<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 16, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EMERALD -- DELAWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7371 91-1745906
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
EMERALD -- DELAWARE, INC.
111 SW 5TH AVENUE, 27TH FLOOR
PORTLAND, OR 97204
(503) 276-2900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARTIN WRIGHT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EMERALD -- DELAWARE, INC.
111 SW 5TH AVENUE, 27TH FLOOR
PORTLAND, OR 97204
(503) 276-2900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
WILLIAM D. SHERMAN, ESQ. PATRICK O'BRIEN, ESQ.
JUSTIN L. BASTIAN, ESQ. CHRISTOPHER J. AUSTIN, ESQ.
MARY ANNE BECKING, ESQ. CHAD D. PERRY, ESQ.
MORRISON & FOERSTER LLP ROPES & GRAY
755 PAGE MILL ROAD ONE INTERNATIONAL PLACE
PALO ALTO, CALIFORNIA 94304 BOSTON, MASSACHUSETTS 02110
(650) 813-5600 (617) 951-7000
</TABLE>
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 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,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value..................... $50,000,000 $13,200
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(o) solely for the purpose of computing the
amount of the registration fee.
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 HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED , 2000
[EMERALD SOLUTIONS LOGO]
- --------------------------------------------------------------------------------
Shares
Common Stock
- --------------------------------------------------------------------------------
This is the initial public offering of Emerald -- Delaware, Inc., and we are
offering shares of our common stock. We anticipate that the initial
public offering price will be between $ and $ per share. We have applied
to list our common stock on The Nasdaq Stock Market's National Market under the
symbol "EMSO."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND EMERALD
PUBLIC COMMISSIONS SOLUTIONS
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
We and a selling stockholder have granted the underwriters the right to purchase
up to additional shares to cover any over-allotments.
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
ADAMS, HARKNESS & HILL, INC.
PACIFIC CREST
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. This summary may not contain all the information that you should
consider before investing in our common stock. You should read the entire
prospectus, including Risk Factors and the Financial Statements and related
Notes, before making an investment decision.
EMERALD-DELAWARE, INC.
We are an e-business services company that designs and builds
Internet-based business solutions by integrating digital business strategy with
both emerging and existing information technologies. We help our clients to
create new e-businesses or to expand and improve their existing e-business
activities. Our solutions enable our clients to use the Internet to enhance
relationships with their customers and business partners, improve the efficiency
of their operations and create new revenue opportunities.
Businesses are increasingly using the Internet in an attempt to capitalize
on these opportunities, and as a result the demand for Internet professional
services has increased. According to International Data Corporation, an
independent research firm, the worldwide market for Internet professional
services will grow from $12.9 billion in 1999 to $78.6 billion in 2003.
Our objective is to become the preferred provider of e-business services,
delivering comprehensive solutions that allow our clients to realize the
opportunities presented by e-business. We work with our clients to understand,
refine and develop their e-business strategy and base our solution on that
strategy, rather than any particular technology. We then architect, design and
implement scalable, reliable and secure solutions that include not only
Internet-centric applications, such as e-commerce web sites and corporate
intranets, but also the integration of enterprise applications, such as business
intelligence, customer relationship management, enterprise resource planning and
supply chain management applications, whether existing or new.
We deliver our e-business solutions from local offices and supplement our
local delivery teams with professionals who possess specific industry expertise
and business functional expertise. Our professionals employ our E-Business
Engineering approach to deliver our solutions. Our approach is governed by a set
of guiding principles and leverages our rapid solutions delivery methodology,
breadth of capabilities and skilled professionals. Our guiding principles
establish a rigor and discipline that, together with our methodology, result in
solutions that are delivered quickly with superior quality. We are able to
provide these solutions in complex e-business environments providing scalable,
reliable and secure solutions because of our skilled and experienced
professionals, who possess these capabilities, apply our guiding principles and
use our solutions delivery methodology to deliver effective e-business
solutions.
To achieve our objective of becoming the preferred provider of e-business
services, we seek to deliver high-quality and timely solutions. We also seek to
attract, retain and motivate experienced professionals, target clients with
potential for large e-business needs, expand our internal information technology
infrastructure to facilitate growth and employ marketing efforts to increase
awareness of our brand.
We provide solutions for Fortune 1000 and emerging high growth companies in
industries such as telecommunications, transportation, pharmaceuticals,
financial services and the Internet. As of December 25, 1999, our 327
professionals had provided solutions for clients such as AT&T, Benjamin Moore,
Dun & Bradstreet, Hawaiian Airlines, Lucent Technologies and Warner Lambert.
Recent client engagements with emerging companies include BSQUARE, Covance,
Pointsbeyond.com and Priceline Webhouse, Inc. Today we deliver our solutions
from 10 offices located throughout the United States, including our headquarters
in Portland, Oregon.
1
<PAGE> 4
THE OFFERING
Common stock offered........................ shares
Common stock to be outstanding after this
offering.................................... shares
Use of proceeds............................. For repayment of debt and
general corporate purposes,
including working capital.
Proposed Nasdaq National Market symbol...... EMSO
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.................................. $ 2,234 $15,011 $34,711
Income (loss) from operations............. (3,853) 777 (5,440)
Net income (loss)......................... (3,853) 708 (5,425)
Income (loss) applicable to common
stockholders........................... (3,853) 708 (6,117)
Net earnings (loss) per share:
Basic earnings (loss) per share........ (0.09) 0.01 (0.12)
Diluted earnings (loss) per share...... (0.09) 0.01 (0.12)
Shares used to calculate basic earnings
(loss) per share..................... 41,848 48,721 49,826
Shares used to calculate diluted
earnings (loss) per share............ 41,848 50,911 49,826
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 25, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 1,708 $6,708 $
Current assets...................................... 10,110 10,110
Current liabilities................................. 10,892 10,892
Total assets........................................ 14,885 14,885
Long term obligations............................... 242 242
Redeemable convertible preferred stock.............. 7,207 --
Total stockholders' equity (deficit)................ (3,457) 8,750
</TABLE>
The total number of outstanding shares of our common stock and the pro
forma data above are based on:
- 50,042,580 shares of our common stock outstanding as of December 25,
1999; and
- the automatic conversion of all outstanding shares of our Series A
Preferred Stock issued in March 1999 into 13,333,334 shares of common
stock, and all outstanding shares of our Series B Preferred Stock issued
in February 2000 into 2,000,000 shares of common stock upon completion of
this offering.
2
<PAGE> 5
The above information excludes:
- 14,116,694 shares of common stock issuable upon exercise of options
outstanding as of December 25, 1999, at a weighted average exercise price
of $0.44 per share;
- 4,522,851 shares of common stock available for issuance under our 1997
Stock Incentive Compensation Plan as of December 25, 1999; and
- 325,000 shares of common stock available for issuance under our 1999
Non-Employee director Stock Option Plan as of December 25, 1999.
See Note 7(b) of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
The pro forma as adjusted amounts above give effect to the sale of the
shares of common stock in this offering at an assumed public
offering price of $ per share (less estimated
underwriting discounts and commissions and estimated offering expenses). See
"Use of Proceeds" and "Capitalization."
Unless otherwise specifically stated, information throughout this
prospectus:
- reflects the automatic conversion of all outstanding shares of redeemable
convertible preferred stock upon completion of this offering into
15,333,334 shares of common stock; and
- assumes no exercise of the underwriters' over-allotment option.
-------------------------
We incorporated in Washington in November 1996 under the name Emerald
Solutions, Inc. Our substantive operations began in January 1997. We
reincorporated in Delaware in April 1999 under the name Emerald -- Delaware,
Inc., and conduct business using the name Emerald Solutions. We are not
affiliated with Emerald Solutions, Inc., a Delaware corporation. Our principal
executive offices are located at 111 SW 5th Avenue, 27th floor, Portland, Oregon
97204 and our telephone number is (503) 276-2900. Our web site is located at
"www.emeraldsolutions.com." Information contained on our web site does not
constitute a part of this prospectus. Our fiscal year ends on the last Saturday
of each calendar year.
-------------------------
"Emerald Solutions" is our registered trademark and "E-Business
Engineering" is our registered service mark, in addition, we have applied for
registration of our Emerald Solutions "ES" logo, "E-Business Engineering" and
"E-Business Engineering at Work." All other trademarks or service marks
appearing in this prospectus are trademarks or service marks of the respective
companies that use them.
3
<PAGE> 6
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the risk factors and the other
information in this prospectus before investing in our common stock. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you may lose part or all of your investment.
RISKS RELATED TO OUR MARKETS AND FINANCIAL CONDITION
OUR LIMITED OPERATING HISTORY AND THE NEW INTERNET PROFESSIONAL SERVICES MARKET
IN WHICH WE OPERATE MAY MAKE IT DIFFICULT FOR YOU TO EVALUATE OUR FUTURE
SUCCESS.
Because we began operations in 1997, we have a limited operating history
upon which you can evaluate our business. In addition, we compete in a
relatively new market known as the Internet professional services market. The
limited amount of historical information about us and our market makes it more
difficult for you to predict whether or not we will be successful. You should
evaluate our chances of financial and operational success in light of the risks,
uncertainties, expenses, delays and difficulties associated with starting a new
business, many of which are beyond our control. Our failure to successfully
address the issues facing our business or our market could harm our ability to
obtain new clients, retain existing clients and recruit and retain
highly-skilled employees.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We incurred net losses of $3.9 million during fiscal year 1997, realized
net income of $708,000 during fiscal year 1998, and incurred a net loss of $5.4
million in fiscal year 1999. As of December 25, 1999, we had an accumulated
deficit of $8.6 million. We cannot assure you that we will achieve profitability
in the future. Further, our operating expenses are to a large degree fixed, and
any shortfall in anticipated revenue in any given period could harm our
operating results. We also expect to continue to incur increasing sales and
marketing, infrastructure development and general and administrative expenses.
As a result, we will need to generate significant revenues to achieve
profitability. If we do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE.
Our quarterly revenues and operating results are volatile and difficult to
predict. As a result, we believe that historical quarterly revenues and
operating results are not necessarily indicative of future performance. A number
of factors that are likely to cause this volatility in the future include:
- variability in market demand for the Internet and for Internet
professional services;
- substantial fixed expenses, including personnel and related costs,
incurred in opening new offices and in advance of contracts for projects;
- the length and variability of our sales cycle;
- the varying efficiency with which we utilize our employees, including our
ability to rapidly transition employees from completed projects to new
projects and among offices;
- the introduction of new services by our competitors;
- seasonality in revenues due to variations in the number of holidays from
quarter to quarter;
4
<PAGE> 7
- changes in pricing policies by our competitors;
- our relatively small number of customers and relatively large individual
projects in proportion to total revenue;
- market reaction to any future acquisitions, joint ventures, mergers or
other business combinations;
- how well we estimate the resources we need to complete projects; and
- our ability to attract and retain professionals.
Due to these factors, it is possible that in some future quarter or
quarters our operating results will be below the expectations of public market
analysts or investors. In such event, the market price of our common stock may
decline significantly.
IF WE FAIL TO ACCURATELY ESTIMATE THE RESOURCES NECESSARY FOR COMPLETION OF
FIXED-FEE CONTRACTS, WE COULD LOSE MONEY ON THOSE CONTRACTS.
We generate a significant portion of our revenues from contracts that have
fees that are capped or that have a fixed fee. We work with complex technologies
in compressed timeframes which makes it difficult for us to judge the time and
resources any particular project may require. We have occasionally had to commit
unanticipated additional resources to complete projects, and we expect we may
have to take similar action in the future. If we fail to accurately estimate the
resources required for a project, then our costs to complete the project could
increase substantially and our results of operations could suffer.
RISKS RELATED TO OUR BUSINESS AND STRATEGY
WE ARE HEAVILY DEPENDENT ON REVENUES GENERATED FROM A LIMITED NUMBER OF CLIENTS,
AND A REDUCTION IN THE WORK WE PERFORM FOR THESE CLIENTS COULD SIGNIFICANTLY
REDUCE OUR REVENUES.
We derive a significant portion of our revenues from a limited number of
clients. As a percentage of total revenues, revenues derived from our five
largest clients decreased from 90% in fiscal year 1997 to 78% in fiscal year
1998 and 64% in fiscal year 1999. In fiscal year 1999, AT&T accounted for more
than 10% of our revenues. No other client accounted for more than 10% of our
revenues in fiscal year 1999. We expect to continue to derive a significant
portion of our revenues from a limited number of clients. The loss of any
significant client or the reduction in the work performed for any significant
client could significantly reduce our revenues.
IF OUR CLIENTS DO NOT REHIRE US FOR NEW PROJECTS, OR IF THEY TERMINATE OR REDUCE
THE SCOPE OF EXISTING PROJECTS, OUR REVENUES MAY DECLINE.
A significant portion of our revenues is derived from fixed-fee, fixed-time
contracts for discrete projects. If clients do not retain us for subsequent
projects, then our revenues could decline. In addition, while our projects
typically comprise several integrated phases, each sequential phase of a project
represents a separate contractual commitment. The client may elect at any time
not to proceed to the next phase of a project, which could reduce our revenues.
Similarly, a client may attempt to cancel or reduce the scope of any phase
of a project. It is possible that we may agree to the cancellation or reduction
in scope, or that the client may prevail in the event of a dispute over whether
it has the right to cancel or reduce the scope of a project. The cancellation,
or reduction in scope, of a project could have a negative impact on our
revenues. Further, a client could reject a deliverable in whole or in part. In
this event, we
5
<PAGE> 8
could be required to either expend additional unanticipated resources which
could cause us to exceed our expected budget for the project, or forego the
associated revenues. Either circumstance could result in a negative impact on
our results of operations.
WE MUST MEET CLIENT EXPECTATIONS AND EXPAND OUR NAME RECOGNITION TO REMAIN
COMPETITIVE.
We believe that establishing and maintaining a good reputation and name
recognition is critical for attracting and expanding our targeted client base.
We also believe that the importance of reputation and name recognition will
increase due to the growing number of Internet professional services firms. If
our reputation is damaged or if potential clients do not know what services we
provide, we may become less competitive or lose our market share. Promotion and
enhancement of our name will depend largely on our success in providing high
quality e-business solutions. If clients do not perceive our e-business
solutions to be effective or of high quality, our brand name and reputation
could be seriously harmed.
OUR BUSINESS IS LABOR INTENSIVE AND IF WE ARE UNABLE TO RECRUIT AND RETAIN
QUALIFIED PROFESSIONALS, OUR BUSINESS RESULTS WILL SUFFER.
Because we are an Internet professional services firm, our success depends,
in large part, on identifying, hiring, training and retaining qualified
professionals. Because of the recent growth of the Internet, there is currently
a shortage of professionals with the appropriate Internet-related skills and
experience we seek and we expect this trend to continue for the foreseeable
future. We compete with other companies to recruit and hire from this limited
pool. If we cannot hire and retain qualified personnel, we may be unable to
complete or retain existing projects or bid for new projects of similar scope
and associated revenues.
OUR OPERATING RESULTS MAY SUFFER IF WE ARE NOT ABLE TO ADEQUATELY MANAGE OUR
GROWTH.
We have grown rapidly and expect to continue to grow rapidly both by hiring
new employees and serving new business and geographic markets. Our headcount has
grown from 169 people as of December 26, 1998, to 457 people as of December 25,
1999, and some members of our current management team have only recently joined
us. Although we currently do not believe that we will continue to grow at this
rate in the long-term, this growth has strained, and will continue to strain in
the future, our managerial and operational resources. To manage our growth, we
must establish new offices in appropriate geographic locations, establish
profitable pricing, maintain high employee utilization rates and maintain
project quality. If we are not able to do this effectively, our results of
operations will be harmed.
THE LOSS OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, OR OTHER KEY PERSONNEL,
MAY HARM OUR BUSINESS.
We believe that our success depends on the continued employment of our
senior management team. This dependence is particular to our business because
personal relationships are a critical element of obtaining and maintaining
client projects. If one or more of these key personnel were unable or unwilling
to continue in their present positions, they would be very difficult to replace
and our business could be seriously harmed. To date, a majority of our revenues
have been generated by the selling efforts of our senior management.
Accordingly, the loss of one or more members of our senior management team,
including our president and chief executive officer, Martin Wright, could have a
direct adverse impact on our future sales. In addition, if any of these key
employees joins a competitor or forms a competing company, some of our clients
might choose to use the services of that competitor or new company instead of
our own. Furthermore, clients or other companies seeking to develop in-house
e-business capabilities may hire away some of our key employees. This would not
only result in
6
<PAGE> 9
the loss of key employees but could also result in the loss of a client
relationship or a new business opportunity. Any losses of client relationships
could seriously harm our business.
IF WE ARE NOT SUCCESSFUL IN OPENING AND GROWING NEW OFFICES, OUR BUSINESS WILL
BE HARMED.
A key component of our growth strategy is to open offices in new geographic
locations. Once we select a new location, we typically devote substantial
financial and management resources to launch and grow that office. We may not
select appropriate markets to enter, open new offices efficiently or manage new
offices profitably. If we commit significant resources to launching and growing
a new office which then fails, our results of operations could be harmed.
WE MAY NOT COMPETE SUCCESSFULLY WITH OUR COMPETITORS.
The Internet and information technology consulting industry is relatively
new and intensely competitive and we expect competition to intensify as this
industry evolves. We believe that our competitors fall into several categories,
including the following:
- Internet services firms, such as iXL, Proxicom, Razorfish, Sapient,
Scient, and Viant;
- technology integrators, such as Andersen Consulting, Cambridge Technology
Partners, EDS, IBM, and Tanning;
- strategic consulting firms, such as Bain, Booz-Allen & Hamilton, Boston
Consulting Group, Diamond Technology Partners, KPMG, and McKinsey; and
- in-house information technology, marketing and design departments of our
potential and current clients.
Many of our competitors have longer operating histories, more clients,
longer relationships with their clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we do. As a result, our competitors may be in a stronger position
to respond quickly to new or emerging technologies and changes in client
requirements. They may also develop and promote their products and services more
effectively than we do.
Because there are relatively low barriers to entry into our industry, we
also expect other competitors to enter our market. In addition, we do not own
any patented technology that would protect our market share or prohibit existing
competitors or new entrants from providing services similar to ours. As a
result, new and unknown market entrants pose a threat to our business.
Current or future competitors may develop or offer services that are
comparable or superior to ours at a lower price, which could harm our revenues
and profitability. Further, competitors may have extensive knowledge of our
industry and well-established relationships with our current or potential
clients. As a result, our competitors may be able to respond more quickly to new
or emerging technologies and changes in client requirements than we can. If we
fail to compete successfully against our competitors, our business could be
seriously harmed.
POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND HARM OUR OPERATING RESULTS.
We have acquired in the past, and may acquire in the future, other
businesses. Any acquisition may complicate our management tasks and require
integration of widely dispersed operations with distinct corporate cultures.
Integration efforts may not succeed or may distract our management from
servicing existing clients. Our failure to manage future acquisitions
successfully could seriously harm our operating results. Also, acquisition costs
could cause our
7
<PAGE> 10
quarterly operating results to vary significantly. Furthermore, our stockholders
could suffer dilution if we finance the acquisitions by incurring debt or
issuing equity securities.
RISKS RELATED TO TECHNOLOGY AND THE INTERNET
OUR SUCCESS DEPENDS ON THE COMMERCIAL GROWTH OF THE INTERNET.
Our business is dependent upon continued growth in the use of the Internet
by our clients, prospective clients and their customers and suppliers. If the
number of users of the Internet does not increase and e-commerce does not become
more accepted and widespread, demand for our services may decrease and, as a
result, our revenues may decrease. The factors that may affect Internet usage or
e-commerce adoption include:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- congestion of Internet traffic;
- inconsistent quality of service;
- increases in access costs to the Internet;
- excessive governmental regulation;
- uncertainty regarding intellectual property ownership;
- reluctance to adopt new business methods; and
- costs associated with deploying new technologies necessary for
e-commerce.
IF WE FAIL TO KEEP UP WITH TECHNOLOGICAL CHANGES, OUR BUSINESS WILL SUFFER.
We generate our revenues from creating complex, integrated e-business
solutions that are based upon today's leading technologies. The Internet
professional services market and the enabling technologies used by our clients
are characterized by rapid technological change, which causes evolving industry
standards and changing client needs. Accordingly, our future success will
depend, in part, on our ability to keep pace with these technological changes.
Our ability to do this will depend on our success in hiring, training and
retaining qualified professionals who can:
- influence and respond to emerging industry standards and other
technological changes;
- understand the changes in technology affecting our industry; and
- deliver effective solutions that utilize the most innovative
technologies.
Failure to respond successfully to these changes in a timely and effective
manner may harm our ability to attract and retain clients.
OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES.
Year 2000 issues may adversely affect our business and our clients'
businesses. Many currently installed computer systems and software products are
coded to accept only two-digit year entries in the date code field. Many of
these systems could fail or malfunction because they may not be able to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies, including us, our clients and our
potential clients, may need to be upgraded to comply with such Year 2000
requirements. Since January 1, 2000 we have not become aware of any material
malfunctions of our computer systems and software relating to Year 2000 issues.
However any failure on the part of our
8
<PAGE> 11
principal internal systems or the systems that we create for our clients could
seriously harm our business, financial condition and operating results.
RISKS RELATED TO LEGAL UNCERTAINTY
WE MAY NOT HAVE RIGHTS TO SOLUTIONS WE DEVELOP FOR SPECIFIC CLIENTS.
Our business often involves the development of software applications for
specific client projects. Clients may negotiate assignment of ownership or
restrictions on our use of the related applications. We also develop software
applications for our own internal use and we retain ownership of these
applications. Issues relating to the ownership of and rights to use software can
be complicated and disputes may arise that affect our ability to reuse software,
which could require us to incur additional expenses to develop new solutions for
future products.
WE DEPEND ON OUR INTELLECTUAL PROPERTY, BUT WE MAY NOT BE ABLE TO PROTECT IT
SUCCESSFULLY.
We believe our trademarks and other proprietary rights are important to our
success and competitive position. If we are unable to protect our trademarks and
other proprietary rights against unauthorized use by others, our reputation
among existing and potential clients could be damaged and our competitive
position harmed. We have registered one trademark in the United States and have
three applications pending for service marks. We use our best efforts to limit
access to and distribution of our proprietary information, as well as
proprietary information licensed from third parties. These strategies may not be
adequate to deter misappropriation of our proprietary information and material
due to:
- non-recognition or inadequate protection of our proprietary rights in
certain foreign countries;
- undetected misappropriation of our proprietary information or materials;
- development of similar software or applications by our competitors; and
- unenforceability of the non-competition agreements entered into by our
key employees.
If our intellectual property protection strategies are inadequate, we could
incur significant costs to defend our rights and our management's attention
would be diverted. In addition, due to claims being made, whether or not they
have merit or are successful, our trademarks and other proprietary rights may
decline in value or not be enforceable. See "Business -- Intellectual Property"
for more information concerning our proprietary intellectual property.
INTELLECTUAL PROPERTY CLAIMS COULD BE TIME CONSUMING AND COSTLY TO DEFEND
AGAINST AND, IF WE ARE UNSUCCESSFUL, OUR ABILITY TO USE INTELLECTUAL PROPERTY IN
THE FUTURE COULD BE LIMITED OR WE COULD BE SUBJECTED TO DAMAGES.
We are obligated under some agreements to indemnify other parties as a
result of claims that we infringe on the proprietary rights of third parties.
Although we do not believe that the solutions that we develop for clients
infringe on any third-party proprietary rights, third parties may assert
infringement claims against us in the future and these claims may be successful.
We could incur substantial costs and diversion of management resources to defend
any claims relating to proprietary rights, which could harm our business. If any
party successfully asserts a claim against us relating to proprietary technology
or information, we may need to obtain licenses to the disputed intellectual
property. We may not, however, be able to obtain these licenses on commercially
reasonable terms, if at all, which could harm our business. Successful
infringement claims against us may also result in monetary liability or may
disrupt our business.
9
<PAGE> 12
OUR BUSINESS IS SUBJECT TO U.S. AND FOREIGN GOVERNMENT REGULATION OF THE
INTERNET.
Both the United States, at the state, local and federal government levels,
and the European Union have recently passed legislation relating to the
Internet. These laws are still being implemented. As a result, we are not
certain how these laws will impact our business. We may be indirectly affected
by this new legislation to the extent it impacts our clients and potential
clients. In addition, U.S. and foreign governmental bodies are considering, and
may consider in the future, other legislative proposals that would regulate the
Internet. We cannot predict if or how any future legislation would impact our
business, results of operations or financial condition. If any new legislation
dampens the growth of the Internet or decreases its acceptance as a
communications or commercial medium, our business would be seriously harmed.
10
<PAGE> 13
RISKS RELATED TO THIS OFFERING
YOUR ABILITY TO INFLUENCE CORPORATE MATTERS MAY BE LIMITED BECAUSE OUR OFFICERS
AND DIRECTORS HAVE SIGNIFICANT VOTING POWER.
Immediately following this offering, our officers, directors and 5% or
greater stockholders will hold approximately shares of our common
stock, or % of the outstanding shares. These stockholders, if acting
together, have the ability to control all matters submitted to our stockholders
for approval, including the election and removal of directors, amendments to our
charter documents and the approval of any business combinations. In addition,
without the consent of these stockholders, we could be prevented from entering
into transactions that could be beneficial to other stockholders or us. Also,
third parties could be discouraged from making a tender offer or bid to acquire
our company at a price per share that is above the then-current market price.
MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
YOU MAY NOT AGREE.
Our management has significant discretion in applying the net proceeds of
this offering and may determine to apply them in ways with which you may not
agree. See "Use of Proceeds" for a detailed description of how management
intends to apply the net proceeds of this offering.
OUR STOCK PRICE COULD BE EXTREMELY VOLATILE AND YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE.
Prior to this offering, there has been no public market for our shares. A
public trading market may fail to develop due to lack of investor interest in
us, or it may develop but not become very liquid. The initial public offering
price for our common stock will be determined by negotiations between us and
representatives of the underwriters. This price may not be indicative of prices
that will prevail later in the market. The stock market has experienced
significant price and volume fluctuations, and the market prices of technology
companies, particularly Internet-related companies, have been highly volatile.
You may not be able to resell your shares at or above the initial public
offering price. See "Underwriting."
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. A securities class action suit against us could result in
substantial costs and the diversion of management's attention and resources,
which could affect our business results.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK
PRICE.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the future. Sales of a substantial
number of shares of our common stock after this offering could cause our stock
price to fall. In addition, the sale of these shares could impair our ability to
raise capital through the sale of additional stock. See "Shares Eligible for
Future Sale."
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common stock in this offering, you will pay more for your
shares than the amount paid by existing stockholders or individuals or companies
which acquired shares by exercising options granted before this offering. As a
result, the value of your investment based on the value of our net tangible
assets, as recorded on our books, will be less than the amount you pay for
shares of common stock in this offering. In addition, the total amount of our
capital will be less than what it would have been had you and all the existing
stockholders and
11
<PAGE> 14
optionees paid the same amount per share of common stock as you will pay in this
offering. See "Dilution" for a more complete description of the dilution of your
investment in our common stock upon the completion of this offering.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE
AVAILABLE ON REASONABLE TERMS TO US, IF AT ALL.
We expect that the net proceeds of this offering will be sufficient to meet
our working capital needs for at least the next 12 months. However, we may need
additional capital prior to that and after that period if we do not generate
sufficient revenue from operations to offset our operating or other expenses. As
a result, in the future, we may need to raise additional funds through public or
private debt or equity financings. We may not be able to borrow money or sell
more of our equity securities to meet our cash needs. Even if we are able to do
so, it may not be on terms that are favorable or reasonable to us. If we are not
able to raise additional capital when we need it in the future, we may not be
able to:
- hire, train and retain qualified Internet and information technology
professionals;
- develop new services;
- respond to competitive pressures;
- take advantage of opportunities, including acquisitions of complementary
businesses or technologies; and
- open new offices, in the United States and internationally.
If we are not able to do any of the above, our business could be seriously
harmed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a more complete description of our historical
financial condition, results of operations and liquidity.
OUR CHARTER DOCUMENTS COULD DETER A FINANCIALLY ATTRACTIVE TAKEOVER ATTEMPT.
Our certificate of incorporation and bylaws are designed to make it
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders. Any third-party takeover not
supported by the board of directors, even if beneficial to our stockholders,
could be subject to significant delays and difficulties. See "Description of
Capital Stock" for a more detailed description of the terms of our charter
documents that could hinder a third party's attempt to acquire control.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
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, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform such statements to actual results.
12
<PAGE> 15
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the
shares of common stock in this offering of approximately $ million
(approximately $ million if the underwriters' over-allotment option is
exercised in full), at an assumed initial public offering price of
$ . per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses. We will not receive any of the net
proceeds from the sale of shares by the selling stockholder.
We intend to use approximately $5.0 million of the net proceeds from this
offering to repay all outstanding debt under our revolving credit facility.
Borrowing under this credit facility bears interest at the bank's prime rate
plus 2.25% (10.75% at December 25, 1999). We intend to use the remaining
$ of the net proceeds from this offering primarily for general
corporate purposes, including working capital. The amounts that we actually
expend will vary significantly, depending on a number of factors, including
future revenue growth, if any, and the amount of cash we generate from
operations. As a result, we will retain broad discretion in the allocation of
the net proceeds of this offering. In addition, we may use a portion of the net
proceeds to acquire complementary products, technologies or businesses; however,
we currently have no commitments or agreements and are not involved in any
negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, our existing bank line of credit prohibits the
payment of dividends without our bank's consent.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth our capitalization as of December 25, 1999
on:
- an actual basis;
- a pro forma basis to give effect to the conversion of all outstanding
shares of our Series A Preferred Stock issued in March 1999 into
13,333,334 shares of common stock, and the conversion of all outstanding
shares of our Series B Preferred Stock issued in February 2000 into
2,000,000 shares of common stock automatically upon completion of this
offering; and
- a pro forma as adjusted basis to give effect both to the conversion of
preferred stock and to the sale of shares of common stock in
this offering at an assumed initial public offering price of $ . per
share (less estimated underwriting discounts and commissions and
estimated offering expenses), and the application of the net proceeds.
You should read this table in conjunction with our Financial Statements and
related Notes, Selected Financial Data and Management's Discussion and Analysis
of Financial Condition and Results of Operations, included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
DECEMBER 25, 1999
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 1,708 $ 6,708 $
------- ------- -------
Capital lease obligations and long-term liabilities, net of
current portion........................................... 242 242
------- ------- -------
Redeemable convertible preferred stock, $0.001 par value,
13,333,334 shares authorized, issued and outstanding
actual; no shares authorized, issued and outstanding
pro forma; and no shares authorized issued and
outstanding pro forma as adjusted...................... 7,207 --
------- ------- -------
Stockholders' equity (deficit):
Common stock, $0.001 par value: 100,000,000 authorized,
50,042,580 issued and outstanding actual; 65,375,914
shares issued and outstanding pro forma; and
shares issued and outstanding pro forma
as adjusted............................................ 50 65
Stock subscription receivable............................. (221) (221)
Additional paid-in capital................................ 5,370 17,562
Deferred compensation..................................... (86) (86) ()
Accumulated deficit....................................... (8,570) (8,570) ()
------- ------- -------
Total stockholders' equity (deficit).............. (3,457) 8,750
------- ------- -------
Total capitalization.............................. $ 3,992 $ 8,992 $
======= ======= =======
</TABLE>
The data in the table above excludes:
- 14,116,694 shares of common stock issuable upon exercise of options
outstanding as of December 25, 1999, at a weighted average exercise price
of $0.44 per share;
- 4,522,851 shares of common stock available for issuance under our 1997
Stock Incentive Compensation Plan as of December 25, 1999; and
- 325,000 shares of common stock available for issuance under our 1999
Non-Employee Director Stock Option Plan as of December 25, 1999.
See "Management -- Stock Plans," "Certain Transactions," "Description of
Capital Stock" and Notes 6 and 11 of Notes to Financial Statements for
additional information regarding these shares.
14
<PAGE> 17
DILUTION
(IN THOUSANDS, EXCEPT SHARE DATA)
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
common stock after this offering. Our pro forma net tangible book value as of
December 25, 1999 was $8,750,293 or $0.13 per share of common stock. Pro forma
net tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the pro forma number of shares of
common stock outstanding. Dilution in pro forma 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 pro forma as adjusted net
tangible book value per share of common stock immediately after the completion
of this offering. After giving effect to the sale of the shares
of common stock in this offering at an assumed public offering price of
$ . per share (less estimated underwriting discounts and
commissions and estimated offering expenses), our pro forma as adjusted net
tangible book value as of December 25, 1999 would have been $ or
approximately $ per share. This represents an immediate increase in net
tangible book value of $ . per share to existing
stockholders and an immediate dilution in net tangible book value of
$ . per share to new investors, or approximately %
of the initial public offering price of $ . per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of December
25, 1999............................................... $0.13
Increase per share applicable to new investors............ $
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... $
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table shows, on a pro forma basis as of December 25, 1999,
and after giving effect to this offering, the differences between existing
holders of common stock and the new investors with respect to the number of
shares of common stock purchased from us, the total consideration paid to us and
the average price per share paid (based on an assumed initial public offering
price of $ . per share, before deducting estimated
underwriting discounts and commissions and estimated offering expenses).
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- ------------------- Price Per
Number Percent Amount Percent Share
-------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... % $ % $
New investors.................. $
-------- ----- -------- ------ --------
Total................ 100.0% $ 100.0%
======== ===== ======== ====== ========
</TABLE>
The foregoing discussion and table are based on pro forma shares
outstanding on December 25, 1999, and assume no exercise of any stock options
outstanding as of that date. As of December 25, 1999 there were options
outstanding to purchase 14,116,694 shares of common stock at a weighted average
exercise price of $0.44 per share. To the extent any of these options are
exercised, there will be further dilution to investors. See "Capitalization,"
"Management -- Stock Plans," "Description of Capital Stock" and Notes 6 and 11
of Notes to Financial Statements.
15
<PAGE> 18
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Financial Statements and related Notes included elsewhere in
this prospectus. The statements of operations data for the fiscal years ended
December 27, 1997, December 26, 1998 and December 25, 1999 and the balance sheet
data as of December 26, 1998 and December 25, 1999, are derived from, and are
qualified by reference to, the audited Financial Statements and related Notes
appearing elsewhere in this prospectus. The balance sheet data as of December
27, 1997 are derived from our audited financial statements not included in this
prospectus. Historical results are not necessarily indicative of results to be
expected for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25,
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................................ $ 2,234 $15,011 $34,711
Expenses:
Cost of revenues...................................... 1,925 7,742 19,281
Sales and marketing................................... 407 2,401 6,590
General and administrative............................ 3,346 4,091 14,280
Equity in losses of unconsolidated subsidiary......... 170 -- --
Loss on investments in subsidiary held for disposal... 239 -- --
</TABLE>
<TABLE>
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Total operating expenses............................ 6,087 14,234 40,151
</TABLE>
<TABLE>
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) from operations........................... (3,853) 777 (5,440)
</TABLE>
<TABLE>
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Net other expense....................................... -- (9) (19)
</TABLE>
<TABLE>
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) before income taxes....................... (3,853) 768 (5,459)
</TABLE>
<TABLE>
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes............................................ -- 60 (34)
</TABLE>
<TABLE>
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss)....................................... (3,853) 708 (5,425)
</TABLE>
<TABLE>
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Accretion of redemption value of redeemable convertible
preferred stock....................................... -- -- 692
Net income (loss) applicable to common stockholders..... $(3,853) $ 708 $(6,117)
</TABLE>
<TABLE>
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Net earnings (loss) per share applicable to common
stockholders:
Basic earnings (loss) per share....................... $ (0.09) $ 0.01 $ (0.12)
Diluted earnings (loss) per share..................... $ (0.09) $ 0.01 $ (0.12)
Shares used to calculate:
Basic earnings (loss) per share....................... 41,848 48,721 49,826
Diluted earnings (loss) per share..................... 41,848 50,911 49,826
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 127 $ 303 $ 1,708
Current assets.......................................... 1,823 2,786 10,110
Current liabilities..................................... 1,650 1,894 10,892
Total assets............................................ 2,945 4,646 14,885
Long term obligations................................... 144 106 242
Redeemable convertible preferred stock.................. -- -- 7,207
Total stockholders' equity (deficit).................... 1,151 2,646 (3,457)
</TABLE>
See Notes 1 and 7 of Notes to Financial Statements for a discussion of the
determination of the shares used in computing basic and diluted net earnings
(loss) per share.
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with "Selected Financial Data" and our
Financial Statements and related Notes included elsewhere in this prospectus.
OVERVIEW
We are an e-business services company that designs and builds
Internet-based business solutions for Fortune 1000 companies and emerging high
growth companies. Our Fortune 1000 clients have included AT&T, Benjamin Moore,
Dun & Bradstreet, Hawaiian Airlines, Lucent Technologies and Warner Lambert.
Recent client engagements with emerging companies include BSQUARE, Covance,
Pointsbeyond.com and Priceline Webhouse, Inc.
Using our E-Business Engineering approach, we deliver Internet and
information technology, or IT, solutions through local project teams of our
experienced e-business professionals. At December 25, 1999, we had 457
employees, including 327 e-business professionals servicing approximately 110
separate projects for 48 clients across a broad spectrum of industries,
including telecommunications, transportation, pharmaceuticals, financial
services, and the Internet.
We currently operate offices in the following metropolitan areas: Portland,
Oregon; Bellevue, Washington; Birmingham, Alabama; Dallas, Texas; Denver,
Colorado; Minneapolis, Minnesota; Phoenix, Arizona; San Francisco, California;
Warren, New Jersey; and, Washington, D.C.
We have generated substantially all of our revenues to date from
professional services fees. We provide our professional services on either a
fixed-fee or a time-and-materials basis, depending on the nature of the project.
We enter into services agreements with our clients that establish the general
terms and conditions of the relationship. Each client relationship has the
potential to yield one or more projects for that client. As specific projects
are identified by a client, we enter into separate statements of work with that
client which outline the time frame and fees applicable to the specific project.
We determine the proposed price for a fixed-fee project by estimating the type
and overall complexity of the project, the anticipated number of professionals
needed and their associated billing rates, and the estimated duration of, and
risks associated with, the project. All fixed-fee proposals are approved by a
member of our senior management team. Additionally, finance department personnel
meet regularly with senior management or project managers to help ensure that
the budgeted costs to complete a project, which are used to calculate revenue
recognition, reflect the actual status of the project and the anticipated costs
to complete the project. Our contracts typically permit us to make adjustments
to the fixed fee if the scale of the project changes.
Revenues earned under fixed-fee contracts are generally recognized as
services are rendered, using the percentage-of-completion method of accounting
(based on the ratio of hours worked to date to the estimated total hours
required for completion). Revenues earned under time-and-materials contracts are
generally recognized as services are provided. Revenues exclude reimbursable
expenses charged to clients. Billings in advance of services performed are
recorded as deferred revenues. Revenues recognized in advance of billings are
recorded as cost in excess of billings. Although we have not experienced
material losses on any project to date, if the resources or time required to
complete a project were to exceed the fixed-fee, we would recognize any
estimated losses on projects in progress in their entirety in the period such
losses became known.
A significant portion of our revenues is derived from a limited number of
clients. In fiscal year 1999, AT&T accounted for more than 10% of our revenues.
No other single client
17
<PAGE> 20
accounted for more than 10% of our revenues in fiscal year 1999. As a percentage
of total revenues, revenues derived from our five largest clients decreased from
90% in fiscal year 1997 to 78% in fiscal year 1998 and to 64% in fiscal year
1999. These decreases were a result of increases in both the size and number of
client projects. In addition, 9.7% of fiscal year 1999 revenues were earned from
a related party. See Note 2 of Notes to Financial Statements. The loss of any
significant client or the reduction or deferral in the work performed for any
significant client could significantly reduce our revenues.
Cost of revenues consists primarily of compensation and benefits for
employees engaged in the delivery of E-Business Engineering services and
non-reimbursable expenses related to client projects. We expect that our cost of
revenues will increase as the number of our professional services personnel
grows and as competitive wages increase and inflation requires adjustments. In
addition, these expenses may increase after this offering because prospective
employees may give less weight to the stock option component of our compensation
package and require higher cash compensation.
Sales and marketing expenses consist primarily of compensation, benefits
and travel costs for employees in the sales and marketing groups and marketing
program costs. We expect sales and marketing expenses will continue to increase
due to continued branding efforts, increased sales and marketing personnel and
increases in advertising and promotional activities.
General and administrative expenses consist primarily of compensation,
benefits and travel costs for employees in our management, human resources,
finance, information technology and administration groups. We expect these
expenses to increase as we open new offices, increase personnel and incur
additional costs related to the operation of our business.
We have incurred a net loss of $3.9 million during fiscal year 1997,
reported net income of $708,000 during fiscal year 1998, and incurred a net loss
of $5.4 million in fiscal year 1999. As of December 25, 1999 we had provided a
full valuation allowance on our net deferred tax assets because of uncertainties
regarding recoverability. See Note 9 of Notes to Financial Statements.
The number of our employees increased from 90 as of December 27, 1997, to
169 as of December 26, 1998, and to 457 as of December 25, 1999. Personnel
compensation and facilities costs represent a high percentage of our operating
expenses and are relatively fixed in advance of each quarter. In the near term,
as we continue to grow our business and open new offices, costs may continue to
exceed our revenues.
18
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth financial data for each of the fiscal years
ended December 27, 1997, December 26, 1998 and December 25, 1999, as a
percentage of total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................... 100.0% 100.0% 100.0%
Expenses:
Cost of revenues......................... 86.2 51.6 55.6
Sales and marketing...................... 18.2 16.0 19.0
General and administrative............... 149.8 27.3 41.1
Equity in losses of unconsolidated
subsidiary............................ 7.6 -- --
Loss on investment in subsidiary held for
disposal.............................. 10.7 -- --
------ ----- -----
Total operating expenses......... 272.5 94.9 115.7
------ ----- -----
Income (loss) from operations.............. (172.5) 5.1 (15.7)
------ ----- -----
Net other expense.......................... -- -- --
------ ----- -----
Income (loss) before income taxes.......... (172.5) 5.1 (15.7)
------ ----- -----
Income taxes............................... -- 0.4 (0.1)
------ ----- -----
Net income (loss).......................... (172.5) 4.7 (15.6)
------ ----- -----
Accretion of redemption value of redeemable
convertible preferred stock.............. -- -- (2.0)
Net income (loss) applicable to common
stockholders............................. (172.5) 4.7 (17.6)
====== ===== =====
</TABLE>
COMPARISON OF FISCAL YEARS 1997, 1998 AND 1999
REVENUES
Revenues increased from $2.2 million in fiscal year 1997, to $15.0 million
in fiscal year 1998, and to $34.7 million in fiscal year 1999. These increases
were due primarily to increases in the number of our clients.
EXPENSES
Cost of Revenues
Cost of revenues increased from $1.9 million in fiscal year 1997, to $7.7
million in fiscal year 1998, and to $19.3 million in fiscal year 1999. These
increases were due primarily to the hiring of additional professionals and to
increases in salaries paid to our professional staff. As a percentage of total
revenues, cost of revenues decreased from 86.2% in fiscal year 1997 to 51.6% in
fiscal year 1998, and increased to 55.6% in fiscal year 1999. The decrease in
fiscal year 1998 was due to revenue growth ahead of the growth of our
professional staff and a decrease in lower-margin Year 2000 code remediation
project engagements. The increase in fiscal year 1999 was due to additional
hiring of professionals in anticipation of increased demand for our services.
19
<PAGE> 22
Sales and Marketing
Sales and marketing expenses increased from $407,000 in fiscal year 1997,
to $2.4 million in fiscal year 1998, and to $6.6 million in fiscal year 1999.
These increases were due to an increase in the number of sales personnel and an
overall increase in our marketing and branding efforts. As a percentage of total
revenues, sales and marketing expenses decreased from 18.2% in fiscal year 1997
to 16.0% in fiscal year 1998, and increased to 19.0% in fiscal year 1999. The
decrease in fiscal year 1998 was due to revenue growth outpacing the growth in
sales and marketing expenses, and the increase in fiscal year 1999 was due to
the growth of our marketing and branding efforts.
General and Administrative
General and administrative expenses increased from $3.3 million in fiscal
year 1997, to $4.1 million in fiscal year 1998, and to $14.3 million in fiscal
year 1999. These increases were due to an increase in lease expenditures in
connection with the expansion of offices and the hiring of additional employees.
As a percentage of total revenues, general and administrative expenses decreased
from 149.8% in fiscal year 1997 to 27.3% in fiscal year 1998, and increased to
41.1% in fiscal year 1999. The decrease in fiscal year 1998 was due to revenue
growth outpacing the growth in general and administrative expenses, and the
increase in fiscal year 1999 was due to the expansion of our infrastructure to
support our growth in systems and professionals.
Net Income (Loss)
We recorded a net loss of $3.9 million in fiscal year 1997, net income of
$708,000 in fiscal year 1998, and an additional net loss of $5.4 million in
fiscal year 1999. Our 1997 results of operations include $170,000 of losses from
operations of an acquired unconsolidated subsidiary and a one-time charge of
$239,000 relating to the disposal of this subsidiary. See Note 10 of Notes to
Financial Statements for a discussion of amounts related to the Company's 1997
unconsolidated subsidiary.
Accretion of Redemption Value of Redeemable Convertible Preferred Stock
In connection with our issuance of redeemable convertible preferred stock
in 1999, $692,000 was recorded relating to accretion, over the period through
redemption, of the difference between the carrying amount and the redemption
value of the redeemable convertible preferred stock. The redeemable convertible
preferred stock will convert into common stock upon the completion of our
initial public offering.
20
<PAGE> 23
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly
operating results for each of the eight quarters in the two-year period ended
December 25, 1999. This data has been derived from our unaudited interim
financial statements which, in our opinion, have been prepared on substantially
the same basis as the audited financial statements contained elsewhere in this
prospectus and include all normal recurring adjustments necessary for a fair
presentation of the financial information for the periods presented. These
unaudited quarterly results should be read in conjunction with our Financial
Statements and Notes thereto included elsewhere in this prospectus. The
operating results in any quarter are not necessarily indicative of the results
that may be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 28, JUN. 27, SEPT. 26, DEC. 26, MAR. 27, JUN. 26, SEPT. 25, DEC. 25,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................ $2,632 $3,143 $4,177 $5,059 $5,929 $8,357 $ 9,763 $10,662
Expenses:
Cost of revenues...................... 1,800 1,623 2,069 2,250 3,328 4,224 5,257 6,472
Sales and marketing................... 462 378 573 988 989 1,356 1,779 2,466
General and administrative............ 861 696 1,145 1,389 2,321 2,914 3,785 5,260
------ ------ ------ ------ ------ ------ ------- -------
Total operating expenses........ 3,123 2,697 3,787 4,627 6,638 8,494 10,821 14,198
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) from operations........... (491) 446 390 432 (709) (137) (1,058) (3,536)
------ ------ ------ ------ ------ ------ ------- -------
Net other expense....................... (2) (3) (2) (2) (15) 47 (13) (38)
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before income taxes....... (493) 443 388 430 (724) (90) (1,071) (3,574)
------ ------ ------ ------ ------ ------ ------- -------
Income taxes............................ -- 16 25 19 -- -- (34) --
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....................... (493) 427 363 411 (724) (90) (1,037) (3,574)
------ ------ ------ ------ ------ ------ ------- -------
Accretion of redemption value of
redeemable convertible preferred
stock................................. -- -- -- -- 69 207 208 208
Net income (loss) applicable to common
stockholders.......................... $ (493) $ 427 $ 363 $ 411 $ (793) $ (297) $(1,245) $(3,782)
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 28, JUN. 27, SEPT. 26, DEC. 26, MAR. 27, JUN. 26, SEPT. 25, DEC. 25,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF REVENUES:
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of revenues...................... 68.4 51.7 49.6 44.5 56.1 50.5 53.8 60.7
Sales and marketing................... 17.6 12.0 13.7 19.5 16.7 16.2 18.2 23.1
General and administrative............ 32.7 22.1 27.4 27.5 39.2 34.9 38.8 49.4
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses........ 118.7 85.8 90.7 91.5 112.0 101.6 110.8 133.2
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations........... (18.7) 14.2 9.3 8.5 (12.0) (1.6) (10.8) (33.2)
----- ----- ----- ----- ----- ----- ----- -----
Net other expense....................... -- (0.1) -- -- (0.2) 0.5 (0.2) (0.3)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes....... (18.7) 14.1 9.3 8.5 (12.2) (1.1) (11.0) (33.5)
----- ----- ----- ----- ----- ----- ----- -----
Income taxes............................ -- (0.5) 0.6 0.4 -- -- (0.4) --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....................... (18.7) 13.6 8.7 8.1 (12.2) (1.1) (10.6) (33.5)
----- ----- ----- ----- ----- ----- ----- -----
Accretion of redemption value of
redeemable convertible preferred
stock................................. -- -- -- -- (1.2) (2.5) (2.1) (2.0)
Net income (loss) applicable to common
stockholders.......................... (18.7)% 13.6% 8.7% 8.1% (13.4)% (3.6)% (12.7)% (35.5)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
21
<PAGE> 24
We believe that fluctuations in our quarterly operating results are caused
by many factors, some of which are outside of our control. The factors
influencing these fluctuations include the variability in market demand for our
services and the length of the sales cycle associated with our service
offerings. In addition, the number, size and scope of our projects and the
efficiency with which we utilize our employees can affect these fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations and investments in property
and equipment through private equity financings, bank borrowings and capital
lease financing arrangements.
Our cash and cash equivalents increased from approximately $303,000 at
December 26, 1998 to $1.7 million at December 25, 1999. This increase was from
the net proceeds of $6.5 million from the issuance of 13,333,334 shares of
redeemable convertible preferred stock in March 1999. Our cash balances were
offset by cash used for operating activities of $6.8 million. Cash used for
operating activities was principally made up of operating losses of $5.4 million
for fiscal year 1999 and working capital used to fund growth. The cash used in
investing activities reflects our purchases of $3.2 million in property and
equipment. In February 2000, we entered into agreements to sell 2,000,000 shares
of our redeemable convertible preferred stock for $5.0 million.
We maintain a revolving credit facility with a bank which provides for
borrowings of up to the lesser of $5.0 million or 85% of eligible accounts
receivable. Borrowings under this line of credit bear interest at the bank's
prime rate plus 2.25% and are secured by substantially all of our assets. As of
December 25, 1999, we had borrowed $5.0 million under this line of credit.
We anticipate that we will expend capital to develop the infrastructure to
support our anticipated future growth. As a result, we expect to use cash from
operations and the net proceeds from this offering to meet capital expenditures
and working capital necessary to support this growth. We currently have no
material commitments for capital expenditures. We believe that our current cash,
cash equivalents, bank facility, short-term investments and the net proceeds
from this offering will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months. However, we may
require additional financing within this time frame and any additional
financing, if needed, may not be available on terms acceptable to us, if at all.
YEAR 2000 ISSUES
Many currently installed computer systems and software products worldwide
are coded to accept only two-digit entries to identify a year in the date code
field. Consequently, many of these systems could fail or malfunction because
they may not be able to distinguish between the year 1900 and the year 2000.
