the address for each of the named individuals is
c/o DigitalWork.com, Inc., 230 West Monroe Street, Suite 1950, Chicago,
Illinois 60606.
The number of shares includes common stock to be issued upon conversion of
preferred stock prior to the completion of this offering. Applicable percentage
ownership in the table is based upon 24,091,293 shares of common stock
outstanding as of December 31, 1999 and 30,341,293 shares outstanding
immediately following the completion of this offering. The percentage of shares
owned after this offering as set forth in the forth column in the table assumes
no exercise of the underwriters' over-allotment option.
We have determined beneficial ownership of our common stock in accordance
with the rules of the SEC. Shares of common stock subject to options presently
exercisable or exercisable within 60 days of December 31, 1999 are deemed to be
outstanding for the purpose of computing the percentage ownership of the person
or entity holding such options, but are not treated as outstanding for the
purpose of computing the percentage ownership for any other person or entity.
To the extent that any such shares are issued upon the exercise of options,
warrants or other rights to acquire our capital stock that are presently
outstanding or granted in the future or reserved for future issuance under our
stock plans, new public investors will be subject to further dilution.
<TABLE>
<CAPTION>
Percent of Common
Stock
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
------------------------ ------------ -------- --------
<S> <C> <C> <C>
Our Executive Officers and Directors
Robert A. Schultz (1)..................... 1,475,000 6.1% 4.9%
Craig A. Terrill (2)...................... 1,550,000 6.4 5.1
David P. Aniol............................ 230,000 * *
John Banta (3)............................ 198,337 * *
Randy Grudzinski.......................... 200,000 * *
Douglas Mulderink (4)..................... 110,000 * *
Brian Petula.............................. 100,000 * *
Loreen Sieroslawski (5)................... 100,000 * *
Raj Atluru (6) (7) (8).................... 5,778,794 24.0 19.0
Warren Packard (7) (8).................... 5,766,833 23.9 19.0
Marc Benioff.............................. 100,105 * *
All directors and executive officers as a
group (11 people)........................ 9,842,236 40.9 32.4
Other Five Percent Stockholders
Draper Fisher Jurvetson (7) (9)........... 5,766,833 23.9 19.0
TL Ventures (7) (10)...................... 4,065,255 16.9 13.4
Attractor Capital Management (7) (11)..... 1,552,686 6.4 5.1
Edward C. Coppola (7) (12)................ 1,584,423 6.6 5.2
</TABLE>
- --------
* Less than 1%
(1) Consists of the following:
. 1,250,000 shares of common stock owned by Mr. Schultz individually;
and
. 225,000 shares of common stock owned by a trust controlled by Mr.
Schultz.
42
<PAGE>
(2) Consists of the following:
. 605,000 shares of common stock owned by Mr. Terrill individually; and
. 945,000 shares of common stock owned by family trusts and relatives
of Mr. Terrill.
(3) Consists of the following:
. 148,337 shares of common stock owned by Maroons Capital II, a limited
partnership, of which Mr. Banta is a general partner; and
. options granted to Mr. Banta to purchase 50,000 shares of common
stock at an exercise price of $0.35 per share.
(4) Consists of the following:
. 42,000 shares of common stock owned by Mr. Mulderink individually;
. 8,000 shares of common stock owned by relatives of Mr. Mulderink; and
. options granted to Mr. Mulderink to purchase 60,000 shares of common
stock at an exercise price of $0.35 per share.
(5) Consists of the following:
. 44,000 shares of common stock owned by Ms. Sieroslawski individually;
. 6,000 shares of common stock owned by relatives of Ms. Sieroslawski;
and
. options granted to Ms. Sieroslawski to purchase 50,000 shares of
common stock at an exercise price of $0.35 per share.
(6) Includes 11,961 shares of common stock owned by Cyprus Partners, LLC, a
limited liability company of which Mr. Atluru is a member.
(7) Includes shares of common stock that may be purchased under a warrant
granted as part of our Series D convertible preferred stock financing.
Each warrant is exercisable from the date the registration statement of
which this prospectus forms a part is declared effective by the SEC to the
one year anniversary of the effective date. The holder of each warrant may
purchase a number of shares, based upon its pro rata holdings of our
Series D convertible preferred stock, at the same price as the offering
price per share of this offering.
(8) Includes 5,766,833 shares of common stock owned by the entities listed in
note 9 below which are collectively owned or controlled by Draper Fisher
Jurvetson as a general partner or manager. Mr. Packard and Mr. Atluru are
affiliated with Draper Fisher Jurvetson; however, both Messrs. Packard and
Atluru disclaim beneficial ownership of the shares of common stock owned
by each of the entities listed below.
(9) Consists of the following:
. 5,334,321 shares of common stock owned by Draper Fisher Jurvetson
Fund V, LP; and
. 432,512 shares of common stock owned by Draper Fisher Jurvetson
Partners V, LLC.
Draper Fisher Jurvetson's address is 400 Seaport Court, Suite 250, Redwood
City, California 94063.
(10) Consists of the following:
. 4,056,016 shares of common stock owned by TL Ventures IV, L.P.; and
. 9,239 shares of common stock owned by TL Ventures Interfund, L.P.
TL Venture's address is The 700 Building, 435 Devon Park Drive, Wayne,
Pennsylvania 19087.
(11) Consists of the following:
. 572,571 shares of common stock owned by Attractor QP LP;
. 546,668 shares of common stock owned by Attractor LP;
43
<PAGE>
. 120,700 shares of common stock owned by Attractor Ventures LLC;
. 67,988 shares of common stock owned by Attractor Institutional LP;
. 52,498 shares of common stock owned by Attractor Offshore Ltd; and
. warrants to purchase 192,261 shares of our common stock at $8.36 per
share.
Attractor Capital Management's address is 1110 Burlingame, Suite 211
Burlingame, California 94010
(12) Consists of the following:
. 696,852 shares of common stock owned by Mr. Coppola individually;
. 696,856 shares of common stock owned by the E.C. Coppola Family
Limited Partnership; and
. warrants to purchase 124,000 shares of our common stock at an
exercise price of $1.10 per share and 66,715 shares of our common
stock at an exercise price of $1.08 per share.
Mr. Coppola's address is 13455 Noel Road, Suite 400, Dallas, Texas 75240
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 100 million shares of common stock and ten million shares of preferred
stock. The following summary of certain provisions of the common stock and
preferred stock is subject to, and qualified in its entirety by, our amended
and restated certificate of incorporation and by-laws and by the provisions of
applicable law.
Common Stock
As of December 31, 1999, we had 24,091,293 shares of common stock
outstanding held of record by 80 stockholders. Subject to preferences that may
apply to shares of preferred stock outstanding at any time, the holders of
outstanding shares of our common stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
board of directors may from time to time determine. Each stockholder is
entitled to one vote for each share of common stock held on all matters
submitted to a vote of stockholders. Cumulative voting for the election of
directors is not provided for in our amended and restated certificate of
incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. Our common stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Upon the occurrence of a liquidation, dissolution or winding-up of
our company, the holders of shares of common stock would be entitled to share
ratably in the distribution of all of our assets remaining available for
distribution after satisfaction of all of our liabilities and the payment of
the liquidation preference of any outstanding preferred stock. Each outstanding
share of common stock is, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and non-assessable.
Preferred Stock
Upon completion of this offering, we will not have any outstanding preferred
stock. Under our amended and restated certificate of incorporation, our board
of directors may issue up to ten million shares of preferred stock in one or
more series with such designations, rights and preferences as may be determined
from time to time by the board of directors. Accordingly, the board of
directors is empowered under our amended and restated certificate of
incorporation, without further stockholder approval, to issue preferred stock
with dividend, liquidation, conversion, voting or other rights that may
adversely affect the voting power or other rights of the holders of our common
stock. In the event of issuance, preferred stock could be utilized to
discourage, delay or prevent an acquisition or change in control. We do not
have any present plans to issue any shares of preferred stock. The issuance of
preferred stock could have the effect of decreasing the market price of the
common stock and could adversely affect the voting and other rights of the
holders of common stock. See "Risk Factors--Our charter documents and Delaware
law contain provisions that may discourage takeover attempts which could
preclude our stockholders from receiving a change of control premium" on page
12.
Rights Plan
Upon completion of this offering, our board of directors will declare a
dividend distribution of one preferred share purchase right for each
outstanding share of common stock. The dividend is payable to stockholders of
record immediately prior to the completion of this offering, which is the
record date for this distribution and with respect to common stock issued
thereafter until the distribution date. Except as set forth below, each right,
when it becomes exercisable, entitles the registered holder to purchase from us
one one-hundredth of a share of the Series A participating preferred stock at
an exercise price equal to five times the initial offering price of our common
stock, subject to adjustment. The description and terms of the rights are set
forth in a rights agreement between us and Chase Mellon Shareholder Services,
L.L.C., as rights agent. A copy of the rights agreement is available to
stockholders free of charge from us upon request directed to our corporate
secretary.
45
<PAGE>
Initially, the rights will be attached to all certificates representing
shares of common stock then outstanding and no separate rights certificates
will be distributed. The rights separate from the common stock upon a
distribution date, which is the earlier of:
. 10 days following public announcement that an acquiring person, a person
or group of affiliated or associated persons, has acquired beneficial
ownership of 15% or more of the outstanding common stock; or
. 15 business days or a later date as our board may determine following the
commencement of, or announcement of an intention to make, a tender offer
or exchange offer the consummation of which would result in a person or
group becoming an acquiring person.
The definition of an acquiring person includes a person or group that
beneficially owns 15% or more of our outstanding common stock, but excludes any
of our employee benefits plans. Affiliates of Draper Fisher Jurvetson will not
be deemed to be an acquiring person as long as these entities beneficially own
less than 28% of our outstanding common stock. The date that a person or group
becomes an acquiring person is the share acquisition date. Until a right is
exercised, the holder of the right, as such, will not have any rights as a
stockholder, including the right to vote or receive dividends on those rights.
The rights agreement provides that, until the distribution date, the rights
will be transferred only with the common stock. Until the distribution date, or
earlier redemption or expiration of the rights, new common stock certificates
issued after the record date upon transfer or new issuance of common stock will
contain a notation incorporating the rights agreement by reference. Until the
distribution date, or earlier redemption or expiration of the rights, the
surrender for transfer of any certificates for common stock outstanding as of
the record date, even without any notation or a copy of the summary of rights,
will also constitute the transfer of the rights associated with the common
stock represented by this certificate. As soon as practicable following the
distribution date, separate certificates evidencing the rights will be mailed
to holders of record of the common stock as of the close of business on the
distribution date and to each initial records holder of certain common stock
issued after the distribution date, and separate rights certificates alone will
evidence the rights.
The rights are not exercisable until the distribution date and will expire
at the close of business on the tenth anniversary of the effective date of the
plan, unless earlier redeemed by us as described below.
In the event that any person becomes an acquiring person, in lieu of
acquiring preferred stock, each holder of a right, other than an acquiring
person, will thereafter have the right to receive upon payment of the exercise
price, the number of shares of common stock, or, in certain circumstances,
cash, or other types of our securities, having a value equal to two times the
exercise price. Notwithstanding the foregoing, following the occurrence of
triggering events described above or in the paragraph below, all rights that
are, or, under certain circumstances specified in the rights agreement were,
beneficially owned by an acquiring person or an affiliate or associate of an
acquiring person will be null and void.
In the event that, at any time following the share acquisition date, we are
acquired in a merger or other business combination transaction, or more than
50% of our assets or earning power is sold or transferred to any other person,
then each holder of a right, except rights which previously have been voided as
set forth above shall thereafter 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 exercise price and the number of shares of preferred stock or other
securities or property issuable upon exercise of the rights are subject to
adjustment from time to time to as a result of, among other things, a
subdivision, split--other than a stock dividend on the common stock payable in
shares of common stock--combination, consolidation or reclassification of the
Series A participating preferred stock or the common stock, or a reverse split
of the outstanding shares of Series A participating preferred stock or common
stock.
46
<PAGE>
At any time prior to the earlier to occur of a person becoming an acquiring
person or the expiration of the rights, and under certain other circumstances,
we may redeem the rights in whole, but not in part, at a price of $0.01 per
right which redemption shall be effective upon the action of the board of
directors. Additionally, at any time after a triggering event and prior to the
time that a person or group acquires 50% or more of the outstanding common
stock, we may exchange the rights, other than those that have become null and
void, in whole or in part, for shares of common stock at an exchange ratio of
one common stock per right, subject to adjustment.
The provisions of the rights agreement may be amended by our board of
directors in order to cure ambiguity, defect or inconsistency, provided that
after such time as any person becomes an acquiring person, the rights agreement
may not be amended in any manner that would adversely affect the interests of
the holders of the rights.
Option and Purchase Plans
As of December 31, 1999, we had outstanding options to purchase a total of
2,375,425 shares of our common stock under our Amended and Restated 1998 Stock
Option Plan. Additionally, as of December 31, 1999, under our Amended and
Restated 1998 Stock Option Plan, our board of directors was authorized to grant
options to purchase up to 3,212,335 additional shares of common stock. Under
our 2000 stock purchase plan, our employees will be able to purchase up to
750,000 shares of our common stock.
Warrants
In November 1998, we issued a warrant to Edward C. Coppola to purchase up to
124,000 shares of our common stock at $1.10 per share, as compensation for
advisory services he performed for us. This warrant will expire in November
2008. In April 1999, we issued Mr. Coppola and one of his affiliates warrants
to purchase up to 66,715 shares of our common stock at $1.08 per share. These
warrants expire in April 2004.
On December 2, 1999, we issued to each of the purchasers of our Series D
convertible preferred stock a warrant to purchase shares of our common stock.
The warrants are exercisable from the date the registration statement of which
this prospectus forms a part is declared effective by the SEC to the one-year
anniversary of this effective date. The holder of the warrant may purchase a
number of shares, based upon its pro rata holdings of our Series D convertible
preferred stock, at the same price as the offering price per share of this
offering.
In connection with the interactive marketing agreement we entered with AOL,
we granted AOL a warrant to purchase 276,000 shares of our common stock. These
warrants are exercisable until three years after the date the registration
statement of which this prospectus forms a part is declared effective by the
SEC, at a per share exercise price of $8.36.
In connection with the master services agreement we entered with Dell, we
granted Dell USA, L.P. a warrant to purchase 150,000 shares of our common
stock. These warrants are exercisable until December 22, 2001, at a per share
exercise price of $8.36.
On December 29, 1999, in connection with our sale of Series D convertible
preferred stock, we issued to each of Attractor QP LP, Attractor LP, Attractor
Ventures LLC, Attractor Institutional LP, and Attractor Offshore Ltd. warrants
to purchase, in the aggregate, 192,261 shares of our common stock. These
warrants are exercisable until December 2, 2004, at a per share exercise price
of $8.36.
Registration Rights
We have granted registration rights to the holders of all outstanding shares
of Series C convertible preferred stock and Series D convertible preferred
stock. Upon the completion of this offering, the shares of Series C and Series
D preferred stock will automatically convert into an equal number of shares of
common stock. Following this offering, holders of 15,830,581 shares of our
common stock, or 52% of the outstanding common stock, will have registration
rights. These registration rights may permit these stockholders to resell
47
<PAGE>
their shares of our common stock in the public market earlier than they
otherwise could. The market price for our common stock could fall if
stockholders sell large amounts of common stock in the public market after this
offering. See "Risk Factors --Shares eligible for future sale by our existing
stockholders may adversely affect our stock price" on page 11.
The registration rights are set forth in an amended and restated
registration rights agreement among our company and the holders of all of our
outstanding Series C and Series D convertible preferred stock. The following
summary of the registration rights agreement is subject to, and qualified in
its entirety by, the amended and restated registration rights agreement, a copy
of which has been filed as an exhibit to the registration statement of which
this prospectus is a part.
Required Registration. At any time after 180 days after this offering,
stockholders owning at least 25% of the number of shares that are subject to
registration rights may require us to file a registration statement with the
SEC to register their shares under the Securities Act. After this same time,
stockholders holding at least 50% of Series D preferred stock may require us to
file a registration statement with respect to the shares of common stock
converted from the Series D preferred stock and exercised warrants received in
the sale of the Series D preferred stock. We have the right to delay filing a
registration statement for up to 90 days once during any 12-month period:
. after a subsequent offering of common stock;
. if, in the good faith judgement of the our board of directors, it would
be materially detrimental to us to file a registration statement at that
time; or
. if the registration would require us to disclose material non-public
information, which, in the reasonable opinion of the board of directors,
should not be disclosed.
If the offering is to be underwritten and the underwriters advise us that
the number of shares to be registered should be reduced, the stockholders with
registration rights are entitled to have their shares registered before the
shares to be sold by our company. We are required to pay all expenses,
including the fees of one counsel representing the stockholders, in connection
with the required registrations. However, we are not required to pay the
underwriting discounts and commissions for those offerings, extraordinary and
unique expenses of a single holder or any special audits required for such
registration.
Incidental Registration Rights. Stockholders with registration rights can
request to have their shares registered under the Securities Act any time we
file a registration statement to register our equity securities for our own
account or for the account of any of our stockholders. There is no limit on the
number of times stockholders may exercise these piggyback registration rights.
We will pay all expenses, other than underwriting discounts and commissions for
selling stockholders, in connection with each piggyback registration.
Delaware Anti-Takeover and Certain Certificate of Incorporation and By-Law
Provisions
Certain provisions of Delaware law and our amended and restated certificate
of incorporation and by-laws could make more difficult the acquisition of our
company by means of a tender offer, a proxy contest, or otherwise, and the
removal of incumbent officers and directors. These provisions are expected to
discourage certain types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of our company 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 our company outweighs the
disadvantages of discouraging such proposals. The increased protection is
beneficial even if a proposal is priced above the then current market value of
our common stock, because negotiation of such proposals could result in an
improvement of their terms.
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<PAGE>
Section 203 of the Delaware General Corporation Law. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an
interested stockholder, unless:
. the transaction in which the stockholder became an interested stockholder
is approved by the board of directors prior to the date the interested
stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction was commenced, excluding those shares owned by persons
who are directors and also officers and stock held by certain employee
stock option plans; or
. on or subsequent to 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 two-thirds of the
outstanding voting stock that is not owned by the interested shareholder.
A business combination includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. For purposes of Section
203, an interested stockholder is defined to include any person that is:
. the owner of 15% or more of the outstanding voting stock of the
corporation;
. an affiliate or associate of the corporation and was the owner of 15% or
more of the voting stock outstanding of the corporation, at any time
within three years immediately prior to the relevant date; and
. an affiliate or associate of the persons described in the foregoing
bullet points.
The restrictions contained in Section 203 do not apply to Draper Fisher
Jurvetson or TL Ventures, because they were interested stockholders when our
voting stock was not listed on a national securities exchange or authorized for
quotation on the Nasdaq national market or held by record by more than 2,000
stockholders.
Stockholders may, by adopting an amendment to the corporation's certificate
of incorporation or by-laws, elect for the corporation not to be governed by
Section 203, effective 12 months after adoption. Neither our amended and
restated certificate of incorporation nor our by-laws exempt us from the
restrictions imposed under Section 203 of the Delaware General Corporation Law.
We anticipate that the provisions of Section 203 of the Delaware General
Corporation Law may encourage companies interested in acquiring us to negotiate
in advance with our board of directors because the stockholder approval
requirement would be avoided if a majority of the directors then in office
approve either the business combination or the transaction that results in the
stockholder becoming an interested stockholder.
Classification and Structure of our Board of Directors. Immediately upon the
completion of this offering, our board of directors will be divided into three
classes of directors serving staggered, three-year terms. The number of
directors will be fixed by resolution of our board of directors consisting of
at least five but not more than nine directors. The size of our board is
currently fixed at five members. The directors shall be elected at the annual
meeting of the stockholders, except for filling vacancies. Directors may be
removed only for cause and only with the approval of the holders of at least
80% of voting power present and entitled to vote at a meeting of stockholders.
Vacancies and newly-created directorships resulting from any increase in the
number of directors may be filled by a majority of the directors then in
office, a sole remaining director, or if a Delaware provision expressly confers
power on stockholders to fill a directorship, at a special meeting by the
holders of at least 80% of the voting power present and entitled to vote at a
meeting of stockholders.
As a result of the classification of our board of directors, approximately
one-third of the members of our board of directors will be elected each year.
When coupled with the provision of our restated certificate of incorporation
authorizing the board of directors to fill vacant directorships and increase
the size of the board of directors up to nine, these provisions may prevent
stockholders from removing incumbent directors and simultaneously gaining
control of the board of directors by filling the vacancies created by such
removals with their own nominees.
49
<PAGE>
Meetings of Stockholders. Our amended and restated certificate of
incorporation and by-laws provide that any action required or permitted to be
taken by our stockholders may be effected at a duly called annual or special
meeting of our stockholders. Special meetings of stockholders may be called by
the chief executive officer or by a majority of our board of directors. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control of our management.
Written Consent. Under our amended and restated certificate of
incorporation, our stockholders will not be allowed to take action in writing
outside of an annual or special meeting of our stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our by-laws require that timely notice in proper form be provided
by stockholders seeking to bring business before, or to nominate candidates for
election as directors at, the annual meeting of stockholders. Such notice must
be received by us 120 calendar days in advance of the date specified in the
previous year's notice of the annual meeting. These provisions may preclude
stockholders from timely bringing matters before, or from making nominations
for directors at, an annual meeting of stockholders.
Amendment of our Amended and Restated Certificate of Incorporation and By-
Laws. Our amended and restated certificate of incorporation may be amended by
the approval of the majority of our board of directors and a majority of our
outstanding voting securities. Except the approval of at least 80% of voting
securities is required to amend a provision in the amended and restated
certificate of incorporation relating to the liability or indemnification of
our officers and directors, the structure and classification of our board of
directors and stockholder actions. Our board of directors is authorized to
amend our by-laws consistent with Delaware law and our amended and restated
certificate of incorporation.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Chase Mellon
Shareholder Services, L.L.C.
Listing
We have applied for quotation of the common stock on the Nasdaq National
Market under the trading symbol "DWRK."
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the common stock.
Future sales of substantial amounts of our common stock in the public market
following this offering could cause the prevailing market price of our common
stock to fall and impede our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
30,341,293 shares of common stock, assuming that the underwriters do not
exercise their over-allotment option and no exercise of outstanding options or
warrants. Of these shares, the 6,250,000 shares sold in this offering will be
freely tradable without registration or further restriction under the
Securities Act, unless such shares are purchased by our officers, directors or
principal shareholders. The remaining 24,091,293 shares of common stock
outstanding upon completion of this offering and held by existing stockholders
will be restricted securities. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or 701, the limitations of which are summarized below.
Of the remaining restricted shares, will be eligible for sale
immediately upon the effective date of this offering under Rule 144(k), and
will be eligible for sale under Rule 144 and Rule 701 beginning 91 days
after the effective date of this offering.
Lock-Up Agreements
Sales of the restricted shares in the public market, or the availability of
such shares for sale, could adversely affect the market price of the common
stock. All of our executive officers and directors and stockholders who
beneficially own more than one percent of our capital stock have agreed under
lock-up agreements, that without the prior written consent of Lehman Brothers
Inc., they will not, directly or indirectly, offer, sell, pledge, or otherwise
dispose of any shares of common stock or any securities which may be converted
into or exchanged for any such shares for the period ending 180 days after the
date of this prospectus. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rule 144 and 701, additional shares will be eligible for sale
beginning 181 days after the effective date of this offering, subject to the
requirements of Rule 144.
Rule 144
In general, under Rule 144 as currently in effect, beginning 91 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who owns shares that were acquired from the issuer or an affiliate of the
issuer at least one year prior to the proposed sales, including persons who may
be deemed to be our "affiliates," would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice of Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a stockholder who is not deemed to have been our
"affiliate" at any time during the 90 days preceding a sale by the stockholder,
and who owns shares that were acquired from the issuer or an affiliate of the
issuer at least two years prior to the proposed sale, is entitled to sell the
shares, without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
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<PAGE>
Warrants, Stock Options and Employee Common Stock Purchases
As of December 31, 1999, there were outstanding warrants to purchase 853,453
shares of common stock and options to purchase 2,375,425 shares of common
stock, of which 72,200 options were fully vested. In addition, we have
outstanding warrants to purchase a number of shares equal to 10% of the shares
of common stock we are selling in this offering. The common stock underlying
these warrants and options will be eligible for sale subject to the
requirements of Rule 144 or Rule 701.
An additional 3,212,335 shares are reserved for issuance under our amended
and restated 1998 stock option plan and an additional 750,000 shares are
reserved under our 2000 employee stock purchase plan. We intend to file
registration statements under the Securities Act covering the shares of common
stock reserved for issuance under our 1998 stock option plan and our 2000
employee stock purchase plan. The registration statements are expected to be
filed within 90 days after the date of this prospectus and will automatically
become effective upon filing. Accordingly, shares registered under such
registration statements will, subject to Rule 144 volume limitations applicable
to affiliates and the expiration of the 180-day lock-up period, be available
for sale in the open market, except to the extent that such shares are subject
to our vesting schedules.
Registration Rights
Holders of 15,830,581 shares of common stock are entitled to registration
rights with respect to their shares for resale under the Securities Act of
1933. If these holders, by exercising their registration rights, cause a large
number of shares to be registered and sold in the public market, these sales
could harm the market price for our common stock. These registration rights may
not be exercised prior to the expiration of 180 days from the date of this
prospectus. See "Description of Capital Stock--Registration Rights" beginning
on page 46.
Rule 701
Rule 701 permits resales of shares issued prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, under certain compensatory benefit plans and contracts commencing 90 days
after the issuer becomes subject to the reporting requirements of the
Securities Exchange Act of 1934, in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirements. In addition, the Securities and Exchange Commission has indicated
that Rule 701 will apply to typical stock options granted by an issuer before
it becomes subject to the reporting requirements of the Securities Exchange Act
of 1934, along with the shares acquired upon exercise of such options,
including exercises after the date the issuer becomes so subject. Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 91 days after the date of
this prospectus, may be sold by persons other than affiliates subject to the
manner of sale provisions of Rule 144 and by affiliates under Rule 144 without
compliance with its one-year minimum holding period requirements.
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<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., U.S. Bancorp Piper Jaffray Inc. and
Prudential Securities Incorporated are acting as representatives, have each
agreed to purchase from us the respective number of shares of common stock
shown opposite its name below:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Lehman Brothers Inc.............................................
U.S. Bancorp Piper Jaffray Inc..................................
Prudential Securities Incorporated..............................
------
Total.......................................................
======
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock which the underwriters have agreed to
purchase under the underwriting agreement, must be purchased. The conditions
contained in the underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters are true, that
there is no material change in the financial markets and that we deliver to the
underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover of this prospectus and to dealers, who may include the
underwriters, at such public offering price less a selling concession not in
excess of $ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per share to brokers and dealers.
After this offering, the underwriters may change the offering price and other
selling terms.
We have granted to the underwriters an option to purchase up to an aggregate
of 937,500 additional shares of common stock, to cover over-allotments, if any,
at the public offering price less the underwriting discounts and commissions
shown on the cover page of this prospectus. The underwriters may exercise this
option at any time until 30 days after the date of the underwriting agreement.
If this option is exercised, each underwriter will be committed, so long as the
conditions of the underwriting agreement are satisfied, to purchase a number of
additional shares of common stock proportionate to the underwriter's initial
commitment as indicated in the preceding table and we will be obligated, under
the over-allotment option, to sell the shares of common stock to the
underwriters.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us:
<TABLE>
<CAPTION>
With Without
Over-Allotment Exercise Over-Allotment
----------------------- --------------
<S> <C> <C>
Exercise
Per Share........................ $ $
Total............................ $ $
</TABLE>
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<PAGE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1,500,000.
Fidelity Capital Markets, a division of National Financial Services
Corporation, will be facilitating electronic distribution of information
through the Internet, its Intranet and other proprietary electronic technology.
Fidelity Capital Markets will not be acting as an underwriter of this offering.
We have agreed that, subject to certain exceptions, without the prior
consent of Lehman Brothers Inc., we will not directly or indirectly, offer,
sell or otherwise dispose of any shares of common stock or any securities which
may be converted into or exchanged for any such shares of common stock for a
period of 180 days from the date of this prospectus. All of our executive
officers and directors and stockholders who beneficially own more than one
percent of our capital stock have agreed under lock-up agreements, that without
the prior written consent of Lehman Brothers Inc., they will not, directly or
indirectly, offer, sell, pledge, or otherwise dispose of any shares of common
stock or any securities which may be converted into or exchanged for any such
shares for the period ending 180 days after the date of this prospectus. See
"Shares Eligible for Future Sale--Lock Up Agreements" on page 51.
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our performance and capital
structure, estimates of our business potential and earning prospects, an
overall assessment of our management and the consideration of the above factors
in relation to market valuation of companies in related businesses.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
Persons participating in this offering may also engage in passive market-
making transactions in the common stock on the Nasdaq National Market.
Specifically, the underwriters may create a short position in the common stock
in connection with this offering, which means that they may sell more shares
than are set forth on the cover page of this prospectus. If the underwriters
create a short position, then the representatives may reduce that short
position by purchasing common stock in the open market. The representatives
also may elect to reduce any short position by exercising all or part of the
over-allotment option.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In
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<PAGE>
addition, neither we nor any of the underwriters makes any representation that
the representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
The representatives have informed us that they do not intend to confirm the
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
At our request, the underwriters have reserved up to 625,000 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to business associates of ours at the
initial public offering price set forth on the cover of this prospectus. These
persons must commit to purchase no later than the close of business on the day
following the date of this prospectus. The number of shares available for sale
to the general public will be reduced to the extent these persons purchase the
reserved shares.
In May 1999, we sold an aggregate of 11,471,276 shares of Series C preferred
stock to investors in a private placement at a purchase price of $1.08 per
share, or $12.4 million in the aggregate. In December 1999, we sold an
aggregate of 4,359,305 shares of our Series D preferred stock for an aggregate
purchase price of $36.4 million, or $8.36 per share. Seven employees of Lehman
Brothers Inc. purchased a total of 138,984 shares of Series C preferred stock
at a price of $1.08 per share, or an aggregate of $150,000 and six employees of
Lehman Brothers Inc. purchased a total of 7,441 shares of Series D preferred
stock at a price of $8.36 per share, or an aggregate of $62,252. These shares
will automatically convert into an equal number of shares of common stock prior
to the closing of this offering. In addition, these individuals received
warrants to purchase in aggregate 27,798 shares of our common stock at an
exercise price of $1.08 per share, and warrants to purchase shares of our
common stock at the initial offering price. Each of the employees of Lehman
Brothers Inc. who own shares of our capital stock have agreed under lock-up
agreements, that they will not, directly or indirectly, offer, sell, pledge, or
otherwise dispose of any shares of our capital stock or any securities which
may be converted into or exchanged for any such shares for the period ending
180 days after the date of this prospectus.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered in this
offering will be passed upon for us by Freeborn & Peters, Chicago, Illinois.
Certain legal matters will be passed upon for the underwriters by Morgan, Lewis
& Bockius LLP, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999 and for the period from March 18, 1998
(inception) to December 31, 1998 and the year ended December 31, 1999, as
described in their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock we are offering by
this prospectus. This prospectus does not contain all of the information set
forth in the registration statement. For further information with respect to
our business and our common stock, please refer to the registration statement
and its exhibits. While we have provided summaries of the material terms of the
contents of contracts and other documents, these summaries do not describe all
of the provisions of the contracts and other documents. In each instance where
we have filed a copy of a contract or other document with the registration
statement, please refer to the registration statement. Each statement about the
contracts and other documents in the prospectus is qualified in all respects to
the actual documents filed with the registration statement.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934,
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. Our fiscal year ends on December 31. We intend
to furnish our stockholders with annual reports containing audited financial
statements and other appropriate reports.
You may read and copy the registration statement on Form S-1, any reports,
statements or other information we file at the SEC's Public Reference Room, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the SEC's
Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You can request copies of these documents, upon payment of a duplicating
fee, by writing the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the Public Reference Room. Our SEC filings are
also available to the public on the SEC Web site at http://www.sec.gov.
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DIGITALWORK.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
DigitalWork.com, Inc.
We have audited the accompanying balance sheets of DigitalWork.com, Inc. as
of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for the period from March 18, 1998
(Inception) to December 31, 1998 and the year ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DigitalWork.com, Inc. at
December 31, 1998 and 1999 and the results of its operations and its cash flows
for the period from March 18, 1998 (Inception) to December 31, 1998 and the
year ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 26, 2000
F-2
<PAGE>
DIGITALWORK.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
------------------------- December 31,
1998 1999 1999
----------- ------------ -------------
<S> <C> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents........... $ 1,394,222 $ 33,751,312
Accounts receivable, net of
allowance of $46,500 at
December 31, 1999.................. 11,704 976,640
Prepaid expenses and other current
assets............................. -- 533,181
----------- ------------
Total current assets.............. 1,405,926 35,261,133
Restricted cash....................... -- 575,685
Other assets.......................... -- 98,272
Property and equipment, net........... 72,369 983,034
----------- ------------
Total assets...................... $ 1,478,295 $ 36,918,124
=========== ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable.................... $ 89,954 $ 2,417,333
Accrued compensation and other
liabilities........................ 143,765 320,224
Accrued strategic partner fees...... -- 266,466
Other accrued liabilities........... 12,284 150,000
Current portion of obligations under
capital leases..................... -- 319,160
----------- ------------
Total current liabilities......... 246,003 3,473,183
Non-current obligations under capital
leases............................... -- 263,290
----------- ------------
Total liabilities................. 246,003 3,736,473
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, par
value $.005; 20,895,360 shares
authorized, 4,240,672 and
20,071,253 shares issued and
outstanding at December 31, 1998
and 1999, respectively and no pro
forma (liquidation preference at
December 31, 1999 of $51,556,769).. 21,203 100,356 $ --
Common stock, par value $.005;
41,633,786 shares authorized,
1,995,240 and 4,020,040 shares
issued and outstanding at December
31, 1998 and 1999, respectively,
and 24,091,293 shares issued and
outstanding pro forma.............. 9,976 20,100 120,456
Additional paid-in capital.......... 2,698,240 61,008,366 61,008,366
Stockholders' receivables........... (30,000) (5,959,750) (5,959,750)
Deferred stock compensation......... -- (5,123,575) (5,123,575)
Accumulated deficit................. (1,467,127) (16,863,846) (16,863,846)
----------- ------------ -----------
Total stockholders' equity........ 1,232,292 33,181,651 $33,181,651
----------- ------------ ===========
Total liabilities and
stockholders' equity............. $ 1,478,295 $ 36,918,124
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
DIGITALWORK.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
March 18,
1998
(Inception) Year ended
to December December 31,
31, 1998 1999
----------- ------------
<S> <C> <C>
Revenues............................................ $ 32,800 $ 1,916,588
Cost of revenues.................................... 61,066 1,586,597
----------- ------------
Gross (loss) profit................................. (28,266) 329,991
Operating expenses:
Marketing and strategic alliances................. 504,036 7,032,380
Technical and product development................. 207,566 2,851,738
General and administrative........................ 660,607 2,441,928
Non-cash stock compensation and charges........... 83,080 3,729,178
----------- ------------
Total operating expenses.......................... 1,455,289 16,055,224
----------- ------------
Operating loss...................................... (1,483,555) (15,725,233)
Interest expense.................................... -- (25,700)
Interest income..................................... 16,428 354,214
----------- ------------
Net loss............................................ $(1,467,127) $(15,396,719)
=========== ============
Basic and diluted net loss per share................ $ (6.13) $ (15.62)
=========== ============
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per
share.............................................. 239,370 985,871
=========== ============
Pro forma basic and diluted net loss per share
(unaudited)........................................ $ (1.22)
============
Weighted average shares used in computing pro forma
basic and diluted net loss per share (unaudited)... 12,659,847
============
</TABLE>
See accompanying notes.
F-4
<PAGE>
DIGITALWORK.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Deferred Total
------------------- ------------------ Paid-In Stockholders' Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Receivables Compensation Deficit Equity
---------- -------- --------- ------- ----------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
18, 1998....... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Proceeds from
the issuance of
common stock to
founders, net
of issuance
costs of
$2,408......... -- -- 2,800,000 14,000 53,592 -- -- -- 67,592
Proceeds from
the issuance of
common stock... -- -- 8,000 40 160 -- -- -- 200
Issuance of
series A
convertible
preferred
stock, net of
issuance costs
of $6,049...... 1,738,672 8,693 -- -- 311,260 -- -- -- 319,953
Issuance of
series B
convertible
preferred
stock, net of
issuance costs
of $6,586...... 2,374,000 11,870 -- -- 2,355,544 (30,000) -- -- 2,337,414
Issuance of
series A
convertible
preferred stock
and common
stock for
services....... 128,000 640 87,240 436 25,104 -- -- -- 26,180
Repurchase of
common stock... -- -- (900,000) (4,500) (130,500) -- -- -- (135,000)
Issuance of
warrant to
purchase
preferred
stock.......... -- -- -- -- 83,080 -- -- -- 83,080
Net loss........ -- -- -- -- -- -- -- (1,467,127) (1,467,127)
---------- -------- --------- ------- ----------- ----------- ----------- ------------ ------------
Balance at
December 31,
1998........... 4,240,672 21,203 1,995,240 9,976 2,698,240 (30,000) -- (1,467,127) 1,232,292
Proceeds on
stockholders'
receivables.... -- -- -- -- -- 30,000 -- -- 30,000
Proceeds from
the issuance of
common stock... -- -- 655,000 3,275 782,725 (786,000) -- -- --
Issuance of
series C
convertible
preferred
stock, net of
issuance costs
of $36,802..... 11,471,276 57,356 -- -- 12,285,887 -- -- -- 12,343,243
Issuance of
series D
convertible
preferred
stock, net of
issuance costs
of $60,826..... 4,359,305 21,797 -- -- 36,361,365 (5,146,250) -- -- 31,236,912
Issuance of
common stock
upon exercise
of stock
options........ -- -- 1,369,800 6,849 27,396 (27,500) -- -- 6,745
Issuance of
warrants to
purchase
preferred
stock.......... -- -- -- -- 2,948,496 -- -- -- 2,948,496
Deferred stock
compensation... -- -- -- -- 5,904,257 -- (5,904,257) -- --
Amortization of
deferred stock
compensation... -- -- -- -- -- -- 780,682 -- 780,682
Net loss........ -- -- -- -- -- -- -- (15,396,719) (15,396,719)
---------- -------- --------- ------- ----------- ----------- ----------- ------------ ------------
Balance at
December 31,
1999........... 20,071,253 $100,356 4,020,040 $20,100 $61,008,366 $(5,959,750) $(5,123,575) $(16,863,846) $ 33,181,651
========== ======== ========= ======= =========== =========== =========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
DIGITALWORK.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
March 18, 1998
(Inception) to Year ended
December 31, December 31,
1998 1999
-------------- ------------
<S> <C> <C>
Operating activities
Net loss......................................... $(1,467,127) $(15,396,719)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 6,784 180,705
Allowance for bad debts........................ -- 46,500
Issuance of series A preferred stock and common
stock for services............................ 26,180 --
Amortization of deferred stock compensation and
other stock related charges................... 83,080 3,729,178
Change in assets and liabilities:
Accounts receivable.......................... (11,704) (1,011,436)
Prepaid expenses and other current assets.... -- (533,181)
Other assets................................. 89,954 (673,957)
Accounts payable............................. 12,284 2,327,379
Accrued compensation and other............... 143,765 176,459
Accrued strategic partner fees............... -- 266,466
Other accrued liabilities.................... -- 137,716
----------- ------------
Net cash used in operating activities...... (1,116,784) (10,750,890)
Investing activities--Capital expenditures....... (79,153) (351,289)
Financing activities
Proceeds from issuance of common stock, net of
issuance cost................................... 67,792 --
Proceeds from the issuance of convertible
preferred stock, net of issuance cost........... 2,657,367 42,980,155
Principal payments on capital lease obligation... -- (157,631)
Repayments on stockholders' receivables.......... -- 30,000
Proceeds from exercise of common stock options... -- 6,745
Proceeds from issuance of convertible notes
payable......................................... -- 600,000
Repurchase of common stock....................... (135,000) --
----------- ------------
Net cash provided by financing activities........ 2,590,159 43,459,269
----------- ------------
Net increase in cash and cash equivalents........ 1,394,222 32,357,090
Cash and cash equivalents at beginning of the
period.......................................... -- 1,394,222
----------- ------------
Cash and cash equivalents at end of the period... $ 1,394,222 $ 33,751,312
=========== ============
Supplemental schedule of cash flow information
Cash paid during the year for interest........... $ -- $ 25,700
=========== ============
Supplemental schedule of non-cash activities
Property and equipment acquired under capital
leases.......................................... $ -- $ 740,081
=========== ============
Conversion of notes payable into series C
convertible preferred stock..................... $ -- $ 600,000
=========== ============
Deferred stock compensation...................... $ -- $ 5,904,257
=========== ============
Stockholders' receivable from issuance of
convertible preferred stock and common stock.... $ 30,000 $ 5,959,750
=========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Description of Business
DigitalWork.com, Inc. (DigitalWork.com) provides Web-based business services
to the small business market. DigitalWork.com has developed a business-to-
business services platform that connects a network of service suppliers,
business portals and small business buyers. DigitalWork.com's e-services help
small businesses grow by simplifying the execution of over 30 critical business
functions on-line, such as launching an integrated marketing campaign,
recruiting new employees and generating sales leads. DigitalWork.com currently
offers its services primarily in the United States. DigitalWork.com was
originally incorporated in Delaware on March 18, 1998 as DigitalWork, Inc.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of financial investments with an original
maturity from the date of purchase of three months or less. As of December 31,
1998 and 1999, cash equivalents consisted primarily of investments in money
market accounts and their cost approximated fair value. DigitalWork.com places
its cash and cash equivalents in high-quality U.S. financial institutions and,
to date, has not experienced any losses on any of its investments.
Restricted Cash
DigitalWork.com maintains restricted collateral invested in certificates of
deposits, which mature within one year, and are used as security for
DigitalWork.com's office lease. The classification is determined based on the
expected term of the collateral requirement and not necessarily the maturity
date of the underlying securities.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Depreciation is computed on a straight-line basis over the
assets' estimated useful life, generally three to seven years. Equipment
acquired under capital leases is amortized on a straight-line basis over the
shorter of its lease term or estimated useful life, generally three years.
Leasehold improvements are depreciated over the shorter of its lease term or
estimated useful life, generally five years.
Income Taxes
DigitalWork.com has elected to be taxed as a C Corporation under the
applicable provisions of the Internal Revenue Code. Deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax basis of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
F-7
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Revenue Recognition
DigitalWork.com generates revenue from e-services transactions and network
fees earned from business portals and service suppliers.
Small businesses utilize DigitalWork.com's Web-based e-services platform to
access and execute business services. DigitalWork.com utilizes business service
suppliers to fulfill the transaction and deliver the service to the customer.
As the economic risk related to collections, customer service and fulfillment
and the establishment of the price of the service remains with DigitalWork.com,
revenues are recognized on the total sales price when the service is delivered.
Network fee revenue is derived principally from reciprocal and non-
reciprocal agreements with business portals. In non-reciprocal agreements,
DigitalWork.com typically earns initial content licensing fees from business
portals for the integration of a co-branded version of DigitalWork.com's e-
services platform into their Web sites. In addition to the licensing fee,
DigitalWork.com also typically earns ongoing maintenance fees, which entitle
the business portals to continue to receive this access. Revenue from the
initial licensing fees and ongoing maintenance fees is recognized on a
straight-line basis over the terms of the respective agreements. Revenue from
the sale of advertising is recognized in the period in which the advertising is
displayed.
DigitalWork.com has entered into reciprocal agreements with third parties
which will act as both a service supplier and distribution partner, resulting
in complex sales and purchase arrangements. DigitalWork.com recognizes the
revenue and expense of the arrangement based on the objective evidence of fair
value of the elements. Objective evidence of fair value is determined by
reference to DigitalWork.com's history of other comparable and relevant third
party cash transactions for each element in the arrangement. In the year ended
December 31, 1999, revenue and expense elements of the arrangements
DigitalWork.com has entered into have been netted and will be recognized over
the terms of the agreements. This treatment resulted in a reduction of revenue
of approximately $443,000 and a corresponding reduction in the amount of
expenses in the year ended December 31, 1999. No reciprocal service
arrangements were entered into during the period from March 18, 1998
(inception) through December 31, 1998.
Technical and Product Development
Technical and product development expenses consist primarily of salaries,
payroll taxes and benefits, expenditures related to editorial content,
community management and support personnel, server hosting costs, and software
development and operations expenses. Statement of Position (SOP) 98-1 requires
all costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. To
date, DigitalWork.com's software development has been completed concurrently
with the establishment of technological feasibility and, as a result, no
technical and product development costs have been capitalized.
