<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 2000
REGISTRATION NO. 333-30574
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
AMENDMENT NO. 1
TO
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> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
AMOUNT AGGREGATE PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value..... 4,600,000 $13.00 $59,800,000 $15,788
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 600,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
(3) $13,200 of this amount was previously paid.
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 APRIL 10, 2000
EMERALD LOGO
- --------------------------------------------------------------------------------
4,000,000 Shares
Common Stock
- --------------------------------------------------------------------------------
This is the initial public offering of Emerald -- Delaware, Inc., and we are
offering 4,000,000 shares of our common stock. We anticipate that the initial
public offering price will be between $11.00 and $13.00 per share. We have
applied to list our common stock on the Nasdaq National Market under the symbol
"EMSO."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
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>
A selling stockholder has granted the underwriters the right to purchase up to
600,000 shares to cover any over-allotments. We will not receive any proceeds
from the sale of these shares in the event the over-allotment option is
exercised.
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 a professional services firm that provides strategic consulting,
creative design and technology services to companies seeking to capitalize on
the Internet using existing and emerging 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.
As a result of increasing use of the Internet by many businesses, 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
professional 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 reliable and secure solutions that accommodate
our clients' growth and changing needs. These solutions include not only
Internet-based applications, such as e-commerce web sites and corporate
intranets, but also enterprise applications that enable our clients to use
business data to make strategic decisions, enhance customer and supplier
relationships and manage enterprise resources such as personnel and inventory.
We deliver our e-business solutions from local offices and supplement our
local delivery teams with professionals who possess expertise in specific
industries and across business functions such as customer relationship
management and supply chain management. Our professionals employ our E-Business
Engineering approach to deliver our solutions. Our approach is governed by a set
of guiding principles and utilizes 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 we deliver quickly with superior quality. We are able to provide
these solutions in complex e-business environments because of our skilled and
experienced professionals, who 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 the
potential for complex 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. Today we deliver our solutions from 11
offices located throughout the United States, including our headquarters in
Portland, Oregon.
1
<PAGE> 4
RECENT DEVELOPMENTS
AT&T SOLUTIONS ALLIANCE
In March 2000, we entered into a strategic alliance agreement with AT&T
Solutions to take advantage of both of our sales channels and our combined
business expertise to provide clients with e-business solutions. Under the terms
of the agreement, AT&T has incentives to direct $84 million of revenue to us by
March 31, 2002; however, there is no assurance that we will realize any future
revenues as a result of this agreement. As part of the agreement, we granted
AT&T a warrant to purchase up to 600,000 shares of our common stock.
Z/COM INCORPORATED ACQUISITION
In March 2000, we acquired Z/COM Incorporated, a creative design firm that
had 28 employees. Z/COM provides Internet marketing solutions, branding
strategies and digital and Internet design services to large and small
businesses. In connection with the acquisition, we issued promissory notes
totaling $1,350,000 and 431,742 shares of our common stock. This transaction has
been accounted for under the purchase method of accounting.
THE OFFERING
Common stock offered........................ 4,000,000 shares
Common stock to be outstanding after this
offering.................................... 30,718,193 shares
Use of proceeds............................. For repayment of debt and
general corporate purposes,
including working capital
Proposed Nasdaq National Market symbol...... EMSO
2
<PAGE> 5
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
------------------------------------------ ---------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 25,
1997 1998 1999 1999 2000
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................. $ 2,721 $15,011 $34,711 $ 5,929 $14,830
Income (loss) from operations............ (3,816) 777 (5,440) (709) (3,271)
Net income (loss)........................ (3,853) 708 (5,425) (724) (3,383)
Net income (loss) applicable to common
stockholders........................... (3,853) 708 (6,117) (793) (5,499)
Net earnings (loss) per share applicable
to common stockholders:
Basic earnings (loss) per share........ (0.23) 0.04 (0.31) (0.04) (0.27)
Diluted earnings (loss) per share...... (0.23) 0.03 (0.31) (0.04) (0.27)
Shares used to calculate:
Basic earnings (loss) per share...... 16,739 19,488 19,930 19,826 20,090
Diluted earnings (loss) per share.... 16,739 20,364 19,930 19,826 20,090
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 25, 2000
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,139 $ 3,139 $ 41,052
Current assets............................................ 13,092 13,092 51,005
Current liabilities....................................... 14,279 14,279 8,234
Total assets.............................................. 27,247 27,247 64,742
Long term obligations..................................... 1,151 1,151 1,151
Redeemable convertible preferred stock.................... 12,484 -- --
Total stockholders' equity (deficit)...................... (667) 11,817 55,357
</TABLE>
The total number of outstanding shares of our common stock and the actual
and pro forma data above are based on:
- 20,584,861 shares of our common stock outstanding as of March 25, 2000;
and
- the automatic conversion of all outstanding shares of our Series A
Preferred Stock issued in March 1999 into 5,333,332 shares of common
stock, and all outstanding shares of our Series B Preferred Stock issued
in February 2000 into 800,000 shares of common stock upon completion of
this offering.
The above information excludes:
- 6,236,966 shares of common stock issuable upon exercise of options
outstanding as of March 25, 2000, at a weighted average exercise price of
$1.58 per share;
- 1,082,765 shares of common stock available for issuance under our 1997
Stock Incentive Compensation Plan as of March 25, 2000;
- 130,000 shares of common stock available for issuance under our 1999
Non-Employee Director Stock Option Plan as of March 25, 2000;
- 28,600 shares of common stock issuable in connection with the Z/COM
Incorporated acquisition; and
- 600,000 shares of common stock issuable upon exercise of a warrant issued
in connection with the AT&T Solutions alliance agreement.
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 also give effect to the sale of the
4,000,000 shares of common stock in this offering at an assumed public offering
price of $12.00 per share, less estimated underwriting discounts and commissions
and estimated offering expenses,
3
<PAGE> 6
and the application of the net proceeds. See "Use of Proceeds" and
"Capitalization" for additional information regarding the common stock.
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
6,133,332 shares of common stock;
- reflects the 2.5 for 1 reverse split of our common stock effected on
April 3, 2000; and
- assumes no exercise of the underwriters' over-allotment option.
In connection with the 2.5 for 1 reverse split of our common stock, the
conversion ratio of our Series A and Series B Preferred Stock was adjusted
accordingly.
-------------------------
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.
-------------------------
4
<PAGE> 7
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
and uncertainties associated with starting a new business, such as risks
relating to our ability to:
- continue to attract and retain a broad customer base;
- negotiate and maintain favorable strategic relationships;
- expand our direct sales force and indirect sales channels;
- attract, integrate, retain and motivate qualified professionals;
- continually enhance our products and services to meet market demand and
customer needs; and
- plan and manage our growth effectively.