Accordingly, many companies, including us and our clients, potential clients,
vendors and strategic partners, may experience system failures and need to
upgrade their systems to comply with applicable Year 2000 requirements. Although
since January 1, 2000 we have not experienced operational difficulties caused by
undetected errors or defects in our internal systems, we cannot assure you that
we will not experience Year 2000 related operational difficulties in the future.
RISKS
Because our clients are dependent, to a very substantial degree, upon the
proper functioning of computer systems, a failure of these systems to correctly
recognize dates beyond January 1, 2000 would disrupt operations. Purchasing
patterns of our clients and potential clients may be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for Year 2000 compliance and may therefore defer new initiatives until
they do so. We may become involved in disputes regarding Year 2000
22
<PAGE> 25
problems occurring in solutions we have developed or implemented or arising from
the interactions of our Internet solutions with other software applications.
Year 2000 problems could require us to incur delays in providing our services to
clients and unanticipated expenses.
STATE OF READINESS
To address these issues, we formed a Year 2000 assessment and contingency
planning committee, called the Y2K Committee, to review both our information
technology systems and our non-information technology systems, and where
necessary, to plan for and supervise the remediation of those systems. We have
assessed the Year 2000 readiness of our critical hardware and software systems.
The providers of these systems have either confirmed to us that these systems
are Year 2000 compliant or provided the information necessary for us to
implement upgrades to make them Year 2000 compliant.
We have completed discussions with other significant vendors regarding
their Year 2000 remediation plans. Based on these discussions, we believe that
the Year 2000 problem will not materially impact the operations of our
significant clients or their plans to purchase our services.
Our standard master services agreement does not warrant Year 2000
compliance other than the warranties provided by vendors of the software used in
our solutions. We have reviewed significant non-standard client contracts to
determine our exposure for failure to provide Year 2000 compliant solutions. We
believe these contracts do not provide express warranties for Year 2000
compliance for our solutions. Nevertheless, under either contractual
arrangement, we may become involved in disputes regarding Year 2000 problems
occurring in solutions we have developed or implemented or arising from the
interactions of our Internet solutions with other software applications. We have
tested for or received assurances of Year 2000 compliance for the major software
components used in our client applications. We believe that our exposure for
failure to provide Year 2000 compliant products would not have a material impact
on our business or operations.
COSTS OF COMPLIANCE
Based on work done to date, we believe that the cost of work and materials
to complete our Year 2000 program will not be material. We believe that the Year
2000 risk will not present significant operational problems for us. However,
there can be no assurance that our Year 2000 program will prevent any material
adverse effect on our operations, financial condition or customer relations.
CONTINGENCY PLAN
We have developed contingency plans for critical individual information
technology systems and non-information technology systems to address Year 2000
risks not fully resolved by our Year 2000 program.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) in
June 1998. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. SFAS No. 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The
23
<PAGE> 26
adoption of this statement is not expected to have a material impact on our
financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements," which we adopted December 26, 1999. SAB 101 provides guidance on
revenue recognition issues. SAB 101 did not have a material impact on our
financial statements.
24
<PAGE> 27
BUSINESS
OVERVIEW
We are an e-business services company that designs and builds
Internet-based business solutions by integrating digital business strategy with
both emerging and existing information technologies. We help our clients to
create entirely new e-businesses or to expand and improve their existing
e-business activities. Our solutions enable our clients to use the Internet to
enhance relationships with their customers and business partners, improve the
efficiency of their operations and create new revenue opportunities.
Our solutions combine digital strategy consulting, systems architecture
analysis, application and technology infrastructure development and
implementation. We deliver our solutions with an interdisciplinary approach
which we call E-Business Engineering. This approach provides a principled
framework for each stage and component of a client engagement. This includes
working with the client to create a strategic vision, designing an effective
e-business solution, developing the appropriate technical architecture, which
provides security, scalability and reliability, and implementing and integrating
Internet and enterprise applications with existing information technology, or
IT, systems. We believe that this approach and our professionals' experience,
especially with high reliability secure applications, are key elements of our
strategy that enable us to deliver innovative, robust and scalable e-business
solutions within our clients' timeframes and budgets.
As of December 25, 1999, we were providing e-business solutions on
approximately 110 separate projects for 48 clients. We have provided solutions
for clients such as AT&T, Benjamin Moore, Dun & Bradstreet, Hawaiian Airlines,
Lucent Technologies and Warner Lambert. As of December 25, 1999, we had 327
professionals who deliver our solutions from offices located in or near
Portland, Oregon; Bellevue, Washington; Birmingham, Alabama; Dallas, Texas;
Denver, Colorado; Minneapolis, Minnesota; Phoenix, Arizona; San Francisco,
California; Warren, New Jersey; and, Washington, D.C.
INDUSTRY BACKGROUND
Businesses are increasingly using the Internet to create new revenue
opportunities by enhancing their interactions with new and existing customers.
Businesses are also using the Internet to increase efficiency in their
operations through improved communication, both internally and with suppliers
and other business partners. According to International Data Corporation, the
market for business-to-business e-commerce will grow from $64.8 billion in 1999
to $978.4 billion in 2003. To capitalize fully on the new opportunities
presented by the Internet, businesses demand Internet-based business solutions
that process transactions and deliver information more effectively than
traditional information technology systems.
Internet-based business solutions are becoming increasingly complex and
usually involve more than implementing the latest technology. To be effective,
these solutions often also encompass business strategy and organizational
transformation and require the integration of a diverse set of partners,
processes and systems. Further, these solutions include not only
Internet-centric applications, such as e-commerce web sites and corporate
intranets, but also the integration of enterprise applications, such as business
intelligence, customer relationship management, enterprise resource planning and
supply chain management applications, whether existing or new.
These Internet-based business solutions are often large and difficult to
manage and must keep pace with constantly evolving business processes and
technological innovations. Internal IT departments often do not have the
appropriate resources or breadth of skills necessary to execute these
initiatives. As a result, companies increasingly turn to outside professionals
to design, integrate and implement their Internet-based business solutions.
According to Interna-
25
<PAGE> 28
tional Data Corporation, the world-wide market for Internet services is
projected to grow from $12.9 billion in 1999 to $78.6 billion in 2003.
The rapidly growing demand for Internet professional services has attracted
many firms to this market. These firms include systems integrators, strategy
consulting firms and Internet professional services providers. While these firms
have specific strengths, many are limited in their ability to deliver
comprehensive, complex e-business solutions. Some firms provide
technology-centric solutions without giving appropriate consideration to their
client's business strategy. Web design firms typically focus on user interfaces
and front-end design and do not offer a broad scope of expertise for rapid
development and deployment of innovative e-business systems and capabilities.
Traditional IT services firms typically have been focused primarily on legacy
systems enhancements, Year 2000 compliance and the implementation of traditional
business applications. Hence, many professional services firms have not
cultivated the skills necessary to design and implement e-business solutions in
a timeframe consistent with market requirements.
Companies that are seeking to build or enhance their e-business
capabilities require a professional services provider that has developed a broad
range of integrated capabilities. These services providers must provide
strategic industry insights combined with extensive technological skills to
design and create infrastructure, applications and business systems that are
innovative, reliable and scalable. Moreover, these services providers must have
a structured approach and the experience necessary to rapidly innovate and
implement e-business solutions. These services providers must also be able to
understand and integrate a wide spectrum of emerging technologies and existing
systems. Although a number of professional services providers currently are
attempting to address the demand for Internet-based business solutions, only a
limited number are able to offer the broad range of integrated capabilities
which allow for the development of highly scalable, reliable and secure
applications. Much of the increasing demand for Internet-based business
solutions remains unaddressed.
OUR SOLUTION
We believe that the following key elements of our solution differentiate us
from most Internet professional services providers and enable us to effectively
meet the demand for Internet-based business solutions:
Our clients' strategy drives our e-business solutions
We work with our clients to understand, refine and develop their e-business
strategy and base our solution on that strategy, rather than any particular
technology. As a result, every technology, technique and process that we
recommend and implement can be traced back to our clients' strategic goals. Our
defined E-business Engineering approach further supports our clients' strategic
goals by enabling us to deliver our solutions within their time and budgetary
constraints. Furthermore, our approach includes a flexible framework that
provides for continual monitoring and reassessment of original business and
technology assumptions to address our clients' changing business needs and
strategies, when applicable.
We deliver enterprise-wide e-business solutions
We employ professionals with the breadth of skills and depth of experience
necessary to provide enterprise-wide e-business solutions in a timely and
effective manner. Generally, our professionals review the client's entire
organization and business processes to determine which parts of its operations
would benefit from e-business initiatives. We then identify the system
architecture and capabilities required to implement these identified
initiatives. Once these requirements are identified, we can then deliver the
solution, whether it entails building an entire e-commerce web site from the
ground up, integrating an Internet-based customer relationship
26
<PAGE> 29
management application with the client's existing IT infrastructure, or
transforming the client's relationships with its suppliers with Internet-based
supply chain management applications. Our experience allows us to be innovative
and, where appropriate, leverage a client's existing IT infrastructure to
integrate existing information and applications with Internet technologies. This
allows us to enhance and extend the value of our client's existing IT
infrastructure. Furthermore, our professionals are typically hired from other
project-based companies and possess the business and technology capabilities and
experience required to manage large, complex projects based on secure, scalable
platforms.
We have a geographic delivery model enhanced with specific, vertical industry
expertise and horizontal solutions capabilities
We have opened offices in ten metropolitan areas in the United States which
allow us to provide e-business solutions to our clients in these areas with a
local core delivery team. Our teams are led by highly experienced, local project
managers who are accountable for delivering our solution. Local core delivery
teams and accountability provide consistent client contact and rapid
availability of resources. Further, our local delivery strategy allows us to
recruit talented professionals who have particular geographic preferences. Where
appropriate, we supplement the core local delivery team with professionals who
possess specific expertise in certain industries including telecommunications,
transportation, pharmaceuticals, financial services and the Internet. These
professionals enhance our ability to understand the key business issues facing
clients in specific industries. We believe that we deliver superior e-business
solutions through a greater understanding of a client's business. We may also
supplement the core team with professionals who operate on a company-wide basis
and possess horizontal, or business functional, capability expertise, such as
e-commerce, customer relationship management and supply chain management. The
local delivery teams can also draw upon our knowledge management and quality
system to supplement their expertise.
OUR STRATEGY
Our objective is to become the preferred provider of comprehensive
e-business solutions. To achieve our objective, we are pursuing the following
strategies:
Focus on high-quality and timely delivery of e-business solutions
We focus on local delivery supported by national vertical and horizontal
expertise that is tied together by our knowledge management and quality system.
This focus allows us to meet our goals of delivering high quality and timely
solutions. We believe our focus on high quality and timely delivery will result
in strong relationships with satisfied clients. We expect these strong
relationships will lead to expanded follow-on engagements with existing clients
and referrals for new clients.
To enhance our delivery of timely, high quality e-business solutions to our
clients, we intend to expand our vertical industry expertise and our horizontal
solutions capabilities as well as our knowledge management and quality system.
Our knowledge management and quality system is a repository of knowledge and
experience including the innovative processes, techniques and analyses our
professionals have developed through prior client projects. This system allows
for the consistent delivery of solutions across all of our offices, as well as
the opportunity to leverage skills and experiences from disparate parts of our
organization. Additionally, this system leads to a reduction in duplicated
efforts, thus improving our ability to deliver timely solutions.
27
<PAGE> 30
Continue to attract, retain and motivate experienced professionals
To grow our business we seek to attract, retain and motivate experienced
professionals who have demonstrated success and who will enable us to deliver
high quality solutions for our clients. As of December 25, 1999, we employed a
full-time staff of 21 recruiters, increased from six as of December 26, 1998.
These recruiters are responsible for hiring professionals who possess the
necessary qualifications and values consistent with our culture. Additionally,
we have established an employee referral program that motivates our current
professionals to bring new professionals to us. This program allows us to hire
professionals with the skills, experience and cultural values we seek. To date,
we have hired a significant portion of our professionals through this program.
We believe we are able to attract, retain and motivate our professionals by
providing:
- the opportunity to work with cutting-edge technologies to create
e-business solutions;
- a corporate culture that encourages innovation, responsibility and open
communication;
- a defined program for professional development and career planning;
- a regional delivery model that seeks to minimize travel; and
- stock options to every employee.
Target clients with potential for large e-business needs
We target clients who are Fortune 1000 and emerging high-growth companies.
We believe our targeted customers have the highest potential for complex
business needs requiring our ability to provide comprehensive e-business
solutions. Generally, clients with complex e-business needs, especially the need
for scalable, reliable and secure applications, provide long-term relationships
and often predictable projects that enable us efficiently to deploy our
professionals and manage our business. Also, through long-term relationships, we
become more familiar with our clients' businesses and are able to provide them
with more successful solutions. Due to their size and visibility, we believe our
successful delivery of e-business solutions to these Fortune 1000 and emerging
high-growth companies helps establish our brand and credibility within the
Internet services marketplace.
Continue to expand our internal IT infrastructure to facilitate growth
Our highly integrated, customized, and scalable IT systems include revenue
forecasting, budgeting, project control and costing, human resource management,
accounting and a corporate intranet. We use our systems to provide our
professionals with quality business information on a timely basis to enhance our
decision-making processes. We intend to continue to expand our internal systems
to facilitate our future growth. We also intend to continue to expand our
knowledge management and quality system in order to enable the reuse of our best
business practices and reduce duplication of effort.
Increase brand awareness
We believe a recognizable brand results in a greater ability to attract new
clients and employees. We seek increased brand awareness through the following
means:
- establishing a position of thought leadership in the e-business
marketplace through presentations at seminars and conferences as well as
representation in the press;
- creating awareness of our company through targeted local and national
marketing and advertising programs;
- enhancing understanding of our service offerings and approach through
expanded web communications and collateral marketing; and
28
<PAGE> 31
- supporting the presence and sales capacity of our local delivery offices
through regional and field marketing efforts.
THE E-BUSINESS ENGINEERING APPROACH
We have developed E-Business Engineering to apply a disciplined, practical
and results-oriented approach to the development of e-business solutions.
E-Business Engineering defines a strategy for the creation and delivery of
e-business solutions that identifies opportunities to add value to the client's
core business activities rather than immediately adopting specific enabling
technologies or techniques. More than just a methodology, E-Business Engineering
is an approach that is governed by a set of guiding principles, and that
leverages our rapid solutions delivery methodology, breadth of capabilities and
skilled people. Our guiding principles establish a rigor and discipline that,
together with our methodology, result in solutions that are delivered quickly
with superior quality. We are able to provide these solutions in complex
e-business environments because of the breadth of our capabilities. Ultimately,
our E-Business Engineering approach is made successful by our skilled and
experienced people, who possess these capabilities, apply our guiding principles
and use our solutions delivery methodology to deliver effective e-business
solutions.
Guiding Principles
E-Business Engineering is based on a set of guiding principles that are
themselves based on engineering standards and best practices. These principles
dictate that our solutions support our client's business objectives and advance
their corporate strategy, while allowing them the flexibility to adapt to
changing markets. In addition, our principles dictate that our solutions should
be based on repeatable processes and attainable goals and should responsibly
meet expected budgetary and time constraints.
Solutions Delivery Methodology
Our solutions delivery methodology comprises three core components: Vision,
Initiative and Iteration.
- Vision -- We believe successful e-business solutions are dependent on,
and shaped by, a sound e-business vision. Within the first component of
our methodology, we work with a client to develop an enterprise-wide
vision of the client's strategic e-business goals.
- Initiative -- Large, complex e-business solutions often demand that we
develop and integrate a number of disparate initiatives to achieve a
client's vision. The modular nature of our initiative delivery
methodology allows us to deliver initiatives in series or in parallel
depending upon the client's objectives and requirements.
- Iteration -- We deliver our solutions in discrete, incremental phases,
incorporating constant feedback from our client. This iterative component
addresses a client's need for rapid initiative deployment and return on
investment.
Together these components of our solutions delivery methodology yield a
flexible framework that provides for continual monitoring and reassessment of
original business and technology assumptions in order to identify clients'
changing business needs. Because our methodology is not overly rigid, our
consultants can create scalable and customized e-business solutions that are in
constant alignment with client expectations and business needs. In addition, our
knowledge management and quality system contains a library of templates and
techniques designed to ensure clients understand their solution, communicate
with the development team and have the opportunity to approve work.
29
<PAGE> 32
Capabilities
We use our E-Business Engineering approach to deliver complex e-business
solutions that often comprise many diverse components, such as Internet
applications, enterprise applications and existing systems. Our capabilities
enable us to determine which combination of components will provide our clients
the most effective solution given their diverse business needs and then to
implement and integrate the appropriate components into an overall solution. We
analyze, develop, implement and integrate a wide variety of solutions,
including:
- Strategy and architecture planning -- digital strategy and enterprise
architecture planning;
- e-Commerce -- integrated web storefronts, Internet billing applications
and business-to-business transaction processing;
- Business Intelligence -- data warehousing, business analytics and
personalized interactions between a business and its customers;
- Customer Relationship Management -- marketing automation, sales force
automation and call center/customer support integration;
- Enterprise Resource Planning -- finance, human resources and
manufacturing application development and deployment;
- Supply Chain Management -- inventory, logistics, distribution and vendor
management strategies and applications;
- Enterprise Application Integration -- enable disparate Internet and
enterprise applications, including existing applications, to share
information and logic throughout various systems;
- Custom Software Development -- focus on platform-specific or system
integration issues which demand a breadth of software engineering skills
and experiences; and
- Program Management -- activities such as strategic alignment and
prioritization, resource allocation, project communications and
initiative management.
People
We establish empowered, multi-disciplined local delivery teams of seasoned
professionals, averaging more than ten years of experience in their respective
fields. These teams incorporate strategic, business and technical concerns,
while applying repeatable disciplines and innovative practices to develop
e-business solutions. We support our local delivery teams with various industry
and business functional experts as well as our knowledge management and quality
system that serves as a repository of our company-wide capabilities, skills and
experiences. These experts and our knowledge management and quality system allow
our delivery teams to access a wealth of solutions and implementation expertise.
CLIENTS
We focus on providing solutions to Fortune 1000 and emerging high growth
companies. We currently serve clients in a wide variety of industries, with
expertise in the telecommunica-
30
<PAGE> 33
tions, transportation, pharmaceuticals, financial services and Internet
industries. The following is a representative list of our clients:
<TABLE>
<S> <C>
AT&T Hawaiian Airlines
Benjamin Moore Lucent Technologies
Boeing Portland Gas & Electric
Consolidated Freightways Transitions for Health
Dun & Bradstreet Unicapital
Emery Worldwide Warner Lambert
Greens.com
</TABLE>
Recent client engagements with emerging companies include BSQUARE, Covance,
Pointsbeyond.com and Priceline Webhouse, Inc.
A significant portion of our revenues is derived from a limited number of
clients. In fiscal year 1999, AT&T accounted for more than 10% of our revenues.
No other single client accounted for more than 10% of our revenues in fiscal
year 1999. The loss of any significant client or the reduction or deferral in
the work performed for any significant client could significantly reduce our
revenues.
CASE STUDIES
AT&T -- An international telecommunications company.
<TABLE>
<S> <C>
Relationship: Our relationship with AT&T began in November 1997. From our
first project for AT&T, which involved custom Internet
software development, this relationship has expanded to
helping AT&T manage a broad series of Internet programs.
Challenge: Assist AT&T in improving its business client billing systems
to realize greater operational efficiencies and provide a
higher level of customer service.
Solution: We designed and implemented a web-based architecture and
suite of systems that leverage and extend various legacy
AT&T customer service support systems for dispute
management, collection, contract management and customer
satisfaction capabilities for business clients. By
integrating its legacy systems with a web-based platform,
AT&T is able to:
- enable its customer service representatives to accurately
quantify and track accounts in review;
- automatically provide tools, information and techniques to
allow these representatives to more efficiently resolve
client issues and prioritize collection activities;
- track and coordinate customer contract management and
special offers; and
- search and sort customer service inquiries through
high-capacity imaging and web-based retrieval systems.
As a result, AT&T can improve the efficiency of its billing
operations and quickly identify priority business clients to
help them resolve billing issues in real-time.
</TABLE>
31
<PAGE> 34
<TABLE>
<S> <C>
DUN & BRADSTREET -- A business credit and marketing information company.
Relationship: Dun & Bradstreet initially retained us in May 1999 to assist
them in the creation of a data store that serves as a
centralized point for data collected from businesses around
the world.
Challenge: Enable Dun & Bradstreet to create a scalable, accessible and
centralized global data warehouse for business-to-business
information.
Solution: We are working with Dun & Bradstreet to centralize the
collection, housing and dissemination of data from more than
58 million businesses in approximately 232 countries around
the world. Our solution includes analyzing, designing and
implementing a multi-lingual data store that contains more
than 17 billion pieces of business information. We are also
working with Dun & Bradstreet to build an application that
will update information in the data store for more than
500,000 businesses daily. Our solution is designed to allow
Dun & Bradstreet to provide consistent, updated and easily
accessible business information to its global customer base.
In addition, our solution will assist Dun & Bradstreet in
delivering new web-enabled products and services to its
customers.
CLIQUE.COM -- An Internet company that provides advertising services,
e-commerce web
sites, and on-line customer care for publishers.
Relationship: We began working with Clique.com in December 1999 to provide
order fulfillment capabilities for their publishing company
clients.
Challenge: Design, develop and implement an Internet-based
infrastructure that will allow for the fulfillment of
e-commerce transactions.
Solution: We are working with Clique.com to enable the fulfillment of
orders that originate at their clients' e-commerce web
sites. Clique.com develops and operates e-commerce web sites
for its clients. In order to ensure fulfillment of customer
orders from those web sites, Clique.com must forward the
order information to third parties capable of physically
fulfilling the orders. Our solution will enable Clique.com
to automatically forward order information from its many
e-commerce web sites to one or multiple third party
fulfillment companies over the Internet, reducing
fulfillment time and expense. Also, our solution will allow
order status and inventory information to be passed from
third party fulfillment companies to Clique.com's e-commerce
system. This information can then be accessed by customers
from the web sites of Clique.com's clients.
</TABLE>
OUR PEOPLE AND CULTURE
We seek to attract, motivate and retain professionals who will deliver the
highest quality solutions for our clients. To achieve this objective, we create
a positive corporate culture and hire professionals with a wide breadth of
skills and substantial depth of experience. These professionals define our
culture. To create a positive culture, we seek to hire professionals whose
values closely align with our core values. These core values include:
- a desire to work with the best;
- striving for excellence;
- a willingness to make and keep commitments;
- maintaining the highest level of integrity;
32
<PAGE> 35
- communicating openly and honestly;
- treating people with respect; and
- encouraging innovation.
From December 26, 1998 to December 25, 1999, we increased our staff from
169 to 457. As of December 25, 1999, our staff included 327 e-business
professionals and had an average of more than 10 years of relevant industry
experience. We typically hire experienced professionals with diverse skill sets
from companies such as big five consulting firms, systems integrators and
Internet professional services firms. None of our employees is represented by a
labor union, and we have no collective bargaining agreements. We consider our
relations with our employees to be good. In addition, we believe our culture
provides us with excellent retention. In fiscal year 1999, our voluntary
turnover rate was 8.1%.
MARKETING AND STRATEGIC SALES PROCESS
As of December 25, 1999, we had a business development and marketing staff
of 34. Our marketing staff's efforts are dedicated to strengthening our brand
name, generating greater market awareness of our company within the Fortune 1000
and emerging high growth businesses and generating sales leads. Our marketing
activities include corporate branding, traditional marketing communications and
local office activities. Branding efforts include advertising programs,
representation at seminars and conferences and capitalizing on opportunities to
present ourselves as thought leaders in the industry through speaking, writing
and public relations activities. We support this branding effort through a
comprehensive marketing communications portfolio of print collateral and trade
materials as well as a web presence. At the local office level, our marketing
includes placing articles and quotes in business journals, participating in
business associations and conferences and supporting sales lead development.
In parallel with our local marketing activities, we employ a strategic
sales process. This process begins with lead generation. We generate targeted,
viable sales leads through a combination of marketing support, relationship
sales and a professional sales staff that focuses on targeted accounts. We
generate leads through marketing events such as speaking and writing
opportunities designed to position our professionals as industry thought
leaders. Furthermore, our local office leaders leverage relationships they have
within their local delivery market, generating interest and opportunities within
the business community. We also employ a professional business development staff
that uses a combination of local office marketing activities, thought leadership
activities and existing business relationships to target the types of clients
and projects that best suit our delivery capabilities.
Once we have established a lead with a prospective client, we qualify the
opportunity, define our ability to deliver the right solution, reach agreement
and commence work. The next step in our strategic sales process, after
delivering successfully on the first project, is to expand the relationship with
our new client. Because of our capacity to deliver a wide variety of business
solutions, we can establish long-term, mutually beneficial relationships with
our clients.
STRATEGIC PARTNERSHIPS
We have developed a series of partnerships in a variety of e-business
solution areas. In addition to providing shared sales opportunities, many of
these offer training, technical support, delivery services and the opportunity
to co-develop new e-business services. We have focused on establishing criteria,
best practices and relationship managers for these partnerships to allow
33
<PAGE> 36
us to continue to work with the best companies and technologies available. Our
current partners include:
- AT&T SOLUTIONS -- deliver enterprise application services focused
specifically on the e-business integration initiatives for multiple
clients. Each partner leverages its extensive experience and capabilities
to deliver solutions to Fortune 1000 clients.
- IBM -- provides hardware, software and services that enable us to build
large, complex e-business solutions for our clients. Our partnership with
IBM as a member of the Web Integrator Program leverages access to
technical support and training as well as shared sales and marketing
opportunities.
- PEOPLESOFT -- provides enterprise resource planning software that enables
us to deliver comprehensive e-business solutions that include and
integrate human resources and financial packages.
- MICROSTRATEGY -- provides software products and services that enable us
to deliver robust business intelligence solutions. Our partnership with
Microstrategy allows us to take advantage of training as well as
strategic sales and marketing activities.
- CORIO -- an application services provider that hosts web and enterprise
applications for clients that would otherwise not be able to afford the
cost and maintenance of web and enterprise applications. Our partnership
with Corio allows us to provide integration services for customers
seeking to implement enterprise applications hosted by Corio.
- ACTIVE SOFTWARE -- provides application integration software that enables
us to link complex enterprise and legacy systems with web-enabled
systems. Our relationship focuses on co-sales, implementation and
marketing opportunities.
COMPETITION
We compete in the Internet and information technology professional services
market, which is relatively new and highly competitive. We expect competition to
intensify as the market continues to evolve. We believe that our competitors
fall into several categories, including the following:
- Internet services firms, such as iXL, Proxicom, Razorfish, Sapient,
Scient, and Viant;
- technology integrators, such as Andersen Consulting, Cambridge Technology
Partners, EDS, IBM, and Tanning;
- strategic consulting firms, such as Bain, Booz-Allen & Hamilton, Boston
Consulting Group, Diamond Technology Partners, KPMG, and McKinsey; and
- in-house information technology, marketing and design departments of our
potential and current clients.
We believe that only a few of these competitors offer an integrated package
of professional Internet services. Several competitors, however, have announced
their intention to offer a broader range of services than they currently
provide.
We believe that the principal competitive factors in the Internet and
Internet professional services industry are quality of service, timeliness of
delivery, reputation, responsiveness to client needs, availability of qualified
IT professionals, price, project management capability, technical expertise,
size and scale of operation. We intend to remain competitive due to the
following:
- our ability to locate, recruit, motivate and retain professionals with
demonstrated performance capabilities and experience;
34
<PAGE> 37
- our ability to deliver solutions on both a regional and national level
and our ability to market our services and secure engagements from
clients seeking to do business with national Internet professional
services firms as well as with regional clients seeking local
relationships; and
- our ability to provide effective management of account relationships and
rapidly respond to our clients' ongoing business needs.
There are relatively low barriers to entry into the Internet professional
services market and, as a result, new competitors could emerge in the future.
INTELLECTUAL PROPERTY
Our success is dependent, in part, upon our proprietary processes,
components and other intellectual property rights. We do not have any patents or
patent applications pending. We rely on a combination of nondisclosure and other
contractual agreements and trade secret, copyright and trademark laws to protect
our proprietary rights. Existing trade secret, copyright and trademark laws
afford us only limited protection. We enter into confidentiality agreements with
our employees, generally require that our consultants and clients enter into
similar agreements and limit access to, and distribution of, our proprietary
information. In addition, we have entered into non-competition agreements with
our key employees. The steps we have taken in this regard may not be adequate to
deter misappropriation of our proprietary information and we may not be able to
detect unauthorized use or take appropriate steps to enforce our intellectual
property rights.
A portion of our business involves the development of software applications
for specific client projects. Ownership of client-specific software is generally
retained by the client, although we retain some rights to the applications,
processes and intellectual property developed in connection with client
projects.
FACILITIES
Our corporate headquarters facilities total approximately 18,000 square
feet. We lease these facilities, which are located in Portland, Oregon, pursuant
to a lease that expires in 2009, unless terminated earlier or extended pursuant
to our option to lease for one additional five-year period.
In addition to our headquarters, we have offices in or near Bellevue,
Washington; Birmingham, Alabama; Dallas, Texas; Denver, Colorado; Minneapolis,
Minnesota; Phoenix, Arizona; San Francisco, California; Warren, New Jersey; and,
Washington, D.C. We do not own any real estate. We do not consider any specific
leased location to be material to our operations, and we believe that equally
suitable alternative locations are available in all areas where we currently do
business.
LITIGATION
We are not a party to any material litigation.
35
<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors as of December 25, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven L. Darrow....................... 54 Chairman of the Board of Directors
Martin Wright.......................... 38 President, Chief Executive Officer and Director
Jerry N. Grant......................... 37 Senior Vice President of Finance, Chief Financial
Officer, Secretary and Director
Jim S. Gruher.......................... 38 Senior Vice President, Western U.S. Operations
Mark Markowitz......................... 44 Senior Vice President, Eastern U.S. Operations
Michael W. Bealmear(1)................. 52 Director
Charles Scott Gibson(2)................ 47 Director
Paul G. Mardesich(1)(2)................ 39 Director
C. Toms Newby, III(1)(2)............... 32 Director
</TABLE>
- -------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
STEVEN L. DARROW is one of our co-founders and has been Chairman of our
board since March 1997. Mr. Darrow is also chairman of the board and chief
executive officer of Greens.com. Before joining us, Mr. Darrow founded Claremont
Technology Group, Inc. (Claremont), which is presently Complete Business
Solutions, Inc. (CBSI), an information technology consulting company, and from
June 1989 until May 1996, held various positions, including chairman, president
and chief executive officer. Mr. Darrow received a B.S. degree from Portland
State University.
MARTIN WRIGHT is one of our co-founders and has been our President since
July 1998, our Chief Executive Officer since July 1999 and a member of our board
since February 1999. Before joining us, from March 1995 to November 1996, Mr.
Wright was responsible for managing and developing the West Coast consulting
practice for MetaCorp Strategies, a company specializing in computer consulting.
From August 1990 to February 1995, Mr. Wright was vice president of Claremont
with responsibility for developing and managing the information engineering
consulting practice. Mr. Wright attended the University of Capetown in South
Africa.
JERRY N. GRANT is one of our co-founders and has been Senior Vice President
of finance and chief financial officer since February 1997. He has been our
secretary since December 1997 and a member of our board since March 1997. Prior
to joining us, Mr. Grant was managing director in the corporate finance group of
KPMG LLP in Chicago, Illinois from October 1993 to December 1996. Mr. Grant
received an M.B.A. from Columbia University and a B.A. in International
Economics and Russian from the University of Illinois.
JIM S. GRUHER has been Senior Vice President, western U.S. operations since
January 1999. Before joining us, he was vice president of Claremont, then CBSI,
from April 1992 through January 1999, where he was responsible for directing the
national manufacturing industry practice. From April 1988 to April 1992, Mr.
Gruher was a manager in the systems integration practice at Andersen Consulting.
Prior to that, he was an industrial engineer at Ford Aerospace and
Communications Company from July 1985 to February 1988 and at McDonnell Douglas
Corporation from June 1983 to July 1985. Mr. Gruher received an M.B.A. from the
University of California, Irvine and a B.S. in Industrial Engineering from
Oregon State University. He is certified at the CPIM level by the American
Production and Inventory Control Society (APICS).
36
<PAGE> 39
MARK MARKOWITZ has been Senior Vice President, Eastern U.S. Operations
since July 1998. He served as Vice President of our New Jersey operations from
August 1997 to July 1998. Prior to joining us, he was vice president of
Claremont from February 1995 to August 1997, and information systems executive
of EDS, an information technology consulting company, from December 1983 to
January 1995. Mr. Markowitz received a M.A. from the American University and a
B.S. from S.U.N.Y. College at Old Westbury.
MICHAEL W. BEALMEAR has been a member of our board since July 1999. Mr.
Bealmear is currently the chief executive officer of Spear Technologies, Inc.
and serves as a director of Inventa, Post Communications, Total Network
Solutions and BusinessEngine Software. Most recently, Mr. Bealmear has served as
entrepreneur-in-residence at Technology Crossover Ventures. Prior to that, he
was executive vice president of Cadence Design Systems from July 1997 to August
1998, and was senior vice president at Sybase from November 1994 to July 1997.
From October 1984 to September 1990, he was worldwide managing partner for
information technology consulting at Coopers & Lybrand, and from August 1973 to
September 1984, he managed the Western United States information technology
consulting practice at KPMG LLP. He has also held executive roles at SHL
Systemhouse (now MCI Systemhouse) and Salomon Brothers. Mr. Bealmear received a
B.S. in Engineering from the University of Texas at Austin.
CHARLES SCOTT GIBSON has been a member of our board since July 1999. Mr.
Gibson also serves as a director of TriQuint Semiconductor, Radisys Corporation,
Inference, IMS (Integrated Measurement Systems), Egghead.com, CenQuest,
Webridge, Telemark, iChristian.com and etrieve, all high technology companies.
He is also chairman of the board of trustees of the Oregon Graduate Institute of
Science and Technology. Mr. Gibson was a general manager with Intel from June
1976 to January 1983 when he cofounded Sequent Computer Systems. He was
president of Sequent Computer Systems until March 1992. Mr. Gibson holds a B.S.
in electrical engineering and a M.B.A. from the University of Illinois.
PAUL G. MARDESICH has been a member of our board since December 1997. Mr.
Mardesich was also a member of the board between January 1997 and August 1998
and April 1999. Mr. Mardesich served as an officer of Cenquest Inc. Mr.
Mardesich is currently chief financial officer and a member of the board of
directors of Greens.com. From January 1995 to July 1996, he was the senior vice
president of administration and corporate development and a member of the board
of directors of Claremont. Mr. Mardesich received a B.S. in Business
Administration from the University of Portland.
C. TOMS NEWBY, III has been a member of our board since March 1999. Mr.
Newby is currently a general partner of Technology Crossover Ventures, a
position he has held since July 1998, and serves as a director of eMachines,
Inc., Total Sports and several other private companies. From April 1996 to July
1998, Mr. Newby was associated with Technology Crossover Ventures. From 1994
through April 1996, Mr. Newby was a technology investment banker at Montgomery
Securities. Mr. Newby holds a B.S. from the University of North Carolina and a
M.B.A. from Stanford University.
BOARD OF DIRECTORS
We currently have authorized seven directors and each director holds office
until his term expires or until his successor is duly elected and qualified.
Upon completion of this offering, our amended and restated certificate of
incorporation will provide for a classified board of directors. In accordance
with the terms of our certificate, our board of directors will be divided into
three classes whose terms will expire at different times.
At each annual meeting of stockholders beginning with the 2000 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their
37
<PAGE> 40
successors have been duly elected and qualified. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of an
equal number of directors.
Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Bealmear, Mardesich and Newby. The audit
committee reviews our internal accounting procedures and consults with and
reviews the services provided by our independent accountants. The compensation
committee consists of Messrs. Gibson, Mardesich and Newby. The compensation
committee reviews the compensation and benefits of our employees and directors
and makes recommendations to our board of directors.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee has served as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or compensation
committee.
Compensation
Directors are reimbursed for expenses incurred in attending any board or
committee meeting.
Our non-employee directors are eligible to participate in our 1999
Non-Employee Director Stock Option Plan. Each non-employee Director will be
eligible to receive a grant of an option to purchase shares of common stock. The
shares subject to each of these options will vest and become fully exercisable
in equal three-month installments beginning three months after the date of grant
and continuing for the length of the director's term. The exercise price per
share for all options automatically granted to directors under our 1999
Non-Employee Director Stock Option Plan will be equal to the market price of our
common stock on the date of grant. Employee directors, including Messrs. Wright
and Grant, are eligible to receive discretionary grants under our 1997 Stock
Incentive Compensation Plan.
Required Number of Independent Directors
Under the rules of the Nasdaq National Market, we must have three
independent directors. For purposes of this rule, an independent director is a
director that is not an employee of ours and does not have other specified
relationships with us as described in the Nasdaq National Market's rules. We
believe that all of our directors, other than Mr. Wright and Mr. Grant are
independent directors for this purpose.
EXECUTIVE OFFICERS
Our executive officers are appointed by our board of directors or president
and serve until their successors are elected or appointed.
38
<PAGE> 41
Compensation
The following table contains information for fiscal year 1999 regarding the
compensation earned by our president and chief executive officer, and each of
our four other most highly compensated officers whose compensation exceeded
$100,000 for the period. In accordance with the rules of the Securities and
Exchange Commission, the compensation described in this table does not include
prerequisites and other personal benefits received by the executive officers
named in the table below which do not exceed the lesser of $50,000 or 10% of the
total salary and bonus reported for these officers. Mr. Darrow received
compensation as our Chief Executive Officer between the beginning of fiscal year
1999 and July 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM COMPENSATION
COMPENSATION ----------------------
------------------ SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS
---------------------------- -------- ------- ----------------------
<S> <C> <C> <C>
Martin Wright............................... $240,923 $37,620 --
President and Chief Executive Officer
Steven L. Darrow............................ $196,163 $ 0 225,000
Chairman of the Board of Directors
Jerry N. Grant.............................. $220,062 $27,588 --
Senior Vice President of Finance, Chief
Financial Officer, Secretary and Director
Mark Markowitz.............................. $210,000 $33,000 75,000
Senior Vice President, Eastern U.S.
Operations
Jim Gruher.................................. $184,616 $27,000 425,000
Senior Vice President, Western U.S.
Operations
</TABLE>
Option Grants in Fiscal Year 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during fiscal
year 1999. Mr. Wright and Mr. Grant did not receive stock option grants in
fiscal year 1999.
Mr. Darrow's options were granted under our 1999 Non-Employee Director
Stock Option Plan. Mr. Darrow's options vest and become fully exercisable
quarterly over three years. All other options granted to the named executive
officers in fiscal year 1999 were granted under our 1997 Stock Incentive
Compensation Plan. 20% of the options vest and become exercisable on the first
anniversary of the date of grant, and an additional 1/48 of the option grants
vest each month over four years thereafter. The percentage of total options
granted in fiscal year 1999 is based on an aggregate of 6,352,535 options
granted to employees, directors and consultants in the year ended December 25,
1999. In general, options were granted at a fair market value as determined by
our board on the date of grant based on our financial results and prospects.
Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock
price appreciation are
39
<PAGE> 42
provided in accordance with rules of the SEC and do not represent our estimate
or projection of the future common stock price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME GRANTED 1999 PER SHARE DATE 5% 10%
---- ---------- ----------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steven L. Darrow......... 225,000 3.5% $0.60 08/25/09 $84,893 $215,145
Mark Markowitz........... 75,000 1.2 $0.50 07/16/09 23,588 59,768
Jim S. Gruher............ 300,000 4.7 $0.35 02/01/09 66,030 167,340
100,000 1.6 $0.50 07/16/09 31,450 79,690
25,000 0.4 $0.60 08/27/09 9,433 23,905
</TABLE>
Aggregate Option Exercises in Fiscal Year 1999, and Option Values at December
25, 1999
None of the named executive officers exercised options during the fiscal
year ended December 25, 1999. The following table sets forth information
concerning exercisable and unexercisable stock options held by the executive
officers named in the summary compensation table at December 25, 1999. The value
of unexercised in-the-money options is based on an assumed initial offering
price of $ . per share minus the actual exercise prices.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 25, 1999 DECEMBER 25, 1999
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven L. Darrow.......................... 18,750 206,250 $ $
Martin Wright............................. 937,576 1,812,424
Jerry N. Grant............................ 766,740 1,233,260
Mark Markowitz............................ 270,018 729,982
Jim S. Gruher............................. 0 425,000
</TABLE>
EMPLOYMENT AGREEMENTS
In January 1997, we entered into an employment agreement with Mr. Wright.
Mr. Wright serves as our President and Chief Executive Officer and is currently
paid a salary at the rate of $240,923 per year. Mr. Wright's employment
agreement provides that if Mr. Wright were terminated without cause by us, he
would receive his base salary for three months after the termination date.
In January 1997, we entered into an employment agreement with Mr. Grant.
Mr. Grant serves as our Senior Vice President of Finance and Chief Financial
Officer and is currently paid a salary at the rate of $220,062 per year. Mr.
Grant's employment agreement provides that if Mr. Grant were terminated without
cause by us, he would receive his base salary for three months after the
termination date.
In August 1997, we entered into an employment agreement with Mr. Markowitz.
Mr. Markowitz serves as our Senior Vice President, Eastern U.S. Operations and
is currently paid a salary at the rate of $210,000 per year. Mr. Markowitz's
employment agreement provides that if Mr. Markowitz were terminated without
cause by us, he would receive his base salary for the longer of one month after
the termination date or one week per year of service up to a maximum of 13 weeks
after the termination date.
40
<PAGE> 43
In January 1999, we entered into an employment agreement with Mr. Gruher.
Mr. Gruher serves as our Senior Vice President, Western U.S. Operations and is
currently paid a salary at the rate of $200,000 per year. Mr. Gruher's
employment agreement provides that if Mr. Gruher were terminated without cause
by us during the first year of his employment, he would receive his base salary,
including health insurance, for three months after the termination date. If Mr.
Gruher were terminated without cause by us after the first year of his
employment, he would receive his base salary, including health insurance and
life insurance, for three months after the termination date, plus an additional
month for each year of service after the first year of employment.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation to be filed upon
completion of this offering limits the liability of our directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability associated with any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemption; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of a director's 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 rescission.
Our certificate of incorporation and bylaws also provide that we shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity, regardless
of whether our bylaws would permit indemnification.
We intend to enter into indemnification agreements with each of our
officers and directors containing provisions that require us to, among other
things, indemnify such officers and directors against liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
STOCK PLANS
1997 Stock Incentive Compensation Plan
Our 1997 Stock Incentive Compensation Plan was originally approved by our
board of directors and stockholders in January 1997. In October 1999, the 1997
Stock Incentive Compensation Plan was amended to increase the number of shares
of common stock reserved for issuance thereunder to 19,000,000 shares. As of
December 25, 1999, options to purchase an aggregate of 13,441,694 shares of
common stock were outstanding, 1,035,455 shares of
41
<PAGE> 44
common stock had been purchased pursuant to exercises of stock options and stock
purchase rights and 4,522,851 shares were available for future grant.
Our 1997 Stock Incentive Compensation Plan provides for the grant of
incentive stock options (as defined in Section 422 of the Internal Revenue Code
of 1986, as amended) to employees and nonstatutory stock options and stock
purchase rights to employees, including officers and directors, and to
non-employee directors and consultants. Unless terminated sooner, this plan will
terminate automatically in January 2007.
Our 1997 Stock Incentive Compensation Plan is administered by our board of
directors and, thus, the board of directors determines the terms of the options
or stock purchase rights granted, including the exercise price, the number of
shares subject to each option or stock purchase right, the vesting and the form
of consideration payable upon such exercise. In addition, the board has the
authority to amend, suspend or terminate the plan, provided that no such action
may affect any share of common stock previously issued and sold or any option
previously granted and then outstanding under the plan.
Options and stock purchase rights granted under our 1997 Stock Incentive
Compensation Plan are not generally transferable by the optionee; during the
lifetime of the optionee, each option and stock purchase right is exercisable
only by the optionee. The plan provides that options granted thereunder must
generally be exercised within three months of the end of optionee's status as
our employee or consultant, or within thirty-six months after his or her
termination by death or disability, but in no event later than the expiration of
the option's ten year term. However, in an exercise of its discretion, the board
has approved agreements under the plan that provide that options must generally
be exercised within twelve months after optionee's termination by death or
disability, but in no event later than the expiration of the option's ten year
term.
In the case of stock purchase rights, the agreement evidencing the grant
may provide that we have a repurchase option exercisable upon the voluntary or
involuntary termination of an employee's employment for any reason (including
death or disability). In the event of the exercise of the repurchase option, the
purchase price paid per share will equal or exceed the original price paid by
the employee and may be paid by cancellation of the employee's outstanding
indebtedness to us, if any. Our repurchase option shall lapse at a rate
determined by the board.
The exercise price of any incentive stock options granted under this plan
and any non-statutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, must be at least
equal to the fair market value of our common stock on the date of grant. With
respect to any participant who owns stock possessing more than 10% of the voting
power of all classes of our outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date and the term of such incentive stock option must not exceed
five years. The term of all other options granted under the plan may not exceed
ten years.
Our 1997 Stock Incentive Compensation Plan provides that in the event of
our merger with or into another corporation or a sale of substantially all of
our assets, each option or right shall be assumed or an equivalent option or
right substituted by the successor corporation. If the outstanding options or
rights are not assumed or substituted, our board shall provide for the optionee
to 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
exercisable.
42
<PAGE> 45
1999 Non-Employee Director Stock Option Plan
Our 1999 Non-Employee Director Stock Option Plan was originally approved by
our board of directors in August, 1999. A total of 1,000,000 shares of common
stock have been reserved for issuance under the plan. As of December 25, 1999,
options to purchase an aggregate of 675,000 shares of common stock were
outstanding, no shares of common stock had been purchased pursuant to exercises
of stock options and 325,000 shares were available for future grant.
Our 1999 Non-Employee Director Stock Option Plan provides for the grant of
non-statutory stock options to our non-employee directors. Unless terminated
sooner, this plan will terminate automatically in January 2009.
Our 1999 Non-Employee Director Stock Option Plan is administered by our
board of directors and, thus, the board of directors determines the terms of the
options granted, including the exercise price, the number of shares subject to
each option or stock purchase right, the vesting and the form of consideration
payable upon such exercise. In addition, the board has the authority to amend,
suspend or terminate the plan, provided that no such action may affect any share
of common stock previously issued and sold or any option previously granted and
then outstanding under the plan.
Options granted under our 1999 Non-Employee Director Stock Option Plan are
transferable by the optionee in a manner and to the extent acceptable to the
plan administrator. Options granted under the plan must generally be exercised
within three months of the end of optionee's status as one of our directors, or
within twelve months after his or her termination by death or disability, but in
no event later than the expiration of the option's ten year term. The exercise
price of any nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, must be at least equal to the fair market value of our common stock on the
date of grant. The term of all options granted under the plan may not exceed ten
years.
Our 1999 Non-Employee Director Stock Option Plan provides that in the event
of our merger with or into another corporation or a sale of substantially all of
our assets, each option shall be assumed or an equivalent option substituted by
the successor corporation. If the outstanding options are not assumed or
substituted, our board shall provide for the optionee to have the right to
exercise the remainder of the option as to two thirds of the total of unvested
shares of common stock subject to such option.
401(K) PLAN
In March 1997, our board of directors adopted a Retirement Savings and
Investment Plan covering our full-time employees located in the United States.
This plan is intended to qualify under Section 401(k) of the Internal Revenue
Code of 1986, as amended, so that contributions to this plan by employees, and
the investment earnings thereon, are not taxable to employees until withdrawn.
Pursuant to this plan, employees may elect to reduce their current compensation
by up to the lesser of 15% of their annual compensation or the statutorily
prescribed limit ($10,000 in 1999) and to have the amount of such reduction
contributed to this plan. We are not obligated to make additional matching
contributions on behalf of plan participants but may do so, at our discretion.
43
<PAGE> 46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SALES OF PREFERRED STOCK
In February 1999, we sold an aggregate of 13,333,334 shares of our Series A
Preferred Stock to the following investors at a per share price of $0.525:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
SERIES A AGGREGATE
NAME OF PURCHASER PREFERRED STOCK PURCHASE PRICE
----------------- --------------- --------------
<S> <C> <C>
Rho Management Trust I.................................... 5,714,286 $3,000,000
Technology Crossover Ventures II, L.P..................... 3,644,750 1,913,494
TCV II (Q), L.P........................................... 2,802,136 1,471,121
Technology Crossover Ventures II, C.V..................... 556,481 292,153
TCV II Strategic Partners, L.P............................ 497,281 261,073
TCV II, V.O.F............................................. 118,400 62,160
</TABLE>
Each share of our Series A Preferred Stock is convertible into such number
of fully paid and nonassessable shares of common stock as is determined by
dividing the original issuance price of our Series A Preferred Stock by the
conversion price for the Series A Preferred Stock in effect at the time the
certificate is surrendered for conversion. Each share of our Series A Preferred
Stock is convertible under certain conditions, including the closing of an
initial public offering of our common stock.
The holders of our Series A Preferred Stock have entered into an agreement
with us pursuant to which they will have registration rights with respect to
their shares of common stock following this offering. See "Description of
Capital Stock -- Preferred Stock" for additional information regarding these
registration rights.
In February 2000, we entered into agreements to sell 2,000,000 shares of
our Series B Preferred Stock for $5.0 million to the following investors at a
per share price of $2.50:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
SERIES B AGGREGATE
NAME OF PURCHASER PREFERRED STOCK PURCHASE PRICE
----------------- --------------- --------------
<S> <C> <C>
TCV III (Q), L.P. ........................................ 1,047,695 $2,619,238
Rho Management Trust I.................................... 857,143 2,142,858
TCV III Strategic Partners, L.P. ......................... 47,445 118,613
TCV III, L.P. ............................................ 39,418 98,545
TCV III (GP).............................................. 8,299 20,748
</TABLE>
Each share of our Series B Preferred Stock is convertible into such number
of fully paid and nonassessable shares of common stock as is determined by
dividing the original issuance price of our Series B Preferred Stock by the
conversion price for the Series B Preferred Stock in effect at the time the
certificate is surrendered for conversion. Each share of our Series B Preferred
Stock is convertible under certain conditions, including the closing of an
initial public offering of our common stock.
The holders of our Series B Preferred Stock have entered into an agreement
with us pursuant to which they will have registration rights with respect to
their shares of common stock following this offering. See "Description of
Capital Stock -- Preferred Stock" for additional information regarding these
registration rights.
44
<PAGE> 47
OPTION GRANTS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
Since our inception in November 1996, we have granted to our executive
officers and directors options for shares of common stock in the amounts and at
the prices indicated.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
NAME DATE OF GRANT OPTIONS PRICE/SHARE
---- ------------- --------- -----------
<S> <C> <C> <C>
Steven L. Darrow.................................... 08/25/99 225,000 $0.60
Martin Wright....................................... 01/27/97 1,000,000 $0.10
07/09/98 250,000 $0.25
12/21/98 1,500,000 $0.35
Jerry N. Grant...................................... 01/27/97 1,000,000 $0.10
12/21/98 1,000,000 $0.35
Mark Markowitz...................................... 08/29/97 100,000 $0.25
02/13/98 400,000 $0.25
07/09/98 100,000 $0.25
12/21/98 250,000 $0.35
07/16/99 75,000 $0.50
Jim S. Gruher....................................... 02/01/99 300,000 $0.35
07/16/99 100,000 $0.50
08/27/99 25,000 $0.60
Michael W. Bealmear................................. 08/25/99 150,000 $0.60
Charles Scott Gibson................................ 08/25/99 150,000 $0.60
Paul G. Mardesich................................... 08/25/99 150,000 $0.60
</TABLE>
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Mr. Wright, our president
and chief executive officer, Mr. Grant, our senior vice president of finance and
Chief Financial Officer, Mr. Gruher, our Senior Vice President, Western U.S.