Stock-Based Compensation
DigitalWork.com accounts for stock-based compensation for awards to
employees using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has
adopted the disclosure only alternative of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123).
DigitalWork.com accounts for stock-based compensation awards to nonemployees
using the fair value method prescribed in FAS 123.
F-8
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Advertising Costs
Advertising costs are charged to expense when incurred. Advertising
expense for the period from March 18, 1998 to December 31, 1998 was
approximately $153,000 and for the year ended December 31, 1999 was
approximately $4,220,000.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("FAS") No. 107, "Disclosures
About Fair Value of Financial Instruments," requires that fair values be
disclosed for most of DigitalWork.com's financial instruments. The carrying
amounts of DigitalWork.com's financial instruments, which include cash and cash
equivalents, accounts receivable, note receivable from stockholder, capital
lease obligations, and current liabilities are considered to be representative
of their respective fair values.
Concentration of Credit Risk
Financial instruments which subject DigitalWork.com to concentrations of
credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. DigitalWork.com maintains cash and cash equivalents with one
domestic financial institution. From time to time, DigitalWork.com's cash
balances with its financial institution may exceed Federal Deposit Insurance
Corporation insurance limits.
DigitalWork.com's customers are concentrated in the United States. The
Company performs ongoing credit evaluations, generally does not require
collateral, and establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of customers, historical trends and other
information.
Comprehensive Loss
DigitalWork.com has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). Under FAS 130, DigitalWork.com
is required to display comprehensive income (loss) and its components as part
of the financial statements. Other comprehensive income includes changes in
equity that are excluded from net income (loss). Specifically, FAS 130 requires
unrealized holding gains and losses on available-for-sale securities to be
included in accumulated and other comprehensive income (loss). DigitalWork.com
has no components of other comprehensive loss, and, as a result, the
comprehensive loss is the same as the net loss for all periods presented.
Segment Information
DigitalWork.com adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS 131)
in the fiscal year ended December 31, 1998. FAS 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. FAS 131 also establishes
standards for related disclosures about products and services, and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by
the chief operating decision maker, or decision making group, in making
decisions how to allocate resources and assess performance. DigitalWork.com's
chief decision maker, as defined under FAS 131, is the Chief Executive Officer.
To date, DigitalWork.com has viewed their operations as principally one
segment. Additionally, DigitalWork.com derives an immaterial amount of revenue
from non-domestic sources. As a result, the financial information disclosed
herein, materially represents all of the financial information related to
DigitalWork.com's principal operating segment. DigitalWork.com's revenues are
divided into two categories: e-services transactions and network fees. For the
F-9
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
year ended December 31, 1999, e-services transactions represented approximately
81% of total revenues, while network fees represented approximately 19% of
total revenues. For the period from March 18, 1998 (inception) through December
31, 1998, e-services transactions represented approximately 70% of total
revenues, while network fees represented approximately 30% of total revenues.
Net Loss Per Share, Pro Forma Net Loss Per Share and Pro Forma Stockholders'
Equity
Basic and diluted net loss per share are presented in conformity with FAS
No. 128, "Earnings Per Share" (FAS 128), for all periods presented. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of DigitalWork.com's
initial public offering must be included in the calculation of basic and
diluted net loss per share as if they had been outstanding for all periods
presented. To date, DigitalWork.com has not had any issuances or grants for
nominal consideration. In accordance with FAS 128, basic and diluted net loss
per share has been computed using the weighted average number of shares of
common stock outstanding during the period, less the weighted average number of
shares subject to repurchase.
Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of convertible preferred stock not included above that will
automatically convert upon completion of DigitalWork.com's initial public
offering (using the as converted method). If DigitalWork.com's initial public
offering is consummated, all of the convertible preferred stock outstanding as
of December 31, 1999 will automatically be converted into an aggregate of
20,071,253 shares of common stock. Pro forma stockholders' equity at December
31, 1999, as adjusted for the conversion of convertible preferred stock, is
disclosed on the balance sheet.
Historical and pro forma basic and diluted net loss per share are as
follows:
<TABLE>
<CAPTION>
Period From
March 18,
1998
(Inception) Year ended
to December December 31,
31, 1998 1999
----------- ------------
<S> <C> <C>
Historical:
Net loss.......................................... $(1,467,127) $(15,396,719)
=========== ============
Basic and diluted shares:
Weighted average shares of common stock
outstanding...................................... 2,137,407 2,491,392
Less weighted average shares subject to
repurchase....................................... 1,898,037 1,505,521
----------- ------------
Weighted average shares of common stock
outstanding used in computing basic and diluted
net per loss share............................... 239,370 985,871
=========== ============
Basic and diluted net loss per share................ $ (6.13) $ (15.62)
=========== ============
Pro forma (unaudited):
Net loss.......................................... $(15,396,719)
============
Weighted average shares of common stock
outstanding used in computing basic and diluted
net loss per share............................... 985,871
Adjustment to reflect the assumed conversion of
convertible preferred stock from the date of
issuance......................................... 11,673,976
------------
Weighted average shares used in computing pro
forma basic and diluted net loss per share....... 12,659,847
============
Pro forma basic and diluted net loss per share.... $ (1.22)
============
</TABLE>
F-10
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
If DigitalWork.com had reported net income, diluted net income per share
would have included the shares used in the computation of pro forma net loss
per share as well as the effect of approximately 3,140,000 and 3,228,878 common
shares related to outstanding options and warrants to purchase common stock not
included above for the years ended December 31, 1998 and 1999, respectively.
The common equivalent shares from options and warrants would be determined on a
weighted average basis using the treasury stock method.
Start-Up Costs
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities." This statement requires
companies to expense the costs of start-up activities and organization costs as
incurred. DigitalWork.com adopted SOP 98-5 on January 1, 1999, and there was no
material impact on the accompanying financial statements.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133, which will be effective for DigitalWork.com for the fiscal year and
quarters beginning after June 15, 2000, requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. DigitalWork.com does not
expect the potential effect of adopting the provisions of SFAS No. 133 to have
a significant impact on its financial position, results of operations, and cash
flows.
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31
------------------
1998 1999
------- ----------
<S> <C> <C>
Computer equipment and software....................... $72,021 $ 717,657
Office furniture, fixtures, and equipment............. 7,132 320,078
Leasehold improvements................................ -- 132,788
------- ----------
79,153 1,170,523
Less: Accumulated depreciation........................ 6,784 187,489
------- ----------
$72,369 $ 983,034
======= ==========
</TABLE>
As of December 31, 1999, property and equipment included amounts under
capital leases of $740,081, with related accumulated amortization of $139,964.
There is no property and equipment under capital leases as of December 31,
1998.
4. Convertible Promissory Notes Payable
In April 1999, DigitalWork.com issued $600,000 in convertible promissory
notes to investors, which bear interest at 7%. Interest was payable on demand
at any time on or after July 22, 1999. On May 17, 1999, the entire principal
balance of $600,000 was converted into 555,948 shares of Series C convertible
preferred stock.
In connection with the convertible promissory notes issued, DigitalWork.com
issued warrants to purchase 111,192 shares of series C preferred stock at an
exercise price of $1.08 per share. The warrants are exercisable
F-11
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
at any time prior to expiration and will expire five years from issuance.
DigitalWork.com allocated approximately $55,600 of the proceeds received from
the issuance of the promissory notes to the value of the warrants. The
principal amounts of the convertible promissory notes were reduced by the value
assigned to the warrants, and such amount was recognized as a non-cash charge
in the year ended December 31, 1999.
5. Stockholders' Equity
General
In September 1999, the Company's stockholders' approved certain
modifications to the Company's capital structure, including a four-for-one
stock split of the Company's common and preferred stock, and an increase in the
number of shares authorized for issuance. All share amounts in the financial
statements have been retroactively adjusted to reflect such split and increase
in shares authorized for issuance.
Stockholders' Receivable
Options to employees to purchase 1,100,000 shares of common stock under
DigitalWork.com's 1998 Stock Plan were exercised in exchange for full recourse
notes receivable. In addition, DigitalWork.com issued 655,000 shares of
restricted stock to certain members of management in exchange for full recourse
notes receivable. These notes receivable bear interest at a rate of
approximately 6% per year and interest payments are due annually on the
anniversary date of the notes. At December 31, 1999, notes receivable in
exchange for exercises of options and issuances of restricted stock totaled
$813,500. The restricted stock is subject to a right of repurchase that
generally lapse over four years.
Additional stockholders' receivables of $5,146,250 at December 31, 1999 and
$30,000 at December 31, 1998 represent proceeds from convertible preferred
stock received in the subsequent year.
Convertible Preferred Stock
DigitalWork.com is authorized to issue 20,895,360 shares of convertible
preferred stock, designated in series. In May 1998, DigitalWork.com issued an
aggregate of 1,866,672 shares of Series A convertible preferred stock at
$0.1875 per share for net cash proceeds of $319,953 and services valued at
$23,999. In October 1998, DigitalWork.com issued 2,374,000 shares of Series B
convertible preferred stock for net cash proceeds of $2,367,414. In May 1999,
DigitalWork.com issued 11,471,276 shares of Series C convertible preferred
stock for net cash proceeds of $12,343,243 including the conversion of the
promissory notes totaling $600,000. In December 1999, DigitalWork.com issued
4,359,305 shares of Series D convertible preferred stock for net cash proceeds
of $31,236,912 and stockholders' receivables of $5,146,250. A summary of
preferred stock is as follows:
<TABLE>
<CAPTION>
Issued and
Outstanding Shares Liquidation
December 31, Preference at
Shares -------------------- December 31,
Designated 1998 1999 1999
---------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Series A.................... 1,866,672 1,866,672 1,866,672 $ 350,001
Series B.................... 2,374,000 2,374,000 2,374,000 2,374,000
Series C.................... 11,471,276 -- 11,471,276 12,388,978
Series D.................... 5,183,412 -- 4,359,305 36,443,790
--------- ---------- -----------
4,240,672 20,071,253 $51,556,769
========= ========== ===========
</TABLE>
F-12
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Each share of convertible preferred stock is convertible, at the option of
the holder, into common stock on a 1-for-1 basis, subject to certain
adjustments for antidilution. Conversion is automatic upon the closing of an
initial public offering of common stock in which, with respect to the series A
and B convertible preferred stock, the offering price equals or exceeds $1.25
per share or upon the approval of two-thirds of the series A and B convertible
preferred stockholders, voting as a single class. Conversion will automatically
occur, with respect to the series C convertible preferred stock, upon the
closing of an initial public offering of common stock in which the aggregate
gross proceeds to DigitalWork.com are at least $10 million and the market value
of DigitalWork.com is at least $50 million or upon the approval of two-thirds
of the series C convertible preferred stockholders. Conversion will
automatically occur, with respect to the series D convertible preferred stock,
upon the closing of an initial public offering of common stock in which the
aggregate gross proceeds to DigitalWork.com are at least $20 million and the
market value of DigitalWork.com is at least $350 million or upon the approval
of two-thirds of the series D convertible preferred stockholders.
Holders of convertible preferred stock are entitled to one vote for each
share of common stock into which such shares are converted. Each of the
convertible preferred stock is entitled to receive, when and as declared by the
board of directors, noncumulative dividends at the annual rate of $0.015,
$0.08, $0.0875, and $0.6688 per share for series A, B, C, and D convertible
preferred stock, respectively, payable in preference and priority to any
payment of any dividend on common stock. As of December 31, 1999, no dividends
have been declared.
In the event of liquidation, the series C and D convertible preferred
stockholders would be entitled to a liquidation preference equal to $1.08 and
$8.36 per share, respectively, plus declared but unpaid dividends, and if
assets remain in the corporation, the series A and B convertible preferred
stockholders would be entitled to a liquidation preference equal to $0.1875 and
$1.00, respectively, plus declared but unpaid dividends. After the series A, B,
C, and D convertible preferred stockholders have received their liquidation
preference, the remaining assets of the corporation, if any, would be
distributed ratably amongst the common stockholders and the series C and D
convertible preferred stockholders unless the liquidation occurs after May 16,
2001 in which case the remaining assets would only be distributed amongst the
common stockholders.
At December 31, 1999, DigitalWork.com has reserved 124,000 shares of series
B convertible preferred stock, 111,192 shares of series C convertible preferred
stock, and 618,261 shares of series D convertible preferred stock for issuance
upon exercise of warrants outstanding.
Common Stock
At December 31, 1999, DigitalWork.com has reserved 20,071,253 shares of its
common stock for issuance upon conversion of the outstanding shares of its
convertible preferred stock, 853,453 shares of its common stock upon exercise
of warrants outstanding and 4,087,760 shares of its common stock for issuance
upon exercise of options outstanding and available under the 1998 Stock Plan.
DigitalWork.com issued 2,800,000 and 655,000 shares of its common stock to
its founders and management in May 1998 and October 1999, respectively. These
shares are subject to certain repurchase rights and lapse ratably over 48
months from the date of issuance. Within 90 days following a termination of
employment, DigitalWork.com may exercise the repurchase option by written
notice. On October 1, 1998, DigitalWork.com repurchased 900,000 shares of
common stock from one of the founders upon his termination. At December 31,
1998 and 1999, 1,603,125 and 1,715,833, respectively, shares of common stock
remain subject to repurchase rights.
F-13
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1998 Stock Plan
During 1998, DigitalWork.com adopted the 1998 Stock Plan (the Plan). Under
the Plan, up to 5,457,560 shares of the DigitalWork.com's common stock may be
granted to employees and directors. Options are generally granted at an
exercise price which approximates 100% of the fair value on the date of the
grant, as determined by the board of directors. Options vest over a three or
four-year period and have a maximum term of 10 years.
A summary of activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
Available Options Price per Exercise
for Grant Outstanding Share Price
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Shares authorized.......... 4,000,000 -- $ -- $ --
Options granted............ (3,716,000) 3,716,000 $0.03-$0.35 $0.04
Options canceled........... 700,000 (700,000) $0.03 $0.03
---------- ---------- ----------- -----
Balances at December 31,
1998........................ 984,000 3,016,000 $0.03-$0.35 $0.04
Shares authorized.......... 1,457,560 -- -- --
Options granted............ (1,074,350) 1,074,350 $0.35-$2.40 $0.93
Options exercised.......... -- (1,369,800) $0.03-$0.35 $0.03
Options canceled........... 345,125 (345,125) $0.03-$1.80 $0.08
---------- ---------- ----------- -----
Balances at December 31,
1999........................ 1,712,335 2,375,425 $0.03-$2.40 $0.44
========== ========== =========== =====
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Life in Exercise Exercise
Prices Shares Years Price Shares Price
----------- --------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$0.03 1,170,000 8.3 $0.03 1,000 $0.03
$0.35-$0.45 545,900 9.0 $0.36 71,200 $0.35
$0.90-$1.20 556,225 9.7 $1.09 -- --
$1.80-$2.40 103,300 9.9 $2.16 -- --
--------- ------
$0.03-$2.40 2,375,425 8.9 $0.44 72,200 $0.35
========= ======
</TABLE>
Stock Based Compensation
DigitalWork.com has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock option plan because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB Opinion
No. 25, when the exercise price of DigitalWork.com's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In connection with its grants of options and issuance of restricted stock to
employees during the year ended December 31, 1999, DigitalWork.com recorded
deferred stock compensation of approximately
F-14
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
$5,904,257 for the difference between the exercise price of the option or
issuance price of the restricted stock at their respective dates of grant or
issuance and what was considered to be the fair values for accounting purposes
of the shares of common stock subject to options. These amounts are included as
a reduction of stockholder's equity and are being amortized on a graded vesting
method. DigitalWork.com has recognized deferred stock compensation expense of
$780,682 for the year ended December 31, 1999 included in non-cash charges in
the statements of operations.
Pro forma information regarding net loss is required by FAS 123 as if
DigitalWork.com had accounted for its stock-based awards to employees under the
fair value method using the Black-Scholes option pricing method. The Black-
Scholes model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock volatility. DigitalWork.com is a
nonpublic company and is permitted to use a near-zero volatility factor in its
assumptions when applying the Black-Scholes model. Since DigtalWork.com's
stock-based awards have characteristics significantly different from those of
traded options and since changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock-based awards. The fair value of DigitalWork.com's
stock-based awards to employees was estimated using input assumptions as
follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Risk-free interest rate....................................... 5.5% 5.5%
Expected dividend yield....................................... -- --
Expected life (in years)...................................... 8 8
Stock volatility.............................................. 0.0% 0.0%
</TABLE>
The weighted-average fair value of options granted and restricted stock
issued during the period from March 18, 1998 (inception) to December 31, 1998
and the year ended December 31, 1999, with an exercise price equal to the fair
value of DigitalWork.com's common stock on the date of grant was $0.01 and
$0.12, respectively. The weighted-average fair value of options granted and
restricted stock issued during the year ended December 31, 1999 with an
exercise price below the deemed fair value of DigitalWork.com's common stock on
the dates of grant was $4.29 and $5.04, respectively.
Had compensation cost for DigitalWork.com's stock option plan been
determined based on the fair value at the dates of grants in accordance with
FAS 123, the Company's net loss and per share data would have been as follows
on a pro forma basis:
<TABLE>
<CAPTION>
1998 1999
----------- -------------
<S> <C> <C>
Net loss.....................................
As reported................................ $(1,467,127) $ (15,396,719)
Pro forma.................................. $(1,475,106) $ (15,443,614)
Net loss per share basic and diluted:
As reported................................ $ (1.22)
Pro forma.................................. $ (1.22)
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the option
is amortized to expense over the options' vesting period. Future pro forma net
loss results may be materially different from actual future amounts reported.
F-15
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Warrants
In November 1998, DigitalWork.com issued a warrant to a stockholder to
purchase 124,000 shares of series B convertible preferred stock at an exercise
price of $1.10 per share. The warrant was issued for business advisory services
and expires in November 2008. The estimated fair value of the warrant, as
calculated using the Black-Scholes method, totaled $83,080, and was included in
non-cash charges in the period ended December 31, 1998 as the warrant was
exercisable on the date of issuance.
In connection with the convertible promissory notes issued in April 1999,
warrants to purchase 111,192 shares of series C convertible preferred stock at
an exercise price of $1.08 per share were issued (see Note 4).
In December 1999, in connection with the issuance of series D convertible
preferred stock, DigitalWork.com issued a warrant to a stockholder to purchase
192,261 shares of series D convertible preferred stock at an exercise price of
$8.36 per share. The fair value of the warrant, as calculated using the Black-
Scholes method, totaled $1.4 million. The warrant was exercisable on the date
of issuance and expires on December 4, 2004.
In connection with a third-party agreement (see Note 7), DigitalWork.com
issued a warrant to purchase 150,000 shares of series D convertible preferred
stock at an exercise price of $8.36 per share, the fair value of the series D
convertible preferred stock at the date of the Agreement. This warrant expires
in December 2001. The fair value of the warrant, as calculated using the Black-
Scholes method, totaled $850,500 at December 31, 1999, and was included in non-
cash charges in DigitalWork.com's statement of operations as the warrant was
exercisable on the date of issuance.
In connection with a third-party agreement (see Note 9), DigitalWork.com
issued a warrant to purchase 276,000 shares of series D convertible preferred
stock at an exercise price of $8.36 per share, the fair value of the series D
convertible preferred stock at the date of the Agreement. This warrant expires
on the earlier of three years after the completion of an initial public
offering or December 2004. The fair value of the warrant, as calculated using
the Black-Scholes method, totaled $2 million at December 31, 1999, and was
included in non-cash charges in DigitalWork.com's statement of operations as
the warrant was exercisable on the date of issuance.
In applying the Black-Scholes method for the warrants issued under third
party agreements, DigitalWork.com used an expected dividend yield of zero, a
risk-free interest rate of 5% and a volatility factor of 135%. The lives used
to value these warrants was based on the term of the warrants.
In December 1999, in connection with the issuance of the convertible
preferred stock, the purchasers of series D convertible preferred stock were
issued warrants to purchase up to an aggregate of 10% of the number of common
stock to be issued in a initial public offering of DigitalWork.com's common
stock. These warrants are exercisable for one year subsequent to the initial
public offering at an exercise price equal to the initial public offering
price.
6. Commitments and Contingencies
Capital and Operating Leases
DigitalWork.com leases certain property and equipment under various
noncancelable operating and capital leases. These leases contain various terms
and provide for renewal at prevailing market rates.
F-16
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Future minimum lease payments for noncancelable operating and capital leases
at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
---------- ---------
<S> <C> <C>
Year ending December 31:
2000.............................................. $ 368,500 $ 401,245
2001.............................................. 374,600 274,895
2002.............................................. 353,300 7,177
2003.............................................. 363,800 --
2004.............................................. 375,900 --
---------- ---------
$1,836,100 683,317
==========
Less: Amounts representing interest................. (100,867)
---------
Capital lease obligations........................... 582,450
Less: Current portion............................... 319,160
---------
$ 263,290
=========
</TABLE>
Total rent expense was approximately $36,000 for the period from March 18,
1998 to December 31, 1998 and $191,000 for the year ended December 31, 1999.
7. License Agreement
In December 1999, DigitalWork.com entered into an agreement with Dell
Computer Corporation (Dell), whereby Dell will offer many of DigitalWork.com's
business services to Dell's customers and prospects. Pursuant to the terms of
the agreement, DigitalWork.com will share with Dell the e-services revenue
generated by Dell users, and DigitalWork.com will pay a fee to Dell for each
registered user and e-services customer generated through this relationship. In
addition, DigitalWork.com will pay Dell a $2.0 million slotting fee 12 months
after the launch of the site. If Dell provides DigitalWork.com with less than a
minimum number of paying customers during the first 12 months after launch of
the site, Dell will refund a portion of the fee. DigitalWork.com will record
and amortize the fee over the two-year term of the agreement, and include it as
a marketing and strategic alliance expense. In connection with this agreement,
DigitalWork.com also issued a warrant to Dell to purchase shares of its series
D convertible preferred stock (see Note 5).
8. Income Taxes
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate
of 34% is primarily due to net operating losses not being benefited. For that
reason, there is no provision for income taxes for the period from March 18,
1998 (inception) to December 31, 1998 and year ended December 31, 1999.
At December 31, 1999, DigitalWork.com had net operating loss carryforwards
of approximately $12.9 million, which may be used to offset future taxable
income. The net operating loss carryforwards expire beginning in 2013, if not
used. Should certain changes in DigitalWork.com's ownership occur, there could
be a limitation on the utilization of its net operating losses.
F-17
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DigitalWork.com's net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
--------- -----------
<S> <C> <C>
Net operating loss carryforwards.................. $ 551,000 $ 5,184,000
Other............................................. 2,000 36,000
Fixed assets...................................... (1,000) (16,000)
--------- -----------
Net deferred tax assets........................... 552,000 5,204,000
Less: Valuation allowance......................... (552,000) (5,204,000)
========= ===========
$ -- $ --
========= ===========
</TABLE>
DigitalWork.com has recorded a 100% valuation allowance equal to the net
deferred tax asset balance based upon management's determination that the
recognition criteria for realization have not been met.
9. Subsequent Events
In January 2000, DigitalWork.com entered into an agreement with America
Online, Inc. (AOL) to provide sales and marketing services on a customized co-
branded site which is accessible throughout certain of AOL's properties. As
part of this agreement, DigitalWork.com will receive all of the e-services
revenue generated from the purchase of its services by AOL's users.
DigitalWork.com paid AOL a $6.0 million fee to enter into this agreement. It is
amortizing the fee it paid to AOL over the 18-month term of the agreement, and
including it as a marketing and strategic alliance expense. In connection with
this agreement, DigitalWork.com also issued a warrant to AOL to purchase shares
of its series D convertible preferred stock (see Note 5).
10. Events Subsequent to Date of Auditors' Report (unaudited)
Option Activity
From January 1, 2000 to March 10, 2000, options to purchase 1,201,500 shares
of common stock were granted to employees pursuant to the 1998 Stock Plan with
exercise prices of between $3.00 and $4.20 per share. The options vest over a
four-year term and have a maximum life of ten years. The Company estimates that
additional deferred compensation of $10.6 million will be recorded as a result
of these option grants and will be amortized to expense using the graded
vesting method.
Amended and Restated 1998 Stock Option Plan
In February 2000, DigitalWork.com amended the 1998 Stock Option Plan (the
Amended Plan), subject to Board of Director and stockholder approval. Under the
Amended Plan, up to 6,957,560 shares of DigitalWork.com's common stock may be
granted to employees, directors, or consultants. On January 1 of each year
beginning in 2001, the number of shares reserved automatically increases by the
lesser of 1,500,000 shares, 4% of outstanding shares, or an amount determined
by the Board of Directors. The types of awards that may be made under the
Amended Plan include the grant of incentive stock options and the grant of
nonqualified stock options. The exercise price for incentive stock options may
not be less than 100% of the fair market value of DigitalWork.com's common
stock on the date of grant.
2000 Employee Stock Purchase Plan
In February 2000, DigitalWork.com adopted the 2000 Employee Stock Purchase
Plan (the "2000 Purchase Plan"), subject to Board of Director and stockholder
approval. A total of 750,000 shares of common stock have been
F-18
<PAGE>
DIGITALWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
reserved for issuance under the 2000 Purchase Plan. The 2000 Purchase Plan
permits eligible employees to acquire shares of DigitalWork.com's common stock
through periodic payroll deductions of up to 10% of total compensation. No
employee may purchase common stock with a fair value of more than $25,000 in
any calendar year. Each purchase period will have a maximum duration of 6
months. Purchases occur on the last day of each June and December of each
offering period. The price at which the commons stock may be purchased is 85%
of the lesser of the fair market value of DigitalWork.com's common stock on
each employee's applicable enrollment date or on the last day of the respective
purchase period. The initial purchase period commences on the effectiveness of
the initial public offering and will end on the last business day of December
2000. The 2000 Purchase Plan will terminate ten years from the date of
adoption.
F-19
<PAGE>
DESCRIPTION OF ARTWORK ON INSIDE BACK COVER
Artwork with the work "network" is treated as a subtle background shadow
with a screen shot and copy overprinting. There is a black rounded bar at the
top of the page that contains the copy: "The DigitalWork.com Solution." A copy
block below this bar and above the screen shot reads: "We believe we have
created a new way for small businesses to execute critical business functions.
Through our e-services network, we facilitate business-to-business e-commerce
transactions among small businesses, service suppliers and business portals.
Our e-services platform provides small businesses with online access to
business services that have not previously been readily available to them. Our
integrated Web-based solution allows time- and resource-constrained small
businesses to complete over 30 critical business functions more efficiently
than with traditional offline methods. Furthermore, our platform enables small
businesses to learn about and execute each business function in an efficient
step-by-step manner."
<PAGE>
6,250,000 Shares
Common Stock
------------------
PROSPECTUS
, 2000
------------------
Lehman Brothers
U.S. Bancorp Piper Jaffray
Prudential Volpe Technology
a unit of Prudential Securities
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Registrant in connection
with the sale of 6,250,000 shares of common stock being registered. All amounts
are estimates except the SEC registration fee, the NASD filing fee and the
Nasdaq National Market Application and Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 23,760
NASD Filing Fee............................................... 9,500
NASDAQ National Market Application and Listing Fee............ 95,000
Blue Sky Fees and Expenses.................................... 3,000
Printing and Engraving Expenses............................... 250,000
Legal Fees and Expenses....................................... 400,000
Accounting Fees and Expenses.................................. 400,000
Director and Officer Securities Act Liability Insurance....... 300,000
Transfer Agent and Registrar Fees............................. 12,000
Miscellaneous Expenses........................................ 6,740
----------
Total..................................................... $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes
a corporation's Board of Directors to grant indemnity to directors and officers
in terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the "Securities Act").
As permitted by the DGCL, Article Sixth of the Registrant's amended and
restated certificate of incorporation provides that (i) the Registrant is
required to indemnify its directors and officers to the fullest extent
permitted by the DGCL, subject to certain very limited exceptions; (ii) the
Registrant is permitted to indemnify its other employees to the extent that it
indemnifies its officers and directors, unless otherwise required by law, its
certificate of incorporation, its by-laws or agreements; (iii) the Registrant
is required to advance expenses, as incurred, to its directors and officers in
connection with a legal proceeding to the fullest extent permitted by the DGCL,
subject to certain very limited exceptions; and (iv) the rights conferred in
the by-laws are not exclusive. As permitted by the DGCL, the Registrant's
amended and restated certificate of incorporation includes a provision that
eliminates the personal inability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Registrant or its stockholders; (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law; (iii) under Section 174 of the DGCL (regarding
payments of dividends; stock purchases or redemptions which are unlawful); or
(iv) for any transaction from which the director derived an improper personal
benefit. This provision in the amended and restated certificate of
incorporation does not eliminate the directors' fiduciary duty, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Registrant for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment
of dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
II-1
<PAGE>
The Registrant has entered into indemnification agreements with its officers
and directors. These Directorship Agreements provide that the directors will be
indemnified to the fullest extent permitted by law against all expenses
(including attorneys' fees), judgments, fines, amounts paid or incurred by them
for settlement in any action or proceeding, including any derivative action, on
account of their service as directors of the Registrant or of any subsidiary of
the Registrant or of any other company or enterprise in which they are serving
at the request of the Registrant. No indemnity will be provided to any director
under these agreements on account of liability for any breach of the director's
duty of loyalty to the Registrant, such subsidiaries, stockholders or
enterprises, any act or omission not in good faith or which involved
intentional misconduct or a knowing violation of laws, or any transaction from
which the director derived an improper personal benefit. In addition, no
indemnification will be provided for which payment is made to or on behalf of
the director under any insurance policy, except with respect to any excess
amount to which the director is entitled under the Directorship Agreement
beyond the amount of payment under such insurance policy, if a court having
jurisdiction in the matter finally determines that such indemnification is not
lawful under any applicable statute or public policy, or in connection with any
proceeding initiated by the director, or any proceeding by the director against
the Registrant or its directors, officers, employees or other persons entitled
to be indemnified by the Registrant, unless (1) the Registrant is expressly
required by law to make the indemnification, (2) the proceeding was authorized
by the board of directors of the Registrant or (3) the director initiated the
proceeding pursuant to the Directorship Agreement and the director is
successful in whole or in part in the proceeding.
Under Article VI of the Registrant's by-laws, the Registrant is authorized
to, and has purchased, insurance covering the Registrant's directors and
officers against liability asserted against them in their capacity as such.
Reference is made to the Underwriting Agreement contained in Exhibit 1.1
hereto, which contains provisions indemnifying officers and directors of the
Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our inception in March 1998, we have sold and issued the following
unregistered securities:
On May 14, 1998, we issued an aggregate of 2,800,000 shares of common stock
at $0.025 per share to our founders, Robert A. Schultz, Craig A. Terrill and
Christopher E. Getner, for an aggregate purchase price of $70,000. The price
per share was negotiated among the founders. No underwriter was involved in
this issuance and no commissions were paid. We issued these shares to our
founders in reliance upon Section 4(2) of the Securities Act as a transaction
by an issuer not involving a public offering. Based upon information we
provided to Messrs. Schultz, Terrill and Getner and their relationship with our
company, each had adequate access to information about our company. We did not
make any offer to sell the securities by means of a general solicitation or
general advertising within the meaning of Rule 502 of Regulation D under the
Securities Act.
Also during May 1998, we issued 1,733,339 shares of Series A convertible
preferred at $0.1875 per share of our capital stock, for an aggregate purchase
price of approximately $325,001 to seven individual and entity accredited
investors. We determined the price per share through arms-length negotiations
with the investors. No underwriter was involved in the offering and no
commissions were paid. We issued these shares in reliance upon an exemption
from registration under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. Based upon representations made to us by the investors,
information we supplied to the investors and the relationship among us and the
investors, all investors had adequate access to information about our company.
In addition, based upon representations made by the investors to us, the
investors were able to bear the financial risk of the investment. The investors
represented their intentions to acquire the securities for investment only and
not with a view to offer for sale in connection with any distribution thereof
and appropriate legends were affixed to the certificates representing the
securities. We did not make any offer to sell the securities by means of a
general solicitation or general advertising within the meaning of Regulation D
of the Securities Act.
Additionally, on May 2, 1998, we issued to Invest Linc Consulting Corp.: (i)
133,333 shares of Series A convertible preferred in exchange for $1,000 and
business consulting services and (ii) 95,240 shares of
II-2
<PAGE>
Common Stock in exchange for $200 and business consulting services. The price
per share was set by us with Invest Line through arms length negotiations. No
underwriter was involved in this offering and no commissions were paid. We
issued these shares to Invest Linc in reliance upon Section 4(2) of the
Securities Act.
During October 1998, we issued 2,374,000 shares of Series B convertible
preferred at $1.00 per share for an aggregate purchase price of approximately
$2.4 million to 25 individual and entity accredited investors. We determined
the price per share through arms-length negotiations with the investors. No
underwriter was involved in the offering and no commissions were paid. We
issued these shares in reliance upon an exemption from registration under Rule
506 of Regulation D and Section 4(2) of the Securities Act. Based upon
representations made to us by the investors, information we supplied to the
investors and the relationship among us and the investors, all investors had
adequate access to information about our company. In addition, based upon
representations made by the investors to us, the investors were able to bear
the financial risk of the investment. The investors represented their
intentions to acquire the securities for investment only and not with a view to
offer for sale in connection with any distribution thereof and appropriate
legends were affixed to the certificates representing the securities. We did
not make any offer to sell the securities by means of a general solicitation or
general advertising within the meaning of Regulation D of the Securities Act.
In November 1998, we issued a warrant to Edward C. Coppola to purchase up to
124,000 shares of our common stock at $1.10 per share. This warrant will expire
in November 2008. In April 1999, we issued Mr. Coppola and one of his
affiliates warrants to purchase up to 66,715 shares of our Series C preferred
stock at $1.08 per share. These warrants expire in April 2004. We issued these
warrants to Mr. Coppola and his affiliate in reliance upon Section 4(2) of the
Securities Act.
During May 1999, we issued 11,471,276 shares of Series C convertible
preferred stock at $1.08 per share for an aggregate purchase price of
approximately $12.4 million to 41 individual and entity accredited investors.
We determined the price per share based upon arms length negotiations with the
investors. No underwriter was involved in the offering and no commissions were
paid. We issued these shares in reliance upon an exemption from registration
under Rule 506 of Regulation D and Section 4(2) of the Securities Act. Based
upon representations made to us by the investors, information we supplied to
the investors and the relationship among us and the investors, all investors
had adequate access to information about our company. In addition, based upon
representations made by the investors to us, the investors were able to bear
the financial risk of the investment. The investors represented their
intentions to acquire the securities for investment only and not with a view to
offer for sale in connection with any distribution thereof and appropriate
legends were affixed to the certificates representing the securities. We did
not make any offer to sell the securities by means of a general solicitation or
general advertising within the meaning of Regulation D of the Securities Act.
During October 1999 we issued an aggregate of 655,000 shares of common stock
to Robert A. Schultz, Craig A. Terrill and David P. Aniol for aggregate
consideration of $786,000 or $1.20 per share. We issued these shares to these
officers in reliance upon an exemption from registration under Rule 701 of the
Securities Act.
During December 1999, we issued 4,359,305 shares of Series D convertible
preferred stock for approximately $36.4 million at $8.36 per share to 51
accredited entities and individuals. In connection with this offering, we
issued to each of the 61 accredited entities and individuals warrants to
purchase shares of our common stock. The warrants are exercisable from the date
the registration statement, of which this prospectus is a part, is declared
effective by the SEC to the one year anniversary of this effective date. Each
holder of the warrant may purchase a number of shares, based upon its pro rata
holdings of our Series D convertible preferred stock, at the same price as the
offering price per share of this offering. No underwriter was involved in the
offering and no commissions were paid. We issued these shares and warrants in
reliance upon an exemption from registration under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. Based upon representations made to us by
the investors, information we supplied to the investors and the relationship
among us and the investors, all investors had adequate access to information
about our company. In addition, based upon representations made by the
investors to us, the investors were able to bear the financial risk of the
II-3
<PAGE>
investment. The investors represented their intentions to acquire the
securities for investment only and not with a view to offer for sale in
connection with any distribution thereof and appropriate legends were affixed
to the certificates representing the securities. We did not make any offer to
sell the securities by means of a general solicitation or general advertising
within the meaning of Regulation D of the Securities Act.
During December 1999, we issued to America Online, Inc. a warrant to
purchase up to 276,000 shares of our Series D convertible preferred stock at an
exercise price of $8.36 per share. This warrant is exercisable until three
years from the effectiveness of this registration statement. No underwriter was
involved in the offering and no commissions were paid. We issued these warrants
to America Online, Inc., an accredited investor, in reliance upon an exemption
from registration under Rule 506 of Regulation D and Section 4(2) of the
Securities Act.
During December 1999, we issued a warrant to Dell USA, L.P. to purchase
150,000 shares of our common stock. This warrant is exercisable until December
2001, at a per share exercise price of $8.36. We issued these shares and
warrants in reliance upon an exemption from registration under Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
During December 1999, we issued to each of Attractor QP LP, Attractor LP,
Attractor Ventures LLC, Attractor Institutional LP, and Attractor Offshore Ltd.
warrants to purchase, in the aggregate, 192,261 shares of our Series D
Convertible Preferred Stock. These warrants are exercisable until December 2,
2004 at a per share exercise price of $8.36.
Since our inception and until December 31, 1999, we have granted options
under our 1998 stock option plan to acquire an aggregate of 3,745,225 shares of
common stock. The exercise prices of those options range from $0.025 to $0.35
per share for options issued in 1998 and $0.35 to $2.40 per share for options
issued in 1999. We have issued these options to our officers in reliance upon
an exemption from registration under Rule 701 and Section 4(2) of the
Securities Act.
Where appropriate, share numbers and per share consideration for common
stock have been adjusted for the 4-for-1 stock split in October 1999.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) Exhibits:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation
of Registrant
3.2* Form of By-Laws of Registrant
4.1* Specimen Certificate for Registrant's common stock
4.2* Amended and Restated Registration Rights Agreement
5.1 Opinion of Freeborn & Peters
10.1 Form of DigitalWork.com Amended and Restated 1998 Stock
Option Plan
10.2 Form of DigitalWork.com 2000 Employee Stock Purchase Plan
10.3* Form of Employee Stock Option Agreement for the Amended
and Restated 1998 Stock Option Plan
10.4*** Form of DigitalWork.com, Inc. Stock Subscription warrant
issued to affiliates of Attractor Capital Management
10.5* Form of DigitalWork.com, Inc. Stock Subscription Warrant
issued to Series D Participants dated December 2, 1999
10.6*** DigitalWork.com, Inc. Stock Subscription Warrant issued to
America Online, Inc. dated December 27, 1999
10.7*** DigitalWork.com, Inc. Stock Subscription Warrant issued to
Dell USA, L.P. dated December 22, 1999
10.8*** DigitalWork.com, Inc. Stock Subscription Warrant issued to
Edward C. Coppola, Jr. dated November , 1998;
DigitalWork.com, Inc. Stock Subscription Warrant issued to
Edward C. Coppola, Jr. dated April , 1999.
10.9* Form of DigitalWork.com, Inc. Employment Confidential
Information, Invention Assignment and Arbitration
Agreement
10.10*** Employment Agreement between Registrant and Robert A.
Schultz
10.11*** Employment Agreement between Registrant and Craig A.
Terrill
10.12*** Employment Agreement between Registrant and David P. Aniol
10.13*** Employment Agreement between Registrant and John Banta
10.14*** Employment Agreement between Registrant and Randy
Grudzinski
10.15*** Employment Agreement between Registrant and Doug Mulderink
10.16*** Employment Agreement between Registrant and Brian Petula
10.17*** Employment Agreement between Registrant and Loreen
Sieroslawski
10.18* Form of Directorship Indemnification Agreement
10.19 Lease for 230 West Monroe between DigitalWork, Inc., TIAA
Realty, Inc., First Amendment to Lease by and between
DigitalWork, Inc. and TIAA Realty, Inc., and Second
Amendment to Lease by and between DigitalWork, Inc. and
TIAA Realty, Inc.
10.20*+ Confidential Interactive Marketing Agreement by and
between the Registrant and America Online, Inc. dated as
of January 1, 2000.
10.21*+ Master Services Agreement by and between the Registrant
and Dell Computer Corporation entered into as of December
22, 1999.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S> <C>
10.22 Form of Rights Agreement between DigitalWork.com, Inc. and
Chase Mellon Shareholder Services L.L.C. as Rights Agent
23.1 Consent of Ernst & Young LLP
23.2 Consent of Freeborn & Peters (contained in Exhibit 5.1)
23.3 Consent of Edward C. Coopola
24.1* Power of Attorney (See page II-6)
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed.
+ Subject to a confidential treatment request.
*** To be filed by amendment.
(B) Financial Statement Schedules:
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the combined financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chicago, State of Illinois, on March 13, 2000.
DigitalWork.com, Inc.
/s/ Robert A. Schultz
By: _________________________________
Robert A. Schultz,
Chairman of the Board of Directors
and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities indicated on March 13, 2000:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Robert A. Schultz Chairman of the Board of Directors and
___________________________________________ Chief Executive Officer (Principal
Robert A. Schultz Executive Officer)
* President and Chief Operating Officer
___________________________________________
Craig A. Terrill
* Chief Financial Officer (Principal
___________________________________________ Financial and Accounting Officer)
David Aniol
* Director
___________________________________________
Raj Atluru
* Director
___________________________________________
Warren Packard
* Director
___________________________________________
</TABLE> Marc Benioff
/s/ Robert A. Schultz
*By: ___________________________
Robert A. Schultz
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation of
Registrant
3.2* Form of By-Laws of Registrant
4.1* Specimen Certificate for Registrant's common stock
4.2* Amended and Restated Registration Rights Agreement among the
Registrant and certain holders of the Registrant's securities
5.1 Opinion of Freeborn & Peters
10.1 Form of DigitalWork.com Amended and Restated 1998 Stock Option
Plan
10.2 Form of DigitalWork.com 2000 Employee Stock Purchase Plan
10.3* Form of Employee Stock Option Agreement for the Amended and
Restated 1998 Stock Option Plan
10.4*** Form of DigitalWork.com, Inc. Stock Subscription warrant
issued to affiliates of Attractor Capital Management
10.5* Form of DigitalWork.com, Inc. Stock Subscription Warrant
issued to Series D Participants dated December 2, 1999
10.6*** DigitalWork.com, Inc. Stock Subscription Warrant issued to
America Online, Inc. dated December 27, 1999
10.7*** DigitalWork.com, Inc. Stock Subscription Warrant issued to
Dell USA, L.P. dated December 22, 1999
10.8*** DigitalWork.com, Inc. Stock Subscription Warrant issued to
Edward C. Coppola, Jr. dated November , 1998;
DigitalWork.com, Inc. Stock Subscription warrant issued to
Edward C. Coppola, Jr. dated April , 1999.
10.9* Form of the Registrant's Employment Confidential Information,
Invention Assignment and Arbitration Agreement
10.10*** Employment Agreement between Registrant and Robert A. Schultz
10.11*** Employment Agreement between Registrant and Craig A. Terrill
10.12*** Employment Agreement between Registrant and David P. Aniol
10.13*** Employment Agreement between Registrant and John Banta
10.14*** Employment Agreement between Registrant and Randy Grudzinski
10.15*** Employment Agreement between Registrant and Doug Mulderink
10.16*** Employment Agreement between Registrant and Brian Petula
10.17*** Employment Agreement between Registrant and Loreen
Sieroslawski
10.18* Directorship Indemnification Agreement
10.19 Lease for 230 West Monroe between DigitalWork, Inc., TIAA
Realty, Inc. , First Amendment to Lease by and between
DigitalWork, Inc. and TIAA Realty, Inc., and Second Amendment
to Lease by and between DigitalWork, Inc. and TIAA Realty,
Inc.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S> <C>
10.20*+ Confidential Interactive Marketing Agreement by and between
the Registrant and America Online, Inc. dated as of January 1,
2000.
10.21*+ Master Services Agreement by and between the Registrant and
Dell Computer Corporation entered into as of December 22,
1999.
10.22 Form of Rights Agreement between DigitalWork.com, Inc. and
Chase Mellon Shareholder Services L.L.C. as Rights Agent.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Freeborn & Peters (contained in Exhibit 5.1)
23.3 Consent of Edward C. Coopola
24.1* Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- --------
*Filed previously.
+Subject to a confidential treatment request.
***To be filed by amendment.
II-9
<PAGE>
EXHIBIT 1.1
_________ shares
DIGITALWORK.COM, INC.