Many of these factors 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, incurred a net loss of $5.4
million in fiscal year 1999 and incurred a net loss of $3.4 million for the
three months ended March 25, 2000. As of March 25, 2000, we had an accumulated
deficit of $12.0 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.
5
<PAGE> 8
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 volatility in the future include:
- variability in market demand for the Internet and for Internet
professional services;
- substantial fixed expenses, incurred in opening new offices and in
advance of contracts for projects, including personnel and related costs;
- 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;
- 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 have generated almost 40% 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.
6
<PAGE> 9
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 92% in fiscal year 1997 to 78% in fiscal year
1998, to 64% in fiscal year 1999, and to 48% for the quarter ended March 25,
2000. AT&T accounted for more than 35% of our revenues in fiscal year 1999 and
for 21% of our revenues in the quarter ended March 25, 2000. In March 2000 we
entered into a two-year strategic alliance agreement with AT&T Solutions. For a
description of the material terms of the agreement, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments." Greens.com accounted for 13% of our revenue for the three months
ended March 25, 2000. No other clients accounted for more than 10% of our
revenues in fiscal year 1999 or for the quarter ended March 25, 2000. 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-time, fixed-fee
contracts for discrete projects. If clients do not retain us for subsequent
projects, then our revenues could decline. Our projects typically have terms
ranging from one to nine months and usually 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 solution in whole or in part. In this event, we
could be required either to forego the associated revenues or to expend
additional unanticipated resources which could cause us to exceed our expected
budget for the project. Either circumstance could result in a negative impact on
our results of operations.
IF WE DO NOT MEET CLIENT EXPECTATIONS AND EXPAND OUR NAME RECOGNITION, WE WILL
NOT 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.
7
<PAGE> 10
OUR BUSINESS IS LABOR INTENSIVE AND IF WE ARE UNABLE TO RECRUIT AND RETAIN
QUALIFIED PROFESSIONALS, WE MAY NOT BE ABLE TO COMPLETE, RETAIN OR BID FOR
PROJECTS.
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 RESULTS OF OPERATIONS COULD SUFFER IF WE DO NOT MANAGE OUR GROWTH
EFFECTIVELY.
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 to 524 people prior to the Z/COM Incorporated acquisition on March 25,
2000, 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 ADVERSELY AFFECT OUR FUTURE GROWTH AND PROFITABILITY.
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 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 adversely affect our future growth and profitability.
IF WE ARE NOT SUCCESSFUL IN OPENING AND GROWING NEW OFFICES, OUR BUSINESS WILL
BE HARMED AND A KEY COMPONENT OF OUR GROWTH STRATEGY WILL HAVE FAILED.
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 resources as well as significant management time and energy to launch
and grow that office. The financial cost of opening an office is dependent on a
number of factors, including geographic location and the size and cost of the
facility. 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.
8
<PAGE> 11
IF WE FAIL TO COMPETE SUCCESSFULLY, OUR BUSINESS COULD BE SERIOUSLY HARMED AND
OUR REVENUES COULD GROW MORE SLOWLY THAN EXPECTED.
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 & Company, Booz-Allen &
Hamilton, Boston Consulting Group, Diamond Technology Partners, KPMG LLP
and McKinsey & Company; 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 who may develop services
that are either superior to ours or comparable to ours but are available at a
lower price, then our business could be seriously harmed and our revenues could
grow more slowly than expected.
OUR RECENT AND POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO
INTEGRATE, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.
We have acquired other businesses in the past, and may undertake additional
acquisitions in the future to grow our business. For example, in March 2000, we
acquired Z/COM Incorporated, a creative design firm that had 28 employees. We
may undertake additional acquisitions in the future to grow our business. Both
our recent and potential future acquisitions may involve a number of risks,
including:
- inability to integrate the acquired business;
- diversion of management attention;
- amortization of substantial goodwill, adversely affecting our reported
results of operations;
9
<PAGE> 12
- inability to retain the management, key personnel and other employees of
the acquired business;
- inability to establish uniform standards, controls, procedures and
policies;
- inability to retain customers of our acquired companies; and
- exposure to legal claims for activities of the acquired business prior to
the acquisition.
RISKS RELATED TO TECHNOLOGY AND THE INTERNET
DEMAND FOR OUR SERVICES MAY DECREASE IF EXPECTED GROWTH IN THE USE OF THE
INTERNET IS NOT ACHIEVED.
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;
- 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 ABILITY TO ATTRACT AND
RETAIN CLIENTS MAY BE HARMED.
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.
10
<PAGE> 13
RISKS RELATED TO LEGAL UNCERTAINTY
DISPUTES RELATING TO RIGHTS TO SOLUTIONS WE DEVELOP FOR SPECIFIC CLIENTS COULD
LIMIT OUR ABILITY TO REUSE SOFTWARE AND CAUSE US TO INCUR ADDITIONAL EXPENSES.
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 these 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, although we have not experienced disputes as to the
ownership of applications developed for specific clients, these kinds of
disputes may arise and could affect our ability to reuse software. This could
require us to incur additional expenses to develop new solutions for future
products.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE COMPETITIVE.
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, if claims are made, whether or not they have
merit or are successful, our trademarks and other proprietary rights may decline
in value or may 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 cause our business results to
11
<PAGE> 14
suffer. Successful infringement claims against us may also result in monetary
liability and may disrupt our business.
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION OF THE INTERNET THAT COULD REDUCE
DEMAND FOR OUR SERVICES OR INCREASE THE COST OF DOING BUSINESS.
The laws, rules and regulations relating to the Internet in the United
States, at the state, local and federal levels, and the European Union are still
new and evolving. As a result, we are not certain how these laws, rules and
regulations will impact our business. We may be indirectly affected by 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. Legislation that dampens the
growth of the Internet or decreases its acceptance as a communications or
commercial medium could reduce demand for our services or increase the cost of
doing business.
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 26,564,441 shares of our common
stock, or 86.5% 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 SELL 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 sell your shares at or above the initial public offering
price. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price.
12
<PAGE> 15
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.
The following table indicates approximately when the 26,718,193 shares of
our common stock that were outstanding as of March 25, 2000, assuming conversion
of all outstanding shares of convertible preferred stock into 6,133,332 shares
of common stock, will be eligible for sale into the public market:
<TABLE>
<CAPTION>
RESTRICTED SHARES ELIGIBLE
FOR SALE IN
THE PUBLIC MARKET
--------------------------
<S> <C>
On the date of this prospectus.............................. 0
180 days after the date of this prospectus.................. 23,139,504
At various times more than 180 days after
the date of this prospectus............................... 3,578,689
</TABLE>
Additionally, there were options outstanding to purchase 6,236,966 shares
and a warrant to purchase 600,000 shares as of March 25, 2000.
The sale of these shares could impair our ability to raise capital through
the sale of additional stock. See "Shares Eligible for Future Sale" for a more
detailed discussion of when shares will become freely tradeable.