Operations and Mr. Markowitz, our Senior Vice President, Eastern U.S.
Operations. See "Management -- Employment Agreements" for additional information
regarding these employment agreements.
OTHER AGREEMENTS
In September 1999, we entered into an agreement with Greens.com for the
provision of services relating to customer relationship management and
enterprise resource planning applications integration. During fiscal year 1999,
revenues from Greens.com represented 9.7% of our total revenues. Steven L.
Darrow, our Chairman of the board, is chairman of the board and chief executive
officer of Greens.com, and owns more than 40% of the outstanding stock of
Greens.com. In November, 1999, Mr. Darrow entered into an agreement with us
whereby Mr. Darrow personally guarantees the payment of up to $4.5 million of
our fees relating to professional services we render to Greens.com. In February
2000, Mr. Darrow contributed to the capital of Greens.com $4.0 million out of
the proceeds from Mr. Darrow's sale of 3,333,333 shares at $1.80 per share of
his Emerald Solutions founders' common stock to certain holders of more than 5%
of our outstanding common stock (an aggregate of 2,222,222 shares of which were
sold to TCV III (GP), TCV III, L.P., TCV III (Q), L.P., TCV III Strategic
Partners, L.P., and 1,111,111 shares of which were sold to Rho Management Trust
I). Also in February 2000, Greens.com paid to us approximately $2.7 million,
representing all monies Greens.com owed us as of January 30, 2000, and placed
approximately $1.3 million in
45
<PAGE> 48
escrow to cover our anticipated professional services fees in connection with
all current on-going projects.
Our agreement with Greens.com includes an exclusivity provision whereby,
contingent upon Greens.com's payment in full of all of our invoices within 30
days of receipt, we will not engage in consulting and project work for certain
of Greens.com's competitors. We believe the other terms of our relationship with
Greens.com are no less favorable than we could have obtained from any
unaffiliated third party. The agreement with Greens.com will continue until
terminated by us or Greens.com. In fiscal year 1999, we generated 9.7% of our
revenues from our agreement with Greens.com.
In July 1999, we loaned to Mr. Wright, our President, Chief Executive
Officer and director, an aggregate of $150,000 in order for Mr. Wright to
purchase 300,000 shares of our common stock. In connection with this loan, Mr.
Wright executed a full recourse promissory note in favor of us. The promissory
note bears interest at a rate of 5.82% per annum, matures in July 2004 and is
secured by a pledge of the common stock purchased by Mr. Wright for cash under
the terms of a stock pledge agreement between Mr. Wright and us. As of December
25, 1999, there was $150,000 plus interest outstanding on the promissory note.
46
<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
the beneficial ownership of our common stock as of December 25, 1999 by the
following:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each of our executive officers named in the compensation table above;
- each of our directors;
- all directors and executive officers as a group; and
- all other selling stockholders.
This table lists applicable percentage ownership based on 65,375,914 shares
of common stock outstanding as of December 25, 1999, as adjusted to reflect (a)
the conversion upon the closing of this offering of all outstanding shares of
redeemable convertible preferred stock (including 13,333,334 shares of our
Series A Preferred Stock issued and sold in March 1999, and 2,000,000 shares of
our Series B Preferred Stock issued and sold in February 2000), and also lists
applicable percentage ownership based on shares of common stock
outstanding after completion of this offering. Except as otherwise indicated, we
believe that the beneficial owners of the common stock listed below, on the
information furnished by such owners, have sole voting power and investment
power with respect to such shares subject to community property laws where
applicable. The address for those individuals for which an address is not
otherwise indicated is Emerald -- Delaware, Inc., 111 SW 5th Avenue, 27th Floor,
Portland, OR 97204. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60 days
after December 25, 1999 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING NUMBER OF AFTER OFFERING
NAME OR GROUP OF BENEFICIAL OWNERS ----------------------- SHARES ---------------------
AND ADDRESS NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
---------------------------------- ---------- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Technology Crossover Management II,
L.L.C.(1)........................... 16,387,165 25.1% %
575 High Street
Suite 400
Palo Alto, CA 94301
Technology Crossover Management III,
L.L.C.(2)........................... 8,365,079 12.8
575 High Street
Suite 400
Palo Alto, CA 94301
Rho Management Trust I(3)............. 13,117,323 20.1
765 Fifth Avenue
New York, NY 10153
Steven L. Darrow(4)................... 9,399,472 14.4
Martin Wright(5)...................... 2,879,072 4.3
Jerry N. Grant(6)..................... 2,427,224 3.7
Mark Markowitz(7)..................... 607,367 *
Jim S. Gruher(8)...................... 342,877 *
Michael W. Bealmear(9)................ 25,000 *
Charles Scott Gibson(10).............. 25,000 *
Paul G. Mardesich(11)................. 644,148 *
All directors and executive officers
as a group (8 persons)(12)........ 13,978,282 21.4
</TABLE>
47
<PAGE> 50
- -------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 7,839,186 shares held by Technology Crossover Ventures II, L.P.,
6,026,877 shares held by TCV II (Q), L.P., 1,196,888 shares held by
Technology Crossover Ventures II, C.V., 1,069,558 shares held by TCV II
Strategic Partners, L.P., 254,656 shares held by TCV II V.O.F.
(2) Includes 7,668,547 shares held by TCV III (Q), L.P., 347,271 shares held by
TCV III Strategic Partners, L.P., 288,520 shares held by TCV III, L.P. and
60,741 shares held by TCV III (GP), which includes 2,222,222 shares
acquired in February 2000.
(3) Includes 1,111,111 shares acquired in February 2000.
(4) Reflects the sale of 3,333,333 shares in February 2000. Includes 37,500
shares issuable upon exercise of stock options held by Mr. Darrow
exercisable within 60 days of December 25, 1999.
(5) Includes 1,045,932 shares issuable upon exercise of stock options held by
Mr. Wright exercisable within 60 days of December 25, 1999.
(6) Includes 250,000 shares held by the Grant II Trust and 12,500 shares held
by the Grant Irrevocable Trust. Also includes 850,090 shares issuable upon
exercise of stock options held by Mr. Grant exercisable within 60 days of
December 25, 1999.
(7) Includes 298,356 shares issuable upon exercise of stock options held by Mr.
Markowitz exercisable within 60 days of December 25, 1999.
(8) Includes 65,000 shares issuable upon exercise of stock options held by Mr.
Gruher exercisable within 60 days of December 25, 1999.
(9) Includes 25,000 shares issuable upon exercise of stock options held by Mr.
Bealmear exercisable within 60 days of December 25, 1999.
(10) Includes 25,000 shares issuable upon exercise of stock options held by Mr.
Gibson exercisable within 60 days of December 25, 1999.
(11) Includes 25,000 shares issuable upon exercise of stock options held by Mr.
Mardesich exercisable within 60 days of December 25, 1999.
(12) Includes an aggregate of 2,371,878 shares issuable upon exercise of stock
options held by our directors and executive officers exercisable within 60
days of December 25, 1999.
48
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
115,333,334 shares, $0.001 par value per share, to be divided into two classes
to be designated common stock and preferred stock. Of the shares authorized,
100,000,000 shares shall be designated as common stock and 15,333,334 shares
shall be designated as preferred stock. The following description of our capital
stock is only a summary. You should refer to our certificate of incorporation
and bylaws as in effect upon the closing of this offering, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.
COMMON STOCK
As of December 25, 1999, there were 63,375,914 shares of common stock
outstanding which were held of record by approximately 140 stockholders
(assuming conversion of all shares of preferred stock outstanding as of December
25, 1999). There will be shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after December 25, 1999) after giving effect to the sale
of our common stock in this offering. There are 13,441,694 shares issuable upon
exercise of outstanding options under our 1997 Stock Incentive Compensation Plan
and 675,000 shares issuable upon exercise of outstanding options under our 1999
Non-Employee Director Stock Option Plan. See "Management -- Stock Plans" for a
description of our stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation, to be filed concurrently with completion
of this offering, does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of our common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding.
Holders of our common stock have no preemptive or other subscription or
conversion rights. There are no redemption or sinking fund provisions applicable
to our common stock. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued upon the completion
of this offering will be fully paid and non-assessable.
The holders of our common stock are subject to the terms of a stockholders'
agreement and a rights and restrictions agreement.
PREFERRED STOCK
As of February 15, 2000, there were 13,333,334 shares of redeemable
convertible Series A Preferred Stock outstanding which were held of record by
six stockholders. All outstanding shares of our Series A Preferred Stock will be
converted into an aggregate of 13,333,334 shares of common stock automatically
upon completion of this offering. As of February 15, 2000, there were 2,000,000
shares of redeemable convertible Series B Preferred Stock outstanding which were
held of record by five stockholders. All outstanding shares of our Series B
Preferred Stock will be converted into an aggregate of 2,000,000 shares of
common stock automatically upon completion of this offering.
Upon the completion of this offering and the filing of our amended and
restated certificate of incorporation, our board will be authorized, without
action by the stockholders, to issue shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and
49
<PAGE> 52
restrictions thereof. These rights, preferences and privileges include dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of any series, all or any of which may be greater than the
rights of the common stock.
The issuance of preferred stock could adversely affect the voting power of
holders of common stock and the likelihood that the holders of common stock will
receive dividend payments and payments upon liquidation. In addition, the
issuance of preferred stock could have the effect of delaying or preventing a
change in our control without further action by the stockholders. We have no
present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to an Amended and Restated Investors Rights Agreement we entered
into with holders of 13,333,334 shares of our Series A Preferred Stock and
2,000,000 shares of our Series B Preferred Stock, the holders of these shares
are entitled to registration rights regarding the common stock into which each
of these series of preferred stock is convertible. Additionally, pursuant to
four common stock purchase agreements between some of our affiliates and some of
the Series A investors, holders of 22,536,233 shares of our common stock are
also subject to the Investors' Rights Agreement and have the same registration
rights. The registration rights provide that if we propose to register any
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, they are
entitled to notice and are entitled to include shares of their common stock in
the registration. This right is subject to conditions and limitations, including
the right of the underwriters to limit the number of shares included in the
registration. The holders of these shares may also require us to file a
registration statement under the Securities Act at our expense with respect to
their shares of common stock. We are required to use our best efforts to effect
this registration, subject to conditions and limitations. Furthermore, the
holders of these shares may require us to file additional registration
statements on Form S-3, when and if we are qualified to use such form, and
subject to further conditions and limitations.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make our acquisition more difficult by means of a tender offer, a
proxy contest or otherwise and could also make the removal of incumbent officers
and directors more difficult. These provisions, summarized below, are expected
to discourage certain types of coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of us to first
negotiate with us. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweighs the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms. The amendment of any of
the following provisions would require approval by holders of at least 66 2/3%
of our outstanding common stock.
BOARD OF DIRECTORS
Effective with the first annual meeting of stockholders following
completion of this offering, our restated bylaws provide for the division of our
board of directors into three classes, as nearly equal in number as possible,
with the directors in each class serving for a three-term, and one class being
elected each year by our stockholders. This system of electing and removing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of us and may maintain the incumbency of
the board of directors, as it generally makes it more difficult for stockholders
to replace a majority of the directors.
50
<PAGE> 53
Further, our amended and restated certificate of incorporation filed in
connection with this offering and restated bylaws do not provide for cumulative
voting in the election of directors.
STOCKHOLDER MEETINGS
Under our amended and restated certificate of incorporation and restated
bylaws, the stockholders may call a special meeting only upon the request of the
holders of at least 51% of the outstanding shares. Additionally, our board of
directors, chairman of the board or president may call special meetings of
stockholders. Our restated bylaws establish advance notice procedures with
respect to stockholder proposals and the nomination of candidates for election
as directors, other than nominations made by or at the direction of the board of
directors or a committee thereof. In addition, our amended and restated
certificate of incorporation eliminates the right of stockholders to act by
written consent without a meeting.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
UNDESIGNATED PREFERRED STOCK
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
us. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is .
NASDAQ STOCK MARKET NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "EMSO."
51
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of
common stock outstanding. Of these shares, the shares sold in
this offering will be freely transferable without restriction under the
Securities Act, unless they are held by "affiliates" as that term is used under
the Securities Act and the Regulations promulgated thereunder.
Of these shares, the remaining shares were sold by us in
reliance on exemptions from the registration requirements of the Securities Act,
are restricted securities within the meaning of Rule 144 under the Securities
Act and become eligible for sale in the public market as follows:
- beginning 90 days after the effective date, shares will
become eligible for sale, subject to the provisions of Rules 144 and 701;
- beginning 181 days after the effective date, additional
shares will become eligible for sale, subject to the provisions of Rules
144, 144(k) or 701, upon the expiration of agreements not to sell such
shares entered into between the underwriters and such stockholders;
- beginning on , 2000, the remaining shares will
become eligible for sale, subject to the provisions of Rule 144.
Beginning 181 days after the date of this prospectus, approximately
additional shares subject to vested options as of the date of
completion of this offering will be available for sale subject to compliance
with Rule 701 and upon the expiration of agreements not to sell such shares
entered into between the underwriters and such stockholders. Any shares subject
to lock-up agreements may be released at any time without notice by the
underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of completion of this
offering, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock (approximately shares
immediately after this offering), or the average weekly trading volume in the
common stock during the four calendar weeks preceding such sale, subject to the
filing of a Form 144 with respect to such sale and certain other limitations and
restrictions. In addition, a person who is not deemed to have been our affiliate
at any time during the 90 days preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above.
Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding-period restrictions, in each case commencing 90
days after the date of completion of this offering. However, we and our
officers, directors and stockholders have agreed not to sell or otherwise
dispose of any shares of our common stock for the 180-day period after the date
of this prospectus without the prior written consent of the underwriters. See
"Underwriting."
As soon as practicable after the date of completion of this offering, we
intend to file a registration statement on Form S-8 under the Securities Act to
register shares of common stock reserved for issuance under our 1997 Stock
Incentive Compensation Plan and our 1999 Non-Employee Director Stock Option
Plan, thus permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act. Such registration
statements will become effective immediately upon filing.
52
<PAGE> 55
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated as
of the date hereof, the underwriters named below, through their representatives
Deutsche Bank Securities Inc., FleetBoston Robertson Stephens Inc., Adams,
Harkness & Hill, Inc. and Pacific Crest Inc. have severally agreed to purchase
from us the following respective number of shares of common stock at the initial
public offering price less the underwriting discounts and commissions set forth
on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Deutsche Bank Securities Inc. ..............................
FleetBoston Robertson Stephens Inc. ........................
Adams, Harkness & Hill, Inc.................................
Pacific Crest Inc...........................................
----------
Total.............................................
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the initial public offering price set forth on the cover of this prospectus
and to some dealers at a price that represents a concession not in excess of
$ . per share under the public offering price. The
underwriters may allow, and these dealers may re-allow, a concession of not more
than $ . per share to other dealers. After the initial
public offering, representatives of the underwriters may change the offering
price and other selling terms.
We and the selling stockholder have granted to the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to additional shares of common stock at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus. The underwriters may exercise this option only to
cover over-allotments made in connection with the sale of the common stock
offered hereby. To the extent that the underwriters exercise this option, each
of the underwriters will become obligated, subject to conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above table bears
to the total number of shares of common stock offered hereby. We and the selling
stockholder will be obligated, pursuant to the option, to sell these additional
shares of common stock to the underwriters to the extent the option is
exercised. If any additional shares of common stock are purchased, the
underwriters will offer the additional shares on the same terms as those on
which the shares are being offered.
The underwriting discounts and commissions are equal to the public offering
price per share of common stock less the amount paid by the underwriters to us
per share of common stock. We and the selling stockholder have agreed to pay the
underwriters the following discounts and
53
<PAGE> 56
commissions, assuming either no exercise or full exercise by the underwriters of
the underwriters' over-allotment option:
<TABLE>
<CAPTION>
TOTAL
-------------------------------
PER WITHOUT WITH FULL
SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
Emerald Solutions................................. $ $ $
Underwriting discounts and commissions paid by the
selling stockholder...............................
</TABLE>
In addition, we estimate that the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately
. The selling stockholder will pay a pro rata share of this
amount based on the percentage of the number of shares sold by the selling
stockholder to the total number of shares sold in connection with the
over-allotment option, if any.
We and the selling stockholder have agreed to indemnify the underwriters
against liabilities in connection with this offering, including liabilities
under the Securities Act and to contribute to payments the underwriters may be
required to make in respect of any of these liabilities.
Each of our officers and directors and substantially all of our
stockholders and holders of options and warrants to purchase our stock, has
agreed not to offer, sell, contract to sell or otherwise dispose of, or enter
into any transaction that is designed to, or could be expected to, result in the
disposition of any portion of our common stock held by these persons prior to
this offering or common stock issuable upon exercise of options or warrants held
by these persons for a period of 180 days after the effective date of the
registration statement of which this prospectus is a part without the prior
written consent of Deutsche Bank Securities Inc. This consent may be given at
any time without public notice. We have entered into a similar agreement with
the representatives of the underwriters, except that we may grant options and
sell shares pursuant to our 1997 Stock Incentive Compensation Plan and our 1999
Non-Employee Director Stock Option Plan without such consent.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than the
underwriter is committed to purchase. Additionally, to cover these
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may stabilize or maintain the market price of
our common stock at a level above that which might otherwise prevail in the open
market. The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares of common stock offered in
this offering for friends and family members of our executive officers and other
persons that are affiliated with companies with whom we have a business
relationship, such as executives of companies that market, sell or otherwise
promote our products. None of these shares will be subject to lock-up
agreements.
54
<PAGE> 57
The number of shares of our common stock available for sale to the general
public will be reduced to the extent these reserved shares are purchased. Any
reserved shares that are not purchased by these persons will be offered by the
underwriters to the general public on the same basis as the other shares in this
offering.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock will
be determined by negotiation among us and the representatives of the
underwriters. Among the primary factors that will be considered in determining
the public offering price are:
- prevailing market conditions;
- our results of operations in recent periods;
- the assessment of our management agreement and the present stage of our
development;
- the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business; and
- estimates of our business potential.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Morrison & Foerster LLP, Palo Alto, California. Legal matters will be passed
upon for the underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The financial statements and schedule of the Company as of December 26,
1998 and December 25, 1999, and for each of the years in the three-year period
ended December 25, 1999, have been included in this prospectus and in the
registration statement in reliance upon the report of KPMG LLP, independent
auditors, appearing elsewhere herein, and upon the authority of that firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement, each statement
being qualified in all respects by this reference. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The Commission maintains a web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
55
<PAGE> 58
EMERALD -- DELAWARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Emerald -- Delaware, Inc.
We have audited the accompanying balance sheets of Emerald -- Delaware,
Inc. (formerly Emerald Solutions, Inc.) as of December 26, 1998 and December 25,
1999, and the related statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three-year period ended December 25,
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 Emerald -- Delaware, Inc. as
of December 26, 1998 and December 25, 1999, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
25, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Seattle, Washington
February 15, 2000
F-2
<PAGE> 60
EMERALD -- DELAWARE, INC.
BALANCE SHEETS
DECEMBER 26, 1998 AND DECEMBER 25, 1999
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 25, PRO
1998 1999 FORMA
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 302,733 $ 1,708,355
Trade accounts receivable, net of allowance for doubtful
accounts of $50,000 in 1998 and $249,999 in 1999........ 2,167,626 6,234,715
Receivable from related party............................. 54,947 1,774,140
Prepaid expenses.......................................... 261,135 392,297
----------- -----------
Total current assets................................ 2,786,441 10,109,507
----------- -----------
Property and equipment, net................................. 1,688,089 4,453,632
Other assets................................................ 171,188 321,691
----------- -----------
$ 4,645,718 $14,884,830
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 652,960 $ 1,661,043
Accrued compensation...................................... 626,918 2,864,762
Other accrued liabilities................................. 169,126 828,302
Line of credit............................................ -- 5,000,000
Deferred revenue.......................................... 375,322 374,415
Current portion of capital lease obligations.............. 69,438 163,882
----------- -----------
Total current liabilities........................... 1,893,764 10,892,404
----------- -----------
Capital lease obligations, excluding current portion........ 74,328 210,717
Other long-term liabilities................................. 31,416 31,416
Series A Redeemable convertible preferred stock, $.001 par
value 13,333,334 shares authorized, issued, and
outstanding at December 25, 1999. Aggregate liquidation
preference of $7,000,000 at December 25, 1999. Aggregate
redemption value of $7,583,333 at December 25, 1999....... -- 7,207,422
Stockholders' equity (deficit):
Common stock, $.001 par value. 100,000,000 shares
authorized, 49,513,000 and 50,042,580 shares issued and
outstanding at December 26, 1998 and December 25, 1999,
respectively, (63,375,914 shares issued and outstanding
pro-forma).............................................. 49,513 50,043 63,376
Additional paid-in capital................................ 5,837,903 5,370,588 12,564,677
Deferred compensation..................................... -- (86,259) (86,259)
Accumulated deficit....................................... (3,145,036) (8,570,219) (8,570,219)
----------- ----------- -----------
2,742,380 (3,235,847) 3,971,575
Less stock subscriptions receivable....................... (96,170) (221,282) (221,282)
----------- ----------- -----------
Total stockholders' equity (deficit)................ 2,646,210 (3,457,129) 3,750,293
Commitments, contingencies and subsequent events
----------- -----------
$ 4,645,718 $14,884,830
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
F-3
<PAGE> 61
EMERALD -- DELAWARE, INC.
STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (Includes related party revenue of $55,000 and
$3,384,000 during 1998 and 1999, respectively)......... $ 2,233,857 $15,010,608 $34,710,594
Expenses:
Cost of revenues....................................... 1,925,167 7,742,208 19,280,517
Sales and marketing.................................... 406,561 2,400,561 6,589,529
General and administrative............................. 3,345,992 4,091,416 14,280,125
Equity in losses of unconsolidated subsidiary.......... 170,211 -- --
Loss on investment in subsidiary held for disposal..... 238,650 -- --
----------- ----------- -----------
Total operating expenses................................. 6,086,581 14,234,185 40,150,171
----------- ----------- -----------
Income (loss) from operations............................ (3,852,724) 776,423 (5,439,577)
----------- ----------- -----------
Net other expense........................................ (321) (8,707) (20,006)
----------- ----------- -----------
Income (loss) before income taxes...................... (3,853,045) 767,716 (5,459,583)
----------- ----------- -----------
Income taxes............................................. -- 59,707 (34,400)
----------- ----------- -----------
Net income (loss)...................................... (3,853,045) 708,009 (5,425,183)
----------- ----------- -----------
Accretion of redemption value of redeemable convertible
preferred stock...................................... -- -- 691,535
Net income (loss) applicable to common stockholders.... $(3,853,045) $ 708,009 $(6,116,718)
=========== =========== ===========
Net earnings (loss) per share applicable to common
stockholders:
Basic earnings (loss) per share........................ $ (0.09) $ 0.01 $ (0.12)
Diluted earnings (loss) per share...................... $ (0.09) $ 0.01 $ (0.12)
Shares used to calculate:
Basic earnings (loss) per share...................... 41,847,572 48,720,903 49,825,516
Diluted earnings (loss) per share.................... 41,847,572 50,910,574 49,825,516
</TABLE>
See accompanying Notes to Financial Statements.
F-4
<PAGE> 62
EMERALD -- DELAWARE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCK STOCKHOLDERS'
-------------------- PAID-IN DEFERRED SUBSCRIPTIONS ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE DEFICIT (DEFICIT)
---------- ------- ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at beginning of
period..................... 25,750,000 $25,750 $2,034,250 $ -- $(2,060,000) $ -- $ --
Sale of common stock......... 19,467,393 19,467 2,735,017 -- (2,754,484) -- --
Payment of stock
subscriptions receivable... -- -- -- -- 4,618,899 -- 4,618,899
Stock issued in
acquisitions............... 1,539,708 1,540 383,388 -- -- -- 384,928
Net loss..................... -- -- -- -- -- (3,853,045) (3,853,045)
---------- ------- ---------- --------- ----------- ----------- -----------
Balances at December 27,
1997....................... 46,757,101 46,757 5,152,655 -- (195,585) (3,853,045) 1,150,782
Sale of common stock......... 2,940,000 2,940 732,061 -- (95,250) -- 639,751
Payment of stock
subscriptions receivable... -- -- -- -- 194,665 -- 194,665
Stock repurchased............ (1,080,000) (1,080) (270,140) -- -- -- (271,220)
Options exercised............ 518,375 518 129,324 -- -- -- 129,842
Settlement of a liability
with common stock.......... 377,524 378 94,003 -- -- -- 94,381
Net income................... -- -- -- -- -- 708,009 708,009
---------- ------- ---------- --------- ----------- ----------- -----------
Balances at December 26,
1998....................... 49,513,000 49,513 5,837,903 -- (96,170) (3,145,036) 2,646,210
Payment of stock
subscriptions receivable... -- -- -- -- 74,888 -- 74,888
Issuance of note receivable
to finance common stock
acquisitions............... -- -- -- -- (200,000) -- (200,000)
Issuance of stock options.... -- -- 105,180 (105,180) -- -- --
Amortization of deferred
compensation............... -- -- -- 18,921 -- -- 18,921
Options exercised............ 517,080 517 99,053 -- -- -- 99,570
Stock issued for services
rendered................... 12,500 13 19,987 -- -- -- 20,000
Net loss..................... -- -- -- -- -- (5,425,183) (5,425,183)
Accretion of redemption value
of redeemable convertible
preferred stock............ -- -- (691,535) -- -- -- (691,535)
---------- ------- ---------- --------- ----------- ----------- -----------
Balances at December 25,
1999....................... 50,042,580 $50,043 $5,370,588 $ (86,259) $ (221,282) $(8,570,219) $(3,457,129)
========== ======= ========== ========= =========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
F-5
<PAGE> 63
EMERALD -- DELAWARE, INC.
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(3,853,045) $ 708,009 $(5,425,183)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 54,687 296,867 819,871
Loss on disposal of equipment........................... -- -- 40,013
Compensation expense related to stock options........... -- -- 18,921
Stock issued for services rendered...................... -- -- 20,000
Equity in losses of unconsolidated subsidiary........... 170,211 -- --
Loss on investment in subsidiary held for disposal...... 238,650 -- --
Changes in certain assets and liabilities, net of effect
of subsidiary disposition:
Accounts receivable................................... (730,771) (1,409,480) (4,067,089)
Receivable from related party......................... -- (54,947) (1,719,193)
Prepaid expenses...................................... (117,463) (143,672) (131,162)
Other assets.......................................... (82,727) (5,280) (233,684)
Accounts payable, accrued compensation and other
accrued liabilities................................. 1,486,911 40,592 3,905,103
Deferred revenue...................................... 82,462 292,860 (907)
----------- ----------- -----------
Net cash used in operating activities............... (2,751,085) (275,051) (6,773,310)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (755,926) (1,028,939) (3,220,316)
Proceeds from disposition of assets held for sale......... -- 548,780 --
Cash paid for acquisition................................. (971,493) -- --
----------- ----------- -----------
Net cash used in investing activities................. (1,727,419) (480,159) (3,220,316)
----------- ----------- -----------
Cash provided by financing activities:
Proceeds from issuance of common stock.................... -- 639,751 --
Payment of stock subscriptions receivable................. 4,618,899 194,665 74,888
Proceeds from issuance of preferred stock................. -- -- 6,515,887
Exercise of stock options................................. -- 129,842 99,570
Proceeds from line of credit, net......................... -- -- 5,000,000
Increase in other long-term liabilities................... -- 31,416 --
Repayment of capital lease obligations.................... (13,229) (64,897) (91,097)
Issuance of notes receivable to finance common stock
acquisitions............................................ -- -- (200,000)
----------- ----------- -----------
Net cash provided by financing activities............. 4,605,670 930,777 11,399,248
----------- ----------- -----------
Net increase in cash and cash equivalents............. 127,166 175,567 1,405,622
Cash and cash equivalents at beginning of year.............. -- 127,166 302,733
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 127,166 $ 302,733 $ 1,708,355
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes................ $ -- $ 59,707 $ --
Cash paid during the year for interest.................... -- -- 80,017
=========== =========== ===========
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired through capital lease obligations...... 221,892 -- 321,930
Common stock issued in acquisitions....................... 384,928 -- --
Reacquisition of common stock in conjunction with sale of
subsidiary.............................................. -- 271,220 --
Stock subscriptions receivable............................ 2,754,484 95,250 --
Stock issued in settlement of a liability................. -- 94,381 --
Accretion of redemption value of redeemable convertible
preferred stock......................................... $ -- $ -- $ 691,535
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
F-6
<PAGE> 64
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Emerald -- Delaware, Inc. (formerly Emerald Solutions, Inc.) (the
"Company") was incorporated in Washington State in November 1996, with
substantive operations beginning in January 1997. During 1999, the Company was
reincorporated in the State of Delaware. The Company is an e-business services
company that designs and builds Internet-based business solutions by integrating
digital business strategy with both emerging and existing information
technologies. The Company helps its clients to create new e-businesses or to
expand and improve their existing e-business activities. The Company's solutions
enable their clients to use the Internet to enhance relationships with their
customers and business partners, improve the efficiency of their operations and
create new revenue opportunities.
(B) BASIS OF PRESENTATION
The Company's fiscal year ends on the last Saturday in December. Fiscal
years 1997, 1998 and 1999 included 52 weeks.
(C) REVENUE RECOGNITION
The Company delivers services under fixed fee and time and materials
contracts. Revenues earned under fixed-fee contracts are generally recognized as
services are rendered, using the percentage-of-completion method of accounting
(measured based on the ratio of hours worked to date to the estimated total
hours at completion). Any estimated losses on projects in progress are
recognized in their entirety in the period such losses become known. Revenues
earned under time-and-materials contracts are generally recognized as services
are provided. Revenues earned in excess of billings represent revenue recognized
in advance of amounts billed and are included in trade accounts receivable.
Billings in excess of revenues earned are classified as deferred revenues.
Revenue excludes reimbursed expenses charged to and collected from clients.
(D) CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents primarily consist of amounts held in money market funds.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives of 3 to 10 years. Leasehold
improvements are amortized over the lesser of the lease term or estimated useful
lives.
The Company periodically assesses the recoverability of long-lived assets.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the assets
exceeds their fair value. Assets to be disposed of are reported at the lower of
the carrying amount or the fair value less costs to sell.
F-7
<PAGE> 65
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
(F) INCOME TAXES
Income taxes are stated using the asset and liability method. The asset and
liability method requires recognition of deferred tax assets and liabilities,
for differences between the financial statement and tax basis of existing assets
and liabilities and tax carryforwards and tax credits measured using the enacted
tax rates and laws expected to apply in the years in which those differences are
expected to be recovered or settled. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
The effect on deferred tax assets and liabilities of a change in tax rate is
recognized in results of operations in the period that includes the enactment
date.
(G) STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation (SFAS No. 123).
Compensation cost for stock options issued to employees is measured as the
excess, if any, of the fair market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. Pro forma
results are presented as if compensation cost for stock options issued to
employees had been determined pursuant to SFAS No. 123.
(H) NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed by dividing net income
(loss) applicable to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net earnings (loss) per share
is computed by dividing net income (loss) applicable to common stockholders by
the weighted average number of common and dilutive common equivalent shares
deemed to be outstanding during the period. Net income (loss) applicable to
common stockholders consists of net income (loss) as adjusted for the impact of
accretion of redeemable convertible preferred stock to its redemption value. The
calculation of diluted net income (loss) per share excludes potential common
shares if the effect is antidilutive.
(I) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(J) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 66
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
(K) SEGMENT INFORMATION
Revenues almost entirely consist of fees received for professional
services. The Company organizes its information reporting by geographical
location and by management responsibility for client projects. Since inception,
the Company operated in a single business segment providing E-Business
Engineering services within the United States. Expenses incurred are reported
according to their expense category. No further segment segregation is
considered meaningful at this time.
(L) FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and accounts
receivable. The fair value of the Company's financial instruments approximates
their financial statement carrying amount. The financial instruments have a
short term until maturity or settlement in cash and therefore the carrying value
approximates fair value. Accounts receivable are typically unsecured and are
derived from revenue earned from clients located in the United States. The
Company performs ongoing credit evaluations of its clients' financial condition
and records an allowance for potential credit losses based upon the expected
collectibility of total accounts receivable. To date, the Company has not
experienced any material credit losses.
The Company derives a significant portion of its revenues from projects
with a limited number of clients. The following customers represent 10% or more
of the Company's revenues during the years ended December 27, 1997, December 26,
1998 and December 25, 1999:
<TABLE>
<CAPTION>
CUSTOMER ACCOUNTS
CUSTOMER AS A % OF RECEIVABLE AS A % OF TRADE
CUSTOMER REVENUE ACCOUNTS RECEIVABLE
-------- ------------------ ---------------------------
<S> <C> <C>
1997:
A.......................... 71% 25%
B.......................... 10 23
1998:
A.......................... 18 8
C.......................... 25 23
D.......................... 13 22
E.......................... 13 13
1999:
C.......................... 35 22
</TABLE>
(M) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) in
June 1998. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. SFAS No. 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The
F-9
<PAGE> 67
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
adoption of this statement is not expected to have a material impact on our
financial statements.
In December 1999, the SEC released Staff Accounting Bulletin No. 101 ("SAB
101") "Revenue Recognition in Financial Statements," which we adopted December
26, 1999. SAB 101 provides guidance on revenue recognition issues. SAB 101 did
not have a material impact on our financial statements.
(N) Initial Public Offering and Unaudited Pro Forma Balance Sheet
In January 2000, the board of directors authorized the filing of a
registration statement with the SEC that would permit the Company to sell shares
of the Company's common stock in connection with a proposed initial public
offering (IPO).
If the offering is consummated under the terms presently anticipated, all
of the then outstanding shares of the Company's redeemable convertible preferred
stock will automatically convert into shares of common stock on a one-for-one
basis upon closing of the proposed IPO. The conversion of the redeemable
convertible preferred stock has been reflected in the accompanying unaudited pro
forma balance sheet as if it had occurred on December 25, 1999.
(2) ACCOUNTS RECEIVABLE
Trade accounts receivable at December 26, 1998 and December 25, 1999
consists of the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Trade accounts receivable...................... $1,673,398 $4,649,471
Revenues earned in excess of billings.......... 544,228 1,835,243
---------- ----------
2,217,626 6,484,714
Less allowance for doubtful accounts........... 50,000 249,999
---------- ----------
Trade accounts receivable, net....... $2,167,626 $6,234,715
========== ==========
</TABLE>
At December 26, 1998, the Company had $42,391 in accounts receivable and
$12,556 in revenues earned in excess of billings related to Greens.com. At
December 25, 1999, the Company has $857,545 in accounts receivable and $916,595
in revenues earned in excess of billings related to Greens.com. Steven Darrow,
Chairman of the Company, is also Chairman of Greens.com. Mr. Darrow has signed a
personal guarantee on the repayment of all Greens.com accounts receivable and
revenues earned in excess of billings up to $4,500,000. The Company's board of
directors approved the contracts with Greens.com prior to their execution. All
balances due from Greens.com as of December 25, 1999 were collected in February
2000.
Included in revenues for the years ended December 27, 1997, December 26,
1998 and December 25, 1999 is approximately $0, $55,000 and $3,384,000,
respectively, of services fees charged to Greens.com.
F-10
<PAGE> 68
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
(3) PROPERTY AND EQUIPMENT
Property and equipment, net, at December 26, 1998 and December 25, 1999
consists of the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Office furniture............................... $ 352,863 $ 706,102
Computer equipment............................. 1,061,244 3,034,879
Computer software.............................. 364,272 1,027,163
Leasehold improvements......................... 228,378 718,116
---------- ----------
2,006,757 5,486,260
Less accumulated depreciation and
amortization................................. 318,668 1,032,628
---------- ----------
Property and equipment, net.......... $1,688,089 $4,453,632
========== ==========
</TABLE>
Depreciation and amortization of property and equipment was $45,015,
$273,653 and $736,690 for the years ended December 27, 1997, December 26, 1998
and December 25, 1999, respectively.
Included in office furniture and computer equipment is the gross amount of
furniture, computer equipment and related accumulated amortization recorded
under capital leases at December 26, 1998 and December 25, 1999 as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Office furniture.................................. $221,892 $208,662
Computer equipment................................ -- 321,930
-------- --------
221,892 530,592
Less accumulated amortization..................... 69,554 147,601
-------- --------
$152,338 $382,991
======== ========
</TABLE>
(4) LINE OF CREDIT
At December 26, 1998 the Company had an operating line of credit with a
bank, which provided for up to the lesser of $2,000,000 or 70% of eligible
accounts receivable at a borrowing rate of 0.65% above the bank's prime rate.
During fiscal year 1999, the line of credit was replaced with a revolving credit
facility with the same bank which provides for borrowings of up to the lesser of
$5,000,000 or 85% of eligible accounts receivable. Borrowings under this credit
facility bear interest at the bank's prime rate plus 2.25% (10.75% at December
25, 1999) and are secured by substantially all Company assets. At December 25,
1999, amounts borrowed under this facility were $5,000,000. In connection with
the facility, the bank requires the maintenance of certain financial covenants.
F-11
<PAGE> 69
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
(5) LEASES
The Company leases office space and equipment under long-term noncancelable
operating and capital leases with various expirations through 2009. Future
minimum lease payments under noncancelable operating and capital leases at
December 25, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -----------
<S> <C> <C>
2000................................................... $194,856 $ 2,375,890
2001................................................... 117,454 2,393,691
2002................................................... 107,667 1,841,855
2003................................................... -- 1,003,327
2004................................................... -- 976,177
Thereafter............................................. -- 2,432,407
-------- -----------
Total minimum lease payments................. 419,977 11,023,347
===========
Amounts due under noncancelable subleases.............. -- 401,476
===========
Less amounts representing interest at 9% to 10%........ 45,378
--------
Present value of future minimum lease
payments................................... 374,599
Less current portion of capital lease obligations...... 163,882
--------
Long-term capital lease obligations,
excluding current portion.................. $210,717
========
</TABLE>
Total rent expense for operating leases during the years ended December 27,
1997, December 26, 1998 and December 25, 1999 amounted to approximately
$155,000, $774,000 and $1,379,661, respectively.
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK
In March 1999, the Company issued 13,333,334 shares of Redeemable
Convertible Preferred Stock (Series A Preferred Stock) at $0.525 per share for
net proceeds totaling $6,515,887.
A summary of the significant terms of the Series A Preferred Stock is as
follows:
- Conversion
Each share of Series A Preferred Stock can be converted at the option of
the holder at any time after issuance according to a conversion ratio, subject
to adjustment for dilution. The initial conversion ratio is determined by
dividing the original issue price of $0.525 by the conversion price in effect at
the time the shares are converted. The conversion price is the original issue
price adjusted for subsequent equity adjustments. Each share of Series A
Preferred Stock automatically converts into the number of shares of common stock
into which such shares are convertible at the then effective conversion ratio,
upon the closing of a public offering of common stock at a per share price of at
least $1.575 per share with gross proceeds of at least $20,000,000. In addition,
each share of Series A Preferred Stock shall automatically convert into shares
of common stock upon the date specified by vote or written consent or agreement
of holders of a majority of the outstanding shares of Series A Preferred Stock.
F-12
<PAGE> 70
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
- Redemption
At the election of the holders of at least a majority of the outstanding
shares of Series A Preferred Stock on or any time after November 1, 2002, the
corporation will redeem the Series A Preferred Stock in two equal consecutive
installments. The first redemption date shall be within 120 days following the
date of the redemption election, and the second redemption date shall occur on
the first anniversary of the first redemption date. The redemption price shall
equal the original issue price per share, plus all declared but unpaid
dividends, plus an amount that will return a 10% internal rate of return
calculated upon the original issue price over and above all declared dividends
on such shares.
The Company accounts for the difference between the carrying amount of
redeemable preferred stock and the redemption amount by increasing the carrying
amount for periodic accretion using the interest method, so that the carrying
amount will equal the redemption amount at the redemption date.
- Voting
Each share of Series A Preferred stock has voting rights equal to common
stock into which it is convertible on the record date of the vote. Holders of
common stock are entitled to vote as a separate class for any remaining
directors.
- Dividends
Holders of Series A Preferred Stock are entitled to receive noncumulative
dividends at the per annum rate of 8% of the original issue price per share when
and if declared by the board of directors. The board of directors has not
declared any dividends as of December 25, 1999. In the event of a conversion of
the Series A Preferred Stock, any declared and unpaid dividends shall be paid at
the election of the holder in cash or common stock at its then fair market
value. If dividends or other distributions are paid on the common stock, the
holders of Series A Preferred Stock are entitled to the preferential dividends
above and are entitled to per share dividends equal to those declared or paid to
holders of common stock.
- Liquidation
In the event of liquidation, dissolution or winding up of the corporation,
either voluntary or involuntary, holders of Series A Preferred Stock are
entitled to receive, prior to the distribution of any corporation assets, an
amount of $0.525 per share in addition to any declared but unpaid dividends. If
the assets of the corporation are insufficient to permit payment to the holders
of Series A Preferred Stock, then the entire assets and funds of the corporation
legally available for distribution shall be distributed ratably between holders
of Series A Preferred Stock in proportion to the product of the liquidation
preference of each such share and the number of such shares owned by each
holder.
After the original liquidation distribution has been paid to the holders of
Series A Preferred Stock, the remaining assets of the corporation shall be
distributed among the holders of the common stock and Series A Preferred Stock
on an as-converted basis, as long as the remaining assets to be distributed to
the holders of Series A Preferred Stock are 4.5 times the original Series A
Preferred Stock price per share. Any remaining assets will be distributed
pro-rata solely to holders of common stock.
F-13
<PAGE> 71
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
(7) STOCKHOLDERS' EQUITY (DEFICIT)
(A) STOCK SUBSCRIPTIONS RECEIVABLE
The Company had common stock subscriptions receivable totaling $96,170 and
$221,282 at December 26, 1998 and December 25, 1999, respectively. The
receivables at December 25, 1999 primarily are collateralized by the stock, bear
interest at 5.82% and are due in 2004. Additionally, the agreements provide for
full recourse against the holder.
On July 30, 1999, a stockholder of the Company sold 333,333 shares of
common stock to two executives at fair market value. The purchase of the common
stock was facilitated through two loans by the Company to the employees totaling
$200,000. The notes are due on July 30, 2004, and are secured by the 333,333
shares of stock sold to the employees. The notes are full recourse and bear
interest at a rate of 5.82%. The balance of the receivables at December 25, 1999
was $200,000 and is recorded under stock subscriptions receivable.
(B) EARNINGS (LOSS) PER SHARE
The following table reconciles the Company's reported net income (loss) to
net income (loss) applicable to common stockholders used to compute basic and
diluted earnings (loss) per share for the years ended December 27, 1997,
December 26, 1998 and December 25, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss).......................... $(3,853,045) $ 708,009 $(5,425,183)
Accretion of redemption value of redeemable
convertible preferred stock.............. -- -- 691,535
----------- ----------- -----------
Net income (loss) applicable to common
stockholders............................. $(3,853,045) $ 708,009 $(6,116,718)
=========== =========== ===========
Shares used to calculated basic earnings
(loss) per share......................... 41,847,572 48,720,903 49,825,516
Basic earnings (loss) per share............ $ (0.09) $ 0.01 $ (0.12)
Dilutive effect of stock options........... -- 2,189,671 --
Shares used to calculate dilutive earnings
(loss) per share......................... 41,847,572 50,910,574 49,825,516
Diluted earnings (loss) per share.......... $ (0.09) $ 0.01 $ (0.12)
</TABLE>
The computation of diluted earnings (loss) per share excludes the following
options to acquire shares of common stock for the years ended December 27, 1997,
December 26, 1998 and December 25, 1999 because the effect would be
antidilutive:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Shares of common stock..................... 4,900,700 3,850,700 14,116,694
----------- ----------- -----------
Weighted average exercise price per
share.................................... $ 0.15 $ 0.35 $ 0.44
</TABLE>
In addition, the computation of diluted earnings (loss) per share during
the year ended December 25, 1999 excluded shares issuable upon conversion of
13,333,334 shares of redeemable convertible preferred stock because the effect
would be antidilutive.
F-14
<PAGE> 72
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
(8) NET OTHER EXPENSE
Net other expense for the years ended December 27, 1997, December 26, 1998
and December 25, 1999 consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Interest income............................ $ -- $ 3,514 $ 103,588
Interest expense........................... (321) (12,221) (123,594)
----------- ----------- -----------
Net other expense................ $ (321) $ (8,707) $ (20,006)
=========== =========== ===========
</TABLE>
(9) INCOME TAXES
The Company had federal net operating loss carryforwards available to
offset future taxable income of approximately $2,855,000 and $7,129,000 at
December 26, 1998 and December 25, 1999, respectively. These operating loss
carryforwards expire in varying amounts beginning in 2017. The amount of
benefits from net operating loss carryforwards may be impaired or limited in
certain circumstances. Events which cause limitations in the amount of net
operating losses that the Company may utilize in any one year include, but are
not limited to, a cumulative ownership change of more than 50%, as defined, over
a three year period. Income tax expense (benefit) differs from "expected" income
tax expense (benefit) (computed by applying the U.S. federal income tax rate of
35%) as follows for the years ended December 27, 1997, December 26, 1998 and
December 25, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------- --------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).... $(1,348,566) $ 268,701 $(1,910,854)
Meals and entertainment...................... 9,415 32,742 123,271
Other........................................ (27,376) 57,882 (5,246)
State income taxes........................... 527 29,902 (21,710)
Increase (decrease) in valuation allowance... 1,366,000 (329,520) 1,780,139
----------- --------- -----------
Tax expense (benefit).............. $ -- $ 59,707 $ (34,400)
=========== ========= ===========
</TABLE>
F-15
<PAGE> 73
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
The tax effects of temporary differences and operating loss carryforwards
that give rise to significant portions of deferred tax assets and liabilities at
December 26, 1998 and December 25, 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred revenue.......................................... $ 131,363 $ 160,254
Capital loss carryforward................................. 143,101 143,101
Net operating loss carryforwards.......................... 999,126 2,495,296
Accrued liabilities....................................... 64,438 250,799
Other..................................................... 31,204 106,815
----------- -----------
Total gross deferred tax assets................... 1,369,232 3,156,265
Valuation allowance......................................... (1,036,480) (2,816,619)
----------- -----------
Net deferred tax assets........................... 332,752 339,646
----------- -----------
Deferred tax liabilities:
Depreciation and amortization............................. (137,878) (339,646)
Other..................................................... (194,874) --
----------- -----------
Total gross deferred tax liabilities.............. (332,752) (339,646)
----------- -----------
Net deferred taxes................................ $ -- $ --
=========== ===========
</TABLE>
Realization of deferred tax assets is contingent upon the generation of
future taxable income. Due to the uncertainty of realization of these deferred
tax assets, the Company has provided a valuation allowance to the extent its
deferred tax assets exceed its deferred tax liabilities.
(10) ACQUISITION OF SERVERLOGIC CORPORATION
On September 8, 1997, the Company acquired all the outstanding shares of
common stock of ServerLogic Corporation ("ServerLogic"), a Washington based
provider of PowerBuilder add-on products and client/server consulting solutions.
The purchase price consisted of $900,000 in cash and 1,075,440 shares of common
stock valued at $268,861. The acquisition was recorded using the purchase method
of accounting. The purchase price of $1,168,861 was allocated to assets acquired
and liabilities assumed based on the fair value at the date of acquisition. The
excess of the purchase price over the fair value of the net identifiable assets
was recorded as goodwill in the amount of $920,000, and was being amortized on
the straight-line basis over ten years.
The Company advanced $60,000 to ServerLogic in September 1997. Prior to
December 27, 1997, the Company committed to a plan of action wherein they would
sell all of the outstanding common stock of ServerLogic to three of the
Company's employee stockholders in exchange for $550,000 in cash, forgiveness of
the $60,000 advance, and 1,080,000 shares of Company stock, valued at $270,000,
held by such stockholders. The loss on investment in subsidiary held for
disposal includes the write-off of the unamortized goodwill acquired in the
original purchase transaction. The transaction was consummated on December 31,
1997.
The results of ServerLogic's operations from September 8, 1997 through
December 27, 1997, consisting of revenues of $1,949,819 and net loss of $170,211
have been accounted
F-16
<PAGE> 74
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
for using the equity method and are included in the Company's financial
statements as equity in losses of unconsolidated subsidiary.
(11) STOCK OPTION PLAN
In 1997, the Company's board of directors and stockholders adopted and
approved the Emerald -- Delaware, Inc. 1997 Stock Incentive Compensation Plan
(the 1997 Plan), which provides for the issuance of nonqualified and incentive
stock options to officers, directors, employees and consultants to acquire
shares of common stock. The exercise price for incentive stock options shall not
be less than the fair market value of the Company's common stock on the date of
grant and generally the options vest at 20% after the end of the first year and
ratably each month for the next four years.
In 1999, the Company's board of directors adopted and approved the 1999
Non-Employee director Stock Option Plan (the 1999 Plan), which provides for the
issuance of nonqualified stock options to non-employee directors to acquire
shares of common stock. The exercise price for stock options shall be 100% of
the fair market value of the Company's common stock on the date of grant and the
options generally vest ratably over the one to three year term of the
non-employee director.
All options under the 1997 and 1999 Plans expire 10 years from the date of
grant and revert back to the option pool if cancelled. The Company has reserved
19,000,000 shares of common stock for issuance under the 1997 Plan and 1,000,000
shares of common stock for issuance under the 1999 Plan.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
---------- ---------- --------------
<S> <C> <C> <C>
Plan introduction............................. 15,000,000 -- $ --
Options granted............................... (6,638,400) 6,638,400 0.14
Options forfeited............................. 1,737,700 (1,737,700) 0.11
---------- ----------
Balances at December 27, 1997................. 10,099,300 4,900,700 0.15
Options granted............................... (6,804,475) 6,804,475 0.32
Options forfeited............................. 1,583,609 (1,583,609) 0.25
Options exercised............................. -- (518,375) 0.25
---------- ----------
Balances at December 26, 1998................. 4,878,434 9,603,191 0.25
Plan amendment and adoption................... 5,000,000 -- --
Options granted............................... (6,352,535) 6,352,535 0.68
Options forfeited............................. 1,321,952 (1,321,952) 0.35
Options exercised............................. -- (517,080) 0.19
---------- ----------
Balances at December 25, 1999................. 4,847,851 14,116,694 0.44
========== ==========
</TABLE>
Options exercisable at December 27, 1997, December 26, 1998 and December
25, 1999 were 154,636, 1,746,060, and 3,093,267 respectively.
Those individuals who purchased the outstanding stock of ServerLogic in
1997 became immediately vested in 450,000 employee stock options. No
compensation charge was
F-17
<PAGE> 75
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
recognized as the intrinsic value of the options was $0 at the time of this
modification. Such individuals remain common stockholders of the Company.