Common Stock, par value $0.005 per share
UNDERWRITING AGREEMENT
----------------------
_____ __, 2000
LEHMAN BROTHERS INC.
U.S. BANCORP PIPER JAFFRAY INC.
PRUDENTIAL SECURITIES INCORPORATED
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Ladies and Gentlemen:
DigitalWork.com, Inc. a Delaware corporation (the "Company"), proposes
to sell ________ shares (the "Firm Stock") of the Company's Common Stock, par
value $0.005 per share. In addition, the Company proposes to grant to the
Underwriters named in Schedule 1 hereto (the "Underwriters") an option to
purchase up to an additional _______ shares of the Common Stock on the terms and
for the purposes set forth in Section 2 (the "Option Stock"). The Firm Stock
and the Option Stock, if purchased, are hereinafter collectively called the
"Stock." This is to confirm the agreement concerning the purchase of the Stock
from the Company by the Underwriters named in Schedule 1 hereto (the
"Underwriters").
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 and amendments thereto,
with respect to the Stock have (i) been prepared by the Company in
conformity with the requirements of the United States Securities Act
of 1933 (the "Securities Act") and the rules and regulations (the
"Rule and Regulations") of the United States Securities and Exchange
Commission (the "Commission") thereunder, (ii) been filed with the
Commission under the Securities Act and (iii) become effective under
the Securities Act. Copies of such registration statement and the
amendments thereto have been delivered by the Company to you as the
representatives (the "Representatives") of the Underwriters. As used
in this Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent post-effective
amendment thereto, if any, was declared effective by the Commission;
"Effective Date" means the date of the Effective Time; "Preliminary
Prospectus" means each prospectus included in such registration
statement, or amendments thereof, before it became effective under the
Securities Act and any prospectus filed with the Commission by the
Company with the consent of the
<PAGE>
Representatives pursuant to Rule 424(a) of the Rules and Regulations;
"Registration Statement" means such registration statement, as amended
at the Effective Time, including all documents filed as a part thereof
and including all information contained in the final prospectus filed
with the Commission pursuant to Rule 424(b) of the Rules and
Regulations in accordance with Section hereof and deemed to be a part
of the registration statement as of the Effective Time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations and also
including any registration statement filed pursuant to Rule 462(b) of
the Rules and Regulations; and "Prospectus" means such final
prospectus, as first filed with the Commission pursuant to paragraph
(1) or (4) of Rule 424(b) of the Rules and Regulations. The Commission
has not issued any order preventing or suspending the use of any
Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or
the Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all respects to the
requirements of the Securities Act and the Rules and Regulations 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 that
no representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information furnished to
the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in
which its ownership or lease of property or the conduct of its
business requires such qualification, and has all power and authority
necessary to own or hold its properties and to conduct the business in
which it is engaged; and the Company has no subsidiaries.
(d) 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 thereof
contained in the Prospectus. There are no preemptive or other rights
to subscribe for or to purchase, nor any restriction upon the voting
or transfer of, any shares of the Stock. The holders of outstanding
capital
2
<PAGE>
stock of the Company are not entitled to require the Company to redeem
any capital stock owned by them.
(e) The shares of the Stock have been duly and validly
authorized and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued, fully paid and non-
assessable; and the Stock will conform to the descriptions thereof
contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The execution, delivery and performance of this by the
Company and the consummation of the transactions contemplated hereby
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, note or other
agreement or instrument to which the Company is a party or by which
the Company is bound or to which any of the property or assets of the
Company is subject, nor will such actions result in any violation of
the provisions of the charter or by-laws of the Company or 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 properties
or assets; and except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and
applicable state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby.
(h) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Securities Act
with respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities in
the securities registered pursuant to the Registration Statement or in
any securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act.
(i) Except as described in the Prospectus, the Company has not
sold or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales pursuant to
Rule 144A under, or Regulations D or S of, the Securities Act other
than shares issued pursuant to employee benefit
3
<PAGE>
plans, qualified stock options plans or other employee compensation
plans or pursuant to outstanding options, rights or warrants.
(j) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements
included in the Prospectus, any material 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, since such date, there has not
been any change in the capital stock or long-term debt of the Company
or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or
results of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby,
at the dates and for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved.
(l) Ernst & Young LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and
who have delivered the initial letter referred to in Section 7(f)
hereof, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(m) The Company does not own any real property. The Company has
good and marketable title to all personal property owned by it, in
each case free and clear of all liens, encumbrances and defects except
such as are described in the Prospectus or such as do not materially
affect the value of such property and do not materially interfere with
the use made and proposed to be made of such property by the Company
and all real property and buildings held under lease by the Company
are held by it 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.
(n) The Company carries or is covered by insurance in such
amounts and covering such risks as is adequate for the conduct of its
respective business and the value of its properties and as is
customary for companies engaged in similar businesses in similar
industries.
4
<PAGE>
(o) The Company owns or possesses enforceable rights to use all
material patents, patent applications, trademarks, service marks,
trade names, trademark registrations, service mark registrations,
copyrights and licenses it uses in the conduct of its business and has
rights to use the content of its service suppliers' Web sites and
software that are adequate for the Company's business purposes and has
no reason to believe that the conduct of its business will conflict
with, and has not received any notice of any claim of conflict with,
any such rights of others.
(p) There are no legal or governmental proceedings pending to
which the Company is a party or of which any property or assets of the
Company is the subject which, if determined adversely to the Company,
might have a material adverse effect on the consolidated financial
position, stockholders' equity, results of operations, business or
prospects of the Company (herein, 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.
(q) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed
as exhibits to the Registration Statement.
(r) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
which is required to be described in the Prospectus which is not so
described.
(s) No labor disturbance by the employees of the Company exists
or, to the knowledge of the Company, is imminent which might be
expected to have a Material Adverse Effect.
(t) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of
the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code"); and
each "pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is
so qualified in all material respects and nothing has occurred,
whether by action or by failure to act, which would cause the loss of
such qualification.
5
<PAGE>
(u) The Company has filed all federal, state and local income
and franchise tax returns required to be filed through the date hereof
and has paid all taxes due thereon, and no tax deficiency has been
determined adversely to the Company which has had (nor does the
Company have any knowledge of any tax deficiency which, if determined
adversely to the Company, might have), a Material Adverse Effect.
(v) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted
any securities, (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred
in the ordinary course of business, (iii) entered into any transaction
not in the ordinary course of business or (iv) declared or paid any
dividend on its capital stock.
(aa) The Company (i) makes and keeps accurate books and records
and (ii) maintains internal accounting controls which provide
reasonable assurance that (A) transactions are executed in accordance
with management's authorization, (B) transactions are recorded as
necessary to permit preparation of its financial statements and to
maintain accountability for its assets, (C) access to its assets is
permitted only in accordance with management's authorization and (D)
the reported accountability for its assets is compared with existing
assets at reasonable intervals.
(ab) The Company (i) is not in violation of its charter or by-
laws, (ii) is not in default in any material respect, and no event has
occurred which, with notice or lapse of time or both, would constitute
such a default in the due performance or observance of any term,
covenant or condition contained in or give any person the right to
terminate or accelerate the date of performance under, any material
indenture, mortgage, deed of trust, loan agreement, note or other
agreement or instrument to which it is a party or by which it is bound
or to which any of its properties or assets is subject or (iii) is not
and has not conducted its business, in violation in any material
respect of any law, ordinance, governmental rule, regulation or court
decree to which it or its property or assets may be subject or has
failed to obtain any material license, permit, certificate, franchise
or other governmental authorization or permit necessary to the
ownership of its property or to the conduct of its business.
(ac) Neither the Company nor any director, officer, agent,
employee or other person associated with or acting on behalf of the
Company, has used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expense relating to political
activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds;
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violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(ad) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of
toxic wastes, medical wastes, hazardous wastes or hazardous substances
by the Company (or, to the knowledge of the Company, any of their
predecessors in interest) at, upon or from any of the property now or
previously owned or leased by the Company in violation of any
applicable law, ordinance, rule, regulation, order, judgment, decree
or permit or which would require remedial action under any applicable
law, ordinance, rule, regulation, order, judgment, decree or permit,
except for any violation or remedial action which would not have, or
could not be reasonably likely to have, singularly or in the aggregate
with all such violations and remedial actions, a material adverse
effect on the general affairs, management, financial position,
stockholders' equity or results of operations of the Company; there
has been no material spill, discharge, leak, emission, injection,
escape, dumping or release of any kind onto such property or into the
environment surrounding such property of any toxic wastes, medical
wastes, solid wastes, hazardous wastes or hazardous substances due to
or caused by the Company or with respect to which the Company has
knowledge, except for any such spill, discharge, leak, emission,
injection, escape, dumping or release which would not have or would
not be reasonably likely to have, singularly or in the aggregate with
all such spills, discharges, leaks, emissions, injections, escapes,
dumpings and releases, a material adverse effect on the general
affairs, management, financial position, stockholders' equity or
results of operations of the Company; and the terms "hazardous
wastes", "toxic wastes", "hazardous substances" and "medical wastes"
shall have the meanings specified in any applicable local, state,
federal and foreign laws or regulations with respect to environmental
protection.
(ae) The Company is not, and after giving effect to the offering
and sale of the Stock, will not be an "investment company" or
"controlled" by an "investment company" within the meaning of such
term under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
2. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell _______ shares of the
Firm Stock to the several Underwriters and each of the Underwriters, severally
and not jointly, agrees to purchase the number of shares of the Firm Stock set
opposite that Underwriter's name in Schedule 1 hereto. The respective purchase
obligations of the Underwriters with respect to the Firm Stock shall be rounded
among the Underwriters to avoid fractional shares, as the Representatives may
determine.
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In addition, the Company grants to the Underwriters an option to
purchase up to _______ shares of Option Stock. Such option is granted for the
purpose of covering over-allotments in the sale of Firm Stock and is exercisable
as provided in Section 4 hereof. Shares of Option Stock shall be purchased
severally for the account of the Underwriters in proportion to the number of
shares of Firm Stock set opposite the name of such Underwriters in Schedule 1
hereto. The respective purchase obligations of each Underwriter with respect to
the Option Stock shall be adjusted by the Representatives so that no Underwriter
shall be obligated to purchase Option Stock other than in 100 share amounts.
The price of both the Firm Stock and any Option Stock shall be $_____ per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on any Delivery Date (as hereinafter defined), as the case may be,
except upon payment for all the Stock to be purchased on such Delivery Date as
provided herein.
3. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
It is understood that approximately __________ shares of the Firm
Stock ("Directed Shares") will initially be reserved by the Underwriters for
offer and sale to employees and persons having business relationships with the
Company and its subsidiaries ("Directed Share Participants") upon the terms and
conditions set forth in the Prospectus and in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. (the
"Directed Share Program"). Under no circumstances will Lehman Brothers or any
Underwriter be liable to the Company or to any Directed Share Participant for
any action taken or omitted to be taken in good faith in connection with such
Directed Share Program. To the extent that any Directed Shares are not
affirmatively reconfirmed for purchase by any Directed Share Participant on or
immediately after the date of this Agreement, such Directed Shares may be
offered to the public as part of the public offering contemplated hereby.
4. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Morgan, Lewis & Bockius LLP,
101 Park Avenue, New York, New York, 10178, at 10:00 A.M., New York City time,
on the fourth full business day following the date of this Agreement or at such
other date or place as shall be determined by agreement between the
Representatives and the Company. This date and time are sometimes referred to
as the First Delivery Date." On the First Delivery Date, the Company shall
deliver or cause to be delivered certificates representing the Firm Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall
be registered in such names and in such denominations as the Representatives
shall request in writing not less than two full business
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days prior to the First Delivery Date. For the purpose of expediting the
checking and packaging of the certificates for the Firm Stock, the Company shall
make the certificates representing the Firm Stock available for inspection by
the Representatives in New York, New York, not later than 2:00 P.M., New York
City time, on the business day prior to the First Delivery Date.
The option granted in Section 2 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Representatives. Such notice
shall set forth the aggregate number of shares of Option Stock as to which the
option is being exercised, the names in which the shares of Option Stock are to
be registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as a "Second Delivery Date" and the First Delivery
Date and any Second Delivery Date are sometimes each referred to as a "Delivery
Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on such
Second Delivery Date. On such Second Delivery Date, the Company shall deliver
or cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall
be registered in such names and in such denominations as the Representatives
shall request in the aforesaid written notice. For the purpose of expediting
the checking and packaging of the certificates for the Option Stock, the Company
shall make the certificates representing the Option Stock available for
inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to such Second Delivery
Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than 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 Securities Act; to make no further
amendment or any supplement to the Registration Statement or to the
Prospectus except as permitted herein; to advise the Representatives,
promptly after it receives notice thereof, of the time when any
amendment to the Registration Statement has
9
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been filed or becomes effective or any supplement to the Prospectus or
any amended Prospectus has been filed and to furnish the
Representatives with copies thereof; to advise the Representatives,
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 the Prospectus, of the
suspension of the qualification of the Stock 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 the
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 the Prospectus or suspending
any such qualification, to use promptly its best efforts to obtain its
withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration
Statement as originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and exhibits
filed therewith;
(c) To deliver promptly to the Representatives such number of
the following documents as the Representatives shall reasonably
request: (i) conformed copies of the Registration Statement as
originally filed with the Commission and each amendment thereto (in
each case excluding exhibits other than this Agreement and the
computation of per share earnings) and (ii) each Preliminary
Prospectus, the Prospectus and any amended or supplemented Prospectus;
and, if the delivery of a prospectus is required at any time after the
Effective Time in connection with the offering or sale of the Stock or
any other securities relating thereto and if at such time any events
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 to amend
or supplement the Prospectus in order to comply with the Securities
Act, to notify the Representatives and, upon their request, to file
such document and to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended
or supplemented Prospectus which will correct such statement or
omission or effect such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by the
Commission;
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<PAGE>
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish a copy thereof to the Representatives and counsel for the
Underwriters and obtain the consent of the Representatives to the
filing;
(f) As soon as practicable after the Effective Date (but in no
event later than 15 months after the Effective Date) to make generally
available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company (which need not
be audited) complying with Section 11(a) of the Securities Act and the
Rules and Regulations (including, at the option of the Company, Rule
158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by
the Company to its shareholders and all public reports and all reports
and financial statements furnished by the Company to the principal
national securities exchange upon which the Common Stock may be listed
pursuant to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions as
the Representatives 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 Stock; 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;
(i) For a period of 180 days from the date of the Prospectus,
not to, directly or indirectly, (1) offer for sale, sell, pledge or
otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any
person at any time in the future of) any shares of Common Stock or
securities convertible into or exchangeable for Common Stock (other
than the Stock and shares issued pursuant to employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date hereof or pursuant to currently outstanding
options, warrants or rights), or sell or grant options, rights or
warrants with respect to any shares of Common Stock or securities
convertible into or exchangeable for Common Stock (other than the
grant of options pursuant to option plans existing on the date
hereof), or (2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock, whether
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any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case without the prior written consent of Lehman
Brothers Inc.; and to cause each officer and director of the Company
to furnish to the Representatives, prior to the First Delivery Date, a
letter or letters, in form and substance satisfactory to counsel for
the Underwriters, pursuant to which each such person shall agree not
to, directly or indirectly, (1) offer for sale, sell, pledge or
otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any
person at any time in the future of) any shares of Common Stock or
securities convertible into or exchangeable for Common Stock or (2)
enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of
ownership of such shares of Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of
Common Stock or other securities, in cash or otherwise, in each case
for a period of 180 days from the date of the Prospectus, without the
prior written consent of Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the inclusion of
the Stock on the Nasdaq National Market and to use its best efforts to
complete that listing, subject only to official notice of issuance,
prior to the First Delivery Date;
(k) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus;
(l) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment
company" within the meaning of such term under the Investment Company
Act of 1940 and the rules and regulations of the Commission
thereunder; and
(m) If necessary or appropriate, to file a registration
statement pursuant to Rule 462(b) under the Securities Act and to pay
the filing fee with respect thereto.
6. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the Stock; (e) the filing fees incident to securing any required
review by the National Association of Securities Dealers, Inc. of the terms of
sale of the Stock; (f) any applicable listing or other fees; including, without
limitation, the fees for quotation of
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the Common Stock on the Nasdaq National Market; (g) the fees and expenses (not
in excess, in the aggregate, of $5,000) of qualifying the Stock under the
securities laws of the several jurisdictions as provided in Section 5(h) and of
preparing, printing and distributing a Blue Sky Memorandum and a Legal
Investment Survey (including related fees and expenses of counsel to the
Underwriters); (i) all fees and disbursements incurred by the Underwriters in
connection with the Directed Share Program, including counsel fees and any stamp
duties or other taxes incurred by the Underwriters in connection with the
Directed Share Program; and (j) all other costs and expenses incident to the
performance of the obligations of the Company under this Agreement; provided
that, except as provided in this Section 6 and in Section 11 the Underwriters
shall pay their own costs and expenses, including the costs and expenses of
their counsel, any transfer taxes on the Stock which they may sell and the
expenses of advertising any offering of the Stock made by the Underwriters.
7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
contained herein to the performance by the Company of its obligations hereunder,
and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 5(a); if the Company is required
to file a 462(b) Registration Statement after the date and time that
this Agreement is executed and delivered, such 462(b) shall have
become effective by 10:00 P.M., New York City 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 any request of the Commission for inclusion of
additional information in the Registration Statement or the Prospectus
or otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration
Statement or the Prospectus or any amendment or supplement thereto
contains an untrue statement of a fact which, in the opinion of
Morgan, Lewis & Bockius LLP, counsel for the Underwriters, is material
or omits to state a fact which, in the opinion of such counsel, is
material and is required to be stated therein or is necessary to make
the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the Stock,
the Registration Statement and the Prospectus, and all other legal
matters relating to this Agreement and the transactions contemplated
hereby shall be reasonably satisfactory in all material respects to
counsel for the Underwriters, and the Company shall have furnished to
such counsel all documents and information that they may reasonably
request to enable them to pass upon such matters.
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(d) Freeborn & Peters shall have furnished to the
Representatives its written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in form
and substance reasonably satisfactory to the Representatives, to the
effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business
and is in good standing as a foreign corporation in each
jurisdiction in which its ownership or lease of property or the
conduct of its business requires such qualification and has all
power and authority necessary to own or hold its properties and
to conduct the business in which it is engaged; and the Company
has no subsidiaries;
(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 of Stock being
delivered on such Delivery Date) have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the Prospectus;
the Company's Common Stock has been registered under the Exchange
Act; and the Stock has been approved for listing on the NASDAQ
National Market;
(iii) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the voting
or transfer of, any shares of the Stock pursuant to the Company's
charter or by-laws or to the best of such counsel's knowledge,
any agreement or other instrument to which the Company is a party
or by which it may be bound;
(iv) The Company does not own any real property and all
real property and buildings held under lease by the Company are
held by it 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;
(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 is a party
or of which any property or assets of the Company is the subject
which, if determined adversely to the Company, might have a
material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or
prospects of the Company; and, to the best of such counsel's
knowledge, no such
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proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(vi) The Registration Statement was declared effective
under the Securities Act as of the date and time specified in
such opinion, the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date specified
therein and no stop order suspending the effectiveness of the
Registration Statement has been issued and, to the knowledge of
such counsel, no proceeding for that purpose is pending or
threatened by the Commission;
(vii) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the Company
prior to such Delivery Date (other than the financial statements
and related schedules therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the requirements of the Securities Act and the Rules and
Regulations; (other than the financial statements and related
schedules therein, as to which such counsel need express no
opinion), when they were filed with the Commission complied as to
form in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission
thereunder;
(viii) To the best of such counsel's knowledge, there are
no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to
the Registration Statement or incorporated therein by reference
as permitted by the Rules and Regulations;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company;
(x) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company with all of the provisions of this Agreement and
the consummation of the transactions contemplated hereby 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 known to such counsel to which the
Company is a party or by which the Company is bound or to which
any of the property or assets of the Company is subject, nor will
such actions result in any violation of the provisions of the
charter or by-laws of the Company or any
15
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statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over
the Company or any of their properties or assets; and, except for
the registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase
and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated
hereby; and
(xi) To the best of such counsel's knowledge, there are no
contracts, agreements or understandings between the Company and
any person granting such person the right to require the Company
to file a registration statement under the Securities Act with
respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities
in the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the
Securities Act.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the Federal laws of the United States
of America, the laws of the State of New York, the laws of the State
of Illinois and the General Corporation Law of the State of Delaware.
Such counsel shall also have furnished to the Representatives a
written statement, addressed to the Underwriters and dated such
Delivery Date, in form and substance satisfactory to the
Representatives, to the effect that (x) such counsel has acted as
counsel to the Company on a regular basis [(although the Company is
also represented by other outside counsel with respect to
___________], has acted as counsel to the Company in connection with
previous financing transactions and has acted as counsel to the
Company in connection with the preparation of the Registration
Statement, and (y) based on the foregoing, no facts have come to the
attention of such counsel which lead it to believe that the
Registration Statement, as of the Effective Date, contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus contains any
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading. The foregoing opinion and statement may be
qualified by a statement to the effect that such counsel does not
assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement
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or the Prospectus except for the statements made in the Prospectus
under the captions "Description of Capital Stock," "Shares Eligible
for Future Sale," and "___________________", insofar as such
statements relate to the Stock and concern legal matters.
(e) The Representatives shall have received from Morgan, Lewis &
Bockius LLP, counsel for the Underwriters, such opinion or opinions,
dated such Delivery Date, with respect to the issuance and sale of the
Stock, the Registration Statement, the Prospectus and other related
matters as the Representatives may reasonably require, and the Company
shall have furnished to such counsel such documents as they reasonably
request for the purpose of enabling them to pass upon such matters.
(f) At the time of the filing of an amendment to the
registration statement including the form of Preliminary Prospectus
first circulated to the Underwriters, the Representatives shall have
received from Ernst & Young LLP a letter ( the "initial letter"), in
form and substance satisfactory to the Representatives, addressed to
the Underwriters and dated the date hereof (i) confirming that they
are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five days prior
to the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(g) At the time of execution of this Agreement and on such
Delivery Date, the Company shall have furnished to the Representatives
a letter (the "bring-down letter") of such accountants, addressed to
the Underwriters and dated such Delivery Date (i) confirming that they
are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, (ii) stating, as of the date of the
bring-down letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date not
more than five days prior to the date of the bring-down letter), the
conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letter and (iii)
confirming in all material respects the conclusions and findings set
forth in the initial letter.
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(h) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board,
its President or a Vice President and its chief financial officer
stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Sections 7(a) and 7(i)
have been fulfilled; and
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of the
Effective Date, the Registration Statement and Prospectus did not
include any untrue statement of a material fact and did not omit
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the Registration
Statement or the Prospectus.
(i) (i) The Company shall not 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 or (ii) since such
date there shall not have been any change in the capital stock or
long-term debt of the Company or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company, 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 Stock being
delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(j) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission, by
such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have
been declared by Federal or state authorities, (iii) the United States
shall have become engaged in hostilities, there shall
18
<PAGE>
have been an escalation in hostilities involving the United States or
there shall have been a declaration of a national emergency or war by
the United States or (iv) there shall have occurred such a material
adverse change in general economic, political or financial conditions
(or the effect of international conditions on the financial markets in
the United States shall be such) as to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the
Stock being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
(k) The Nasdaq National Market shall have approved the Stock
for inclusion, subject only to official notice of issuance and
evidence of satisfactory distribution.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter, officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in (A) any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or (B) in
any materials or information provided to investors by, or with the approval of,
the Company in connection with the marketing of the offering of the Stock
("Marketing Materials"), including any roadshow or investor presentations made
to investors by the Company (whether in person or electronically), (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Marketing Materials, any material fact required to be stated
therein or necessary to make the statements therein not misleading, (iii) any
act or failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall not be
liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct), and shall reimburse each Underwriter and each
such officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer,
19
<PAGE>
employee or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action 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,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any such
amendment or supplement, in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for inclusion
therein which information consists solely of the information specified in
Section 8(e). The foregoing indemnity agreement is in addition to any liability
which the Company may otherwise have to any Underwriter or to any officer,
employee or controlling person of that Underwriter.
In connection with the offer and sale of the Directed Shares, the
Company agrees, promptly upon a request in writing, to indemnity and hold
harmless Lehman Brothers and the other Underwriters from and against any loss,
claim, damage, expense, liability or action which (i) arises out of, or is based
upon, any untrue statement or alleged untrue statement of a material fact
contained in any material prepared by or with the approval of the Company for
distribution to Directed Share Participants in connection with the Directed
Share Program or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) arises out of the failure of any Directed Share Program
participant to pay for and accept delivery of Directed Shares that the
Participant agreed to purchase or (iii) is otherwise related to the Directed
Share Program, other than losses, claims, damages or liabilities (or expenses
relating thereto) that are finally judicially determined to have resulted
directly from the bad faith or gross negligence of Lehman Brothers.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors
(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 each person, if
any, who controls the Company within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof, to which the Company or any such director, officer or
controlling person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained (A) in any Preliminary Prospectus, the Registration Statement or
the Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky
Application or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information concerning such Underwriter furnished to the
Company through the Representatives by or on behalf of that Underwriter
specifically for inclusion therein, and shall reimburse the Company
20
<PAGE>
and any such director, officer or controlling person for any legal or other
expenses reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred. The foregoing indemnity agreement is in addition to any
liability which any Underwriter may otherwise have to the Company or any such
director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice
from the indemnifying party to the indemnified party of its election to assume
the defense of such claim or action, the indemnifying party shall not be liable
to the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company under this Section 8 if, in the reasonable judgment of the
Representatives, it is advisable for the Representatives and those Underwriters,
officers, employees and controlling persons to be jointly represented by
separate counsel, and in that event the fees and expenses of such separate
counsel shall be paid by the Company. No indemnifying party shall (i) without
the prior written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
21
<PAGE>
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be 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 Stock or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company on the one hand and the Underwriters on the
other with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action 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 with respect to such
offering shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Stock purchased under this Agreement (before deducting
expenses) received by the Company, on the one hand, and the total underwriting
discounts and commissions received by the Underwriters with respect to the
shares of the Stock purchased under this Agreement, on the other hand, bear to
the total gross proceeds from the offering of the shares of the Stock under this
Agreement, 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 whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Underwriters, the intent of the parties and their relative 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 Section were to be 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 into
account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this Section
shall be deemed to include, for purposes of this Section 8(d), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Stock
underwritten by it and distributed to the public was offered to the public
exceeds the amount of any damages which such Underwriter has otherwise paid or
become liable to pay by reason of any untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 8(d) are several in proportion to their respective underwriting
obligations and not joint.
(e) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the
22
<PAGE>
cover page of, the legend concerning over-allotments on the inside front cover
page of and the concession and reallowance figures appearing under the caption
"Underwriting" in, the Prospectus are correct and constitute the only
information concerning such Underwriters furnished in writing to the Company by
or on behalf of the Underwriters specifically for inclusion in the Registration
Statement and the Prospectus.
9. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining non-
defaulting Underwriter shall not be obligated to purchase more than 110% of the
number of shares of the Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining Underwriters
or other underwriters satisfactory to the Representatives do not elect to
purchase the shares which the defaulting Underwriter or Underwriters agreed but
failed to purchase on such Delivery Date, this Agreement (or, with respect to
the Second Delivery Date, the obligation of the Underwriters to purchase, and of
the Company to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting Underwriter or the Company, except that the Company
will continue to be liable for the payment of expenses to the extent set forth
in Sections 6 and 11. As used in this Agreement, the term "Underwriter"
includes, for all purposes of this Agreement unless the context requires
otherwise, any party not listed in Schedule 1 hereto who, pursuant to this
Section 8, purchases Firm Stock which a defaulting Underwriter agreed but failed
to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the Delivery Date for up to seven full business days in order to effect
any changes that in the opinion of counsel for the Company or counsel for the
Underwriters may be necessary in the Registration Statement, the Prospectus or
in any other document or arrangement.
23
<PAGE>
10. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7(i) or 7(j), shall have occurred
or if the Underwriters shall decline to purchase the Stock for any reason
permitted under this Agreement.
11. Reimbursement of Underwriters' Expenses. If the Company shall
fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company is
not fulfilled, the Company will reimburse the U.S. Underwriters for all
reasonable out-of-pocket expenses (including fees and disbursements of counsel)
incurred by the Underwriters in connection with this Agreement and the proposed
purchase of the Stock, and upon demand the Company shall pay the full amount
thereof to the Representatives. If this Agreement is terminated pursuant to
Section 9 by reason of the default of one or more Underwriters, the Company
shall not be obligated to reimburse any defaulting Underwriter on account of
those expenses.
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice
pursuant to Section 11(d), to the Director of Litigation, Office of
the General Counsel, Lehman Brothers Inc., 3 World Financial Center,
10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex
or facsimile transmission to the address of the Company set forth in
the Registration Statement, Attention: [_________] (Fax: _________);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the
Representatives.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, and
their respective successors. This Agreement and the terms and provisions hereof
are for the sole benefit of only those persons, except that (A) the
representations, warranties, indemnities and agreements of the Company
24
<PAGE>
contained in this Agreement shall also be deemed to be for the benefit of the
person or persons, if any, who control any Underwriter within the meaning of
Section 15 of the Securities Act and (B) the indemnity agreement of the
Underwriters contained in Section 8(b) of this Agreement shall be deemed to be
for the benefit of directors of the Company, officers of the Company who have
signed the Registration Statement and any person controlling the Company within
the meaning of Section 15 of the Securities Act. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
referred to in this Section 13, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Stock and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or 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 and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
16. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
25
<PAGE>
If the foregoing correctly sets forth the agreement between the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
DIGITALWORK.COM
By _______________________________________
Name:
Title:
Accepted:
Lehman Brothers Inc.
U.S. Bancorp Piper Jaffray Inc.
Prudential securities incorporated
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By Lehman Brothers Inc.
By ________________________________
Authorized Representative
26
<PAGE>
SCHEDULE 1
Number of
Underwriters Shares
------------ ---------
Lehman Brothers Inc....................................
U.S. Bancorp Piper Jaffray Inc.
Prudential Securities Incorporated.....................
Total
=========
27
<PAGE>
Exhibit 5.1
_____, 2000
DigitalWork.com, Inc.
230 West Monroe Street, Suite 1950
Chicago, Illinois 60606
Ladies and Gentlemen,
We have examined the Registration Statement on Form S-1 filed by
DigitalWork.com, Inc. (the "Company") with the Securities and Exchange
Commission on February 2, 2000 (as amended or supplemented, the "Registration
Statement"), in connection with the registration under the Securities Act of
1933, as amended, of shares of Common Stock of DigitalWork.com, Inc. (the
"Shares"). The Shares, which include shares of Common Stock issuable pursuant to
an over allotment option granted to the underwriters, are to be sold to the
underwriters as described in the Registration Statement for the sale to the
public or issued to the representatives of the underwriters. As your counsel, in
connection with this transaction, we have examined the proceedings proposed to
be taken in connection with the sale and issuance of the Shares.
It is our opinion that, upon approval by the price committee duly
authorized by the Company's Board of Directors, the Shares when issued and sold
in the manner referred to in the Registration Statement will be legally and
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 the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
<PAGE>
Exhibit 10.1
- ------------
FORM OF
DIGITALWORK.COM, INC.
AMENDED AND RESTATED 1998 STOCK PLAN
1. Establishment and Purpose.
-------------------------
(a) Establishment. The DigitalWork, Inc. Stock Option Plan, as
--------------
amended, is amended and restated in its entirety hereby and is renamed the
DigitalWork.com, Inc. Amended and Restated 1998 Stock Option Plan. Options
granted under this Plan may be "incentive stock options" intended to
satisfy the requirements of Section 422 of the Code, or "nonqualified
options" as determined by the Administrator at the time of the grant of the
option and subject to the applicable Provisions of Section 422 of the Code,
as amended, and the regulations promulgated thereunder.
(b) Purpose. The purposes of this Plan are to attract and retain
-------
the best available personnel for positions of substantial responsibility,
to provide additional incentive to employees, directors and consultants and
to promote the success of the Company's business, thereby advancing the
interests of the Company and its stockholders. Options granted under the
Plan may be Incentive Stock Options or Nonqualified Stock Options, as
determined by the Administrator at the time of grant.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board of Directors of the Company
and/or Committee appointed by the Board pursuant to Section 4 of the Plan.
(b) "Affiliate" means a parent or subsidiary corporation as defined
in the applicable provisions (currently Section 424(e) and (f),
respectively) of the Code.
(c) "Agreement" means the written agreement between the Company and
an Optionee evidencing the grant of an Option and setting forth the terms
and conditions thereof.
(d) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any other country or jurisdiction where Options are
granted under the Plan.
(e) "Board" means the Board of Directors of the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
(g) "Committee" means a committee appointed by the Board to
administer the Plan in accordance with Section 4 hereof, and to perform the
functions set forth herein.
(h) "Common Stock" means the common stock of the Company, par value
per share $0.005.
(i) "Company" means DigitalWork.com, Inc., a Delaware corporation.
(j) "Consultant" means any person who is engaged by the Company or
any Affiliate to render consulting or advisory services and is compensated
for such services.
(k) "Director" means a member of the Board of Directors of the
Company or any of its Affiliates.
(l) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(m) "Employee" means any person, including Officers and Directors,
employed by the Company or any Affiliate designated by the Administrator as
eligible to receive Options subject to the conditions set forth herein.
For purposes hereof, "Employee" shall also include individuals who have not
commenced employment with the Company but have received an offer of
employment with the Company. A person shall not cease to be an Employee in
the case of (i) any leave approved by the Company or (ii) transfers between
locations of the Company or between the Company and its Affiliates. For
purposes of ISOs, no such leave may exceed ninety (90) days, unless
reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence as
provided by the Company is not so guaranteed, on the 181st day of such
leave any ISO held by the Optionee shall cease to be treated as an ISO and
shall be treated for tax purposes as a NQO. Neither service as a Director
nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(o) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) if the Common Stock is listed on any established stock
exchange or a national market system including, without limitation,
the National Market of the National Association of Securities Dealers,
Inc. Automated Quotation System ("Nasdaq"), its Fair Market Value
shall be the closing sales price for such stock (or the closing bid,
if no sales were
2
<PAGE>
reported) as quoted on such exchange or system for the last market
trading day prior to the time of determination, as reported in The
Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) if the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high bid and low asked prices for
the Common Stock on the last market trading day prior to the day of
determination; or
(iii) in the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith
by the Administrator.
(p) "Incentive Stock Option" or "ISO" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Administrator
as an Incentive Stock Option.
(q) "Nonqualified Stock Option" or "NQO" means an Option that is not
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 an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(u) "Option Exchange Program" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
(v) "Optioned Stock" means the Common Stock subject to an Option.
(w) "Optionee" means a person to whom an Option has been granted
under the Plan.
(x) "Parent" means a "parent corporation" within the meaning of
Section 424(e) of the Code, whether now or hereafter existing.
(y) "Plan" means the DigitalWork.com, Inc. 1998 Stock Option Plan, as
amended and restated hereby.
(z) "Plan Year" shall be a calendar year.
3
<PAGE>
(aa) "Reporting Person" means an Officer, Director, or greater than
ten percent (10%) stockholder of the Company within the meaning of Rule
16a-2 under the Exchange Act, who is required to file reports pursuant to
Rule 16a-3 under the Exchange Act.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
(cc) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(dd) "Subsidiary" means a "subsidiary corporation" within the meaning
of Section 424(f) of the Code, whether now or hereafter existing.
(ee) "Ten-Percent Stockholder" means an Employee, who, at the time an
ISO is to be granted to him or her, owns (within the meaning of Section
422(b) (6) 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
any Affiliate.
3. Stock Subject to the Plan. Subject to Section 11 of the Plan, the
-------------------------
maximum aggregate number of Shares that may be subject to options and sold
under the Plan is Six Million Seven Hundred Fifty Seven Thousand Five Hundred
Sixty (6,757,560) Shares, plus an automatic annual increase on the first day of
each year beginning in 2001 and ending in 2009 equal to the lesser of: (i)
1,500,000, (ii) four percent of the Shares outstanding on December 31 of the
previous year or (iii) such lesser number of Shares as is determined by the
Board.
If an Option expires, is canceled, surrendered (without exercise)
pursuant to an Option Exchange Program, or otherwise become unexercisable for
any reason, the Shares allocable to the canceled, surrendered or otherwise
terminated Option may again be the subject of Options granted hereunder (unless
the Plan has terminated). However, Shares that have actually been issued under
the Plan, upon exercise of an Option, shall not be returned to the Plan and
shall not become available for future distribution under the Plan. Shares that
are retained by the Company upon exercise of an Option in order to satisfy the
exercise price for such Option or any withholding taxes due with respect to such
exercise shall be treated as not issued and shall continue to be available under
the Plan.
4. Administration.
--------------
(a) Administrator. The Plan shall be administered by the Board and/or
-------------
by a duly appointed Committee of the Board having such powers as shall be
specified by the Board. A majority of the Board or Committee, as the case
may be, may authorize any action.
(b) Compliance with Section 162(m) of the Code. In the event that the
------------------------------------------
Company is a "publicly held corporation" as defined in paragraph (2) of
section 162(m) of the Code, as amended, and the regulations promulgated
thereunder ("Section 162(m)"), the Company may establish a committee of
outside directors meeting the requirements of Section 162(m) to approve the
grant of Options which might reasonably be anticipated to result in the
payment of employee remuneration that would otherwise exceed the limit on
employee remuneration deductible for income tax purposes pursuant to
Section 162(m).
4
<PAGE>
(c) Administration with Respect to Reporting Persons. With respect to
------------------------------------------------
options granted to Reporting Persons, the Plan may (but need not) be
administered so as to permit such options to qualify for the exemption set
forth in Rule 16-3 of the Exchange Act.
(d) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, the Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select Employees, Directors and/or Consultants to whom
Options may from time to time be granted hereunder;
(iii) to determine the terms and conditions of any Option
granted hereunder. Such terms and conditions include, without
limitation, the exercise price, the time when Options may be
exercised, any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option
or the Common Stock relating thereto, based in each case on such
factors as the Administrator, in its sole discretion, shall determine;
(iv) to determine the number of shares of Common Stock to be
covered by each such Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option granted hereunder;
(vii) to initiate an Option Exchange Program;
(viii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(e) instead of Common
Stock;
(ix) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options to participants who are
foreign nationals or employed outside of the United States in order to
recognize differences in local law, tax policies customs;
(x) to allow Optionees to satisfy withholding tax obligations
as contemplated by Section 10 hereof;
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan and to establish, amend and revoke rules
and regulations for the administration of the Plan, including, but
without limitation, correcting any defect or supplying any omission,
or reconciling any inconsistency in the Plan or in any Agreement, in
the manner and to
5
<PAGE>
the extent it shall deem necessary or advisable to make the Plan fully
effective;
(xii) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee on an individual basis
without constituting a termination of employment or service for
purposes of the Plan;
(xiii) to exercise its discretion with respect to the powers and
rights granted to it as set forth in the Plan; and
(xiv) generally, to exercise such powers and to perform such
acts as are deemed necessary or advisable to promote the best
interests of the Company with respect to the Plan.
(e) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final, binding and
conclusive upon the Company and its Affiliates, the Optionees and all other
persons having any interest therein.
(f) Indemnification. The Administrator shall not be liable for any
---------------
action, failure to act, determination or interpretation made in good faith
with respect to this Plan or any transaction hereunder, except for
liability arising from his or her own willful misfeasance, gross negligence
or reckless disregard of his or her duties. The Company hereby agrees to
indemnity the Administrator for all costs and expenses and, to the extent
permitted by applicable law, any liability incurred in connection with
defending against, responding to, negotiation for the settlement of or
otherwise dealing with any claim, cause of action or dispute of any kind
arising in connection with any actions in administering this Plan or in
authorizing or denying authorization to any transaction hereunder.
5. Eligibility.
-----------
(a) NQOs may be granted to Employees, Directors or Consultants. ISOs
may be granted only to Employees.
(b) Each Option shall be designated in the Option Agreement as either
an ISO or a NQO. However, notwithstanding such designation, to the extent
that the aggregate Fair Market Value of the Shares with respect to which
ISOs are exercisable for the first time by the Optionee during any calendar
year (under all plans of the Company and any Affiliate) exceeds $100,000,
such excess Options shall be treated as NQOs. For purposes of this Section
5(b), ISOs shall be taken into account in the order in which they were
granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
6
<PAGE>
(c) The aggregate number of Options that may be granted to any
Optionee under the Plan shall not exceed fifty percent (50%) of the
aggregate number of Shares referred to in Section 3 hereof.
(d) Neither the Plan nor any Option shall not confer upon any
Optionee any right with respect to continuing the Optionee's relationship
as an Employee, Director or Consultant with the Company, nor shall it
interfere in any way with his or her right or the Company's right to
terminate such relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by
------------
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
---------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date it is granted (five (5) years in the case of an ISO
granted to a Ten-Percent Stockholder), or such shorter term as the Administrator
may, subsequent to the granting of any Option, provide.
8. Option Exercise Price and Consideration.
----------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be such price as is
determined by the Administrator, but shall be subject to the following:
(i) In the case of an ISO granted:
(aa) to an Employee who is a Ten-Percent Stockholder, the
exercise price shall be no less than 110% of the Fair Market
Value per Share on the date of grant.
(bb) to any other Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a NQO granted to an Employee, Director or
Consultant, the per Share exercise price shall be such price as
determined by the Administrator; provided, however, that if such
eligible person is, at the time of the grant of such Option, a Named
Executive of the Company, the per share price shall be no less than
100% of the Fair Market Value on the date of the grant if such Option
is intended to qualify as performance-based compensation under Section
162(m) of the Code. As used herein, "Named Executive" means any
individual who, on the last day of the year, is the chief executive
officer of the Company or among the four most highly compensated
officers of the Company (other than the chief executive officer). Such
officer status shall be determined pursuant to the executive
compensation disclosure rules under the Exchange Act.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a
merger or other corporate transaction.
7
<PAGE>
(b) Payment of Option Price. The consideration to be paid for the
-----------------------
Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and in the case of an
ISO, shall be determined at the time of grant). Such consideration may
consist of: (i) cash, by check, or cash equivalent, (ii) promissory note,
(iii) by tender to the Company of other Shares owned by the Optionee which
(A) in the case of Shares acquired upon exercise of an Option have been
owned by the Optionee for more than six months on the date of surrender,
and (B) have a Fair Market Value, as determined by the Administrator (but
without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company), of not less than the option price of the
Shares as to which such Option shall be exercised (provided such tender of
stock would not constitute a violation of the provisions of any law,
regulation and/or agreement restricting the redemption of the Common
Stock), (iv) consideration received by the Company under a cashless
exercise program, (v) authorization for the Company to retain from the
total number of Shares as to which the Option is exercised that number of
Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, or (vi) such other consideration and method of payment for the
issuance of Shares that may be permitted under Applicable Laws.
The Administrator may at any time or from time to time grant
Options which do not permit all of the foregoing forms of consideration to
be used in payment of the option price and/or which otherwise restrict one
or more forms of consideration.
(c) Promissory Note. To the extent that the Administrator so
---------------
provides, all or a portion of the Option Price may be paid with a full-
recourse promissory note. The Shares shall be pledged as security for
payment of the principal amount of the promissory note and interest
thereon. The interest rate payable under the terms of the promissory note
shall not be less than the minimum rate (if any) required to avoid the
imputation of additional interest under the Code. Subject to the
foregoing, the Administrator (at its sole discretion) shall specify the
term, interest rate, amortization requirements (if any) and other
provisions of such note.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance
criteria with respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan. An Option may not be exercised
for a fraction of a Share.
An Option shall be deemed to be exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with
the Option Agreement) from the person entitled to exercise the Option and
(ii) full
8
<PAGE>
payment for the Shares with respect to which the Option is exercised. Full
payment may, as authorized by the Administrator, consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise
of an Option shall be issued in the name of the Optionee or, if requested
by the Optionee, in the name of the Optionee and his or her spouse. Until
the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no
right to vote or receive dividends or any other rights as a stockholder
shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued)
such stock certificate promptly upon exercise of the Option. No adjustment
will be made for a dividend or other right for which the record date is
prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Relationship as Employee, Director or Consultant.