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 results would
suffer. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a
13
<PAGE> 16
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. Unless required by law to do so, 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.
14
<PAGE> 17
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the 4,000,000 shares of
common stock in this offering of approximately $43.5 million at an assumed
initial public offering price of $12.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses. We will
not receive any of the net proceeds from any sale of shares by the selling
stockholder.
We intend to use approximately $7.0 million of the net proceeds from this
offering to repay all outstanding debt under our current revolving credit
facility. Borrowing under this credit facility bears interest at the bank's
prime rate plus 1.75%. We intend to use approximately $1.4 million of the net
proceeds from this offering to repay promissory notes payable to two former
Z/COM shareholders. We intend to use the remaining 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.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of March 25, 2000 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
5,333,332 shares of common stock, and the conversion of all outstanding
shares of our Series B Preferred Stock issued in February 2000 into
800,000 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 4,000,000 shares of common stock in
this offering at an assumed initial public offering price of $12.00 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>
MARCH 25, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 3,139 $ 3,139 $ 41,052
-------- -------- --------
Capital lease obligations and long-term liabilities, net of
current portion........................................... 1,151 1,151 1,151
-------- -------- --------
Series A and Series B Preferred Stock, $0.001 par value,
15,333,334 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................................... 12,484 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value: 40,800,000 authorized,
20,584,861 issued and outstanding actual; 26,718,193
shares issued and outstanding pro forma; and 30,718,193
shares issued and outstanding pro forma as adjusted..... 21 27 31
Additional paid-in capital................................ 19,289 31,767 75,303
Deferred compensation..................................... (7,805) (7,805) (7,805)
Accumulated deficit....................................... (11,953) (11,953) (11,953)
-------- -------- --------
Less stock subscriptions receivable....................... (219) (219) (219)
Total stockholders' equity (deficit)............... (667) 11,817 55,357
-------- -------- --------
Total capitalization............................... 12,968 12,968 56,508
======== ======== ========
</TABLE>
The data in the table above excludes:
- 6,236,966 shares of common stock issuable upon exercise of options
outstanding as of March 25, 2000, at a weighted average exercise price of
$1.58 per share;
- 1,082,765 shares of common stock available for issuance under our 1997
Stock Incentive Compensation Plan as of March 25, 2000;
- 130,000 shares of common stock available for issuance under our 1999
Non-Employee Director Stock Option Plan as of March 25, 2000;
- 28,600 shares of common stock issuable in connection with the Z/COM
Incorporated acquisition; and
- 600,000 shares of common stock issuable upon exercise of a warrant issued
in connection with the AT&T Solutions alliance agreement.
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.
16
<PAGE> 19
DILUTION
(IN THOUSANDS, EXCEPT SHARE AND PER 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
March 25, 2000 was $4,399,555 or $0.16 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 4,000,000 shares of
common stock in this offering at an assumed public offering price of $12.00 per
share less estimated underwriting discounts and commissions and estimated
offering expenses, our pro forma as adjusted net tangible book value as of March
25, 2000 would have been $48,357,473 or approximately $1.57 per share. This
represents an immediate increase in net tangible book value of $1.41 per share
to existing stockholders and an immediate dilution in net tangible book value of
$10.43 per share to new investors, or approximately 86.9% of the initial public
offering price of $12.00 per share. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of March
25, 2000............................................... 0.16
Increase per share to existing stockholders............... 1.41
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 1.57
------
Dilution per share to new investors......................... $10.43
======
</TABLE>
The following table shows, on a pro forma basis as of March 25, 2000, 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 $12.00 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..... 26,718,193 87.0% $17,871,687 27.1% $ 0.67
New investors............. 4,000,000 13.0 48,000,000 72.9 12.00
----------- ----- ----------- ------ ------
Total........... 30,718,193 100.0% $65,871,687 100.0% $ 2.14
=========== ===== =========== ====== ======
</TABLE>
The foregoing discussion and table are based on pro forma shares
outstanding on March 25, 2000, and assume no exercise of any stock options
outstanding as of that date. As of March 25, 2000 there were options outstanding
to purchase 6,236,966 shares of common stock at a weighted average exercise
price of $1.58 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 for a more detailed discussion of dilution to
investors.
17
<PAGE> 20
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 financial data as of and for the
periods ended March 27, 1999 and March 25, 2000 are unaudited, but have been
prepared on a basis consistent with our audited financial statements and the
notes thereto and include all adjustments, which include only normal recurring
adjustments, which we considered necessary for a fair presentation of the
information. Historical results are not necessarily indicative of results to be
expected for any future period. Although we were incorporated in November 1996,
our substantive business activities did not begin until January 1997.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
------------------------------------------ ---------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 25,
1997 1998 1999 1999 2000
------------ ------------ ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.................................... $ 2,721 $15,011 $34,711 $ 5,929 $ 14,830
Expenses:
Cost of revenues -- professional services
(excluding stock compensation).......... 2,418 7,742 19,281 3,328 7,885
Cost of revenues -- AT&T warrant.......... -- -- -- -- 74
Sales and marketing (excluding stock
compensation)........................... 407 2,401 6,590 989 3,046
General and administrative (excluding
stock compensation)..................... 3,474 4,091 14,261 2,321 5,874
Stock compensation........................ -- -- 19 -- 1,222
Loss on investment in subsidiary held for
disposal................................ 238 -- -- -- --
------- ------- ------- ------- --------
Total operating expenses................ 6,537 14,234 40,151 6,638 18,101
------- ------- ------- ------- --------
Income (loss) from operations............... (3,816) 777 (5,440) (709) (3,271)
------- ------- ------- ------- --------
Interest income (expense), net.............. (37) (9) (19) (15) (112)
------- ------- ------- ------- --------
Income (loss) before income taxes........... (3,853) 768 (5,459) (724) (3,383)
------- ------- ------- ------- --------
Income taxes................................ -- 60 (34) -- --
------- ------- ------- ------- --------
Net income (loss)........................... (3,853) 708 (5,425) (724) (3,383)
------- ------- ------- ------- --------
Accretion of redemption value of redeemable
convertible preferred stock............... -- -- 692 69 276
Effect of beneficial conversion feature of
the Series B Preferred Stock.............. -- -- -- -- 1,840
Net income (loss) applicable to common
stockholders.............................. $(3,853) $ 708 $(6,117) $ (793) $ (5,499)
======= ======= ======= ======= ========
Net earnings (loss) per share applicable to
common stockholders:
Basic earnings (loss) per share........... $ (0.23) $ 0.04 $ (0.31) $ (0.04) $ (0.27)
Diluted earnings (loss) per share......... $ (0.23) $ 0.03 $ (0.31) $ (0.04) $ (0.27)
Shares used to calculate:
Basic earnings (loss) per
share................................... 16,739 19,488 19,930 19,826 20,090
Diluted earnings (loss) per share......... 16,739 20,364 19,930 19,826 20,090
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AS OF MARCH 25, 2000
------------------------------------------ ----------------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, PRO FORMA
1997 1998 1999 ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------ -------- --------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 182 $ 303 $ 1,708 $ 3,139 $ 3,139 $41,052
Current assets................. 1,143 2,786 10,110 13,092 13,092 51,005
Current liabilities............ 1,750 1,894 10,892 14,279 14,279 8,234
Total assets................... 3,049 4,646 14,885 27,247 27,247 64,742
Long term obligations.......... 148 106 242 1,151 1,151 1,151
Redeemable convertible
preferred stock.............. -- -- 7,207 12,484 -- --
Total stockholders' equity
(deficit).................... 1,151 2,646 (3,457) (667) 11,817 55,357
</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.