The following table summarizes information concerning currently outstanding
and exercisable options at December 25, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 2,350,000 6.4 years $0.10 1,483,480 $0.10
0.25 - 0.35 7,599,459 8.7 years 0.32 1,553,537 0.29
0.50 - 0.75 2,999,660 9.6 years 0.56 56,250 0.60
1.47 - 1.60 1,167,575 9.9 years 1.57 -- --
---------- ---------
14,116,694 $0.44 3,093,267 $0.21
========== =========
</TABLE>
Had compensation expense for the Company's stock option plans been
determined based on the fair value methodology under SFAS No. 123, the Company's
net income (loss) as reported for the years ended December 27, 1997, December
26, 1998 and December 25, 1999 would have been changed to the pro forma amounts
indicated in the table below.
<TABLE>
<CAPTION>
1997 1998 1999
----------- -------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported............................. $(3,853,045) $708,009 $(5,425,183)
Pro forma............................... (3,959,565) 567,968 (5,866,046)
Net income (loss) applicable to common
stockholders:
As reported............................. (3,853,045) 708,009 (6,116,718)
Pro forma............................... (3,959,565) 567,968 (6,557,581)
Basic and diluted earnings (loss) per
share:
As reported............................. (0.09) 0.01 (0.12)
Pro forma............................... (0.09) 0.01 (0.13)
</TABLE>
The fair value of options granted was estimated using the minimum value
method. The weighted average fair value of stock options granted where the
exercise price equaled the fair market value of the Common stock at time of
grant was $.03, $.07 and $0.14 per share during 1997, 1998 and 1999,
respectively, using the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................ 5.50% 5.25% 5.35%
Expected option lives.............................. 5 years 5 years 4.5 years
Assumed dividend rate.............................. 0% 0% 0%
</TABLE>
During 1999, the Company granted certain options with exercise prices less
than the then current fair market value. The Company recorded deferred
compensation of $105,180 for the intrinsic value of the options and will
recognize the amount as compensation expense over the vesting period of the
options. The fair market value of these options was $0.22 per share.
F-18
<PAGE> 76
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
(12) 401(k) SAVINGS PLAN
The Company's Retirement/Savings Plan (401(k) Plan) under Section 401(k) of
the Internal Revenue Code covers those employees that meet eligibility
requirements. Eligible employees may contribute up to 15% of their compensation
subject to Internal Revenue Code provisions. Under the 401(k) Plan, management
may, but is not obligated to, match a portion of the employee contributions up
to a defined maximum.
The Company contributed $0, $121,011 and $523,782 during the years ended
December 27, 1997, December 26, 1998 and December 25, 1999, respectively.
(13) CONTINGENCIES
The Company is involved in legal and administrative proceedings and claims
of various types from time to time. While any litigation contains an element of
uncertainty, management presently believes that the outcome of each such
proceeding or claim which is pending or known to be threatened, or all of them
combined, will not have a material adverse effect on the Company.
(14) SUBSEQUENT EVENT
In February 2000, the Company amended its articles of incorporation and
designated 2,000,000 of its preferred shares as Series B convertible redeemable
preferred stock (Series B Preferred Stock). Also, in February 2000, the Company
entered into agreements to sell 2,000,000 shares of Series B Preferred Stock for
$5.0 million. The shares of Series B Preferred Stock have similar rights and
preferences as the shares of Series A Preferred Stock except they are
non-voting, the initial conversion ratio is based on the original issue price of
$2.50 per share, and the liquidation price is $3.50 per share for the first
twelve months after issuance and $4.50 per share thereafter. In addition, the
Series B Preferred Stockholders will have the right to convert their shares into
Series B-1 voting preferred stock upon certain regulatory approvals. The Series
B-1 preferred stock will have identical rights as the Series B Preferred Stock
except it will also have voting rights.
F-19
<PAGE> 77
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH
WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Special Note Regarding Forward-
Looking Statements.................. 12
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....................... 17
Business.............................. 25
Management............................ 36
Certain Relationships and Related
Transactions........................ 44
Principal Stockholders................ 47
Description of Capital Stock.......... 49
Shares Eligible for Future Sale....... 52
Underwriting.......................... 53
Legal Matters......................... 55
Experts............................... 55
Additional Information................ 55
Index to Financial Statements......... F-1
</TABLE>
DEALER PROSPECTUS DELIVERY OBLIGATION: UNTIL , 2000 (25 DAYS AFTER
THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN
THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
ADAMS, HARKNESS & HILL, INC.
PACIFIC CREST
PROSPECTUS
, 2000
<PAGE> 78
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 us in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $13,200
NASD filing fee............................................. 5,500
Nasdaq National Market listing fee..........................
Printing and engraving costs................................ *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. 5,000
Transfer Agent and Registrar fees........................... *
Miscellaneous expenses...................................... *
-------
Total............................................. $ *
=======
</TABLE>
- -------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Our Restated Certificate of Incorporation provides for the indemnification
of directors to the fullest extent permissible under Delaware law.
Our Bylaws provide for the indemnification of officers, directors and third
parties acting on our behalf if such person acted in good faith and in a manner
reasonably believed to be in and not opposed to our best interest, and, with
respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
We have entered into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our Bylaws,
and intend to enter into indemnification agreements with any new directors and
executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Within the last three years, we have issued and sold unregistered
securities to a limited number of persons, as described below.
(1) Since our inception, we have issued and sold an aggregate of
50,042,580 shares of common stock to our officers and directors and to
certain other individuals at purchase prices ranging from $0.12 to $1.60
per share.
(2) Since our inception and through December 25, 1999, we have granted
options to purchase an aggregate of 19,120,410 shares of common stock to
employees, directors and consultants under our 1997 Stock Incentive
Compensation Plan at exercise prices ranging from $0.10 to $1.60 per share.
Of the 19,120,410 options granted, options to acquire 13,441,694 shares of
our common stock remain outstanding, 1,035,455 shares
II-1
<PAGE> 79
have been issued pursuant to exercise of stock options and options to
acquire 4,643,261 shares of our common stock have been canceled and
returned to the 1997 Stock Incentive Compensation Plan as of December 25,
1999.
(3) Since our inception, we have granted options to purchase an
aggregate of 675,000 shares of common stock to non-employee directors under
our 1999 Non-Employee director Stock Option Plan at an exercise price of
$0.60 per share. All of these options remain outstanding, and no shares of
our common stock have been issued pursuant to the exercise of these stock
options.
(4) In February 1999, we issued and sold an aggregate of 13,333,334
shares of our series A preferred stock in exchange for cash in the
aggregate amount of $7.0 million to six investors.
(5) In February 2000, we issued and sold an aggregate of 2,000,000
shares of our Series B Preferred Stock in exchange for cash in the
aggregate amount of $5.0 million to five investors.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule
701 pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients in such
transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The Exhibits are as set forth on the Exhibit Index hereto.
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
II -- Valuation and Qualifying Accounts..................... S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification by us for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the provisions referenced in Item 14 of this Registration
Statement, or otherwise, we have been advised that, in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by one of our directors, officers or
controlling persons in the successful defense of any action, suit or proceeding)
is asserted by a director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel
II-2
<PAGE> 80
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and we will be governed
by the final adjudication of such issue.
We hereby undertake 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 us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended,
Emerald -- Delaware, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Portland, State of Oregon, on the 15th day of February, 2000.
Emerald -- Delaware, Inc.
By /s/ MARTIN WRIGHT
------------------------------------
Martin Wright
president and chief executive
officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven L. Darrow and Jerry N. Grant and
each of them, his attorneys-in-fact, each with the power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARTIN WRIGHT president and chief executive February 15, 2000
- ------------------------------------------------ officer and director (Principal
(Martin Wright) Executive Officer)
/s/ JERRY N. GRANT Senior Vice president of February 15, 2000
- ------------------------------------------------ Finance, chief financial
(Jerry N. Grant) officer, secretary and director
(Principal Financial Officer)
/s/ STEVEN L. DARROW chairman of the board February 15, 2000
- ------------------------------------------------
(Steven L. Darrow)
/s/ MICHAEL BEALMEAR director February 15, 2000
- ------------------------------------------------
(Michael Bealmear)
/s/ CHARLES SCOTT GIBSON director February 15, 2000
- ------------------------------------------------
(Charles Scott Gibson)
/s/ PAUL G. MARDESICH director February 15, 2000
- ------------------------------------------------
(Paul G. Mardesich)
/s/ C. TOMS NEWBY, III director February 15, 2000
- ------------------------------------------------
(C. Toms Newby, III)
</TABLE>
II-4
<PAGE> 82
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
EMERALD SOLUTIONS, INC.
FOR THE YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998, AND DECEMBER 25, 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND DEDUCTIONS AT END OF
DESCRIPTION YEAR EXPENSES (1) YEAR
----------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 27, 1997:
Valuation accounts deducted from assets:
Allowance for doubtful accounts
receivable......................... $ -- $ 50,000 $ -- $ 50,000
YEAR ENDED DECEMBER 26, 1998:
Valuation accounts deducted from assets:
Allowance for doubtful accounts
receivable......................... 50,000 30,105 (30,105) 50,000
YEAR ENDED DECEMBER 25, 1999:
Valuation accounts deducted from assets:
Allowance for doubtful accounts
receivable......................... 50,000 229,084 (29,085) 249,999
</TABLE>
- -------------------------
(1) Represents amounts written off.
S-1
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Amendment and Restated Certificate of Incorporation of the
Registrant, as currently in effect
3.2* Form of Amended and Restated Certificate of Incorporation of
the Registrant
3.3 Bylaws of the Registrant
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2* Specimen certificate for common stock
5.1* Opinion of Morrison & Foerster LLP
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2 Employment Agreement dated January 27, 1997 between the
Registrant and Martin Wright
10.3 Employment Agreement dated January 7, 1997 between the
Registrant and Jerry Grant
10.4 Employment Agreement dated August 21, 1997 between the
Registrant and Mark Markowitz
10.5 Employment Agreement dated January 18, 1999 between the
Registrant and Jim Gruher
10.7 1997 Stock Incentive Compensation Plan and forms of
agreements thereunder
10.8 1999 Non-Employee director Stock Option Plan and form of
agreements thereunder
23.1 Consent and report on schedule of KPMG LLP, independent
auditors
23.2 Consent of Counsel (see Exhibit 5.1)
24.1 Power of Attorney (Registration Statement signature page)
27.1 Financial Data Schedules
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
EMERALD-DELAWARE, INC.
Emerald-Delaware, Inc., a Delaware corporation, hereby certifies as follows:
ARTICLE I
The name of the Corporation is Emerald-Delaware, Inc.
ARTICLE II
The address of its registered office in the State of Delaware is 1209
Orange Street, in the City of Wilmington, 19801, County of New Castle. The name
of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The nature of the business of the Corporation and the objects or purposes
to be transacted, promoted or carried on by it are as follows: To engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
ARTICLE IV
A. The total number of shares of all classes of stock that the Corporation
is authorized to issue is One Hundred Fifteen Million Three Hundred Thirty-Three
Thousand Three Hundred Thirty Four (115,333,334) shares, consisting of One
Hundred Million (100,000,000) shares of Common Stock with a par value of $0.001
per share and Fifteen Million Three Hundred Thirty-Three Thousand Three Hundred
Thirty Four (15,333,334) shares of Preferred Stock with a par value of $0.001
per share.
B. The Preferred Stock shall be divided into series. The first series
shall consist of Thirteen Million Three Hundred Thirty-Three Thousand Three
Hundred Thirty-Four (13,333,334) shares and is designated "Series A Preferred
Stock." The second series shall consist of Two Million (2,000,000) shares and is
designated "Series B Preferred Stock."
C. The powers, preferences, rights, restrictions, and other matters
relating to the Series A and Series B Preferred Stock are as follows:
1. Dividends.
1
<PAGE> 2
(a) The holders of the Series A Preferred Stock, prior to and
in preference to holders of the Corporation's Common Stock or Series B Preferred
Stock, shall each be entitled to receive dividends at the rate of eight percent
(8%) of the Original Series A Issue Price (as defined in Section 2(a)) per share
(as adjusted for any stock dividends, combinations or splits with respect to
such shares) per annum, respectively, payable out of funds legally available
therefor. Such dividends shall be payable only when, as, and if declared by the
Board of Directors and shall be noncumulative. The holders of the Series B
Preferred Stock, prior to and in preference to holders of the Corporation's
Common Stock, shall each be entitled to receive dividends at the rate of eight
percent (8%) of the Original Series B Issue Price (as defined below) per share
(as adjusted for any stock dividends, combinations or splits with respect to
such shares) per annum, respectively, payable out of funds legally available
therefor. Such dividends shall be payable only when, as, and if declared by the
Board of Directors and shall be noncumulative. The "Original Series B Issue
Price" shall equal two dollars and fifty cents ($2.50) per share of Series B
Preferred Stock as adjusted for any stock dividends, combinations or splits with
respect to such shares.
(b) No dividends (other than those payable solely in the
Common Stock of the Corporation) shall be paid on any Common Stock of the
Corporation during any fiscal year of the Corporation until the dividends
described in Section 1(a) hereof on the Series A and Series B Preferred Stock
shall have been paid or declared and set apart during that fiscal year. No
dividend rights shall accrue to the holders of Series A or Series B Preferred
Stock by reason of the fact that dividends on said shares are not declared in
any prior year, nor shall any undeclared or unpaid dividends accrue any
interest.
(c) In the event of a conversion of the Series A or Series B
Preferred Stock pursuant to Section 3 hereof, any declared and unpaid dividends
shall be paid at the election of the holder in cash or Common Stock at its then
fair market value, as determined by the Board of Directors.
(d) To the extent that dividends or other distributions are
paid on the Common Stock (other than those payable solely in Common Stock), the
holders of the Series A and Series B Preferred Stock shall, in addition to the
preferential dividends described above, be entitled to per-share dividends
(based on the number of shares of Common Stock into which such Series A and
Series B Preferred Stock is convertible, respectively) equal to those declared
or paid with respect to the Common Stock.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary (a "Liquidation Event"), the
holders of Series A and Series B Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets of the
Corporation to the holders of the Common Stock or other junior equity security
by reason of their ownership thereof, an amount equal to (i) fifty-two and one
half cents ($0.525) per share of Series A Preferred Stock (the "Original Series
A Issue Price"), as adjusted
2
<PAGE> 3
for any stock dividends, combinations or splits with respect to such shares, and
adding thereto an amount equal to all declared but unpaid dividends on each such
share, and (ii) either the Early Series B Liquidation Amount or the Late Series
B Liquidation Amount per share of Series B Preferred Stock, as set forth in
Section 2(b) below and adding thereto an amount equal to all declared but unpaid
dividends on each such share. If upon the occurrence of such event, the assets
and funds thus distributed among the holders of the Series A and Series B
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A and Series B Preferred Stock in proportion to
the product of the liquidation preference of each such share and the number of
such shares owned by each such holder.
(b) If a Liquidation Event takes place within twelve (12)
months from the date the first share of Series B Preferred Stock is issued, the
holders of Series B Preferred Stock shall be entitled to receive an amount equal
to three dollars and fifty cents ($3.50) per share of Series B Preferred Stock
as adjusted for any stock dividends, combinations or splits with respect to such
shares (the "Early Series B Liquidation Amount"). If a Liquidation Event takes
place after twelve (12) months from the date the first share of Series B
Preferred Stock is issued, the holders of Series B Preferred Stock shall be
entitled to receive an amount equal to four dollars and fifty cents ($4.50) per
share of Series B Preferred Stock as adjusted for any stock dividends,
combinations or splits with respect to such shares (the "Late Series B
Liquidation Amount").
(c) After the distributions described in Section 2(a) hereof
have been paid, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among the holders of Common
Stock and Series A Preferred Stock on an as-converted basis, pro rata based on
the number of shares of Common Stock issued or issuable upon conversion to each;
provided, however, that at such time as the remaining assets distributed to the
holders of the Series A Preferred Stock shall reach an aggregate amount equal to
four and one-half (4.5) times the Original Series A Issue Price per share (not
including the liquidation preference described in Section 2(a) above), any
remaining assets of the Corporation shall thereafter be distributed pro rata
solely to the holders of Common Stock.
(d) For purposes of this Section 2, (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary and in which the stockholders of the Corporation immediately
prior to such transaction do not own a majority of the outstanding shares of the
surviving corporation immediately after such transaction, (ii) a sale of all or
substantially all of the assets of the Corporation or (iii) a sale of all of the
outstanding shares of capital stock of the Corporation shall be treated as a
Liquidation Event and shall entitle the holders of Series A and Series B
Preferred Stock and, if appropriate, Common Stock to receive at the closing
cash, securities or other property as specified in Sections 2(a) and 2(c)
hereof.
(e) Any securities to be delivered to the holders of Series A
and Series B Preferred Stock and Common Stock pursuant to Section 2(d) hereof
shall be valued as follows:
3
<PAGE> 4
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
(1) If traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to
be the average of the closing price of the securities on such
exchange over the thirty (30) day period ending ten (10) days
prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing ask price
over the thirty (30) day period ending ten (10) days prior to
the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as determined in
good faith by the Board of Directors of the Corporation.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be
to make an appropriate discount from the market value determined in
Sections 2(e)(i)(1), (2) or (3) hereof to reflect the approximate fair
market value thereof, as determined in good faith by the Board of
Directors of the Corporation.
(f) The provisions of this Section 2 are in addition to the
protective provisions of Section 6 hereof.
3. Conversion. The holders of Series A and Series B Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) Right To Convert. Subject to Section 3(d) hereof, each
share of Series A and Series B Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share and on or prior to the fifth day prior to the Redemption Date, if any, as
may have been fixed in any Redemption Notice with respect to such share of
Preferred Stock, at the office of the Corporation or any transfer agent for such
stock, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing (i) for the Series A Preferred Stock, the Original
Series A Issue Price by the conversion price for the Series A Preferred Stock in
effect at the time that the certificate is surrendered for conversion (the
"Series A Conversion Price") and (ii) for the Series B Preferred Stock, the
Original Series B Issue Price by the conversion price for the Series B Preferred
Stock in effect at the time that the certificate is surrendered for conversion
(the "Series B Conversion Price"). The initial Series A Conversion Price shall
be the Original Series A Issue Price, subject to adjustment as set forth in
Section 3(d) hereof. The initial Series B Conversion Price shall be the Original
Series B Issue Price, subject to adjustment as set forth in Section 3(d) hereof.
(b) Automatic Conversion. Each share of Series A and Series B
Preferred
4
<PAGE> 5
Stock shall automatically be converted into shares of Common Stock at their
respective Conversion Prices then in effect, upon the earlier to occur of (i)
the date specified by vote or written consent or agreement of holders of a
majority of the outstanding shares of Series A and Series B Preferred Stock
acting as a single class or (ii) upon the closing of the sale of the
Corporation's Common Stock in a firm commitment, underwritten public offering
registered under the Securities Act of 1933, as amended (the "Securities Act"),
other than a registration relating solely to a transaction under Rule 145 under
the Securities Act or to an employee benefit plan of the Corporation, with
aggregate proceeds to the Corporation and/or any selling stockholders (before
deduction for underwriters' discounts and expenses) of at least $20,000,000 and
at a price per share of at least one dollar and fifty-seven and one-half cents
($1.575) (as adjusted for any stock dividends, combinations or splits with
respect to such shares); provided, however, that if, within twelve months from
the date the first share of Series B Preferred Stock was issued, the closing of
a sale of the Corporation's Common Stock in any initial public offering (an
"IPO") takes place at a price per share (the "IPO Price") of less than the Early
Series B Liquidation Amount, then immediately prior to such transaction, the
Series B Conversion Price shall be reduced to a new Series B Conversion Price
determined by dividing the current Series B Conversion Price by the quotient of
(A) the Early Series B Liquidation Amount, divided by (B) the IPO Price;
provided, further that if, after twelve months from the date the first share of
Series B Preferred Stock was issued, an IPO takes place with an IPO Price of
less than the Late Series B Liquidation Amount, then immediately prior to such
transaction, the Series B Conversion Price shall be reduced to a new Series B
Conversion Price determined by dividing the current Series B Conversion Price by
the quotient of (A) the Late Series B Liquidation Amount, divided by (B) the IPO
Price.
(c) Mechanics of Conversion.
(i) Before any holder of Series A or Series B Preferred
Stock shall be entitled voluntarily to convert the same into shares of
Common Stock, he, she or it shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation
or of any transfer agent for such stock, and shall give written notice
to the Corporation at such office that he, she or it elects to convert
the same and shall state therein the number of shares to be converted
and the name or names in which he, she or it wishes the certificate or
certificates for shares of Common Stock to be issued. The Corporation
shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A or Series B Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to
which he, she or it shall be entitled. Such conversion shall be deemed
to have been made immediately prior to the close of business on the date
of surrender of the shares of Series A or Series B Preferred Stock to be
converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock
on such date.
(ii) If the conversion is in connection with an
underwritten offering of securities pursuant to the Securities Act, the
conversion may, at the option of any holder tendering shares of the
Series A or Series B Preferred Stock for conversion, be
5
<PAGE> 6
conditioned upon the closing with the underwriters of the sale of
securities pursuant to such offering, in which event the person(s)
entitled to receive the Common Stock upon conversion of the Series A or
Series B Preferred Stock shall not be deemed to have converted such
Series A or Series B Preferred Stock until immediately prior to the
closing of such sale of securities.
(d) Adjustments to Conversion Price.
(i) Special Definitions. For purposes of this Section
3(d), the following definitions apply:
(1) "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either
Common Stock or Convertible Securities (defined below).
(2) "Original Issue Date" shall mean the date on
which the first share of Series A or Series B Preferred Stock
was issued, with respect to the conversion calculation for the
Series A or Series B Preferred Stock, respectively.
(3) "Convertible Securities" shall mean any
evidences of indebtedness, shares (other than Common Stock and
Series A and Series B Preferred Stock) or other securities
convertible into or exchangeable for Common Stock.
(4) "Additional Shares of Common Stock" shall
mean all shares of Common Stock issued (or, pursuant to Section
3(d)(iii) hereof, deemed to be issued) by the Corporation after
the Original Issue Date, other than shares of Common Stock
issued or issuable:
(A) upon conversion of shares of Series A
or Series B Preferred Stock;
(B) to employees, officers, directors,
consultants or service providers upon the exercise of
Options granted under stock option, stock bonus or stock
purchase plans or agreements or similar plans or
agreements approved by the Board of Directors or by the
duly authorized Compensation Committee thereof, but not
exceeding 20,000,000 shares in the aggregate (as
adjusted for any stock dividends, combinations or splits
and net of any repurchases of shares or cancellations or
expirations of Options) issued (or deemed to be issued
or issuable) to such employees, officers, directors,
consultants or service providers;
(C) as a dividend or distribution on Series
A or Series B Preferred Stock;
6
<PAGE> 7
(D) for which adjustment of the Series A or
Series B Conversion Price is made pursuant to Section
3(e) hereof;
(E) for consideration other than cash
pursuant to a merger, consolidation, acquisition or
similar business combination approved by the Board of
Directors or in connection with obtaining acquisition
financing from a financial institution on terms approved
by the Board of Directors;
(F) to vendors or customers or to other
persons in similar commercial situations with the
Corporation on terms unanimously approved by the Board
of Directors;
(G) in connection with obtaining lease
financing, whether issued to a lessor or guarantor, on
terms approved by the Board of Directors; and
(H) in connection with corporate
partnerships or strategic alliances on terms unanimously
approved by the Board of Directors.
(ii) No Adjustment of Conversion Price. Any provision
herein to the contrary notwithstanding, no adjustment in the Series A
Conversion Price shall be made in respect of the issuance of Additional
Shares of Common Stock unless the consideration per share (determined
pursuant to Section 3(d)(v) hereof) for an Additional Share of Common
Stock issued or deemed to be issued by the Corporation is less than the
Series A Conversion Price in effect on the date of, and immediately
prior to, such issue. Any provision herein to the contrary
notwithstanding, no adjustment in the Series B Conversion Price shall be
made in respect of the issuance of Additional Shares of Common Stock
unless the consideration per share (determined pursuant to Section
3(d)(v) hereof) for an Additional Share of Common Stock issued or deemed
to be issued by the Corporation is less than the Series B Conversion
Price in effect on the date of, and immediately prior to, such issue.
Further, no adjustment in the Series A or Series B Conversion Price
shall be required unless such adjustment would require an increase or
decrease of at least one cent ($0.01) in such Conversion Price;
provided, however, that any adjustments which by reason of this
subsection 3(d)(ii) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment.
(iii) Deemed Issue of Additional Shares of Common Stock.
In the event the Corporation at any time or from time to time after the
Original Issue Date shall issue any Options or Convertible Securities or
shall fix a record date for the determination of holders of any class of
securities then entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained
therein designed to protect against dilution) of Common Stock issuable
upon the exercise of such Options or,
7
<PAGE> 8
in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed
to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the
close of business on such record date, provided that in any such case in
which Additional Shares of Common Stock are deemed to be issued:
(1) No further adjustments in the Conversion
Price shall be made upon the subsequent issue of such
Convertible Securities, or Series A or Series B Preferred Stock
or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities or Series
A or Series B Preferred Stock;
(2) If such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the
Corporation, or decrease or increase in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange
under such Convertible Securities (provided, however, that no
such adjustment of the Conversion Price shall affect Common
Stock previously issued upon conversion of the Preferred Stock);
(3) Upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Conversion
Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(A) In the case of Convertible Securities
or Options for Common Stock the only Additional Shares
of Common Stock issued were the shares of Common Stock,
if any, actually issued upon the exercise of such
Options or the conversion or exchange of such
Convertible Securities and the consideration received
therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually
received by the Corporation upon such exercise, or for
the issue of all such Convertible Securities, plus the
additional consideration, if any, actually received by
the Corporation upon such conversion or exchange and
(B) In the case of Options for Convertible
Securities or Series A or Series B Preferred Stock only
the Convertible Securities or Series A or Series B
Preferred Stock, if any, actually issued upon the
8
<PAGE> 9
exercise thereof were issued at the time of issue of
such Options, and the consideration received by the
Corporation for the Additional Shares of Common Stock
deemed to have been then issued was the consideration
actually received by the Corporation for the issue of
all such Options, whether or not exercised, plus the
consideration deemed to have been received by the
Corporation (determined pursuant to Section 3(d) hereof)
upon the issue of the Convertible Securities or Series A
or Series B Preferred Stock with respect to which such
Options were actually exercised;
(4) No readjustment pursuant to clause (2) or
(3) above shall have the effect of increasing the Conversion
Price to an amount which exceeds the lower of (a) the Conversion
Price on the original adjustment date, or (b) the Conversion
Price that would have resulted from any issuance of Additional
Shares of Common Stock between the original adjustment date and
such readjustment date.
(5) In the case of any Options which expire by
their terms not more than thirty (30) days after the date of
issue thereof, no adjustment of the Conversion Price shall be
made until the expiration or exercise of all such Options,
whereupon such adjustment shall be made in the same manner
provided in clause (3) above.
(6) If any such record date shall have been
fixed and such Options or Convertible Securities are not issued
on the date fixed therefor, the adjustment previously made in
the Conversion Price which became effective on such record date
shall be canceled as of the close of business on such record
date, and shall instead be made on the actual date of issuance,
if any.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock.
(1) In the event the Corporation, at any time after the
Original Issue Date, shall issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued
pursuant to Section 3(d)(iii) hereof) without consideration or for a
consideration per share less than the Series A Conversion Price in
effect on the date of and immediately prior to such issue, then the
Series A Conversion Price shall be reduced, concurrently with such
issue, to a price (calculated to the nearest cent) determined by
multiplying the Series A Conversion Price by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common
Stock which the aggregate consideration received by the Corporation for
the total number of Additional Shares of Common Stock so issued would
purchase at the Series A Conversion Price in effect immediately prior to
such issuance, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus
the
9
<PAGE> 10
number of such Additional Shares of Common Stock so issued.
(2) In the event the Corporation, at any time after the
Original Issue Date, shall issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued
pursuant to Section 3(d)(iii) hereof) without consideration or for a
consideration per share less than the Series B Conversion Price in
effect on the date of and immediately prior to such issue, then the
Series B Conversion Price shall be reduced, concurrently with such
issue, to a price (calculated to the nearest cent) determined by
multiplying the Series B Conversion Price by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common
Stock which the aggregate consideration received by the Corporation for
the total number of Additional Shares of Common Stock so issued would
purchase at the Series B Conversion Price in effect immediately prior to
such issuance, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus
the number of such Additional Shares of Common Stock so issued.
For the purpose of the preceding calculations, the number of shares of
Common Stock outstanding immediately prior to such issue shall be calculated on
a fully diluted basis as if all shares of Series A and Series B Preferred Stock
had been fully converted into shares of Common Stock immediately prior to such
issuance and outstanding Options or other rights for the purchase of shares of
stock or Convertible Securities had been fully exercised immediately prior to
such issuance (and the resulting securities fully converted into shares of
Common Stock, if so convertible) as of such date, but not including in such
calculation any additional shares of Common Stock issuable with respect to
shares of Series A or Series B Preferred Stock, Convertible Securities or
outstanding Options or other rights for the purchase of shares of stock or
Convertible Securities, solely as a result of the adjustment of the Conversion
Price (or other conversion rights) resulting from the issuance of the Additional
Shares of Common Stock causing the adjustment in question.
(v) Determination of Consideration. For purposes of this
Section 3(d), the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as
follows:
(1) Cash and Property. Such consideration shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the
Corporation excluding amounts paid or payable for
accrued interest or accrued dividends;
(B) insofar as it consists of property
other than cash, be computed at the fair value thereof
at the time of such issue, as determined in good faith
by the Board of Directors; and
(C) in the event Additional Shares of
Common Stock
10
<PAGE> 11
are issued together with other shares or securities or
other assets of the Corporation for consideration which
covers both, be the proportion of such consideration so
received, computed as provided in clauses (A) and (B)
above, as determined in good faith by the Board of
Directors.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for
Additional Shares of Common Stock deemed to have been issued
pursuant to Section 3(d)(iii) hereof, relating to Options and
Convertible Securities shall be determined by dividing:
(A) The total amount, if any, received or
receivable by the Corporation as consideration for the
issue of such Options or Convertible Securities, plus
the minimum aggregate amount of additional consideration
(as set forth in the instruments relating thereto,
without regard to any provision contained therein
designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the
conversion or exchange of such Convertible Securities,
or in the case of Options for Convertible Securities,
the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible
Securities by
(B) The maximum number of shares of Common
Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein
designed to protect against the dilution) issuable upon
the exercise of such Options or conversion or exchange
of such Convertible Securities.
(e) Adjustments to Conversion Prices for Stock Dividends and
for Combinations or Subdivisions of Common Stock. In the event that the
Corporation at any time or from time to time after the Original Issue Date shall
declare or pay, without consideration, any dividend on the Common Stock payable
in Common Stock or in any right to acquire Common Stock for no consideration, or
shall effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right to
acquire Common Stock), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Series A and/or Series B
Conversion Price, as applicable, in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be proportionately
decreased or increased, as appropriate. In the event that the Corporation shall
declare or pay, without consideration, any dividend on the Common Stock payable
in any right to acquire Common Stock for no consideration, then the Corporation
shall be deemed to have made a dividend payable in Common Stock in an amount of
shares equal to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock.
(f) Adjustments for Reclassification and Reorganization. If
the Common
11
<PAGE> 12
Stock issuable upon conversion of the Series A and Series B Preferred Stock
shall be changed into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification
or otherwise (other than a subdivision or combination of shares provided for in
Section 3(e) hereof or a merger or other reorganization referred to in Section
2(c) hereof), the Series A and Series B Conversion Prices then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted so that the Series A and Series B Preferred Stock
shall be convertible into, in lieu of the number of shares of Common Stock which
the holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Series A and Series B Preferred Stock immediately before that
change.
(g) No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation, Bylaws or through any agreement,
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A and Series B Preferred Stock
against impairment.
(h) Certificates as to Adjustments. Upon the occurrence of
each adjustment or readjustment of any Conversion Price pursuant to this Section
3, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A and/or Series B Preferred Stock, as applicable, a certificate
executed by the Corporation's President or Chief Financial Officer setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A or Series B Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(i) such adjustments and readjustments, (ii) the Conversion Price at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon the conversion of the
Series A or Series B Preferred Stock.
(i) Notices of Record Date. In the event that the Corporation
shall propose at any time: (i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus; (ii) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights; (iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or (iv) to
merge or consolidate with or into any other corporation, or sell, lease or
convey all or substantially all of its assets, or to liquidate, dissolve or wind
up; then, in connection with each such event, the Corporation shall send to the
holders of Series A and Series B Preferred Stock:
12
<PAGE> 13
(1) At least twenty (20) calendar days' prior written
notice of the date on which a record shall be taken for such dividend,
distribution or subscription rights (and specifying the date on which
the holders of Common Stock shall be entitled thereto) or for
determining rights to vote, if any, in respect of the matters referred
to in (iii) and (iv) above; and
(2) In the case of the matters referred to in (iii) and
(iv) above, at least twenty (20) calendar days' prior written notice of
the date when the same shall take place (and specifying the date on
which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon the
occurrence of such event).
(j) Issue Taxes. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Series A and Series B Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(k) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A and Series B Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A and Series B
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A and Series B Preferred Stock, the Corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including, without
limitation, engaging in best efforts to obtain the requisite shareholder
approval of any necessary amendment to this Certificate of Incorporation.
(1) Fractional Shares. No fractional share shall be issued
upon the conversion of any share or shares of Series A or Series B Preferred
Stock. All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series A or Series B Preferred Stock by a
holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, round to the nearest whole share, with one half (.5) share
rounded up.
(m) Notices. Any notice required by this Section 3 to be given
to the holders of shares of Series A or Series B Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address on the books of the Corporation.
13
<PAGE> 14
(n) HSR Compliance. Notwithstanding anything contained herein
to the contrary, no shares of Series B Preferred Stock shall be converted into
shares of Common Stock until the expiration of the applicable waiting periods,
if any, under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended.
4. Redemption.
(a) At the election of the holders of at least a majority of
the outstanding shares of Series A Preferred Stock given to the Corporation by
written notice on or any time after November 1, 2002 (the "Series A Redemption
Election"), this Corporation shall redeem, from any source of funds legally
available therefor, the Series A Preferred Stock in two (2) equal consecutive
annual installments (each a "Series A Redemption Date"). The first Series A
Redemption Date shall occur within one-hundred twenty (120) days following the
date of the Series A Redemption Election, and the second Series A Redemption
Date shall occur on the first anniversary of the first Series A Redemption Date.
The Corporation shall effect such redemptions on the applicable Series A
Redemption Dates by paying in cash in exchange for the shares of Series A
Preferred Stock to be redeemed a sum equal to the Original Series A Issue Price
per share of Series A Preferred Stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares), plus all declared but
unpaid dividends on such shares, plus an amount which will return a ten percent
(10%) internal rate of return calculated upon the Original Series A Issue Price
over and above all declared dividends on such shares (the "Series A Redemption
Price"). The number of shares of Series A Preferred Stock that the Corporation
shall be required under this Section 4(a) to redeem on any one Series A
Redemption Date shall be equal to the amount determined by dividing (i) the
aggregate number of shares of Series A Preferred Stock outstanding immediately
prior to the Series A Redemption Date by (ii) the number of remaining Redemption
Dates (including the Series A Redemption Date to which such calculation
applies). Any redemption effected pursuant to this Section 4(a) shall be made on
a pro rata basis among the holders of the Series A Preferred Stock in proportion
to the shares of Series A Preferred Stock then held by them.
(b) At the election of the holders of at least a majority of
the outstanding shares of Series B Preferred Stock given to the Corporation by
written notice on or any time after November 1, 2002 (the "Series B Redemption
Election"), this Corporation shall redeem, from any source of funds legally
available therefor, the Series B Preferred Stock in two (2) equal consecutive
annual installments (each a "Series B Redemption Date"). The first Series B
Redemption Date shall occur within one-hundred twenty (120) days following the
date of the Series B Redemption Election, and the second Series B Redemption
Date shall occur on the first anniversary of the first Series B Redemption Date.
The Corporation shall effect such redemptions on the applicable Series B
Redemption Dates by paying in cash in exchange for the shares of Series B
Preferred Stock to be redeemed a sum equal to the Original Series B Issue Price
per share of Series B Preferred Stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares), plus all declared but
unpaid dividends on such shares, plus an amount which will return a ten percent
(10%) internal rate of return calculated upon the Original Series B Issue Price
over and above all declared dividends on such shares (the "Series B Redemption
Price"). The number of shares of Series B Preferred Stock that the Corporation
shall
14
<PAGE> 15
be required under this Section 4(b) to redeem on any one Series B Redemption
Date shall be equal to the amount determined by dividing (i) the aggregate
number of shares of Series B Preferred Stock outstanding immediately prior to
the Series B Redemption Date by (ii) the number of remaining Series B Redemption
Dates (including the Series B Redemption Date to which such calculation
applies). Any redemption effected pursuant to this Section 4(b) shall be made on
a pro rata basis among the holders of the Series B Preferred Stock in proportion
to the shares of Series B Preferred Stock then held by them.
(c) If the holders have elected redemption pursuant to Section
4(a) or (b), at least fifteen (15) but no more than thirty (30) days prior to
each Redemption Date, written notice shall be mailed, first class postage
prepaid, to each holder of record (at the close of business on the business day
next preceding the day on which notice is given) of the Series A or Series B
Preferred Stock to be redeemed, at the address last shown on the records of the
Corporation for such holder, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from such holder, the
Redemption Date, the Redemption Price, the place at which payment may be
obtained and calling upon such holder to surrender to the Corporation, in the
manner and at the place designated, its certificate or certificates representing
the shares to be redeemed (the "Redemption Notice"). Except as provided in
Section 4(d), on or after the Redemption Date, each holder of Series A or Series
B Preferred Stock to be redeemed shall surrender to this Corporation the
certificate or certificates representing such shares, in the manner and at the
place designated in the Redemption Notice, and thereupon the Redemption Price of
such shares shall be payable to the order of the person whose name appears on
such certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(d) If the holders have elected redemption pursuant to Section
4(a) or (b), from and after the Redemption Date, unless there shall have been a
default in payment of the Redemption Price, all rights of the holders of shares
of Series A Preferred Stock or Series B Preferred Stock, as applicable, as
holders of Series A or Series B Preferred Stock, as applicable, (except the
right to receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. If the funds of the
Corporation legally available for redemption of shares of Series A or Series B
Preferred Stock on any Redemption Date are insufficient to redeem the total
number of shares of Series A or Series B Preferred Stock to be redeemed on such
date, those funds which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed based upon their holdings of Series A and Series B Preferred Stock, as
applicable. The shares of Series A or Series B Preferred Stock not redeemed
shall remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of shares of Series A or Series B Preferred
Stock such funds will immediately be used to redeem the balance of the shares
which the Corporation has become obliged to redeem on any Redemption Date, but
which it has not redeemed.
15
<PAGE> 16
(e) On or prior to each Redemption Date, the Corporation shall
deposit the Redemption Price of all shares of Series A or Series B Preferred
Stock designated for redemption in the Redemption Notice and not yet redeemed
with a bank or trust corporation having aggregate capital and surplus in excess
of $ 100,000,000 as a trust fund for the benefit of the respective holders of
the shares designated for redemption and not yet redeemed, with irrevocable
instructions and authority to the bank or trust corporation to pay the
Redemption Price for such shares to their respective holders on or after the
Redemption Date upon receipt of notification from the Corporation that such
holder has surrendered his share certificate to the Corporation pursuant to
Section 4(c) above. As of the Redemption Date, the deposit shall constitute full
payment of the shares to their holders, and from and after the Redemption Date
the shares so called for redemption shall be redeemed and shall be deemed to be
no longer outstanding, and the holders thereof shall cease to be stockholders
with respect to such shares and shall have no rights with respect thereto except
the right to receive from the bank or trust corporation payment of the
Redemption Price of the shares, without interest, upon surrender of their
certificates therefor. Such instructions shall also provide that any moneys
deposited by the Corporation pursuant to this Section 4(e) for the redemption of
shares thereafter converted into shares of the Corporation's Common Stock
pursuant to Section 3 hereof prior to the Redemption Date shall be returned to
the Corporation forthwith upon such conversion. The balance of any moneys
deposited by the Corporation pursuant to this Section 4(e) remaining unclaimed
at the expiration of one (1) year following the Redemption Date shall thereafter
be returned to the Corporation upon its request expressed in a resolution of its
Board of Directors.
(f) Upon default in the payment of any required redemption
installment provided for in this Section 4, the unpaid balance of the Redemption
Price shall accrue interest at the rate of fifteen percent (15%) per annum,
payable quarterly in arrears.
(g) Notwithstanding anything to the contrary contained in this
amended and restated Certificate of Incorporation, any default in the payment of
any required redemption installment which continues for more than ninety (90)
days after the applicable Redemption Date shall constitute a Voting Right Event
permitting the holders of a majority of the outstanding Series A Preferred
Stock, as applicable, to elect, pursuant to Section 5(d) below, a majority of
the Board of Directors during the pendency of such default.
5. Voting Rights.
(a) Subject to the provisions of Sections 4(g), 5(b) and (c)
hereof, the holder of each share of Series A Preferred Stock shall have the
right to one (1) vote for each share of Common Stock into which such share of
Series A Preferred Stock could be converted on the record date for the vote or
written consent of stockholders. In all cases any fractional share, determined
on an aggregate conversion basis, shall be rounded to the nearest whole share.
With respect to such vote, such holder shall have full voting rights and powers
equal to the voting rights and powers of the holders of Common Stock (except as
otherwise provided herein or as required by law, voting together with the Common
Stock as a single class), and shall be entitled, notwithstanding any provision
hereof, to notice of any stockholders' meeting in accordance with the bylaws of
the Corporation. Subject to the provisions of Sections 4(f), 5(b) and (c)
hereof,
16
<PAGE> 17
each holder of Common Stock shall be entitled to one (1) vote for each share of
Common Stock held.
(b) With respect to the election of directors of the
Corporation, for so long as at least twenty-five percent (25%) of the shares of
the Series A Preferred Stock remain outstanding (as adjusted for any stock
dividends, combinations or splits with respect to such shares), (i) the holders
of the Series A Preferred Stock shall be entitled, voting as a separate class,
to elect two (2) directors and (ii) the holders of Common Stock shall be
entitled, voting as a single class, to elect any and all remaining directors.
(c) The holders of the Series A Preferred Stock shall be
entitled to vote as a separate class on the removal, with or without cause, of
any director who was elected by the holders of the Series A Preferred Stock. The
holders of the Common Stock shall be entitled to vote as a single class on the
removal, with or without cause, of any director who was elected by the holders
of the Common Stock.
(d) In the event of a Voting Right Event, the holders of the
Series A Preferred Stock shall, voting as a separate class, either by a special
meeting of such holders duly called for that purpose or pursuant to a written
consent of the holders of a majority of the then outstanding shares of Series A
Preferred Stock, be entitled to elect the smallest number of directors that
shall constitute a majority of the authorized number of directors of the
Corporation, and the holders of the Common Stock, shall be entitled to elect the
remaining members of the Board of Directors. Such election shall take effect
immediately upon the giving of written notice of such election to the
Corporation. Upon the election by the holders of the Series A Preferred Stock,
voting as a separate class, of the directors they are entitled to elect as
hereinabove provided, the terms of office of all persons who were theretofore
directors of the Corporation shall forthwith terminate, whether or not the
holders of the Common Stock shall then have elected the remaining directors of
the Corporation. If, after the election of a new Board of Directors pursuant to
this Section 5(d), the Voting Right Event is cured, then the holders of the
Series A Preferred Stock shall be divested of the special voting rights
specified in this Section 5(d). However, the special voting rights of this
Section 5(d) shall again accrue to the holders of the shares of the Series A
Preferred Stock in case of any later occurrence of a Voting Rights Event. Upon
the termination of any such special voting rights as hereinabove provided, the
Board of Directors shall promptly call a special meeting of the stockholders at
which all directors will be elected, and the terms of office of all persons who
are then directors of the Corporation shall terminate immediately upon the
election of their successors.
6. Restrictions and Limitations.
(a) So long as at least twenty-five percent (25%) of the
shares of the Preferred Stock remain outstanding, the Corporation shall not,
without the vote or written consent by the holders of at least a majority of the
then-outstanding shares of the Series A and Series B Preferred Stock voting
together as a single class:
(i) Alter or change the rights, preferences or
privileges of the Series A
17
<PAGE> 18
or Series B Preferred Stock;
(ii) Redeem, purchase or otherwise acquire (or pay into
or set aside for a sinking fund for such purpose) any of the Series A
Preferred Stock (other than pursuant to Section 4 hereof), Series B
Preferred Stock (other than pursuant to Section 4 hereof), or Common
Stock; provided, however, that this restriction shall not apply to the
repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons performing services for the
Corporation or any subsidiary pursuant to agreements under which the
Corporation has the option to repurchase such shares at cost upon the
occurrence of certain events, such as the termination of employment or
other services;
(iii) Declare, pay or set aside a dividend on the Common
Stock of the Corporation;
(iv) Effect any sale, lease, assignment, transfer or
other conveyance of all or substantially all of the assets of the
Corporation, or any consolidation or merger involving the Corporation,
or any reclassification or other change of any stock, or any
recapitalization of the Corporation, in which the stockholders of the
Corporation shall own less than a majority of the outstanding shares of
the surviving entity (collectively, a "Sale"), other than any such Sale
in which the aggregate amount of net proceeds per share resulting
therefrom is at least four (4) times the Original Series A Issue Price
(as adjusted for any stock dividends, combinations or splits with
respect to such shares), in which case no consent of the holders of the
Series A Preferred Stock shall be required, other than as required by
law, or at least four (4) times the Original Series B Issue Price (as
adjusted for any stock dividends, combinations or splits with respect to
such shares), in which case no consent of the holders of the Series B
Preferred Stock shall be required, other than as required by law;
(v) Create, authorize or issue any other equity security
(including any security convertible into or exercisable for any equity
security) having rights, preferences or privileges that are senior to or
on a parity with the Series A or Series B Preferred Stock as to dividend
rights, redemption rights, conversion rights or liquidation preferences,
or more preferential than the Series A or Series B Preferred Stock as to
voting rights;
(vi) Increase or decrease the aggregate number of
authorized shares of the Series A or Series B Preferred Stock or Common
Stock;
(vii) Amend or waive any provision of this Certificate
of Incorporation or the Bylaws which amendment or waiver adversely
affects the rights of the Series A or Series B Preferred Stock;
(viii) Change the authorized number of Directors on the
Corporation's Board of Directors, presently set at seven (7);
18
<PAGE> 19
(ix) Issue new stock options beyond the fifteen million
(15,000,000) such options that were originally authorized for issuance
pursuant to the Corporation's 1997 Stock Option Plan; or
(x) Borrow funds in a single transaction or series of
such transactions, in an amount exceeding in the aggregate seven million
dollars ($7,000,000.00).
7. Status of Converted Stock; No Reissuance. In the event any shares of
Series A or Series B Preferred Stock shall be converted pursuant to Section 3
hereof, the shares so converted shall be canceled and shall not be issuable by
the Corporation, and this Certificate of Incorporation of the Corporation shall
be further amended to effect the corresponding reduction in the Corporation's
authorized capital stock. No share or shares of Series A or Series B Preferred
Stock acquired by the Corporation by reason of redemption, purchase or otherwise
shall be reissued, and all such shares shall be cancelled, retired and
eliminated from the shares which the Corporation shall be authorized to issue.
ARTICLE V
The board of directors is expressly authorized to make, alter, or repeal
the bylaws of the Corporation.
ARTICLE VI
Except as provided in Section 2 of that certain Investor's Rights
Agreement among the Corporation and certain holders of its Series A Preferred
Stock dated February 12, 1999, the stockholders of the Corporation have no
preemptive rights to acquire additional shares of the capital stock of the
Corporation.
ARTICLE VII
Elections of directors need not be by written ballot unless the bylaws
of the Corporation shall so provide.
ARTICLE VIII
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this
19
<PAGE> 20
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE X
To the fullest extent permitted by Delaware statutory or decisional law,
as amended or interpreted, no director of this Corporation shall be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. This Article XI does not affect the availability
of equitable remedies for breach of fiduciary duties.
This Amended and Restated Certificate of Incorporation was duly adopted by
written consent of the stockholders in accordance with the applicable provisions
of Section 228, 242 and 245 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by _____________________, its ________________, this ____ day of February
2000.
----------------------------------------
20
<PAGE> 1
EXHIBIT 3.3
BYLAWS
OF
EMERALD-DELAWARE, INC.,
A DELAWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I OFFICES ................................................................... 1
Section 1.1 Registered Office ...................................................... 1
Section 1.2 Other Offices .......................................................... 1
ARTICLE II STOCKHOLDERS' MEETINGS ................................................... 1
Section 2.1 Date, Time and Place of Meetings ....................................... 1
Section 2.2 Annual Meetings ........................................................ 1
Section 2.3 Special Meetings ....................................................... 2
Section 2.4 Notice of Meetings ..................................................... 2
Section 2.5 Quorum and Voting ...................................................... 3
Section 2.6 Voting Rights .......................................................... 3
Section 2.7 Voting Procedures and Inspectors of Elections .......................... 4
Section 2.8 List of Stockholders ................................................... 5
Section 2.9 Stockholder Proposals at Annual Meetings ............................... 5
Section 2.10 Nominations of Persons for Election to the Board of Directors ......... 6
Section 2.11 Action Without Meeting ................................................ 7
ARTICLE III DIRECTORS ............................................................... 7
Section 3.1 Number and Term of Office .............................................. 7
Section 3.2 Powers ................................................................. 8
Section 3.3 Vacancies .............................................................. 8
Section 3.4 Resignations and Removals .............................................. 8
Section 3.5 Meetings ............................................................... 9
Section 3.6 Quorum and Voting ...................................................... 10
Section 3.7 Action Without Meeting ................................................. 10
Section 3.8 Fees and Compensation .................................................. 10
Section 3.9 Committees ............................................................. 10
ARTICLE IV OFFICERS ................................................................. 12
Section 4.1 Officers Designated .................................................... 12
Section 4.2 Tenure and Duties of Officers .......................................... 12
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING OF
SECURITIES OWNED BY THE CORPORATION ................................................. 13
Section 5.1 Execution of Corporate Instruments ..................................... 13
Section 5.2 Voting of Securities Owned by Corporation .............................. 14
ARTICLE VI SHARES OF STOCK .......................................................... 14
Section 6.1 Form and Execution of Certificates ..................................... 14
Section 6.2 Lost Certificates ...................................................... 14
Section 6.3 Transfers .............................................................. 15
Section 6.4 Fixing Record Dates .................................................... 15
Section 6.5 Registered Stockholders ................................................ 16
ARTICLE VII OTHER SECURITIES OF THE CORPORATION ..................................... 16
ARTICLE VIII CORPORATE SEAL ......................................................... 17
ARTICLE IX INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS ............. 17
Section 9.1 Right to Indemnification ............................................... 17
Section 9.2 Authority to Advance Expenses .......................................... 17
Section 9.3 Right of Claimant to Bring Suit ........................................ 18
Section 9.4 Provisions Nonexclusive ................................................ 18
Section 9.5 Authority to Insure .................................................... 18
Section 9.6 Survival of Rights ..................................................... 19
Section 9.7 Settlement of Claims ................................................... 19
Section 9.8 Effect of Amendment .................................................... 19
Section 9.9 Subrogation ............................................................ 19
Section 9.10 No Duplication of Payments ............................................ 19
ARTICLE X NOTICES ................................................................... 19
ARTICLE XI AMENDMENTS ............................................................... 20
</TABLE>
<PAGE> 4
BYLAWS OF EMERALD-DELAWARE, INC.