---------------------------------------------------------------
If an Optionee ceases to be an Employee, Director or Consultant, as the
case may be, such Optionee may exercise his or her Option within such
period of time as is specified in the Option Agreement to the extent that
the Option is vested on the date of termination (but in no event later than
the expiration of the term of the Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement,
the Option shall remain exercisable for three (3) months following the
Optionee's termination. If, on the date of termination, the Optionee is
not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the
time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan. No termination
shall be deemed to occur if (i) the Optionee is a Consultant or Director
who becomes an Employee within the time specified herein; or (ii) the
Optionee is an Employee who becomes a Consultant or Director who is not
also an employee, within the time specified herein.
(c) Disability of Optionee. If an Optionee ceases to be an Employee,
----------------------
Director or Consultant as a result of Optionee's Disability, the Optionee
may within six (6) months from the date of such termination (but in no
event later than the expiration date of the term of such Option as set
forth in the Option Agreement), exercise an Option to the extent otherwise
entitled to exercise it at the date of such termination. To the extent
that Optionee is not entitled to exercise the Option on the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
9
<PAGE>
(d) Death of Optionee. If an Optionee dies while an Employee,
-----------------
Director or Consultant, the Option may be exercised at any time within six
(6) months following the date of death (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), to the extent the Optionee was vested on the date of death or
as otherwise provided in the Option Agreement or any other agreement. If,
at the time of death, Optionee is not vested as to the entire Option, the
Shares covered by the unvested portion of the Option shall revert to the
Plan. The Option may be exercised by the executor or administrator of the
Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or under the laws of descent and
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted,
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
(f) Golden Parachute Payment Restrictions. If in any taxable year any
--------------------------------------
Employee is a "disqualified individual" within the meaning of Section 280G
of the Code, then, in such event, notwithstanding anything herein to the
contrary, the exercise of any Options and all other payments to such
Optionee under any other agreements or arrangements with the Company which
constitutes "parachute payments" within the meaning of Section 280G of the
Code shall be collectively subject to an overall limit in such taxable year
and in succeeding taxable years. Such maximum limit shall be $1.00 less
then the aggregate amount which would otherwise cause any such exercise of
options or stock purchase rights or payments to be considered a "parachute
payment" within the meaning of Section 280G of the Code, as determined by
the Company. Accordingly, to the extent that such exercise or payments
would constitute a "parachute payment" with respect to an Optionee, then
such payments shall be carried forward and paid to the Optionee in
succeeding taxable years as quickly as possible without causing any such
payments to constitute "parachute payments" within the meaning of Section
280G of the Code as determined by the Company. Subject to any contractual
obligations of the Company to the Optionee (other than those set forth in
this Plan), the Company shall have the right to select which compensation
item or items shall be carried forward in the event this subsection (f)
becomes applicable.
10. Withholding to Satisfy Tax Obligations.
---------------------------------------
(a) Permitted Methods. At the discretion of the Administrator,
-----------------
Optionees may satisfy withholding obligations as provided in this Section
10. When an Optionee incurs tax liability in connection with an Option,
which tax liability is subject to tax withholding under applicable tax
laws, and the Optionee is obligated to pay the Company an amount required
to be withheld under applicable tax laws, the Optionee may satisfy the
withholding tax obligation by one or some combination of the following
methods: (i) by cash payment; (ii) out of Optionee's current compensation;
(iii) if permitted by the Administrator, in its discretion, by surrendering
to the Company Shares that (A) in the case of Shares previously acquired
from the Company, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized; (iv) by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option, if any,
that number of Shares having a Fair Market Value equal to the amount of
withholding due; (v) a promissory note in accordance with Section 8(c)
of the Plan. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined.
(b) Procedures for Stock Withholding. All elections by an Optionee
--------------------------------
to have Shares withheld to satisfy tax withholding obligations shall be
made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions: (i) the election must be made on or
prior to the applicable tax withholding date; (ii) once made, the election
shall be irrevocable as to the particular Shares of the Option as to which
the election is made; (iii) all elections shall be subject to the consent
or disapproval of the Administrator; (iv) if the
10
<PAGE>
Optionee is an Officer, Director or greater than Ten-Percent Stockholder
within the meaning of Rule 16a-2 under the Exchange Act ("Reporting
Person"), the election must comply with the applicable provisions of Rule
16b-3 and shall be subject to such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption from
Section 16 of the Exchange Act with respect to Plan transactions.
11. Adjustments upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number and class of shares of Common Stock
with respect to which Options may be granted under the Plan, the number and
class of Shares of Common Stock which are subject to outstanding Options
granted under the Plan, and the purchase price per Share of Common Stock ,
if applicable, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in
the number of issued Shares of Common Stock effected without receipt of
consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt
of consideration." Any such adjustment in the Shares subject to
outstanding ISOs (including any adjustments in the purchase price) shall be
made in such manner as not to constitute a modification as defined by
Section 424(h)(3) of the Code and only to the extent otherwise permitted by
Sections 422 and 424 of the Code. Adjustments shall be made by the
Administrator, whose determination in that respect shall be final, binding
and conclusive. If, by reason of a change in Capitalization, an Optionee
shall be entitled to exercise an Option with respect to new, additional or
different shares of stock, such new, additional or different shares shall
thereupon be subject to all of the conditions which were applicable to the
Shares subject to the Option, as the case may be, prior to such Change in
Capitalization.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed action. The Administrator in its discretion may provide for an
Optionee to have the right to exercise his or her Option until fifteen (15)
days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be
exercisable. To the extent it has not been previously exercised, an Option
will terminate immediately prior to the consummation of such proposed
action.
(c) Change of Control. If the Company is to be consolidated with or
-----------------
acquired by another entity in a merger or other reorganization in which the
holders of the outstanding voting stock of the Company immediately
preceding
11
<PAGE>
the consummation of such event, shall, immediately following such event,
hold, as a group, less than a majority of the voting securities of the
surviving or successor entity, or in the event of a sale of all or
substantially all of the Company's assets or otherwise (each, a "Change-of-
Control"), each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for
the Option or Stock Purchase Right, the Optionee shall fully vest in and
have the right to exercise the Option or Stock Purchase Right as to all of
the Optioned Stock, including Shares as to which it would not otherwise be
vested or exercisable. If an Option or Stock Purchase Right becomes fully
vested and exercisable in lieu of assumption or substitution in the event
of a Change of Control, the Administrator shall notify the Optionee in
writing or electronically that the Option or Stock Purchase Right shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the Option or Stock Purchase Right shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option
or Stock Purchase Right shall be considered assumed if, following the
Change of Control, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right immediately prior to the Change of Control, the
consideration (whether stock, cash or other securities or property)
received in the change of control by holders of Common Stock for each Share
held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders
of a majority of the outstanding Shares); provided, however, that if such
consideration received in the Change of Control is not solely common stock
of the successor corporation or its Parent, the Administrator may, with the
consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each
Share of Optioned Stock subject to the Option or Stock Purchase Right, to
be solely common stock of the successor corporation or its Parent equal in
fair market value to the per share consideration received by holders of
Common Stock in the Change of Control.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without
receipt of consideration by the Company, the Administrator may, in its
discretion, appropriately adjust the price per share of Common Stock
covered by each outstanding Option to reflect the effect of such
distribution.
12. Non-Transferability of Options. Except as otherwise provided in this
------------------------------
Section, Options may not be sold, pledged, assigned, hypothecated, transferred,
or disposed of in any manner other than by will or by the laws of descent or
distribution and may be exercised or purchased during the lifetime of the
Optionee, only by the Optionee. Notwithstanding the foregoing, the
Administrator may, in its discretion, authorize all or a portion of the Options
to be granted to an Optionee to be transferred by such Optionee to (i) the
spouse, children or grandchildren of such Optionee ("Immediate Family Members"),
(ii) a trust of trusts for the benefit of an Immediate Family Member, or (iii) a
partnership in which Immediate Family Members are the only partners, provided,
that (x) there is no consideration for such transfer, (y) the Option Agreement
expressly provides for the transfer of the Options in accordance with this
Section, and (z) subsequent transfers of such Options are prohibited except by
or in accordance with the laws of descent or distribution.
13. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee, Director or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board or the Administrator may at
-------------------------
any time amend, alter, suspend or terminate the Plan.
(b) Stockholder Approval. To the extent necessary and desirable to
--------------------
comply with Applicable Laws, the Company shall obtain stockholder approval
of any Plan amendment in such a manner and to such a degree as required.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator,
12
<PAGE>
which agreement must be in writing and signed by the Optionee and the
Company. Termination of the Plan shall not affect the Administrator's
ability to exercise the powers granted to it hereunder with respect to
Options granted under the Plan prior to the date of such termination.
15. Securities Laws.
---------------
(a) The Company shall not be obliged to issue any Stock pursuant to
any Option under the Plan at any time when the offering of the shares
covered by such Option have not been registered under the Securities Act of
1933, (the "Securities Act") and such other state, federal or foreign laws,
rules or regulations as the Company or the Board deems applicable and, in
the opinion of legal counsel for the Company, there is no exemption from
the register requirements of such laws, rules or regulations available for
the offering and sale of such shares.
(b) The Company intends to register for issuance under the Securities
Act the shares of common stock issuable upon the exercise of Options and to
keep such registration effective throughout the period any Options are
exercisable. In the absence of such effective registration or an available
exemption from registration under the Securities Act, issuance of shares of
common stock issuable upon exercise of Options may be delayed until
registration of such shares is effective or an exemption from registration
under the Securities Act is available. The Company intends to use its best
efforts to ensure that no such delay will occur. In the event exemption
from registration under the Securities Act is available upon and exercise
of Options, the Option holder (or the person otherwise permitted to
exercise such Option), if requested by the Company to do so, shall execute
and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
(c) At the time of any exercise of an Option, the Company may, as a
condition precedent to the exercise of such Option, require from the holder
of the Option such written representations, if any, concerning the holder's
intentions with regard to the retention or disposition of the shares of
stock being acquired pursuant to such exercise and such written covenants
and agreements, if any, as to the manner of disposal of such shares as, in
the opinion of counsel to the Company, may be necessary to ensure that any
disposition by that holder will not involve a violation of the Securities
Act or any other applicable securities law or regulation.
(d) The certificates representing the shares of common stock issued
pursuant to an exercise of Options may bear such legend or legends as the
Company deems appropriate in order to assure compliance with applicable
securities laws and regulations. The Company may refuse to register the
transfer of the shares of common stock issued pursuant to an exercise of
Options on the stock transfer records of the Company if such proposed
transfer would, in the opinion of counsel to the Company, constitute a
violation of any applicable securities law or regulation, and the Company
may give related instructions to its transfer agent, if any, to stop
registration of the transfer of the shares of common stock issued pursuant
to an exercise of Options.
16. Regulations and Other Approvals; Governing Law.
----------------------------------------------
(a) This Plan and the rights of all persons claiming hereunder shall
be construed and determined in accordance with the laws of the State of
Illinois.
(b) The obligation of the Company to sell or deliver Shares with
respect to Options granted under the Plan shall be subject to all
Applicable Laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Administrator.
(c) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any
Shares hereunder, shall relieve the Company of any liability in respect of
the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
(d) The Plan is intended to comply with Rule 16b-3 promulgated under
the Exchange Act and the Administrator shall interpret and administer the
13
<PAGE>
provisions of the Plan or any Agreement in a manner consistent therewith.
Any provisions inconsistent with such Rule shall be inoperative and shall
not affect the validity of the Plan.
(e) The Administrator may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Employees granted ISOs the tax benefits under
the applicable provisions of the Code and regulations promulgated
thereunder.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Agreements. Options shall be evidenced by written agreements in such
----------
form as the Administrator shall approve from time to time.
19. Effective Date; Stockholder Approval. This Plan, as amended and
------------------------------------
restated, shall become effective upon the date the Securities and Exchange
Commission (the "Commission") declares effective the Registration Statement of
Form S-1 (File No. 333-95895) (the "Registration Statement") filed by the
Company the Commission with respect to the initial public offering of shares of
Common Stock, subject to approval by the stockholders of the Company within
twelve (12) months after the date the Plan is so amended and restated. Such
stockholder approval shall be obtained in the degree and manner required under
Applicable Law. All Options issued under the Plan shall become void in the event
such approval is not obtained.
[insert See Rider F]
14
<PAGE>
Exhibit 10.2
- ------------
FORM OF
DIGITALWORK.COM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
1. Purpose.
-------
The purpose of this Plan is to provide Employees of the Company and its
subsidiaries with an opportunity to acquire a proprietary interest in the
Company through the purchase of shares of Common Stock of the Company and
thereby provide Employees with an additional incentive to contribute to the
prosperity of the Company. It is the intention of the Company that the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of Section 423
of the Code.
2. Definitions.
-----------
"Administrator" means the Board of Directors of the Company and/or
Committee appointed by the Board.
"Affiliate" shall mean a parent or subsidiary corporation as defined in the
applicable provisions (currently Section 424(e) and (f), respectively) of
the Code.
"Applicable Laws" means the requirements relating to the administration of
stock purchase plans under U.S. state corporate laws, U.S. federal and
state securities laws, the Code, any stock exchange or quotation system on
which the Common Stock is listed or quoted and the applicable laws of any
other country or jurisdiction where Shares are issued under the Plan.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Committee appointed by the Board to administer
the Plan.
"Common Stock" shall mean the Common Stock of the Company.
"Company" shall mean DigitalWork.com, Inc., a Delaware corporation.
"Employee" shall mean any individual who is an employee of the Company, or
of any Affiliate designated by the Administrator as eligible to participate
in the Plan, for purposes of tax withholding under the Code whose customary
employment with the Company is at least twenty (20) hours per week and more
than five (5) months in any calendar year. For purposes of the Plan, the
employment relationship shall be treated as continuing intact while the
individual is on sick leave or other leave of absence approved by the
Company or Affiliate. Where the period of leave exceeds ninety (90) days
and the
1
<PAGE>
individual's right to reemployment is not guaranteed by statute or by
contract, the employment relationship will be deemed to have terminated on
the ninety first (91) day of such leave.
"Five-Percent Stockholder" shall mean an Employee who owns (or is deemed to
own pursuant to Section 424(d) of the Code, or would own upon the exercise
of any option extended hereunder or any other option, whether qualified or
nonqualified, held by such employee) shares of capital stock possessing
five percent (5%) or more of the total combined voting power or value of
all classes of stock of the Company, or any subsidiary of the Company.
"Offering Date" shall mean the first business day of each Purchase Period.
"Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) if the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the
National Market or SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted
on such exchange or system for the last market trading day prior
to the time of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems
reliable;
(ii) if the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low
asked prices for the Common Stock on the last market trading day
prior to the day of determination; or
(iii) in the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith
by the Administrator.
"Participant" shall mean an Employee who is a participant in the Plan.
"Pay" shall mean an Employee's total compensation paid by the Company,
exclusive of any payment in cash or kind under any stock option plan,
deferred compensation plan, or other employee benefit plan or program of
the Company.
"Plan" shall mean this DigitalWork.com, Inc. 1999 Employee Stock Purchase
Plan.
"Plan Year" shall mean a calendar year.
"Purchase Date" shall mean the last business day of each Purchase Period.
"Purchase Period" shall mean a six-month period that commences on the
Offering Date and ends on the Purchase Date. The initial period shall
commence on the date the
2
<PAGE>
Company's Registration Statement respecting its public offering is declared
effective by the Securities and Exchange Commission and ending on December
31, 1999, and subsequent six-month periods thereafter commencing on January
1, 2000, during which options granted pursuant to the Plan may be
exercised.
"Share" shall mean a share of the Common Stock, as adjusted in accordance
with Section 8 of the Plan.
"Stockholder" shall mean a record holder of shares entitled to vote shares
of Common Stock.
"Subsidiary" shall mean a subsidiary corporation of the Company within the
meaning of Section 424(f) of the Code, whether now or hereafter existing.
3. Administration.
--------------
The Board shall appoint an Administrator who will serve for such period of
time as the Board may specify and who may be removed by the Board at any time.
The Administrator will have the authority and responsibility for the day-to-day
administration of the Plan, the authority and responsibility specifically
provided in this Plan and any additional duties, responsibility and authority
delegated by the Board. The Administrator may delegate to one or more
individuals the day-to-day administration of the Plan. The Administrator shall
have full power and authority to promulgate any rules and regulations which it
deems necessary for the proper administration of the Plan, to interpret the
provisions and supervise the administration of the Plan, to make factual
determinations relevant to Plan entitlements, and to take all action in
connection with administration of the Plan as it deems necessary or advisable,
consistent with the delegation from the Board, provided, however, the
administration of the Plan shall be consistent with Rule 16b-3 ("Rule 16b-3")
under the Securities Exchange Act of 1934, The administration, interpretation
or application of the Plan by the Administrator shall be final and binding upon
all Participants. The Company shall pay all expenses incurred in the
administration of the Plan. No Board or Committee member shall be liable for
any action or determination made in good faith with respect to the Plan or any
option granted thereunder.
4. Eligibility.
-----------
Any Employee employed by either the Company, or by any Affiliate designated
by the Administrator as eligible to participate in the Plan, on a given Offering
Date shall be eligible to participate in the Plan with respect to the Purchase
Period commencing on such Offering Date. Any provisions of the Plan to the
contrary notwithstanding, no Employee shall be granted an option under the Plan
if such Employee is a Five Percent Stockholder.
5. Participation and Withdrawal.
----------------------------
(a) Payroll Deduction Authorization and Plan Enrollment. An eligible
---------------------------------------------------
Employee may become a Participant by completing and filing, on a date
prescribed by the Administrator prior to an applicable Offering Date,
a payroll deduction
3
<PAGE>
authorization and Plan enrollment form provided by the Company. Once
properly made, an eligible Employee's election to participate shall be
automatically renewed for each subsequent Offering Period, subject to
any termination or withdrawal as provided in Section 5(c). Payroll
deductions for a Participant shall commence on the first payroll
following the Offering Date and shall end on the last payroll in
Purchase Period to which such authorization is applicable, unless
sooner terminated by the Participant as provided in Section 5(c). An
eligible Employee may authorize payroll deductions at the rate of any
whole percentage of the Employee's Pay, in an amount not exceeding ten
percent (10%) of Pay received by Employee on each payday during the
Purchase Period, and the aggregate of such payroll deductions during
the Purchase Period shall not exceed ten percent (10%) of the
Employee's Pay during the Purchase Period. All payroll deductions made
for a Participant shall be credited to his account under the Plan and
will be withheld in whole percentages only. A Participant may not make
any additional payments into such account.
(b) Modification of Payroll Deduction. A Participant may decrease his or
---------------------------------
her rate of payroll deductions at any time in accordance with
procedures prescribed by the Administrator. A Participant may
increase his or her rate of payroll deductions only effective on the
first payroll date following the next Purchase Date by filing a new
payroll deduction authorization and Plan enrollment form.
(c) Discontinuance of Participation. A Participant may discontinue
-------------------------------
participation in the Plan at any time during a Purchase Period by
completing and filing a new payroll deduction authorization and Plan
enrollment form with the Company.
If a Participant discontinues participation during a Purchase Period,
his or her accumulated payroll deductions will remain in the Plan for
purchase of shares as specified in Section 7 on the following Purchase
Date, but the Participant will not again participate until he or she
re-enrolls in the Plan. Alternatively, participants may request a cash
distribution of monies accumulated but not yet distributed by
following procedures specified by the Administrator. The Administrator
may (1) establish rules limiting the frequency with which Participants
may discontinue and resume payroll deductions under the Plan and may
impose a waiting period on Participants wishing to resume payroll
deductions following discontinuance, and (2) change the rules
regarding discontinuance of participation or changes in participation
in the Plan.
In the event any Participant terminates employment with the Company
for any reason (including death) prior to the expiration of a Purchase
Period, the Participant's participation in the Plan shall terminate
and all accumulated payroll deductions credited to the Participant's
account shall be paid to the Participant or the Participant's estate
without interest (except where required by local law).
(d) Failure to Follow Procedures. If a Participant has not followed
----------------------------
procedures prescribed by the Administrator to change the rate of
payroll deductions or to discontinue the payroll deductions, the rate
of payroll deductions shall continue at
4
<PAGE>
the originally elected rate throughout the Purchase Period and future
Purchase Periods (or any lower maximum rate then in effect).
(e) Tax Withholding. At the time the option is exercised, or at the time
---------------
the Company's Common Stock issued under the Plan is disposed of, the
Participant must make adequate provision for the Company's federal,
state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At
any time, the Company may, but will not be obligated to, withhold from
the Participant's Pay the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required
to make available to the Company any tax deductions or benefits
attributable to sale or early disposition of Common Stock by the
Employee.
6. Offering.
--------
(a) Maximum Number of Shares. The maximum number of Shares that may be
------------------------
sold under the Plan is seven hundred fifty thousand (750,000), subject
to adjustment upon changes in capitalization of the Company as
provided in Section 9. Shares sold under the Plan may be either
authorized and unissued Shares or issued Shares heretofore or
hereafter acquired and held as treasury Shares, as the Administrator
may from time to time determine. If on a given Purchase Date the
number of shares with respect to which options are to be exercised
exceeds the number of shares then available under the Plan, the
Company shall make a pro rata allocation of the shares remaining
available for purchase in as uniform a manner as shall be practicable
and as it shall determine to be equitable.
(b) Purchase Periods. The Plan will operate with successive semi-annual
----------------
Purchase Periods after the initial Purchase Period with a new Purchase
Period commencing on the first business day of July and January of
each year, or on such other date as the Administrator shall determine,
and continuing thereafter until terminated in accordance with Sections
12 or 13 hereof. The Administrator shall have the power to change the
duration of the Purchase Periods with respect to future offerings
without stockholder approval if such change is announced at least
fifteen (15) days prior to the scheduled beginning of the first
Purchase Period to be affected.
(c) Option to Purchase. With respect to each Purchase Period, each
------------------
eligible Employee who has elected to participate as provided in
Section 5(a) shall be granted an option to purchase the number of
shares of Common Stock which may be purchased with the payroll
deductions accumulated in an account maintained on behalf of such
Employee during each Purchase Period at the purchase price specified
in subparagraph (d) below, subject to the limitation contained in this
subparagraph (c). No Participant shall have the right to purchase more
than an aggregate of $25,000 of Shares under the Plan and any other
employee stock purchase plan of the Company described in Section 423
of the Code, in any calendar year, based upon the Fair Market Value
per Share of such Common Stock (determined at the time
5
<PAGE>
such option is granted). The foregoing sentence shall be interpreted
so as to comply with Code Section 423(b)(8).
(d) Option Price. The option price under each option shall be the lower
------------
of: (i) a percentage (not less than eighty-five percent (85%))
established by the Administrator ("Designated Percentage") of the Fair
Market Value of the Common Stock on the Offering Date on which an
option is granted, or (ii) the Designated Percentage of the Fair
Market Value of the Common Stock on the Purchase Date. The
Administrator may change the Designated Percentage with respect to any
future Purchase Period, but not below eighty-five percent (85%), and
the Administrator may determine with respect to any prospective
Purchase Period that the option price shall be the Designated
Percentage of the Fair Market Value of the Common Stock on the
Purchase Date.
7. Purchase of Stock.
-----------------
Upon the expiration of each Purchase Period, a Participant's option shall
be exercised automatically for the purchase of that number of full and
fractional shares of Common Stock which the accumulated payroll deductions
credited to the Participant's account at that time shall purchase at the
applicable price specified in Section 6(d), subject to Section 6(c).
8. Payment and Delivery.
--------------------
Upon the exercise of an option on each Purchase Date, the Company or
Affiliate shall deliver to the Participant a record of the Common Stock
purchased, except as specified below. Shares to be delivered to a Participant
under the Plan will be registered in the name of the Participant or, if the
Participant so directs by written notice to the Administrator prior to the
Purchase Date, in the names of the Participant and one such other person as may
be designated by the Participant, as joint tenants with rights of survivorship,
to the extent permitted by the Applicable Laws. The Administrator may permit or
require that shares be deposited directly with a broker designated by the
Administrator (or a broker selected by the Administrator) or to a designated
agent of the Company, and the Administrator may utilize electronic or automated
methods of share transfer. The Administrator may require that shares be
retained with such broker or agent for a designated period of time (and may
restrict dispositions during that period) and/or may establish other procedures
to permit tracking of disqualifying dispositions of such shares or to restrict
transfer of such shares. The Administrator may require that shares purchased
under the Plan shall automatically participate in a dividend reinvestment plan
or program maintained by the Company. The Company shall retain the amount of
payroll deductions used to purchase Common Stock as full payment for the Common
Stock and the Common Stock shall then be fully paid and non-assessable. No
Participant shall have any voting, dividend, or other stockholder rights with
respect to shares subject to any option granted under the Plan until the shares
subject to the option have been purchased and delivered to the Participant as
provided in Section 8.
9. Recapitalization.
----------------
6
<PAGE>
(a) If after the grant of an option, but prior to the purchase of Common
Stock under the option, there is any increase or decrease in the
number of outstanding shares of Common Stock because of a stock split,
stock dividend, combination or recapitalization of shares subject to
options, the number of shares to be purchased pursuant to an option,
the share limit of Section 6(c) and the maximum number of shares
specified in Section 6(a) shall be proportionately increased or
decreased, the terms relating to the purchase price with respect to
the option shall be appropriately adjusted by the Administrator, and
the Administrator shall take any further actions which, in the
exercise of its discretion, may be necessary or appropriate under the
circumstances.
(b) The Administrator, if it so determines in the exercise of its sole
discretion, also may adjust the number of shares specified in Section
6(a), as well as the price per share of Common Stock covered by each
outstanding option and the maximum number of shares subject to any
individual option, in the event the Company effects one or more
reorganizations, recapitalizations, spin-offs, split-ups, rights
offerings or reductions of shares of its outstanding Common Stock.
(c) The Administrator's determinations under this Section 9 shall be
conclusive and binding on all parties.
10. Merger, Liquidation, Other Corporation Transactions.
---------------------------------------------------
(a) In the event of the proposed liquidation or dissolution of the
Company, the Purchase Period then in progress will terminate
immediately prior to the consummation of such proposed liquidation or
dissolution, unless otherwise provided by the Administrator in its
sole discretion, and all outstanding options shall automatically
terminate and the amounts of all payroll deductions will be refunded
without interest to the Participants.
(b) In the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger or consolidation of the Company
with or into another corporation, then in the sole discretion of the
Administrator, (1) each option shall be assumed or an equivalent
option shall be substituted by the successor corporation or parent or
subsidiary of such successor corporation, (2) a date established by
the Administrator on or before the date of consummation of such
merger, consolidation or sale shall be treated as an Exercise Date,
and all outstanding options shall be deemed exercisable on such date
or (3) all outstanding options shall terminate and the accumulated
payroll deductions shall be returned to the Participants, without
interest.
11. Transferability.
---------------
Neither payroll deductions credited to a Participant's account nor any
rights with regard to the exercise of an option or to receive Shares under the
Plan may be voluntarily or involuntarily assigned, transferred, pledged, or
otherwise disposed of in any way other than by
7
<PAGE>
will or the laws of descent and distribution or by a "qualified domestic
relations order" under the Code, and any other attempted assignment, transfer,
pledge, or other disposition shall be null and void and without effect. If a
Participant in any manner attempts to transfer, assign or otherwise encumber his
or her rights or interest under the Plan, other than as permitted by the Code,
such act shall be treated as an election by the Participant to discontinue
participation in the Plan pursuant to Section 5(c). Any option granted to a
Participant under the Plan may be exercised only by the Participant during his
or her lifetime.
12. Term of Plan.
------------
The Plan shall continue for a ten year term measured from its Effective
Date, unless previously terminated in accordance with Section 13.
13. Amendment or Termination of the Plan.
------------------------------------
The Administrator may, in its sole discretion, insofar as permitted by law,
terminate or suspend the Plan or revise or amend it in any respect whatsoever.
No such termination shall affect options previously granted and exercised, nor
shall any amendment make any change in any option theretofore granted which
would adversely affect the rights of any Participant. No revision or amendment
shall be made without prior approval of the stockholders if such amendment
would:
(a) materially increase the number of shares subject to the Plan, other
than an adjustment under Section 9 of the Plan;
(b) materially modify the requirements as to eligibility for participation
in the Plan, except as otherwise specified in this Plan;
(c) reduce the purchase price specified in Section 6(d), except as
specified in Section 9; or
(d) extend the term of the Plan beyond the date specified in Section 12.
14. Use of Funds.
------------
All payroll deductions received or held by the Company or Affiliate under
the Plan may be used by the Company or by the Affiliate for any corporate
purpose, and may be commingled with its other corporate funds. No interest shall
be paid or credited to the Participant with respect to such payroll deductions
except where required by local law as determined by the Administrator.
15. Local Law.
---------
The Administrator may adopt rules or procedures relating to the operation
and administration of the Plan to accommodate the specific requirements of local
laws and procedures. Without limiting the generality of the foregoing, the
Administrator is specifically
8
<PAGE>
authorized to adopt rules and procedures regarding handling of payroll
deductions, payment of interest, payroll tax, withholding procedures and
handling of stock certificates which vary with local requirements.
16. Securities Laws Compliance.
--------------------------
The Company shall not be under any obligation to issue Common Stock upon
the exercise of any option unless and until the Company has determined that: (i)
it and the Participant have taken all actions required to register the Common
Stock under the Securities Act of 1933, or to perfect an exemption from the
registration requirements thereof; (ii) any applicable listing requirement of
any stock exchange on which the Common Stock is listed has been satisfied; and
(iii) all other applicable provisions of state and federal law have been
satisfied.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such shares if such a representation is
required by Applicable Law.
17. Notices.
-------
All notices or other communications by a Participant to the Company or
Affiliate under or in connection with the Plan shall be deemed to have been
given when received by the Administrator or when received in the form specified
by the Administrator at the location, or by the person, designated by the
Administrator for the receipt thereof.
18. No Enlargement of Employee Rights.
---------------------------------
Nothing contained in this Plan shall be deemed to give any Employee the
right to be retained in the employ of the Company or of the Affiliate or to
interfere with the right of the Company or Affiliate to discharge any Employee
at any time.
19. Regulations and Other Approvals; Governing Law.
----------------------------------------------
(a) This Plan and the rights of all persons claiming hereunder shall be
construed and determined in accordance with the laws of the State of
Illinois.
(b) This Plan and the Company's obligation to sell and deliver Shares
under the Plan shall be subject to all Applicable Laws, and the
obtaining of such approvals by governmental agencies required in
connection with the Plan or the authorization, issuance, sale, or
delivery of stock hereunder.
20. Notice of Disqualifying Disposition.
-----------------------------------
The Administrator may require, as a condition of participation in the Plan,
that a Participant agree to promptly notify the Company of any disposition of
Shares acquired pursuant to an option granted under the Plan within two years of
the grant date of the applicable option or
9
<PAGE>
within one year of the transfer of the Shares to him or her (a "disqualifying
disposition"), and the number of Shares disposed of.
21. Effective Date; Stockholder Approval.
------------------------------------
This Plan shall become effective upon the effective date of the S-1
registration statement filed by the Company pursuant to an initial public
offering of its Shares, subject to approval by the stockholders of the Company
within twelve (12) months after the date the Plan is adopted by the Board of
Directors ("Effective Date"). Such stockholder approval shall be obtained in
the degree and manner required under Applicable Law. All Shares issued under
the Plan shall become void in the event such approval is not obtained. No
options shall be granted under the Plan prior to such effective date.
10
<PAGE>
Exhibit 10.19
- -------------
* * * * * * * * * * * * * * * * * * * *
---------------------------------------
Lease
-----
230 West Monroe
---------------
Chicago, Illinois
-----------------
* * * * * * * * * * * * * * * * * * * *
---------------------------------------
Between
-------
Digital Work, Inc.
------------------
(Tenant)
--------
and
---
TIAA Realty, Inc.
-----------------
(Landlord)
----------
<PAGE>
LEASE
-----
230 WEST MONROE
---------------
CHICAGO, ILLINOIS
-----------------
THIS LEASE (the "Lease") is made and is effective as of ,
--------------------------------------------------------------------
19____ between TIAA REALTY, INC., a Delaware corporation (the "Landlord") and
the Tenant as named in the Schedule below. The term "Project" means the
building (the "Building") known as "230 West Monroe" and the land (the "Land")
located at the northeast corner of Monroe and Franklin Streets, Chicago,
Illinois. "Premises" means that part of the Project leased to Tenant described
in the Schedule and outlined on Appendix A.
The following schedule (the "Schedule") is an integral part of this Lease.
Terms defined in this Schedule shall have the same meaning throughout the Lease.
SCHEDULE
1. Tenant: Digital Work, Inc., a _____________ _______________
2. Premises: A portion of the 19th Floor of the Building, known as Suite
_____
3. Rentable Square Feet of the Premises: Approximately 10,254 rentable
square feet
4. Tenant's Proportionate Share: 1.7878% (based upon a total of 573,550
rentable square feet in the Building)
5. Rent Abatement, if any: N/A
6. Security Deposit: See Section 20 of the Lease
7. Tenant's address for notices before possession date:
__________________
8. Tenant's Real Estate Broker for this Lease: Julien J. Studley, Inc.
9. Tenant Improvements, if any: See the Tenant Improvement Agreement
attached hereto as Appendix D.
10. Commencement Date: July 1, 1999
but if the Premises are subject to new construction pursuant to
Appendix D, then the Completion Date, as defined therein, if it is
later.
11. Termination Date/Term: Five (5) years after the Commencement Date, or
if the Commencement Date is not the first day of a month, then after
the first day of the following month.
12. Base Rent:
Annual Monthly
Period Base Rent Base Rent
-------------------------------------------------------------------
First Lease Year $146,119.50 $12,176.63
($14.25 per rentable square foot)
Second Lease Year $150,528.72 $12,544.06
($14.68 per rentable square foot)
Third Lease Year $155,040.48 $12,920.04
($15.12 per rentable square foot)
<PAGE>
Fourth Lease Year $159,654.78 $13,304.57
($15.57 per rentable square foot)
Fifth Lease Year $164,474.16 $13,706.18
($16.04 per rentable square foot)
For purposes of this Lease, "Lease Year" shall mean each consecutive
twelve-month period beginning with the Commencement Date, except that if
the Commencement Date is other than the first day of a calendar month, then
the first Lease Year shall be the period from the Commencement Date through
the date twelve months after the last day of the calendar month in which
the Commencement Date occurs, and each subsequent Lease Year shall be the
period of twelve months following the last day of the prior Lease Year.
13. Guarantor: N/A
I. LEASE AGREEMENT. On the terms stated in this Lease, Landlord
leases the Premises to Tenant, and Tenant leases the Premises from Landlord, for
the Term beginning on the Commencement Date and ending on the Termination Date
unless extended or sooner terminated pursuant to this Lease.
I. RENT.
A. Types of Rent. Tenant shall pay the following Rent in the form
-------------
of a check to Landlord's building manager at the office of the Building, or in
such other manner as Landlord may notify Tenant:
1. Base Rent in monthly installments in advance on or before the
---------
first day of the Lease and the first day of each month of the Term thereafter in
the amount set forth on the Schedule.
1. Operating Cost Share Rent in an amount equal to the Tenant's
-------------------------
Proportionate Share of the Operating Costs for the applicable fiscal year of the
Lease, paid monthly in advance in an estimated amount. Definitions of Operating
Costs and Tenant's Proportionate Share, and the method for billing and payment
of Operating Cost Share Rent are set forth in Sections 2B, 2C and 2D.
1. Tax Share Rent in an amount equal to the Tenant's Proportionate
--------------
Share of Taxes for the applicable fiscal year of this Lease, paid monthly in
advance in an estimated amount. A definition of Taxes and the method for
billing and payment of Tax Share Rent are set forth in Sections 2B, 2C and 2D.
1. Additional Rent in the amount of all costs, expenses,
---------------
liabilities, and amounts which Tenant is required to pay under this Lease,
excluding Base Rent, Operating Cost Share Rent, and Tax Share Rent, but
including any interest for late payment of any item of Rent.
1. Rent as used in this Lease means Base Rent, Operating Cost
----
Share Rent, Tax Share Rent and Additional Rent. Tenant's agreement to pay Rent
is an independent covenant, with no right of setoff, deduction or counterclaim
of any kind.
<PAGE>
A. Payment of Operating Cost Share Rent and Tax Share Rent.
-------------------------------------------------------
a) Payment of Estimated Operating Cost Share Rent and Tax Share Rent.
-----------------------------------------------------------------
Landlord shall estimate the Operating Costs and Taxes of the Project each
fiscal year, generally after the beginning of the year. Landlord may revise
these estimates whenever it obtains more accurate information, such as the final
real estate tax assessment or tax rate for the Project.
Within ten (10) days after notice from Landlord setting forth an
estimate of Operating Costs for a particular fiscal year, Tenant shall pay
Landlord an amount equal to one-twelfth (1/12th) of Tenant's Proportionate
Share of such estimated Operating Costs for such fiscal year, multiplied by
the number of months that have elapsed in the applicable fiscal year to the
date of such payment including the current month, minus payments previously
made by Tenant for the months elapsed. Thereafter on the first day of each
month, Tenant shall pay monthly until a new estimate of Operating Costs is
applicable, one-twelfth (1/12th) of Tenant's Proportionate Share of the
estimated Operating Costs.
Within ten (10) days after notice from Landlord setting forth an
estimate of Taxes for a particular fiscal year, Tenant shall pay Landlord
an amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share of
such estimated Taxes, multiplied by the number of months that have elapsed
in the applicable fiscal year to the date of such payment, including the
current month, minus payments previously made by Tenant for the months
elapsed. Thereafter on the first day of each month, Tenant shall pay
monthly until a new estimate of Taxes is applicable, one-twelfth (1/12th)
of Tenant's Proportionate Share of the estimated Taxes.
a) Correction of Operating Cost Share Rent. As soon as reasonably
---------------------------------------
possible after the end of each fiscal year, Landlord shall deliver to Tenant a
report for such year (the "Operating Cost Report") setting forth (a) the actual
Operating Costs incurred, (b) the amount of Operating Cost Share Rent due from
Tenant, and (c) the amount of Operating Cost Share Rent paid by Tenant. Within
thirty (30) days after such delivery, Tenant shall pay to Landlord the amount
due minus the amount paid. If the amount paid exceeds the amount due, Landlord
shall apply the excess to Tenant's next month's payment of Operating Cost Share
Rent, refunding any overage directly to Tenant. The provisions of this Section
2B(2) shall survive the termination of this Lease.
a) Correction of Tax Share Rent. As soon as reasonably possible
----------------------------
after the end of each fiscal year, Landlord shall deliver to Tenant a report for
such fiscal year (the "Tax Report") setting forth (a) the actual Taxes, (b) the
amount of Tax Share Rent due from Tenant, and (c) the amount of Tax Share Rent
paid by Tenant. Within thirty (30) days after such delivery, Tenant shall pay
to Landlord the amount due from Tenant minus the amount paid by Tenant. If the
amount paid exceeds the amount due, Landlord shall apply any the excess as a
credit against Tenant's next month's payment of Tax Share Rent, refunding any
overage to Tenant. The provisions of this Section 2B(3) shall survive the
termination of this Lease.
<PAGE>
A. Definitions.
-----------
a) Taxes. "Taxes" means any and all taxes, assessments and
-----
charges of any kind, general or special, ordinary or extraordinary, levied by
any governmental entity, which Landlord shall pay or become obligated to pay in
connection with the ownership, leasing, renting, management, control or
operation of the Project or of the personal property, fixtures, machinery,
equipment, systems and apparatus used in connection therewith. Taxes shall
include real estate taxes, personal property taxes, sewer rents, water rents,
special or general assessments, transit taxes, ad valorem taxes, and any tax
levied on the rents hereunder or the interest of Landlord under this Lease (the
"Rent Tax"). Taxes shall also include all legal fees and other costs and
expenses paid by Landlord in seeking a refund or reduction of any Taxes, whether
or not the Landlord is ultimately successful.
For any year, the amount to be included in Taxes (a) from taxes or
assessments payable in installments, shall be the amount of the
installments (with any interest) due and payable during such year, and (b)
from all other Taxes, shall at Landlord's election be the amount accrued,
assessed, or otherwise imposed for such year or the amount due and payable
in such year. Any refund or other adjustment to any Taxes by the taxing
authority, shall apply during the year in which the adjustment is made.
Taxes shall not include any net income (except Rent Tax), capital,
stock, succession, transfer, franchise, gift, estate or inheritance tax,
except to the extent that such tax shall be imposed in lieu of any portion
of Taxes.
a) Operating Costs. "Operating Costs" means any expenses, costs
---------------
and disbursements of any kind other than Taxes, paid or incurred by Landlord in
connection with the ownership, leasing, management, maintenance, operation and
repair of any part of the Project and of the personal property, fixtures,
machinery, equipment, systems and apparatus used in connection therewith,
including the cost of providing those services required to be furnished by
Landlord under this Lease. Operating Costs shall not include (a) costs of
alterations of tenant premises; (b) costs of capital improvements, except those
intended to reduce Operating Costs, and those made to keep the Project in
compliance with governmental requirements applicable from time to time,
amortized by Landlord in accordance with sound accounting and management
principles; (c) interest and principal payments on mortgages or any other debt
costs, or rental payments on any ground lease of the Project ("Ground Lease");
(d) real estate brokers' leasing commissions; (e) any cost or expenditure for
which Landlord is reimbursed, by insurance proceeds or otherwise, except by
Operating Cost Share Rent; (f) the cost of any service furnished to any office
tenant of the Project which Landlord does not make available to Tenant; (g)
executives' salaries above the grade of building manager; (h) legal and auditing
fees which are for the benefit of Landlord such as collecting delinquent rents,
preparing tax returns and other financial statements, and audits other than
those incurred in connection with the preparation of statements required
pursuant to Section 2B above; and (i) costs of correcting defects in
construction of the Building (as opposed to the cost of normal repair,
maintenance and replacement expected with the construction materials and
equipment installed in the Building in light of their specifications).
If the Project is not fully leased during any portion of any fiscal
year, Landlord may adjust (an "Equitable Adjustment") Operating Costs to
equal what would have been incurred by Landlord had the Project been fully
leased. For
<PAGE>
example, assume (i) the Building has ten floors; (ii) the Tenant occupies
one floor and Tenant's Proportionate Share is ten percent (10%); (iii) the
other nine floors are vacant; (iv) the cost of providing a particular
service for Tenant's floor is $1,000. If Tenant paid Tenant's Proportionate
Share of that cost, Tenant would pay $100. Instead, Landlord shall estimate
the cost of such service for the Building if it were one hundred percent
(100%) leased. Landlord would take into account any economies of scale; for
example, the cost for the entire Building might be $9,000. The Landlord's
estimate ($9,000) minus the actual cost incurred by the Landlord ($1000)
equals the Equitable Adjustment ($8000). The Equitable Adjustment is added
to the actual cost and Tenant pays Tenant's Proportionate Share of the
total; in this example, Tenant would pay $9,000 times 10% or $900. This
Equitable Adjustment shall apply only to Operating Costs which are variable
and therefore increase as leasing of the Project increases. Landlord may
incorporate the Equitable Adjustment in its estimates of Operating Costs.
If Landlord does not furnish any particular service whose cost would
have constituted an Operating Cost to a tenant who has undertaken to
perform such service itself, Operating Costs shall be increased by the
amount which Landlord would have incurred if it had furnished the service
to such tenant.
"Lease Year" means each consecutive twelve-month period beginning with
the Commencement Date, except that if the Commencement Date is not the
first day of a calendar month, then the first Lease Year shall be the
period from the Commencement Date through the final day of the twelve
months after the first day of the following month, and each subsequent
Lease Year shall be the twelve months following the prior Lease Year.
a) Fiscal Year. "Fiscal Year" means the calendar year, except
-----------
that the first fiscal year and the last fiscal year of the Term may be a partial
calendar year.
A. Computation of Base Rent and Rent Adjustments.
- -- ---------------------------------------------
a) Prorations. If this Lease begins on a day other than the first
----------
day of a month, the Base Rent, Operating Cost Share Rent and Tax Share Rent
shall be prorated for such partial month. If this Lease begins on a day other
than the first day, or ends on a day other than the last day, of the fiscal
year, Operating Cost Share Rent and Tax Share Rent shall be prorated for the
applicable fiscal year.
a) Default Interest. Any sum due from Tenant to Landlord not
----------------
paid when due ("Late Payment") shall bear interest from the date due until paid
at the annual rate equal to twelve percent (12%), provided, that if Tenant pays
such Late Payment prior to the expiration of any applicable cure period, if any,
no default interest shall be charged on such Late Payment.
a) Rent Adjustments. If the number of rentable square feet in
----------------
either the Premises or the Building shall be changed, Tenant's Proportionate
Share shall be appropriately recalculated as of the date of the change,
provided, that in no event shall Tenant's Proportionate Share be increased as a
result of such change. If any Operating Cost paid in one fiscal year relates to
more than one fiscal year, Landlord may proportionately allocate such Operating
Cost among the related fiscal years.