19
<PAGE> 22
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 a professional services firm that provides strategic consulting,
creative design and technology services for Fortune 1000 companies and emerging
high-growth companies. We currently operate offices in 11 metropolitan areas.
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. Prior to the Z/COM Incorporated acquisition, at March
25, 2000, we had 524 employees, including 362 e-business professionals. During
the quarter ended March 25, 2000 we provided services to approximately 78
clients across a broad spectrum of industries, including telecommunications,
transportation, pharmaceuticals, financial services and the Internet.
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.
Approximately 60% of our engagements are on a time-and-materials basis and the
balance are on a fixed-fee basis. 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
which is 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.
We derive a significant portion of our revenues from a limited number of
clients. For the quarter ended March 25, 2000, AT&T accounted for 21% of our
revenues and Greens.com accounted for 13% of our revenues. No other single
client accounted for more than 10% of our revenues for the quarter ended March
25, 2000. As a percentage of total revenues, revenues derived from our five
largest clients decreased from 92% in fiscal year 1997 to 78% in fiscal year
1998 to 64% in fiscal year 1999 and to 48% for the quarter ended March 25, 2000.
These decreases were a result of increases in both the size and number of client
projects. In
20
<PAGE> 23
addition, 10% of fiscal year 1999 revenues and 13% for the quarter ended March
25, 2000 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 -- professional services 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. We expect
sales and marketing expenses will continue to increase as a percentage of
revenue 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.
Stock Compensation
Stock compensation results from the grant of stock options to employees at
exercise prices subsequently deemed to be less than the fair value of the common
stock on the date of grant. These charges are amortized ratably over the five
year vesting period of the options and were approximately $272,000 for the
quarter ended March 25, 2000. At March 25, 2000, deferred stock compensation
related to options was $2,431,000. We expect the amortization of deferred stock
compensation to be at least $1,064,000 in the remaining nine months of 2000,
$746,000 in 2001, $363,000 in 2002, $186,000 in 2003 and $72,000 in 2004.
It is possible that the amount of our total deferred compensation, and
therefore the amount of expense we incur each year, may increase as a result of
factors such as the grant of additional stock awards with a purchase price below
the deemed fair market value of our common stock.
Additionally, during the quarter ended March 25, 2000, one of our
stockholders sold shares at prices subsequently deemed to be less than the fair
value of the common stock to others for which the company recorded $950,000 in
stock compensation.
Accretion of Redemption Value and Deferred Conversion Feature of Redeemable
Convertible Preferred Stock
In connection with our issuance of Series A Preferred Stock and Series B
Preferred Stock, $692,000 in 1999 and $276,000 for the quarter ended March 25,
2000 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 Series A and Series B Preferred
Stock will convert into common stock upon completion of our initial public
offering.
In connection with the issuance of our Series B Preferred Stock in 2000,
$1.84 million was recorded as an in substance dividend to the preferred
stockholders calculated as the
21
<PAGE> 24
difference between the conversion price and the deemed fair value of the common
stock into which the preferred stock is convertible.
We have incurred a net loss of $3.9 million during fiscal year 1997, and
reported net income of $708,000 during fiscal year 1998. We incurred a net loss
of $5.4 million in fiscal year 1999 and a net loss of $3.4 million for the three
month period ended March 25, 2000. As of March 25, 2000, we had an accumulated
deficit of $12.0 million. As of March 25, 2000 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 for additional
information regarding limitations on our net operating loss carryforwards.
The number of our employees increased from 90 as of December 27, 1997, to
169 as of December 26, 1998, to 457 as of December 25, 1999 and to 524 as of
March 25, 2000. 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.
The Effect of Beneficial Conversion Feature of Series B Preferred Stock
We recorded a charge of approximately $1.8 million for the beneficial
conversion feature related to Series B Preferred Stock sold during February
2000. The Series B Preferred Stock was convertible into common stock which was
subsequently deemed to have a fair value greater than the price at which the
Series B Preferred Stock was initially sold.
RECENT DEVELOPMENTS
AT&T Solutions Alliance. On March 15, 2000, we entered into a strategic
alliance agreement with AT&T Solutions to take advantage of both of our sales
channels and our combined business expertise to provide clients with e-business
solutions. As part of the agreement, we granted AT&T a warrant to purchase up to
600,000 shares of our common stock, 40,000 of which were immediately
exercisable. The remainder of AT&T's warrants become exercisable on March 15,
2007. However, some or all of these warrants may become immediately exercisable
upon the first or second anniversary of the grant based upon the amount of
revenue AT&T has directed to us as of those dates. AT&T's warrants may become
exercisable ratably as set forth in the examples below:
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
IF REVENUES ARE DIRECTED AT&T'S WARRANTS
TO US BY AT&T THAT WOULD ACCELERATE
------------------------ ---------------------
<S> <C>
$30 million............................................................200,000
39 million............................................................260,000
48 million............................................................320,000
57 million............................................................380,000
66 million............................................................440,000
75 million............................................................500,000
84 million............................................................560,000
</TABLE>
In order to accelerate the exercisability of any of its shares, AT&T must
direct a minimum of $12 million of revenue to us prior to the first anniversary
of the grant or $30 million prior to the second anniversary. However, AT&T is
not obligated to direct any revenues to us. As a result, we cannot assure you
that we will realize any future revenues as a result of this agreement.
22
<PAGE> 25
Z/COM Incorporated Acquisition. In March 2000, we acquired Z/COM
Incorporated, a creative design firm that had 28 employees. Z/COM provides
Internet marketing solutions, branding strategies and digital and Internet
design services to large and small businesses. In connection with the
acquisition, we issued promissory notes totaling $1,350,000 and 431,742 shares
of our common stock. This transaction has been accounted for under the purchase
method of accounting.