ARTICLE I
OFFICES
SECTION 1.1 REGISTERED OFFICE.
The registered office of the corporation in the State of Delaware shall
be in the City of Wilmington, County of New Castle.
SECTION 1.2 OTHER OFFICES.
The corporation shall also have and maintain an office or principal
place of business at 1512 SW Park Avenue, Suite 200, Portland, Oregon, and may
also have offices at such other places, both within and without the State of
Delaware, as the Board of Directors may from time to time determine or the
business of the corporation may require.
ARTICLE II
STOCKHOLDERS' MEETINGS
SECTION 2.1 DATE, TIME AND PLACE OF MEETINGS.
Except as otherwise provided herein, meetings of the stockholders of the
corporation shall be held on such date, and at such time and place, either
within or without the State of Delaware, as may be designated from time to time
by the Board of Directors, or, if not so designated, then at the office of the
corporation required to be maintained pursuant to Section 1.2 of Article I
hereof.
SECTION 2.2 ANNUAL MEETINGS.
The annual meetings of the stockholders of the corporation, commencing
with the year 2000, for the purpose of election of directors and for such other
business as may lawfully come before it, shall be held on such date and at such
time as may be designated from time to time by the Board of Directors, or, if
not so designated, then at 1:30 p.m. on the last Tuesday of January of each year
if not a legal holiday, and, if a legal holiday, at the same hour and place on
the next succeeding day not a holiday.
<PAGE> 5
SECTION 2.3 SPECIAL MEETINGS.
Special Meetings of the stockholders of the corporation may be called,
for any purpose or purposes, by the Chairman of the Board or the President or
the Board of Directors at any time. Upon written request of any stockholder or
stockholders holding in the aggregate not less than ten percent (10%) of the
voting power of-all stockholders delivered in person or sent by registered mail
to the Chairman of the Board, President or Secretary of the Corporation, the
Secretary shall call a special meeting of stockholders to be held at the office
of the corporation required to be maintained pursuant to Section 1.2 of Article
I hereof at such time as the Secretary may fix, such meeting to be held not less
than ten nor more than sixty days after the receipt of such request, and if the
Secretary shall neglect or refuse to call such meeting, within seven days after
the receipt of such request, the stockholder making such request may do so.
SECTION 2.4 NOTICE OF MEETINGS.
(a) Except as otherwise provided by law or the Certificate of
Incorporation, written notice of each meeting of stockholders, specifying the
place, date and hour and purpose or purposes of the meeting, shall be given not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote thereat, directed to his address as it
appears upon the books of the corporation; except that where the matter to be
acted on is a merger or consolidation of the Corporation or a sale, lease or
exchange of all or substantially all of its assets, such notice shall be given
not less than twenty (20) nor more than sixty (60) days prior to such meeting.
(b) If at any meeting action is proposed to be taken which, if taken,
would entitle shareholders fulfilling the requirements of section 262(d) of the
Delaware General Corporation Law to an appraisal of the fair value of their
shares, the notice of such meeting shall contain a statement of that purpose and
to that effect and shall be accompanied by a copy of that statutory section.
(c) When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken unless the
adjournment is for more than thirty days, or unless after the adjournment a new
record date is fixed for the adjourned meeting, in which event a notice of the
adjourned meeting shall be given to each stockholder of record entitled to vote
at the meeting.
(d) Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, either before or after such meeting, and to the extent
permitted by law, will be waived by any stockholder by his attendance thereat,
in person or by proxy. Any stockholder so waiving notice of such meeting shall
be bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
(e) Unless and until voted, every proxy shall be revocable at the
pleasure of the person who executed it or of his legal representatives or
assigns, except in those cases where an irrevocable proxy permitted by statute
has been given.
2
<PAGE> 6
SECTION 2.5 QUORUM AND VOTING.
(a) At all meetings of stockholders, except where otherwise provided by
law, the Certificate of Incorporation, or these Bylaws, the presence, in person
or by proxy duly authorized, of the holders of a majority of the outstanding
shares of stock entitled to vote shall constitute a quorum for the transaction
of business. Shares, the voting of which at said meeting have been enjoined, or
which for any reason cannot be lawfully voted at such meeting, shall not be
counted to determine a quorum at said meeting. In the absence of a quorum, any
meeting of stockholders may be adjourned, from time to time, by vote of the
holders of a majority of the shares represented thereat, but no other business
shall be transacted at such meeting. At such adjourned meeting at which a quorum
is present or represented any business may be transacted which might have been
transacted at the original meeting. The stockholders present at a duly called or
convened meeting, at which a quorum is present, may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
(b) Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, all action taken by the holders of a majority of
the voting power represented at any meeting at which a quorum is present shall
be valid and binding upon the corporation.
(c) Where a separate vote by a class or classes is required, a majority
of the outstanding shares of such class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter and the affirmative vote of the majority of
shares of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class.
SECTION 2.6 VOTING RIGHTS.
(a) Except as otherwise provided by law, only persons in whose names
shares entitled to vote stand on the stock records of the corporation on the
record date for determining the stockholders entitled to vote at said meeting
shall be entitled to vote at such meeting. Shares standing in the names of two
or more persons shall be voted or represented in accordance with the
determination of the majority of such persons, or, if only one of such persons
is present in person or represented by proxy, such person shall have the right
to vote such shares and such shares shall be deemed to be represented for the
purpose of determining a quorum.
(b) Every person entitled to vote or execute consents shall have the
right to do so either in person or by an agent or agents authorized by a written
proxy executed by such person or his duly authorized agent, which proxy shall be
filed with the Secretary of the corporation at or before the meeting at which it
is to be used. Said proxy so appointed need not be a stockholder. No proxy shall
be voted on after three (3) years from its date unless the proxy provides for a
longer period.
(c) Without limiting the manner in which a stockholder may authorize
another person or persons to act for him as proxy pursuant to subsection (b) of
this section, the following shall constitute a valid means by which a
stockholder may grant such authority:
3
<PAGE> 7
(1) A stockholder may execute a writing authorizing another
person or persons to act for him as proxy. Execution may be accomplished by the
stockholder or his authorized officer, director, employee or agent signing such
writing or causing his or her signature to be affixed to such writing by any
reasonable means including, but not limited to, by facsimile signature.
(2) A stockholder may authorize another person or persons to
act for him as proxy by transmitting or authorizing the transmission of a
telegram, cablegram, or other means of electronic transmission to the person who
will be the holder of the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the person who will be the
holder of the proxy to receive such transmission, provided that any such
telegram, cablegram or other means of electronic transmission must either set
forth or be submitted with information from which it can be determined that the
telegram, cablegram or other electronic transmission was authorized by the
stockholder. Such authorization can be established by the signature of the
stockholder on the proxy, either in writing or by a signature stamp or facsimile
signature, or by a number or symbol from which the identity of the stockholder
can be determined, or by any other procedure deemed appropriate by the
inspectors or other persons making the determination as to due authorization. If
it is determined that such telegrams, cablegrams or other electronic
transmissions are valid, the inspectors or, if there are no inspectors, such
other persons making that determination shall specify the information upon which
they relied.
(d) Any copy, facsimile telecommunication or other reliable reproduction
of the writing or transmission created pursuant to subsection (c) of this
section may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or transmission.
SECTION 2.7 VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.
(a) The corporation shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at the meeting and make a written report
thereof. The corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector with strict impartiality
and according to the best of his ability.
(b) The inspectors shall (i) ascertain the number of shares outstanding
and the voting power of each, (ii) determine the shares represented at a meeting
and the validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (v) certify their
determination of the number of shares represented at the meeting, and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors.
4
<PAGE> 8
(c) The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting. No ballot, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the Inspectors after the
closing of the polls unless the Court of Chancery upon application by a
stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies and ballots, the
inspectors shall be limited to an examination of the proxies, any envelopes
submitted with those proxies, any information provided in accordance with
Section 212(c)(2) of the Delaware General Corporation Law, ballots and the
regular books and records of the corporation, except that the inspectors may
consider other reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks, brokers, their nominees
or similar persons which represent more votes than the holder of a proxy is
authorized by the record owner to cast or more votes than the stockholder holds
of record. If the inspectors consider other reliable information for the limited
purpose permitted herein, the inspectors at the time they make their
certification pursuant to subsection (b)(v) of this section shall specify the
precise information considered by them including the person or persons from whom
they obtained the information, when the information was obtained, the means by
which the information was obtained and the basis for the inspectors' belief that
such information is accurate and reliable.
SECTION 2.8 LIST OF STOCKHOLDERS.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held and which place shall
be specified in the notice of the meeting, or, if not specified, at the place
where said meeting is to be held, and the list shall be produced and kept at the
time and place of meeting during the whole time thereof, and may be inspected by
any stockholder who is present.
SECTION 2.9 STOCKHOLDER PROPOSALS AT ANNUAL MEETINGS.
At an annual meeting of the stockholders, only such business shall be
conducted, as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, otherwise properly brought before the meeting by or at
the direction of the Board of Directors or otherwise properly brought before the
meeting by a stockholder. In addition to any other applicable requirements, for
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the coloration, not
less than forty-five (45) days nor more than seventy-five (75) days prior to the
date on which
5
<PAGE> 9
the corporation first mailed its proxy materials for the previous year's annual
meeting of shareholders (or the date on which the corporation mails its proxy
materials for the current year if during the prior year the corporation did not
hold an annual meeting or if the date of the annual meeting was changed more
than 30 days from the prior year). A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of the stockholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business.
Notwithstanding anything in the By-Laws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 2.9, provided, however, that nothing in
this Section 2.9 shall be deemed to preclude discussion by any stockholder of
any business properly brought before the annual meeting in accordance with said
procedure.
The Chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 2.9, and if he should
so determine he shall so declare to the meeting, and any such business not
properly brought before the meeting shall not be transacted.
Nothing in this Section 2.9 shall affect the right of a stockholder to
request inclusion of a proposal in the corporation's proxy statement to the
extent that such right is provided by an applicable rule of the Securities and
Exchange Commission.
SECTION 2.10 NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS.
In addition to any other applicable requirements, only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors. Nominations of persons for election to the Board of
Directors of the corporation may be made at a meeting of stockholders by or at
the direction of the Board of Directors, by any nominating committee or person
appointed by the Board of Directors or by any stockholder of the corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 2.10. Such nominations, other
than those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation, not less than forty-five
(45) days nor more than seventy-five (75) days prior to the date on which the
corporation first mailed its proxy materials for the previous year's annual
meeting of shareholders (or the date on which the corporation mails its proxy
materials for the current year if during the prior year the corporation did not
hold an annual meeting or if the date of the annual meeting was changed more
than 30 days from the prior year). Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class and number of shares of the corporation which are
beneficially owned by the
6
<PAGE> 10
person, and (iv) any other information relating to the person that is required
to be disclosed in solicitations for proxies for election of directors pursuant
to Rule 14a under the Securities Exchange Act of 1934; and (b) as to the
stockholder giving the notice, (i) the name and record address of the
stockholder, and (ii) the class and number of shares of the corporation which
are beneficially owned by the stockholder. The corporation may require any
proposed nominee to furnish such other information as may reasonably be required
by the corporation to determine the eligibility of such proposed nominee to
serve as a director of the corporation. No person shall be eligible for election
as a director of the corporation unless nominated in accordance with the
procedures set forth herein. These provisions shall not apply to nomination of
any persons entitled to be separately elected by holders of preferred stock.
The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
SECTION 2.11 ACTION WITHOUT MEETING.
Unless otherwise provided in the Certificate of Incorporation, any
action required by statute to be taken at any annual or special meeting of
stockholders of the corporation, or any action which may be taken at any annual
or special meeting of such stockholders, may be taken without a meeting, without
prior notice and without a vote, if a consent or consents in writing, setting
forth the action so taken, are signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. To be effective, a written consent must be delivered to
the corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to a corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. Every written consent shall bear the
date of signature of each stockholder who signs the consent and no written
consent shall be effective to take the corporate action referred to therein
unless, within sixty days of the earliest dated consent delivered in the manner
required by this Section to the corporation, written consents signed by a
sufficient number of holders to take action are delivered to the corporation in
accordance with this Section. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
SECTION 3.1 NUMBER AND TERM OF OFFICE.
The number of directors of the corporation shall not be less than one
(1) nor more than seven (7) until changed by amendment of the Certificate of
Incorporation or by a Bylaw
7
<PAGE> 11
amending this Section 3.1 duly adopted by the vote or written consent of holders
of a majority of the outstanding shares or by the Board of Directors. The exact
number of directors shall be fixed from time to time, within the limits
specified in the Certificate of Incorporation or in this Section 3.1, by a bylaw
or amendment thereof duly adopted by the vote of a majority of the shares
entitled to vote represented at a duly held meeting at which a quorum is
present, or by the written consent of the holders of a majority of the
outstanding shares entitled to vote, or by the Board of Directors.
With the exception of the first Board of Directors, which shall be
elected by the incorporator, and except as provided in Section 3.3 of this
Article III, the directors shall be elected by a plurality vote of the shares
represented in person or by proxy, at the stockholders annual meeting in each
year and entitled to vote on the election of directors. Elected directors shall
hold office until the next annual meeting and until their successors shall be
duly elected and qualified. Directors need not be stockholders. If, for any
cause, the Board of Directors shall not have been elected at an annual meeting,
they may be elected as soon thereafter as convenient at a special meeting of the
stockholders called for that purpose in the manner provided in these Bylaws.
As provided in the Certificate of Incorporation, at all elections of
directors each shareholder having the right to vote shall be entitled to as many
votes as the number of shares so held by him of record multiplied by the number
of directors to be elected, and he may cast all of such votes for a single
director, or he may distribute them among any two or more of the directors to be
voted for, as he may see fit.
SECTION 3.2 POWERS.
The powers of the corporation shall be exercised, its business conducted
and its property controlled by or under the direction of the Board of Directors.
SECTION 3.3 VACANCIES.
Vacancies and newly created directorships resulting from any increase in
the authorized number of directors may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director,
and each director so elected shall hold office for the unexpired portion of the
term of the director whose place shall be vacant, and until his successor shall
have been duly elected and qualified. A vacancy in the Board of Directors shall
be deemed to exist under this section in the case of the death, removal or
resignation of any director, or if the stockholders fail at any meeting of
stockholders at which directors are to be elected (including any meeting
referred to in Section 3.4 below) to elect the number of directors then
constituting the whole Board.
SECTION 3.4 RESIGNATIONS AND REMOVALS.
(a) Any director may resign at any time by delivering his written
resignation to the Chairman of the Board, the President or the Secretary, such
resignation to specify whether it will
8
<PAGE> 12
be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made it shall be
deemed effective at the pleasure of the Board of Directors. When one or more
directors shall resign from the Board, effective at a future date, a majority of
the directors then in office, including those who have so resigned, shall have
power to fill such vacancy or vacancies, the vote thereon to take effect when
such resignation or resignations shall become effective, and each director so
chosen shall hold office for the unexpired portion of the term of the director
whose place shall be vacated and until his successor shall have been duly
elected and qualified.
(b) At a special meeting of stockholders called for the purpose in the
manner hereinabove provided, the Board of Directors, or any individual director,
may be removed from office, with or without cause, and a new director or
directors elected by a vote of stockholders holding a majority of the
outstanding shares entitled to vote at an election of directors. However, if the
corporation has cumulative voting for directors, if less than the entire board
is to be removed, no director may be removed without cause if the votes cast
against his removal would be sufficient to elect him if voted cumulatively at an
election of the entire board.
SECTION 3.5 MEETINGS.
(a) The annual meeting of the Board of Directors shall be held
immediately after the annual stockholders' meeting and at the place where such
meeting is held or at the place announced by the Chairman at such meeting. No
notice of an annual meeting of the Board of Directors shall be necessary and
such meeting shall be held for the purpose of electing officers and transacting
such other business as may lawfully come before it.
(b) Except as hereinafter otherwise provided, regular meetings of the
Board of Directors shall be held in the office of the corporation required to be
maintained pursuant to Section 1.2 of Article I hereof. Regular meetings of the
Board of Directors may also be held at any place within or without the State of
Delaware which has been designated by resolutions of the Board of Directors or
the written consent of all directors.
(c) Special meetings of the Board of Directors may be held at any time
and place within or without the State of Delaware whenever called by the
Chairman of the Board or, if there is no Chairman of the Board, by the
President, the Secretary or by any one (1) director and, in the case of any
special meeting of any committee designated by the Board of Directors, by the
Chairman thereof.
(d) Written notice of the time and place of all regular and special
meetings of the Board of Directors shall be delivered personally to each
director or sent by telegram or facsimile transmission at least 48 hours before
the start of the meeting, or sent by first class mail at least 120 hours before
the start of the meeting. Notice of any meeting may be waived in writing at any
time before or after the meeting and will be waived by any director by
attendance thereat.
9
<PAGE> 13
SECTION 3.6 QUORUM AND VOTING.
(a) A quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time in accordance with Section
3.1 of Article III of these Bylaws, but not less than one; provided, however, at
any meeting whether a quorum be present or otherwise, a majority of the
directors present may adjourn from time to time until the time fixed for the
next regular meeting of the Board of Directors, without notice other than by
announcement at the meeting.
(b) At each meeting of the Board at which a quorum is present all
questions and business shall be determined by a vote of a majority of the
directors present, unless a different vote be required by law, the Certificate
of Incorporation, or these Bylaws.
(c) Any member of the Board of Directors, or of any committee thereof,
may participate in a meeting by means of conference telephone or similar
communication equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting by such means shall
constitute presence in person at such meeting.
(d) The transactions of any meeting of the Board of Directors, or any
committee thereof, however called or noticed, or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice, if a
quorum be present and if, either before or after the meeting, each of the
directors not present shall sign a written waiver of notice, or a consent to
holding such meeting, or an approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
SECTION 3.7 ACTION WITHOUT MEETING.
Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors or of any committee thereof may be taken without a meeting, if all
members of the Board or of such committee, as the case may be, consent thereto
in writing, and such writing or writings are filed with the minutes of
proceedings of the Board or committee.
SECTION 3.8 FEES AND COMPENSATION.
Directors and members of committees may receive such compensation, if
any, for their services, and such reimbursement for expenses, as may be fixed or
determined by resolution of the Board of Directors.
SECTION 3.9 COMMITTEES.
(a) EXECUTIVE COMMITTEE: The Board of Directors may appoint an Executive
Committee of not less than one member, each of whom shall be a director. The
Executive Committee, to the extent permitted by law, shall have and may exercise
when the Board of Directors is not in session all powers of the Board in the
management of the business and affairs of the Corporation, except such committee
shall not have the power or authority to amend these
10
<PAGE> 14
Bylaws or to approve or recommend to the stockholders any action which must be
submitted to stockholders for approval under the General Corporation Law.
(b) OTHER COMMITTEES: The Board of Directors may, by resolution passed
by a majority of the whole Board, from time to time appoint such other
committees as may be permitted by law. Such other committees appointed by the
Board of Directors shall have such powers and perform such duties as may be
prescribed by the resolution or resolutions creating such committee, but in no
event shall any such committee have the powers denied to the Executive Committee
in these Bylaws.
(c) TERM: The members of all committees of the Board of Directors shall
serve a term coexistent with that of the Board of Directors which shall have
appointed such committee. The Board, subject to the provisions of subsections
(a) or (b) of this Section 3.9, may at any time increase or decrease the number
of members of a committee or terminate the existence of a committee; provided,
that no committee shall consist of less than one member. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation, but the Board may at any time for any reason remove any individual
committee member and the Board may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(d) MEETINGS: Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 3.9 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter; special meetings of any such
committee may be held at the principal office of the corporation required to be
maintained pursuant to Section 1.2 of Article I hereof; or at any place which
has been designated from time to time by resolution of such committee or by
written consent of all members thereof, and may be called by any director who is
a member of such committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the time
and place of special meetings of the Board of Directors. Notice of any special
meeting of any committee may be waived in writing at any time after the meeting
and will be waived by any director by attendance thereat. A majority of the
authorized number of members of any such committee shall constitute a quorum for
the transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee.
11
<PAGE> 15
ARTICLE IV
OFFICERS
SECTION 4.1 OFFICERS DESIGNATED.
The officers of the corporation shall be a President, a Secretary, and a
Treasurer. The Board of Directors or the President may also appoint a Chairman
of the Board, one or more Vice-Presidents, assistant secretaries, assistant
treasurers, and such other officers and agents with such powers and duties as it
or he shall deem necessary. The order of the seniority of the Vice-Presidents
shall be in the order of their nomination, unless otherwise determined by the
Board of Directors. The Board of Directors may assign such additional titles to
one or more of the officers as they shall deem appropriate. Any one person may
hold any number of offices of the corporation at any one time unless
specifically prohibited therefrom by law. The salaries and other compensation of
the officers of the corporation shall be fixed by or in the manner designated by
the Board of Directors.
SECTION 4.2 TENURE AND DUTIES OF OFFICERS.
(a) GENERAL: All officers shall hold office at the pleasure of the Board
of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors. Nothing in these Bylaws shall be construed as creating any
kind of contractual right to employment with the corporation.
(b) DUTIES OF THE CHAIRMAN OF THE BOARD OF DIRECTORS: The Chairman of
the Board of Directors (if there be such an officer appointed) shall be the
chief executive officer of the corporation and, when present, shall preside at
all meetings of the shareholders and the Board of Directors. The Chairman of the
Board of Directors shall perform such other duties and have such other powers as
the Board of Directors shall designate from time to time.
(c) DUTIES OF PRESIDENT: The President shall be the chief executive
officer of the corporation in the absence of the Chairman of the Board and shall
preside at all meetings of the shareholders and at all meetings of the Board of
Directors, unless the Chairman of the Board of Directors has been appointed and
is present. The President shall perform such other duties and have such other
powers as the Board of Directors shall designate from time to time.
(d) DUTIES OF VICE-PRESIDENTS: The Vice-Presidents, in the order of
their seniority, may assume and perform the duties of the President in the
absence or disability of the President or whenever the office of the President
is vacant. The Vice-President shall perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time.
(e) DUTIES OF SECRETARY: The Secretary shall attend all meetings of the
shareholders and of the Board of Directors and any committee thereof, and shall
record all acts and
12
<PAGE> 16
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice, in conformity with these Bylaws, of all meetings of the
shareholders, and of all meetings of the Board of Directors and any Committee
thereof requiring notice. The Secretary shall perform such other duties and have
such other powers as the Board of Directors shall designate from time to time.
The President may direct any Assistant Secretary to assume and perform the
duties of the Secretary in the absence or disability of the Secretary, and each
Assistant Secretary shall perform such other duties and have such other powers
as the Board of Directors or the President shall designate from time to time.
(f) DUTIES OF TREASURER: The Treasurer shall keep or cause to be kept
the books of account of the corporation in a thorough and proper manner, and
shall render statements of the financial affairs of the corporation in such form
and as often as required by the Board of Directors or the President. The
Treasurer, subject to the order of the Board of Directors, shall have the
custody of all funds and securities of the corporation. The Treasurer shall
perform all other duties commonly incident to his office and shall perform such
other duties and have such other powers as the Board of Directors or the
President shall designate from time to time. The President may direct any
Assistant Treasurer to assume and perform the duties of the Treasurer in the
absence or disability of the Treasurer, and each Assistant Treasurer shall
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
ARTICLE V
EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 5.1 EXECUTION OF CORPORATE INSTRUMENTS.
(a) The Board of Directors may, in its discretion, determine the method
and designate the signatory officer or officers, or other person or persons, to
execute any corporate instrument or document, or to sign the corporate name
without limitation, except where otherwise provided by law, and such execution
or signature shall be binding upon the corporation.
(b) Unless otherwise specifically determined by the Board of Directors
or otherwise required by law, formal contracts of the corporation, promissory
notes, deeds of trust, mortgages and other evidences of indebtedness of the
corporation, and other corporate instruments or documents requiring the
corporate seal, and certificates of shares of stock owned by the corporation,
shall be executed, signed or endorsed by the Chairman of the Board (if there be
such an officer appointed) or by the President and by any Vice-President,
Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
13
<PAGE> 17
(c) All checks and drafts drawn on banks or other depositaries on funds
to the credit of the corporation, or in special accounts of the corporation,
shall be signed by such person or persons as the Board of Directors shall
authorize so to do.
SECTION 5.2 VOTING OF SECURITIES OWNED BY CORPORATION.
All stock and other securities of other corporations owned or held by
the corporation for itself, or for other parties in any capacity, shall be
voted, and all proxies with respect thereto shall be executed, by the person
authorized so to do by resolution of the Board of Directors or, in the absence
of such authorization, by the Chairman of the Board (if there be such an officer
appointed), or by the President, or by any Vice-President.
ARTICLE VI
SHARES OF STOCK
SECTION 6.1 FORM AND EXECUTION OF CERTIFICATES.
Certificates for the shares of stock of the corporation shall be in such
form as is consistent with the Certificate of Incorporation and applicable law.
Every holder of stock in the corporation shall be entitled to have a certificate
signed by, or in the name of the corporation by, the Chairman of the Board (if
there be such an officer appointed), or by the President or any Vice-President
and by the Treasurer or Assistant Treasurer or the Secretary or Assistant
Secretary, certifying the number of shares owned by him in the corporation. Any
or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue. If the corporation shall be authorized to issue
more than one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in section 202 of the Delaware General
Corporation Law, in lieu of the foregoing requirements, there may be set forth
on the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
SECTION 6.2 LOST CERTIFICATES.
The Board of Directors may direct a new certificate or certificates to
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost or
14
<PAGE> 18
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue of
a new certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
indemnify the corporation in such manner as it shall require and/or to give the
corporation a surety bond in such form and amount as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost or destroyed.
SECTION 6.3 TRANSFERS.
Transfers of record of shares of stock of the corporation shall be made
only upon its books by the holders thereof, in person or by attorney duly
authorized, and upon the surrender of a certificate or certificates for a like
number of shares, properly endorsed.
SECTION 6.4 FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty nor less than ten days before the date of such meeting. If no record
date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the date on which the meeting is held. A determination of stockholders
of record entitled notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by the Delaware General Corporation Law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation by delivery to its registered office in
Delaware, its principal place of business, or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to
15
<PAGE> 19
corporate action in writing without a meeting shall be at the close of business
on the day on which the Board of Directors adopts the resolution taking such
prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
SECTION 6.5 REGISTERED STOCKHOLDERS.
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends, and
to vote as such owner, and shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE VII
OTHER SECURITIES OF THE CORPORATION
All bonds, debentures and other corporate securities of the corporation,
other than stock certificates, may be signed by the Chairman of the Board (if
there be such an officer appointed), or the President or any Vice-President or
such other person as may be authorized by the Board of Directors and the
corporate seal impressed thereon or a facsimile of such seal imprinted thereon
and attested by the signature of the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature of a trustee under an indenture pursuant to which such bond, debenture
or other corporate security shall be issued, the signature of the persons
signing and attesting the corporate seal on such bond, debenture or other
corporate security may be the imprinted facsimile of the signatures of such
persons. Interest coupons appertaining to any such bond, debenture or other
corporate security, authenticated by a trustee as aforesaid, shall be signed by
the Treasurer or an Assistant Treasurer of the corporation, or such other person
as may be authorized by the Board of Directors, or bear imprinted thereon the
facsimile signature of such person. In case any officer who shall have signed or
attested any bond, debenture or other corporate security, or whose facsimile
signature shall appear thereon or before the bond, debenture or other corporate
security so signed or attested shall have been delivered, such bond, debenture
or other corporate security nevertheless may be adopted by the corporation and
issued and delivered as though the person who signed the same or whose facsimile
signature shall have been used thereon had not ceased to be such officer of the
corporation.
16
<PAGE> 20
ARTICLE VIII
CORPORATE SEAL
The corporate seal shall consist of a die bearing the name of the
corporation and the state and. date of its incorporation. Said seal may be used
by causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE IX
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
SECTION 9.1 RIGHT TO INDEMNIFICATION.
Each person who was or is a party or is threatened to be made a party to
or is involved (as a party, witness, or otherwise), in any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter a "Proceeding"), by reason of .the
fact that he, or a person of whom he is the legal representative, is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation or of a partnership, joint venture, trust, or other
enterprise, including service with respect to employee benefit plans, whether
the basis of the Proceeding is alleged action in an official capacity as a
director, officer, employee, or agent or in any other capacity while serving as
a director, officer, employee, or agent (hereafter an "Agent"), shall be
indemnified and held harmless by the corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended or interpreted (but, in the case of any such amendment or
interpretation, only to the extent that such amendment or interpretation permits
the corporation to provide broader indemnification rights than were permitted
prior thereto) against all expenses, liability, and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties', and amounts paid or to
be paid in settlement, and any interest, assessments, or other charges imposed
thereon, and any federal, state, local, or foreign taxes imposed on any Agent as
a result of the actual or deemed receipt of any payments under this Article)
reasonably incurred or suffered by such person in connection with investigating,
defending, being a witness in, or participating in (including on appeal), or
preparing for any of the foregoing in, any Proceeding (hereinafter "Expenses")
provided, however, that except as to actions to enforce indemnification rights
pursuant to Section 9.3 of this Article, the corporation shall indemnify any
Agent seeking indemnification in connection with a Proceeding (or part thereof)
initiated by such person only if the Proceeding (or part thereof) was authorized
by the Board of Directors of the corporation]. The right to indemnification
conferred in this Article shall be a contract right.
SECTION 9.2 AUTHORITY TO ADVANCE EXPENSES.
The right to indemnification provided in Section I of this Article shall
include the right to be paid, in advance of a Proceeding's final disposition,
Expenses incurred in defending that Proceeding; provided, however, that if
required by the Delaware General Corporation Law, as
17
<PAGE> 21
amended, the payment of such expenses incurred by an officer or director acting
in his capacity as such (and not in any other capacity) in advance of the final
disposition of the Proceeding shall be made only upon delivery to the
corporation of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized under this Article or
otherwise. Any obligation to reimburse the corporation for Expense advances
shall be unsecured and no interest shall be charged thereon.
SECTION 9.3 RIGHT OF CLAIMANT TO BRING SUIT.
If a claim under Section 9.1 or 9.2 of this Article is not paid in full
by the corporation within sixty (60) days after a written claim has been
received by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense (including attorneys' fees) of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending a Proceeding in advance of its final disposition
where the required undertaking has been tendered to the corporation) that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. The burden of proving such a defense shall be on the
corporation. Neither the failure of the corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper under the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant had not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that claimant has not met the applicable standard of conduct.
SECTION 9.4 PROVISIONS NONEXCLUSIVE.
The rights conferred on any person by this Article shall not be
exclusive of any other rights that such person may have or hereafter acquire
under any statute, provision of the Certificate of Incorporation, agreement,
vote of stockholders or disinterested directors, or otherwise, both as to action
in an official capacity and as to action in another capacity while holding such
office. To the extent that any provision of the Certificate, agreement, or vote
of the stockholders or disinterested directors is inconsistent with these
bylaws, the provision, agreement, or vote shall take precedence.
SECTION 9.5 AUTHORITY TO INSURE.
The corporation may purchase and maintain insurance to protect itself
and any Agent against any Expense, whether or not the corporation would have the
power to indemnify the Agent against such Expense under applicable law or the
provisions of this Article.
18
<PAGE> 22
SECTION 9.6 SURVIVAL OF RIGHTS.
The rights provided by this Article shall continue as to a person who
has ceased to be an Agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
SECTION 9.7 SETTLEMENT OF CLAIMS.
The corporation shall not be liable to indemnify any Agent under this
Article (a) for any amounts paid in settlement of any action or claim effected
without the corporation's written consent, which consent shall not be
unreasonably withheld; or (b) for any judicial award if the corporation was not
given a reasonable and timely opportunity, at its expense, to participate in the
defense of such action.
SECTION 9.8 EFFECT OF AMENDMENT.
Any amendment, repeal, or modification of this Article shall not
adversely affect any right or protection of any Agent existing at the time of
such amendment, repeal, or modification.
SECTION 9.9 SUBROGATION.
In the event of payment under this Article, the corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Agent, who shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such documents
necessary to enable the corporation effectively to bring suit to enforce such
rights.
SECTION 9.10 NO DUPLICATION OF PAYMENTS.
The corporation shall not be liable under this Article to make any
payment in connection with any claim made against the Agent to the extent the
Agent has otherwise actually received payment (under any insurance policy,
agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder.
ARTICLE X
NOTICES
Whenever, under any provisions of these Bylaws, notice is required to be
given to any stockholder, the same shall be given in writing, timely and duly
deposited in the United States Mail, postage prepaid, and addressed to his last
known post office address as shown by the stock record of the corporation or its
transfer agent. Any notice required to be given to any director may be given by
the method hereinabove stated, or by telegram or other means of electronic
transmission, except that such notice other than one which is delivered
personally, shall be sent to such address or (in the case of facsimile
telecommunication) facsimile telephone number as such director shall have filed
in writing with the Secretary of the corporation, or, in the absence of such
filing, to the last known post office address of such director. If no address of
a
19
<PAGE> 23
stockholder or director be known, such notice may be sent to the office of the
corporation required to be maintained pursuant to Section 1.2 of Article I
hereof. An affidavit of mailing, executed by a duly authorized and competent
employee of the corporation or its transfer agent appointed with respect to the
class of stock affected, specifying the name and address or the names and
addresses of the stockholder or stockholders, director or directors, to whom any
such notice or notices was or were given, and the time and method of giving the
same, shall be conclusive evidence of the statements therein contained. All
notices given by mail, as above provided, shall be deemed to have been given as
at the time of mailing and all notices given by telegram or other means of
electronic transmission shall be deemed to have been given as at the sending
time recorded by the telegraph company or other electronic transmission
equipment operator transmitting the same. It shall not be necessary that the
same method of giving be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
The period or limitation of time within which any stockholder may exercise any
option or right, or enjoy any privilege or benefit, or be required to act, or
within which any director may exercise any power or right, or enjoy any
privilege, pursuant to any notice sent him in the manner above provided, shall
not be affected or extended in any manner by the failure of such a stockholder
or such director to receive such notice. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation, or of these Bylaws, a waiver thereof in writing signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Whenever notice is required
to be given, under any provision of law or of the Certificate of Incorporation
or Bylaws of the corporation, to any person with whom communication is unlawful,
the giving of such notice to such person shall not be required and there shall
be no duty to apply to any governmental authority or agency for a license or
permit to give such notice to such person. Any action or meeting which shall be
taken or held without notice to any such. person with whom communication is
unlawful shall have the same force and effect as if such notice had been duly
given. In the event that the action taken by the corporation is such as to
require the filing of a certificate under any provision of the Delaware General
Corporation Law, the certificate shall state, if such is the fact and if notice
is required, that notice was given to all persons entitled to receive notice
except such persons with whom communication is unlawful.
ARTICLE XI
AMENDMENTS
These Bylaws may be repealed, altered or amended or new Bylaws adopted
by written consent of stockholders in the manner authorized by Section 2.11 of
Article II, or at any meeting of the stockholders, either annual or special, by
the affirmative vote of a majority of the stock entitled to vote at such
meeting, unless a larger vote is required by these Bylaws or the Certificate of
Incorporation. The Board of Directors shall also have the authority to repeal,
alter or amend these Bylaws or adopt new Bylaws (including, without limitation,
the amendment of any Bylaws setting forth the number of directors who shall
constitute the whole Board of Directors) by unanimous written consent or at any
annual, regular, or special meeting by the
20
<PAGE> 24
affirmative vote of a majority of the whole number of directors, subject to the
power of the stockholders to change or repeal such Bylaws and provided that the
Board of Directors shall not make or alter any Bylaws fixing the qualifications,
classifications, or term of office of directors.
21
<PAGE> 25
CERTIFICATE OF SECRETARY
The undersigned. Secretary of __________________________, a
Delaware corporation, hereby certifies that the foregoing is a full, true and
correct copy of the Bylaws of said corporation, with all amendments to date of
this Certificate.
WITNESS the signature of the undersigned [and the seal of the
Corporation] this
day of ___________________, 19 _
Jerry N. Grant, Secretary
22
<PAGE> 1
EXHIBIT 10.1
EMERALD--DELAWARE, INC.
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is entered into, effective as of ______________
___, 2000, by and between Emerald--Delaware, Inc., a Delaware corporation (the
"Company"), and _____________________ ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director and/or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased
risk of litigation and other claims currently being asserted against directors
and officers of corporations;
WHEREAS, the Certificate of Incorporation and Bylaws of the
Company require the Company to indemnify and advance expenses to its directors
and officers to the fullest extent permitted under Delaware law, and the
Indemnitee has been serving and continues to serve as a director and/or officer
of the Company in part in reliance on the Company's Certificate of Incorporation
and Bylaws; and
WHEREAS, in recognition of Indemnitee's need for (i) substantial
protection against personal liability based on Indemnitee's reliance on the
aforesaid Certificate of Incorporation and Bylaws, (ii) specific contractual
assurance that the protection promised by the Certificate of Incorporation and
Bylaws will be available to Indemnitee (regardless of, among other things, any
amendment to or revocation of the Certificate of Incorporation and Bylaws or any
change in the composition of the Company's Board of Directors or acquisition
transaction relating to the Company), and (iii) an inducement to provide
effective services to the Company as a director and/or officer, the Company
wishes to provide in this Agreement for the indemnification of and the advancing
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted under Delaware law and as set forth in this Agreement, and, to the
extent insurance is maintained, to provide for the continued coverage of
Indemnitee under the Company's directors' and officers' liability insurance
policies.
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee continuing to serve the Company directly or, at its request, with
another enterprise, and intending to be legally bound hereby, the parties agree
as follows:
<PAGE> 2
1. Certain Definitions:
(a) Board: the Board of Directors of the Company.
(b) Affiliate: any corporation or other person or entity
that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
(c) Change in Control: shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))(other than a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, and other than any person holding shares of the Company on the date
that the Company first registers under the Act or any transferee of such
individual if such transferee is a spouse or lineal descendant of the transferee
or a trust for the benefit of the individual, his spouse or lineal descendants),
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
30% or more of the total voting power represented by the Company's then
outstanding Voting Securities, or (ii) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board and
any new director whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority of the Board, or (iii)
the stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation that would
result in the Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) at least 80% of the
total voting power represented by the Voting Securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(iv) the stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company (in one
transaction or a series of transactions) of all or substantially all of the
Company's assets.
(d) Expenses: any expense, liability, or loss, including
attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts
paid or to be paid in settlement, any interest, assessments, or other charges
imposed thereon, any federal, state, local, or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement, and all
other costs and obligations, paid or incurred in connection with investigating,
defending, being a witness in, participating in (including on appeal), or
preparing for any of the foregoing in, any Proceeding relating to any
Indemnifiable Event.
(e) Indemnifiable Event: any event or occurrence that
takes place either prior to or after the execution of this Agreement, related to
the fact that Indemnitee is or was a director or officer of the Company, or
while a director or officer is or was serving at the request
2
<PAGE> 3
of the Company as a director, officer, employee, trustee, agent, or fiduciary of
another foreign or domestic corporation, partnership, joint venture, employee
benefit plan, trust, or other enterprise, or was a director, officer, employee,
or agent of a foreign or domestic corporation that was a predecessor corporation
of the Company or of another enterprise at the request of such predecessor
corporation, or related to anything done or not done by Indemnitee in any such
capacity, whether or not the basis of the Proceeding is alleged action in an
official capacity as a director, officer, employee, or agent or in any other
capacity while serving as a director, officer, employee, or agent of the
Company, as described above.
(f) Independent Counsel: the person or body appointed in
connection with Section 3.
(g) Proceeding: any threatened, pending, or completed
action, suit, or proceeding (including an action by or in the right of the
Company), or any inquiry, hearing, or investigation, whether conducted by the
Company or any other party, that Indemnitee in good faith believes might lead to
the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative, or other.
(h) Reviewing Party: the person or body appointed in
accordance with Section 3.
(i) Voting Securities: any securities of the Company that
vote generally in the election of directors.
2. Agreement to Indemnify.
(a) General Agreement. In the event Indemnitee was, is, or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Proceeding by reason of
(or arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee from and against any and all Expenses to the fullest extent permitted
by law, as the same exists or may hereafter be amended or interpreted (but in
the case of any such amendment or interpretation, only to the extent that such
amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior thereto). The parties hereto
intend that this Agreement shall provide for indemnification in excess of that
expressly permitted by statute, including, without limitation, any
indemnification provided by the Company's Certificate of Incorporation, its
Bylaws, vote of its stockholders or disinterested directors, or applicable law.
(b) Initiation of Proceeding. Notwithstanding anything in
this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Proceeding
initiated by Indemnitee against the Company or any director or officer of the
Company unless (i) the Company has joined in or the Board has consented to the
initiation of such Proceeding; (ii) the Proceeding is one to enforce
indemnification rights under Section 5; or (iii) the Proceeding is instituted
after a Change in Control (other than a Change in Control approved by a majority
of the directors on the Board who were directors immediately prior to such
Change in Control) and Independent Counsel has approved its initiation.
3
<PAGE> 4
(c) Expense Advances. If so requested by Indemnitee, the
Company shall advance (within ten business days of such request) any and all
Expenses to Indemnitee (an "Expense Advance"); provided that (i) such an Expense
Advance shall be made only upon delivery to the Company of an undertaking by or
on behalf of the Indemnitee to repay the amount thereof if it is ultimately
determined that Indemnitee is not entitled to be indemnified by the Company, and
(ii) if and to the extent that the Reviewing Party determines that Indemnitee
would not be permitted to be so indemnified under applicable law, the Company
shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse
the Company) for all such amounts theretofore paid. If Indemnitee has commenced
or commences legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, as
provided in Section 4, any determination made by the Reviewing Party that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding, and Indemnitee shall not be required to reimburse the Company
for any Expense Advance until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or have lapsed). Indemnitee's obligation to reimburse the Company for Expense
Advances shall be unsecured and no interest shall be charged thereon.
(d) Mandatory Indemnification. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been successful
on the merits or otherwise in defense of any Proceeding relating in whole or in
part to an Indemnifiable Event or in defense of any issue or matter therein,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
(e) Partial Indemnification. If Indemnitee is entitled
under any provision of this Agreement to indemnification by the Company for some
or a portion of Expenses, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled.
(f) Prohibited Indemnification. No indemnification
pursuant to this Agreement shall be paid by the Company on account of any
Proceeding in which judgment is rendered against Indemnitee for an accounting of
profits made from the purchase or sale by Indemnitee of securities of the
Company pursuant to the provisions of Section 16(b) of the Securities Exchange
Act of 1934, as amended, or similar provisions of any federal, state, or local
laws.
3. Reviewing Party. Prior to any Change in Control, the Reviewing
Party shall be any appropriate person or body consisting of a member or members
of the Board or any other person or body appointed by the Board who is not a
party to the particular Proceeding with respect to which Indemnitee is seeking
indemnification; after a Change in Control, the Independent Counsel referred to
below shall become the Reviewing Party. With respect to all matters arising
after a Change in Control (other than a Change in Control approved by a majority
of the directors on the Board who were directors immediately prior to such
Change in Control) concerning the rights of Indemnitee to indemnity payments and
Expense Advances under this Agreement or any other agreement or under applicable
law or the Company's Certificate of Incorporation or Bylaws now or hereafter in
effect relating to indemnification for Indemnifiable
4
<PAGE> 5
Events, the Company shall seek legal advice only from Independent Counsel
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), and who has not otherwise performed services for the
Company or the Indemnitee (other than in connection with indemnification
matters) within the last five years. The Independent Counsel shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent the Indemnitee
should be permitted to be indemnified under applicable law. The Company agrees
to pay the reasonable fees of the Independent Counsel and to indemnify fully
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities, loss, and damages arising out of or relating to this Agreement or
the engagement of Independent Counsel pursuant hereto.
4. Indemnification Process and Appeal.
(a) Indemnification Payment. Indemnitee shall be entitled
to indemnification of Expenses, and shall receive payment thereof, from the
Company in accordance with this Agreement as soon as practicable after
Indemnitee has made written demand on the Company for indemnification, unless
the Reviewing Party has given a written opinion to the Company that Indemnitee
is not entitled to indemnification under applicable law.
(b) Suit to Enforce Rights. Regardless of any action by
the Reviewing Party, if Indemnitee has not received full indemnification within
thirty days after making a demand in accordance with Section 4(a), Indemnitee
shall have the right to enforce its indemnification rights under this Agreement
by commencing litigation in any court in the State of California or the State of
Delaware having subject matter jurisdiction thereof seeking an initial
determination by the court or challenging any determination by the Reviewing
Party or any aspect thereof. The Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
not challenged by the Indemnitee shall be binding on the Company and Indemnitee.
The remedy provided for in this Section 4 shall be in addition to any other
remedies available to Indemnitee at law or in equity.
(c) Defense to Indemnification, Burden of Proof, and
Presumptions. It shall be a defense to any action brought by Indemnitee against
the Company to enforce this Agreement (other than an action brought to enforce a
claim for Expenses incurred in defending a Proceeding in advance of its final
disposition where the required undertaking has been tendered to the Company)
that it is not permissible under applicable law for the Company to indemnify
Indemnitee for the amount claimed. In connection with any such action or any
determination by the Reviewing Party or otherwise as to whether Indemnitee is
entitled to be indemnified hereunder, the burden of proving such a defense or
determination shall be on the Company. Neither the failure of the Reviewing
Party or the Company (including its Board, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action by Indemnitee that indemnification of the claimant is proper under the
circumstances because Indemnitee has met the standard of conduct set forth in
applicable law, nor an actual
5
<PAGE> 6
determination by the Reviewing Party or Company (including its Board,
independent legal counsel, or its stockholders) that the Indemnitee had not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the Indemnitee has not met the applicable standard of
conduct. For purposes of this Agreement, the termination of any claim, action,
suit, or proceeding, by judgment, order, settlement (whether with or without
court approval), conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
5. Indemnification for Expenses Incurred in Enforcing Rights. The
Company shall indemnify Indemnitee against any and all Expenses that are
incurred by Indemnitee in connection with any action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the
Company under this Agreement or any other agreement or under
applicable law or the Company's Certificate of Incorporation or
Bylaws now or hereafter in effect relating to indemnification
for Indemnifiable Events, and/or
(ii) recovery under directors' and officers' liability
insurance policies maintained by the Company, but only in the
event that Indemnitee ultimately is determined to be entitled to
such indemnification or insurance recovery, as the case may be.
In addition, the Company shall, if so requested by Indemnitee,
advance the foregoing Expenses to Indemnitee, subject to and in
accordance with Section 2(c).
6. Notification and Defense of Proceeding.
(a) Notice. Promptly after receipt by Indemnitee of notice
of the commencement of any Proceeding, Indemnitee shall, if a claim in respect
thereof is to be made against the Company under this Agreement, notify the
Company of the commencement thereof; but the omission so to notify the Company
will not relieve the Company from any liability that it may have to Indemnitee,
except as provided in Section 6(c).
(b) Defense. With respect to any Proceeding as to which
Indemnitee notifies the Company of the commencement thereof, the Company will be
entitled to participate in the Proceeding at its own expense and except as
otherwise provided below, to the extent the Company so wishes, it may assume the
defense thereof with counsel reasonably satisfactory to Indemnitee. After notice
from the Company to Indemnitee of its election to assume the defense of any
Proceeding, the Company shall not be liable to Indemnitee under this Agreement
or otherwise for any Expenses subsequently incurred by Indemnitee in connection
with the defense of such Proceeding other than reasonable costs of investigation
or as otherwise provided below. Indemnitee shall have the right to employ legal
counsel in such Proceeding, but all Expenses related thereto incurred after
notice from the Company of its assumption of the defense shall be at
Indemnitee's expense unless: (i) the employment of legal counsel by Indemnitee
has been authorized by the Company, (ii) Indemnitee has reasonably determined
that there may be a
6
<PAGE> 7
conflict of interest between Indemnitee and the Company in the defense of the
Proceeding, (iii) after a Change in Control (other than a Change in Control
approved by a majority of the directors on the Board who were directors
immediately prior to such Change in Control), the employment of counsel by
Indemnitee has been approved by the Independent Counsel, or (iv) the Company
shall not in fact have employed counsel to assume the defense of such
Proceeding, in each of which cases all Expenses of the Proceeding shall be borne
by the Company. The Company shall not be entitled to assume the defense of any
Proceeding brought by or on behalf of the Company or as to which Indemnitee
shall have made the determination provided for in (ii), (iii) and (iv) above.
(c) Settlement of Claims. The Company shall not be liable
to indemnify Indemnitee under this Agreement or otherwise for any amounts paid
in settlement of any Proceeding effected without the Company's written consent,
such consent not to be unreasonably withheld; provided, however, that if a
Change in Control has occurred (other than a Change in Control approved by a
majority of the directors on the Board who were directors immediately prior to
such Change in Control), the Company shall be liable for indemnification of
Indemnitee for amounts paid in settlement if the Independent Counsel has
approved the settlement. The Company shall not settle any Proceeding in any
manner that would impose any penalty or limitation on Indemnitee without
Indemnitee's written consent. The Company shall not be liable to indemnify the
Indemnitee under this Agreement with regard to any judicial award if the Company
was not given a reasonable and timely opportunity, at its expense, to
participate in the defense of such action; the Company's liability hereunder
shall not be excused if participation in the Proceeding by the Company was
barred by this Agreement.
7. Establishment of Trust. In the event of a Change in Control
(other than a Change in Control approved by a majority of the directors on the
Board who were directors immediately prior to such Change in Control) the
Company shall, upon written request by Indemnitee, create a Trust for the
benefit of the Indemnitee and from time to time upon written request of
Indemnitee shall fund the Trust in an amount sufficient to satisfy any and all
Expenses reasonably anticipated at the time of each such request to be incurred
in connection with investigating, preparing for, participating in, and/or
defending any Proceeding relating to an Indemnifiable Event. The amount or
amounts to be deposited in the Trust pursuant to the foregoing funding
obligation shall be determined by the Independent Counsel. The terms of the
Trust shall provide that (i) the Trust shall not be revoked or the principal
thereof invaded without the written consent of the Indemnitee, (ii) the Trustee
shall advance, within ten business days of a request by the Indemnitee, any and
all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse
the Trust under the same circumstances for which the Indemnitee would be
required to reimburse the Company under Section 2(c) of this Agreement), (iii)
the Trust shall continue to be funded by the Company in accordance with the
funding obligation set forth above, (iv) the Trustee shall promptly pay to the
Indemnitee all amounts for which the Indemnitee shall be entitled to
indemnification pursuant to this Agreement or otherwise, and (v) all unexpended
funds in the Trust shall revert to the Company upon a final determination by the
Independent Counsel or a court of competent jurisdiction, as the case may be,
that the Indemnitee has been fully indemnified under the terms of this
Agreement. The Trustee shall be chosen by the Indemnitee. Nothing in this
Section 7 shall relieve the Company of any of its obligations under
7
<PAGE> 8
this Agreement. All income earned on the assets held in the Trust shall be
reported as income by the Company for federal, state, local, and foreign tax
purposes. The Company shall pay all costs of establishing and maintaining the
Trust and shall indemnify the Trustee against any and all expenses (including
attorneys' fees), claims, liabilities, loss, and damages arising out of or
relating to this Agreement or the establishment and maintenance of the Trust.