<PAGE>
a) Books and Records. Landlord shall maintain books and records
-----------------
reflecting the Operating Costs and Taxes in accordance with sound accounting and
management practices. Tenant, and its agents and representatives, may inspect
Landlord's records at Landlord's office upon one day's prior notice during
normal business hours during the forty-five (45) days following delivery of
either the Operating Cost Report or the Tax Report. Tenant and any agent or
representative must agree, in their contract for such services, that the results
of any such inspection shall be kept entirely confidential and shall
specifically not be made available to any other tenant of the Building. Unless
Tenant sends to Landlord any written exception to either such report within said
forty-five (45) day period, such report shall be deemed final and accepted by
Tenant. Tenant shall pay the amount shown on both reports in the manner
prescribed in this Lease, whether or not Tenant takes any such written
exception, without any prejudice to such exception. If Tenant makes a timely
exception, Landlord shall cause its independent certified public accountant to
issue a final and conclusive resolution of Tenant's exception (the "Audit
Resolution"). If, after the Audit Resolution, it is determined the amount paid
by Tenant exceeded the amount due, Landlord shall refund any overage to Tenant.
Tenant shall pay the cost of such certification unless Landlord's original
determination of annual Operating Costs or Taxes was in error by more than five
percent (5%).
a) Miscellaneous. So long as Tenant is in default of any
-------------
obligation under this Lease, Tenant shall not be entitled to any refund of any
amount from Landlord. If this Lease is terminated for any reason prior to the
annual determination of Operating Cost Share Rent or Tax Share Rent, either
party shall pay the full amount due to the other within fifteen (15) days after
Landlord's notice to Tenant of the amount when it is determined. Landlord may
commingle any payments made with respect to Operating Cost Share Rent or Tax
Share Rent, without payment of interest.
I. PREPARATION AND CONDITION OF PREMISES; POSSESSION AND SURRENDER
OF PREMISES.
A. Condition of Premises. Except (1) for latent defects, and (2)
---------------------
to the extent of the Tenant Improvements item on the Schedule, Landlord is
leasing the Premises to Tenant "as is," without any representations or
warranties, including any express or implied warranties of merchantability,
fitness or habitability, and without any obligation to alter, remodel, improve,
repair, decorate or clean any part of the Premises. Tenant acknowledges that
there are two supplemental heating, ventilating and air conditioning systems
presently located in the Premises, one of which is a 15 ton Trane Air-Cooled
Unit, and the other is a 5 ton Trane Air-Cooled Unit (collectively, the
"Supplemental Units"). Tenant further acknowledges that Landlord has made no
representation or warranty as to the condition of the Supplemental Units, and
that the Supplemental Units are included in the Premises in an "as is"
condition, without any representations or warranties, including any express or
implied warranties of merchantability or fitness, and without any obligation to
repair or maintain any part of the Supplemental Units. Landlord acknowledges
that Tenant has no obligation to remove the Supplemental Units from the Premises
upon the termination of this Lease. If the Tenant Improvements item on the
Schedule applies, Landlord shall cause the Premises to be completed in
accordance with the Tenant Improvement Agreement attached as Appendix D.
A. Tenant's Possession. Tenant's taking possession of any portion
-------------------
of the Premises shall be conclusive evidence that such portion was in good
order, repair and condition. If Landlord authorizes Tenant to take possession
of any part of the Premises prior to the Commencement Date for purposes of doing
business, all terms of
<PAGE>
this Lease shall apply to such pre-Term possession, including Base Rent at the
rate set forth for the First Lease Year in Section 2A prorated for any partial
month.
A. Maintenance. Throughout the Term, Tenant shall maintain the
-----------
Premises (including without limitation, the Supplemental Units and all plumbing
fixtures and pipes used in connection with the bathroom located in the Premises)
in their condition as of the Completion Date, loss or damage caused by the
elements, ordinary wear, and fire and other casualty excepted, and at the
termination of this Lease, or Tenant's right to possession, Tenant shall return
the Premises to Landlord in broom-clean condition. To the extent Tenant fails
to perform either obligation, Landlord may, but need not, restore the Premises
to such condition and Tenant shall pay the cost thereof.
A. Ownership of Improvements. All Work as defined in Section 5,
-------------------------
partitions, hardware, and all fixtures except trade fixtures, constructed in the
Premises by either Landlord or Tenant, shall become Landlord's property upon
installation without compensation to Tenant, unless Landlord consents otherwise
in writing, or requires Tenant to remove any such item at the termination of the
Lease or of Tenant's right to possession.
A. Removal at Termination. Tenant shall remove its trade
----------------------
fixtures, furniture, moveable equipment and other personal property from the
Premises upon the termination of this Lease or Tenant's right of possession. If
Tenant does not, then Tenant shall be conclusively presumed to have, at
Landlord's election (i) conveyed such property to Landlord without compensation
or (ii) abandoned such property, and Landlord may dispose of any part thereof in
any manner without liability to Tenant or any other person. Landlord shall have
no duty to be a bailee of any such personal property. If Landlord elects
abandonment, Tenant shall pay to Landlord, upon demand, any expenses incurred
for disposition.
A. Landlord's Maintenance. Throughout the term, Landlord shall
----------------------
maintain the roof, the exterior walls of the Building and the heating,
ventilating and air conditioning systems of the Building in good condition.
I. PROJECT SERVICES.
Landlord shall furnish services as follows:
A. Heating and Air Conditioning. During the normal business hours
----------------------------
of 8:00 a.m. to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 1:00 p.m. on
Saturday, Landlord shall furnish heating and air conditioning to provide a
comfortable temperature, in Landlord's judgment, for normal business operations,
except to the extent Tenant installs equipment which adversely affects the
temperature maintained by the air conditioning system. If Tenant installs such
equipment, Landlord may install supplementary air conditioning units in the
Premises, and Tenant shall pay to Landlord upon demand as Additional Rent the
cost of installation, operation and maintenance thereof.
Landlord shall furnish heating and air conditioning after business
hours if Tenant provides Landlord at least twenty-four (24) hours' notice,
and pays Landlord all then current charges for such additional heating or
air conditioning.
<PAGE>
A. Elevators. Landlord shall provide passenger elevator service
---------
during normal business hours to Tenant in common with Landlord and all other
tenants. Landlord shall provide limited passenger service at other times,
except in case of an emergency. Landlord shall provide freight elevator service
at reasonable hours at Tenant's request, subject to scheduling by the Landlord
and payment for the service by Tenant.
A. Electricity. All the electricity used in the Premises shall be
-----------
supplied through a separate meter and be paid for by Tenant, provided that
Landlord shall pay for the electricity required for the operation of the heating
and air conditioning systems in the Premises during the hours specified in
Paragraph 4A above, and shall include such payment in Operating Costs. Any
decrease or discontinuance of electric service shall not affect the parties'
rights and obligations under this Lease. Tenant shall not use electricity at a
rate which causes the use by all tenants to exceed the capacity of the Building
or the risers or wiring to the Premises. Landlord shall at Tenant's expense
maintain the light fixtures and install lamps, bulbs, ballasts and starters in
the Premises.
Tenant shall pay for all electricity required for janitorial service,
for alterations and repairs to the Premises, and for the operation of any
supplementary air conditioning or ventilating system required for its
equipment.
A. Water. Landlord shall furnish cold water for drinking and
-----
toilet purposes, and cold and hot water for lavatory purposes. Tenant shall pay
Landlord for water furnished for any other purpose as Additional Rent at rates
fixed by Landlord, including without limitation, hot water for kitchenette
purposes. Tenant shall not permit water to be wasted.
A. Janitorial Service. Landlord shall furnish janitorial service
------------------
as set forth in Appendix B. Tenant may obtain supplementary janitorial service
only at its sole cost and responsibility, with employees or contractors
satisfactory to Landlord, and subject to Landlord's prior written consent, which
may be withheld in Landlord's discretion.
A. Telephone Service. Tenant shall arrange for telephone service
-----------------
in the Premises directly with the telephone company. Tenant shall pay the cost
of all charges for installation and service.
G. Interruption of Services. No interruption of services caused by
------------------------
repairs, replacements, or alterations to the service system, or by any
other cause beyond the reasonable control of Landlord, shall be deemed an
eviction or disturbance of Tenant's possession of any part of the Premises,
or render Landlord liable to Tenant for damages, or otherwise affect the
rights and obligations of Landlord and Tenant under this Lease, except as
provided below.
The Rent otherwise payable under this Lease shall abate in the manner
described in the last sentence of this paragraph if all of the following
conditions are met: (i) Landlord ceases to furnish any service in the
Building as a result of a condition which affects only the Building (i.e.
which does not affect office buildings in general in the vicinity of the
Building); (ii) Tenant notifies Landlord in writing within one (1) business
day after such cessation; (iii) such cessation is not caused by Force
Majeure (as defined in Section 23 below); (iv) such cessation is not the
result of an act or omission
<PAGE>
of Tenant; and (v) the Premises (or a material portion thereof) is rendered
untenantable (meaning that Tenant is unable to use such space in the normal
course of its business) and Tenant in fact ceases to use such space as a
result of such cessation. As Tenant's sole and exclusive remedy for such
cessation, on the sixth day after all of the foregoing conditions have been
met, the Rent payable hereunder shall be equitably abated based upon the
percentage of the space in the Premises so rendered untenantable and not
being so used by Tenant, and such abatement shall continue until the date
the Premises become fully tenantable again.
I. ALTERATIONS AND REPAIRS.
A. Landlord's Consent and Conditions. Tenant shall not make any
---------------------------------
improvements or alterations in or additions, changes or installations to the
Premises which (i) impact the base structural components or the heating, air
conditioning, ventilation, electrical, plumbing or mechanical systems
(collectively, the "Systems") of the Building, or (ii) impact any other tenant's
premises (collectively, the "Systems/Structure Work"), without submitting plans
and specifications to Landlord and obtaining Landlord's prior written consent
(which consent Landlord may withhold in its sole discretion). Tenant shall not
make any improvements or alterations in or additions, changes or installations
to the Premises which are not deemed Systems/Structure Work, without submitting
plans and specifications to Landlord and obtaining Landlord's prior written
consent (which consent shall not be unreasonably withheld), if (a) the cost
thereof is in excess of $10,000.00, or (b) such improvements, alterations,
additions, changes or installations are visible from outside the Premises
(collectively, the "Non-Systems Work"). Tenant shall be allowed to make any
improvements or alterations in or additions, changes or installations to the
Premises which are not deemed Systems/Structure Work or Non-Systems Work without
Landlord's consent (collectively, the "Non-Consent Work"). Systems/Structure
Work, Non-Systems Work and Non-Consent Work are sometimes collectively referred
to herein as the "Work." Landlord shall inform Tenant of its approval or
disapproval of any such Systems/Structure Work or Non-Systems Work within
fifteen (15) days after receipt of a complete set of plans and specifications
therefor. Tenant shall pay Landlord's standard charge for review of the plans
and all other items submitted by Tenant. Tenant shall pay for the cost of all
Work. At Landlord's option, the Work shall be performed by Landlord's employees
or contractors. All Work shall become the property of Landlord upon its
installation, except for Tenant's trade fixtures and for items which Landlord
requires Tenant to remove at Tenant's cost at the termination of the Lease. The
following requirements shall apply to all Work:
a) Prior to commencement, Tenant shall furnish to Landlord building
permits, certificates of insurance satisfactory to Landlord, and, at Landlord's
request, security for payment of all costs.
a) Tenant shall perform all Work so as to maintain peace and harmony
among other contractors serving the Project and shall avoid interference with
other work to be performed or services to be rendered in the Project.
a) The Work shall be performed in a good and workmanlike manner,
meeting the standard for construction and quality of materials in the Building,
and shall comply with all insurance requirements and all applicable laws,
ordinances and regulations.
<PAGE>
a) Tenant shall permit Landlord to supervise all Work. Landlord may
charge a supervisory fee not to exceed five percent (5%) of labor, material, and
all other costs of the Work, if Tenant's employees or contractors perform the
Work.
a) Upon completion, Tenant shall furnish Landlord with contractor's
affidavits and full and final statutory waivers of liens, as-built plans and
specifications, and receipted bills covering all labor and materials.
A. Electronic Systems. If Tenant notifies Landlord that Tenant
------------------
requires additional electrical or cable capacity for telegraph, telephone,
burglar alarm, computer, or signal service, Landlord shall direct how the
installation shall be done. Tenant shall make no installation of any kind
except in accordance with Landlord's direction. At Landlord's election,
Landlord may make the installation itself. Tenant shall pay for the entire cost
of both the installation and the service.
A. Damage to Systems. If any part of the mechanical, electrical
-----------------
or other systems in the Premises shall be damaged, Tenant shall promptly notify
Landlord, and Landlord shall repair such damage. Landlord may also at any
reasonable time make any repairs or alterations which Landlord deems necessary
for the safety or protection of the Project, or which Landlord is required to
make by any court or other governmental authority. Landlord shall, in
performing such repairs or alterations, take reasonable steps to avoid
interference with Tenant's normal business activities. Tenant shall at its
expense make all other repairs necessary to keep the Premises, and Tenant's
fixtures and personal property, in good order, condition and repair; to the
extent Tenant fails to do so, Landlord may make such repairs itself. The cost
of any repairs made by Landlord on account of Tenant's default, or on account of
the misuse or neglect by Tenant or its invitees, contractors or agents anywhere
in the Project, shall become Additional Rent payable on demand by Tenant.
A. No Liens. Tenant has no authority to cause or permit any lien
--------
or encumbrance of any kind to affect Landlord's interest in the Project; any
such lien or encumbrance shall attach to Tenant's interest only. If any
mechanic's lien shall be filed or claim of lien made for work or materials
furnished to Tenant, then Tenant shall at its expense within ten (10) days
thereafter either discharge or contest the lien or claim. If Tenant contests
the lien or claim, then Tenant shall (i) within such ten (10) day period,
provide Landlord adequate security for the lien or claim, (ii) contest the lien
or claim in good faith by appropriate proceedings that operate to stay its
enforcement, and (iii) pay promptly any final adverse judgment entered in any
such proceeding. If Tenant does not comply with these requirements, Landlord
may discharge the lien or claim, and the amount paid, as well as attorney's fees
and other expenses incurred by Landlord, shall become Additional Rent payable on
demand by Tenant.
I. USES OF PREMISES. Tenant shall use the Premises only for
executive and general administrative offices, which shall include the
development of software programs, the construction of web pages, the performance
of systems integration, consulting, sales and related uses. Tenant shall not
allow any use of the Premises which will negatively affect the cost of coverage
of Landlord's insurance on the Project. Tenant shall not allow any inflammable
or explosive liquids or materials to be kept on the Premises. Tenant shall not
allow any use of the Premises which would cause the value or utility of any part
of the Premises to diminish or would interfere with any other Tenant or with the
operation of the Project by Landlord. Tenant shall
<PAGE>
not permit any nuisance or waste upon the Premises, or allow any offensive noise
or odor in or around the Premises. Tenant shall not place vending or dispensing
machines of any kind in the Premises.
I. GOVERNMENTAL REQUIREMENTS AND BUILDING RULES. Tenant shall
comply with all governmental laws or regulations applying to its use of the
Premises. Tenant shall also comply with all rules established for the Project
from time to time by Landlord. The present rules are contained in Appendix C.
Failure by another tenant to comply with the rules or failure by Landlord to
enforce them shall not relieve Tenant of its obligation to comply with the rules
or make Landlord responsible to Tenant in any way.
I. WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE.
- --
A. Waiver of Claims. To the extent permitted by law, Tenant waives
- -- ----------------
any claims it may have against the Landlord or its officers, directors, agents,
contractors or employees for business interruption, damage to property, or any
other loss sustained by Tenant as the result of any accident or occurrence in
the Project or of any part of the Building becoming in disrepair.
To the extent permitted by law, Landlord waives any claims it may have
against Tenant or its officers, directors, agents, contractors, or employees for
rent loss, damage to the property, or any other loss sustained by Landlord as
the result of any accident or occurrence in the Premises or Project or of any
part of the Premises becoming in disrepair.
A. Indemnification. Tenant shall indemnify, defend and hold
---------------
harmless Landlord, the property manager of the Project and their respective
directors, officers, employees, agents and contractors against any claims by any
third party for injury to any person or damage to or loss of any property
occurring in the Project and arising from the use of the Premises or from any
other act or omission of Tenant or any of Tenant's employees, agents, invitees
or contractors.
Landlord shall indemnify, defend and hold harmless Tenant and its
officers, directors, servants, agents and employees against any claims or
liability for damage to person or property (or for loss or misappropriation of
property) occurring in the Premises or Project, proximately caused by the
intentional misconduct or sole negligence of Landlord or of any employee, agent,
servant, invitee or contractor of Landlord during the Term, and from any costs
relating thereto (including, without limitation, attorneys' fees), but only to
the extent of the sum of (i) Landlord's deductibles under the insurance policy
required to be obtained by Landlord hereunder, and (ii) amounts of insurance
proceeds recoverable under such insurance policy.
A. Insurance Coverage. Tenant shall maintain insurance customary
------------------
for an office tenant, with such terms, coverages and insurers, as Landlord shall
reasonably require from time to time. Initially, such insurance shall include:
a) Commercial General Liability Insurance, with (a) Contractual
Liability including the indemnification provisions contained in this Lease, (b)
a severability of interest endorsement, (c) limits of not less than One Million
Dollars ($1,000,000) combined single limit per occurrence for bodily injury,
sickness or death, and property damage, and umbrella coverage of not less than
Five Million
<PAGE>
Dollars ($5,000,000), and (d) Landlord and Landlord's building manager named as
additional insureds.
a) Insurance against "All Risks" of physical loss covering the
replacement cost of all of Tenant's fixtures and personal property. Tenant's
property insurance shall include a waiver of subrogation. Tenant's insurance
shall be primary and not contributory.
A. Insurance Certificates. Tenant shall deliver to Landlord
----------------------
certificates and endorsements evidencing all required insurance no later than
five (5) days prior to the Commencement Date and each renewal date. Each
certificate will provide for the thirty (30) days prior written notice of
cancellation to Landlord and Tenant.
I. FIRE AND OTHER CASUALTY.
A. Termination. If a fire or other casualty causes substantial damage
-----------
to the Building or the Premises, Landlord shall engage a registered architect to
certify within one (1) month of the casualty to both Landlord and Tenant, the
amount of time needed to restore the Building and the Premises to tenantability,
using standard working methods. If the time needed exceeds eighteen (18) months
from the beginning of the restoration, or two (2) months therefrom if the
restoration would begin during the last eighteen (18) months of the Lease, then
in the case of the Premises, either Landlord or Tenant may terminate this lease,
and in the case of the Building, Landlord may terminate this Lease, by notice to
the other party within ten (10) days after the notifying party's receipt of the
architect's certificate. The termination shall be effective thirty (30) days
from the date of the notice and Rent shall be paid by Tenant to that date,
within an abatement for any portion of the space which has been untenantable
after the casualty.
B. Restoration. If a casualty causes damage to the Building or the
-----------
Premises but this Lease is not terminated for any reason, then subject to the
rights of any mortgagees or ground lessors, Landlord shall obtain the applicable
insurance proceeds and diligently restore the Building and the Premises subject
to current governmental requirements. Tenant shall replace its damaged
personal property and fixtures. Rent shall be abated on a per diem basis during
the restoration for any portion of the Premises which is untenantable, except to
the extent that Tenant's negligence caused the casualty and Landlord's rent loss
insurance would not provide coverage if the Rent were abated.
I. EMINENT DOMAIN. If a part of the Project is taken by eminent
domain or deed in lieu thereof which is so substantial that the Premises cannot
reasonably be used by Tenant for the operation of its business, then either
party may terminate this Lease effective as of the date of the taking. If any
substantial portion of the Project is taken without affecting the Premises, then
Landlord may terminate this Lease as of the date of such taking. Rent shall
abate from the date of the taking in proportion to any part of the Premises
taken. The entire award for a taking of any kind shall be paid to Landlord, and
Tenant shall have no right to share in the award. All obligations accrued to the
date of the taking shall be performed by each party.
I. RIGHTS RESERVED TO LANDLORD.
<PAGE>
Landlord may exercise at any time any of the following rights respecting
the operation of the Project without liability to the Tenant of any kind:
A. Name. To change the name or street address of the Building or
----
the suite numbers of the Premises; provided that if any of the foregoing is
voluntarily done by Landlord (as opposed to required by a governmental agency or
authority), Landlord shall reimburse Tenant for its reasonable actual out-of-
pocket expenses incurred as a result thereof to purchase stationary and business
cards, in an amount not to exceed $1,000.
A. Signs. To install and maintain any signs on the exterior and
-----
in the interior of the Building, and to approve at its discretion prior to
installation any of the Tenant's signs in the Premises visible from the common
areas or the exterior of the Building.
A. Window Treatments. To approve, at its discretion, prior to
-----------------
installation any shades, blinds, ventilators or window treatments of any kind,
as well as any lighting within the Premises that may be visible from the
exterior of the Building.
A. Service Contracts. To enter into service contracts with all
-----------------
providers furnishing ice and drinking water, towels, toilet supplies, shoe
shines, sign painting, beverage or food services, or other services to the
Premises, provided that the rates charged are reasonably competitive for office
buildings in the Chicago area.
A. Keys. To retain and use at any time passkeys to enter the
----
Premises or any door within the Premises. Tenant shall not alter or add any
lock or bolt.
A. Access. To have access to inspect the Premises, and to perform
------
its obligations, or make repairs, alterations, additions or improvements, as
permitted by this Lease.
A. Preparation for Reoccupancy. To decorate, remodel, repair,
---------------------------
alter or otherwise prepare the Premises for reoccupancy at any time after Tenant
abandons the Premises, without relieving Tenant of any obligation to pay Rent.
A. Heavy Articles. To approve the weight, size, placement and
--------------
time and manner of movement within the Building of any safe or other heavy
article of Tenant's property. Tenant shall move its property entirely at its
own risk.
A. Show Premises. To show the Premises to prospective purchasers
-------------
or brokers at any reasonable time, and to prospective tenants during the final
year of the Term, provided that Landlord gives prior notice to Tenant and does
not materially interfere with Tenant's use of the Premises.
A. Restrict Access. To restrict access to the Project during such
---------------
hours as Landlord shall determine, provided access will normally be available on
a 24-hour basis, subject to the event of an emergency and appropriate regulation
by Landlord. Landlord agrees to use reasonable efforts to provide Tenant with
prior notice of any such restriction of access.
<PAGE>
A. Relocation of Tenant. To relocate the Tenant, upon thirty
--------------------
days' prior written notice, from all or part of the Premises (the "old
premises") to another area in the Project (the "new premises"), provided that:
1. the size of the new premises is at least equal to the size of the
old premises;
1. the purpose of the relocation is to put a major tenant into the
old premises;
1. Landlord pays the cost of moving the Tenant and improving the new
premises to the substantially same condition of the old premises. Tenant shall
cooperate with Landlord in all reasonable ways to facilitate the move, including
supervising the movement of files or fragile equipment, designating new
locations for furniture, equipment and new telephone and electrical outlets, and
determining the color of paint in the new premises; and
1. Tenant shall not be required to move into the new premises until
the new premises is in the substantially same condition of the old premises.
A. Use of Lockbox. To designate a lockbox collection agent for
--------------
collections of amounts due Landlord. In that case, the date of payment of Rent
or other sums shall be the date of the agent's receipt of such payment or the
date of actual collection if payment is made in the form of a negotiable
instrument thereafter dishonored upon presentment. However, if Tenant is in
default under this Lease, Landlord may reject any payment for all purposes as of
the date of receipt or actual collection by mailing to Tenant within 21 days
after such receipt or collection a check equal to the amount sent by Tenant.
A. Repairs and Alterations. To make repairs or alterations to the
-----------------------
Project and in doing so transport any required material through the Premises, to
close entrances, doors, corridors, elevators and other facilities in the
Project, to open any ceiling in the Premises, or to temporarily suspend services
or use of common areas in the Building. Landlord may perform any such repairs
or alterations during ordinary business hours, except that Tenant may require
any Work in the Premises to be done after business hours if Tenant pays Landlord
for overtime and any other expenses incurred. Landlord may do or permit any
work on any nearby building, land, street, alley or way.
A. Landlord's Agents. If Tenant is in default under this Lease,
-----------------
possession of Tenant's funds or negotiation of Tenant's negotiable instrument by
any of Landlord's agents shall not waive any breach by Tenant or any remedies of
Landlord under this Lease.
A. Building Services. To install, use and maintain through the
-----------------
Premises, pipes, conduits, wires and ducts serving the Building, provided that
such installation, use and maintenance does not unreasonably interfere with
Tenant's use of the Premises.
A. Other Actions. To take any other action which Landlord deems
-------------
reasonable in connection with the operation, maintenance or preservation of the
Building.
<PAGE>
I. TENANT'S DEFAULT
Any of the following shall constitute a default by Tenant:
A. Rent Default. Tenant fails to pay any Rent when due, and, in
------------
the case of only the first such failure in any 12 consecutive months, this
failure continues for five days after written notice from Landlord;
A. Assignment/Sublease or Hazardous Substances Default. Tenant
---------------------------------------------------
defaults in its obligations under Section 17 Assignment and Sublease or Section
28 Hazardous Substances;
A. Other Performance Default. Tenant fails to perform any other
-------------------------
obligation to Landlord under this Lease, and, in the case of only the first such
failure in any twelve consecutive months, this failure continues for twenty days
after written notice from Landlord, except that if Tenant begins to cure its
failure within the twenty day period but cannot reasonably complete its cure
within such period, then the twenty day period shall be extended to ninety days,
or such lesser period as is reasonably necessary to complete the cure;
A. Credit Default. One of the following credit defaults occurs:
--------------
1. Tenant commences any proceeding under any law relating to
bankruptcy, insolvency, reorganization or relief of debts, or seeks appointment
of a receiver, trustee, custodian or other similar official for the Tenant or
for any substantial part of its property, or any such proceeding is commenced
against Tenant and either remains undismissed for a period of thirty days or
results in the entry of an order for relief against Tenant which is not fully
stayed within seven days after entry;
1. Tenant dissolve, liquidates or otherwise winds up its business,
becomes insolvent or bankrupt, does not generally pay its debts as they become
due, or admits in writing its inability to pay its debts, or makes a general
assignment for the benefit of creditors;
1. Any third party obtains a levy or attachment under process of law
against Tenant's leasehold interest.
I. LANDLORD REMEDIES.
A. Termination of Lease or Possession. If Tenant defaults, Landlord may
----------------------------------
elect by notice to Tenant either to terminate this Lease or to terminate
Tenant's possession of the Premises without terminating this Lease. In either
case, Tenant shall immediately vacate the Premises and deliver possession to
Landlord, and Landlord may repossess the Premises and may remove any of Tenant's
signs and any of its other property, without relinquishing its right to receive
Rent or any other right against Tenant.
B. Lease Termination Damages. If Landlord terminates the Lease, Tenant
-------------------------
shall pay to Landlord all Rent due on or before the date of termination, plus
Landlord's reasonable estimate of the aggregate Rent that would have been
payable from the date of termination through the Termination Date, reduced by
the rental value of the Premises calculated as of the date of termination for
the same period, taking into account reletting expenses and market concessions,
both discounted to
<PAGE>
present value at the rate of five (5) percent per annum. If Landlord shall relet
any part of the Premises for any part of such period before such present value
amount shall have been paid by Tenant or finally determined by a court, then the
amount of Rent payable pursuant to such reletting shall be deemed to be the
reasonable rental value for that portion of the Premises relet during the period
of the reletting.
C. Possession Termination Damages. If Landlord terminates Tenant's
------------------------------
right to possession without terminating the Lease and Landlord takes possession
of the Premises itself, Landlord may relet any part of the Premises for such
Rent, for such time, and upon such terms as Landlord in its sole discretion
shall determine, without any obligation to do so prior to renting other vacant
areas in the Building. Any proceeds from reletting the Premises shall first be
applied to the expenses of reletting, including redecoration, repair,
alteration, advertising, brokerage, legal, and other reasonably necessary
expenses. If the reletting proceeds after payment of expenses are insufficient
to pay the full amount of Rent under this Lease, Tenant shall pay such
deficiency to Landlord monthly upon demand as it becomes due. Any excess
proceeds shall be retained by Landlord.
D. Landlord's Remedies Cumulative. All of Landlord's remedies under
------------------------------
this Lease shall be in addition to all other remedies Landlord may have at law
or in equity. Waiver by Landlord of any breach of an obligation by Tenant shall
be effective only if it is in writing, and shall not be deemed a waiver of any
other breach, or any subsequent breach of the same obligation. Landlord's
acceptance of payment by Tenant shall not constitute a waiver of any breach by
Tenant, and if the acceptance occurs after Landlord's notice to Tenant, or
termination of the Lease or of Tenant's right to possession, the acceptance
shall not affect such notice or termination. Acceptance of payment by Landlord
after commencement of a legal proceeding or final judgment shall not affect such
proceeding or judgment.
E. Waiver of Trial by Jury. Each party waives trial by jury in the
-----------------------
event of any legal proceeding brought by the other in connection with this
Lease. Each party shall bring any action against the other in connection with
this Lease in a federal or state courts located in Chicago, Illinois, consents
to the jurisdiction of such courts, and waives any right to have any proceeding
transferred from such courts on the ground of improper venue or inconvenient
forum.
F. Litigation Costs. The non-prevailing party in any lawsuit to enforce
----------------
this Lease shall pay the attorneys' fees and other costs of the prevailing
party.
I. SURRENDER. Upon termination of this Lease or Tenant's right to
possession, Tenant shall return the Premises to Landlord in good order and
condition, ordinary wear and casualty damage excepted. If Landlord requires
Tenant to remove any alterations, then Tenant shall remove the alterations in a
good and workmanlike manner and restore the Premises to its condition prior to
their installation.
I. HOLDOVER. If Tenant retains possession of any part of the
Premises after the Term, Tenant shall become a month-to-month tenant upon all of
the terms of this Lease as might be applicable to such month-to-month tenancy,
except that Tenant shall pay Base Rent at double the rate in effect immediately
prior to such holdover, computed on a monthly basis for each full or partial
month Tenant remains in possession. If Tenant holds over for more than one
month, Tenant shall also pay Landlord all of Landlord's direct and consequential
damages, and in addition, if Landlord so elects by notice to Tenant, such
holdover shall constitute a renewal of this Lease for one year at the then
current market rate as determined by Landlord but
<PAGE>
in no event less than the Rent payable immediately prior to such holdover. No
acceptance of Rent or other payments by Landlord under these holdover provisions
shall operate as a waiver of Landlord's right to regain possession or any other
of Landlord's remedies.
I. SUBORDINATION TO GROUND LEASES AND MORTGAGES.
A. Subordination. This Lease shall be subordinate to any present or
-------------
future ground lease or mortgage respecting the Project, and any amendments to
such ground lease or mortgage, at the election of the ground lessor or mortgagee
as the case may be, effected by notice to Tenant in the manner provided in this
Lease. The subordination shall be effective upon such notice, but at the
request of Landlord or ground lessor or mortgagee, Tenant shall within ten (10)
days of the request, execute and deliver to the requesting party any reasonable
documents provided to evidence the subordination.
At any time that any ground lease or mortgage is put in effect on the
Project, Landlord shall use reasonable efforts to cause the mortgagee or ground
lessor to deliver to Tenant a non-disturbance agreement, in form and substance
reasonably acceptable to Tenant, which agreement shall provide that so long as
Tenant is not in default under this Lease (after the expiration of any
applicable notice and cure periods), Tenant shall have the right to remain in
possession of the Premises and to exercise all of its option and rights on the
terms and conditions set forth herein, even if there is a default under any such
ground lease or if any such mortgagee forecloses its mortgage or accepts a deed
in lieu of foreclosure. At such time as any additional ground leases or
mortgages are placed on the Project, Landlord shall use reasonable efforts to
cause the additional ground lessor and/or mortgagee to deliver a non-disturbance
agreement to Tenant.
B. Termination of Ground Lease or Foreclosure of Mortgage. If any ground
------------------------------------------------------
lease is terminated or mortgage foreclosed or deed in lieu of foreclosure given
and the ground lessor, mortgagee, or purchaser at a foreclosure sale shall
thereby become the owner of the Project, Tenant shall attorn to such ground
lessor or mortgagee or purchaser without any deduction or setoff by Tenant, and
this Lease shall continue in effect as a direct lease between Tenant and such
ground lessor, mortgagee or purchaser. The ground lessor or mortgagee or
purchaser shall be liable as Landlord only during the time such ground lessor or
mortgagee or purchaser is the owner of the Project. At the request of Landlord,
ground lessor or mortgagee, Tenant shall execute and deliver within ten (10)
days of the request any document furnished by the requesting party to evidence
Tenant's agreement to attorn.
C. Security Deposit. Any ground lessor or mortgagee shall be
----------------
responsible for the return of any security deposit by Tenant only to the extent
the security deposit is received by such ground lessor or mortgagee.
D. Notice and Right to Cure. The Project is subject to any ground
------------------------
lease and mortgage identified with name and address of ground lessor or
mortgagee in any Appendix to this Lease. Tenant agrees to send by registered or
certified mail to any ground lessor or mortgagee identified either in such
Appendix or in any later notice from Landlord to Tenant a copy of any notice of
default sent by Tenant to Landlord. If Landlord fails to cure such default
within the required time period under this Lease, but ground lessor or mortgagee
begins to cure within ten (10) days after such period and proceeds diligently to
complete such cure, then ground lessor or mortgagee shall have such additional
time as is necessary to complete such cure, including any
<PAGE>
time necessary to obtain possession if possession is necessary to cure, and
Tenant shall not begin to enforce its remedies so long as the cure is being
diligently pursued.
E. Definitions. As used in this Section 16, "mortgage" shall include
-----------
"trust deed" and "mortgagee" shall include "trustee", "mortgagee" shall include
the mortgagee of any ground lessee, and "ground lessor", "mortgagee", and
"purchaser at a foreclosure sale" shall include, in each case, all of its
successors and assigns, however remote.
I. ASSIGNMENT AND SUBLEASE.
- --
A. Consent Required. Tenant shall not, without the prior consent of
----------------
Landlord in each case, (i) make or allow any assignment or transfer, by
operation of law or otherwise, of any part of Tenant's interest in this Lease,
(ii) grant or allow any lien or encumbrance, by operation of law or otherwise,
upon any part of Tenant's interest in this Lease, (iii) sublet any part of the
Premises, or (iv) permit anyone other than Tenant and its employees to occupy
any part of the Premises. Landlord may withhold its consent to the assignment or
sublease if Tenant is in default under this Lease, if the proposed assignee or
sublessee is a tenant in the Project or an affiliate of such a tenant, or if the
financial responsibility, nature of business, and character of the proposed
assignee or subtenant are not all reasonably satisfactory to Landlord. Landlord
will not otherwise unreasonably withhold its consent on any other basis to such
an assignment or subletting. No consent granted by Landlord shall relieve Tenant
of any of its obligations under this Lease, nor shall it be deemed to be a
consent to any subsequent assignment or transfer, lien or encumbrance, sublease
or occupancy. Tenant shall pay all of Landlord's attorneys' fees and other
expenses incurred in connection with any consent requested by Tenant or in
reviewing any proposed assignment or subletting. Any assignment or transfer,
grant of lien or encumbrance, or sublease or occupancy without Landlord's prior
written consent shall be void.
A. Procedure. Tenant shall notify Landlord of any proposed
---------
assignment or sublease at least forty-five (45) days prior to its proposed
effective date. The notice shall include the name and address of the proposed
assignee or subtenant, its corporate affiliates in the case of a corporation and
its partners in a case of a partnership, an execution copy of the proposed
assignment or sublease, and sufficient information to permit Landlord to
determine the financial responsibility and character of the proposed assignee or
subtenant. As a condition to any effective assignment of this Lease, the
assignee shall execute and deliver in form satisfactory to Landlord at least
fifteen (15) days prior to the effective date of the assignment, an assumption
of all of the obligations of Tenant under this Lease. As a condition to any
effective sublease, subtenant shall execute and deliver in form satisfactory to
Landlord at least fifteen (15) days prior to the effective date of the sublease,
an agreement to comply with all of Tenant's obligations under this Lease, and at
Landlord's option, an agreement (except for the economic obligations which
subtenant will undertake directly to Tenant) to attorn to Landlord under the
terms of the sublease in the event this Lease terminates before the sublease
expires.
A. Change of Management or Ownership. Any transfer of the
---------------------------------
direct or indirect power to affect the management or policies of Tenant or
direct or indirect change in 40% or more of the ownership interest in Tenant
shall constitute an assignment of this Lease.
<PAGE>
A. Excess Payments. If Tenant shall assign this Lease or
---------------
sublet any part of the Premises for consideration in excess of the pro-rata
portion of Rent applicable to the space subject to the assignment or sublet,
then Tenant shall pay to Landlord as Additional Rent 50% of any such excess
immediately upon receipt.
I. CONVEYANCE BY LANDLORD. If Landlord shall at any time transfer
its interest in the Project or this Lease, Landlord shall be released of any
obligations occurring after such transfer, except the obligation to return to
Tenant any security deposit not delivered to its transferee, and Tenant shall
look solely to Landlord's successors for performance of such obligations. This
Lease shall not be affected by any such transfer.
I. ESTOPPEL CERTIFICATE. Each party shall, within ten (10) days of
receiving a request from the other party, execute, acknowledge in recordable
form, and deliver to the other party or its designee a certificate stating,
subject to a specific statement of any applicable exceptions, that the Lease as
amended to date is in full force and effect, that the Tenant is paying Rent and
other charges on a current basis, and that to the best of the knowledge of the
certifying party, the other party has committed no uncured defaults and has no
offsets or claims. The certifying party may also be required to state the date
of commencement of payment of Rent, the Commencement Date, the Termination Date,
the Base Rent, the current Operating Cost Share Rent and Tax Share Rent
estimates, the status of any improvements required to be completed by Landlord,
and such other matters as may be reasonably requested. Failure to deliver such
statement within the time required shall be conclusive evidence against the non-
certifying party that this Lease, with any amendments identified by the
requesting party, is in full force and effect, that there are no uncured
defaults by the requesting party, that not more than one month's Rent has been
paid in advance, and that the non-certifying party has no claims or offsets
against the requesting party.
I. SECURITY DEPOSIT.
A. Tenant shall deposit with Landlord on the date of this Lease security
for the performance of all of its obligations (the "Security Deposit") in the
amounts set forth in paragraph C of this Section 20 and in the form set forth
below. If Tenant defaults under this Lease, Landlord may use any part of the
Security Deposit to make any defaulted payment, to pay for Landlord's cure of
any defaulted obligation, or to compensate Landlord for any loss or damage
resulting from any default. To the extent any portion of the Security Deposit
is used, Tenant shall within five (5) days after demand from Landlord reinstate
the Letter of Credit (defined below). If Tenant shall perform all of its
obligations under this Lease and return the Premises to Landlord at the end of
the Term, Landlord shall return either all of the remaining Security Deposit or
the Letter of Credit to Tenant. The Security Deposit shall not serve as an
advance payment of Rent or a measure of Landlord's damages for any default under
this Lease.
B. The Security Deposit shall be in the form of an unconditional and
irrevocable letter of credit (the "Letter of Credit"), which Letter of Credit
shall (a) be in the initial amount of $220,000, (b) be in form and substance
satisfactory to Landlord, (c) name Landlord as its beneficiary, (d) expressly
allow Landlord to draw upon it at any time or from time to time by delivering to
the issuer written notice that Landlord is entitled to draw thereunder, (e) be
drawn on an FDIC-insured financial institution satisfactory to Landlord, (f) be
redeemable in the State of New York, (g) be freely assignable by Landlord to any
successor to Landlord's
<PAGE>
interest in the Project. If Landlord is not provided with a substitute Letter of
Credit complying with all of the requirements hereof at least ten (10) days
before the stated expiration date thereof, then Landlord shall have the right to
draw under such Letter of Credit then held by Landlord and hold such funds as a
Security Deposit in accordance with the terms of this Section 20.
C. Provided that Tenant is not in default under any of the terms,
covenants or conditions of the Lease, beginning with the start of the third
Lease Year, and at the start of each Lease Year thereafter, the amount of the
Letter of Credit to be delivered to Landlord may be decreased by $50,000, as
more specifically set forth in the following:
Lease Year Amount of Letter of Credit
----------------------------------------------
1 $220,000
2 $220,000
3 $170,000
4 $120,000
5 $ 70,000
D. If Landlord transfers its interest in the Project or this Lease,
Landlord may transfer the Security Deposit to its transferee. Upon such
transfer, Landlord shall have no further obligation to return the Security
Deposit to Tenant, and Tenant's right to the return of the Security Deposit
shall apply solely against Landlord's transferee.
I. EXTENSION. Subject to Sections 21B and 21C below, the Term of
this Lease may be extended, at the option of Tenant, for one additional period
of five (5) years (the "Renewal Term"). The Renewal Term shall be upon the same
terms, covenants and conditions contained in this Lease, excluding the
provisions of Section 22 and Appendix D of the Lease and except for the amount
of Base Rent payable during the Renewal Term, and any reference in the Lease to
the "Term" of the Lease shall be deemed to include the Renewal Term and apply
thereto, unless it is expressly provided otherwise. Tenant shall have no
extension option beyond the aforesaid five year extension option. Any
termination of this Lease during the initial Term of this Lease shall terminate
all rights under this Section 21.
A. The initial Base Rent during the Renewal Term for any space then
constituting a portion of the Premises shall be at a rate equal to the greater
of (i) the Base Rent (as escalated pursuant to Section 2A above) applicable to
the fifth Lease Year, and (ii) the then prevailing market rate for fully
creditworthy tenants for comparable space in the Building and other first class
office buildings in the vicinity of the Building as reasonably determined by
Landlord. Tenant's obligation to pay Operating Cost Share Rent and Tax Share
Rent pursuant to Section 2A of the Lease shall continue during the Renewal Term.
B. Such option to extend shall be exercised by Tenant delivering an
initial non-binding written notice to Landlord not less than twelve (12) full
calendar months prior to the expiration of the initial Term of this Lease.
Thereafter, Landlord shall calculate the prevailing market rate for the
Premises, which calculation shall reflect the market rate that would be payable
per annum for a term commencing on the first day of the Renewal Term, provided
that such calculation shall be final and shall not be recalculated at the actual
commencement of the Renewal Term (if any).
<PAGE>
Tenant shall give Landlord final binding written notice of intent to exercise
its option to extend, if at all, no later than nine (9) months prior to the
expiration of the initial Term.
C. Tenant's right to exercise its option to extend this Lease pursuant to
this Section 21, is subject to the following conditions: (i) that on the date
that Tenant delivers its final binding written notice of its election to
exercise its option to extend, Tenant is not in default under any of the terms,
covenants or conditions of the Lease, after the expiration of any applicable
notice and cure periods, and (ii) that Tenant shall not have assigned the Lease
or sublet the Premises at any time during the period commencing with the date
that Tenant delivers its final binding written notice to Landlord of its
exercise of such option to extend and ending on the commencement date of the
Renewal Term, or at any time prior to such period, if such assignment or
sublease extends into such period.
D. If Tenant fails to give its initial non-binding written notice of
intent or its final binding written notice of intent to exercise its option to
extend when due as provided in this Section 21, Tenant will be deemed to have
waived such option to extend.
I. RIGHT OF FIRST OFFER. Subject to Section 22B below, during the
Term of this Lease, Tenant shall have and is hereby granted a right of first
offer on any portion of the 19th floor of the Building contiguous to the Leased
Premises that is not originally demised to Tenant under this Lease,
(collectively, the "ROFO Space"), which right shall be exercised in accordance
with the procedures set forth in Section 22A below.
A. If at any time during the Term of this Lease any ROFO Space becomes
available for lease to anyone other than a prior tenant, Landlord shall give
written notice thereof to Tenant (the "Landlord's ROFO Notice") identifying that
portion of the ROFO Space that is available (the "Subject ROFO Space").
Landlord's ROFO Notice may be given at any time up to sixteen (16) months in
advance of such availability and shall contain the terms upon which Landlord
intends to offer the Subject ROFO Space for lease at a market rate to the
market. Tenant shall notify Landlord within ten (10) days of receipt of
Landlord's ROFO Notice whether it desires to lease the Subject ROFO Space on the
terms set forth in Landlord's ROFO Notice; provided, however, that failure to
notify Landlord within said 10-day period shall be deemed a refusal by Tenant.