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, and for the
three month period ended March 27, 1999 and March 25, 2000, as a percentage of
total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
------------------------------------------ ---------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 25,
1997 1998 1999 1999 2000
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of revenues -- professional
services (excluding stock
compensation).................... 88.9 51.6 55.6 56.2 53.2
Cost of revenues -- AT&T warrant... -- -- -- -- 0.5
Sales and marketing (excluding
stock compensation).............. 14.9 16.0 19.0 16.7 20.5
General and administrative
(excluding stock compensation)... 127.7 27.3 41.1 39.1 39.6
Stock compensation................. -- -- -- -- 8.2
Loss on investment in subsidiary
held for disposal................ 8.7 -- -- -- --
------ ----- ----- ----- -----
Total operating expenses.... 240.2 94.9 115.7 112.0 122.0
------ ----- ----- ----- -----
Income (loss) from operations........ (140.2) 5.1 (15.7) (12.0) (22.0)
------ ----- ----- ----- -----
Interest income (expense), net....... (1.4) -- -- (0.2) (0.8)
------ ----- ----- ----- -----
Income (loss) before income taxes.... (141.6) 5.1 (15.7) (12.2) (22.8)
------ ----- ----- ----- -----
Income taxes......................... -- 0.4 (0.1) -- --
------ ----- ----- ----- -----
Net income (loss).................... (141.6) 4.7 (15.6) (12.2) (22.8)
------ ----- ----- ----- -----
Accretion of redemption value of
redeemable convertible preferred
stock.............................. -- -- 2.0 1.2 1.9
Effect of beneficial conversion
feature of Series B Preferred
Stock.............................. -- -- -- -- 12.4
Net income (loss) applicable to
common stockholders................ (141.6)% 4.7% (17.6)% (13.4)% (37.1)%
====== ===== ===== ===== =====
</TABLE>
COMPARISON OF QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000
REVENUES
Revenues increased from $5.9 million for the three month period ended March
27, 1999 to $14.8 million for the comparable period in 2000. This increase was
due primarily to an increase in the number of clients and related projects from
25 clients during the quarter ended March 27, 1999 to 78 clients during the
quarter ended March 25, 2000.
23
<PAGE> 26
EXPENSES
Cost of Revenues -- Professional Services
Cost of revenues -- professional services increased from $3.3 million for
the three month period ended March 27, 1999 to $7.9 million for the comparable
period in 2000. This increase was due primarily to costs associated with hiring
additional professionals. The number of professionals increased from 169 as of
March 27, 1999 to 362 as of March 25, 2000. As a percentage of total revenues,
cost of revenues decreased from 56.2% for the quarter ended March 27, 1999 to
53.2% for the comparable period in 2000. This decrease was due primarily to
revenues exceeding the increases in costs associated with the growth of our
professional staff.
Cost of Revenues -- AT&T Warrant
During the quarter ended March 25, 2000 we recorded approximately $75,000
amortization for the fair value of the warrant to purchase up to 600,000 shares
of our common stock granted to AT&T. We expect to recognize the remaining fair
value of the warrant of approximately $5.5 million over the two-year period of
the agreement.
Sales and Marketing
Sales and marketing expenses increased from $989,000 for the quarter ended
March 27, 1999 to $3.0 million for the comparable period in 2000. This increase
was due primarily to the growth in the number of sales personnel from 14 to 62.
As a percentage of total revenues, sales and marketing expenses increased from
16.7% for the quarter ended March 27, 1999 to 20.5% for the comparable period in
2000. The increase was due primarily to the growth in sales and marketing
expenses outpacing revenues growth.
General and Administrative
General and administrative expenses increased from $2.3 million for the
quarter ended March 27, 1999 to $5.9 million for the comparable period in 2000.
This increase was due primarily to the increase in the number of general and
administrative personnel from 38 as of March 27, 1999 to 100 as of March 25,
2000.
COMPARISON OF FISCAL YEARS 1997, 1998 AND 1999
REVENUES
Revenues increased from $2.7 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 -- Professional Services
Cost of revenues -- professional services increased from $2.4 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. We
had 127 professionals at the end of 1998 and 327 professionals at the end of
1999. As a percentage of total revenues, cost of revenues decreased from 88.9%
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
24
<PAGE> 27
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.
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 from 17
as of December 26, 1998 to 34 as of December 25, 1999. As a percentage of total
revenues, sales and marketing expenses increased from 14.9% in fiscal year 1997
to 16.0% in fiscal year 1998, and increased to 19.0% in fiscal year 1999. The
increase 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 $3.5 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 primarily to expenses associated with the
increase in the number of our employees from 25 as of December 26, 1998 to 96 as
of December 25, 1999, and to a lesser extent to an increase in lease
expenditures in connection with the expansion of offices. As a percentage of
total revenues, general and administrative expenses decreased from 127.7% 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 a one-time charge of
$239,000 relating to the disposal of a subsidiary. See Note 10 of Notes to
Financial Statements for a discussion of amounts related to the Company's 1997
subsidiary.
25
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly
operating results for each of the quarters in the two most recent fiscal years
and for the three months ended March 25, 2000. 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 related notes 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,
1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <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
Expenses:
Cost of revenues -- professional
services (excluding stock
compensation)................. 1,800 1,623 2,069 2,250 3,328 4,224 5,257
Cost of revenues -- AT&T
warrant....................... -- -- -- -- -- -- --
Sales and marketing (excluding
stock compensation)........... 462 378 573 988 989 1,356 1,779
General and administrative
(excluding stock
compensation)................. 861 696 1,145 1,389 2,321 2,914 3,785
Stock compensation.............. -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ -------
Total operating
expenses................. 3,123 2,697 3,787 4,627 6,638 8,494 10,821
------ ------ ------ ------ ------ ------ -------
Income (loss) from operations.... (491) 446 390 432 (709) (137) (1,058)
------ ------ ------ ------ ------ ------ -------
Interest income (expense), net... (2) (3) (2) (2) (15) 47 (13)
------ ------ ------ ------ ------ ------ -------
Income (loss) before income
taxes........................... (493) 443 388 430 (724) (90) (1,071)
------ ------ ------ ------ ------ ------ -------
Income taxes..................... -- 16 25 19 -- -- (34)
------ ------ ------ ------ ------ ------ -------
Net income (loss)................ (493) 427 363 411 (724) (90) (1,037)
------ ------ ------ ------ ------ ------ -------
Accretion of redemption value of
redeemable convertible preferred
stock........................... -- -- -- -- 69 207 208
Effect of beneficial conversion
feature of Series B Preferred
Stock........................... -- -- -- -- -- -- --
Net income (loss) applicable to
common stockholders............. $ (493) $ 427 $ 363 $ 411 $ (793) $ (297) $(1,245)
====== ====== ====== ====== ====== ====== =======
<CAPTION>
QUARTER ENDED
----------------------
DEC. 25, MAR. 25,
1999 2000
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................... $10,662 $14,830
Expenses:
Cost of revenues -- professional
services (excluding stock
compensation)................. 6,472 7,885
Cost of revenues -- AT&T