8. Non-Exclusivity. The rights of Indemnitee hereunder shall be
in addition to any other rights Indemnitee may have under the Company's
Certificate of Incorporation, Bylaws, applicable law, or otherwise; provided,
however, that this Agreement shall supersede any prior indemnification agreement
between the Company and the Indemnitee. To the extent that a change in
applicable law (whether by statute or judicial decision) permits greater
indemnification than would be afforded currently under the Company's Certificate
of Incorporation, Bylaws, applicable law, or this Agreement, it is the intent of
the parties that Indemnitee enjoy by this Agreement the greater benefits so
afforded by such change.
9. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing general and/or directors' and officers'
liability insurance, Indemnitee shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer.
10. Period of Limitations. No legal action shall be brought and
no cause of action shall be asserted by or on behalf of the Company or any
Affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs,
executors, or personal or legal representatives after the expiration of two
years from the date of accrual of such cause of action, or such longer period as
may be required by state law under the circumstances. Any claim or cause of
action of the Company or its Affiliate shall be extinguished and deemed released
unless asserted by the timely filing and notice of a legal action within such
period; provided, however, that if any shorter period of limitations is
otherwise applicable to any such cause of action, the shorter period shall
govern.
11. Amendment of this Agreement. No supplement, modification, or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be binding unless in the form of a writing signed by the party against
whom enforcement of the waiver is sought, and no such waiver shall operate as a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver. Except as specifically provided herein,
no failure to exercise or any delay in exercising any right or remedy hereunder
shall constitute a waiver thereof.
12. Subrogation. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
8
<PAGE> 9
13. No Duplication of Payments. The Company shall not be liable
under this Agreement to make any payment in connection with any claim made
against Indemnitee to the extent Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable hereunder.
14. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors (including any direct or indirect successor by purchase,
merger, consolidation, or otherwise to all or substantially all of the business
and/or assets of the Company), assigns, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation, or otherwise) to all,
substantially all, or a substantial part, of the business and/or assets of the
Company, by written agreement in form and substance satisfactory to Indemnitee,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform if no such
succession had taken place. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity pertaining to an Indemnifiable Event even though he
may have ceased to serve in such capacity at the time of any Proceeding.
15. Severability. If any provision (or portion thereof) of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, or otherwise unenforceable, the remaining provisions shall remain
enforceable to the fullest extent permitted by law. Furthermore, to the fullest
extent possible, the provisions of this Agreement (including, without
limitation, each portion of this Agreement containing any provision held to be
invalid, void, or otherwise unenforceable, that is not itself invalid, void, or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, void, or unenforceable.
16. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed in such State without giving
effect to its principles of conflicts of laws.
9
<PAGE> 10
17. Notices. All notices, demands, and other communications
required or permitted hereunder shall be made in writing and shall be deemed to
have been duly given if delivered by hand, against receipt, or mailed, postage
prepaid, certified or registered mail, return receipt requested, and addressed
to the Company at:
Emerald--Delaware, Inc.
500 - 108th Avenue
Suite 1800
Bellevue, Washington 98004
Attention: Dave Stewart
and to Indemnitee at:
--------------------------
--------------------------
--------------------------
Notice of change of address shall be effective only when given in accordance
with this Section. All notices complying with this Section shall be deemed to
have been received on the date of hand delivery or on the third business day
after mailing.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the day specified above.
EMERALD--DELAWARE, INC.
By:
-------------------------------
Martin Wright
President and Chief Executive Officer
INDEMNITEE
By:
-------------------------------
11
<PAGE> 1
EXHIBIT 10.2
SENIOR EXECUTIVE EMPLOYMENT AGREEMENT
Emerald Solutions, Inc. (Emerald Solutions), whose address is 500 -
108th Avenue N.E., Suite 2020, Bellevue, Washington 98004 and Martin Wright
(Executive), whose address is 10660 Youngberg Hill Road, McMinnville, Oregon
97128, enter this agreement.
The parties acknowledge that Emerald Solutions sells and implements
software-based custom strategic solutions and that Executive is an experienced
and successful manager and leader.
Emerald Solutions hires Executive under these terms:
1. EMPLOYMENT
1.1 LENGTH. Executive's employment with Emerald Solutions begins on
January 27, 1997 (Effective Date), and continues until ended as
this Agreement provides.
1.2 FULL TIME. Executive will work full time. Executive will devote
his good faith efforts in support of Emerald Solutions'
operations and goals, during the entire term of this Agreement.
While Executive's employment by Emerald Solutions under this
Agreement continues, Executive will not engage in any other
employment or consulting without Emerald Solutions' advanced
written knowledge.
2. EXECUTIVE'S DUTIES.
Executive will serve as Emerald Solutions' Vice President. If
Emerald Solutions reassigns Executive without Executive's consent, the
Executive may, at the Executive's option, decline to accept the change
in title or the new assignment and elect instead to treat it as
termination without cause by Emerald Solutions.
3. COMPENSATION PLAN.
3.1 PAY. Emerald Solutions will pay Executive initially at the rate
of $120,000 a year (Base Salary), payable in equal increments on
Emerald Solutions' standard payroll schedules, which are
bi-weekly as of the date of this Agreement. Payment will begin
as of the first standard payroll following the Effective Date.
Executive's compensation will otherwise be reviewed on an annual
basis, as with other executives of the Company.
3.2 STOCK OPTIONS. Executive will be granted 200,000 stock options
on the Effective Date under Emerald Solutions' Stock Option
Plan.
3.3 BONUS. Based on performance criterion established by President
and approved by the Board of Directors, Executive will be
eligible for a bonus up to 30% percent of base salary. To be
eligible for this payment, Executive must be an active employee
at end of calendar year. During first year of employment, any
payments will be prorated based on the number of full calendar
months of employment. This bonus may be doubled based upon the
Company exceeding its financial plan by a specified level.
3.4 OTHER COMPENSATION.
3.4.1 HEALTH INSURANCE BENEFITS. Emerald Solutions will pay
medical insurance, life insurance, disability insurance,
retirement, and other fringe benefits in accordance with
Emerald Solutions' then existing policies applicable
generally to senior executives.
3.4.2 REIMBURSEMENT. Emerald Solutions will reimburse
Executive for all expenses reasonably incurred in
discharging duties as an employee of Emerald Solutions,
subject
<PAGE> 2
to Emerald Solutions' standard policies for amounts and
documentation to which all comparable employees may be
subject from time to time.
3.4.3 VACATION/PERSONAL TIME. Executive shall be entitled to
vacation and sick time in accordance with Emerald
Solutions' then existing Earned-Time-Off (ETO) policies
applicable generally to senior management.
4. TERMINATION.
4.1 VOLUNTARY BY EXECUTIVE. Executive may resign from Emerald
Solutions by one month's notice.
4.2 VOLUNTARY BY EMERALD SOLUTIONS. Emerald Solutions may end
Executive's employment, without cause, by Notice, subject to
Emerald Solutions' obligation to pay termination pay noted
below.
4.3 WITH CAUSE. For the purposes of this Agreement, to be terminated
With Cause shall only mean termination for (a) failure or
refusal to carry out directions of the Board of Directors and/or
Emerald Solutions' senior executive officers, which directions
are reasonably consistent with the duties set forth to be
performed by Executive; (b) an act which results in Executive
being convicted of a felony; or (c) an act of misappropriation
of Emerald Solutions' monies or assets, fraud and/or dishonesty
or disloyalty to Emerald Solutions, such as but not limited to a
violation of Executive's obligations under Section 5 or 7 of
this Agreement. Emerald Solutions may terminate this Agreement
effective as of the date Notice of Termination With Cause is
given specifying the cause.
4.4 COMPENSATION ON TERMINATION. Following termination, Emerald
Solutions will pay these things:
4.4.1 COMPENSATION AND EARNED VACATION EARNED THROUGH
TERMINATION DATE. Executive's Base Salary and bonuses as
earned through the termination date, and a buyout of all
accumulated but unused ETO time, to be paid within
thirty days of termination.
4.4.2 BASE EXTENSION. Unless Employee is terminated With
Cause, or voluntarily resigns for reasons other than a
breach of Emerald Solutions' obligations to the
Executive of which the Executive has given Emerald
Solutions Notice and at least thirty days opportunity to
cure, Emerald Solutions will continue Employee's Base
Salary for the longer of three months after the
termination date, or one year after the Effective Date
of this Agreement. Payment of the Executive Base Salary
shall be made on Emerald Solutions' standard payroll
schedules from the date of termination, as if the
Executive had not been terminated.
4.4.3 LIMIT TO PAY. Emerald Solutions shall not pay Executive
any continuation of base salary under Section 4.4.2 for
any period during which Executive violates his
obligation under Section 5 or 7 of this Agreement.
4.5 OFFSET. To the extent permissible under applicable law, without
prejudice to other remedies, Emerald Solutions may offset any
amounts Executive owes Emerald Solutions against any amounts due
upon termination or thereafter.
5. CONFIDENTIALITY.
5.1 CONFIDENTIALITY. Executive will keep Emerald Solutions' Data
confidential. In doing so, Executive will not disclose Emerald
Solutions' Data directly or indirectly to any person, other than
an employee of Emerald Solutions or a person to whom disclosure
is reasonably necessary or appropriate to further Emerald
Solutions' business.
<PAGE> 3
5.2 EMERALD SOLUTION'S DATA. Emerald Solutions' Data consists of any
trade secret or proprietary or confidential information of
Emerald Solutions or of any Emerald Solutions affiliate. Emerald
Solution's Data includes, but is not limited to, records, files,
memorandum, reports, price lists, software, customer lists,
drawings, sketches, documents, equipment, and the like relating
to Emerald Solutions business which Executive uses, prepares, or
comes in contact with during the course of his work for Emerald
Solutions. Any information known generally to the public or any
information of a type not otherwise generally considered
confidential by persons engaged in the same business will not be
treated as confidential.
5.3 THIRD PARTY DATA. Executive will also keep third party Data
confidential as required by Emerald Solutions; obligations to
the third party, for at least as long as is required for Emerald
Solutions' Data, but longer if required by any agreement Emerald
Solutions enters into with the third party.
5.4 RETURN ON TERMINATION. Executive will return all Emerald
Solutions' Data and third party data on termination of this
Agreement.
5.5 SURVIVAL OF OBLIGATION. The provisions of this Section 5 shall
survive termination of this Agreement.
6. INVENTIONS
6.1 DEFINITIONS. "Inventions" means new ideas, improvements, or
discoveries, whether or not patentable or copyrightable, as well
as other newly discovered or newly applied information or
concepts. An Invention is a "Covered Invention" if it relates to
Emerald Solutions' actual or anticipated business; or was
developed in any part using Emerald Solutions' resources (time,
supplies, facilities, or data); or it if results from or is
suggested by a task assigned to, or work performed for Emerald
Solutions by Executive. As used in this Section 6, "Emerald
Solutions" includes Emerald Solutions' sister corporations or
subsidiaries and Emerald Solutions' clients, consultants, and
contractors.
6.2 ASSIGNMENT. All Executive's right, title and interest to any
Covered Inventions that Executive makes or conceives while
employed by Emerald Solutions, belong to Emerald Solutions. This
Agreement operates as a prospective assignment of all those
rights to Emerald Solutions.
6.3 OBLIGATION. The provisions of this Section 6 shall survive
termination of this Agreement.
6.4 NOTICE. Notwithstanding any other provision of this Agreement to
the contrary, this Agreement does not obligate Executive to
assign or offer to assign to Emerald Solutions any of
Executive's rights in an invention for which no equipment,
supplies, facilities or trade secret information of Emerald
Solutions was used and which was developed entirely on
Executive's own time, unless (a) the invention relates (i)
directly to the business of Emerald Solutions or (ii) to Emerald
Solutions' actual or demonstrably anticipated research or
development or (b) the invention results from any work performed
by Executive for Emerald Solutions. This satisfies the written
notice and other requirements of RCW49.44.140.
7. NON-COMPETITION; NON-SOLICITATION.
7.1 COMPETING DEFINED. During Executive's employment with Emerald
Solutions, and for eighteen months afterward, unless Emerald
Solutions consents in writing, Executive will not compete with
Emerald Solutions, or solicit business from Emerald Solutions'
customers. This commitment will not survive termination of this
Agreement if the Executive voluntarily terminates his employment
as a result of Emerald Solutions' breach of its obligations to
the Executive under this Agreement, provided the Executive has
first given Emerald Solutions Notice of the breach and at least
thirty days' opportunity to cure it.
<PAGE> 4
7.1.1. COMPETING DEFINED. "Competing" means to provide any
services or knowledge in the area of information
technology directly or indirectly to an Emerald
Solutions' customer. Service is "indirect" if the
service is provided to another person or company who in
turn provides it to an Emerald Solutions' customer.
"Service" includes acting as an employee, independent
contractor, consultant, officer, director, or agent.
Being employed by a company that itself provides service
to an Emerald Solutions' customer or competes with
Emerald Solutions is not competition unless the
Executive himself is providing the service directly, or
gives assistance that is substantively related to a
particular Emerald Solutions' customer or to providing
services or knowledge that competes with Emerald
Solutions to others to help them perform those services
or compete directly.
7.1.2. SOLICITING BUSINESS DEFINED. "Soliciting business" means
with respect to custom solutions, performing work for or
soliciting work from anyone who has been a customer or
client of Emerald Solutions, or providing knowledge or
assistance to another for any of those purposes, on
either a consulting or an employment basis.
7.1.3. EMERALD SOLUTIONS' CUSTOMERS DEFINED. Emerald Solutions'
"customers" are:
(a) EXISTING. Entities or individuals who have
purchased consulting or programming services,
software, or goods from Emerald Solutions at
anytime within three years before the day
employment ends.
(b) ACTIVE PROSPECTS. Entities or individuals who
are active prospects of Emerald Solutions. An
active prospect is one upon whom more than three
calls have been made in any one-month period, or
to whom a proposal has been submitted or by whom
a proposal has been requested, and from whom, on
the date employee's employment terminates,
Emerald Solutions reasonably believes it may
secure work or product or service orders.
(c) DEPARTMENTS OR DIVISIONS OF CUSTOMERS. In the
event a customer has more than one department
and/or division, only the particular department
and/or division which would otherwise qualify as
an Emerald Solutions' Customer, if considered
independently, shall be deemed a customer of
Emerald Solutions under this paragraph 7.1.3,
and not any other department or division.
7.2 NON-HIRING. During Executive's employment and for eighteen
months afterward, unless Emerald Solutions consents in writing,
Executive will not solicit or assist in the solicitation of
Emerald Solutions' employees.
7.3 SURVIVAL OF OBLIGATION. The provisions of this Section 7 shall
survive termination of this Agreement.
8. NO CONFLICTING OBLIGATIONS.
8.1 VIOLATION OF OTHER AGREEMENTS. Execution, delivery and
performance of this Agreement and the performance of Executive's
other obligations and duties to Emerald Solutions will not cause
any breach, default or violation of any other employment,
nondisclosure, confidentiality, consulting or other agreement to
which Executive is a party or by which Executive may be bound.
8.2 DISCLOSURE OF OTHER TRADE SECRETS. Executive will not use in
performance of Executive's work for Emerald Solutions or
disclose to Emerald Solutions any trade secret, confidential or
proprietary information of any prior employer or other Person if
and to the extent that such use or disclosure may cause a
breach, default, or violation of any obligation or duty that
Executive owes to such other person (e.g., under any agreement
or applicable law). Executive's compliance with this paragraph
will not prohibit, restrict or impair the performance of
Executive's work, obligations and duties to Emerald Solutions.
<PAGE> 5
8.3 FALSE REPRESENTATIONS. Executive will not (a) make any false,
misleading or disparaging representations or statements with
regard to Emerald Solutions or the products or services of
Emerald Solutions or (b) make any statement that may impair or
otherwise adversely affect the goodwill or reputation of Emerald
Solutions.
9. OTHER MATTERS.
9.1 EMPLOYMENT AT WILL. Executive's employment with Emerald
Solutions is "at will" and may be terminated at any time by an
executive of Emerald Solutions. This Agreement will survive any
termination of Executive's employment.
9.2 NOTICE. Notice to Executive shall be sent to Executive's most
recent address shown in Emerald Solutions' personnel records.
Notice to Emerald Solutions shall be sent to Emerald Solutions'
headquarters address, marked attention: President. Either party
may change its address by Notice. Notice shall be effective when
the person to whom it is sent actually gets it, if sent by any
method that leaves a paper or electronic record in the hands of
the recipient. If sent certified or registered mail, postage
prepaid, return receipt requested, to the proper address this
section defines, notice shall be considered effective whether or
not actually received on the date the return receipt shows the
notice was accepted, refused, or returned undeliverable.
9.3 SEVERABILITY. This agreement will be enforced to the fullest
extent permitted by applicable law. If for any reason any
provision of this Agreement is held to be invalid or
unenforceable to any extent, then (a) such provision will be
interpreted, construed or reformed to the extent reasonably
required to render the same valid, enforceable and consistent
with the original intent underlying such provision and (b) such
invalidity or unenforceability will not affect any other
provision of this Agreement or any other agreement between
Emerald Solutions and Executive. If the invalidity or
unenforceability is due to the unreasonableness of the scope or
duration of the provision, the provision will remain effective
for such scope and duration as may be determined to be
reasonable.
9.4 NON-WAIVER. The failure of Emerald Solutions to insist upon or
enforce strict performance of any provision of this Agreement or
to exercises any of its rights or remedies under this Agreement
will not be construed as a waiver or a relinquishment to any
extent of Emerald Solutions' rights to assert or rely on any
such provision, right or remedy in that or any instance, rather,
the same will be and remain in full force and effect.
9.5 ASSIGNMENT. This Agreement shall be binding upon and inure to
the benefit of Emerald Solutions, its successors and assigns and
shall be binding upon and inure to the benefit of Executive, and
Executive's administrators, executors, legatees, and heirs. This
Agreement shall not be assigned by Executive.
EMERALD SOLUTIONS, INC. MARTIN WRIGHT:
- ------------------------------------ --------------------------------
Chairman and Chief
Title: Executive Officer Date: January 27, 1997
-------------------------- ------------------------
Date: January 27, 1997
--------------------------
<PAGE> 1
EXHIBIT 10.3
SENIOR EXECUTIVE EMPLOYMENT AGREEMENT
Emerald Solutions, Inc. (Emerald Solutions), whose address is 500 -
108th Avenue N.E., Suite 2020, Bellevue, Washington 98004 and Jerry N. Grant
(Executive), whose address is 1324 W. Cornelia, Chicago, Illinois, 60657, enter
this agreement.
The parties acknowledge that Emerald Solutions sells and implements
software-based custom strategic solutions and that Executive is an experienced
and successful manager and leader.
Emerald Solutions hires Executive under these terms:
1. EMPLOYMENT
1.1 LENGTH. Executive's employment with Emerald Solutions begins on
January 27, 1997 (Effective Date), and continues until ended as
this Agreement provides.
1.2 FULL TIME. Executive will work full time. Executive will devote
his good faith efforts in support of Emerald Solutions'
operations and goals, during the entire term of this Agreement.
While Executive's employment by Emerald Solutions under this
Agreement continues, Executive will not engage in any other
employment or consulting without Emerald Solutions' advanced
written knowledge.
2. EXECUTIVE'S DUTIES.
Executive will serve as Emerald Solutions' Chief Financial
Officer. If Emerald Solutions reassigns Executive without Executive's
consent, the Executive may, at the Executive's option, decline to accept
the change in title or the new assignment and elect instead to treat it
as termination without cause by Emerald Solutions.
3. COMPENSATION PLAN.
3.1 PAY. Emerald Solutions will pay Executive initially at the rate
of $175,000 a year (Base Salary), payable in equal increments on
Emerald Solutions' standard payroll schedules, which are
bi-weekly as of the date of this Agreement. Payment will begin
as of the first standard payroll following the Effective Date.
Executive's compensation will otherwise be reviewed on an annual
basis, as with other executives of the Company.
3.2 STOCK OPTIONS. Executive will be granted 200,000 stock options
on the Effective Date under Emerald Solutions' Stock Option
Plan.
3.3 BONUS. Based on performance criterion established by Executive
and Emerald Solutions Chief Executive Officer, Executive will be
eligible for a bonus up to $50,000.00. To be eligible for this
payment, Executive must be an active employee at end of calendar
year. During first year of employment, any payments will be
prorated based on the number of full calendar months of
employment. This bonus may be doubled based upon the Company
exceeding its financial plan by a specified level.
3.4 RELOCATION. Emerald Solutions will provide up to $25,000 in
relocation assistance to help in Executive's move to Washington.
Should Executive voluntarily terminate employment with Emerald
Solutions within twelve (12) months from Effective Date,
Executive will be responsible for returning a pro-rated amount
of relocation assistance back to Emerald Solutions.
<PAGE> 2
3.5 OTHER COMPENSATION.
3.5.1 HEALTH INSURANCE BENEFITS. Emerald Solutions will pay
medical insurance, life insurance, disability insurance,
retirement, and other fringe benefits in accordance with
Emerald Solutions' then existing policies applicable
generally to senior executives.
3.5.2 REIMBURSEMENT. Emerald Solutions will reimburse
Executive for all expenses reasonably incurred in
discharging duties as an employee of Emerald Solutions,
subject to Emerald Solutions' standard policies for
amounts and documentation to which all comparable
employees may be subject from time to time.
3.5.3 VACATION/PERSONAL TIME. Executive shall be entitled to
vacation and sick time in accordance with Emerald
Solutions' then existing Earned-Time-Off (ETO) policies
applicable generally to senior management.
4. TERMINATION.
4.1 VOLUNTARY BY EXECUTIVE. Executive may resign from Emerald
Solutions by one month's notice.
4.2 VOLUNTARY BY EMERALD SOLUTIONS. Emerald Solutions may end
Executive's employment, without cause, by Notice, subject to
Emerald Solutions' obligation to pay termination pay noted
below.
4.3 WITH CAUSE. For the purposes of this Agreement, to be terminated
With Cause shall only mean termination for (a) failure or
refusal to carry out directions of the Board of Directors and/or
Emerald Solutions' senior executive officers, which directions
are reasonably consistent with the duties set forth to be
performed by Executive; (b) an act which results in Executive
being convicted of a felony; or (c) an act of misappropriation
of Emerald Solutions' monies or assets, fraud and/or dishonesty
or disloyalty to Emerald Solutions, such as but not limited to a
violation of Executive's obligations under Section 5 or 7 of
this Agreement. Emerald Solutions may terminate this Agreement
effective as of the date Notice of Termination With Cause is
given specifying the cause.
4.4 COMPENSATION ON TERMINATION. Following termination, Emerald
Solutions will pay these things:
4.4.1 COMPENSATION AND EARNED VACATION EARNED THROUGH
TERMINATION DATE. Executive's Base Salary and bonuses as
earned through the termination date, and a buyout of all
accumulated but unused ETO time, to be paid within
thirty days of termination.
4.4.2 BASE EXTENSION. Unless Employee is terminated With
Cause, or voluntarily resigns for reasons other than a
breach of Emerald Solutions' obligations to the
Executive of which the Executive has given Emerald
Solutions Notice and at least thirty days opportunity to
cure, Emerald Solutions will continue Employee's Base
Salary for the longer of three months after the
termination date, or one year after the Effective Date
of this Agreement. Payment of the Executive's Base
Salary shall be made on Emerald Solutions' standard
payroll schedules from the date of termination, as if
the Executive had not been terminated.
4.4.3 LIMIT TO PAY. Emerald Solutions shall not pay Executive
any continuation of base salary under Section 4.4.2 for
any period during which Executive violates his
obligation under Section 5 or 7 of this Agreement.
<PAGE> 3
4.5 OFFSET. To the extent permissible under applicable law, without
prejudice to other remedies, Emerald Solutions may offset any
amounts Executive owes Emerald Solutions against any amounts due
upon termination or thereafter.
5. CONFIDENTIALITY.
5.1 CONFIDENTIALITY. Executive will keep Emerald Solutions' Data
confidential. In doing so, Executive will not disclose Emerald
Solutions' Data directly or indirectly to any person, other than
an employee of Emerald Solutions or a person to whom disclosure
is reasonably necessary or appropriate to further Emerald
Solutions' business.
5.2 EMERALD SOLUTION'S DATA. Emerald Solutions' Data consists of any
trade secret or proprietary or confidential information of
Emerald Solutions or of any Emerald Solutions affiliate. Emerald
Solution's Data includes, but is not limited to, records, files,
memorandum, reports, price lists, software, customer lists,
drawings, sketches, documents, equipment, and the like relating
to Emerald Solutions business which Executive uses, prepares, or
comes in contact with during the course of his work for Emerald
Solutions. Any information known generally to the public or any
information of a type not otherwise generally considered
confidential by persons engaged in the same business will not be
treated as confidential.
5.3 THIRD PARTY DATA. Executive will also keep third party Data
confidential as required by Emerald Solutions; obligations to
the third party, for at least as long as is required for Emerald
Solutions' Data, but longer if required by any agreement Emerald
Solutions enters into with the third party.
5.4 RETURN ON TERMINATION. Executive will return all Emerald
Solutions' Data and third party data on termination of this
Agreement.
5.5 SURVIVAL OF OBLIGATION. The provisions of this Section 5 shall
survive termination of this Agreement.
6. INVENTIONS
6.1 DEFINITIONS. "Inventions" means new ideas, improvements, or
discoveries, whether or not patentable or copyrightable, as well
as other newly discovered or newly applied information or
concepts. An Invention is a "Covered Invention" if it relates to
Emerald Solutions' actual or anticipated business; or was
developed in any part using Emerald Solutions' resources (time,
supplies, facilities, or data); or it if results from or is
suggested by a task assigned to, or work performed for Emerald
Solutions by Executive. As used in this Section 6, "Emerald
Solutions" includes Emerald Solutions' sister corporations or
subsidiaries and Emerald Solutions' clients, consultants, and
contractors.
6.2 ASSIGNMENT. All Executive's right, title and interest to any
Covered Inventions that Executive makes or conceives while
employed by Emerald Solutions, belong to Emerald Solutions. This
Agreement operates as a prospective assignment of all those
rights to Emerald Solutions.
6.3 OBLIGATION. The provisions of this Section 6 shall survive
termination of this Agreement.
6.4 NOTICE. Notwithstanding any other provision of this Agreement to
the contrary, this Agreement does not obligate Executive to
assign or offer to assign to Emerald Solutions any of
Executive's rights in an invention for which no equipment,
supplies, facilities or trade secret information of Emerald
Solutions was used and which was developed entirely on
Executive's own time, unless (a) the invention relates (i)
directly to the business of Emerald Solutions or (ii) to Emerald
Solutions' actual or demonstrably anticipated research or
development or (b) the invention results from any work performed
by Executive for Emerald Solutions. This satisfies the written
notice and other requirements of RCW49.44.140.
<PAGE> 4
7. NON-COMPETITION; NON-SOLICITATION.
7.1 COMPETING DEFINED. During Executive's employment with Emerald
Solutions, and for eighteen months afterward, unless Emerald
Solutions consents in writing, Executive will not compete with
Emerald Solutions, or solicit business from Emerald Solutions'
customers. This commitment will not survive termination of this
Agreement if the Executive voluntarily terminates his employment
as a result of Emerald Solutions' breach of its obligations to
the Executive under this Agreement, provided the Executive has
first given Emerald Solutions Notice of the breach and at least
thirty days' opportunity to cure it.
7.1.1. COMPETING DEFINED. "Competing" means to provide any
services or knowledge in the area of information
technology directly or indirectly to an Emerald
Solutions' customer. Service is "indirect" if the
service is provided to another person or company who in
turn provides it to an Emerald Solutions' customer.
"Service" includes acting as an employee, independent
contractor, consultant, officer, director, or agent.
Being employed by a company that itself provides service
to an Emerald Solutions' customer or competes with
Emerald Solutions is not competition unless the
Executive himself is providing the service directly, or
gives assistance that is substantively related to a
particular Emerald Solutions' customer or to providing
services or knowledge that competes with Emerald
Solutions to others to help them perform those services
or compete directly.
7.1.2. SOLICITING BUSINESS DEFINED. "Soliciting business" means
with respect to custom solutions, performing work for or
soliciting work from anyone who has been a customer or
client of Emerald Solutions, or providing knowledge or
assistance to another for any of those purposes, on
either a consulting or an employment basis.
7.1.3. EMERALD SOLUTIONS' CUSTOMERS DEFINED. Emerald Solutions'
"customers" are:
(a) EXISTING. Entities or individuals who have
purchased consulting or programming services,
software, or goods from Emerald Solutions at
anytime within three years before the day
employment ends.
(b) ACTIVE PROSPECTS. Entities or individuals who
are active prospects of Emerald Solutions. An
active prospect is one upon whom more than three
calls have been made in any one-month period, or
to whom a proposal has been submitted or by whom
a proposal has been requested, and from whom, on
the date employee's employment terminates,
Emerald Solutions reasonably believes it may
secure work or product or service orders.
(c) DEPARTMENTS OR DIVISIONS OF CUSTOMERS. In the
event a customer has more than one department
and/or division, only the particular department
and/or division which would otherwise qualify as
an Emerald Solutions' Customer, if considered
independently, shall be deemed a customer of
Emerald Solutions under this paragraph 7.1.3,
and not any other department or division.
7.2 NON-HIRING. During Executive's employment and for eighteen
months afterward, unless Emerald Solutions consents in writing,
Executive will not solicit or assist in the solicitation of
Emerald Solutions' employees.
7.3 SURVIVAL OF OBLIGATION. The provisions of this Section 7 shall
survive termination of this Agreement.
8. NO CONFLICTING OBLIGATIONS.
8.1 VIOLATION OF OTHER AGREEMENTS. Execution, delivery and
performance of this Agreement and the performance of Executive's
other obligations and duties to Emerald Solutions will not cause
any
<PAGE> 5
breach, default or violation of any other employment,
nondisclosure, confidentiality, consulting or other agreement to
which Executive is a party or by which Executive may be bound.
8.2 DISCLOSURE OF OTHER TRADE SECRETS. Executive will not use in
performance of Executive's work for Emerald Solutions or
disclose to Emerald Solutions any trade secret, confidential or
proprietary information of any prior employer or other Person if
and to the extent that such use or disclosure may cause a
breach, default, or violation of any obligation or duty that
Executive owes to such other person (e.g., under any agreement
or applicable law). Executive's compliance with this paragraph
will not prohibit, restrict or impair the performance of
Executive's work, obligations and duties to Emerald Solutions.
8.3 FALSE REPRESENTATIONS. Executive will not (a) make any false,
misleading or disparaging representations or statements with
regard to Emerald Solutions or the products or services of
Emerald Solutions or (b) make any statement that may impair or
otherwise adversely affect the goodwill or reputation of Emerald
Solutions.
9. OTHER MATTERS.
9.1 EMPLOYMENT AT WILL. Executive's employment with Emerald
Solutions is "at will" and may be terminated at any time by
Executive or an executive of Emerald Solutions. This Agreement
will survive any termination of Executive's employment.
9.2 NOTICE. Notice to Executive shall be sent to Executive's most
recent address shown in Emerald Solutions' personnel records.
Notice to Emerald Solutions shall be sent to Emerald Solutions'
headquarters address, marked attention: President. Either party
may change its address by Notice. Notice shall be effective when
the person to whom it is sent actually gets it, if sent by any
method that leaves a paper or electronic record in the hands of
the recipient. If sent certified or registered mail, postage
prepaid, return receipt requested, to the proper address this
section defines, notice shall be considered effective whether or
not actually received on the date the return receipt shows the
notice was accepted, refused, or returned undeliverable.
9.3 SEVERABILITY. This agreement will be enforced to the fullest
extent permitted by applicable law. If for any reason any
provision of this Agreement is held to be invalid or
unenforceable to any extent, then (a) such provision will be
interpreted, construed or reformed to the extent reasonably
required to render the same valid, enforceable and consistent
with the original intent underlying such provision and (b) such
invalidity or unenforceability will not affect any other
provision of this Agreement or any other agreement between
Emerald Solutions and Executive. If the invalidity or
unenforceability is due to the unreasonableness of the scope or
duration of the provision, the provision will remain effective
for such scope and duration as may be determined to be
reasonable.
9.4 NON-WAIVER. The failure of Emerald Solutions to insist upon or
enforce strict performance of any provision of this Agreement or
to exercises any of its rights or remedies under this Agreement
will not be construed as a waiver or a relinquishment to any
extent of Emerald Solutions' rights to assert or rely on any
such provision, right or remedy in that or any instance, rather,
the same will be and remain in full force and effect.
9.5 ASSIGNMENT. This Agreement shall be binding upon and inure to
the benefit of Emerald Solutions, its successors and assigns and
shall be binding upon and inure to the benefit of Executive, and
Executive's administrators, executors, legatees, and heirs. This
Agreement shall not be assigned by Executive.
<PAGE> 6
EMERALD SOLUTIONS, INC. JERRY N. GRANT:
- -------------------------------- ----------------------------------
Title: Chairman and Chief Date: January 7, 1997
Executive Officer
-------------------------
Date: January 7, 1997
-------------------------
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
Emerald Solutions, Inc. (Emerald Solutions), whose address is 500 -
108th Avenue N.E., Suite 2020, Bellevue, Washington 98004 and Mark Markowitz
(Executive), whose address is 10 Graydon Place, Flanders, New Jersey 07836 enter
this agreement.
The parties acknowledge that Emerald Solutions sells and implements
software-based custom strategic solutions and that Executive is an experienced
and successful manager and leader.
Emerald Solutions hires Executive under these terms:
1. EMPLOYMENT
1.1 LENGTH. Executive's employment with Emerald Solutions begins on
August 29, 1997 (Effective Date), and continues until ended as
this Agreement provides.
1.2 FULL TIME. Executive will work full time. Executive will devote
his good faith efforts in support of Emerald Solutions'
operations and goals, during the entire term of this Agreement.
While Executive's employment by Emerald Solutions under this
Agreement continues, Executive will not engage in any other
employment or consulting without Emerald Solutions' advanced
written knowledge.
2. EXECUTIVE'S DUTIES.
Executive will serve as Emerald Solutions' Vice President. If
Emerald Solutions reassigns Executive without Executive's consent, the
Executive may, at the Executive's option, decline to accept the change
in title or the new assignment and elect instead to treat it as
termination without cause by Emerald Solutions.
3. COMPENSATION PLAN.
3.1 PAY. Emerald Solutions will pay Executive initially at the rate
of $120,000 a year (Base Salary), payable in equal increments on
Emerald Solutions' standard payroll schedules, which are
bi-weekly as of the date of this Agreement. Payment will begin as
of the first standard payroll following the Effective Date.
Executive's compensation will otherwise be reviewed on an annual
basis, as with other executives of the Company.
3.2 STOCK OPTIONS. Executive will be granted 100,000 stock options
n the Effective Date under Emerald Solutions' Stock Option Plan.
3.3 BONUS. Based on performance criterion established by President
and approved by the Board of Directors, Executive will be
eligible for a bonus up to 30 percent of base salary. To be
eligible for this payment, Executive must be an active employee
at end of calendar year. During first year of employment, any
payments will be prorated based on the number of full calendar
months of employment. This bonus may be doubled based upon the
Company exceeding its financial plan by a specified level.
3.4 OTHER COMPENSATION.
3.4.1 HEALTH INSURANCE BENEFITS. Emerald Solutions will pay
medical insurance, life insurance, disability insurance,
retirement, and other fringe benefits in accordance with
Emerald Solutions' then existing policies applicable
generally to senior executives.
3.4.2 REIMBURSEMENT. Emerald Solutions will reimburse
Executive for all expenses reasonably incurred in
discharging duties as an employee of Emerald Solutions,
subject
<PAGE> 2
to Emerald Solutions' standard policies for amounts and
documentation to which all comparable employees may be
subject from time to time.
3.4.3 VACATION/PERSONAL TIME. Executive shall be entitled to
vacation and sick time in accordance with Emerald
Solutions' then existing Earned-Time-Off (ETO) policies
applicable generally to senior management.
4. TERMINATION.
4.1 VOLUNTARY BY EXECUTIVE. Executive may resign from Emerald Solutions
by one month's notice.
4.2 VOLUNTARY BY EMERALD SOLUTIONS. Emerald Solutions may end
Executive's employment, without cause, by Notice, subject to Emerald
Solutions' obligation to pay termination pay noted below.
4.3 WITH CAUSE. For the purposes of this Agreement, to be terminated
With Cause shall only mean termination for (a) failure or refusal to
carry out directions of the Board of Directors and/or Emerald
Solutions' senior executive officers, which directions are
reasonably consistent with the duties set forth to be performed by
Executive; (b) an act which results in Executive being convicted of
a felony; or (c) an act of misappropriation of Emerald Solutions'
monies or assets, fraud and/or dishonesty or disloyalty to Emerald
Solutions, such as but not limited to a violation of Executive's
obligations under Section 5 or 7 of this Agreement. Emerald
Solutions may terminate this Agreement effective as of the date
Notice of Termination With Cause is given specifying the cause.
4.4 COMPENSATION ON TERMINATION. Following termination, Emerald
Solutions will pay these things:
4.4.1 COMPENSATION AND EARNED VACATION EARNED THROUGH
TERMINATION DATE. Executive's Base Salary and bonuses as
earned through the termination date, and a buyout of all
accumulated but unused ETO time, to be paid within thirty
days of termination.
4.4.2 BASE EXTENSION. Unless Employee is terminated With Cause,
or voluntarily resigns for reasons other than a breach of
Emerald Solutions' obligations to the Executive of which
the Executive has given Emerald Solutions Notice and at
least thirty days opportunity to cure, Emerald Solutions
will continue Employee's Base Salary for the longer of one
month after the termination date, or one week per year of
service up to a maximum of thirteen (13) weeks after the
Effective Date of this Agreement. Payment of the Executive
Base Salary shall be made on Emerald Solutions' standard
payroll schedules from the date of termination, as if the
Executive had not been terminated.
4.4.3 LIMIT TO PAY. Emerald Solutions shall not pay Executive
any continuation of base salary under Section 4.4.2 for
any period during which Executive violates his obligation
under Section 5 or 7 of this Agreement.
4.5 OFFSET. To the extent permissible under applicable law, without
prejudice to other remedies, Emerald Solutions may offset any
amounts Executive owes Emerald Solutions against any amounts due
upon termination or thereafter.
5. CONFIDENTIALITY.
5.1 CONFIDENTIALITY. Executive will keep Emerald Solutions' Data
confidential. In doing so, Executive will not disclose Emerald
Solutions' Data directly or indirectly to any person, other than an
employee of Emerald Solutions or a person to whom disclosure is
reasonably necessary or appropriate to further Emerald Solutions'
business.
<PAGE> 3
5.2 EMERALD SOLUTIONS' DATA. Emerald Solutions' Data consists of any
trade secret or proprietary or confidential information of
Emerald Solutions or of any Emerald Solutions affiliate. Emerald
Solutions' Data includes, but is not limited to, records, files,
memorandum, reports, price lists, software, customer lists,
drawings, sketches, documents, equipment, and the like relating
to Emerald Solutions' business which Executive uses, prepares, or
comes in contact with during the course of his work for Emerald
Solutions. Any information known generally to the public or any
information of a type not otherwise generally considered
confidential by persons engaged in the same business will not be
treated as confidential.
5.3 THIRD PARTY DATA. Executive will also keep third party Data
confidential as required by Emerald Solutions' obligations to the
third party, for at least as long as is required for Emerald
Solutions' Data, but longer if required by any agreement Emerald
Solutions enters into with the third party.
5.4 RETURN ON TERMINATION. Executive will return all Emerald
Solutions' Data and third party data on termination of this
Agreement.
5.5 SURVIVAL OF OBLIGATION. The provisions of this Section 5 shall
survive termination of this Agreement.
6. INVENTIONS
6.1 DEFINITIONS. "Inventions" means new ideas, improvements, or
discoveries, whether or not patentable or copyrightable, as well
as other newly discovered or newly applied information or
concepts. An Invention is a "Covered Invention" if it relates to
Emerald Solutions' actual or anticipated business; or was
developed in any part using Emerald Solutions' resources (time,
supplies, facilities, or data); or it if results from or is
suggested by a task assigned to, or work performed for Emerald
Solutions by Executive. As used in this Section 6, "Emerald
Solutions" includes Emerald Solutions' sister corporations or
subsidiaries and Emerald Solutions' clients, consultants, and
contractors.
6.2 ASSIGNMENT. All Executive's right, title and interest to any
Covered Inventions that Executive makes or conceives while
employed by Emerald Solutions, belong to Emerald Solutions. This
Agreement operates as a prospective assignment of all those
rights to Emerald Solutions.
6.3 OBLIGATION. The provisions of this Section 6 shall survive
termination of this Agreement.
6.4 NOTICE. Notwithstanding any other provision of this Agreement to
the contrary, this Agreement does not obligate Executive to
assign or offer to assign to Emerald Solutions any of Executive's
rights in an invention for which no equipment, supplies,
facilities or trade secret information of Emerald Solutions was
used and which was developed entirely on Executive's own time,
unless (a) the invention relates (i) directly to the business of
Emerald Solutions or (ii) to Emerald Solutions' actual or
demonstrably anticipated research or development or (b) the
invention results from any work performed by Executive for
Emerald Solutions. This satisfies the written notice and other
requirements of RCW49.44.140.
7. NON-COMPETITION; NON-SOLICITATION.
7.1 COMPETING DEFINED. During Executive's employment with Emerald
Solutions, and for eighteen months afterward, unless Emerald
Solutions consents in writing, Executive will not compete with
Emerald Solutions, or solicit business from Emerald Solutions'
customers. This commitment will not survive termination of this
Agreement if the Executive voluntarily terminates his employment
as a result of Emerald Solutions' breach of its obligations to
the Executive under this Agreement, provided the Executive has
first given Emerald Solutions Notice of the breach and at least
thirty days' opportunity to cure it.
<PAGE> 4
7.1.1. COMPETING DEFINED. "Competing" means to provide any
services or knowledge in the area of information
technology directly or indirectly to an Emerald Solutions'
customer. Service is "indirect" if the service is provided
to another person or company who in turn provides it to an
Emerald Solutions' customer. "Service" includes acting as
an employee, independent contractor, consultant, officer,
director, or agent. Being employed by a company that
itself provides service to an Emerald Solutions' customer
or competes with Emerald Solutions is not competition
unless the Executive himself is providing the service
directly, or gives assistance that is substantively
related to a particular Emerald Solutions' customer or to
providing services or knowledge that competes with Emerald
Solutions to others to help them perform those services or
compete directly.
7.1.2. SOLICITING BUSINESS DEFINED. "Soliciting business" means
with respect to custom solutions, performing work for or
soliciting work from anyone who has been a customer or
client of Emerald Solutions, or providing knowledge or
assistance to another for any of those purposes, on either
a consulting or an employment basis.
7.1.3. EMERALD SOLUTIONS' CUSTOMERS DEFINED. Emerald Solutions'
"customers" are:
(a) EXISTING. Entities or individuals who have
purchased consulting or programming services,
software, or goods from Emerald Solutions at
anytime within three years before the day
employment ends.
(b) ACTIVE PROSPECTS. Entities or individuals who are
active prospects of Emerald Solutions. An active
prospect is one upon whom more than three calls
have been made in any one-month period, or to whom
a proposal has been submitted or by whom a proposal
has been requested, and from whom, on the date
employee's employment terminates, Emerald Solutions
reasonably believes it may secure work or product
or service orders.
(c) DEPARTMENTS OR DIVISIONS OF CUSTOMERS. In the event
a customer has more than one department and/or
division, only the particular department and/or
division which would otherwise qualify as an
Emerald Solutions' Customer if considered
independently shall be deemed a customer of Emerald
Solutions under this paragraph 7.1.3, and not any
other department or division.
7.2 NON-HIRING. During Executive's employment and for eighteen months
afterward, unless Emerald Solutions consents in writing,
Executive will not solicit or assist in the solicitation of
Emerald Solutions' employees.
7.3 SURVIVAL OF OBLIGATION. The provisions of this Section 7 shall
survive termination of this Agreement.
8. NO CONFLICTING OBLIGATIONS.
8.1 VIOLATION OF OTHER AGREEMENTS. Execution, delivery and
performance of this Agreement and the performance of Executive's
other obligations and duties to Emerald Solutions will not cause
any breach, default or violation of any other employment,
nondisclosure, confidentiality, consulting or other agreement to
which Executive is a party or by which Executive may be bound.
8.2 DISCLOSURE OF OTHER TRADE SECRETS. Executive will not use in
performance of Executive's work for Emerald Solutions or
disclose to Emerald Solutions any trade secret, confidential
or proprietary information of any prior employer or other
Person if and to the extent that such use or disclosure may
cause a breach, default, or violation of any obligation or
duty that Executive owes to such other person (e.g., under any
agreement or applicable law). Executive's compliance with
<PAGE> 5
this paragraph will not prohibit, restrict or impair the
performance of Executive's work, obligations and duties to
Emerald Solutions.
8.3 FALSE REPRESENTATIONS. Executive will not (a) make any false,
misleading or disparaging representations or statements with
regard to Emerald Solutions or the products or services of
Emerald Solutions or (b) make any statement that may impair or
otherwise adversely affect the goodwill or reputation of Emerald
Solutions.
9. OTHER MATTERS.
9.1 EMPLOYMENT AT WILL. Executive's employment with Emerald Solutions
is "at will" and may be terminated at any time by an executive of
Emerald Solutions. This Agreement will survive any termination of
Executive's employment.
9.2 NOTICE. Notice to Executive shall be sent to Executive's most
recent address shown in Emerald Solutions' personnel records.
Notice to Emerald Solutions shall be sent to Emerald Solutions'
headquarters address, marked attention: President. Either party
may change its address by Notice. Notice shall be effective when
the person to whom it is sent actually gets it, if sent by any
method that leaves a paper or electronic record in the hands of
the recipient. If sent certified or registered mail, postage
prepaid, return receipt requested, to the proper address this
section defines, notice shall be considered effective whether or
not actually received on the date the return receipt shows the
notice was accepted, refused, or returned undeliverable.
9.3 SEVERABILITY. This agreement will be enforced to the fullest
extent permitted by applicable law. If for any reason any
provision of this Agreement is held to be invalid or
unenforceable to any extent, then (a) such provision will be
interpreted, construed or reformed to the extent reasonably
required to render the same valid, enforceable and consistent
with the original intent underlying such provision and (b) such
invalidity or unenforceability will not affect any other
provision of this Agreement or any other agreement between
Emerald Solutions and Executive. If the invalidity or
unenforceability is due to the unreasonableness of the scope or
duration of the provision, the provision will remain effective
for such scope and duration as may be determined to be
reasonable.
9.4 NON-WAIVER. The failure of Emerald Solutions to insist upon or
enforce strict performance of any provision of this Agreement or
to exercises any of its rights or remedies under this Agreement
will not be construed as a waiver or a relinquishment to any
extent of Emerald Solutions' rights to assert or rely on any such
provision, right or remedy in that or any instance, rather, the
same will be and remain in full force and effect.
9.5 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of Emerald Solutions, its successors and assigns and
shall be binding upon and inure to the benefit of Executive, and
Executive's administrators, executors, legatees, and heirs. This
Agreement shall not be assigned by Executive.
EMERALD SOLUTIONS, INC. MARK MARKOWITZ:
- ------------------------------------- -----------------------------------
Title: President
--------------------------- Date:
------------------------------
Date: August 21, 1997
---------------------------
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
Emerald Solutions, Inc. (Emerald Solutions), whose address is 500 -
108th Avenue N.E., Suite 1800, Bellevue, Washington 98004 and Jim Gruher
(Employee), whose address is 11905 S.W. Wildwood Street, Tigard, Oregon 97224
enter this agreement.
The parties acknowledge that Emerald Solutions sells and implements
software-based custom strategic solutions and that Employee is an experienced
and successful manager and leader.
Emerald Solutions hires Employee under these terms:
1. EMPLOYMENT
1.1 LENGTH. Employee's employment with Emerald Solutions begins on or
before January 21, 1999 (Effective Date), and continues until
ended as this Agreement provides.
1.2 FULL TIME. Employee will work full time. Employee will devote his
good faith efforts in support of Emerald Solutions' operations
and goals, during the entire term of this Agreement. While
Employee's employment by Emerald Solutions under this Agreement
continues, Employee will not engage in any other employment or
consulting without Emerald Solutions' advanced written consent.
2. EMPLOYEE'S DUTIES.
Employee will serve as Emerald Solutions' Senior Vice President.
If Emerald Solutions reassigns Employee without Employee's consent, the
Employee may, at the Employee's option, decline to accept the change in
title or the new assignment and elect instead to treat it as termination
without cause by Emerald Solutions.
3. COMPENSATION PLAN.
3.1 PAY. Emerald Solutions will pay Employee initially at the rate of
$200,000.00 a year (Base Salary), payable in equal increments on
Emerald Solutions' standard payroll schedules, which are
bi-weekly as of the date of this Agreement. Payment will begin as
of the first standard payroll following the Effective Date.
Employee's compensation will otherwise be reviewed on an annual
basis, as with other Employees of the Company.
3.2 STOCK OPTIONS. Employee will be granted 300,000 stock options
on the Effective Date under Emerald Solutions' Stock Option Plan.
3.3 BONUS. Based on performance criterion approved by the Board of
Directors, Employee will be eligible for a bonus according to the
Bonus Plan in place for Senior Vice Presidents. To be eligible
for this payment, Employee must be an active employee at end of
calendar year. During first year of employment, any payments will
be prorated based on the number of full calendar months of
employment.
3.4 BONUS OPTIONS. Based on performance criterion approved by the
Board of Directors, Employee will be eligible for bonus options
according to the plan in place for Senior Vice Presidents. To be
eligible for bonus options, Employee must be an active employee
when bonuses are distributed. Bonus options will be granted
according to meeting of objectives. Potential bonus options
available are 50,000 at the end of June 30, 1999 and 50,000 at
the end of the calendar year and will be paid in the same
proportion as the targeted bonus.
<PAGE> 2
3.5 OFFICE OPENING OPTIONS. Employee will be granted 25,000 options
for each new office opened in calendar year 1999.
3.6 OTHER COMPENSATION.
3.6.1 HEALTH INSURANCE BENEFITS. Emerald Solutions will pay
medical insurance, life insurance, disability insurance,
retirement, and other fringe benefits in accordance with
Emerald Solutions' then existing policies applicable
generally to employees.
3.6.2 REIMBURSEMENT. Emerald Solutions will reimburse Employee
for all expenses reasonably incurred in discharging duties
as an employee of Emerald Solutions, subject to Emerald
Solutions' standard policies for amounts and documentation
to which all comparable employees may be subject from time
to time.
3.6.3 VACATION/PERSONAL TIME. In the first year of employment,
Employee shall be entitled to a total of 22 vacation and
sick days and will accrue such days in accordance with
Emerald Solutions' then existing Earned-Time-Off (ETO)
policies applicable generally to employees.
4. TERMINATION.
4.1 VOLUNTARY BY EMPLOYEE. Employee may resign from Emerald
Solutions by two weeks' notice.