After any such refusal or deemed refusal, Tenant shall have no further rights to
such Subject ROFO Space and Landlord shall be free to lease such space to any
person or entity for any term. If Tenant exercises its right of first offer
with respect to such Subject ROFO Space, such space shall be added to the
Premises for the remaining Term of the Lease (including the Renewal Term, if
any) on (a) all the terms, covenants and conditions specified in the Landlord's
ROFO Notice, and (b) the terms, covenants and conditions of this Lease to the
extent that such terms, covenants and conditions of this Lease do not conflict
with the terms, covenants and conditions specified in the Landlord's ROFO
Notice; provided, however, that notwithstanding anything herein to the contrary,
during the Renewal Term, if any, Base Rent, Operating Cost Share Rent, Tax Share
Rent and Additional Rent and all other economic terms applicable to any ROFO
Space shall be adjusted in the manner provided in Section 21 hereof, and the
rent and other economic terms described in the Landlord's ROFO Notice shall not
apply during any such Renewal Term, but shall be in accordance with Section 21
above. Any ROFO Space added to the Premises pursuant to this Section 22 shall
become a part of the Premises for all purposes of this Lease, and any reference
in this Lease to the term "Premises" shall be deemed to refer to
<PAGE>
and include such portion of the ROFO Space, except as expressly provided
otherwise in this Lease.
B. Tenant's right to exercise its right of first offer with respect to
any portion of the ROFO Space pursuant to this Section 22, is subject to the
following conditions: (i) that on the date that Tenant delivers its binding
written notice of its election to exercise its right of first offer, Tenant is
not in default under any of the terms, covenants or conditions of the Lease, and
an unmatured event of default has not occurred and is not continuing; and (ii)
that Tenant shall not have assigned the Lease or sublet any portion of the
Premises at any time during the period commencing with the date that Tenant
delivers its binding written notice to Landlord of its exercise of its right of
first offer and ending on the date on which such ROFO Space is available to be
added to the Premises, or at any time prior to such period, if such assignment
or sublease extends into such period.
C. Promptly after Tenant's exercise of its right of first offer pursuant
to this Section 22, Landlord shall prepare an amendment to the Lease to reflect
changes in the size of the Premises, Base Rent, Tenant's Proportionate Share and
any other appropriate terms, due to the addition of the ROFO Space. Tenant
shall execute and return such an amendment to the Lease within fifteen (15) days
after its submission to Tenant.
I. FORCE MAJEURE. Landlord shall not be in default under this
Lease to the extent Landlord is unable to perform any of its obligations on
account of any strike or labor problem, energy shortage, governmental pre-
emption or prescription, national emergency, or any other cause of any kind
beyond the reasonable control of Landlord ("Force Majeure").
I. INTENTIONALLY OMITTED.
I. NOTICES. All notices, consents, approvals and similar
communications to be given by one party to the other under this Lease, shall be
given in writing, mailed or personally delivered as follows:
A. Landlord. To Landlord as follows:
--------
TIAA Realty, Inc. c/o TIAA Realty, Inc.
c/o Office of the Building Teachers Insurance and Annuity
Manager Association of America
230 West Monroe Street 730 Third Avenue
Chicago, Illinois 60606 New York, New York 10017
Attn: Vice President
or to such other person at such other address as Landlord may designate by
notice to Tenant.
A. Tenant. To Tenant at the address stated in the Schedule until
------
Tenant takes possession of the Premises, and thereafter at the Premises or such
other address as Tenant may designate by notice to Landlord.
Mailed notices shall be sent by United States certified or registered mail,
or by a reputable national overnight courier service, postage prepaid. Mailed
notices shall be deemed to have been given upon posting in the United States
mail in the case
<PAGE>
of registered or certified mail, and one business day in the case of overnight
courier.
I. QUIET POSSESSION. So long as Tenant shall perform all of its
obligations under this Lease, Tenant shall enjoy peaceful and quiet possession
of the Premises against any party claiming through the Landlord.
I. REAL ESTATE BROKER. Tenant represents to Landlord that Tenant
has not dealt with any real estate broker with respect to this Lease except for
Miglin-Beitler Management Corporation and any broker listed in the Schedule, and
no other broker is in any way entitled to any broker's fee or other payment in
connection with this Lease. Tenant shall indemnify and defend Landlord against
any claims by any other broker or third party for any payment of any kind in
connection with this Lease.
I. MISCELLANEOUS.
A. Successors and Assigns. Subject to the limits on Tenant's
----------------------
assignment contained in Section 14, the provisions of this Lease shall be
binding upon and inure to the benefit of all successors and assigns of Landlord
and Tenant.
B. Date Payments Are Due. Except for payments to be made by Tenant
---------------------
under this Lease which are due upon demand, Tenant shall pay to Landlord any
amount for which Landlord renders a statement of account within ten days of
Tenant's receipt of Landlord's statement.
C. Meaning of "Landlord", "Re-Entry, "including" and "Affiliate". The
-------------------------------------------------------------
term "Landlord" means only the owner of the Project and the lessor's interest in
this Lease from time to time. The words "re-entry" and "re-enter" are not
restricted to their technical legal meaning. The words "including" and similar
words shall mean "without limitation." The word "affiliate" shall mean a person
or entity controlling, controlled by or under common control with the applicable
entity. "Control" shall mean the power directly or indirectly, by contract or
otherwise, to direct the management and policies of the applicable entity.
D. Time of the Essence. Time is of the essence of each provision of this
-------------------
Lease.
E. No Option. This document shall not be effective for any purpose
---------
until it has been executed and delivered by both parties; execution and delivery
by one party shall not create any option or other right in the other party.
F. Severability. The unenforceability of any provision of this Lease
------------
shall not affect any other provision.
G. Governing Law. This Lease shall be governed in all respects by the
-------------
laws of Illinois, without regard to the principles of conflicts of laws.
H. Lease Modification. Tenant agrees to modify this Lease in any way
------------------
requested by a mortgagee which does not cause increased expense to Tenant or
otherwise materially adversely affect Tenant's interests under this Lease.
I. No Oral Modification. No modification of this Lease shall be
--------------------
effective unless it is a written modification signed by both parties.
<PAGE>
J. Landlord's Right to Cure. If Landlord breaches any of its
------------------------
obligations under this Lease, Tenant shall notify Landlord and shall take no
action respecting such breach so long as Landlord immediately begins to cure the
breach and diligently pursues such cure to its completion. Landlord may cure any
default by Tenant; any expenses incurred shall become Additional Rent due from
Tenant on demand by Landlord.
K. Captions. The captions used in this Lease shall have no effect on the
--------
construction of this Lease.
L. Authority. Landlord and Tenant each represents to the other that it
---------
has full power and authority to execute and perform this Lease.
M. Landlord's Enforcement of Remedies. Landlord may enforce any of its
----------------------------------
remedies under this Lease either in its own name or through an agent.
N. Entire Agreement. This Lease, together with all Appendices,
----------------
constitutes the entire agreement between the parties. No representations or
agreements of any kind have been made by either party which are not contained in
this Lease.
O. Landlord's Title. Landlord's title shall always be paramount to the
----------------
interest of the Tenant, and nothing in this Lease shall empower Tenant to do
anything which might in any way impair Landlord's title.
P. Light and Air Rights. Landlord does not grant in this Lease any
--------------------
rights to light and air in connection with Project. Landlord reserves to itself,
the Land, the Building below the improved floor of each floor of the Premises,
the Building above the ceiling of each floor of the Premises, the exterior of
the Premises and the areas on the same floor outside the Premises, along with
the areas within the Premises required for the installation and repair of
utility lines and other items required to serve other tenants of the Building.
Q. Consents. Neither party shall unreasonably withhold or delay any
--------
consent or approval required under this Lease, except as specifically permitted
in this Lease.
R. Singular and Plural. Wherever appropriate in this Lease, a singular
-------------------
term shall be construed to mean the plural where necessary, and a plural term
the singular. For example, if at any time two parties shall constitute Landlord
or Tenant, then the relevant term shall refer to both parties together.
S. No Recording by Tenant. Tenant shall not record in any public
----------------------
records any memorandum or any portion of this Lease.
T. Exclusivity. Landlord does not grant to Tenant in this Lease any
-----------
exclusive right except the right to occupy its Premises.
U. No Construction Against Drafting Party. The rule of construction
--------------------------------------
that ambiguities are resolved against the drafting party shall not apply to this
Lease.
V. Survival. All obligations of Landlord and Tenant under this Lease
--------
shall survive the termination of this Lease.
<PAGE>
W. Rent Not Based on Income. No rent or other payment in respect of
------------------------
the Premises shall be based in any way upon net income or profits from the
Premises. Tenant may not enter into or permit any sublease or license or other
agreement in connection with the Premises which provides for a rental or other
payment based on net income or profit.
X. Building Manager and Service Providers. Landlord may perform any of
--------------------------------------
its obligations under this Lease through its employees, the building manager
of the Project, or third parties hired by the Landlord or the building manager.
Upon the request of Landlord, Tenant shall enter into a contract approved by
Landlord as to form and content with the building manager of the Project or
third parties designated by Landlord for the furnishing of such services,
provided that no such contract shall require Tenant to make more payments or
accept fewer services than Tenant is entitled to under this Lease.
Y. Interest on Late Payments. Interest shall be paid by Tenant to
-------------------------
Landlord on any late payments of Rent from the date due until paid at the rate
provided in Section 2D(2).
I. UNRELATED BUSINESS INCOME. If Landlord is advised by its counsel
at any time that any part of the payments by Tenant to Landlord under this Lease
may be characterized as unrelated business income under the United States
Internal Revenue Code and its regulations, then Tenant shall enter into any
amendment proposed by Landlord to avoid such income, so long as the amendment
does not require Tenant to make more payments or accept fewer services from
Landlord, than this Lease provides.
I. HAZARDOUS SUBSTANCES. Tenant shall not cause or permit any
Hazardous Substances to be brought upon, produced, stored, used, discharged or
disposed of in or near the Project unless Landlord has consented to such storage
or use in its sole discretion. "Hazardous Substances" include those hazardous
substances described in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the
Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et
seq., any other applicable federal, state or local law, and the regulations
adopted under these laws. If any lender or governmental agency shall require
testing for Hazardous Substances in the Premises, Tenant shall pay for such
testing.
I. EXCULPATION. Landlord shall have no personal liability under
this Lease; its liability shall be limited to its interest in the Project, and
shall not extend to any other property or assets of the Landlord.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease.
TIAA REALTY, INC., a Delaware corporation,
Landlord
By: Teachers Insurance and Annuity Association
of America, a New York corporation, its
authorized representative
By: /S/ Robert D. Loverro
Name: Robert D. Loverro
Title: Assistant Secretary
TENANT:
DIGITAL WORK INC., a Delaware Corporation
By: /s/ Loreen Sieroslawski
Name: Loreen Sieroslawski
Title: Vice President
Finance and Business Operations
<PAGE>
APPENDIX A
PLAN OF THE PREMISES
(attach floor plan depicting the Premises)
APPENDIX A
Page 1 of 1
<PAGE>
APPENDIX B
CLEANING SCHEDULE
Landlord shall furnish janitorial service as described below:
DAILY
-----
Sweep, dry mop (using treated mops), or vacuum all floor areas (moving
light furniture) of resilient wood or carpet, remove matter such as gum and tar
which had adhered to the floor.
Empty and damp wipe all ashtrays and waste baskets and remove all trash.
Dust all horizontal surfaces with treated dust cloth, including furniture,
files, equipment, blinds, and louvers that can be reached without a ladder.
Damp wipe all telephones, including dials and crevices.
Spot wash to remove smudges, marks and fingerprints from such areas as
walls, equipment, doors, partitions and light switches within reach.
Wash and disinfect water fountains and water coolers.
Damp mop all non-resilient floors such as concrete, terrazzo and ceramic
tile.
Empty all waste containers.
Dust and rub down elevator doors, walls, and metal work in elevator cabs.
TOILET ROOMS
------------
Clean mirrors, soap dispensers, shelves, wash basins, exposed plumbing,
dispenser and disposal container exteriors using detergent disinfectant and
water. Damp wipe all ledges, toilet stalls and doors, spot clean light
switches, doors and walls.
Clean toilets and urinals with detergent disinfectant, beginning with seats
and working down. Pour one ounce of bowl cleaner into urinal after cleaning and
do not flush.
Furnish and refill all soap, toilet, sanitary napkin and towel dispensers.
Clean all baseboards.
Damp mop floors using detergent disinfectant.
WEEKLY
------
Wash all directory board, display, entry door and side light glass, as
necessary.
Spot clean carpet stains.
APPENDIX B
Page 1 of 2
<PAGE>
Spot wash interior partition glass and door glass to remove smudge marks,
and all smudge marks and finger marks from doors, partitions, woodwork, window
ledges and window mullions.
APPENDIX B
2 of 2
<PAGE>
MONTHLY
-------
Sweep stairwells and landings.
Wash all uncarpeted areas.
High dust all horizontal and vertical surfaces not reached in nightly
cleaning, such as pipes, light fixtures, door frames, picture frames and other
wall hangings.
QUARTERLY
---------
Vacuum all ceilings and wall air supply and exhaust diffusers or grills.
Wash all stairwell landings and treads.
Exterior windows of the building will be cleaned, weather permitting.
All tile areas to be scrubbed, waxed and buffed.
APPENDIX B
Page 2 of 2
<PAGE>
APPENDIX C
RULES AND REGULATIONS
1. Tenant shall not place anything, or allow anything to be placed near
the glass of any window, door, partition or wall which may, in Landlord's
judgment, appear unsightly from outside of the Project.
2. The Project directory shall be available to Tenant solely to display
names and their location in the Project, which display shall be as directed by
Landlord.
3. The sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by Tenant or used by Tenant for any purposes
other than for ingress to and egress from the Premises. Tenant shall lend its
full cooperation to keep such areas free from all obstruction and in a clean and
sightly condition and shall move all supplies, furniture and equipment as soon
as received directly to the Premises and move all such items and waste being
taken from the Premises (other than waste customarily removed by employees of
the Building) directly to the shipping platform at or about the time arranged
for removal therefrom. The halls, passages, exits, entrances, elevators,
stairways, balconies and roof are not for the use of the general public and
Landlord shall, in all cases, retain the right to control and prevent access
thereto by all persons whose presence in the judgment of Landlord, reasonably
exercised, shall be prejudicial to the safety, character, reputation and
interests of the Project. Neither Tenant nor any employee or invitee of Tenant
shall go upon the roof of the Project.
4. The toilet rooms, urinals, wash bowls and other apparatuses shall not
be used for any purposes other than that for which they were constructed, and no
foreign substance of any kind whatsoever shall be thrown therein, and to the
extent caused by Tenant or its employees or invitees, the expense of any
breakage, stoppage or damage resulting from the violation of this rule shall be
borne by Tenant.
5. Tenant shall not cause any unnecessary janitorial labor or services by
reason of Tenant's carelessness or indifference in the preservation of good
order and cleanliness.
6. Tenant shall not install or operate any refrigerating, heating or air
conditioning apparatus, or carry on any mechanical business without the prior
written consent of Landlord; use the Premises for housing, lodging or sleeping
purposes; or permit preparation or warming of food in the Premises (warming of
coffee and individual meals with employees and guests excepted). Tenant shall
not occupy or use the Premises or permit the Premises to be occupied or used for
any purpose, act or thing which is in violation of any public law, ordinance or
governmental regulation or which may be dangerous to persons or property.
7. Tenant shall not bring upon, use or keep in the Premises or the
Project any kerosene, gasoline or inflammable or combustible fluid or material,
or any other articles deemed hazardous to persons or property, or use any method
of heating or air conditioning other than that supplied by Landlord.
8. Landlord shall have sole power to direct electricians as to where and
how telephone and other wires are to be introduced. No boring or cutting for
wires is to be allowed without the consent of Landlord. The location of
telephones, call boxes
APPENDIX C
Page 1 of 4
<PAGE>
and other office equipment affixed to the Premises shall be subject to the
approval of Landlord.
9. No additional locks shall be placed upon any doors, windows or transoms
in or to the Premises. Tenant shall not change existing locks or the mechanism
thereof. Upon termination of the lease, Tenant shall deliver to Landlord all
keys and passes for offices, rooms, parking lot and toilet rooms which shall
have been furnished Tenant and shall make known to Landlord the combination of
all locks then remaining on the Premises. In the event of the loss of keys so
furnished, Tenant shall pay Landlord therefor. Tenant shall not make, or cause
to be made, any such keys and shall order all such keys solely from Landlord and
shall pay Landlord for any keys in addition to the two sets of keys originally
furnished by Landlord for each lock.
10. Tenant shall not install linoleum, tile, carpet or other floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved by Landlord.
11. No furniture, packages, supplies, equipment or merchandise will be
received in the Project or carried up or down in the freight elevator, except
between such hours and in such freight elevator as shall be designated by
Landlord. Tenant shall not take or permit to be taken in or out of other
entrances of the Building, or take or permit on other elevators, any item
normally taken in or out through the trucking concourse or service doors or in
or on freight elevators.
12. Tenant shall cause all doors to the Premises to be closed and securely
locked and shall turn off all utilities, lights and machines before leaving the
Project at the end of the day.
13. Without the prior written consent of Landlord, Tenant shall not use
the name of the Project or any picture of the Project in connection with, or in
promoting or advertising the business of, Tenant, except Tenant may use the
address of the Project as the address of its business.
14. Tenant shall cooperate fully with Landlord to assure the most
effective operation of the Premises' or the Project's heating and air
conditioning, and shall refrain from attempting to adjust any controls, other
than room thermostats installed for Tenant's use. Tenant shall keep corridor
doors closed.
15. Tenant assumes full responsibility for protecting the Premises from
theft, robbery and pilferage which includes keeping doors locked and other means
of entry to the Premises closed and secured.
16. Peddlers, solicitors and beggars shall be reported to the office of
the Project or as Landlord otherwise requests.
17. Tenant shall not advertise the business, profession or activities of
Tenant conducted in the Project in any manner which violates the letter or
spirit of any code of ethics adopted by any recognized association or
organization pertaining to such business, profession or activities.
18. No bicycle or other vehicle and no animals or pets shall be allowed in
the Premises, halls, freight docks, or any other parts of the Building except
that blind persons may be accompanied by "seeing eye" dogs. Tenant shall not
make or
APPENDIX C
Page 2 of 4
<PAGE>
permit any noise, vibration or odor to emanate from the Premises, or do anything
therein tending to create, or maintain, a nuisance, or do any act tending to
injure the reputation of the Building.
19. Tenant acknowledges that Building security problems may occur which
may require the employment of extreme security measures in the day-to-day
operation of the Project.
Accordingly:
(a) Landlord may, at any time, or from time to time, or for regularly
scheduled time periods, as deemed advisable by Landlord and/or its agents, in
their sole discretion, require that persons entering or leaving the Project or
the Property identify themselves to watchmen or other employees designated by
Landlord, by registration, identification or otherwise.
(b) Tenant agrees that it and its employees will cooperate fully with
Project employees in the implementation of any and all security procedures.
(c) Such security measures shall be the sole responsibility of
Landlord, and Tenant shall have no liability for any action taken by Landlord in
connection therewith.
20. Tenant shall not do or permit the manufacture, sale, purchase, use or
gift of any fermented, intoxicating or alcoholic beverages without obtaining
written consent of Landlord.
21. Tenant shall not disturb the quiet enjoyment of any other tenant.
22. Tenant shall not provide any janitorial services or cleaning without
Landlord's written consent and then only subject to supervision of Landlord and
at Tenant's sole responsibility and by janitor or cleaning contractor or
employees at all times satisfactory to Landlord.
23. Landlord may retain a pass key to the Premises and be allowed
admittance thereto at all times to enable its representatives to examine the
Premises from time to time and to exhibit the same and Landlord may place and
keep on the windows and doors of the Premises at any time signs advertising the
Premises for Rent.
24. No equipment, mechanical ventilators, awnings, special shades or other
forms of window covering shall be permitted either inside or outside the windows
of the Premises without the prior written consent of Landlord, and then only at
the expense and risk of Tenant, and they shall be of such shape, color,
material, quality, design and make as may be approved by Landlord.
25. Tenant shall not during the term of this Lease canvas or solicit other
tenants of the Building for any purpose.
26. Tenant shall not install or operate any phonograph, musical or
sound-producing instrument or device, radio receiver or transmitter, TV receiver
or transmitter, or similar device in the Building, nor install or operate any
antenna, aerial, wires or other equipment inside or outside the Building, nor
operate any electrical device from which may emanate electrical waves which may
interfere with or impair radio or television broadcasting or reception from or
in the Building or
APPENDIX C
Page 3 of 4
<PAGE>
elsewhere, without in each instance the prior written approval of Landlord. The
use thereof, if permitted, shall be subject to control by Landlord to the end
that others shall not be disturbed.
27. Tenant shall promptly remove all rubbish and waste from the Premises.
28. Tenant shall not exhibit, sell or offer for sale, Rent or exchange in
the Premises or at the Project any article, thing or service, except those
ordinarily embraced within the use of the Premises specified in Section 6 of
this Lease, without the prior written consent of Landlord.
29. Tenant shall list all furniture, equipment and similar articles Tenant
desires to remove from the Premises or the Building and deliver a copy of such
list to Landlord and procure a removal permit from the office of the Building
authorizing Building employees to permit such articles to be removed.
30. Tenant shall not overload any floors in the Premises or any public
corridors or elevators in the Building.
31. Tenant shall not do any painting in the Premises, or mark, paint, cut
or drill into, drive nails or screws into, or in any way deface any part of the
Premises or the Building, outside or inside, without the prior written consent
of Landlord.
32. Whenever Landlord's consent, approval or satisfaction is required
under these Rules, then unless otherwise stated, any such consent, approval or
satisfaction must be obtained in advance, such consent or approval may be
granted or withheld in Landlord's sole discretion, and Landlord's satisfaction
shall be determined in its sole judgment.
33. Tenant and its employees shall cooperate in all fire drills conducted
by Landlord in the Building.
APPENDIX C
Page 4 of 4
<PAGE>
APPENDIX D
TENANT IMPROVEMENT AGREEMENT
1. INITIAL IMPROVEMENTS. Landlord shall cause to be performed the
improvements (the "Initial Improvements") in the Premises provided for in the
plans and specifications to be reasonably and mutually agreed to by Landlord and
Tenant (the "Plans"). The Initial Improvements shall be performed by a
contractor approved by Landlord (which approval Landlord may withhold in its
sole discretion) (the "Contractor"). Landlord shall use commercially reasonable
efforts to cause the Work to be substantially completed on or before the
Commencement Date specified in the Schedule to the Lease, subject to "Tenant
Delay" (as defined in Section 4 hereof) and any Force Majeure.
2. ADDITIONAL IMPROVEMENTS. If Tenant shall require improvements
("Additional Improvements") to the Premises in addition to or substitution for
the Initial Improvements, Tenant shall deliver to Landlord for its approval
plans and specifications for such Additional Improvements. If Landlord does not
approve of the plans for Additional Improvements, Landlord shall advise Tenant
of the changes required. Tenant shall revise and redeliver the plans and
specifications to Landlord within five (5) business days of Landlord's advice or
Tenant shall be deemed to have abandoned its request for such Additional
Improvements. Tenant shall pay for all preparations and revisions of plans and
specifications, and the construction of all Additional Improvements.
3. LANDLORD'S CONTRIBUTION. Landlord shall contribute an amount up to
$174,318 ($17.00 x 10,254 r.s.f.) ("Landlord's Contribution") toward the costs
incurred by Landlord for the Initial Improvements, including without limitation,
the cost of any architecture fees. Landlord has no obligation to pay for costs
of the Initial Improvements in excess of Landlord's Contribution. If the cost of
the Initial Improvements exceeds the Landlord's Contribution, Tenant shall pay
such overage to Landlord prior to commencement of construction of the Initial
Improvements. Tenant shall also pay to Landlord prior to commencement of
construction, the cost of all Additional Improvements. Notwithstanding anything
to the contrary contained in this Lease, the Landlord's Contribution shall be
available to Tenant for a period of twenty-four months after the Commencement
Date. If Tenant fails to use any portion of the Landlord's Contribution within
such twenty-four (24) month period, any such portion shall be unavailable to
Tenant.
4. COMMENCEMENT DATE DELAY. The Commencement Date shall be delayed until
the Initial Improvements have been substantially completed (the "Completion
Date"), except to the extent that the delay shall be caused by any one or more
of the following a ("Tenant Delay"):
(a) Tenant's request for Additional Improvements whether or not any
such Additional Improvements are actually performed; or
(b) Contractor's performance of any Additional Improvements; or
(c) Tenant's request for materials, finishes or installations
requiring unusually long lead times; or
APPENDIX D
Page 1 of 12
<PAGE>
(d) Any other act or omission by Tenant, its agents, contractors or
persons employed by any of such persons.
If the Commencement Date is delayed for any reason, then Landlord shall cause
Landlord's Architect to certify the date on which the Initial Improvements would
have been completed but for such Tenant Delay, or were in fact completed without
any Tenant Delay.
5. ACCESS BY TENANT PRIOR TO COMMENCEMENT OF TERM. Landlord at its
discretion may permit Tenant and its agents to enter the Premises prior to the
Commencement Date to prepare the Premises for Tenant's use and occupancy. Any
such permission shall constitute a license only, conditioned upon Tenant's:
(a) working in harmony with Landlord and Landlord's agents, contractors,
workmen, mechanics and suppliers and with other tenants and occupants of the
Building;
(b) obtaining in advance Landlord's approval of the contractors proposed to
be used by Tenant and depositing with Landlord in advance of any work (i)
security satisfactory to Landlord for the completion thereof, and (ii) the
general contractor's affidavit for the proposed work and the waivers of lien
from the general contractor and all subcontractors and suppliers of material;
and
(c) furnishing Landlord with such insurance as Landlord may require against
liabilities which may arise out of such entry.
Landlord shall have the right to withdraw such license for any reason upon
twenty-four (24) hours' written notice to Tenant. Landlord shall not be liable
in any way for any injury, loss or damage which may occur to any of Tenant's
property or installations in the Premises prior to the Commencement Date. Tenant
shall protect, defend, indemnify and save harmless Landlord from all
liabilities, costs, damages, fees and expenses arising out of the activities of
Tenant or its agents, contractors, suppliers or workmen in the Premises or the
Building. Any entry and occupation permitted under this Section shall be
governed by Section 5 and all other terms of the Lease.
6. MISCELLANEOUS.
Terms used in this Appendix D shall have the meanings assigned to them in
the Lease. The terms of this Appendix D are subject to the terms of the Lease.
APPENDIX D
Page 2 of 2
<PAGE>
APPENDIX E
MORTGAGES CURRENTLY AFFECTING THE PROJECT
-----------------------------------------
None.
APPENDIX E
Page 1 of 1
<PAGE>
Lease
230 West Monroe
Chicago, Illinois
<TABLE>
<CAPTION>
Page
<S> <C>
1. LEASE AGREEMENT................................................................. 2
2. RENT 2
A. Types of Rent............................................................... 2
(1) Base Rent.............................................................. 2
(2) Operating Cost Share Rent.............................................. 2
(3) Tax Share Rent......................................................... 2
(4) Additional Rent........................................................ 2
(5) Rent................................................................... 2
B. Payment of Operating Cost Share Rent and Tax Share Rent..................... 2
(1) Payment of Estimated Operating Cost
Share Rent and Tax Share Rent.......................................... 2
(2) Correction of Operating Cost Share Rent................................ 3
(3) Correction of Tax Share Rent........................................... 3
C. Definitions................................................................. 3
(1) Taxes.................................................................. 3
(2) Operating Costs........................................................ 3
(3) Fiscal Year............................................................ 4
D. Computation of Base Rent and Rent Adjustments............................... 4
(1) Prorations............................................................. 4
(2) Default Interest....................................................... 5
(3) Rent Adjustments....................................................... 5
(4) Books and Records...................................................... 5
(5) Miscellaneous.......................................................... 5
3. PREPARATION AND CONDITION OF PREMISES; POSSESSION AND SURRENDER OF PREMISES..... 5
A. Condition of Premises...................................................... 5
B. Tenant's Possession........................................................ 6
C. Maintenance................................................................ 6
D. Ownership of Improvements.................................................. 6
E. Removal at Termination..................................................... 6
4. PROJECT SERVICES................................................................ 6
A. Heating and Air Conditioning............................................... 6
B. Elevators.................................................................. 7
C. Electricity................................................................ 7
D. Water...................................................................... 7
E. Janitorial Service......................................................... 7
F. Telephone Service.......................................................... 7
G. Interruption of Services................................................... 7
5. ALTERATIONS AND REPAIRS......................................................... 8
A. Landlord's Consent and Conditions.......................................... 8
B. Electronic Systems......................................................... 8
C. Damage to Systems.......................................................... 8
D. No Liens................................................................... 9
</TABLE>
APPENDIX F
Page 1 of 1
<PAGE>
<TABLE>
<S> <C>
6. USES OF PREMISES................................................................... 9
7. GOVERNMENTAL REQUIREMENTS AND BUILDING RULES....................................... 9
8. WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE....................................... 9
A. Waiver of Claims............................................................. 9
B. Indemnification.............................................................. 9
C. Insurance Coverage........................................................... 10
D. Insurance Certificates....................................................... 10
9. FIRE AND OTHER CASUALTY............................................................ 10
A. Termination.................................................................. 10
B. Restoration.................................................................. 10
10. EMINENT DOMAIN..................................................................... 11
11. RIGHTS RESERVED TO LANDLORD........................................................ 11
A. Name......................................................................... 11
B. Signs........................................................................ 11
C. Window Treatments............................................................ 11
D. Service Contracts............................................................ 11
E. Keys......................................................................... 11
F. Access....................................................................... 11
G. Preparation for Reoccupancy.................................................. 11
H. Heavy Articles............................................................... 11
I. Show Premises................................................................ 11
J. Restrict Access.............................................................. 11
K. Relocation of Tenant......................................................... 12
L. Use of Lockbox............................................................... 12
M. Repairs and Alterations...................................................... 12
N. Landlord's Agents............................................................ 12
O. Building Services............................................................ 12
P. Other Actions................................................................ 12
12. TENANT'S DEFAULT................................................................... 12
A. Rent Default................................................................. 12
B. Assignment/Sublease or Hazardous Substances Default.......................... 12
C. Other Performance Default.................................................... 13
D. Credit Default............................................................... 13
13. LANDLORD REMEDIES.................................................................. 13
A. Termination of Lease or Possession........................................... 13
B. Lease Termination Damages.................................................... 13
C. Possession Termination Damages............................................... 13
D. Landlord's Remedies Cumulative............................................... 13
E. Waiver of Trial by Jury...................................................... 14
14. SURRENDER.................................................................... 14
15. HOLDOVER..................................................................... 14
16. SUBORDINATION TO GROUND LEASES AND MORTGAGES....................................... 14
A. Subordination................................................................ 14
B. Termination of Ground Lease or Foreclosure of Mortgage....................... 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
C. Security Deposit................................................... 15
D. Notice and Right to Cure........................................... 15
E . Definitions........................................................ 15
17. ASSIGNMENT AND SUBLEASE................................................. 15
A. Consent Required................................................... 15
B. Procedure.......................................................... 15
C. Change of Management or ownership.................................. 16
D. Excess Payments.................................................... 16
18. CONVEYANCE BY LANDLORD.................................................. 16
19. ESTOPPEL CERTIFICATE.................................................... 16
20. SECURITY DEPOSIT........................................................ 16
21. EXTENSION............................................................... 17
22. RIGHT OF FIRST OFFER.................................................... 18
23. FORCE MAJEURE........................................................... 19
24. INTENTIONALLY OMITTED................................................... 19
25. NOTICES................................................................. 19
A. Landlord........................................................... 19
B. Tenant............................................................. 19
26. QUIET POSSESSION........................................................ 19
27. REAL ESTATE BROKER...................................................... 19
28. MISCELLANEOUS........................................................... 19
A. Successors and Assigns............................................. 19
B. Date Payments Are Due.............................................. 19
C. Meaning of "Landlord", "Re-Entry", "including" and "Affiliate"..... 19
D. Time of the Essence................................................ 20
E. No Option.......................................................... 20
F. Severability....................................................... 20
G. Governing Law...................................................... 20
H. Lease Modification................................................. 20
I. No Oral Modification............................................... 20
J. Landlord's Right to Cure........................................... 20
K. Captions........................................................... 20
L. Authority.......................................................... 20
M. Landlord's Enforcement of Remedies................................. 20
N. Entire Agreement................................................... 20
0. Landlord's Title................................................... 20
P. Light and Air Rights............................................... 20
Q. Consents........................................................... 20
R. Singular and Plural................................................ 20
S. No Recording by Tenant............................................. 21
T. Exclusivity........................................................ 21
U. No Construction Against Drafting Party............................. 21
V. Survival........................................................... 21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C> <C>
W. Rent Not Based on Income.......................................... 21
X. Building Manager and Service Providers............................ 21
Y. Interest on Late Payments......................................... 21
30. HAZARDOUS SUBSTANCES................................................... 21
31. EXCULPATION............................................................ 21
</TABLE>
APPENDIX A - PLAN OF THE PREMISES
APPENDIX B - CLEANING SCHEDULE
APPENDIX C - RULES AND REGULATIONS
APPENDIX D - TENANT IMPROVEMENT AGREEMENT
APPENDIX E - MORTGAGES CURRENTLY AFFECTING THE PROJECT
<PAGE>
Exhibit 10.19
- -------------
FIRST AMENDMENT TO LEASE
------------------------
THIS FIRST AMENDMENT TO LEASE (this "Amendment") is made and entered into
---------
as of this day of __________, 1999 by and between TIAA REALTY, INC., a
Delaware corporation ("Landlord") and DIGITAL WORKS INC., a Delaware corporation
--------
("Tenant").
------
W I T N E S S E T H
-------------------
WHEREAS, Landlord and Tenant have heretofore entered into that certain
lease dated as of June 3, 1999 (the "Lease"), pursuant to which Landlord leased
-----
to Tenant approximately 10,254 rentable square feet of space located on the
nineteenth (19th) floor (the "Original Premises") in the building commonly known
-----------------
as 230 West Monroe Street, situated at the northeast corner of Monroe and
Franklin Streets in Chicago, Illinois (the "Building"), as more particularly set
--------
forth in the Lease;
WHEREAS, Landlord and Tenant desire to amend and supplement the Lease
according to the terms hereof to extend the Term of the Lease with respect to
the Original Premises and to evidence Tenant's expansion into the Additional
Space (as hereinafter defined);
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant
hereby to modify and amend the Lease as follows:
I. Controlling Language. Insofar as the specific terms and provisions of
--------------------
this Amendment purport to amend or modify or are in conflict with the specific
terms, provisions and exhibits of the Lease, the terms and provisions of this
Amendment shall govern and control; in all other respects, the terms, provisions
and exhibits of the Lease shall remain unmodified in full force and effect.
I. Term of Lease. The Term of the Lease was heretofore scheduled to
-------------
expire on August 31, 2004. Landlord and Tenant hereby agree that the Term of the
Lease is hereby extended for an additional period of four (4) months, commencing
on September 1, 2004 ("Extension Commencement Date") and ending on December 31,
---------------------------
2004 ("Extension Term") on all the terms, covenants and conditions of the Lease,
--------------
except as set forth in this Section 2. Any reference in the Lease to the "Term"
of Lease shall be deemed to include Extension Term. Any reference to the
"Termination Date" in the Lease shall be deemed to refer to December 31, 2004.
<PAGE>
Beginning on the Extension Commencement Date and for the duration of the
Extension Term, Tenant shall, with respect to the Original Premises, pay to
Landlord Base Rent in monthly installments in advance on or before the first day
of each month of the Extension Term as set forth in the following schedule:
Monthly
Installment
Base Rent of Base Rent
-----------------------------------
Extension Term $57,559.12 $ 14,389.78
Tenant shall, during the Extension Term, continue to pay, with respect to the
Original Premises, Operating Cost Share Rent, Tax Share Rent and Additional Rent
as required by the Lease. Tenant shall, during the Extension Term, pay rent with
respect to the Additional Space as set forth in Section 3 below.
I. Additional Space. Landlord shall lease to Tenant the approximately
----------------
12,159 rentable square feet of space on the twentieth (20th) floor of the
Building depicted on Exhibit A attached hereto and made a part hereof (the
---------
"Additional Space") for a term commencing upon the earlier to occur of (a)
----------------
January 1, 2000 or (b) the date the Additional Space Build-Out (as hereinafter
defined) has been substantially completed (the "Additional Space Commencement
-----------------------------
Date") and ending on the last day of the Term of the Lease, as extended by
- ----
Section 2 above. The Additional Space shall be included in the term "Premises"
as such term used in the Lease shall be subject to all the terms and conditions
of the Lease except to the extent expressly modified hereby, and except for
Section 2A of the Lease, Items 4, 10, 11 and 12 of the Schedule to the Lease,
and Appendix D to the Lease.
I. Additional Space Rent. Beginning on the Additional Space Commencement
---------------------
Date and for the remainder of the Term of the Lease, as extended by Section 2
above, Tenant shall pay to Landlord, in addition to (and not in substitution of)
the Rent Tenant is obligated to pay under the Lease with respect to the Original
Premises, the following:
A. Base Rent to be paid, in monthly installments in advance on or before
---------
the first day of each month set forth in the following schedule:
<PAGE>
Monthly
Installment
Period Base Rent of Base Rent
First Additional $185,424.75 $15,452.06
Space Lease Year
Second Additional $191,017.89 $15,918.16
Space Lease Year
Third Additional $196,732.62 $16,394.39
Space Lease Year
Fourth Additional $202,568.94 $16,880.75
Space Lease Year
Fifth Additional $208,648.44 $17,387.37
Space Lease Year
For the purposes of this Amendment, "First Additional Space Lease
----------------------------
Year" shall mean the period commencing on the Additional Space Commencement
Date and ending December 31, 2000 (which period Landlord and Tenant
acknowledge may be greater than twelve months), and each subsequent
"Additional Space Lease Year" shall be the period of twelve calendar months
---------------------------
following the last day of the prior Additional Space Lease Year.
A. Operating Cost Share Rent in an amount equal to one hundred
-------------------------
percent (100%) of Tenant's Additional Space Proportionate Share (hereinafter
defined) of Operating Costs for the applicable fiscal year of the Lease.
Operating Cost Share Rent shall be paid monthly in advance in an estimated
amount, as adjusted by Landlord from time to time.
A. Tax Share Rent in an amount equal to one hundred percent (100%)
--------------
of Tenant's Additional Space Proportionate Share of Taxes for the applicable
fiscal year of the Lease. Tax Share Rent shall be paid monthly in advance in an
estimated amount, as adjusted by Landlord from time to time.
A. Additional Rent consisting of all of the sums, liabilities,
---------------
obligations and other amounts (excepting Base Rent, Operating Cost Share Rent
and Tax Share Rent) which Tenant is required to pay or discharge pursuant to the
Lease or this Amendment (including, without limitation, any
<PAGE>
amounts which the Lease or this Amendment provides shall be Tenant's cost or
expense), together with interest for late payment thereon, all as hereafter or
in the Lease provided.
For purposes of this Amendment, "Tenant's Additional Space Proportionate
Share" shall mean 2.12%.
This Section 4 of this Amendment is intended to supplement the terms of the
Lease. Nothing in this Section 4 of this Amendment is intended to modify or
change the terms and conditions applicable to Base Rent, Operating Cost Share
Rent, Tax Share Rent or Additional Rent with respect to the Original Premises.
Any references herein or in the Lease to Base Rent, Operating Cost Share Rent,
Tax Share Rent or Additional Rent shall be deemed to apply to the Original
Premises and Tenant's Proportionate Share with respect thereto, or to the
Additional Space and Tenant's Additional Space Proportionate Share, as the case
may be. The definition of Taxes and Operating Costs shall be as set forth in
Section 2C of the Lease. Operating Cost Share Rent and Tax Share Rent for both
the Original Premises and the Additional Space shall be paid in the manner set
forth in Section 2B of the Lease.
I. Condition of Additional Space. Except for latent defects
-----------------------------
relating to the Additional Space of which Tenant notifies Landlord within one
year of the Additional Space Commencement Date, Landlord is leasing the
Premises, including the Additional Space, to Tenant for the remainder of the
Term of the Lease "AS IS", without any representations or warranties of any kind
(including, without limitation, any express or implied warranties of
merchantability, fitness or habitability) and without any obligation on the part
of Landlord to alter, remodel, improve, repair, or decorate the Premises or any
part thereof.
I. Tenant Construction Allowance. Landlord hereby agrees to provide
-----------------------------
Tenant with an amount not to exceed Three Hundred Sixty-Four Thousand Seven
Hundred Seventy and No/100 Dollars ($364,770) ($30.00 X 12,159 rentable square
feet) (the "Tenant Construction Allowance") to be applied toward costs of
-----------------------------
construction, preparation of architectural and mechanical drawings, and Tenant's
architectural fees in connection with the build-out of the Additional Space in
accordance with plans and specifications approved by Landlord in accordance with
Section 5 of the Lease (the "Additional Space Build-Out"). The Additional Space
--------------------------
Build-Out shall be performed by Tenant in accordance with Section 5 of the
Lease. In addition, Tenant shall not perform the Additional Space Build-Out
until it has obtained Landlord's prior written consent to all contracts
relating to the construction and performance of the Additional Space Build-Out.
If the total costs incurred by Tenant in connection
<PAGE>
with the Additional Space Build-Out exceed the Tenant Construction Allowance
("Excess Costs"), Tenant hereby acknowledges that all of such Excess Costs shall
------------
be borne entirely by Tenant, and Tenant hereby agrees to pay such Excess Costs
upon demand. If the cost of the Additional Space Build-Out are less than the
Tenant Construction Allowance, such excess shall be retained by Landlord and
Tenant shall have no right thereto. Upon written request of Tenant (not more
frequently than once each month), Landlord shall pay all or any portion of the
Tenant Construction Allowance to Tenant, within thirty (30) days after receipt
of (i) invoices evidencing payment of all Excess Costs, (ii) evidence
satisfactory to Landlord that the work covered by such invoices and any other
work for which reimbursement from the Tenant Construction Allowance is sought
has been completed in a satisfactory manner, (iii) lien waivers and sworn
affidavits covering all work performed or otherwise reasonably requested by
Landlord, (iv) marked copies of the originally approved plans and specifications
showing changes made in constructing the Additional Space Build-Out after such
plans and specifications were initially approved by Landlord (any such changes
must be approved by Landlord in the same manner as the initial plans and
specifications); and (v) such other documentation as Landlord may reasonably
require under the circumstances. Tenant shall deliver as-built plans to Landlord
upon completion of the Additional Space Build-Out.
Landlord shall permit Tenant and its agents to enter the Additional Space
subsequent to the date of this Amendment, but prior to the Additional Space
Commencement Date to prepare the Additional Space for Tenant's use and
occupancy. Any such permission shall constitute a license only, conditioned
upon Tenant's: (a) working in harmony with Landlord and Landlord's agents,
contractors, workmen, mechanics and suppliers and with other tenants and
occupants of the Building; (b) obtaining in advance Landlord's approval of the
contractors proposed to be used by Tenant and depositing with Landlord in
advance of any work (i) security satisfactory to Landlord for the payment of any
Excess Costs, and (ii) the general contractor's affidavit for the proposed work
and the waivers of lien from the general contractor and all subcontractors and
suppliers of material; and (c) furnishing Landlord with such insurance as
Landlord may require against liabilities which may arise out of such entry.
Landlord shall have the right to withdraw such license for any reason upon
twenty-four (24) hours' written notice to Tenant. Landlord shall not be liable
in any way for any injury, loss or damage which may occur to any of Tenant's
property or installations in the Additional Space prior to the Additional Space
Commencement Date. Tenant shall protect, defend, indemnify and save harmless
Landlord from all liabilities, costs, damages, fees and expenses arising out of
the activities of Tenant or its
<PAGE>
agents, contractors, suppliers or workmen in the Additional Space or the
Building. Any entry and occupation permitted under this Section shall be
governed by Section 6 of the Lease and all other terms of the Lease.
Tenant's plans and specifications shall comply with all applicable
statutes, ordinances, regulations, laws and codes. Landlord's approval of the
Tenant's plans and specifications or any modifications or changes thereto shall
not impose upon Landlord or its agents or representatives any obligation with
respect to the design of the Additional Space Build-Out or with respect to the
compliance of the Additional Space Build-Out and/or such Tenant's plans and
specifications (or modifications or changes thereto) with applicable laws,
codes, ordinances and regulations, it being expressly understood that the
obligation with respect to the design of the Additional Space Build-Out and its
compliance with applicable law, codes, ordinances and regulations rests with the
Tenant and the party responsible for preparing such Tenant's plans and
specifications.