warrant....................... -- 74
Sales and marketing (excluding
stock compensation)........... 2,466 3,046
General and administrative
(excluding stock
compensation)................. 5,260 5,874
Stock compensation.............. -- 1,222
------- -------
Total operating
expenses................. 14,198 18,101
------- -------
Income (loss) from operations.... (3,536) (3,271)
------- -------
Interest income (expense), net... (38) (112)
------- -------
Income (loss) before income
taxes........................... (3,574) (3,383)
------- -------
Income taxes..................... -- --
------- -------
Net income (loss)................ (3,574) (3,383)
------- -------
Accretion of redemption value of
redeemable convertible preferred
stock........................... 208 276
Effect of beneficial conversion
feature of Series B Preferred
Stock........................... -- 1,840
Net income (loss) applicable to
common stockholders............. $(3,782) $(5,499)
======= =======
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
MAR. 28, JUN. 27, SEPT. 26, DEC. 26, MAR. 27, JUN. 26, SEPT. 25, DEC. 25, MAR. 25,
1998 1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- --------- -------- -------- -------- --------- -------- -----------
<S> <C> <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% 100.0%
Expenses:
Cost of
revenues -- professional
services (excluding
stock compensation).... 68.4 51.7 49.6 44.5 56.1 50.5 53.8 60.7 53.2
Cost of revenues -- AT&T
warrant................ -- -- -- -- -- -- -- -- 0.5
Sales and marketing
(excluding stock
compensation).......... 17.6 12.0 13.7 19.5 16.7 16.2 18.2 23.1 20.5
General and
administrative
(excluding stock
compensation).......... 32.7 22.1 27.4 27.5 39.2 34.9 38.8 49.4 39.6
Stock compensation....... -- -- -- -- -- -- -- -- 8.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.......... 118.7 85.8 90.7 91.5 112.0 101.6 110.8 133.2 122.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............... (18.7) 14.2 9.3 8.5 (12.0) (1.6) (10.8) (33.2) (22.0)
----- ----- ----- ----- ----- ----- ----- ----- -----
Interest income (expense),
net...................... -- (0.1) -- -- (0.2) 0.5 (0.2) (0.3) (.8)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes............. (18.7) 14.1 9.3 8.5 (12.2) (1.1) (11.0) (33.5) (22.8)
----- ----- ----- ----- ----- ----- ----- ----- -----
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) (22.8)
----- ----- ----- ----- ----- ----- ----- ----- -----
Accretion of redemption
value of redeemable
convertible preferred
stock.................... -- -- -- -- 1.2 2.5 2.1 2.0 1.9
Effect of beneficial
conversion feature of
Series B Preferred
Stock.................... -- -- -- -- -- -- -- -- 12.4
Net income (loss)
applicable to common
stockholders............. (18.7)% 13.6% 8.7% 8.1% (13.4)% (3.6)% (12.7)% (35.5)% (37.1)%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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.
27
<PAGE> 30
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. Through March 25, 2000, gross proceeds from the
private sale of our preferred stock totaled approximately $12 million.
As of March 25, 2000 we had cash and cash equivalents of $3.1 million, an
increase of approximately $1.4 million from cash and cash equivalents at
December 25, 1999. This increase was due primarily to the $5 million we received
from the sale of 2,000,000 shares of our Series B Preferred Stock during
February 2000, offset by the $2.2 million used in operations and the $1.2
million used to acquire property and equipment during the quarter.
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 of 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 purchase of $3.2 million in property and
equipment.
We had a revolving credit facility with Silicon Valley Bank, which provided
for borrowings of up to the lesser of $5 million or 85% of eligible accounts
receivable. Borrowings on the line of credit were with interest at the Bank's
prime rate plus 2.25% -- 10.75% at December 25, 1999 and 11.25% at March 25,
2000. As of December 25, 1999, we had borrowed $5.0 million under this line of
credit. We cancelled this facility on March 31, 2000 and replaced it with a new
line of credit agreement with Imperial Bank. The new line of credit agreement
provides for borrowings of up to the lesser of $7 million or 85% of eligible
accounts receivable and 50% of eligible unbilled accounts receivable. Borrowings
under this agreement bear interest at the Bank's prime rate plus 1.75% and are
secured by substantially all Company assets. In addition, we are required to
comply with financial and restrictive covenants related to, among other things,
tangible net worth. The credit agreement has a maturity date of March 29, 2001.
We have also financed our equipment purchases with the use of a $1 million
capital lease facility with a leasing company that is secured by the capital
assets purchased with the borrowings. The credit facility was fully utilized as
of March 25, 2000. In addition we have operating leases for our facilities
requiring payments of over $11.8 million. Ten days after the completion of the
offering we intend to repay $1.4 million to two former Z/COM employees.
Our Series A and Series B Preferred Stock, as described in Note 6 of Notes
to the Financial Statements, carry certain redemption preferences. If such
redemption preferences were elected we would be obligated to pay the preferred
stockholders an amount equal to the original issue price per share, plus all
declared and unpaid dividends, plus an amount that will yield a 10% internal
rate of return calculated upon the original issue price and independent of all
declared dividends on such shares. At March 25, 2000, this redemption amount was
approximately $12.8 million. Upon automatic conversion of our Series A and
Series B Preferred Stock at the completion of the offering, these redemption
rights will terminate.
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.
Our ability to grow, implement our business strategies and continue our
operations may be limited if we are not able to obtain additional financing when
necessary.
28
<PAGE> 31
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities 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 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 "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.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of ABB Opinion No. 25. The Interpretation
clarifies the application of APB Opinion No. 25, Accounting for Stock Issued to
Employees for certain issues. The provisions of the Interpretation are effective
July 1, 2000. We do not expect Interpretation No. 44 will have a material impact
on the financial statements.
29
<PAGE> 32
BUSINESS
OVERVIEW
We are a professional services firm that provides strategic consulting,
creative design and technology services to Fortune 1000 companies and emerging
high-growth companies seeking to capitalize on opportunities presented by the
Internet. 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 e-business strategy consulting, analysis and
optimization of existing software and hardware infrastructures as well as
implementation of new software and systems for e-business applications. We
deliver our solutions with an interdisciplinary approach that we call E-Business
Engineering. This approach provides a principled framework for each stage and
component of a client engagement. E-Business Engineering includes working with
the client to create a strategic vision, designing an effective e-business
solution and developing the appropriate technical architecture to implement that
solution. The technical architecture we develop provides security and
reliability and accommodates our clients' growth and evolving needs. Our
solutions implement and integrate Internet and enterprise applications with
existing information technology, or IT, systems. We believe our approach and our
professionals' experience, especially with reliable secure applications, are key
elements of our strategy that enable us to deliver innovative, robust and
adaptable e-business solutions within our clients' timeframes and budgets.