4.2 VOLUNTARY BY EMERALD SOLUTIONS. Emerald Solutions may end
Employee's employment, without cause, by Notice, subject to
Emerald Solutions' obligation to pay termination pay noted
below.
4.3 WITH CAUSE. For the purposes of this Agreement, to be terminated
With Cause shall only mean termination for (a) substantial
failure or refusal to carry out lawful directions of the Board of
Directors and/or Emerald Solutions' senior executive officers,
which directions are reasonably consistent with the duties set
forth to be performed by Employee; (b) an act which results in
Employee being convicted of a felony; or (c) an act of
misappropriation of Emerald Solutions' monies or assets, fraud
and/or dishonesty or disloyalty to Emerald Solutions, such as but
not limited to a violation of Employee's obligations under
Section 5 or 7 of this Agreement. Emerald Solutions may terminate
this Agreement effective as of the date Notice of Termination
With Cause is given specifying the cause. Emerald will provide
specific notice of such failure or refusal to Employee with a 30
day opportunity to cure such act or omission.
4.4 COMPENSATION ON TERMINATION. Following termination, Emerald
Solutions will pay these things:
4.4.1 COMPENSATION AND EARNED VACATION EARNED THROUGH
TERMINATION DATE. Employee's Base Salary as earned through
the termination date, and a buyout of all accumulated but
unused ETO time, to be paid within thirty days of
termination.
4.4.2 BASE EXTENSION. Unless Employee is terminated With
Cause, or voluntarily resigns for reasons other than a
breach of Emerald Solutions' obligations to the Employee
of which the Employee has given Emerald Solutions Notice
and at least thirty days opportunity to cure, and provided
the employee signs Emerald Solutions' standard Termination
Agreement, Emerald Solutions will continue Employee's Base
Salary, including the health insurance then in effect, for
three months after the termination date if termination
occurs during the first year of employment and will
continue Employee Base Salary, including the health
insurance and life insurance then in effect, for one
additional month for each year of service after the first
year of employment. Payment of the Employee Base Salary
shall be made on Emerald Solutions' standard payroll
schedules from the date of termination, as if the Employee
had not been terminated. In order to qualify for
<PAGE> 3
this extension of base salary, the employee will be
required to sign a "Termination of Employment Agreement."
4.4.3 LIMIT TO PAY. Emerald Solutions shall not pay Employee any
continuation of base salary under Section 4.4.2 for any
period during which Employee violates his obligation under
Section 5 or 7 of this Agreement.
4.5 OFFSET. To the extent permissible under applicable law, without
prejudice to other remedies, Emerald Solutions may offset any
amounts Employee owes Emerald Solutions against any amounts due
upon termination or thereafter.
5. CONFIDENTIALITY.
5.1 CONFIDENTIALITY. Employee will keep Emerald Solutions' Data
confidential. In doing so, Employee will not disclose Emerald
Solutions' Data directly or indirectly to any person, other than
an employee of Emerald Solutions or a person to whom disclosure
is reasonably necessary or appropriate to further Emerald
Solutions' business.
5.2 EMERALD SOLUTIONS' DATA. Emerald Solutions' Data consists of any
trade secret or proprietary or confidential information of
Emerald Solutions or of any Emerald Solutions affiliate. Emerald
Solutions' Data includes, but is not limited to, records, files,
memorandum, reports, price lists, software, customer lists,
drawings, sketches, documents, equipment, and the like relating
to Emerald Solutions' business which Employee uses, prepares, or
comes in contact with during the course of his work for Emerald
Solutions. Any information known generally to the public or any
information of a type not otherwise generally considered
confidential by persons engaged in the same business will not be
treated as confidential.
5.3 THIRD PARTY DATA. Employee will also keep third party Data
confidential as required by Emerald Solutions' obligations to the
third party, for at least as long as is required for Emerald
Solutions' Data, but longer if required by any agreement Emerald
Solutions enters into with the third party.
5.4 RETURN ON TERMINATION. Employee will return all Emerald
Solutions' Data and third party data on termination of this
Agreement.
5.5 SURVIVAL OF OBLIGATION. The provisions of this Section 5 shall
survive termination of this Agreement.
6. INVENTIONS
6.1 DEFINITIONS. "Inventions" means new ideas, improvements, or
discoveries, whether or not patentable or copyrightable, as well
as other newly discovered or newly applied information or
concepts. An Invention is a "Covered Invention" if it relates to
Emerald Solutions' actual or anticipated business; or was
developed in any part using Emerald Solutions' resources (time,
supplies, facilities, or data); or it if results from or is
suggested by a task assigned to, or work performed for Emerald
Solutions by Employee. As used in this Section 6, "Emerald
Solutions" includes Emerald Solutions' sister corporations or
subsidiaries and Emerald Solutions' clients, consultants, and
contractors.
6.2 ASSIGNMENT. All Employee's right, title and interest to any
Covered Inventions that Employee makes or conceives while
employed by Emerald Solutions, belong to Emerald Solutions. This
Agreement operates as a prospective assignment of all those
rights to Emerald Solutions.
6.3 OBLIGATION. The provisions of this Section 6 shall survive
termination of this Agreement.
6.4 NOTICE. Notwithstanding any other provision of this Agreement
to the contrary, this Agreement does not obligate Employee to
assign or offer to assign to Emerald Solutions any of Employee's
<PAGE> 4
rights in an invention for which no equipment, supplies, facilities
or trade secret information of Emerald Solutions was used and which
was developed entirely on Employee's own time, unless (a) the
invention relates (i) directly to the business of Emerald Solutions
or (ii) to Emerald Solutions' actual or demonstrably anticipated
research or development or (b) the invention results from any work
performed by Employee for Emerald Solutions. This satisfies the
written notice and other requirements of RCW49.44.140.
7. NON-COMPETITION; NON-SOLICITATION.
7.1 COMPETING DEFINED. During Employee's employment with Emerald
Solutions, and for twelve months afterward, unless Emerald Solutions
consents in writing, Employee will not compete with Emerald
Solutions, or solicit business from Emerald Solutions' customers.
This commitment will not survive termination of this Agreement if
the Employee voluntarily terminates his employment as a result of
Emerald Solutions' breach of its obligations to the Employee under
this Agreement, provided the Employee has first given Emerald
Solutions Notice of the breach and at least thirty days' opportunity
to cure it.
7.1.1. COMPETING DEFINED. "Competing" means to provide any
services or knowledge in the area of information
technology directly or indirectly to an Emerald Solutions'
customer. Service is "indirect" if the service is provided
to another person or company who in turn provides it to an
Emerald Solutions' customer. "Service" includes acting as
an employee, independent contractor, consultant, officer,
director, or agent. Being employed by a company that
itself provides service to an Emerald Solutions' customer
or competes with Emerald Solutions is not competition
unless the Employee himself is providing the service
directly, or gives assistance that is substantively
related to a particular Emerald Solutions' customer or to
providing services or knowledge that competes with Emerald
Solutions to others to help them perform those services or
compete directly.
7.1.2. SOLICITING BUSINESS DEFINED. "Soliciting business" means
with respect to custom solutions, performing work for or
soliciting work from anyone who has been a customer or
client of Emerald Solutions, or providing knowledge or
assistance to another for any of those purposes, on either
a consulting or an employment basis.
7.1.3. EMERALD SOLUTIONS' CUSTOMERS DEFINED. Emerald Solutions'
"customers" are:
(a) EXISTING. Entities or individuals who have
purchased consulting or programming services,
software, or goods from Emerald Solutions at
anytime within three years before the day
employment ends.
(b) ACTIVE PROSPECTS. Entities or individuals who are
active prospects of Emerald Solutions. An active
prospect is one upon whom more than three calls
have been made in any one-month period, or to whom
a proposal has been submitted or by whom a proposal
has been requested, and from whom, on the date
employee's employment terminates, Emerald Solutions
reasonably believes it may secure work or product
or service orders.
(c) DEPARTMENTS OR DIVISIONS OF CUSTOMERS. In the event
a customer has more than one department and/or
division, only the particular department and/or
division which would otherwise qualify as an
Emerald Solutions' Customer if considered
independently shall be deemed a customer of Emerald
Solutions under this paragraph 7.1.3, and not any
other department or division.
7.2 NON-HIRING. During Employee's employment and for twelve months
afterward, unless Emerald Solutions consents in writing, Employee
will not solicit or assist in the solicitation of Emerald Solutions'
employees.
<PAGE> 5
7.3 NON-DEFAMATION. During Employee's employment and for twelve months
afterward, Employee will not take any action or make any statement
which could prove defamatory or prejudicial to Emerald Solutions'
interests.
7.4 SURVIVAL OF OBLIGATION. The provisions of this Section 7 shall
survive termination of this Agreement.
8. NO CONFLICTING OBLIGATIONS.
8.1 VIOLATION OF OTHER AGREEMENTS. Execution, delivery and performance
of this Agreement and the performance of Employee's other
obligations and duties to Emerald Solutions will not cause any
breach, default or violation of any other employment, nondisclosure,
confidentiality, consulting or other agreement to which Employee is
a party or by which Employee may be bound.
8.2 DISCLOSURE OF OTHER TRADE SECRETS. Employee will not use in
performance of Employee's work for Emerald Solutions or disclose to
Emerald Solutions any trade secret, confidential or proprietary
information of any prior employer or other Person if and to the
extent that such use or disclosure may cause a breach, default, or
violation of any obligation or duty that Employee owes to such other
person (e.g., under any agreement or applicable law). Employee's
compliance with this paragraph will not prohibit, restrict or impair
the performance of Employee's work, obligations and duties to
Emerald Solutions.
8.3 FALSE REPRESENTATIONS. Employee will not (a) make any false,
misleading or disparaging representations or statements with regard
to Emerald Solutions or the products or services of Emerald
Solutions or (b) make any statement that may impair or otherwise
adversely affect the goodwill or reputation of Emerald Solutions.
9. OTHER MATTERS.
9.1 EMPLOYMENT AT WILL. Employee's employment with Emerald Solutions is
"at will" and may be terminated at any time by an executive of
Emerald Solutions. This Agreement will survive any termination of
Employee's employment.
9.2 NOTICE. Notice to Employee shall be sent to Employee's most recent
address shown in Emerald Solutions' personnel records. Notice to
Emerald Solutions shall be sent to Emerald Solutions' headquarters
address, marked attention: President. Either party may change its
address by Notice. Notice shall be effective when the person to whom
it is sent actually gets it, if sent by any method that leaves a
paper or electronic record in the hands of the recipient. If sent
certified or registered mail, postage prepaid, return receipt
requested, to the proper address this section defines, notice shall
be considered effective whether or not actually received on the date
the return receipt shows the notice was accepted, refused, or
returned undeliverable.
9.3 SEVERABILITY. This agreement will be enforced to the fullest extent
permitted by applicable law. If for any reason any provision of this
Agreement is held to be invalid or unenforceable to any extent, then
(a) such provision will be interpreted, construed or reformed to the
extent reasonably required to render the same valid, enforceable and
consistent with the original intent underlying such provision and
(b) such invalidity or unenforceability will not affect any other
provision of this Agreement or any other agreement between Emerald
Solutions and Employee. If the invalidity or unenforceability is due
to the unreasonableness of the scope or duration of the provision,
the provision will remain effective for such scope and duration as
may be determined to be reasonable.
9.4 NON-WAIVER. The failure of Emerald Solutions to insist upon or
enforce strict performance of any provision of this Agreement or to
exercises any of its rights or remedies under this Agreement will
not be construed as a waiver or a relinquishment to any extent of
Emerald Solutions' rights to
<PAGE> 6
assert or rely on any such provision, right or remedy in that or any
instance, rather, the same will be and remain in full force and
effect.
9.5 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of Emerald Solutions, its successors and assigns and
shall be binding upon and inure to the benefit of Employee, and
Employee's administrators, executors, legatees, and heirs. This
Agreement shall not be assigned by Employee.
EMERALD SOLUTIONS, INC. JIM GRUHER:
- ---------------------------------- -------------------------------------
Title: Chief Financial Officer
-------------------------- Date:
--------------------------------
Date: January 18, 1999
--------------------------
<PAGE> 1
EXHIBIT 10.7
1997 STOCK INCENTIVE COMPENSATION PLAN
EMERALD SOLUTIONS, INC.,
A WASHINGTON CORPORATION
OCTOBER 29, 1997
<PAGE> 2
EMERALD SOLUTIONS, INC.
1997 STOCK INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the Emerald Solutions, Inc. 1997 Stock Incentive
Compensation Plan (the "Plan") is to enhance the long-term shareholder value of
Emerald Solutions, Inc., a Washington corporation (the "Company"), by offering
opportunities to employees, directors, officers, consultants, agents, advisors
and independent contractors of the Company and its Subsidiaries (as defined in
Section 2) to participate in the Company's growth and success, and to encourage
them to remain in the service of the Company and its Subsidiaries and to acquire
and maintain stock ownership in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
"Award" means an award or grant made to a Participant pursuant to the
Plan, including, without limitation, awards or grants of Options and Stock
Awards, or any combination of the foregoing.
"Board" means the Board of Directors of the Company.
"Cause" shall, with respect to a participant, have the same meaning as
assigned to that term in the employment agreement by and between the Participant
and the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Common Stock" means the common stock, par value $0.001 per share, of
the Company.
"Corporate Transaction" means any of the following events:
(a) the consummation of any merger or consolidation of the
Company in which the Company is not the continuing or surviving corporation, or
pursuant to which shares of the Common Stock are converted into cash, securities
or other property, if following such merger or consolidation the holders of the
Company's outstanding voting securities immediately prior to such merger or
consolidation own less than 66-2/3% of the outstanding voting securities of the
surviving corporation;
(b) the consummation of any sale, lease, exchange or other
transfer or disposition in one transaction or a series of related transactions
of all or substantially all of the Company's
1
<PAGE> 3
assets, including the capital stock of the Company's Subsidiaries), other than a
transfer of the Company's assets to a majority-owned Subsidiary of the Company;
(c) the approval by the holders of the Common Stock of any plan
or proposal for the liquidation or dissolution of the Company; or
(d) the acquisition by a person, within the meaning of Section
3(a)(9) or of Section 13(d)(3) (as in effect on the date of adoption of the
Plan) of the Exchange Act, of a majority or more of the Company's outstanding
voting securities (whether directly or indirectly, beneficially or of record).
Ownership of voting securities shall take into account and shall include
ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the
date of adoption of the Plan) pursuant to the Exchange Act.
"Disability" means "disability" as that term is defined for purposes of
Section 22(e)(3) of the Code.
"Early Retirement" means early retirement as that term is defined by the
Plan Administrator from time to time for purposes of the Plan.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" on any given date means the value of a share of
Common Stock which shall be as established in good faith by the Plan
Administrator, or (a) if the Common Stock is listed on the Nasdaq National
Market, the average of the high and low per share sales prices for the Common
Stock as reported by the Nasdaq National Market for the trading day prior to the
time of determination, or (b) if the Common Stock is listed on the New York
Stock Exchange or the American Stock Exchange, the average of the high and low
per share sales prices for the Common Stock as such price is officially quoted
in the composite tape of transactions on such exchange for the trading day prior
to the time of determination. If there is no such reported price for the Common
Stock for the date in question, then such price on the last preceding date for
which such price exists shall be determinative of Fair Market Value.
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Holder:
(a) a change in the Holder's status, title, position or
responsibilities (including reporting responsibilities) that, in the Holder's
reasonable judgment, represents a substantial reduction in the status, title,
position or responsibilities in effect immediately prior thereto; the assignment
to the Holder of any duties or responsibilities that, in the Holder's reasonable
judgment, are materially inconsistent with such status, title, position or
responsibilities; or any removal of the Holder from or failure to re-appoint or
reelect the Holder to any position held by
2
<PAGE> 4
Holder immediately prior thereto, except in connection with the termination of
the Holder's employment for Cause, for Disability or as a result of his or her
death, or by the Holder other than for Good Reason;
(b) the Successor Corporation's requiring the Holder (without the
Holder's consent) to be based at any place outside a 35-mile radius of his or
her place of employment prior to a Corporate Transaction, except for reasonably
required travel on the Successor Corporation's business that is not materially
greater than such travel requirements prior to the Corporate Transaction;
(c) the Successor Corporation's failure to (i) continue in effect
any material compensation or benefit plan (or the substantial equivalent
thereof) in which the Holder was participating at the time of a Corporate
Transaction, including, but not limited to, the Plan, or (ii) provide the Holder
with compensation and benefits substantially equivalent (in terms of benefit
levels and/or reward opportunities) to those provided for under each material
employee benefit plan, program and practice as in effect immediately prior to
the Corporate Transaction;
(d) any material breach by the Successor Corporation of its
obligations to the Holder under the Plan or any substantially equivalent plan of
the Successor Corporation; or
(e) any purported termination of the Holder's employment or
service for Cause by the Successor Corporation that does not comply with the
terms of the Plan or any substantially equivalent plan of the Successor
Corporation.
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
"Holder" means the Participant to whom an Award is granted or, for a
Holder who has died, the personal representative of the Holder's estate, the
person(s) to whom the Holder's rights under the Award have passed by will or the
applicable laws of descent and distribution or the beneficiary designated
pursuant to Section 10.
"Incentive Stock Option" means an Option to purchase Common Stock
granted under Section 7 with the intention that it qualify as an "incentive
stock option" as that term is defined in Section 422 of the Code.
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
"Option" means the right to purchase Common Stock granted under Section
7.
"Parent" means a "parent corporation" as defined in Section 424(e) of
the Code.
3
<PAGE> 5
"Participant" means an individual who is a Holder of an Award or, as the
context may require, any employee, director, officer, consultant, agent, advisor
or independent contractor of the Company or a Subsidiary who has been designated
by the Plan Administrator as eligible to participate in the Plan.
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
"Restricted Stock" means shares of Common Stock granted under Section 9,
the rights of ownership of which are subject to restrictions prescribed by the
Plan Administrator.
"Retirement" means retirement as of the individual's normal retirement
date, as that term is defined by the Plan Administrator from time to time for
purposes of the Plan.
"Securities Act" means the Securities Act of 1933, as amended.
"Service Provider" means an employee, director, officer, consultant,
agent, advisor or independent contractor of the Company or a Subsidiary.
"Stock Award" means an Award granted under Section 9.
"Subsidiary" means a "parent corporation" as defined in Section 424(f)
of the Code.
"Successor Corporation" has the meaning set forth under Section 11.2.
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
With respect to grants of Awards to employees who are also officers or
directors of the Company, the Plan shall be administered by the Board or a
committee or committees (which term includes subcommittees) designated by the
Board, which committee shall be constituted in such a manner as to satisfy
applicable law and to permit such grants and related transactions under the Plan
to be exempt from Section 16(b) of the Exchange Act in accordance with Rule
16b-3.
With respect to grants of Awards to Participants who are neither
directors nor officers of the Company, the Plan shall be administered by the
Board or a committee or committees (which term includes subcommittees)
designated by the Board, which committee shall be constituted in such a manner
as to satisfy applicable law.
The Board may delegate the responsibility for administering the Plan
with respect to designated classes of eligible Participants to different
committees, subject to such limitations as the Board deems appropriate.
Committee members shall serve for such term as the Board may determine, subject
to removal by the Board at any time.
4
<PAGE> 6
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Subject to the terms and conditions explicitly set forth in the Plan,
the Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 11.1, a
maximum aggregate of 15,000,000 shares of Common Stock shall be available for
issuance under the Plan. Shares issued under the Plan shall be drawn from
authorized and unissued shares. In addition, the total number of shares issuable
upon exercise of all outstanding Awards shall not exceed a number of shares
which is equal to 30% of the then outstanding shares of the Company, as
calculated in accordance with the conditions and exclusions of Section
260.140.45 of Title 10 of the California Code of Regulations, unless a
percentage higher than 30% is approved by at least two-thirds of the outstanding
shares entitled to vote.
4.2 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares), shall again
be available for issuance in connection with future grants of Awards under the
Plan.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Incentive Stock Options may only be granted to employees
(including directors who are employees) of the Company. Awards (other than
Incentive Stock Options) may also be made to consultants, agents, advisors and
independent contractors who provide services to the Company and its
Subsidiaries.
5
<PAGE> 7
SECTION 6. AWARDS
6.1 FORM AND GRANT OF AWARDS
The Plan Administrator shall have the authority, in its sole discretion,
to determine the type or types of Awards to be made under the Plan. Such Awards
may include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options and Stock Awards. Awards may be granted singly or in combination.
6.2 ACQUIRED COMPANY AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction") with or of the Acquired Entity. In the event that a
written agreement pursuant to which the Acquisition Transaction is completed is
approved by the Board and said agreement sets forth the terms and conditions of
the substitution for or assumption of outstanding awards of the Acquired Entity,
said terms and conditions shall be deemed to be the action of the Plan
Administrator without any further action by the Plan Administrator, except as
may be required for compliance with Rule 16b-3 under the Exchange Act, and the
persons holding such Awards shall be deemed to be Participants and Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 OPTION EXERCISE PRICE
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than the following:
(A) with respect to Incentive Stock Options (i) 100% of the Fair Market Value of
the Common Stock on the Grant Date, and (ii) not less than 110% of the Fair
Market Value if the Holder possesses more than 10% of the total voting power of
all classes of the Company's stock or the stock of any Parent or Subsidiary, and
(B) with respect to Nonqualified Stock Options (i) not less than 85% of the Fair
Market Value of the Common Stock on the Grant Date, and (ii) not less than 110%
of the Fair Market Value if the Holder possesses more than 10% of the total
voting power of all classes of the Company's stock or the stock of any Parent or
Subsidiary.
6
<PAGE> 8
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan
Administrator, to a maximum of 10 years from the Grant Date or, if not so
established, shall be 10 years from the Grant Date. However, in the case of an
Incentive Stock Option granted to a Participant who, at the time the Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be five (5) years from the date of grant
thereof or such shorter term as may be provided in the Award Agreement.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall vest and become exercisable, which provisions may be waived or
modified by the Plan Administrator at any time, provided, however, that in the
case of an Option, such Option shall in no case become exercisable at a rate of
less than 20% per year over five (5) years from the date the Option is granted,
subject to reasonable conditions such as continued employment. However, in the
case of an Option granted to an officer, director or consultant, the Award
Agreement may provide that the Option may become fully exercisable, subject to
reasonable conditions such as continued employment, at any time or during any
period established in the Award Agreement. If not otherwise established in the
instrument evidencing the Option, the Option will become exercisable according
to the following schedule, which may be waived or modified by the Plan
Administrator at any time:
<TABLE>
<CAPTION>
PERIOD OF HOLDER'S CONTINUOUS EMPLOYMENT OR
SERVICE WITH THE COMPANY OR ITS SUBSIDIARIES PERCENT OF TOTAL OPTION
FROM THE OPTION GRANT DATE THAT IS EXERCISABLE
-------------------------------------------- -----------------------
<S> <C>
During the first 11 months 0%
At month 12 20%
Each one-month period of service
completed thereafter An additional 1.667%
At 5 years 100%
</TABLE>
7
<PAGE> 9
To the extent that the right to purchase shares has accrued thereunder,
an Option may be exercised from time to time by written notice to the Company,
in accordance with procedures established by the Plan Administrator, setting
forth the number of shares with respect to which the Option is being exercised
and accompanied by payment in full as described in Section 7.5. The Plan
Administrator may determine at any time that an Option may not be exercised as
to less than 100 shares at any one time (or the lesser number of remaining
shares covered by the Option).
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check, or, to the extent permitted by the Plan
Administrator in its sole discretion, either at the time the Option is granted
or at any time before it is exercised, a combination of cash and/or check and
one or more of the following alternative forms: (a) tendering (either actually
or, if and so long as the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act, by attestation) Common Stock already owned by the
Holder for at least six months (or any shorter period necessary to avoid a
charge to the Company's earnings for financial reporting purposes) having a Fair
Market Value on the day prior to the exercise date equal to the aggregate Option
exercise price; (b) if and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed
exercise notice, together with irrevocable instructions, to (i) a brokerage firm
designated by the Company to deliver promptly to the Company the aggregate
amount of sale or loan proceeds to pay the Option exercise price and any
withholding tax obligations that may arise in connection with the exercise, and
(ii) the Company to deliver the certificates for such purchased shares directly
to such brokerage firm, all in accordance with the regulations of the Federal
Reserve Board; or (c) such other consideration as the Plan Administrator may
permit.
7.6 POST-TERMINATION EXERCISES
In case of termination of the Holder's employment or services other than
by reason of death or Cause, the Option shall be exercisable, to the extent of
the number of shares purchasable by the Holder at the date of such termination,
only (a) within three years after the date the Holder ceases to be a Service
Provider if the termination of the Holder's employment or services are
coincident with Retirement, Early Retirement at the Company's request, or
Disability or, (b) within six months after the date the Holder ceases to be a
Service Provider if the termination of the Holder's employment or services is
due to a disability that does not qualify as a Disability; or (c) within three
months after the date the Holder ceases to be a Service Provider if termination
of the Holder's employment or services is for any reason other than Retirement,
Early Retirement at the Company's request, or Disability, but in no event later
than the remaining term of the Option. Any Option exercisable at the time of the
Holder's death may be exercised, to the extent of the number of shares
purchasable by the Holder at the date of the Holder's death, by the
8
<PAGE> 10
personal representative of the Holder's estate, the person(s) to whom the
Holder's rights under the Award have passed by will or the applicable laws of
descent and distribution or the beneficiary designated pursuant to Section 10,
at any time or from time to time within one year after the date of death, but in
no event later than the remaining term of the Option. Any portion of an Option
that is not exercisable on the date of termination of the Holder's employment or
services shall terminate on such date, unless the Plan Administrator determines
otherwise. In case of termination of the Holder's employment or services for
Cause, the Option shall automatically terminate upon first notification to the
Holder of such termination, unless the Plan Administrator determines otherwise.
If a Holder's employment or services with the Company are suspended pending an
investigation of whether the Holder shall be terminated for Cause, all the
Holder's rights under any Option likewise shall be suspended during the period
of investigation.
A transfer of employment or services between or among the Company and
its Subsidiaries shall not be considered a termination of employment or
services. The effect of a Company approved leave of absence on the terms and
conditions of an Option shall be determined by the Plan Administrator, in its
sole discretion, in accordance with applicable law.
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
not be inconsistent with this subsection and which may be waived or modified by
the Plan Administrator at any time.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock
Options shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the
Grant Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the Participant holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted.
8.2 10% SHAREHOLDERS
If a Participant owns more than 10% of the total voting power of all
classes of the Company's stock or the stock of any Parent or Subsidiary, then
the exercise price per share of an Incentive Stock Option shall not be less than
110% of the Fair Market Value of the Common
9
<PAGE> 11
Stock on the Grant Date and the Option term shall not exceed five years. The
determination of 10% ownership shall be made in accordance with Section 422 of
the Code.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company, or one of its Parents
or Subsidiaries may not be granted Incentive Stock Options.
8.4 TERM
The term of an Option shall not exceed 10 years. The term of an
Incentive Stock Option shall not exceed 5 years if the Holder possesses more
than 10% of the total voting power of all classes of the Company's stock or the
stock of any Parent or Subsidiary.
8.5 EXERCISABILITY
To qualify for Incentive Stock Option tax treatment, an Option
designated as an Incentive Stock Option must be exercised within three months
after termination of employment for reasons other than death, except that, in
the case of termination of employment due to total disability, such Option must
be exercised within one year after such termination. Employment shall not be
deemed to continue beyond the first 90 days of a leave of absence unless the
Participant's re-employment rights are guaranteed by statute or contract. For
purposes of this Section 8.5, "total disability" shall mean a mental or physical
impairment of the Participant that is expected to result in death or that has
lasted or is expected to last for a continuous period of 12 months or more and
that causes the Participant to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties for the Company and to be
engaged in any substantial gainful activity. Total disability shall be deemed to
have occurred on the first day after the Company and the two independent
physicians have furnished their opinion of total disability to the Plan
Administrator.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock
Options under Section 422 of the Code, the Participant must hold the shares
issued upon the exercise of an Incentive Stock Option for two years after the
Grant Date of the Incentive Stock Option and one year from the date of exercise.
A Participant may be subject to the alternative minimum tax at the time of
exercise of an Incentive Stock Option. The Plan Administrator may require a
Participant to give the Company prompt notice of any disposition of shares
acquired by the exercise of an Incentive Stock Option prior to the expiration of
such holding periods.
8.7 PROMISSORY NOTES
The amount of any promissory note delivered pursuant to Section 13 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in
10
<PAGE> 12
no case less than the rate required to avoid imputation of interest (taking into
account any exceptions to the imputed interest rules) for federal income tax
purposes.
SECTION 9. STOCK AWARDS
9.1 GRANT OF STOCK AWARDS
The Plan Administrator is authorized to make Awards of Common Stock to
Participants on such terms and conditions and subject to such restrictions, if
any (which may be based on continuous service with the Company or the
achievement of performance goals related to profits, profit growth, profit
related return ratios, cash flow or total shareholder return, where such goals
may be stated in absolute terms or relative to comparison companies), as the
Plan Administrator shall determine, in its sole discretion, which terms,
conditions and restrictions shall be set forth in the instrument evidencing the
Award. The terms, conditions and restrictions that the Plan Administrator shall
have the power to determine shall include, without limitation, the manner in
which shares subject to Stock Awards are held during the periods they are
subject to restrictions and the circumstances under which forfeiture of
Restricted Stock shall occur by reason of termination of the Holder's services.
Provided, however that if provisions of an Award Agreement grant to the Company
the right to repurchase shares upon termination of the Participant's status as a
Service Provider, the Award Agreement shall provide that the repurchase price
will be either:
(a) Not less than the Fair Market Value of the shares to be repurchased
on the date of termination of the Participant's status as a Service Provider,
and the right to repurchase must be exercised for cash or cancellation of
purchase money indebtedness for the shares within ninety (90) days of the
termination of the Participant's status as a Service Provider (or in the case of
shares issued upon exercise of Awards after the date of termination of the
Participant within ninety (90) days after the date of the Award exercise), and
the right terminates when the Company's securities become publicly traded; or
11
<PAGE> 13
(b) The original purchase price, provided that the right to repurchase
at the original purchase price lapses at the rate of at least twenty percent
(20%) of the shares subject to the Award per year over five (5) years from the
date the Award is granted (without respect to the date the Award was exercised
or became exercisable), and the right to repurchase must be exercised for cash
or cancellation of purchase money indebtedness for the shares within ninety (90)
days of termination of the Participant's status as a Service Provider (or in the
case of shares issued upon exercise of Awards after the date of termination of
the Participant's continuous status as a Service Provider within (90) days after
the date of the Award exercise).
(c) In addition to the restrictions set forth in (a) and (b) above, the
shares held by an officer, director or consultant may be subject to additional
or greater restrictions.
9.2 ISSUANCE OF SHARES
Upon the satisfaction of any terms, conditions and restrictions
prescribed in respect to a Stock Award, or upon the Holder's release from any
terms, conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall deliver, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, a stock certificate for the
appropriate number of shares of Common Stock.
9.3 WAIVER OF RESTRICTIONS
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Restricted Stock under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate.
SECTION 10. ASSIGNABILITY
No Option granted under the Plan may be sold, pledged, assigned,
transferred or disposed of in any manner by the Holder other than by will or by
the laws of descent and distribution, and during the Holder's lifetime, such
Awards may be exercised only by the Holder or a permitted assignee or transferee
of the Holder (as provided below). Notwithstanding the foregoing, and to the
extent permitted by Section 422 of the Code, the Plan Administrator, in its sole
discretion, may permit such assignment, transfer and exercisability and may
permit a Holder of such Awards to designate a beneficiary who may exercise the
Award or receive compensation under the Award after the Holder's death;
provided, however, that any Award so assigned or transferred shall be subject to
all the same terms and conditions contained in the instrument evidencing the
Award.
12
<PAGE> 14
SECTION 11. ADJUSTMENTS
11.1 ADJUSTMENT OF SHARES
Subject to any required action by the shareholders of the Company, the
number of shares of Common Stock covered by each outstanding Award, and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but as to which no Awards have yet been granted or which have been
returned to the Plan, as well as the price per share of Common Stock covered by
each such outstanding Award, 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 similar event resulting in an
increase or decrease in the number of issued shares of Common Stock. Such
adjustment shall be made by the Plan Administrator, and its determination in
that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason hereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Award.
11.2 CORPORATE TRANSACTION
Except as otherwise provided in the instrument that evidences the Award,
in the event of any Corporate Transaction, each Award that is at the time
outstanding shall automatically accelerate so that each such Award shall,
immediately prior to the specified effective date for the Corporate Transaction,
become 100% vested, except that such acceleration will not occur, if in the
opinion of the Company's accountants, it would render unavailable "pooling of
interest" accounting for a Corporate Transaction that would otherwise qualify
for such accounting treatment. Such Award shall not so accelerate, however, if
and to the extent that (a) such Award is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation or parent thereof
(the "Successor Corporation") or to be replaced with a comparable award for the
purchase of shares of the capital stock of the Successor Corporation or (b) such
Award is to be replaced with a cash incentive program of the Successor
Corporation that preserves the spread existing at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to such Award. The determination of Award
comparability shall be made by the Plan Administrator, and its determination
shall be conclusive and binding. All such Awards shall terminate and cease to
remain outstanding immediately following the consummation of the Corporate
Transaction, except to the extent assumed by the Successor Corporation. Any such
Awards that are assumed or replaced in the Corporate Transaction and do not
otherwise accelerate at that time shall be accelerated in the event that the
Holder's employment or services should subsequently terminate within two years
following such Corporate Transaction, unless such employment or services are
terminated by the Successor Corporation for Cause or by the Holder voluntarily
without Good Reason.
13
<PAGE> 15
11.3 FURTHER ADJUSTMENT OF AWARDS
Subject to Section 11.2, the Plan Administrator shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Plan Administrator, to take such further action as it determines to be
necessary or advisable, and fair and equitable to Participants, with respect to
Awards. Such authorized action may include (but shall not be limited to)
establishing, amending or waiving the type, terms, conditions or duration of, or
restrictions on, Awards so as to provide for earlier, later, extended or
additional time for exercise, lifting restrictions and other modifications, and
the Plan Administrator may take such actions with respect to all Participants,
to certain categories of Participants or only to individual Participants. The
Plan Administrator may take such action before or after granting Awards to which
the action relates and before or after any public announcement with respect to
such sale, merger, consolidation, reorganization, liquidation or change in
control that is the reason for such action.
11.4 LIMITATIONS
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 12. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of
any withholding taxes that the Company is required to withhold with respect to
the grant, vesting or exercise of any Award. Subject to the Plan and applicable
law, the Plan Administrator may, in its sole discretion, permit the Holder to
satisfy withholding obligations, in whole or in part, by paying cash, by
electing to have the Company withhold shares of Common Stock or by transferring
shares of Common Stock to the Company, in such amounts as are equivalent to the
Fair Market Value of the withholding obligation. The Company shall have the
right to withhold from any Award or any shares of Common Stock issuable pursuant
to an Award or from any cash amounts otherwise due or to become due from the
Company to the Participant an amount equal to such taxes. The Company may also
deduct from any Award any other amounts due from the Participant to the Company
or a Subsidiary.
SECTION 13. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist a Holder (including a Holder who is an officer or director of
the Company) in acquiring shares of Common Stock pursuant to an Award granted
under the Plan, the Plan Administrator, in its sole discretion, may authorize,
either at the Grant Date or at any time before the acquisition of Common Stock
pursuant to the Award, (a) the extension of a loan to the Holder by the Company,
(b) the payment by the Holder of the purchase price, if any, of the Common Stock
in installments, or (c) the guarantee by the Company of a loan obtained by the
14
<PAGE> 16
grantee from a third party. The terms of any loans, installment payments or loan
guarantees, including the interest rate and terms of and security for repayment,
will be subject to the Plan Administrator's discretion. Loans, installment
payments and loan guarantees may be granted with or without security. The
maximum credit available is the purchase price, if any, of the Common Stock
acquired, plus the maximum federal and state income and employment tax liability
that may be incurred in connection with the acquisition.
SECTION 14. AMENDMENT AND TERMINATION OF PLAN
14.1 AMENDMENT OF PLAN
The Plan may be amended only by the Board at any time in such respects
as it shall deem advisable; however, to the extent required for compliance with
Section 422 of the Code or any applicable law or regulation, the Company shall
obtain shareholder approval in such a manner and to such a degree as required
for any amendment that will (a) increase the total number of shares as to which
Options may be granted under the Plan or that may be issued as Stock Awards, (b)
modify the class of persons eligible to receive Options, or (c) otherwise
require shareholder approval under any applicable law or regulation.
14.2 TERMINATION OF PLAN
The Company's shareholders or the Board may suspend or terminate the
Plan at any time. No Awards may be granted more than 10 years after the earlier
of the Plan's adoption by the Board or approval by the shareholders. No Award
may be granted during any suspension or after termination of the Plan.
14.3 CONSENT OF HOLDER
The amendment or termination of the Plan shall not, without the consent
of the Holder of any Award under the Plan, impair or diminish any rights or
obligations under any Award theretofore granted under the Plan. Any change or
adjustment to an outstanding Incentive Stock Option shall not, without the
consent of the Holder, be made in a manner so as to constitute a "modification"
that would cause such Incentive Stock Option to fail to continue to qualify as
an Incentive Stock Option.
SECTION 15. GENERAL
15.1 AWARD AGREEMENTS
Awards granted under the Plan shall be evidenced by a written agreement
that shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and that are not inconsistent with the
Plan.
15
<PAGE> 17
15.2 SHAREHOLDER AGREEMENT
Concurrent with the issuance under the Plan to a Holder of the shares
that are the subject of an Award, such Holder shall enter into that certain
Shareholders' Agreement by and among the Company and all of its shareholders, as
may from time to time be amended, providing, among other things, for certain
restrictions on the transfer of such shares and for the repurchase of such
shares by the Company under certain circumstances.
15.3 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS
None of the Plan, participation in the Plan as a Participant or any
action of the Plan Administrator taken under the Plan shall be construed as
giving any Participant or employee of the Company any right to be retained in
the employ of the Company or limit the Company's right to terminate the
employment or services of the Participant.
15.4 REGISTRATION; CERTIFICATES FOR SHARES
The Company shall be under no obligation to any Participant to register
for offering or resale or to qualify for exemption under the Securities Act, or
to register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the non-issuance or
sale of such shares as to which such requisite authority shall not have been
obtained.
As a condition to the exercise of an Option or any other receipt of
Common Stock pursuant to an Award under the Plan, the Company may require the
Participant to represent and warrant at the time of any such exercise or receipt
that such shares are being purchased or received only for the Participant's own
account and without any present intention to sell or distribute such shares if,
in the opinion of counsel for the Company, such a representation is required by
any relevant provision of the aforementioned laws. At the option of the Company,
a stop-transfer order against any such shares may be placed on the official
stock books and records of the Company, and a legend indicating that such shares
may not be pledged, sold or otherwise transferred, unless an opinion of counsel
is provided (concurred in by counsel for the Company) stating that such transfer
is not in violation of any applicable law or regulation, may be stamped on stock
certificates to ensure exemption from registration. The Plan Administrator may
also require such other action or agreement by the Participants as may from time
to time be necessary to comply with the federal and state securities laws.
16
<PAGE> 18
15.5 NO RIGHTS AS A SHAREHOLDER
No Option shall entitle the Holder to any cash dividend, voting or other
right or privilege of a shareholder unless and until the date of issuance under
the Plan of the shares that are the subject of such Award, free of all
applicable restrictions.
15.6 COMPLIANCE WITH LAWS AND REGULATIONS
Notwithstanding anything in the Plan to the contrary, the Board, in its
sole discretion, may bifurcate the Plan so as to restrict, limit or condition
the use of any provision of the Plan to Participants who are officers or
directors subject to Section 16 of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other Participants.
Additionally, in interpreting and applying the provisions of the Plan, any
Option granted as an Incentive Stock Option pursuant to the Plan shall, to the
extent permitted by law, be construed as an "incentive stock option" within the
meaning of Section 422 of the Code.
15.7 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Participant, and no
Participant shall have any rights that are greater than those of a general
unsecured creditor of the Company.
15.8 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
15.9 INFORMATION TO HOLDERS.
The Company shall provide to each Holder, during the period for which
such Holder has one or more Awards outstanding, copies of financial statements
at least annually.
17
<PAGE> 19
SECTION 16. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the
Board, so long as it is approved by the Company's shareholders at any time
within 12 months of such adoption.
Adopted by the Board as of October 28, 1997.
APPROVAL:
By:
---------------------------------
Shareholder
Date:
-------------------------------
18
<PAGE> 20
APPENDIX A
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
<TABLE>
<CAPTION>
DATE OF
ADOPTION/
AMENDMENT/ EFFECT OF DATE OF SHAREHOLDER
ADJUSTMENT SECTION AMENDMENT APPROVAL
---------- ------- --------- -------------------
<S> <C> <C> <C>
March 14, 1997 4.1 Number of shares N/A
available for
(five-for-one stock issuance under the
split) Plan increased to
15,000,000
October 28, 1997 Amend and Restate Plan _____________
</TABLE>
Appendix A
<PAGE> 21
EXHIBIT 10.7
1997 STOCK OPTION AGREEMENT
BY AND BETWEEN
EMERALD-DELAWARE, INC.,
A DELAWARE CORPORATION
AND
-------------------------
(INSERT NAME OF EMPLOYEE)
<PAGE> 22
EMERALD-DELAWARE, INC.
1997 INCENTIVE COMPENSATION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT.
---------------------------------
---------------------------------
---------------------------------
The Company has granted you an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
Date of Grant _________________
Vesting Commencement Date _________________
Exercise Price per Share _________________
Total Number of Shares Granted _________________
Total Exercise Price _________________
Type of Option _______ Incentive Stock Option
_______ Nonstatutory Stock Option
Term: 10 years
1
<PAGE> 23
Vesting Schedule:
You may exercise this Option, in whole or in part, in accordance with
the following schedule:
PERIOD OF YOUR CONTINUOUS EMPLOYMENT OR
SERVICE WITH THE COMPANY OR ITS SUBSIDIARIES PERCENT OF TOTAL OPTION
FROM THE OPTION GRANT DATE THAT IS EXERCISABLE
- -------------------------------------------- -----------------------
At month 12 20%
Each one-month period of service completed
thereafter An additional 1.667%
After 5 years 100%
Termination Period:
You may exercise this Option at any time until ninety (90) days after
termination of your employment or consulting relationship with the Company, or
such longer period as may be applicable upon your death or disability as
provided in the Plan, but in no event later than the Term/Expiration Date as
provided above.
2
<PAGE> 24
II. AGREEMENT.
1. GRANT OF OPTION.
Emerald-Delaware, Inc., a Delaware corporation (the "Company"),
hereby grants to the Optionee (the "Optionee") named above in the Notice of
Stock Option Grant, an option (the "Option") to purchase the total number of
shares of Common Stock (the "Shares") set forth in the Notice of Stock Option
Grant, at the exercise price per share set forth in the Notice of Stock Option
Grant (the "Exercise Price") subject to the terms, definitions and provisions of
the Emerald-Delaware 1997 Incentive Compensation Plan (the "Plan") adopted by
the Company, which is incorporated herein by reference. Unless otherwise defined
herein, the terms defined in the Plan shall have the same defined meanings in
this Option.
If designated in the Notice of Stock Option Grant as an Incentive
Stock Option ("ISO"), the Company and the Optionee intend this Option to qualify
as an Incentive Stock Option as defined in Section 422 of the Code. However, if
the Company and the Optionee intend this Option to be an Incentive Stock Option,
then, to the extent that it exceeds the $100,000 rule of Code Section 422(d),
the parties shall treat the Option as a Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
This Option shall be exercised during its term in accordance with
the Vesting Schedule set out in the Notice of Stock Option Grant and with the
provisions of Section 7 of the Plan as follows:
(a) Right to Exercise.
(i) This Option may not be exercised for a fraction of a Share.
(ii) In the event of Optionee's death, disability or other
termination of the employment or consulting relationship, the exercisability of
the Option is governed by Sections 6, 7 or 8 below, subject to the limitation
contained in ((iii)) immediately below.
(iii) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Stock Option
Grant.
(b) Method of Exercise.
Optionee may exercise by written notice (in the form attached as
Exhibit A), that shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company pursuant to the
provisions of the Plan. Optionee shall sign such written notice and deliver the
notice in person or by certified mail to the Secretary of the Company. The
Optionee
3
<PAGE> 25
shall tender payment of the Exercise Price with the written notice. This Option
shall be deemed to be exercised upon receipt by the Company of such written
notice accompanied by the Exercise Price.
The Company shall issue no Shares pursuant to the exercise of an
Option unless such issuance and such exercise shall comply with all relevant
provisions of law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes,
the Shares shall be considered transferred to the Optionee on the date on which
the Option is exercised with respect to such Shares.
Upon his or her exercise of the Option, the Optionee shall enter
into that certain Shareholders' Agreement (the "Shareholders' Agreement") dated
July 31, 1997, and as may be amended from time to time, by and among the Company
and all of its Stockholders, a copy of which the Company has provided to the
Optionee.
3. OPTIONEE'S REPRESENTATIONS.
In the event the Shares purchasable pursuant to the exercise of the
Option have not been registered under the Securities Act of 1933, as amended, at
the time this Option is exercised, Optionee shall, if required by the Company,
concurrently with the exercise of all or any portion this Option, deliver to the
Company his or her Investment Representation Statement in the form attached
hereto as Exhibit B, and shall (if the Optionee is a resident of the state of
California) read the rules of the Commissioner of Corporations of the State of
California attached to such Investment Representation Statement.
4. METHOD OF PAYMENT.
At his or her election, Optionee may pay the Exercise Price by any
of the following methods, or a combination thereof:
(a) cash; or
(b) check; or
(c) surrender of other shares of Common Stock of the Company which
(i) in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by the Optionee for more than six (6) months on the date of
surrender, and (ii) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(d) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the Exercise Price.
4
<PAGE> 26
5. RESTRICTIONS ON EXERCISE.
The Optionee may not exercise this Option until such time as the
Plan has been approved by the stockholders or the Company, or if the issuance of
the Shares upon such exercise or the method of payment of consideration for such
shares would constitute a violation of any applicable federal or state
securities or other law or regulation, including any rule under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by
the Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. TERMINATION OF RELATIONSHIP.
If the Optionee's employment or consulting arrangement with the
Company terminates, Optionee may, to the extent otherwise so entitled at the
date of such termination (the "Termination Date"), exercise this Option during
the Termination Period set out in the Notice of Stock Option Grant. To the
extent that Optionee was not entitled to exercise this Option at the date of
such termination, or if the Optionee does not exercise this Option within the
time specified herein, the Option shall terminate.
7. DISABILITY OF OPTIONEE.
Notwithstanding the provisions of Section 6 above, if the Optionee's
employment or consulting arrangement with the Company terminates as a result of
his or her disability, then Optionee may, but only within twelve (12) months
from the date of such termination (and in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination; provided, however, that if such disability is not a "disability" as
such term is defined in Section 22(e)(3) of the Code, in the case of an
Incentive Stock Option such Incentive Stock Option shall automatically convert
to a Nonstatutory Stock Option on the day three months and one day following
such termination. To the extent that Optionee was not entitled to exercise the
Option at 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.
8. DEATH OF OPTIONEE.
If the Optionee's employment or consulting arrangement with the
Company terminates as a result of the death of Optionee, then the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance from Optionee may exercise the Option at any time within twelve
(12) months following the date of death (but in no event later than the date of
expiration of the term of this Option as set forth in Section 10 below), but
only to the extent the Optionee could exercise the Option at the date of death.
5
<PAGE> 27
9. NON-TRANSFERABILITY OF OPTION.
The Optionee may not transfer this Option in any manner otherwise
than by will or by the laws of descent or distribution and may be exercised
during the lifetime of Optionee only by Optionee. The terms of this Option shall
be binding upon the executors, administrators, heirs, successors and assigns of
the Optionee.
10. TERM OF OPTION.
The Optionee may exercise this Option only within the term set out
in the Notice of Stock Option Grant, and only in accordance with the Plan and
the terms of this Option. The limitations set out in Section 7 of the Plan
regarding Options designated as Incentive Stock Options and Options granted to
more than ten percent (10%) stockholders shall apply to this Option.
11. TAXATION UPON EXERCISE OF OPTION.
Optionee understands that, upon exercising a Nonstatutory Option, he
or she will recognize income for tax purposes in an amount equal to the excess
of the then Fair Market Value of the Shares over the exercise price. However,
the timing of this income recognition may be deferred for up to six months if
Optionee is subject to Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). If the Optionee is an employee, the Company will
be required to withhold from Optionee's compensation, or collect from Optionee
and pay to the applicable taxing authorities an amount equal to a percentage of
this compensation income. Additionally, the Optionee may at some point be
required to satisfy tax withholding obligations with respect to the
disqualifying disposition of an Incentive Stock Option. The Optionee shall
satisfy his or her tax withholding obligation arising upon the exercise of this
Option out of Optionee's compensation or by payment to the Company.
12. TAX CONSEQUENCES.
Set forth below is a brief summary as of the date of this Option of
some of the federal and state tax consequences of exercise of this Option and
disposition of the Shares.
THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS
ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE
EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of ISO.
If this Option qualifies as an ISO, there will be no regular
federal income tax liability or state income tax liability upon the exercise of
the Option, although the excess, if any, of the Fair Market Value of the Shares
on the date of exercise over the Exercise Price will
6
<PAGE> 28
be treated as an adjustment to the alternative minimum tax for federal tax
purposes and may subject the Optionee to the alternative minimum tax in the year
of exercise.
(b) Exercise of ISO Following Disability.
If the Optionee's employment or consulting arrangement with the
Company terminates as a result of disability that is not total and permanent
disability as defined in Section 22(e)(3) of the Code, then, to the extent
permitted on the date of termination, the Optionee must exercise an ISO within
90 days of such termination for the ISO to be qualified as an ISO.
(c) Exercise of Nonstatutory Stock Option.
There may be a regular federal income tax liability and state
income tax liability upon the exercise of a Nonstatutory Stock Option. The
Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
employee or a former employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(d) Disposition of Shares.
In the case of an NSO, if Shares are held for at least one year,
any gain realized on disposition of the Shares will be treated as long-term
capital gain for federal and state income tax purposes. In the case of an ISO,
if Shares transferred pursuant to the Option are held for at least one year
after exercise and are disposed of at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal and state income tax purposes. If Shares purchased
under an ISO are disposed of within such one-year period or within two years
after the Date of Grant, any gain realized on such disposition will be treated
as compensation income (taxable at ordinary income rates) to the extent of the
difference between the Exercise Price and the lesser of (i) the Fair Market
Value of the Shares on the date or exercise, or (ii) the sale price of the
Shares.
(e) Notice of Disqualifying Disposition of ISO Shares.
If the Option granted to Optionee herein is an ISO, and if
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
the ISO on or before the later of (i) the date two (2) years after the Date of
Grant, or (ii) the date one (1) year after the date of exercise, the Optionee
shall immediately notify the Company in writing of such disposition. Optionee
agrees that Optionee may be subject to income tax withholding by the Company on
the compensation income recognized by the Optionee.
7
<PAGE> 29
13. ENTIRE AGREEMENT: GOVERNING LAW.
The Plan is incorporated herein by reference. The Plan, this Option
Agreement and the Shareholders' Agreement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by Washington law except for that body of
law pertaining to conflict of laws.