I. Intentionally Omitted.
---------------------
I. Right of First Offer. Subject to Section 8B below, and subject
--------------------
to any expansion or renewal options of any current tenant or tenants in the
Building (each individually, a "Prior Tenant"), during the Term of the Lease,
------------
Tenant shall have and is hereby granted a right of first offer on the portion of
the space located on the 20th floor of the Building depicted on Exhibit B
---------
attached hereto (collectively, the "ROFO Space"), which right shall be exercised
----------
in accordance with the procedures set forth in Section 8A below.
1. If at any time during the Term of the Lease any ROFO Space
becomes available for lease to anyone other than a Prior Tenant, Landlord shall
give written notice thereof to Tenant (the "Landlord's ROFO Notice") identifying
----------------------
that portion of the ROFO Space that is available (the "Subject ROFO Space").
------------------
Landlord's ROFO Notice may be given at any time up to sixteen (16) months in
advance of such availability and shall contain the terms upon which Landlord
intends to offer the Subject ROFO Space for lease to the market. Tenant shall
notify Landlord within ten (10) days of receipt of Landlord's ROFO Notice
whether it desires to lease the Subject ROFO Space on the terms set forth in
Landlord's ROFO Notice; provided, however, that failure to notify Landlord
within said 10-day period shall be deemed a refusal by Tenant. After any such
refusal or deemed refusal, Tenant shall have no further rights to such Subject
ROFO Space and Landlord shall be free to lease such space to any person or
entity for any term. If Tenant exercises its right of first offer with respect
to such Subject ROFO Space, such space shall be added to the Premises on (a) all
<PAGE>
the terms, covenants and conditions specified in the Landlord's ROFO Notice,
including without limitation the rent and the term set forth therein, and (b)
the terms, covenants and conditions of this Lease to the extent that such terms,
covenants and conditions of this Lease do not conflict with the terms, covenants
and conditions specified in the Landlord's ROFO Notice. Any ROFO Space added to
the Premises pursuant to this Section 8 shall become a part of the Premises for
all purposes of this Lease, and any reference in this Lease to the term
"Premises" shall be deemed to refer to and include such portion of the ROFO
Space, except as expressly provided otherwise in this Lease.
1. Tenant's right to exercise its right of first offer with respect
to any portion of the ROFO Space pursuant to this Section 8, is subject to the
following conditions: (i) that on the date that Tenant delivers its binding
written notice of its election to exercise its right of first offer, Tenant is
not in default under any of the terms, covenants or conditions of the Lease, and
an unmatured event of default has not occurred and is not continuing; and (ii)
that Tenant shall not have assigned the Lease or sublet any portion of the
Premises at any time during the period commencing with the date that Tenant
delivers its binding written notice to Landlord of its exercise of its right of
first offer and ending on the date on which such ROFO Space is available to be
added to the Premises, or at any time prior to such period, if such assignment
or sublease extends into such period.
1. Promptly after Tenant's exercise of its right of first offer
pursuant to this Section 8, Landlord shall prepare an amendment to the Lease to
reflect changes in the size of the Premises, Base Rent, Tenant's Proportionate
Share and any other appropriate terms, due to the addition of the ROFO Space.
Tenant shall execute and return such an amendment to the Lease within fifteen
(15) days after its submission to Tenant.
I. Additional Security Deposit. A. In addition to and not in
---------------------------
replacement of the Security Deposit required pursuant to Section 20 of the
Lease, Tenant shall deposit with Landlord on the date of this Amendment as
security for the performance of all of its obligations under the Lease, as
amended by this Amendment, an amount of $350,000 (the "Additional Security
-------------------
Deposit", which Additional Security Deposit is, together with the Security
- -------
Deposit described in Section 20 of the Lease, are referred to collectively
herein as the "Security Deposit").
----------------
The Additional Security Deposit shall be in the form of an unconditional
and irrevocable letter of credit, which letter of credit shall (a) be in the
initial amount of $350,000, (b) be in form and substance satisfactory to
<PAGE>
Landlord, (c) name Landlord as its beneficiary, (d) expressly allow Landlord to
draw upon it at any time or from time to time by delivering to the issuer
written notice that Landlord is entitled to draw thereunder, (e) be drawn on an
FDIC-insured financial institution satisfactory to Landlord, (f) be redeemable
in the State of New York, and (g) be freely assignable by Landlord to any
successor to Landlord's interest in the Project. If Landlord is not provided
at least ten (10) days before the stated expiration date thereof, then Landlord
shall have the right to draw under such letter of credit then held by Landlord
and hold such funds as a Security Deposit as defined in and in accordance with
the terms of Section 20 of the Lease.
Except as provided in Section 9B. below (which with respect to the Letter
of Credit deposited as the Additional Security Deposit pursuant to this Section
9 only, supersedes Section 20C of the Lease), all terms and conditions of the
Lease regarding Tenant's Security Deposit shall apply equally to the Additional
Security Deposit and to the Security Deposit made pursuant to Section 20 of the
Lease.
B. Provided that Tenant is not in default under any of the terms,
covenants or conditions of the Lease, beginning with the first day of the third
Additional Space Lease Year, and at the first day of each Additional Space Lease
Year thereafter, the amount of the Letter of Credit delivered as the Additional
Security Deposit pursuant to this Section 9 may be decreased in the following
manner:
Additional Space Amount of Additional Security
Lease Year Deposit Letter of Credit
---------- ------------------------
1 $350,000.00
2 $350,000.00
3 $266,197.00
4 $186,140.00
5 $ 97,701.00
I. Incorporation of Lease. Landlord and Tenant hereby agree that
----------------------
(a) this Amendment is incorporated into and made a part of the Lease, (b) any
and all references herein to the Lease shall include this Amendment, and (c) the
Lease and all terms, conditions and provisions of the Lease are in full force
and effect as of the date hereof, except as expressly modified and amended
hereinabove.
I. Defined Terms. All terms capitalized but not defined herein
-------------
shall have the same meaning ascribed to such terms in the Lease. The marginal
headings and titles to the
<PAGE>
paragraphs of this Amendment are not a part of this Amendment and shall have no
effect upon the construction or interpretation of any part hereof.
I. Governing Law. This Amendment shall be governed by and construed
-------------
under the laws of the State of Illinois.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
LANDLORD: TENANT:
TIAA REALTY, INC., DIGITAL WORKS, INC., a Delaware
a Delaware corporation corporation
By: Teachers Insurance and
Annuity Association of
America, its authorized By: /s/ Loreen Sieroslawski
representative Name: Loreen Sieroslawski
Title: Vice President Finance
By: /s/ S. Marc Flannery
Name:
Title:_____________________
<PAGE>
EXHIBIT A
---------
Plan of Additional Space
<PAGE>
EXHIBIT 10.19
- -------------
SECOND AMENDMENT TO LEASE
-------------------------
THIS SECOND AMENDMENT TO LEASE (this "Amendment") is made and entered into
---------
as of this ________ day of ______________, 1999 by and between TIAA REALTY,
INC., a Delaware corporation ("Landlord") and DIGITAL WORKS INC., a Delaware
--------
corporation ("Tenant").
------
W I T N E S S E T H
-------------------
WHEREAS, Landlord and Tenant have heretofore entered into that certain
lease dated as of June 3, 1999 (the "Original Lease"), pursuant to which
--------------
Landlord leased to Tenant approximately 10,254 rentable square feet of space
located on the nineteenth (19th) floor (the "Original Premises") in the building
-----------------
commonly known as 230 West Monroe Street, situated at the northeast corner of
Monroe and Franklin Streets in Chicago, Illinois (the "Building"), as more
--------
particularly set forth in the Lease;
WHEREAS, Landlord and Tenant have heretofore entered into that certain
First Amendment to Lease, dated November 17, 1999 (the "First Amendment"); the
---------------
Original Lease and the First Amendment are referred to collectively herein as,
the "Lease") to extend the Term of the Lease with respect to the Original
-----
Premises and to evidence Tenant's expansion into the Additional Space (as
defined in the First Amendment);
WHEREAS, Tenant desires to lease certain space in the Building on a short-
term basis;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant
hereby agree as follows:
I. Controlling Language. Insofar as the specific terms and
--------------------
provisions of this Amendment purport to amend or modify or are in conflict with
the specific terms, provisions and exhibits of the Lease, the terms and
provisions of this Amendment shall govern and control; in all other respects,
the terms, provisions and exhibits of the Lease shall remain unmodified in full
force and effect.
I. Temporary Space. Tenant shall have the right to occupy
---------------
approximately 5,731 rentable square feet on the 7th floor of the Building and
described in the plan attached hereto as Exhibit A (the "Temporary Space")
--------- ---------------
commencing on December 20, 1999 and ending February 28, 2000 (the "Temporary
---------
Space Term"). Tenant shall pay rent with respect to the Temporary Space in an
- ----------
amount equal to $10,000 for per month, payable in advance. Contemporaneous with
its execution, Tenant shall pay
<PAGE>
to Landlord all rent due and payable for the Temporary Space Term (i.e.,
$23,548.00). Rent for any partial month shall during the Temporary Space Term
shall be prorated based on the number of days of such month falling within the
Temporary Space Term. In addition, Tenant shall pay for all utilities furnished
to the Temporary Space. Tenant's occupancy of the Temporary Space shall be on
all of the terms, covenants and conditions contained in the Lease, except as
provided in this Section 2 and except as provided in Sections 2, 15, 21, 22 and
---------
Appendix D of the Original Lease and Sections 2, 3, 4, 5, 6, 8 of the First
Amendment.
If Tenant retains possession of any part of the Temporary Space after the
Temporary Space Term, Tenant shall (i) be deemed to be in default under the
Lease, without any obligation of Landlord to provide notice of such default and
without provision of any cure period (except to the extent required by law); and
(ii) become a tenant at sufferance upon all of the terms of this Lease as might
be applicable to such tenancy, except during such holdover Tenant shall pay rent
in an amount equal to (x) $670.00 per day (plus an equitable share of
Operating Expense and Taxes [each as defined in the Lease]) for the first seven
(7) days of such holdover and (y) $1000 per day (plus an equitable share of
Operating Expenses and Taxes)for each day after the initial seven (7) days of
such holdover. In addition, if Tenant holds over for more than 30 days, Tenant
shall also pay Landlord all of Landlord's direct and consequential damages, and
in addition, if Landlord so elects by notice to Tenant, such holdover shall
constitute a renewal of this Lease for one year at 110% of the then current
market rate as determined by Landlord. No acceptance of Rent or other payments
by Landlord under these holdover provisions shall operate as a waiver of
Landlord's right to regain possession or any other of Landlord's remedies.
In the event that Tenant vacates the Temporary Space prior to the
expiration of the Temporary Space Term and surrenders the Temporary Space to
Landlord in the condition required by the Lease (including if Landlord so
requires, a written confirmation of such surrender executed by Tenant), Landlord
shall refund to Tenant any amount equal to portion of the rent, prorated on a
daily basis, previously paid by Tenant to Landlord for the Temporary Space for
the period from (a) the date of which is one (1) day after the date on which
such surrender occurs to (b) the date on which the Temporary Space Term would
otherwise have expired.
I. Condition of Temporary Space. Landlord is leasing the Temporary
----------------------------
Space, to Tenant for the remainder of the Term of the Lease "AS IS", without any
representations or warranties of any kind (including, without limitation, any
express or implied warranties of merchantability, fitness or habitability) and
without any obligation on the part of Landlord to alter, remodel, improve,
repair, or decorate the Premises or any part thereof.
I. Incorporation of Lease. Landlord and Tenant hereby agree that
----------------------
(a) this Amendment is incorporated into and made a part of the Lease, (b) any
and all references herein to the Lease shall include this Amendment, and (c) the
Lease and all
<PAGE>
terms, conditions and provisions of the Lease are in full force and effect as of
the date hereof, except as expressly modified and amended hereinabove.
I. Defined Terms. All terms capitalized but not defined herein
-------------
shall have the same meaning ascribed to such terms in the Lease. The marginal
headings and titles to the paragraphs of this Amendment are not a part of this
Amendment and shall have no effect upon the construction or interpretation of
any part hereof.
I. Governing Law. This Amendment shall be governed by and construed
-------------
under the laws of the State of Illinois.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
LANDLORD: TENANT:
TIAA REALTY, INC., a DIGITAL WORKS, INC., a
Delaware
a Delaware corporation corporation
By: Teachers Insurance and
Annuity Association of
America, its authorized By: /s/ Loreen Sieroslawski
representative Name:
Title:
By: /s/ S. Marc Flannery
Name:
Title:_____________________________
<PAGE>
EXHIBIT A
---------
Plan of Temporary Space
<PAGE>
Exhibit 10.22
================================================================================
RIGHTS AGREEMENT
between
DIGITALWORK.COM, INC.
and
CHASE MELLON SHAREHOLDER SERVICES, LLC,
As Rights Agent
Dated as of ____________, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Certain Definitions....................................... 1
Section 2. Appointment of Rights Agent............................... 6
Section 3. Issue of Right Certificates............................... 6
Section 4. Form of Right Certificates................................ 8
Section 5. Countersignature and Registration......................... 9
Section 6. Transfer, Split Up, Combination and
Exchange of Right Certificates;
Mutilated, Destroyed, Lost or
Stolen Right Certificates................................ 9
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights................................ 10
Section 8. Cancellation and Destruction of
Right Certificates....................................... 12
Section 9. Availability of Preferred Shares.......................... 13
Section 10. Preferred Shares Record Date.............................. 13
Section 11. Adjustment of Purchase Price, Number of
Shares or Number of Rights............................... 13
Section 12. Certificate of Adjusted Purchase Price
or Number of Shares...................................... 20
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power............................... 20
Section 14. Fractional Rights and Fractional Shares................... 23
Section 15. Rights of Action.......................................... 24
Section 16 Agreement of Right Holders................................ 24
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
Section 17. Right Certificate Holder Not Deemed a
Stockholder.............................................. 25
Section 18. Concerning the Rights Agent............................... 25
Section 19. Merger or Consolidation or Change of
Name of Rights Agent..................................... 26
Section 20. Duties of Rights Agent.................................... 26
Section 21. Change of Rights Agent.................................... 29
Section 22. Issuance of New Right Certificates........................ 29
Section 23. Redemption................................................ 30
Section 24. Exchange.................................................. 31
Section 25. Notice of Certain Events.................................. 32
Section 26. Notices................................................... 33
Section 27. Supplements and Amendments................................ 33
Section 28. Successors................................................ 34
Section 29. Benefits of This Agreement................................ 34
Section 30. Severability.............................................. 34
Section 31. Governing Law............................................. 34
Section 32. Counterparts.............................................. 34
Section 33. Descriptive Headings...................................... 34
</TABLE>
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<PAGE>
Page
----
Section 34. Determinations and Actions by the
Board of Directors.................................. 34
Exhibit A - Form of Certificate of Designation, Preferences and
Rights
Exhibit B - Form of Right Certificate
Exhibit C - Summary of Rights Plan
-iii-
<PAGE>
RIGHTS AGREEMENT
----------------
This Rights Agreement, dated as of _________________, 2000 ("Agreement"),
between DIGITALWORK.COM, INC., a Delaware corporation (the "Company"), and CHASE
MELLON SHAREHOLDER SERVICES, LLC (the "Rights Agent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Board of Directors of the Company authorized and declared a
dividend distribution of one Right (as hereinafter defined) for each Common
Share (as such term is hereinafter defined) of the Company outstanding as of the
Close of Business on _____________, 2000 (the "Record Date"), each Right
representing the right to purchase one one-hundredth of a Preferred Share (as
such term is hereinafter defined) having the rights, powers and preferences set
forth in the form of Certificate of Designations attached hereto as Exhibit A,
---------
upon the terms and subject to the conditions herein set forth, and has further
authorized and directed the issuance of one Right with respect to each Common
Share that shall become outstanding between the Record Date and the earlier of
the Distribution Date and the Expiration Date (as such terms are hereinafter
defined) or, in certain circumstances provided in Section 22 hereof, after the
Distribution Date.
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:
"Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as
such term is hereinafter defined) of 15% or more of the Common Shares of the
Company then outstanding, but shall not include the Company, any Subsidiary (as
such term is hereinafter defined) of the Company, any employee benefit plan of
the Company or any Subsidiary of the Company, any Person holding Common Shares
for or pursuant to the terms of any such plan, or any Grandfathered Person.
Notwithstanding the foregoing, no Person (including, without limitation, any
Grandfathered Person) shall become an "Acquiring Person" as the result of (a) an
acquisition of Common Shares by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 15% or more of the Common Shares of the Company then
outstanding or (b) the acquisition by such Person of newly
-1-
<PAGE>
issued Common Shares directly from the Company (it being understood that a
purchase from an underwriter or other intermediary is not directly from the
Company); provided, however, that if a Person shall become the Beneficial Owner
-------- -------
of 15% or more of the Common Shares of the Company then outstanding by reason of
share purchases by the Company or the receipt of newly issued Common Shares
directly from the Company and shall, after such share purchases or direct
issuance by the Company, become the Beneficial Owner of any additional Common
Shares of the Company, then such Person shall be deemed to be an "Acquiring
Person"; provided, further, that any transferee from such Person who becomes the
-------- -------
Beneficial Owner of 15% or more of the Common Shares of the Company then
outstanding shall nevertheless be deemed to be an "Acquiring Person."
Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an "Acquiring
Person," as defined pursuant to the foregoing provisions of this paragraph, has
become such inadvertently, and such Person divests as promptly as practicable
(and in any event within ten business days after notification by the Company) a
sufficient number of Common Shares so that such Person would no longer be an
Acquiring Person, as defined pursuant to the foregoing provisions of this
paragraph, then such Person shall not be deemed to be an "Acquiring Person" for
any purposes of this Agreement.
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act (as such term is hereinafter defined), as in effect on the date
of this Agreement.
A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to have "beneficial ownership" of or "beneficially own" any securities which:
(a) such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(b) such Person or any of such Person's Affiliates or Associates,
directly or indirectly, has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding, whether written or oral (other
than customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities), or upon
the exercise of conversion rights, exchange rights, rights (other than
these Rights), warrants or options, or otherwise; provided, however, that a
-------- -------
Person shall not be deemed the Beneficial Owner of, or to beneficially own,
securities tendered pursuant to a tender or exchange offer made by or on
behalf of such Person or any of such Person's Affiliates or Associates
until such tendered securities are accepted for purchase or exchange; (B)
the sole or shared right to vote or dispose of (including any such right
pursuant to any agreement, arrangement or understanding, whether written or
oral); provided, however, that a Person shall not be deemed the Beneficial
-------- -------
Owner of, or to beneficially own, any
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<PAGE>
security if the agreement, arrangement or understanding to vote such
security (1) arises solely from a revocable proxy or consent given to such
Person in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable rules and regulations
promulgated under the Exchange Act and (2) is not also then reportable on
Schedule 13D under the Exchange Act (or any comparable or successor
report); or (c) "beneficial ownership" of (as determined pursuant to Rule
13d-3 (or any successor rule) of the General Rules and Regulations under
the Exchange Act); or
(c) are beneficially owned, directly or indirectly, by any other
Person (or any Affiliate or Associate thereof) with which such Person or
any of such Person's Affiliates or Associates has any agreement,
arrangement or understanding, whether written or oral (other than customary
agreements with and between underwriters and selling group members with
respect to a bona fide public offering of securities) for the purpose of
acquiring, holding, voting (except to the extent contemplated by the
proviso to clause (B) of subparagraph (b) of this definition) or disposing
of any securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in Illinois are authorized or obligated by law
or executive order to close.
"Close of Business" on any given date shall mean 5:00 P.M., Chicago
time, on such date; provided, however, that if such date is not a Business Day
-------- -------
it shall mean 5:00 P.M., Chicago time, on the next succeeding Business Day.
"Common Shares" when used with reference to the Company shall mean the
shares of common stock, par value $.005 per share (as such shares may be
constituted or designated, or as such par value may be changed, from time to
time during the term of this Agreement), of the Company. "Common Shares" when
used with reference to any Person other than the Company shall mean the capital
stock (or equity interest) with the greatest voting power of such other Person
or the equity securities or other equity interest having power to control or
direct the management of such other Person.
"Distribution Date" shall have the meaning set forth in Section 3
hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
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<PAGE>
"Exchange Ratio" shall have the meaning set forth in Section 24
hereof.
"Expiration Date" shall have the meaning set forth in Section 7
hereof.
"Final Expiration Date" shall have the meaning set forth in Section 7
hereof.
"Grandfathered Person" shall mean:
(a) Draper Fisher Jurvetson and/or TL Ventures;
(b) Any former or future spouse of any Person described in
subparagraph (a) of this definition;
(c) Any child, grandchild or great-grandchild, whether by birth or
adoption, whether now living or hereafter born, of any Person described in
subparagraph (a) or (b) of this definition;
(d) Any spouse (including any former or future spouse) of any Person
described in subparagraph (c) of this definition;
(e) Any estate of, or the executor or administrator of any estate of,
or any guardian or custodian for, any Person described in subparagraphs (a)
through (d) of this definition (so long as such executor, administrator,
guardian or custodian is acting in his or her capacity as such);
(f) Any legal advisor of any Person described in subparagraphs (a)
through (e), (g) or (h) of this definition who is given a revocable proxy
by such Person with respect to voting securities of the Company of which
such Person is the Beneficial Owner or who is or becomes an attorney-in-
fact or agent of such Person;
(g) any organization (whether now existing or hereafter formed)
described in Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended;
(h) Any corporation, limited liability company, trust (including any
voting trust), general partnership, limited partnership, organization or
other entity (whether now existing or hereafter formed) of which
substantially all of the outstanding beneficial, voting or equity interests
are beneficially owned, directly or indirectly, either (A) by one or more
of the Persons described in subparagraphs (a) through (e) of this
definition, or (B) by any combination of one or more of the Persons
described in subparagraphs (a)
-4-
<PAGE>
through (e) of this definition and one or more organizations described in
subparagraph (g) of this definition; and
(i) Any other Person (A) who or which is or becomes an Affiliate or
Associate of any Person described in subparagraphs (a) through (h) of this
definition, or (B) of which any Person described in subparagraphs (a)
through (h) of this definition is or becomes an Affiliate or Associate;
provided, in either case (A) or case (B), such other Person is not the
Beneficial Owner of 5% or more of the Common Shares then outstanding (for
purposes of determining the number of Common Shares of which such other
Person is the Beneficial Owner under this subparagraph (i), such other
Person shall not be deemed to beneficially own Common Shares solely by
reason of an Affiliate or Associate relationship of the kind described in
(A) or (B) above in this subparagraph (i)).
Notwithstanding the foregoing, a Grandfathered Person shall cease to be
deemed a Grandfathered Person if, without the prior approval of the Company, in
the case of Draper Fisher Jurvetson, it becomes the Beneficial Owners of 25% or
more of the Common Shares outstanding or in the case of TL Ventures, it becomes
the Beneficial Owners of 18% or more of the Common Shares outstanding, other
than (i) pursuant to dividends or rights (including the Rights) paid or offered
to stockholders of the Company generally (other than an Acquiring Person or
Persons), or (ii) options or grants of shares by the Company pursuant to an
employment agreement or other compensatory arrangement including, without
limitation, the Company's employee stock ownership plan and stock option plans.
"Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
"Preferred Shares" shall mean shares of Series A Participating
Preferred Stock, par value $0.005 per share, of the Company having the rights
and preferences set forth in the Form of Certificate of Designation, Preferences
and Rights attached to this Agreement as Exhibit A.
---------
"Principal Party" shall have the meaning set forth in Section 13
hereof.
"Purchase Price" shall have the meaning set forth in Section 4 hereof.
"Redemption Date" shall have the meaning set forth in Section 7
hereof.
"Right Certificate" shall have the meaning set forth in Section 3
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
-5-
<PAGE>
"Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) promulgated under the
Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has
become such.
"Subsidiary" shall mean, with reference to any Person, any corporation
or other entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such Person.
"Trading Day" shall have the meaning set forth in Section 11(d)(I)
hereof.
"Triggering Event" shall mean any event described in Section 11(a)(ii)
or Section 13(a) hereof.
Any determination or interpretation required in connection with any of the
definitions contained in this Section 1 shall be made by the Board of Directors
of the Company in their good faith judgment, which determination shall be final
and binding on the Rights Agent.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
---------------------------
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) 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;
provided, however, that 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 Right Certificates.
---------------------------
(a) Until the earlier of (i) the Close of Business on the tenth day after
the Shares Acquisition Date or (ii) the Close of Business on the tenth Business
Day (or such later date as may be determined by action of the Board of Directors
prior to such time as any Person becomes an Acquiring Person) after the date
that a tender or exchange offer by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company or any entity holding Common Shares for or pursuant to
the terms of any such plan, or any Grandfathered Person) is first published or
sent or given within the meaning of Rule 14d-2(a) of the General Rules and
Regulations under the Exchange Act, of which tender or exchange offer would
result in any Person becoming the Beneficial Owner of Common Shares aggregating
15% or more of the then outstanding Common Shares (including any such date which
is after the date of this Agreement and prior to the issuance of the Rights; the
earlier of (i) or (ii) being herein referred to as the "Distribution Date"), (x)
the Rights will be
-6-
<PAGE>
evidenced (subject to the provisions of Section 3(b) hereof) by the certificates
for Common Shares registered in the names of the holders thereof (which
certificates shall also be deemed 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 Common Shares (including a
transfer to the Company). The Company shall give the Rights Agent prompt written
notice of the Distribution Date. As soon as practicable after the Distribution
Date, the Company will prepare and execute, the Rights Agent will countersign,
and the Company will cause to be sent (and the Rights Agent will, if requested
and at the expense of the Company, send) by first-class, insured, postage-
prepaid mail, to each record holder of Common Shares as of the close of business
on the Distribution Date, at the address of such holder shown on the records of
the Company, a Right Certificate, in substantially the form of Exhibit B hereto
---------
(a "Right Certificate"), evidencing one Right for each Common Share so held. In
the event that an adjustment in the number of Rights per Common share has been
made pursuant to Section 11(n) hereof, at the time of distribution of Rights
Certificates, the Company shall make the necessary and appropriate rounding
adjustments (in accordance with Section 14 (a) hereof) so that Rights
Certificates only representing 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 Right Certificates.
(b) With respect to certificates for Common Shares 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 Plan, and registered holders of Common Shares shall also be
the registered holders of the associated Rights. Until the Distribution Date
(or the earlier of the Redemption Date or the Final Expiration Date), the
transfer of any certificate for Common Shares outstanding on the Record Date,
with or without a copy of the Summary of Rights Plan, shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
(c) Rights shall be issued in respect of all Common Shares which are issued
(whether originally issued or delivered from the Company's treasury) after the
Record Date but prior to the earliest of the Distribution Date, the Redemption
Date, the Final Expiration Date or, in certain circumstances provided in Section
22 hereof, after the Distribution Date. Certificates representing such Common
Shares shall also be deemed to be certificates for Rights. Certificates
representing both Common Shares and Rights in accordance with this Section 3
which are executed and delivered (whether the Common Shares represented thereby
are originally issued, delivered from the Company's treasury or are presented
for transfer) by the Company (including, without limitation, certificates
representing reacquired Common Shares referred to in the last sentence of this
paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date or, in
certain circumstances provided in Section 22 hereof, after the Distribution
Date, shall have impressed on, printed on, written on or otherwise affixed to
them a legend substantially equivalent to the following:
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<PAGE>
This certificate also evidences and entitles the holder hereof to certain
rights as set forth in the Rights Agreement between Quotesmith.com, Inc.
(the "Company") and Chase Mellon Shareholder Services, LLC, as Rights
Agent, dated as of _____________ (the "Rights Agreement"), the terms of
which are hereby incorporated herein by reference and a copy of which is on
file at the principal offices of the Company. 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 an 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, shall become null and void.
With respect to such certificates bearing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Final Expiration Date, the
Rights associated with the Common Shares shall be evidenced by the certificates
representing the associated Common Shares alone, and the transfer of any such
certificate shall also constitute the transfer of the Rights associated with the
Common Shares represented thereby. In the event that the Company purchases or
acquires any Common Shares after the Record Date but prior to the Distribution
Date, any Rights associated with such Common Shares shall be deemed canceled and
retired so that the Company shall not be entitled to exercise any Rights
associated with the Common Shares which are no longer outstanding.
Section 4. Form of Right Certificates.
--------------------------
(a) The Right Certificates (and the forms of election to purchase Preferred
Shares and of assignment to be printed on the reverse thereof) shall each be
substantially in the form set forth in Exhibit B 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 with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange 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 Right Certificates shall entitle the holders thereof
to purchase such number of one one-hundredths of a Preferred Share as shall be
set forth therein at the price per one one-hundredth of a Preferred Share set
forth therein (the "Purchase Price"), but the amount and type of securities
purchasable upon the exercise of each Right and the Purchase Price thereof shall
be subject to adjustment as provided herein.
-8-
<PAGE>
(b) Any Right Certificate issued pursuant to Section 3(a) or Section 22
hereof that represents Rights beneficially owned by: (i) an Acquiring Person or
any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or such Associate or Affiliate) who becomes a transferee after
the Acquiring Person becomes an Acquiring Person, or (iii) a transferee of an
Acquiring Person (or such Associate or Affiliate) who becomes a transferee prior
to or concurrently with the Acquiring Person becoming such and receives such
Rights pursuant to either (A) a transfer (whether or not for consideration) from
the Acquiring Person to holders of equity interests in such Acquiring Person or
to any Person with whom the Acquiring Person has any continuing agreement,
arrangement or understanding, whether written or oral, regarding the transferred
Rights or (B) a transfer which is part of a plan, arrangement or understanding,
whether written or oral, which has as a primary purpose or effect avoidance of
Section 7(e) hereof, and any Right Certificate issued pursuant to Section 6 or
Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Right Certificate referred to in this sentence, shall contain (to the
extent feasible and otherwise reasonably identifiable as such) the following
legend:
The Rights represented by this Right Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement). Accordingly, this Right Certificate and the Rights represented
hereby may become void in the circumstances specified in Section 7(e) of
such Agreement.
The provisions of Section 7(e) shall apply whether or not any Right Certificate
actually contains the foregoing legend.
Section 5. Countersignature and Registration. The Right Certificates
---------------------------------
shall be executed on behalf of the Company by any of its Chairman of the Board,
its Chief Executive Officer, its President, its Executive Vice President, or its
Chief Financial Officer, either manually or by facsimile signature, shall have
affixed thereto the Company's seal or a facsimile thereof, and shall be attested
by the Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Right Certificates shall be countersigned by the
Rights Agent either manually or by facsimile signature and shall not be valid
for any purpose unless countersigned. In case any officer of the Company who
shall have signed any of the Right Certificates shall cease to be such officer
of the Company before countersignature by the Rights Agent and issuance and
delivery by the Company, such Right Certificates, nevertheless, may be
countersigned by the Rights Agent and issued and delivered by the Company with
the same force and effect as though the person who signed such Right
Certificates had not ceased to be such officer of the Company; and any Right
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Right Certificate, shall be a proper
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<PAGE>
officer of the Company to sign such Right Certificate, although at the date of
the execution of this Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to be
kept, at its office designated for such purpose, books for registration and
transfer of the Right Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Right Certificates, the
number of Rights evidenced on its face by each of the Right Certificates and the
date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
-----------------------------------------------------
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
- ---------------------------------------------------------------------
(a) Subject to the provisions of Sections 4(b), 7(e), 14 and 24 hereof, at
any time after the close of business on the Distribution Date, and at or prior
to the close of business on the earlier of the Redemption Date or the Final
Expiration Date, any Right Certificate or Right Certificates may be transferred,
split up, combined or exchanged for another Right Certificate or Right
Certificates, entitling the registered holder to purchase a like number of
Preferred Shares (or, following a Triggering Event, Common Shares, other
securities or property, as the case may be) as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right Certificate
or Right Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the office of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the Company shall be
obligated to take any action whatsoever with respect to the transfer of any such
surrendered Right Certificate until the registered holder shall have completed
and signed the certificate contained in the form of assignment on the reverse
side of such Right Certificate accompanied by such documents as the Rights Agent
may deem appropriate and the Company shall have been provided with such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request. Thereupon the Rights Agent shall, subject to Sections 4 and
7 hereof, countersign and deliver to the person entitled thereto a Right
Certificate or Right 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 Right Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor
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<PAGE>
to the Rights Agent for countersignature and delivery to the registered holder
in lieu of the Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
-------------------------------------------------------------
(a) Subject to Section 7(e) hereof, the registered holder of any Right
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein) in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
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
Purchase Price with respect to each surrendered Right for the total number of
Preferred Shares (or other securities or property, as the case may be) as to
which the Rights are exercised, at or prior to the earliest of (i) the close of
business on the tenth anniversary of the effective date of this Agreement (the
"Final Expiration Date"), (ii) the time at which the Rights are redeemed as
provided in Section 23 hereof (the "Redemption Date") (the earlier of (i) and
(ii) being herein referred to as the "Expiration Date") and (iii) the time at
which such Rights are exchanged as provided in Section 24 hereof.
Notwithstanding anything herein to the contrary, the Rights will lapse and be of
no further effect if there is not on file with the Securities and Exchange
Commission prior to August 31, 1999 an effective Form S-1 Registration Statement
relating to the initial public offering of the Company's Common Shares.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
pursuant to the exercise of a Right shall initially be five times the initial
offering price of one share of the Company's common stock pursuant to an
effective S-1 Registration Statement and shall be subject to adjustment from
time to time as provided in Sections 11 and 13 hereof and shall be payable in
lawful money of the United States of America in accordance with paragraph (c)
below.
(c) Upon receipt of a Right Certificate representing exercisable Rights,
with the form of election to purchase and the certificate on the reverse side of
the Right Certificate duly executed, accompanied by such documents as the Rights
Agent may deem appropriate, payment of the Purchase Price for the shares (or
other securities or property, as the case may be) to be purchased and an amount
equal to any applicable transfer tax required to be paid by the holder of such
Right Certificate in accordance with Section 9 hereof by certified check,
cashier's check or money order payable to the order of the Company, the Rights
Agent shall thereupon promptly (i) (A) requisition from any transfer agent of
the Preferred Shares (or make available, if the Rights Agent is the transfer
agent of the Preferred Shares) certificates for the number of Preferred Shares
to be purchased and the Company hereby irrevocably authorizes its transfer agent
to comply with all such requests, or (B) if the Company shall have elected to
deposit the Preferred Shares issuable upon exercise of the Rights with a
depositary agent, requisition from the depositary agent depositary receipts
representing such number of one one-hundredths of a
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<PAGE>
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company will direct the depositary
agent to comply with such request; (ii) when appropriate, requisition from the
Company the amount of cash to be paid in lieu of issuance of fractional shares
in accordance with Section 14 hereof; (iii) after receipt of such certificates
or depositary receipts, cause the same to be delivered to or upon the order of
the registered holder of such Right Certificate, registered in such name or
names as may be designated by such holder; and (iv) when appropriate, after
receipt, deliver such cash to or upon the order of the registered holder of such
Right Certificate. In the event that the Company is obligated to issue other
securities (including Common Shares) 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 other securities, cash and/or property are
available for distribution by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Right Certificate shall exercise
less than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent and delivered to the registered holder of such Right Certificate or
to his duly authorized assigns, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and
after the occurrence of a Triggering 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) who
becomes a transferee after the Acquiring Person becomes an Acquiring Person, or
(iii) a transferee of an Acquiring Person (or such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
an Acquiring Person and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding,
whether written or oral, regarding the transferred Rights or (B) a transfer
which the Board of Directors otherwise concludes in good faith is part of a
plan, arrangement or understanding (whether written or oral) which has as a
primary purpose or effect the avoidance of this Section 7(e), shall become null
and void without any further action, and any holder of such Rights shall
thereupon have no rights whatsoever with respect to such Rights, whether under
any provision of this Agreement or otherwise, from and after the occurrence of a
Triggering Event. 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 for the inability to make any determinations
with respect to an Acquiring Person or its Affiliates, Associates or transferees
hereunder.
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<PAGE>
(f) Notwithstanding anything in this Agreement 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 as
set forth in this Section 7 unless the certificate contained in the form of
election to purchase set forth on the reverse side of the Right Certificate
surrendered for such exercise shall have been completed and signed by the
registered holder thereof and the Company shall have been provided with such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
(g) The Company covenants and agrees that it will cause to be reserved and
kept available out of its authorized and unissued Preferred Shares (and,
following the occurrence of a Triggering Event, Common Shares and/or other
securities) or any Preferred Shares (and, following the occurrence of a
Triggering Event, Common Shares and/or other securities) held in its treasury,
the number of Preferred Shares (and, following the occurrence of a Triggering
Event, Common Shares and/or other securities) that will be sufficient to permit
the exercise in full of all outstanding Rights.
(h) Notwithstanding any statement to the contrary contained in this
Agreement or in any Right Certificate, if the Distribution Date or the Shares
Acquisition Date shall occur prior to the Record Date, the provisions of this
Agreement, including (without limitation) Sections 3 and 11(a)(ii), shall be
applicable to the Rights upon their issuance to the same extent such provisions
would have been applicable if the Record Date were the date of this Agreement.
Section 8. Cancellation and Destruction of Right Certificates. All Right
--------------------------------------------------
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all canceled Right Certificates to the Company, or shall, at the written
request of the Company, cause such canceled Right Certificates to be destroyed,
and in such case cause a certificate of destruction to be delivered to the
Company.
Section 9. Reservation and Availability of Preferred Shares. The Company
------------------------------------------------
covenants and agrees that it will take all such action as may be necessary to
ensure that all Preferred Shares (and, following the occurrence of a Triggering
Event, Common Shares and/or other securities) delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such Preferred Shares
(and, following the occurrence of a Triggering Event, Common Shares and/or
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<PAGE>
other securities), subject to payment of the Purchase Price, be duly and validly
authorized and issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares (or Common Shares and/or other securities, as the case may
be) upon the exercise of Rights. The Company shall not, however, be required to
pay any transfer tax which may be payable in respect of any transfer or delivery
of Right Certificates to a person other than, or the issuance or delivery of
certificates or depositary receipts for the Preferred Shares (or Common Shares
and/or other securities, as the case may be) in a name other than that of, the
registered holder of the Right Certificate evidencing Rights surrendered for
exercise or to issue or to deliver any certificates or depositary receipts for
Preferred Shares (or Common Shares and/or other securities, as the case may be)
upon the exercise of any Rights until any such tax shall have been paid (any
such tax being payable by the holder of such Right Certificate at the time of
surrender) or until it has been established to the Company's reasonable
satisfaction that no such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
----------------------------
certificate for Preferred Shares (or Common Shares and/or other securities, as
the case may be) is issued upon the exercise of Rights shall for all purposes be
deemed to have become the holder of record of the shares or securities
represented thereby on, and such certificate shall be dated, the date upon which
the Right 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 Shares (or Common Shares and/or other securities, as the case may be)
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares or securities on, and such certificate
shall be dated, the next succeeding Business Day on which the Preferred Shares
(or Common Shares and/or other securities, as the case may be) transfer books of
the Company are open. Prior to the exercise of the Rights evidenced thereby,
the holder of a Right Certificate shall not be entitled to any rights of a
holder of Preferred Shares (or Common Shares and/or other securities, as the
case may be) 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 of Preferred Shares covered by
- ----------------
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
-14-
<PAGE>
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C)
combine the outstanding Preferred Shares into a smaller number of Preferred
Shares or (D) issue any shares of its capital stock in a reclassification
of the Preferred Shares (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)
and Section 7(e) hereof, 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
capital stock issuable on such date, shall be proportionately adjusted so
that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if
such Right had been exercised immediately prior to such date and at a time
when the Preferred Shares transfer books of the Company were open, he 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 exercise of one Right. If an
event occurs which would require an adjustment under both Section 11(a)(i)
and Section 11(a)(ii), 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).
(ii) Subject to Section 24 of this Agreement, in the event any
Person becomes an Acquiring Person, each holder of a Right, except as
provided below and in Section 7(e) hereof, shall thereafter have a right to
receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-hundredths of a
Preferred Share for which a Right is then exercisable, in accordance with
the terms of this Agreement and in lieu of Preferred Shares, such number of
Common Shares of the Company as shall equal the result obtained by (x)
multiplying the then current Purchase Price by the number of one one-
hundredths of a Preferred Share for which a Right is then exercisable and
dividing that product by (y) 50% of the then current per share market price
of the Company's Common Shares (determined pursuant to Section 11(d)
hereof) on the date of the occurrence of such event. In the event that any
Person shall become an Acquiring Person and the Rights shall then be
outstanding, the Company shall not take any action which would eliminate or
diminish the benefits intended to be afforded by the Rights.
(iii) In lieu of issuing Common Shares of the Company in accordance
with Section 11(a)(ii) hereof, the Company may, in the sole discretion of
the Board of Directors, elect to (and, in the event that the Board of
Directors has not exercised the exchange right contained in Section 24
hereof and there are not sufficient issued but not
-15-
<PAGE>
outstanding and authorized but unissued Common Shares to permit the
exercise in full of the Rights in accordance with the foregoing
subparagraph (ii), the Company shall) take all such action as may be
necessary to authorize, issue or pay, upon the exercise of the Rights, cash
(including by way of a reduction of the Purchase Price), property, other
securities or any combination thereof having an aggregate value equal to
the value of the Common Shares of the Company which otherwise would have
been issuable pursuant to Section 11(a)(ii), which aggregate value shall be
determined by a majority of the Board of Directors. For purposes of the
preceding sentence, the value of the Common Shares shall be determined
pursuant to Section 11(d) hereof and the value of any equity securities
which a majority of the Board of Directors determines to be a "common stock
equivalent" (including the Preferred Shares, in such ratio as the Board of
Directors shall determine) shall be deemed to have the same value as the
Common Shares. Any such election by the Board of Directors must be made and
publicly announced within 60 days following the date on which the event
described in Section 11(a)(ii) shall have occurred. Following the
occurrence of the event described in Section 11(a)(ii), a majority of the
Board of Directors then in office may suspend the exercisability of the
Rights for a period of up to 60 days following the date on which the event
described in Section 11(a)(ii) shall have occurred to the extent that such
directors have not determined whether to exercise the company's right of
election under this Section 11(a)(iii). In the event of any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended.
(b) In case the Company shall fix a record date for the issuance of rights,
options or warrants to all holders of Preferred Shares entitling them (for a
period expiring within 45 calendar days after such record date) to subscribe for
or purchase Preferred Shares (or shares having the same rights, privileges and
preferences as the Preferred Shares ("equivalent preferred shares")) or
securities convertible into Preferred Shares or equivalent preferred shares at a
price per Preferred Share or equivalent preferred share (or having a conversion
price per share, if a security convertible into Preferred Shares or equivalent
preferred shares) less than the then current per share market price of the
Preferred Shares (as defined in Section 11(d)) on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the number of Preferred Shares
outstanding on such record date plus the number of Preferred Shares which the
aggregate offering price of the total number of Preferred Shares and/or
equivalent preferred shares 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 Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); 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
-16-
<PAGE>
stock of the Company issuable upon exercise of one Right. In case such
subscription price may be paid in a consideration part or all of which shall be
in a form other than cash, the value of such consideration shall be as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Rights Agent. Preferred Shares owned by or held for the
account of the Company 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 the making of a
distribution to all holders of the Preferred Shares (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
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights 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 then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share, and the denominator of which shall be such
current per share market price of the Preferred Shares; 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
to be issued upon exercise of one Right. 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 again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation hereunder, other than
under Section 11(a)(iii) hereof, the "current per share market price" of
any security (a "Security" for the purpose of this Section 11(d)(i)) on any
date shall be deemed to be the average of the daily closing prices per
share of such Security for the 30 consecutive Trading Days (as such term is
hereinafter defined) immediately prior to such date, and for the purpose of
any computation under Section 11(a)(iii) hereof, the "current per share
market price" of a Security on any date shall be deemed to be the average
of the daily closing prices per share of such Security for thirty (30)
consecutive Trading Days immediately following such date; provided,
--------
however, that in the event that the current per share market price of the
-------
Security is determined during a period following the announcement by the
issuer of such Security of (A) a dividend or distribution on such Security
payable in shares of such
-17-
<PAGE>
Security or securities convertible into such shares (other than the
Rights), or (B) any subdivision, combination or reclassification of such
Security and prior to the expiration of 30 Trading Days after the ex-
dividend date for such dividend or distribution, or the record date for
such subdivision, combination or reclassification, then, and in each such
case, the "current per share market price" shall be appropriately adjusted
to reflect the current market price per share equivalent (ex-dividend) of
such Security. The closing price for each day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Security is not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which the Security is listed or
admitted to trading or, if the Security is 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 National Association of
Securities Dealers, Inc. Automated Quotation System ("Nasdaq") or such
other system then in use, or, if on any such date the Security is 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
Security selected by the Board of Directors of the Company. If on any such
date no market maker is making a market in the Security, the fair value of
such Security on such date (as determined in good faith by the Board of
Directors of the Company) shall be used. The term "Trading Day" shall mean
a day on which the principal national securities exchange on which the
Security is listed or admitted to trading is open for the transaction of
business or, if the Security is not listed or admitted to trading on any
national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current per
share market price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i). If the Preferred
Shares are not publicly traded, the "current per share market price" of the
Preferred Shares shall be conclusively deemed to be the current per share
market price of the Common Shares of the Company as determined pursuant to
Section 11(d)(i) (appropriately adjusted to reflect any stock split or
similar transaction, other than a stock dividend, occurring after the date
hereof), multiplied by one hundred. If neither the Common Shares of the
Company nor the Preferred Shares are publicly held or so listed or traded,
"current per share market price" shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights
Agent.