In March 2000, we entered into a strategic alliance agreement with AT&T
Solutions to take advantage of both of our sales channels and our combined
business expertise to provide clients with e-business solutions. Under the terms
of the agreement, AT&T has incentives to direct $84 million of revenue to us by
March 31, 2002; however there is no assurance that we will realize any future
revenues as a result of this agreement. As part of the agreement, we granted
AT&T a warrant to purchase up to 600,000 shares of our common stock. See Note
7(c) of Notes to Financial Statements for a discussion of this warrant.
During the quarter ended March 25, 2000, we provided e-business solutions
for 78 clients. We have provided solutions for clients such as AT&T, Benjamin
Moore, Dun & Bradstreet, Hawaiian Airlines, Lucent Technologies and Warner
Lambert. As of March 25, 2000, we had 362 professionals who deliver our
solutions from offices located in 11 metropolitan areas across the United
States.
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. The market for business-to-business e-commerce is
expected to grow from $64.8 billion in 1999 to $978.4 billion in 2003, according
to International Data Corporation. 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 must encompass business strategy and organizational
transformation and integrate a diverse set of
30
<PAGE> 33
partners, processes and systems. Further, these solutions must include not only
Internet-based applications, such as e-commerce web sites and corporate
intranets, but also enterprise applications, such as customer and supply chain
management and enterprise resource planning software.
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 International
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-based
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 enhancing existing
systems, implementing traditional business applications and Year 2000
compliance. As a result, 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 capable of growing with the business. 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 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 adaptable, reliable and secure
applications that can keep pace with the increasing use of e-business systems
supported by these 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
31
<PAGE> 34
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 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, enhance the value of a client's existing IT infrastructure by
integrating existing information and applications with new Internet
technologies. 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 platforms
that can keep pace with the increased usage of the e-business system.
We have a geographic delivery model enhanced with specific industry expertise
and capabilities across business functions
We have opened offices in 11 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 of experienced professionals. Our teams are led by
highly experienced, local project managers who are accountable for delivering
our solutions. Local core delivery teams provide consistent client contact,
accountability 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 from other offices 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
expertise across business functions, such as e-commerce, customer relationship
management and supply chain management. The local delivery teams can also draw
upon our knowledge sharing and collaboration 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
The expertise of our local and national team of professionals is tied
together by our knowledge sharing and collaboration system that consists of
electronic documents and shared workspaces as well as quality control systems.
We refer to this system as our knowledge management and quality system. 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
32
<PAGE> 35
disparate parts of our organization. Additionally, the knowledge management and
quality system leads to a reduction in duplicated efforts, thus improving our
ability to deliver timely solutions. Our knowledge management and quality system
allows our professionals to share knowledge, access past projects and deploy our
best-practice policies. 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 industry expertise and our capabilities across business functions and to
enhance and expand our knowledge management and quality system.
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 March 25, 2000, we employed a
full-time staff of 18 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 local delivery model that seeks to minimize travel; and
- stock options to every employee.
Target clients with potential for large, complex 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 also helps establish our brand and credibility within the
Internet services marketplace.
Continue to expand our internal IT infrastructure to facilitate growth
Our highly integrated and customized IT systems include revenue
forecasting, budgeting, project control and costing, human resource management,
accounting and a corporate intranet and are designed to accommodate rapid growth
of the business system. 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
33
<PAGE> 36
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
- 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.
34
<PAGE> 37
- Initiative -- Large, complex e-business solutions often demand that we
develop and integrate a number of disparate strategic programs, or
initiatives, to achieve a client's vision. Our step-by-step 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 delivery
methodology allows the client to benefit from each phase of an initiative
as it is implemented, rather than waiting until the entire e-business
solution is delivered. Iteration therefore 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 customized e-business solutions that are able to
accommodate the growth in demand placed upon the e-business system and 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 that clients understand their solution,
communicate with the development team and have the opportunity to approve work.
Capabilities
We use our E-Business Engineering approach to deliver complex e-business
solutions that often consist of many diverse components including Internet
applications, new 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 -- this solution provides our clients
with both Internet-based business strategy consulting and enterprise-wide
hardware, software and technical planning;
- e-Commerce -- this solution involves integration of our clients'
e-commerce web sites and development of Internet billing applications and
business-to-business transaction processing systems;
- Business Intelligence -- this solution provides centralized storage,
analysis and strategic use of business data, enabling personalized
interactions between a business and its customers;
- Customer Relationship Management -- this solution enhances our clients'
marketing and sales force management capabilities and integrates their
call center and customer support functions;
- Enterprise Resource Planning -- this solution involves finance, human
resources and manufacturing application development and deployment;
- Supply Chain Management -- this solution delivers inventory, logistics,
distribution and vendor management strategies and applications;
- Enterprise Application Integration -- this solution enables disparate
Internet and enterprise applications, including existing applications, to
share information and logic throughout various systems of the enterprise;
35
<PAGE> 38
- Custom software development -- this solution addresses platform-specific
or system integration issues which demand a breadth of software
engineering skills and experience; and
- Program management -- this solution involves alignment and prioritization
of strategic goals, resource allocation and project communications and
management.
People
We establish multi-disciplinary local delivery teams of experienced
professionals, averaging more than 10 years of experience in their respective
fields, with the authority to make, and accountability for, decisions regarding
our delivery of professional services. 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
company-wide knowledge management and quality system allow our local 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 telecommunications, transportation, pharmaceuticals, financial
services and Internet industries. The following is a representative list of our
clients, each of which accounted for more than $300,000 of revenue for the
quarter ended March 25, 2000:
<TABLE>
<S> <C>
AT&T Greens.com
Benjamin Moore Hawaiian Airlines
Cenquest Pointsbeyond
Covance Priceline.com
Dun & Bradstreet Unicapital
Emery Worldwide
</TABLE>
For the quarter ended March 25, 2000, AT&T accounted for more than 21% of
our revenues and Greens.com accounted for more than 13% of our revenues. Other
than AT&T and Greens.com, no single client accounted for more than 10% of our
revenues in the quarter ended March 25, 2000. The loss of any significant client
or the reduction or deferral in the work performed for any significant client
could significantly reduce our revenues.
While our agreement with Greens.com prohibits us from engaging in
consulting and project work for some of Greens.com's competitors, our agreements
with our customers do not in general prohibit us from providing the same or
similar services to other customers.
36
<PAGE> 39
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 platform and suite
of software applications that enhance and extend various
existing AT&T customer service support software applications
for dispute management, collection, contract management and
customer satisfaction. By integrating its existing software
applications 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 customer service representatives to efficiently
resolve client issues and prioritize collection
activities;
- track and coordinate customer contract management and
special offers; and
- utilize high volume electronic scanning hardware and
web-based software applications to create, search and sort
customer service inquiry databases.
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.