*********************
EMERALD-DELAWARE, INC., a
Delaware corporation
by:
---------------------------------------
Jerry N. Grant, Chief Financial Officer
(signatures and acknowledgments continued on next page)
8
<PAGE> 30
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT
AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE
COMPANY'S 1997 INCENTIVE COMPENSATION PLAN WHICH IS INCORPORATED HEREIN
BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO
CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT
INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and the
Shareholders' Agreement, and represents that he or she is familiar with
the terms and provisions thereof, and hereby accepts this Option subject
to all of the terms and provisions thereof. Optionee has reviewed the
Plan, this Option and the Shareholders' Agreement in their entirety, has
had an opportunity to obtain the advice of counsel prior to executing
this Option and fully understands all provisions of the Option. Optionee
hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions arising under
the Plan or this Option. Optionee further agrees to notify the Company
upon any change in the residence address indicated below.
Dated:________________________ Signed:_________________________
Optionee Residence Address:
<Insert Name of Employee>
______________________________
______________________________
9
<PAGE> 31
EXHIBIT A
1997 INCENTIVE COMPENSATION PLAN
EXERCISE NOTICE
Emerald-Delaware, Inc.
500 -- 108th Avenue NE, Suite 1800
Bellevue, Washington 98004
1. EXERCISE OF OPTION.
Effective as of today, ______________, 19__, the undersigned
("Optionee") hereby elects to exercise Optionee's option to purchase ___________
shares of the Common Stock (the "Shares") of Emerald-Delaware, Inc. (the
"Company") under and pursuant to the 1997 Incentive Compensation Plan, as
amended (the "Plan") and the [ ] Incentive [ ] Nonstatutory Stock Option
Agreement dated ______________, 19__ (the "Option Agreement").
2. REPRESENTATIONS OF OPTIONEE.
Optionee acknowledges that he or she has received, read and
understood the Plan, the Option Agreement and that certain Shareholders'
Agreement dated July 31, 1997, and as may be amended from time to time, by and
among the Company and all of its stockholders (the "Shareholders' Agreement"),
and agrees to abide by and be bound by their terms and conditions.
3. RIGHTS AS STOCKHOLDER.
Until the stock certificate evidencing such Shares is 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 after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in Section 11 of the Plan.
Optionee shall enjoy rights as a stockholder, subject to the rights
and duties imposed upon him or her as a party to the Shareholders' Agreement,
until such time as Optionee disposes of the Shares in accordance with the terms
and conditions of the Shareholders' Agreement.
Exercise Notice
1
<PAGE> 32
4. TAX CONSULTATION.
Optionee understands that he or she may suffer adverse tax
consequences as a result of Optionee's purchase or disposition of the Shares.
Optionee represents that Optionee has consulted with any tax consultants
Optionee deems advisable in connection with the purchase or disposition of the
Shares and that Optionee is not relying on the Company for any tax advice.
5. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) Legends.
Optionee understands and agrees that the Company shall cause the
legends set forth below or legends substantially equivalent thereto, and any
others that in the opinion of the Company are necessary to comply with state or
federal securities laws, to be placed upon any certificate(s) evidencing
ownership of the Shares together with any other legends that may be required by
the Company or by state or federal securities laws:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 NOR REGISTERED NOR QUALIFIED UNDER ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED, OR HYPOTHECATED UNLESS
QUALIFIED AND REGISTERED UNDER APPLICABLE STATE AND FEDERAL SECURITIES
LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO
EMERALD-DELAWARE, SUCH QUALIFICATION AND REGISTRATION IS NOT REQUIRED.
ANY TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
FURTHER SUBJECT TO OTHER RESTRICTIONS, TERMS, AND CONDITIONS WHICH ARE
SET FORTH IN A SHAREHOLDERS' AGREEMENT AMONG EMERALD-DELAWARE AND ALL OF
ITS STOCKHOLDERS."
Optionee understands that transfer of the Shares may be restricted
by Section 260.141.11 of the Rules of the California Corporations Commissioner,
a copy of which is attached to Exhibit B, the Investment Representation
Statement.
(b) Stop-Transfer Notices.
Optionee agrees that, in order to ensure compliance with the
restrictions referred to herein and the Shareholders' Agreement, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
Exercise Notice
2
<PAGE> 33
6. SUCCESSORS AND ASSIGNS.
The Company may assign any of its rights under this Agreement to
single or multiple assignees, and this Agreement shall inure to the benefit of
the successors and assigns of the Company. Subject to the restrictions on
transfer herein set forth, this Agreement shall be binding upon Optionee and his
or her heirs, executors, administrators, successors and assigns.
7. INTERPRETATION.
Any dispute regarding the interpretation of this Agreement shall be
submitted by Optionee or by the Company forthwith to the Company's Board of
Directors or the committee thereof that administers the Plan, which shall review
such dispute at its next regular meeting. The resolution of such a dispute by
the Board or committee shall be final and binding on the Company and on
Optionee.
8. GOVERNING LAW; SEVERABILITY.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Washington excluding that body of law pertaining to
conflicts of law. Should any provision of this Agreement be determined by a
court of law to be illegal or unenforceable, the other provisions shall
nevertheless remain effective and shall remain enforceable.
9. NOTICES.
Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States mail by certified mail, with postage and fees prepaid,
addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
10. FURTHER INSTRUMENTS.
The parties agree to execute such further instruments and to take
such further action as may be reasonably necessary to carry out the purposes and
intent of this Agreement.
11. DELIVERY OF PAYMENT.
Optionee herewith delivers to the Company the full Exercise Price
for the Shares.
12. ENTIRE AGREEMENT.
The Plan and Notice of Stock Option Grant/Option Agreement are
incorporated herein by reference. This Agreement, the Plan, the Option
Agreement, the Shareholders' Agreement and the Investment Representation
Statement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior under-
Exercise Notice
3
<PAGE> 34
takings and agreements of the Company and Purchaser with respect to the subject
matter hereof, and may not be modified adversely to the Purchaser's interest
except by means of a writing signed by the Company and Purchaser.
*********************
SUBMITTED BY: ACCEPTED BY:
EMERALD-DELAWARE, INC., a
Delaware corporation
by:
- ------------------------------- ---------------------------------------
(Print Name) Jerry N. Grant, Chief Financial Officer
- -------------------------------
(Signature)
Exercise Notice
4
<PAGE> 35
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : EMERALD-DELAWARE, INC.
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Securities. Optionee
is acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon among other things, the bona fide nature
of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities, except as may be provided in that certain Shareholders'
Agreement dated July 31, 1997, and as may be amended from time to time, by and
among the Company and all of its stockholders (the "Shareholders' Agreement").
Optionee understands that the certificate evidencing the Securities will be
imprinted with a legend which prohibits the transfer of the Securities unless
they are registered or such registration is not required in the opinion of
counsel satisfactory to the Company, and certain other requirements as set forth
in the Shareholders' Agreement.
Investment Representation Statement
1
<PAGE> 36
(c) Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions specified by Rule 144, including: (1) the resale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being
sold during any three month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the
time of grant of the Option, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than one year after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than two years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Optionee hereby agrees that if so requested by the Company or
any representative of the underwriters in connection with any registration of
the offering of any securities of the Company under the Securities Act, Optionee
shall not sell or otherwise transfer any Shares or other securities of the
Company during the 180-day period following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however, that
such restriction shall only apply to the first registration statement of the
Company become effective under the Securities which includes securities to be
sold on behalf of the Company to the public in an underwritten public offering
under the Securities Act. The Company may impose stop-transfer instructions with
respect to securities subject to the foregoing restrictions until the end of
such 180-day period.
(e) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available
Investment Representation Statement
2
<PAGE> 37
for such offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk. Optionee understands
that no assurances can be given that any such other registration exemption will
be available in such event.
(f) Optionee understands that, if he or she is a resident of the
state of California, the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities without the consent
of the Commissioner of Corporations of California. Optionee has read the
applicable Commissioner's Rules with respect to such restriction, a copy of
which is attached.
Signature of Optionee:
------------------------------------
Date: ,
------------------- ----------
Investment Representation Statement
3
<PAGE> 38
ATTACHMENT 1
STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE
Title 10. Investment - Chapter 3. Commissioner of Corporations
260.141.11: Restriction on Transfer. (a) The issuer of any security upon
which a restriction on transfer has been imposed pursuant to Sections 260.102.6,
260.141.10 or 260.534 shall cause a copy of this section to be delivered to each
issuee or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants or
spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such securities
is not in violation of any securities law of the foreign state, territory or
country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113
or 25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect with
respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or subdivision (a)
of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries
who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law
or to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property law
or by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (ii) delivers to
each purchaser a copy of this rule, and (iii) advises the Commissioner of the
name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102; provided that any such transfer is on the condition that
any certificate evidencing the security issued to such transferee shall contain
the legend required by this section.
<PAGE> 39
(c) The certificate representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY
OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION
THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED
IN THE COMMISSIONER'S RULES."
<PAGE> 1
EXHIBIT 10.8
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
EMERALD-DELAWARE, INC.,
A DELAWARE CORPORATION
<PAGE> 2
EMERALD-DELAWARE, INC.
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
ARTICLE 1. PURPOSE
The purpose of this Emerald-Delaware, Inc. 1999 Non-Employee Director
Stock Option Plan (the "Plan") is to attract and retain the best available
Non-Employee Directors, to provide them additional incentives, and to promote
the success of Emerald-Delaware, Inc., a Delaware corporation (the "Company").
ARTICLE 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
"Administrator" means the Board or any of the Committees appointed to
administer the Plan.
"Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 promulgated under the Exchange Act.
"Applicable Laws" means the legal requirements relating to the
administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein.
"Award" means an award or grant made to a Grantee pursuant to the Plan,
including, without limitation, awards or grants of Options, Restricted Stock and
Shares, or any combination of the foregoing.
"Award Agreement" means the written agreement evidencing the grant of an
Award executed by the Company and the Grantee, including any amendments thereto.
"Board" means the Board of Directors of the Company.
"Change in Control" means a change in ownership or control of the
Company effected through either of the following transactions:
(a) the direct or indirect acquisition by any person or related
group of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than sixty-six and two-thirds
percent (66 2/3%) of the
1
<PAGE> 3
total combined voting power of the Company's outstanding securities pursuant to
a tender or exchange offer made directly to the Company's stockholders which a
majority of the Continuing Directors who are not Affiliates or Associates of the
offeror do not recommend such stockholders accept, or
(b) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Members of the Board
(rounded up to the next whole number) ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who are
Continuing Directors.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means any committee appointed by the Board to administer the
Plan.
"Common Stock" means the common stock, par value $0.001 per share, of
the Company.
"Consultant" means any person who is engaged by the Company or any
Related Entity to render consulting or advisory services as an independent
contractor and is compensated for such services.
"Continuing Directors" means Members of the Board who either (i) have
been Members of the Board continuously for a period of at least thirty-six (36)
months, or (ii) have been Members of the Board for less than thirty-six (36)
months and were elected or nominated for election as Members of the Board by at
least a majority of the Members of the Board described in clause (i) who were
still in office at the time such election or nomination was approved by the
Board.
"Continuous Service" means that the Grantee's service as a Director is
not interrupted or terminated. The Continuous Service of a Grantee shall not be
considered interrupted or terminated in the case of (i) any approved leave of
absence, or (ii) terminating service as a Director followed within thirty (30)
days of such termination by commencing service to the Company or a Related
Entity as an Employee or a Consultant until the time such service as an Employee
or Consultant is terminated. An approved leave of absence shall include sick
leave, military leave, or any other authorized personal leave.
"Corporate Transaction" means any of the following events:
(a) the consummation of any merger or consolidation of the
Company in which the Company is not the continuing or surviving corporation, or
pursuant to which shares of the Common Stock are converted into cash, securities
or other property if, following such merger or consolidation, the holders of the
Company's outstanding voting securities immediately prior to such merger or
consolidation own less than 66-2/3% of the outstanding voting securities of the
surviving corporation;
2
<PAGE> 4
(b) the consummation of any sale, lease, exchange or other
transfer or disposition in one transaction or a series of related transactions
of all or substantially all of the Company's assets, including the capital stock
of a Related Entity), other than a transfer of the Company's assets to a
majority-owned Subsidiary of the Company;
(c) the approval by the holders of the Common Stock of any plan
or proposal for the liquidation or dissolution of the Company; or
(d) the acquisition by a person, within the meaning of Section
3(a)(9) or of Section 13(d)(3) (as in effect on the date of adoption of the
Plan) of the Exchange Act, of a majority or more of the Company's outstanding
voting securities (whether directly or indirectly, beneficially or of record),
whether or not the transaction also constitutes a Change of Control.
"Disability" means that a Grantee is unable to serve as a Director by
reason of any medically determinable physical or mental impairment. A Grantee
will not be considered to have incurred a Disability unless he or she furnishes
proof of such condition sufficient to satisfy the Administrator, in its sole
discretion.
"Employee" means any person, including an Officer or Director, who is an
employee of the Company or any Related Entity. The payment of a director's fee
by the Company shall not be sufficient to constitute "employment" by the
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" on any given date means the value of a share of
Common Stock which shall be as established in good faith by the Administrator,
or (a) if the Common Stock is listed on the Nasdaq National Market, the average
of the high and low per share sales prices for the Common Stock as reported by
the Nasdaq National Market for the business day prior to the time of
determination, or (b) if the Common Stock is listed on the New York Stock
Exchange or the American Stock Exchange, the average of the high and low per
share sales prices for the Common Stock as such price is officially quoted in
the composite tape of transactions on such exchange for the business day prior
to the time of determination. If there is no such reported price for the Common
Stock for the date in question, then such price on the last preceding date for
which such price exists shall be determinative of Fair Market Value.
"Grant" means the grant of an Option under the Plan.
"Grant Date" means the date the Administrator adopted the granting
resolution or a later date designated in a resolution of the Administrator as
the date an Award is to be granted.
"Grantee" means a Non-Employee Director who receives an Award under the
Plan.
"Member of the Board" means an individual who is a member of the Board.
"Non-Employee Director" means a Director who is not an Employee.
3
<PAGE> 5
"Nonqualified Stock Option" means an Option not intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
"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.
"Option" means a stock option granted pursuant to the Plan.
"Related Entity" means any parent, subsidiary and any business,
corporation, partnership, limited liability company or other entity in which the
Company, a parent or a subsidiary holds a substantial ownership interest,
directly or indirectly.
"Restricted Stock" means Shares issued under the Plan to the Grantee for
such consideration, if any, and subject to such restrictions on transfer, rights
of first refusal, repurchase provisions, forfeiture provisions, and other terms
and conditions as established under the Plan or by the Administrator.
"Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any
successor thereto.
"Securities Act" means the Securities Act of 1933, as amended.
ARTICLE 3. ADMINISTRATION
Section 3.1 Administrator
(a) The Plan shall be administered by the Board or a committee or
committees (which term includes subcommittees) designated by the Board, which
committee shall be constituted in such a manner as to satisfy applicable law and
to permit such grants and related transactions under the Plan to be exempt from
Section 16(b) of the Exchange Act in accordance with Rule 16b-3.
(b) The Board may delegate the responsibility for administering the
Plan with respect to designated classes of eligible Grantees to different
committees, subject to such limitations as the Board deems appropriate.
Committee members shall serve for such term as the Board may determine, subject
to removal by the Board at any time.
Section 3.2. Administration and Interpretation by the Administrator
Subject to Applicable Laws and the provisions of the Plan (including any
other powers given to the Administrator hereunder), and except as otherwise
provided by the Board, the Administrator shall have the authority, in its
discretion:
(a) to approve forms of Award Agreement for use under the Plan;
4
<PAGE> 6
(b) to determine the terms and conditions consistent with the terms of
the Plan of any Award granted hereunder;
(c) to amend the terms of any outstanding Award granted under the
Plan, including a reduction in the exercise price (or base amount on which
appreciation is measured) of any Award to reflect a reduction in the Fair Market
Value of the Common Stock since the Grant Date, provided that any amendment that
would adversely affect the Grantee's rights under an outstanding Award shall not
be made without the Grantee's written consent;
(d) to construe and interpret the terms of the Plan and Awards granted
pursuant to the Plan; and
(e) to take such other action, not inconsistent with the terms of the
Plan, as the Administrator deems appropriate.
The Administrator's interpretation of the Plan and its rules and
regulations, and all actions taken and determinations made by the Administrator
pursuant to the Plan, shall be conclusive and binding on all parties involved or
affected. The Administrator may delegate administrative duties to such of the
Officers as it so determines.
ARTICLE 4. STOCK SUBJECT TO THE PLAN
Section 4.1. Authorized Number of Shares
Subject to adjustment from time to time as provided in ARTICLE 8 below,
a maximum aggregate of 1,000,000 shares of Common Stock shall be available for
issuance under the Plan. Shares issued under the Plan shall be drawn from
authorized and unissued shares.
Section 4.2. Reuse of Shares
Any Shares covered by an Award (or portion of an Award) which is
forfeited or canceled, expires or is settled in cash, shall be deemed not to
have been issued for purposes of determining the maximum aggregate number of
Shares which may be issued under the Plan. If any unissued Shares are retained
by the Company upon exercise of an Award in order to satisfy the exercise price
for such Award or any withholding taxes due with respect to such Award, such
retained Shares subject to such Award shall become available for future issuance
under the Plan (unless the Plan has terminated). Shares that actually have been
issued under the Plan pursuant to an Award shall not be returned to the Plan and
shall not become available for future issuance under the Plan, except that if
unvested Shares are forfeited, or repurchased by the Company at their original
purchase price, such Shares shall become available for future grant under the
Plan.
5
<PAGE> 7
ARTICLE 5. AWARD OF OPTIONS
Section 5.1. Eligibility.
Each Non-Employee Director shall be entitled to receive Options to
acquire shares of Common Stock upon the terms and conditions of this Plan and
the respective Award Agreement.
Section 5.2. Grant of Options by the Administrator.
The Administrator may Grant at any time during the term of this Plan a
Non-Qualified Stock Option to purchase shares of Common Stock to each
Non-Employee Director.
Section 5.3. Vesting.
Subject to other limitations set forth in this Plan, each Grant shall
vest and become exercisable, unless otherwise determined by the Administrator,
as follows:
(a) for each Non-Employee Director that serves a one-year term as a
Member of the Board, to one-fourth (1/4th) of the shares of Common Stock subject
to such Option three (3) months after the Grant Date and an additional
one-fourth (1/4th) of the shares of Common Stock subject to such Option shall
vest at the end of each successive three (3) month period thereafter, such that
the Option will be fully exercisable one (1) year after its date of grant;
(b) for each Non-Employee Director that serves a two-year term as a
Member of the Board, to one-eighth (1/8th) of the shares of Common Stock subject
to such Option three (3) months after the Grant Date and an additional
one-eighth (1/8th) of the shares of Common Stock subject to such Option shall
vest at the end of each successive three (3) month period thereafter, such that
the Option will be fully exercisable two (2) years after its date of grant;
(c) for each Non-Employee Director that serves a three-year term as a
Member of the Board, to one-twelfth (1/12th) of the shares of Common Stock
subject to such Option three (3) months after the Grant Date and an additional
one-twelfth (1/12th) of the shares of Common Stock subject to such Option shall
vest at the end of each successive three (3) month period thereafter, such that
the Option will be fully exercisable three (3) years after its date of grant.
Section 5.4. Corporate Transactions/Change of Control.
(a) In the event of a Corporate Transaction, immediately prior to the
specified date of such Corporate Transaction each Grant that is outstanding at
that time, to the extent it is unvested, shall automatically vest and become
exercisable as to a number of shares equal to two thirds (2/3) of the total of
unvested shares of Common Stock subject to such option. Effective upon the
consummation of the Corporate Transaction, all outstanding Options under the
Plan shall terminate, unless such Options are assumed by the successor
corporation or parent thereof in connection with the Corporate Transaction.
6
<PAGE> 8
(b) In the event of a Change in Control (other than a Change in
Control which also is a Corporate Transaction), immediately prior to the
specified date of such Change in Control, each Grant that is outstanding at that
time, to the extent it is unvested, shall automatically vest and become
exercisable as to a number of shares equal to two thirds (2/3) of the total of
unvested shares of Common Stock subject to such Option.
Section 5.5. Exercise of Option Following Termination of Service.
In the event of termination of a Grantee's Continuous Service for any
reason other than Disability or death, such Grantee may, but only within ninety
(90) days after 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 Award Agreement),
exercise his or her Option to the extent that the Grantee was entitled to
exercise it at the date of such termination or to such other extent as may be
determined by the Administrator. If the Grantee should die within ninety (90)
days after the date of such termination, the Grantee's estate or the person who
acquired the right to exercise the Option by bequest or inheritance may exercise
the Option to the extent that the Grantee was entitled to exercise it at the
date of such termination within one year after the Grantee's date of death, but
in no event later than the expiration date of the term of such Option as set
forth in the Award Agreement.
Section 5.6. Disability of Grantee.
In the event of termination of a Grantee's Continuous Service as a
result of his or her Disability, such Grantee may, but only within one year
after the date of such termination (and in no event later than the expiration
date of the term of such Option as set forth in the Award Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that the Grantee is not entitled to exercise the
Option at the date of termination, or if Grantee does not exercise such Option
to the extent so entitled within the time specified herein, the Option shall
terminate.
Section 5.7. Death of Grantee.
In the event of the death of a Grantee, the Option may be exercised at
any time within one year after the date of death (but in no event later than the
expiration of the term of such Option as set forth in the Award Agreement), by
the Grantee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent that the Grantee was
entitled to exercise the Option at the date of death. If, at the time of death,
the Grantee was not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall immediately revert to
the Plan. If, after death, the Grantee's estate or a person who acquired the
right to exercise the Option by bequest or inheritance does not exercise the
Option within the time specified herein, the Option shall terminate.
7
<PAGE> 9
Section 5.8. Term of Option.
The term of each Option awarded under this Plan shall be ten (10) years
from the date of grant thereof.
Section 5.9. Transferability of Option.
Each Option awarded under this Plan shall be transferable to the extent
provided in the Award Agreement.
Section 5.10. Exercise Price.
The exercise price for each Option awarded under this Plan shall be one
hundred percent (100%) of the Fair Market Value per Share on the date of grant.
Section 5.11. Consideration.
Subject to Applicable Laws, the consideration to be paid for the Shares
to be issued upon exercise of an Option under this ARTICLE 5 shall be the
following:
(a) cash;
(b) check;
(c) surrender of Shares or delivery of a properly executed form of
attestation of ownership of Shares as the Administrator may require (including
withholding of Shares otherwise deliverable upon exercise of the Option) which
have a Fair Market Value on the date of surrender or attestation equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised (but only to the extent that such exercise of the Option would not
result in an accounting compensation charge with respect to the Shares used to
pay the exercise price unless otherwise determined by the Administrator);
(d) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price; or
(e) any combination of the foregoing methods of payment.
ARTICLE 6. STOCK FEE PROGRAM.
Section 6.1. Eligibility.
Each Non-Employee Director shall be eligible to elect to apply all or any
portion of the annual retainer fee and meeting fees otherwise payable to such
individual in cash to the acquisi-
8
<PAGE> 10
tion of shares of Common Stock upon the terms and conditions of the Stock Fee
Program established by this ARTICLE 6.
Section 6.2. Election Procedure.
(a) A Non-Employee Director must make a stock-in-lieu-of-fee election
prior to the start of the calendar year for which the election is to be
effective. The first calendar year for which any such election may be filed
shall be the 2000 calendar year. Each election, once filed, shall be revocable
prior to the start of the calendar year for which the election is to be
effective. Thereafter, the election is irrevocable. The election for any
upcoming calendar year may be filed at any time prior to the start of that year,
but in no event later than December 31 of the immediately preceding calendar
year. A Non-Employee Director may file a standing election to be in effect for
two (2) or more consecutive calendar years or to remain in effect indefinitely
until revoked by written instrument filed with the Administrator prior to the
start of the first calendar year for which such standing election is no longer
to remain in effect.
(b) The election must be filed with the Administrator on the
appropriate form provided for this purpose. On the election form, a Non-Employee
Director must indicate the percentage or dollar amount of his or her annual
retainer fee and/or his or her meeting fees to be applied to the acquisition of
Shares.
Section 6.3. Share Issuance.
(a) On the first business day following the date any portion of the
annual retainer fee is otherwise due to be paid, in a calendar year for which
the election is effective, the portion of the annual retainer fee subject to
such election shall automatically be applied to the acquisition of shares of
Common Stock by dividing the elected dollar amount by the Fair Market Value per
Share. The number of issuable Shares shall be rounded down to the next whole
Share, and such Shares shall be issued to the Non-Employee Director.
(b) On the first business day following any meeting in a calendar year
for which the election is effective, the portion of the meeting fee subject to
such election shall automatically be applied to the acquisition of shares of
Common Stock by dividing the elected dollar amount by the Fair Market Value per
Share. The number of issuable Shares shall be rounded down to the next whole
Share, and such Shares shall be issued to the Non-Employee Director.
ARTICLE 7. CONDITIONS UPON ISSUANCE OF SHARES.
Section 7.1. Satisfaction of Applicable Laws.
Shares shall not be issued pursuant to the exercise of an Award unless
the exercise of such Award and the issuance and delivery of such Shares pursuant
thereto shall comply with all Applicable Laws, and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
9
<PAGE> 11
Section 7.2. Investment Representation.
As a condition to the exercise of an Award, the Company may require the
person exercising such Award to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any Applicable
Laws.
Section 7.3. Taxes.
No Shares shall be delivered under the Plan to any Grantee or other
person until such Grantee or other person has made arrangements acceptable to
the Administrator for the satisfaction of any foreign, federal, state, or local
income and employment tax withholding obligations. Upon exercise of an Award,
the Company shall withhold or collect from Grantee an amount sufficient to
satisfy such tax obligations.
ARTICLE 8. ADJUSTMENTS
Subject to any required action by the shareholders of the Company, the
number of shares of Common Stock covered by each outstanding Award, and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but as to which no Awards have yet been granted or which have been
returned to the Plan, as well as the price per share of Common Stock covered by
each such outstanding Award, 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 similar event resulting in an
increase or decrease in the number of issued shares of Common Stock. Such
adjustment shall be made by the Administrator, and its determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason hereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Award.
ARTICLE 9. AMENDMENT AND TERMINATION OF PLAN
Section 9.1. Amendment of Plan
(a) The Board may at any time amend, suspend or terminate the Plan. To
the extent necessary 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.
(b) No Award may be granted during any suspension of the Plan or after
termination of the Plan.
(c) Any amendment, suspension or termination of the Plan (including
termination of the Plan under Section 9.2 below) shall not affect Awards already
granted, and such Awards shall
10
<PAGE> 12
remain in full force and effect as if the Plan had not been amended, suspended
or terminated, unless mutually agreed otherwise between the Grantee and the
Administrator, which agreement must be in writing and signed by the Grantee and
the Company.
Section 9.2. Termination of Plan
The Company's shareholders or the Board may suspend or terminate the
Plan at any time. No Awards may be granted more than ten (10) years after the
earlier of the Plan's adoption by the Board or approval by the shareholders. No
Award may be granted during any suspension or after termination of the Plan.
ARTICLE 10. GENERAL
Section 10.1. Award Agreements
Awards granted under the Plan shall be evidenced by an Award Agreement
that shall contain such terms, conditions, limitations and restrictions as the
Administrator shall deem advisable and that are not inconsistent with the Plan.
Section 10.2. Shareholder Agreement
Concurrent with the issuance under the Plan to a Grantee of the shares
that are the subject of an Award, such Grantee shall enter into that certain
Shareholders' Agreement by and among the Company and all of its shareholders, as
may from time to time be amended, providing, among other things, for certain
restrictions on the transfer of such shares and for the repurchase of such
shares by the Company under certain circumstances.
Section 10.3. Registration; Certificates for Shares
The Company shall be under no obligation to any Grantee to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the non-issuance or
sale of such shares as to which such requisite authority shall not have been
obtained.
As a condition to the exercise of an Option or any other receipt of Common Stock
pursuant to an Award under the Plan, the Company may require the Grantee to
represent and warrant
11
<PAGE> 13
at the time of any such exercise or receipt that such shares are being purchased
or received only for the Grantee's own account and without any present intention
to sell or distribute such shares if, in the opinion of counsel for the Company,
such a representation is required by any relevant provision of the
aforementioned laws. At the option of the Company, a stop-transfer order against
any such shares may be placed on the official stock books and records of the
Company, and a legend indicating that such shares may not be pledged, sold or
otherwise transferred, unless an opinion of counsel is provided (concurred in by
counsel for the Company) stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on stock certificates to ensure
exemption from registration. The Administrator may also require such other
action or agreement by the Grantees as may from time to time be necessary to
comply with the federal and state securities laws.
Section 10.4. No Rights as a Shareholder
No Option shall entitle the Grantee to any cash dividend, voting or
other right or privilege of a shareholder unless and until the date of issuance
under the Plan of the shares that are the subject of such Award, free of all
applicable restrictions.
Section 10.5. No Trust or Fund
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Grantee, and no Grantee
shall have any rights that are greater than those of a general unsecured
creditor of the Company.
Section 10.6. Severability
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Administrator's determination, materially altering the intent of the Plan or
the Award, such provision shall be stricken as to such jurisdiction, person or
Award, and the remainder of the Plan and any such Award shall remain in full
force and effect.
Section 10.7. Information to Grantees.
The Company shall provide to each Grantee, during the period for which
such Grantee has one or more Awards outstanding, copies of financial statements
at least annually.
ARTICLE 11. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the
Board, so long as it is approved by the Company's shareholders at any time
within 12 months of such adoption.
12
<PAGE> 14
EXHIBIT 10.8
1999 NON-EMPLOYEE DIRECTOR
STOCK OPTION AWARD AGREEMENT
BY AND BETWEEN
EMERALD-DELAWARE, INC.
A DELAWARE CORPORATION
AND
-------------------------
<PAGE> 15
EMERALD-DELAWARE, INC.
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION AWARD AGREEMENT
NOTICE OF STOCK OPTION GRANT
Grantee's Name and Address:
---------------------------------
---------------------------------
---------------------------------
You have been granted an option to purchase shares of Common Stock of
the Company that it intends as a Grant as provided under the Plan, subject to
the terms and conditions of this Notice of Stock Option Award (the "Notice"),
the Plan and the Stock Option Award Agreement (the "Award Agreement") attached
hereto, as follows:
Grant Number _________________
Date of Grant _________________
Vesting Commencement Date _________________
Exercise Price per Share _________________
Total Number of Shares Granted _________________
Total Exercise Price _________________
Type of Option Non-Qualified Stock Option
Term/Expiration Date: __________________
Vesting Schedule:
Subject to the Grantee's Continuous Service and other limitations set
forth in this Notice, the Plan and the Award Agreement, the Option may be
exercised, in whole or in part, in accordance with the following schedule:
One-twelfth (1/12th) of the shares of Common Stock subject to such Option three
(3) months after the Vesting Commencement Date and an additional one-twelfth
(1/12th) of the shares of Common Stock subject to such Option shall vest at the
end of each successive three (3) month period thereafter, such that the Option
will be fully exercisable three (3) years after the Vesting Commencement Date.
Notice of Stock Option Award
1
<PAGE> 16
Termination Period:
The Option may be exercised within ninety (90) days from termination of
the Grantee's Continuous Service or such longer period as may be applicable upon
death or Disability of the Grantee as provided in the Award Agreement.
********************
IN WITNESS WHEREOF, the Company and the Grantee have executed this
Notice and agree that the Option is to be governed by the terms and conditions
of this Notice, the Plan, and the Award Agreement.
Emerald-Delaware, Inc., a Delaware corporation
By:
-------------------------------------------
Title:
----------------------------------------
THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THE OPTION SHALL
VEST, IF AT ALL, ONLY DURING THE PERIOD OF GRANTEE'S CONTINUOUS SERVICE (NOT
THROUGH THE ACT BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). THE
GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE OPTION
AGREEMENT, OR THE COMPANY'S 1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN SHALL
CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF GRANTEE'S
CONTINUOUS SERVICE.
The Grantee acknowledges receipt of a copy of the Plan and the Award
Agreement, and represents that he or she is familiar with the terms and
provisions thereof, and hereby accepts the Option subject to all of the terms
and provisions hereof and thereof. The Grantee has reviewed this Notice, the
Plan, and the Award Agreement in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Notice, and fully
understands all provisions of this Notice, the Plan and the Award Agreement. The
Grantee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions arising under this
Notice, the Plan or the Award Agreement. The Grantee further agrees to notify
the Company upon any change in the residence address indicated in this Notice.
Dated: ____________________ Signed: _______________________________________
Grantee
Notice of Stock Option Award
2
<PAGE> 17
AWARD NUMBER: ___________
EMERALD-DELAWARE, INC.
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
STOCK OPTION AWARD AGREEMENT
1. Grant of Option.
Emerald-Delaware, Inc., a Delaware corporation (the "Company"), hereby
grants to the Grantee named above in the Notice of Stock Option Grant, an option
(the "Option") to purchase the total number of shares of Common Stock (the
"Shares") set forth in the Notice of Stock Option Grant, at the exercise price
per share set forth in the Notice of Stock Option Grant (the "Exercise Price")
subject to the terms, definitions and provisions of the Emerald-Delaware, Inc.
1999 Non-Employee Director Stock Option Plan (the "Plan") adopted by the
Company, which is incorporated herein by reference. Unless otherwise defined
herein, the terms defined in the Plan shall have the same defined meanings in
this Option.
2. Exercise of Option.
2.1 Right to Exercise.
The Option shall be exercisable during its term in accordance with
the Vesting Schedule set out in the Notice and with the applicable provisions of
the Plan and this Award Agreement. The Option shall be subject to the provisions
of Section 5.4 of the Plan relating to the exercisability or termination of the
Option in the event of a Corporate Transaction or Change in Control. No partial
exercise of the Option may be for less than the lesser of five percent (5%) of
the total number of Shares subject to the Option or the remaining number of
Shares subject to the Option. In no event shall the Company issue fractional
Shares.
2.2 Method of Exercise.
(a) The Option shall be exercisable only by delivery of an Exercise
Notice (attached as Exhibit A) which shall state the election to exercise the
Option, the whole number of Shares in respect of which the Option is being
exercised, such other representations and agreements as to the holder's
investment intent with respect to such Shares and such other provisions as may
be required by the Administrator. The Exercise Notice shall be signed by the
Grantee and shall be delivered in person or by certified mail to the Secretary
of the Company accompanied by payment of the Exercise Price. The Option shall be
deemed to be exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
Stock Option Award Agreement
1
<PAGE> 18
(b) No Shares will be issued pursuant to the exercise of the Option
unless such issuance and such exercise shall comply with all Applicable Laws.
Assuming such compliance, for income tax purposes, the Shares shall be
considered transferred to the Grantee on the date on which the Option is
exercised with respect to such Shares.
(c) Upon his or her exercise of the Option, the Grantee shall enter
into that certain Shareholders Agreement (the "Shareholders Agreement") dated
March 5, 1999 (attached as Exhibit B), and as may be amended from time to time,
by and among the Company and all of its Shareholders, a copy of which the
Company has provided to the Grantee.
2.3 Taxes.
No Shares will be delivered to the Grantee or other person pursuant
to the exercise of the Option until the Grantee or other person has made
arrangements acceptable to the Administrator for the satisfaction of foreign,
federal, state and local income and employment tax withholding obligations.
3. Method of Payment.
Payment of the Exercise Price shall be by any of the following, or a
combination thereof, at the election of the Grantee; provided, however, that
such exercise method does not then violate any Applicable Law:
(a) cash;
(b) check;
(c) surrender of Shares or delivery of a properly executed form of
attestation of ownership of Shares as the Administrator may require (including
withholding of Shares otherwise deliverable upon exercise of the Option) which
have a Fair Market Value on the date of surrender or attestation equal to the
aggregate Exercise Price of the Shares as to which the Option is being exercised
(but only to the extent that such exercise of the Option would not result in an
accounting compensation charge with respect to the Shares used to pay the
exercise price); or
(d) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the Exercise Price.
4. Restrictions on Exercise.
The Option may not be exercised if the issuance of the Shares subject to
the Option upon such exercise would constitute a violation of any Applicable
Laws.
Stock Option Award Agreement
2
<PAGE> 19
5. Termination of Continuous Service.
In the event the Grantee's Continuous Service terminates, the Grantee
may, to the extent otherwise so entitled at the date of such termination (the
"Termination Date"), exercise the Option during the Termination Period set out
in the Notice. Except as provided in Sections 6 and 7 below, to the extent that
the Grantee was not entitled to exercise the Option on the Termination Date, or
if the Grantee does not exercise the Option within the Termination Period, the
Option shall terminate.
6. Disability of Grantee.
In the event the Grantee's Continuous Service terminates as a result of
his or her Disability, the Grantee may, but only within one year after the
Termination Date (and in no event later than the Expiration Date), exercise the
Option to the extent he or she was otherwise entitled to exercise it on the
Termination Date. To the extent that the Grantee is not entitled to exercise the
Option on the Termination Date, or if the Grantee does not exercise the Option
to the extent so entitled within the time specified herein, the Option shall
terminate.
7. Death of Grantee.
In the event of the termination of the Grantee's Continuous Service as a
result of his or her death, or in the event of the Grantee's death during the
Termination Period, the Grantee's estate, or a person who acquired the right to
exercise the Option by bequest or inheritance, may exercise the Option, but only
to the extent the Grantee could exercise the Option at the date of termination,
within one year after the date of such termination (but in no event later than
the Expiration Date). To the extent that the Grantee is not entitled to exercise
the Option on the date of death, or if the Option is not exercised to the extent
so entitled within the time specified herein, the Option shall terminate.
8. Transferability of Option.
The Option may be transferred by the Grantee in a manner and to the
extent acceptable to the Administrator as evidenced by a writing signed by the
Company and the Grantee. The terms of the Option shall be binding upon the
executors, administrators, heirs and successors of the Grantee.
9. Term of Option.
The Option may be exercised no later than the Expiration Date set forth
in the Notice or such earlier date as otherwise provided herein.
10. Tax Consequences.
Set forth below is a brief summary as of the date of this Award
Agreement of some of the federal tax consequences of exercise of the Option and
disposition of the Shares. THIS SUM-
Stock Option Award Agreement
3
<PAGE> 20
MARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE GRANTEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR
DISPOSING OF THE SHARES.
11. Grantee's Representations.
In the event the Shares purchasable pursuant to the exercise of the
Option have not been registered under the Securities Act of 1933, as amended, at
the time this Option is exercised, Grantee shall, if required by the Company,
concurrently with the exercise of all or any portion this Option, deliver to the
Company his or her Investment Representation Statement in the form attached
hereto as Exhibit C, and shall (if the Grantee is a resident of the state of
California) read the rules of the Commissioner of Corporations of the State of
California attached to such Investment Representation Statement.
12. Restrictions on Exercise.
The Grantee may not exercise this Option until such time as the Plan has
been approved by the stockholders or the Company, or if the issuance of the
Shares upon such exercise or the method of payment of consideration for such
shares would constitute a violation of any applicable federal or state
securities or other law or regulation, including any rule under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by
the Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Grantee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
13. Entire Agreement: Governing Law.
The Notice, the Plan and this Award Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and the
Grantee with respect to the subject matter hereof, and may not be modified
adversely to the Grantee's interest except by means of a writing signed by the
Company and the Grantee. These agreements are to be construed in accordance with
and governed by the internal laws of the State of Delaware without giving effect
to any choice of law rule that would cause the application of the laws of any
jurisdiction other than the internal laws of the State of Delaware to the rights
and duties of the parties. Should any provision of the Notice or this Award
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
14. Headings.
The captions used in the Notice and this Award Agreement are inserted
for convenience and shall not be deemed a part of the Option for construction or
interpretation.
Stock Option Award Agreement
4
<PAGE> 21
15. Interpretation.
Any dispute regarding the interpretation of the Notice, the Plan, and
this Award Agreement shall be submitted by the Grantee or by the Company
forthwith to the Administrator, which shall review such dispute at its next
regular meeting. The resolution of such dispute by the Administrator shall be
final and binding on all persons.
*********************
EMERALD-DELAWARE, INC., a
Delaware corporation
by:
-------------------------------
-------------------------------
its:
-------------------------------
(signatures and acknowledgments continued on next page)
Stock Option Award Agreement
5
<PAGE> 22
Grantee acknowledges receipt of a copy of the Plan and the Shareholders
Agreement, and represents that he or she is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the
terms and provisions thereof. Grantee has reviewed the Plan, this Option
and the Shareholders Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Grantee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations
of the Plan Administrator upon any questions arising under the Plan or
this Option. Grantee further agrees to notify the Company upon any
change in the residence address indicated below.
Dated: Signed:
-------------------------- ----------------------------
Grantee Residence Address:
-----------------------------------
-----------------------------------
Stock Option Award Agreement
6
<PAGE> 23
EXHIBIT A
EMERALD-DELAWARE, INC.
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
EXERCISE NOTICE
Emerald-Delaware, Inc.
500 -- 108th Avenue NE, Suite 1800
Bellevue, Washington 98004
1. Exercise of Option.
Effective as of today, ______________, the undersigned ("Grantee")
hereby elects to exercise Grantee's option to purchase ___________ shares of the
Common Stock (the "Shares") of Emerald-Delaware, Inc. (the "Company") under and
pursuant to the 1999 Non-Employee Director Stock Option Plan, as amended (the
"Plan") and the Stock Option Award Agreement dated ______________ (the "Award
Agreement").
2. Representations of Grantee.
Grantee acknowledges that he or she has received, read and understood
the Plan, the Award Agreement and that certain Shareholders Agreement dated
March 5, 1999 (attached as Exhibit B to the Stock Option Award Agreement), and
as may be amended from time to time, by and among the Company and all of its
shareholders (the "Shareholders Agreement"), and agrees to abide by and be bound
by their terms and conditions.
3. Rights as Stockholder.
Until the stock certificate evidencing such Shares is 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 after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in Article 8 of the Plan.
Grantee shall enjoy rights as a stockholder, subject to the rights and
duties imposed upon him or her as a party to the Shareholders Agreement, until
such time as Grantee disposes of the Shares in accordance with the terms and
conditions of the Shareholders Agreement.
Exhibit A
Exercise Notice
1
<PAGE> 24
4. Tax Consultation.
Grantee understands that he or she may suffer adverse tax consequences
as a result of Grantee's purchase or disposition of the Shares. Grantee
represents that Grantee has consulted with any tax consultants Grantee deems
advisable in connection with the purchase or disposition of the Shares and that
Grantee is not relying on the Company for any tax advice.
5. Restrictive Legends and Stop-Transfer Orders.
(a) Legends.
Grantee understands and agrees that the Company shall cause the
legends set forth below or legends substantially equivalent thereto, and any
others that in the opinion of the Company are necessary to comply with state or
federal securities laws, to be placed upon any certificate(s) evidencing
ownership of the Shares together with any other legends that may be required by
the Company or by state or federal securities laws:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 NOR REGISTERED NOR QUALIFIED UNDER ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED, OR HYPOTHECATED UNLESS
QUALIFIED AND REGISTERED UNDER APPLICABLE STATE AND FEDERAL SECURITIES
LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO
EMERALD-DELAWARE, INC. SUCH QUALIFICATION AND REGISTRATION IS NOT
REQUIRED. ANY TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
IS FURTHER SUBJECT TO OTHER RESTRICTIONS, TERMS, AND CONDITIONS WHICH
ARE SET FORTH IN A SHAREHOLDERS AGREEMENT AMONG EMERALD-DELAWARE, INC.
AND ALL OF ITS SHAREHOLDERS."
Grantee understands that transfer of the Shares may be restricted by
Section 260.141.11 of the Rules of the California Corporations Commissioner, a
copy of which is attached to the Investment Representation Statement (which is
attached as Exhibit C to the Stock Option Award Agreement).
(c) Stop-Transfer Notices.
Grantee agrees that, in order to ensure compliance with the
restrictions referred to herein and the Shareholders Agreement, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
Exhibit A
Exercise Notice
2
<PAGE> 25
7. Successors and Assigns.
The Company may assign any of its rights under this Agreement to single
or multiple assignees, and this Agreement shall inure to the benefit of the
successors and assigns of the Company. Subject to the restrictions on transfer
herein set forth, this Agreement shall be binding upon Grantee and his or her
heirs, executors, administrators, successors and assigns.
8. Interpretation.
Any dispute regarding the interpretation of this Agreement shall be
submitted by Grantee or by the Company forthwith to the Company's Board of
Directors or the committee thereof that administers the Plan, which shall review
such dispute at its next regular meeting. The resolution of such a dispute by
the Board or committee shall be final and binding on the Company and on Grantee.
9. Entire Agreement; Governing Law; Severability.
The Plan and the Notice are incorporated herein by this reference. This
Agreement, the Plan, the Shareholders Agreement and the Investment
Representation Statement constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and the Grantee with respect to the
subject matter hereof, and may not be modified adversely to the Grantee's
interest except by means of a writing signed by the Company and the Grantee.
These agreements are to be construed in accordance with and governed by the
internal laws of the State of Delaware without giving effect to any choice of
law rule that would cause the application of the laws of any jurisdiction other
than the internal laws of the State of Delaware to the rights and duties of the
parties. Should any provision of the Notice or this Award Agreement be
determined by a court of law to be illegal or unenforceable, the other
provisions shall nevertheless remain effective and shall remain enforceable.
10. Notices.
Any notice required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery or upon deposit in the
United States mail by certified mail, with postage and fees prepaid, addressed
to the other party at its address as shown below beneath its signature, or to
such other address as such party may designate in writing from time to time to
the other party.
11. Further Instruments.
The parties agree to execute such further instruments and to take such
further action as may be reasonably necessary to carry out the purposes and
intent of this Agreement.
Exhibit A
Exercise Notice
3
<PAGE> 26
12. Delivery of Payment.
Grantee herewith delivers to the Company the full Exercise Price for the
Shares.
*********************
SUBMITTED BY: ACCEPTED BY:
EMERALD-DELAWARE, INC., a
Delaware corporation
by:
- ------------------------------- ---------------------------------------
(Print Name)
---------------------------------------
its:
- ------------------------------- ---------------------------------------
(Signature)
Exhibit A
Exercise Notice
4
<PAGE> 27
EXHIBIT B
EMERALD-DELAWARE, INC.
SHAREHOLDERS AGREEMENT
Exhibit B
Shareholders Agreement
1
<PAGE> 28
EXHIBIT C
INVESTMENT REPRESENTATION STATEMENT
GRANTEE :
COMPANY : EMERALD-DELAWARE, INC.
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Grantee represents to the Company the following:
(a) Grantee is aware of the Company's business affairs and financial condition
and has acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. Grantee is acquiring these
Securities for investment for Grantee's own account only and not with a view to,
or for resale in connection with, any "distribution" thereof within the meaning
of the Securities Act of 1933, as amended (the "Securities Act").
(b) Grantee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon among other things, the bona fide nature of Grantee's
investment intent as expressed herein. In this connection, Grantee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Grantee's representation was predicated
solely upon a present intention to hold these Securities for the minimum capital
gains period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future. Grantee further understands
that the Securities must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such registration is
available. Grantee further acknowledges and understands that the Company is
under no obligation to register the Securities, except as may be provided in
that certain Shareholders Agreement dated March 5, 1999 and as may be amended
from time to time, by and among the Company and all of its shareholders (the
"Shareholders Agreement"). Grantee understands that the certificate evidencing
the Securities will be imprinted with a legend which prohibits the transfer of
the Securities unless they are registered or such registration is not required
in the opinion of counsel satisfactory to the Company, and certain other
requirements as set forth in the Shareholders Agreement.
(c) Grantee is familiar with the provisions of Rule 701 and Rule 144, each
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities"
Exhibit C
Investment Representation Statement
<PAGE> 29
acquired, directly or indirectly, from the issuer thereof, in a non-public
offering subject to the satisfaction of certain conditions. Rule 701 provides
that if the issuer qualifies under Rule 701 at the time of the grant of the
Option to the Grantee, the exercise will be exempt from registration under the
Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
ninety (90) days thereafter (or such longer period as any market stand-off
agreement may require) the Securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions specified by Rule 144,
including: (1) the resale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934); and, in the case of
an affiliate, (2) the availability of certain public information about the
Company, (3) the amount of Securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the
time of grant of the Option, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than one year after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than two years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Grantee hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any securities of the Company under the Securities Act, Grantee
shall not sell or otherwise transfer any Shares or other securities of the
Company during the 180-day period following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however, that
such restriction shall only apply to the first registration statement of the
Company become effective under the Securities which includes securities to be
sold on behalf of the Company to the public in an underwritten public offering
under the Securities Act. The Company may impose stop-transfer instructions with
respect to securities subject to the foregoing restrictions until the end of
such 180-day period.
(e) Grantee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do
Exhibit C
Investment Representation Statement
<PAGE> 30
so at their own risk. Grantee understands that no assurances can be given that
any such other registration exemption will be available in such event.
(f) Grantee understands that, if he or she is a resident of the state of
California, the certificate evidencing the Securities will be imprinted with a
legend which prohibits the transfer of the Securities without the consent of the
Commissioner of Corporations of California. Grantee has read the applicable
Commissioner's Rules with respect to such restriction, a copy of which is
attached.
Signature of Grantee:
------------------------------------
Date:
-------------------------------
Exhibit C
Investment Representation Statement
<PAGE> 31
ATTACHMENT 1
STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE
Title 10. Investment - Chapter 3. Commissioner of Corporations
260.141.11: Restriction on Transfer. (a) The issuer of any security upon
which a restriction on transfer has been imposed pursuant to Sections 260.102.6,
260.141.10 or 260.534 shall cause a copy of this section to be delivered to each
issuee or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants or
spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such securities
is not in violation of any securities law of the foreign state, territory or
country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113
or 25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect with
respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or subdivision (a)
of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries
who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law
or to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property law
or by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (ii) delivers to
each purchaser a copy of this rule, and (iii) advises the Commissioner of the
name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102; provided that any such transfer is on the condition that
any certificate evidencing the security issued to such transferee shall contain
the legend required by this section.
<PAGE> 32
(c) The certificate representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY
OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION
THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED
IN THE COMMISSIONER'S RULES."
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors of
Emerald -- Delaware, Inc.:
The audits referred to in our report dated February 15, 2000, included the
related financial statement schedule as of December 27, 1997, December 26, 1998
and December 25, 1999, and for each of the years in the three year period ended
December 25, 1999, included in the registration statement. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
Seattle, Washington
February 15, 2000
/s/ KPMG LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> DEC-25-1999
<CASH> 1,708
<SECURITIES> 0
<RECEIVABLES> 8,259
<ALLOWANCES> 250
<INVENTORY> 0
<CURRENT-ASSETS> 10,110
<PP&E> 5,486
<DEPRECIATION> 1,033
<TOTAL-ASSETS> 14,885
<CURRENT-LIABILITIES> 10,892
<BONDS> 0
7,207
0
<COMMON> 50,043
<OTHER-SE> (3,286)
<TOTAL-LIABILITY-AND-EQUITY> 14,885
<SALES> 34,711
<TOTAL-REVENUES> 34,711
<CGS> 19,281
<TOTAL-COSTS> 19,281
<OTHER-EXPENSES> 20,870
<LOSS-PROVISION> 229
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> (5,460)
<INCOME-TAX> 34
<INCOME-CONTINUING> (5,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,117)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