(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
-18-
<PAGE>
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
one-millionth of a Preferred Share or one ten-thousandth of any other share or
security, 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 requires
such adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Shares, thereafter the number of such other shares so receivable upon
exercise of any Right 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 Shares contained in this Section 11, and the provisions
of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares 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 one one-hundredths of a
Preferred Share purchasable 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 one one-hundredths of a
Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (i) multiplying (x) the number of one one-hundredths of a
share 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 substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share 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
-19-
<PAGE>
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 Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right 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 Right Certificates on such record date Right 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 Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein and shall be
registered in the names of the holders of record of Right 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 one one-hundredths of a Preferred Share issuable upon the exercise of
the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-hundredths of a
Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares 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 fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) 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
issuing to the holder of any Right exercised after such record date of the
Preferred Shares and other capital stock or securities of the Company, if any,
issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
--------
however, that the Company shall deliver to such holder a due bill or other
- -------
appropriate instrument evidencing such holder's right to receive such additional
shares 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
-20-
<PAGE>
required by this Section 11, as and to the extent that it in its sole discretion
shall determine to be advisable in order that any consolidation or subdivision
of the Preferred Shares, issuance wholly for cash of any Preferred Shares at
less than the current market price, issuance wholly for cash of Preferred Shares
or securities which by their terms are convertible into or exchangeable for
Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or
issuance of rights, options or warrants referred to hereinabove in Section
11(b), hereafter made by the Company to holders of its Preferred Shares shall
not be taxable to such stockholders.
(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall effect a subdivision,
combination or consolidation of the Common Shares (by reclassification or
otherwise, other than by payment of dividends in Common Shares) into a greater
or lesser number of Common Shares, then in any such case (i) the number of one
one-hundredths of a Preferred Share purchasable after such event upon proper
exercise of each Right shall be determined by multiplying the number of one one-
hundredths of a Preferred Share so purchasable immediately prior to such event
by a fraction, the numerator of which is the number of Common Shares outstanding
immediately before such event, and the denominator of which is the number of
Common Shares outstanding immediately after such event, and (ii) each Common
Share outstanding immediately after such event shall have issued with respect to
it that number of Rights which each Common Share outstanding immediately prior
to such event had issued with respect to it. The adjustments provided for in
this Section 11(n) shall be made successively whenever such a subdivision,
combination or consolidation is effected.
(o) So long as the shares issuable upon the exercise of the Rights may be
listed on any national securities exchange, the Company shall use its best
efforts to cause, from and after such time as the Rights become exercisable, all
shares reserved for such issuance to be listed on such exchange upon official
notice of issuance upon such exercise.
(p) The Company shall use its best efforts to (i) file, as soon as
practicable following the first occurrence of a Triggering Event, a registration
statement under the Securities Act with respect to the securities purchasable
upon exercise of the Rights on an appropriate form, (ii) cause such registration
statement to become effective as soon as practicable after such filing and (iii)
cause such registration statement to remain effective (with a prospectus at all
times meeting the requirements of the Securities Act) until the date of the
expiration of the Rights. The Company will also take such action as may be
appropriate under the blue sky laws of the various states. The Company may
temporarily suspend, for a period of time not to exceed 90 days, the
exercisability of the Rights in order to prepare and file such registration
statement or in order to comply with such blue sky laws. Upon any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended.
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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 promptly (a) 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
Common Shares or the Preferred Shares a copy of such certificate and (c) mail a
brief summary thereof to each holder of a Right Certificate 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
obligated or responsible for calculating any adjustment and may assume that no
adjustment has been made unless and until it shall have received such
certificate.
Notwithstanding the foregoing sentence, the failure of the Company to make
such certificate or give such notice shall not affect the validity or the force
or effect of the requirement for such adjustment. Any adjustment to be made
pursuant to Section 11 or Section 13 shall be effective as of the date of the
event giving rise to such adjustment.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
--------------------------------------------------------------
Power.
- -----
(a) If after the Shares Acquisition Date, directly or indirectly, (x) the
Company shall consolidate with, or merge with and into, any other Person, (y)
any Person shall consolidate with the Company, or merge with and into the
Company and the Company shall be the continuing or surviving corporation of such
merger and, in connection with such merger, all or part of the Common Shares
shall be changed into or exchanged for stock or other securities of any other
Person (or the Company) 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), in one or more transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons other than the Company
or one or more of its wholly-owned Subsidiaries, then, and in each such case,
proper provision shall be made so that (i) each holder of a Right (except as
otherwise provided herein) shall thereafter have the right to receive, upon the
exercise thereof at a price equal to the then current Purchase Price multiplied
by the number of one one-hundredths of a Preferred Share for which a Right is
then exercisable, in accordance with the terms of this Agreement and in lieu of
Preferred Shares, such number of validly authorized and issued, fully paid,
nonassessable and freely tradeable Common Shares of the Principal Party (as
hereinafter defined), free and clear of all liens, rights of call or first
refusal, encumbrances or other adverse claims, as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable (or,
if such Right is not then exercisable for a number of one one-hundredths of a
Preferred Share, the number of such fractional shares for which it was
exercisable immediately prior to an event described under Section 11(a)(ii)
hereof) and dividing that product by (B) 50% of the then current per share
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market price of the Common Shares of such Principal Party (determined pursuant
to Section 11(d) hereof) on the date of consummation of such consolidation,
merger, sale or transfer; (ii) such Principal Party shall thereafter be liable
for, and shall assume, by virtue of such consolidation, merger, sale or
transfer, or otherwise, 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 and (iv) such Principal Party shall take such steps
(including, but not limited to, the reservation of a sufficient number of its
Common Shares in accordance with Section 9 hereof) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to its
Common Shares thereafter deliverable upon the exercise of the Rights.
(b) "Principal Party" shall mean:
(i) In the case of any transaction described in (x) or (y) of the
first sentence of Section 13(a), the Person that is the issuer of any
securities into which Common Shares of the Company are converted in such
merger or consolidation, and if no securities are so issued, the Person
that is the surviving entity of such merger or consolidation (including the
Company if applicable); and
(ii) in the case of any transaction described in (z) of the first
sentence in Section 13(a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to
such transaction or transactions;
provided, however, that in any such case described in clauses (b)(i) and
- -------- -------
(b)(ii): (1) if the Common Shares of such Person are not at such time and have
not been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act, and such Person is a direct or indirect
Subsidiary of another Person the Common Shares of which is and has been so
registered, "Principal Party" shall refer to such other Person; (2) in case such
Person is a Subsidiary, directly or indirectly, of more than one Person, the
Common Shares of two or more of which are and have been so registered,
"Principal Party" shall refer to whichever of such Persons is the issuer of the
Common Shares having the greatest aggregate market value; and (3) in case such
Person is owned, directly or indirectly, by a joint venture formed by two or
more Persons that are not owned, directly or indirectly, by the same Person, the
rules set forth in (1) and (2) above shall apply to each of the chains of
ownership having an interest in such joint venture as if such party were a
"Subsidiary" of both or all of such joint venturers and the Principal Parties in
each such chain shall bear the obligations set forth in this Section 13 in the
same ratio as their direct or indirect interests in such Person bear to the
total of such interests.
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(c) The Company shall not consummate any such consolidation, merger, sale
or transfer unless the Principal Party shall have sufficient Common Shares
authorized to permit the full exercise of the Rights and 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, as soon as
practicable after the date of any consolidation, merger or sale of assets
mentioned in paragraph (a) of this Section 13, the Principal Party will:
(i) prepare and file a registration statement under the Securities
Act, with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best
efforts to cause such registration statement to (A) become effective as
soon as practicable after such filing and (B) remain effective (with a
prospectus at all times meeting the requirements of the Securities Act)
until the Expiration Date;
(ii) 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 (whether or not the Principal Party would otherwise be
required to file such form);
(iii) take such actions as may be necessary or appropriate under the
blue sky laws of the various states;
(iv) use its best efforts, if the Common Stock of the Principal party
shall be listed or admitted to trading on the Nasdaq National Market or on
a national securities exchange, to list or admit to trading the Rights and
the securities purchasable upon exercise of the Rights on the Nasdaq
National Market or such securities exchange; and
(v) obtain waivers of any rights of first refusal or preemptive
rights in respect of Common Stock of the Principal Party subject to
purchase upon exercise of outstanding rights.
(d) The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. In the event that one of
the transactions described in Section 13(a) shall occur at any time after the
occurrence of a transaction described in Section 11(a)(ii) hereof, the Rights
which have not theretofore been exercised shall thereafter become exercisable in
the manner described in Section 13(a).
(e) In no event shall the Rights Agent have liability in respect of any
such Principal Party transactions, including, without limitation, the propriety
thereof. The Rights Agent may rely and be fully protected in relying upon a
certificate of the Company stating that the
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provisions of this Section 13 have been fulfilled. The Rights Agent shall not be
obligated to enter into any supplemental agreement referenced in Section 13(c)
if such supplemental agreement would change or increase the duties, liabilities
or obligations of the Rights Agent hereunder.
Section 14. Fractional Rights and Fractional Shares.
---------------------------------------
(a) The Company shall not be required to issue fractional Rights or to
distribute Right Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there may be paid to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
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 the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Rights are not listed or admitted to trading on the
New York Stock 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 the Board of Directors of the Company. 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 the Board of Directors of the Company
shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred Share
may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it; provided, that such agreement shall provide that the holders of
--------
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred Shares
that are not integral multiples of one one-hundredth of a Preferred Share, the
Company may pay to the
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registered holders of Right Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of one one-hundredth of a Preferred Share. For the purposes of this
Section 14(b), the current market value of one one-hundredth of a Preferred
Share shall be one one-hundredth of the closing price of a Preferred Share (as
determined pursuant to the second sentence of Section 11(d)(I) hereof) for the
Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall not
be required to issue fractions of Common Shares upon exercise of the Rights or
to distribute certificates which evidence fractional Common Shares. In lieu of
fractional Common Shares, the Company may pay to the registered holders of Right
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of one Common
Share. For purposes of this Section 14(c), the current market value of one
Common Share shall be the closing price of one Common Share (as determined
pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
----------------
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right 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 will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right 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:
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(a) prior to the Distribution Date, the Rights will be transferable only
in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right 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 appropriate forms and certificates fully
executed;
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither
the Company nor the Rights Agent shall have any liability to any holder of a
Right or any other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority prohibiting or otherwise restraining
performance of such obligation.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder,
-------------------------------------------------
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the Preferred Shares 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
Right Certificate be construed to confer upon the holder of any Right
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 to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. 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
and counsel fees and other disbursements (including any taxes other than income
taxes) incurred in the administration and execution of this Agreement and the
exercise and performance of its duties hereunder. The
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Company also agrees to indemnify the Rights Agent for, and to hold it harmless
against, any loss, liability, or expense, incurred without negligence, bad faith
or willful misconduct on the part of the Rights Agent, for anything done or
omitted by the Rights Agent in connection with the acceptance and administration
of this Agreement, including the costs and expenses of defending against any
claim of liability arising, directly or indirectly, therefrom. The reasonable
costs and expenses incurred in enforcing this indemnity shall be paid by the
Company. The indemnification provided for hereunder shall survive the expiration
of the Rights and termination of the Agreement.
The Rights Agent may conclusively rely upon and 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 Right Certificate or certificate for the Preferred Shares or
Common Shares 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 be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons, or otherwise upon the advice of
counsel as set forth in Section 20 hereof.
Notwithstanding anything in this Agreement to the contrary, in no event
shall the Rights Agent be liable for special, indirect or consequential loss or
damage of any kind whatsoever (including but limited to lost profits), even if
the Rights Agent has been advised of the likelihood of such loss or damage and
regardless of the form of action.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
---------------------------------------------------------
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 stock transfer or
corporate trust business 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 paper or any further act on the part of any of the
parties hereto; provided, 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 Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
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In case at any time the name of the Rights Agent shall be changed and at
such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right 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 Right Certificates,
by their acceptance thereof, shall be bound:
(a) Before the Rights Agent acts or refrains from acting, the Rights Agent
may consult with legal counsel satisfactory to it (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, and the Rights Agent shall
incur no liability or responsibility to the Company or to any holder of any
Right Certificate in respect of 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 be
proved or established by the Company prior to taking or suffering or omitting
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization to the Rights Agent for any action taken, suffered
or omitted in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company only for,
and shall indemnify and hold harmless the Company from and against, any and all
losses, liabilities, costs, damages and expenses (including attorneys' fees)
arising out of or in connection with, the Rights Agent's 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 Right
Certificates (except its countersignature thereof) or be required to verify the
same, 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 be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by
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the Rights Agent) or in respect of the validity or execution of any Right
Certificate (except its countersignature thereof); nor shall it be responsible
for any breach by the Company of any covenant or condition contained in this
Agreement or in any Right Certificate; nor shall it be responsible for any
change in the exercisability of the Rights (including the Rights becoming void
pursuant to Section 7(e) hereof) or any adjustment in the terms of the Rights
(including the manner, method or amount thereof) provided for in Section 3, 11,
13, 23 or 24, or the ascertaining of the existence of facts that would require
any such change or adjustment (except with respect to the exercise of Rights
evidenced by Right Certificates after receipt of a certificate furnished
pursuant to Section 12 describing a change or adjustment); nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares or Common Shares to be
issued pursuant to this Agreement or any Right Certificate or as to whether any
Preferred Shares or Common Shares will, when issued, be validly authorized and
issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Secretary or the 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 by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions. 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 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 such application is given, 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 stockholder, 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 its Subsidiaries or become pecuniarily interested in any
transaction in which the Company or its Subsidiaries may be interested, or
contract with or lend money to the Company or its Subsidiaries or otherwise act
as fully and freely as though it were not Rights Agent under this
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<PAGE>
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or its Subsidiaries 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, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(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 hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(j) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise, transfer, split up, combination or exchange, the certificate
attached to the form of assignment or form of election to purchase, as the case
may be, has either not been completed 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, transfer, split up, combination or
exchange without first consulting with the Company.
(k) The Rights Agent shall not be under any duty or responsibility to
ensure compliance with any applicable federal or state securities laws in
connection with the issuance, transfer or exchange of Right Certificates.
(l) The Rights Agent shall be under no obligation to institute any action,
suit or legal proceeding or to take any other action likely to involve expense
unless the Company or one or more holders of Right Certificates shall furnish
the Rights Agent with security and indemnity to its satisfaction for any costs
and expenses which may be incurred.
(m) The Rights Agent shall not be liable for failure to perform any duties
except as specifically set forth herein, and no implied covenants or obligations
shall be read into this Agreement against the Rights Agent whose duties and
obligations are ministerial and shall be determined solely by the express
provisions hereof.
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 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and to
the holders of the Right Certificates by first-class
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<PAGE>
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
30 days' notice in writing, mailed to the Rights Agent or successor Rights
Agent, as the case may be, and to each transfer agent of the Common Shares or
Preferred Shares by registered or certified mail, and, at the expense of the
Company, to the holders of the Right 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 30 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 Right Certificate (who shall, with such notice, submit his Right
Certificate for inspection by the Company), then the registered holder of any
Right 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 corporation or bank organized and
doing business under the laws of the United States or of any other state of the
United States, which is authorized under such laws to exercise corporate trust
or stock transfer powers and is subject to supervision or examination by federal
or state authority and which has at the time of its appointment as Rights Agent
a combined capital and surplus of at least $150 million. 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 Common Shares or Preferred Shares, and mail a
notice thereof in writing to the registered holders of the Right 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, as
the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
----------------------------------
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of its Common Shares following the Distribution Date
and prior to the redemption or expiration of the Rights, the Company (a) shall,
with respect to Common Shares so issued or sold pursuant to the exercise of
stock options or under any employee plan or arrangement, granted or awarded
prior to the Distribution Date, 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 the Board of Directors of the Company, issue
Rights Certificates representing an appropriate number of Rights in connection
with such issuance or sale; provided, however, that
-------- -------
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<PAGE>
(i) no such Rights Certificate shall be issued if, and to the extent that, the
Company shall be advised by counsel that such issuance would create a
significant risk of material adverse tax consequences to the company or the
Person to whom such Rights Certificate would be issued, and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption.
----------
(a) The Board of Directors of the Company may, at its option, at any time
prior to such time as any Person becomes an Acquiring Person, redeem all but not
less than all of the then outstanding Rights at a redemption price of $.01 per
Right, appropriately adjusted to reflect any stock split or similar transaction
(other than a stock dividend) occurring after the date hereof (such redemption
price being hereinafter referred to as the "Redemption Price"). Notwithstanding
anything contained in this Agreement to the contrary, the Rights shall not be
exercisable after the first occurrence of an event specified in Section
11(a)(ii) until such time as the Company's right of redemption hereunder has
expired. The redemption 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. If redemption of the Rights is
to be effective as of a future date, the Rights shall continue to be
exercisable, subject to Section 7 hereof, until the effective date of the
redemption, provided that nothing contained herein shall preclude the Board of
Directors from subsequently causing the Rights to be redeemed at a date earlier
than the previously scheduled effective date of the redemption. The Company
may, at its option, pay the Redemption Price in cash, Common Shares (based on
the current per share market price of the Common Shares at the time of
redemption) or any other form of consideration deemed appropriate by the Board
of Directors.
(b) Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights (or at the effective time of such
redemption established by the Board of Directors of the Company pursuant to
paragraph (a) of this Section 23), 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.
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. Within 10 days after such action of the
Board of Directors ordering the redemption of the Rights or, if later, the
effectiveness of the redemption of the Rights pursuant to paragraph (a) of this
Section 23, the Company shall mail a notice of redemption to all the holders of
the then outstanding Rights at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Shares. 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. The Company
may, at
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<PAGE>
its option, discharge all of its obligations with respect to the Rights by (i)
issuing a press release announcing the manner of redemption of the Rights, (ii)
depositing with a bank or trust company having a capital and surplus of at least
$100,000,000, funds necessary for such redemption, in trust, to be applied to
the redemption of the Rights so called for redemption and (iii) arranging for
the mailing of the Redemption Price to the registered holders of the Rights;
then, and upon such action, all outstanding Rights Certificates shall be null
and void without further action by the Company. Neither the Company nor any of
its Affiliates or Associates may redeem, acquire or purchase for value any
Rights at any time in any manner other than that specifically set forth in this
Section 23, in Section 24 hereof, or in connection with the purchase of Common
Shares prior to the Distribution Date.
Section 24. Exchange.
--------
(a) The Board of Directors of the Company may, at its option, at any time
after a Triggering Event, exchange all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have become void
pursuant to the provisions of Section 7(e) hereof) for Common Shares at an
exchange ratio of one Common Share per Right, appropriately adjusted to reflect
any stock split or similar transaction (other than a stock dividend) occurring
after the date hereof (such exchange ratio being hereinafter referred to as 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 the Company, any Subsidiary of the Company, any employee benefit plan of
the Company or any such Subsidiary, or any entity holding Common Shares for or
pursuant to the terms of any such plan, or any Grandfathered Person), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of 50% or more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the Company
ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24
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 Common Shares 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 will state the method by which the
exchange of the Common Shares 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.
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<PAGE>
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute Preferred Shares (or equivalent preferred shares, as such
term is defined in Section 11(b) hereof) for Common Shares exchangeable for
Rights, at the initial rate of one one-hundredth of a Preferred Share (or
equivalent preferred share) for each Common Share, as appropriately adjusted to
reflect adjustments in the voting rights of the Preferred Shares pursuant to the
terms thereof, so that the fraction of a Preferred Share delivered in lieu of
each Common Share shall have the same voting rights as one Common Share.
(d) In the event that there shall not be sufficient Common Shares or
Preferred Shares issued but not outstanding or authorized but unissued to permit
any exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such action as may be necessary to authorize additional
Common Shares or Preferred Shares for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of Common Shares
or to distribute certificates which evidence fractional Common Shares. In lieu
of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
paragraph (e), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25. 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 its
Preferred Shares or to make any other distribution to the holders of its
Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer
to the holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, 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 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise, other than by payment of dividends in Common
Shares), then, in each such case, the Company shall give to each holder of a
Right Certificate, in accordance with Section 26
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<PAGE>
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such stock dividend, or 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 Common Shares and/or Preferred
Shares, 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 10 days
prior to the record date for determining holders of the Preferred Shares for
purposes of such action, and in the case of any such other action, at least 10
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares and/or Preferred
Shares, whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof shall
occur, then the Company shall, as soon as practicable thereafter, give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice of
the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
-------
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
DigitalWork.com, Inc.
230 West Monroe, Suite 1950
Chicago, Illinois 60606
Attn: David P. Aniol, Chief Financial Officer
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sent by registered or
certified mail, and shall be deemed given upon receipt, addressed (until another
address is filed in writing with the Company) as follows:
Chase Mellon Shareholder Services, LLC
________________________
________________________
Attention: Shareholder Services Department
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate 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
-36-
<PAGE>
on the registry books of the Company. Notices or demands sent by mail shall be
deemed given or made three Business Days after the date they are sent.
Section 27. Supplements and Amendments. The Company may from time to time
--------------------------
supplement or amend this Agreement without the approval of any holders of Right
Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions with respect to the Rights
which the Company may deem necessary or desirable, any such supplement or
amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes an
-------- -------
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights. Notwithstanding
anything in this Agreement to the contrary, no supplement or amendment that
changes the rights and duties of the Rights Agent under this Agreement will be
effective against the Rights Agent without the execution of such supplement or
amendment by the Rights Agent.
Section 28. 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 29. Benefits of This Agreement. Nothing in this Agreement shall
--------------------------
be construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Shares) 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 Right Certificates (and, prior to the Distribution Date, the Common Shares).
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 the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, 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 day following the date of such determination by the Board of Directors of
the Company.
Section 31. Governing Law. This Agreement and each Right Certificate
-------------
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for
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<PAGE>
all purposes shall be governed by and construed in accordance with the laws of
such State applicable to contracts to be made and performed entirely within such
State.
Section 32. Counterparts. This Agreement may be executed in any number of
------------
counterparts, and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 34. Determinations and Actions by the Board of Directors. The
----------------------------------------------------
Board of Directors of the Company shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to the Board or the Company or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, interpretations and determinations
(including, for purpose of clause (y) below, all omissions with respect to the
foregoing) which are done or made by the Board in good faith, shall (x) be
final, conclusive and binding on the Company, the Rights Agent, the holders of
the Right Certificates and all other parties, and (y) not subject the Board of
Directors to any liability to the holders of the Right Certificates.
[Signatures appear on the following page]
-38-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
Attest: DIGITALWORK.COM, INC.
By: By: /s/
------------------------------- -------------------------------
Title: Corporate Secretary Name:
Title:
Attest: CHASE MELLON SHAREHOLDER SERVICES,
LLC, as Rights Agent
By: By: /s/
------------------------------- -------------------------------
Title: Name:
Title:
<PAGE>
Exhibit A
---------
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES A PARTICIPATING PREFERRED STOCK
of
DIGITALWORK.COM, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, Craig A. Terrill, President and Chief Operating Officer, and Robert A.
Schultz, Chairman of the Board, Chief Executive Officer and Secretary, of
DigitalWork.com, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), in accordance with
the provisions of Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation of the Corporation, the Board of Directors on March
____, 2000 adopted the following resolution creating a series of 300,000 shares
of preferred stock designated as Series A Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation in accordance with the provisions of its Certificate of
Incorporation, as amended, a series of preferred stock, par value $.005 per
share, of the Corporation (such preferred stock being herein referred to as
"Preferred Stock," which term shall include any additional shares of preferred
stock of the same class heretofore or hereafter authorized to be issued by the
Corporation), consisting of 300,000 shares is hereby created, and the voting
powers, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, are as
follows:
Section 1. Designation and Amount. There shall be a series of Preferred
----------------------
Stock of the Corporation which shall be designated as "Series A Participating
Preferred Stock," par value $.005 per share (hereinafter called "Series A
Preferred Stock"), and the number of shares constituting such series shall be
300,000. Such number of shares may be increased or decreased by resolution of
the Board of Directors and by the filing of a certificate pursuant to the
provisions of the General Corporation Law of the State of Delaware stating that
such increase or reduction has been so authorized; provided, however, that no
-------- -------
decrease shall reduce the number of shares of Series A Preferred Stock to a
number less than that of the shares then outstanding plus the number of shares
of Series A Preferred Stock issuable upon exercise of outstanding rights,
options or warrants or upon conversion of outstanding securities issued by the
Corporation.
<PAGE>
Section 2. Dividends and Distributions.
---------------------------
(A) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash to holders of record on the last business
day of March, June, September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate per
share amount of all cash dividends, and 100 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock (hereinafter defined) or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $.005 per share, of the
Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any time following April
__, 2000 effect a subdivision, split, combination or consolidation of the Common
Stock (by reclassification or otherwise than by payment of dividends in Common
Stock), then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying each such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(B) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) above at the time it declares a
dividend or distribution on the Common Stock (other than a dividend payable in
shares of Common Stock).
(C) No dividend or distribution (other than a dividend payable in shares of
Common Stock) shall be paid or payable to the holders of shares of Common Stock
unless, prior thereto, all accrued but unpaid dividends to the date of such
dividend or distribution shall have been paid to the holders of shares of Series
A Preferred Stock.
<PAGE>
(D) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 30 days prior to the date fixed
for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
-------------
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each one
one-hundredth of a share of Series A Preferred Stock shall entitle the holder
thereof to one vote on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time following April
__, 2000 effect a subdivision, split, combination or consolidation of the Common
Stock (by reclassification or otherwise than by payment of dividends in Common
Stock), then in each such case the number of votes per share to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C) (i) Whenever, at any time or times, dividends payable on any share or
shares of Series A Preferred Stock shall be in arrears in an amount equal
to at least six full quarterly dividends (whether or not declared and
whether or not consecutive), the holders of record of the outstanding
Preferred Stock shall have the exclusive right, voting separately as a
single class, to elect two directors of the Corporation at a special
meeting of stockholders of the Corporation or at the Corporation's next
annual meeting of stockholders, and at each subsequent annual meeting of
stockholders, as provided below. At elections for such
<PAGE>
directors, the holders of shares of Series A Preferred Stock shall be
entitled to cast one vote for each one one-hundredth of a share of Series A
Preferred Stock held.
(ii) Upon the vesting of such right of the holders of the Preferred
Stock, the maximum authorized number of members of the Board of Directors
shall automatically be increased by two and the two vacancies so created
shall be filled by vote of the holders of the outstanding Preferred Stock
as hereinafter set forth. A special meeting of the stockholders of the
Corporation then entitled to vote shall be called by the Chief Executive
Officer or the Board of Directors of the Corporation, if requested in
writing by the holders of record of not less than 10% of the Preferred
Stock then outstanding. At such special meeting, or, if no such special
meeting shall have been called, then at the next annual meeting of
stockholders of the Corporation, the holders of the shares of the Preferred
Stock shall elect, voting as above provided, two directors of the
Corporation to fill the aforesaid vacancies created by the automatic
increase in the number of members of the Board of Directors. At any and
all such meetings for such election, the holders of a majority of the
outstanding shares of the Preferred Stock shall be necessary to constitute
a quorum for such election, whether present in person or by proxy, and such
two directors shall be elected by the vote of at least a plurality of
shares held by such stockholders present or represented at the meeting.
Any director elected by holders of shares of the Preferred Stock pursuant
to this Section may be removed at any annual or special meeting, by vote of
a majority of the stockholders voting as a class who elected such director,
with or without cause. In case any vacancy shall occur among the directors
elected by the holders of the Preferred Stock pursuant to this Section,
such vacancy may be filled by the remaining director so elected, or his
successor then in office, and the director so elected to fill such vacancy
shall serve until the next meeting of stockholders for the election of
directors. After the holders of the Preferred Stock shall have exercised
their right to elect Directors in any default period and during the
continuance of such period, the number of Directors shall not be further
increased or decreased except by vote of the holders of Preferred Stock as
herein provided or pursuant to the rights of any equity securities ranking
senior to or pari passu with the Series A Preferred Stock.
---- -----
<PAGE>
(iii) The right of the holders of the Preferred Stock, voting
separately as a class, to elect two members of the Board of Directors of
the Corporation as aforesaid shall continue until, and only until, such
time as all arrears in dividends (whether or not declared) on the Preferred
Stock shall have been paid or declared and set apart for payment, at which
time such right shall terminate, except as herein or by law expressly
provided, subject to revesting in the event of each and every subsequent
default of the character above-mentioned. Upon any termination of the
right of the holders of the shares of the Preferred Stock as a class to
vote for directors as herein provided, the term of office of all directors
then in office elected by the holders of Preferred Stock pursuant to this
Section shall terminate immediately. Whenever the term of office of the
directors elected by the holders of the Preferred Stock pursuant to this
Section shall terminate and the special voting powers vested in the holders
of the Preferred Stock pursuant to this Section shall have expired, the
maximum number of members of the Board of Directors of the Corporation
shall be such number as may be provided for in the By-Laws of the
Corporation irrespective of any increase made pursuant to the provisions of
this Section.
(D) Except as set forth herein, holders of Series A Preferred Stock shall
have no special voting rights and their consent shall not be required (except to
the extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
--------------------
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred Stock; or
<PAGE>
(iv) purchase or otherwise acquire for consideration any shares of
Series A Preferred Stock, except in accordance with a purchase offer made
in writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
-----------------
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any
--------------------------------------
voluntary liquidation, dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock unless, prior thereto, the holders of shares of Series
A Preferred Stock shall have received $1.00 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment (the "Series A Liquidation Preference"). Following
the payment of the full amount of the Series A Liquidation Preference, no
additional distributions shall be made to the holders of shares of Series A
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation Preference by (ii)
100 (as appropriately adjusted as set forth in subparagraph C below to reflect
such events (other than stock dividends) as stock splits and recapitalizations
with respect to the Common Stock) (such number in clause (ii), the "Adjustment
Number"). Following the payment of the full amount of the Series A Liquidation
Preference and the Common Adjustment in respect of all outstanding shares of
Series A Preferred Stock and Common Stock, respectively, holders of Series A
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ratio, on a per share basis, of the Adjustment Number to 1 with respect to such
Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of Preferred Stock, if any, which
rank on a parity with the Series A Preferred Stock, then such
<PAGE>
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
(C) In the event the Corporation shall at any time following April __, 2000
effect a subdivision, split, combination or consolidation of the Common Stock
(by reclassification or otherwise than by payment of dividends in Common Stock),
then in each such case the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
<PAGE>
Section 7. Consolidation, Merger, etc. In case the Corporation shall
---------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time effect a subdivision, split,
combination or consolidation of the Common Stock (by reclassification or
otherwise than by payment of dividends in Common Stock), then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 8. Redemption. The shares of a Series A Preferred Stock shall not
----------
be redeemable by the Corporation. The preceding sentence shall not limit the
ability of the Corporation to purchase or otherwise deal in such shares of stock
to the extent permitted by law.
Section 9. Ranking. The Series A Preferred Stock shall rank junior to all
-------
other series of the Corporation's preferred stock (whether with or without par
value) as to the payment of dividends and the distribution of assets, unless the
terms of any such series shall provide otherwise.
Section 10. Amendment. The Certificate of Incorporation of the
---------
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of a
majority or more of the outstanding shares of Series A Preferred Stock, voting
separately as a class.
Section 11. Fractional Shares. Series A Preferred Stock may be issued in
-----------------
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
<PAGE>
IN WITNESS WHEREOF, DigitalWork.com has caused its corporate seal to be
hereunto affixed and this Certificate to be signed by Craig A. Terrill, its
Chairman, President and Chief Operating Officer, and the same to be attested by
Robert A. Schultz, its Secretary, this ____ day of ____________, 2000.
DIGITALWORK.COM, INC.
By:_______________________________
Craig A. Terrill, President and
Chief Operating Officer
Attest:
By:__________________________
Robert A. Schultz
Secretary
[Signature Page to Certificate of Designation]
<PAGE>
Exhibit B
---------
[Form of Right Certificate]
Certificate No. R- ____________ Rights
NOT EXERCISABLE AFTER APRIL __, 2010 OR EARLIER IF THE RIGHTS EXPIRE UNDER
CERTAIN CIRCUMSTANCES OR ARE REDEEMED BY THE COMPANY. THE RIGHTS ARE
SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.001 PER RIGHT ON
THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES,
RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS DEFINED
IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS CERTIFICATE ARE OR
WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON
OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHT CERTIFICATE AND
THE RIGHTS REPRESENTED HEREBY MAY BECOME VOID IN THE CIRCUMSTANCES
SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.]*/
-
Right Certificate
DigitalWork.com, Inc.
This certifies that __________________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of April __, 2000 (the "Rights Agreement"),
between DigitalWork.com, Inc., a Delaware corporation (the "Company"), and Chase
Mellon Shareholder Services, LLC, a New Jersey limited liability company (the
ARights Agent"), to purchase from the Company at any time after the Distribution
Date (as such term is defined in the Rights Agreement) and prior to 5:00 p.m.
(Chicago time) on April __, 2000, or notice of redemption or exchange at the
office of the Rights Agent (or its successors as Rights Agent) designated for
such purpose, one one-hundredth of a fully paid non-assessable share of Series A
Participating Preferred Stock, par value $.005 per share (the "Preferred
Shares") of the Company at a purchase price five times the initial offering
price of one share of the Common Stock of the Company (the "Purchase Price")
upon presentation and surrender of this Right Certificate with the appropriate
Form of Election to Purchase and related Certificate duly executed. The number
______________________
*/ The portion of the legend in brackets shall be inserted only if applicable
- -
and shall replace the preceding sentence.
<PAGE>
Rights evidenced by this Right Certificate (and the number of shares which may
be purchased upon exercise thereof) set forth above, and the Purchase Price per
share set forth above, are the number and Purchase Price as of April __, 2000,
based on the Preferred Shares as constituted at such date. Capitalized terms not
defined in this Right Certificate that are defined in the Rights Agreement shall
have the meanings ascribed to them in the Rights Agreement.
Upon the occurrence of a Triggering Event, if the Rights evidenced by this
Right Certificate are beneficially owned by (I) an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
in the Rights Agreement), (ii) under certain circumstances specified in the
Rights Agreement, a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, after such transfer, became an
Acquiring Person, or an Affiliate or Associate of an Acquiring Person, such
Rights shall become null and void and no holder hereof shall have any right with
respect to such Rights from and after the occurrence of any such Triggering
Event.
As provided in the Rights Agreement, the Purchase Price and the number and
kind of Preferred Shares or other securities, which may be purchased upon the
exercise of the Rights evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under certain circumstances specified in such Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal corporate trust office of the Rights Agent, may be
exchanged for another Right Certificate or Right Certificates of like tenor and
date evidencing Rights entitling the holder to purchase a like aggregate number
of Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Company at its option at a redemption
price of $.005 per Right at any time prior to the earlier of the close of
business on (I) the tenth day following the Shares Acquisition Date and (ii) the
Final Expiration Date.
<PAGE>
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share, which may at the election
of the Company be evidenced by depository receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of Preferred Shares or
of any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or, to receive notice of meetings or
other actions affecting stockholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
<PAGE>
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal.
Dated as of __________, 20__
ATTEST: DIGITALWORK.COM, INC.
_________________________ By: _______________________
Name: Name:
Title: Title:
Countersigned:
_________________________
By: _____________________
Authorized Signature
<PAGE>
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such holder desires to transfer
the Right Certificate.)
FOR VALUE RECEIVED ___________________________________________________
hereby sells, assigns and transfers unto _____________________________
______________________________________________________________________
(Please print name and address of transferee)
______________________________________________________________________
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint _______________________ Attorney,
to transfer the within Right Certificate on the books of the within-named
Company, with full power of substitution.
Date: ___________________, 20__
_____________________________
Signature
Signature Guaranteed:
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Right Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person
or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement)
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Right Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: _____________, 20__ _______________________
Signature
<PAGE>
NOTICE
------
The signature to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Right Certificate in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to
exercise Rights represented by the
Right Certificate.)
To: DIGITALWORK.COM, INC.
The undersigned hereby irrevocably elects to exercise ____ Rights
represented by this Right Certificate to purchase the Preferred Shares issuable
upon the exercise of the Rights (or such other securities of the Company or of
any other person which may be issuable upon the exercise of the Rights) and
requests that certificates for such shares be issued in the name of:
Please insert social security or other identifying number:_________________
______________________________________________________________________
(Please print name and address)
______________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this
Right Certificate, a new Right Certificate for the balance of such Rights shall
be registered in the name of and delivered to:
Please insert social security or other identifying number:_________________
______________________________________________________________________
(Please print name and address)
______________________________________________________________________
Dated: ________, 20__ ________________________
Signature
Signature Guaranteed:
<PAGE>
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Right Certificate [_] are [_] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [_]
did [_] did not acquire the Rights evidenced by this Right Certificate from any
Person who is, was or became an Acquiring Person or an Affiliate or Associate of
an Acquiring Person.
Dated: _______, 20__ _______________________
Signature
NOTICE
------
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE>
Exhibit C
---------
UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE
RIGHTS AGREEMENT, RIGHTS OWNED BY OR
TRANSFERRED TO ANY PERSON WHO IS OR BECOMES AN
ACQUIRING PERSON (AS DEFINED IN THE RIGHTS
AGREEMENT) AND CERTAIN TRANSFEREES THEREOF WILL
BECOME NULL AND VOID AND WILL NO LONGER BE
TRANSFERABLE
SUMMARY OF RIGHTS PLAN
----------------------
On April __, 2000, the Board of Directors of DigitalWork.com, Inc. (the
"Company") declared a dividend distribution of one Right for each outstanding
share of common stock, par value $.005 per share (the "Common Stock"), of the
Company to stockholders of record at the close of business on April __, 2000
(the "Record Date"). Except as described below, each Right, when exercisable,
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Participating Preferred Stock, par value $.005 per share
(the "Preferred Stock"), at a price equal to five times the initial public
offering price of one share of the Common Stock of the Company (the "Purchase
Price"), subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement (the "Rights Agreement") between the Company and
Chase Mellon Shareholder Services, LLC, as Rights Agent.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Right certificates will be
distributed. Until the earlier to occur of (I) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of Common Stock (the "Shares
Acquisition Date") or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors of the Company (the "Board of
Directors") prior to the time that any person becomes an Acquiring Person)
following the commencement of (or a public announcement of an intention to make)
a tender or exchange offer if, upon consummation thereof, such person or group
would be the beneficial owner of 15% or more of such outstanding shares of
Common Stock (the earlier of such dates being called the "Distribution Date"),
the Rights will be evidenced by the Common Stock certificates together with a
copy of the Summary of Rights Plan and not by separate certificates. Draper
Fisher Jurvetson and TL Ventures and certain other affiliates and associates
will not be deemed to be an Acquiring Person as long as such entities
beneficially own less than 28% and 18% of the outstanding Common Stock,
respectively.
<PAGE>
The Rights Agreement also provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Stock. Until the
Distribution Date (or earlier redemption, expiration or termination of the
Rights), the transfer of any certificates for Common Stock, with or without a
copy of this Summary of Rights Plan, will also constitute the transfer of the
Rights associated with the Common Stock represented by such certificates. As
soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the Common Stock as of the close of business on the Distribution Date and,
thereafter, such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the earliest of (I) the tenth anniversary of the effective date of the Rights
Agreement (the "Final Expiration Date"), (ii) the redemption of the Rights by
the Company as described below and (iii) the exchange of all Rights for Common
Stock as described below. The Rights will lapse and be of no further effect if
there is not on file with the Securities and Exchange Commission prior to May
31, 2000 an effective S-1 Registration Statement relating to the initial public
offering of the Company's common stock.
In the event that any person (other than the Company, its affiliates or any
person receiving newly-issued shares of Common Stock directly from the Company)
becomes the beneficial owner of 15% or more of the then outstanding shares of
Common Stock, each holder of a Right will thereafter have the right to receive,
upon exercise at the then current exercise price of the Right, Common Stock (or,
in certain circumstances, cash, property or other securities of the Company)
having a value equal to two times the exercise price of the Right. The Rights
Agreement contains an exemption for any issuance of Common Stock by the Company
directly to any person (for example, in a private placement or an acquisition by
the Company in which Common Stock is used as consideration), even if that person
would become the beneficial owner of 15% or more of the Common Stock, provided
that such person does not acquire any additional shares of Common Stock.
In the event that, at any time following the Shares Acquisition Date, the
Company is acquired in a merger or other business combination transaction or 50%
or more of the Company's assets or earning power are sold, proper provision will
be made so that each holder of a Right will thereafter have the right to
receive, upon exercise at the then current exercise price of the Right, common
stock of the acquiring or surviving company having a value equal to two times
the exercise price of the Right.
Notwithstanding the foregoing, following the occurrence of any of the
events set forth in the preceding two paragraphs (the "Triggering Events"), any
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person will immediately
become null and void.
<PAGE>
The Purchase Price payable, and the number of shares of Preferred Stock or
other securities or property issuable, upon exercise of the Rights, are subject
to adjustment from time to time to prevent dilution, among other circumstances,
in the event of a subdivision, split (other than a stock dividend on the Common
Stock payable in shares of Common Stock), combination, consolidation or
reclassification of, the Preferred Stock or the Common Stock, or a reverse split
of the outstanding shares of Preferred Stock or the Common Stock.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the outstanding
Common Stock and prior to the acquisition by such person or group of 50% or more
of the outstanding Common Stock, the Board of Directors may exchange the Rights
(other than Rights owned by such person or group, which have become void), in
whole or in part, at an exchange ratio of one share of Common Stock per Right
(subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
the Purchase Price. The Company will not be required to issue fractional shares
of Preferred Stock or Common Stock (other than fractions in multiples of one
one-hundredths of a share of Preferred Stock) and, in lieu thereof, an
adjustment in cash may be made based on the market price of the Preferred Stock
or Common Stock on the last trading date prior to the date of exercise.
At any time after the date of the Rights Agreement until the time that a
person becomes an Acquiring Person, the Board of Directors may redeem the Rights
in whole, but not in part, at a price of $.005 per Right (the "Redemption
Price"), which may (at the option of the Company) be paid in cash, shares of
Common Stock or other consideration deemed appropriate by the Board of
Directors. Upon the effectiveness of any action of the Board of Directors
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The provisions of the Rights Agreement may be amended by the Company,
except that any amendment adopted after the time that a person becomes an
Acquiring Person may not adversely affect the interests of holders of Rights.
As of the Record Date, there were __________ shares of Common Stock
outstanding and __________ shares of Common Stock reserved for issuance under
employee benefit plans. Each outstanding share of Common Stock on the Record
Date will receive one Right. A total of 300,000 shares of Preferred Stock will
be reserved for issuance in the event of exercise of the Rights.
<PAGE>
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired, and under certain circumstances the Rights
beneficially owned by such a person or group may become void. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors because, if the Rights would become exercisable as a result
of such merger or business combination, the Board of Directors may, at its
option, at any time prior to the time that any Person becomes an Acquiring
Person, redeem all (but not less than all) of the then outstanding Rights at the
Redemption Price.
A copy of the Rights Agreement is being filed with the Securities and
Exchange Commission as an exhibit to a Registration Statement on Form 8-A. This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 26,
2000 with respect to DigitalWork.com, Inc. in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-95895) and related Prospectus of
DigitalWork.com, Inc. for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Chicago, Illinois
March 13, 2000
<PAGE>
Exhibit 23.3
CONSENT OF DIRECTOR NOMINEE
I hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form
S-1 of the initial public offering of common stock $0.005 par value per share
of DigitalWork.com, Inc.
(the "Corporation") of my biographical information and the disclosure of my
status as a director nominee of the Corporation.
/s/ Edward C. Coppola
_____________________________________
Edward C. Coppola