DUN & BRADSTREET -- A leading global provider of business credit,
marketing, purchasing and supplier information.
Relationship: Dun and Bradstreet 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 an adaptable, 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 up to
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. Also included is an Intranet
global error messaging system used to identify data
anomalies requiring investigation and data correction. Our
solution allows Dun & Bradstreet to provide its customer
base consistent, updated and easily accessible business
information.
</TABLE>
37
<PAGE> 40
<TABLE>
<S> <C>
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;
- a commitment to excellence;
- a willingness to make and keep commitments;
- a high level of integrity;
- open and honest communication;
- respectful work environment; and
- innovation and creativity.
From December 26, 1998 to December 25, 1999, we increased our staff from
169 to 457, and to 524 as of March 25, 2000, prior to our acquisition of Z/COM
Incorporated. As of March 25, 2000, our staff included 362 e-business
professionals who 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 March 25, 2000, we had a business development and marketing staff of
62. Our marketing staff's efforts are dedicated to strengthening our brand name,
increasing market
38
<PAGE> 41
awareness of our company and generating sales leads within the Fortune 1000 and
emerging high-growth businesses. 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 us to
continue to work with the best companies and technologies available. Our current
partners include:
- AT&T SOLUTIONS -- delivers enterprise application services focused
specifically on e-business integration initiatives for multiple clients.
We have a strategic alliance with AT&T Solutions to take advantage of
both of our sales channels and our combined business expertise to provide
clients with e-business solutions. 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. We are a Premier Web
Integration Partner in IBM's Business Partner Software Program. As part
of this program, we have access to training and technical support
relating to IBM's software, hardware and services offerings, as well as
shared sales and marketing opportunities. Our Premier Partner status is
subject to annual renewal and payment of an annual fee. Our relationship
is not exclusive and we do not share fees.
- MICROSTRATEGY -- provides software products and services that enable us
to deliver robust business intelligence solutions. We are a MicroStrategy
Alliance Partner. As an Alliance Partner, we have access to product
licenses, training, technical support, and strategic sales and marketing
support to assist us in delivering robust business
39
<PAGE> 42
intelligence solutions. Our agreement has an initial one-year term and is
renewed annually unless terminated by either party. We did not pay a fee
to enter into the agreement, although certain services offered pursuant
to the agreement are subject to a fee. Our relationship is not exclusive
and we do not share fees.
- 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. We are a Corio
Gold Implementation Partner. Pursuant to our agreement, we have access to
training, technical support and joint strategic sales and marketing
efforts that enable us to provide integration services for customers
seeking to implement enterprise applications hosted by Corio. We did not
pay a fee to enter into the agreement, which does not have an expiration
date and will continue unless terminated by either party. Our
relationship is not exclusive and we do not share fees.
- ACTIVE SOFTWARE -- provides application integration software that enables
us to link complex enterprise and legacy systems with web-enabled
systems. We are an ActiveWorks Integration Partner in Active Software's
Global Active Partner Program. As an ActiveWorks Integration Partner, we
have access to training, technical support and sales and marketing
opportunities that enable us to link complex enterprise and existing
software applications with web-enabled applications. Our agreement has a
three-year term and is subject to an annual program fee. Our relationship
is not exclusive and we do not share fees.
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 & Company, Booz-Allen &
Hamilton, Boston Consulting Group, Diamond Technology Partners, KPMG and
McKinsey & Company; 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;
- 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
40
<PAGE> 43
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; Atlanta, Georgia; 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.
41
<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors as of March 25, 2000.
<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., an information technology consulting company, which has
been acquired by Complete Business Solutions, Inc., 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. Mr. Wright also served as Vice President of our Portland
practice from January 1997 to December 1997 and as Senior Vice President of our
Western Region from January 1997 to June 1998. 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 Technology Group, Inc. 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 Technology
Group, Inc., and Complete Business Solutions, Inc., 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.
42
<PAGE> 45
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.
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 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 is currently chief financial officer and a member of the board of
directors of Greens.com. From January 1996 to January 1999, Mr. Mardesich was a
private investor in a number of high technology start-up companies. Prior to
that, Mr. Mardesich was chief financial officer and controller of Claremont
Technology Group, Inc. from March 1991 to December 1994, senior vice president
of administration and corporate development of Claremont Technology Group, Inc.
from January 1995 to June 1996 and a member of the board of directors of
Claremont Technology Group, Inc. from March 1991 to June 1996. 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.
43
<PAGE> 46
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 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 is 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 these rules, 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 these purposes.
44
<PAGE> 47
EXECUTIVE OFFICERS
Our executive officers are appointed by our board of directors or president
and serve until their successors are elected or appointed.
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
percquisites 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
COMPENSATION LONG TERM 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 90,000
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 30,000
Senior Vice President, Eastern U.S.
Operations
Jim S. Gruher............................... $184,616 $27,000 170,000
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 2,541,014 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 reported in the columns below represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their term
assuming the specified compound rates of appreciation (5% and 10%) applied to an
assumed initial public offering
45
<PAGE> 48
price of $12.00 per share over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange Commission
and do not reflect our estimate of future stock price growth. The gains shown
are net of the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise of the option or the sale of the
underlying shares. The actual gains, if any, on the exercises of stock options
will depend on the future performance of our common stock, the optionholders'
continued employment through the option period, and the date on which the
options are exercised.
<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..... 90,000 3.5% $1.50 08/25/09 $1,624,026 $2,666,242
Mark Markowitz....... 30,000 1.2 $1.25 07/16/09 548,902 896,247
Jim S. Gruher........ 120,000 4.7 $0.88 02/01/09 2,240,008 3,629,389
40,000 1.6 $1.25 07/16/09 731,869 1,194,996
10,000 0.4 $1.50 08/27/09 180,467 296,249
</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 $12.00 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........................ 7,500 82,500 $ 78,750 $ 866,250
Martin Wright........................... 375,030 724,970 4,320,982 8,191,518
Jerry N. Grant.......................... 306,696 493,304 3,553,678 5,596,322
Mark Markowitz.......................... 108,007 291,993 1,223,582 3,181,418
Jim S. Gruher........................... 0 200,000 0 2,110,000
</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.
46
<PAGE> 49
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.
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.
47
<PAGE> 50
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 7,600,000 shares. As of
March 25, 2000, options to purchase an aggregate of 5,966,966 shares of common
stock were outstanding, 550,269 shares of common stock had been purchased
pursuant to exercises of stock options and stock purchase rights and 1,082,765
shares were available for future grant.
Our 1997 Stock Incentive Compensation Plan provides for the grant of
incentive stock options within the meaning of 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.
48
<PAGE> 51
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.
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 400,000 shares of common
stock have been reserved for issuance under the plan. As of March 25, 2000,
options to purchase an aggregate of 270,000 shares of common stock were
outstanding, no shares of common stock had been purchased pursuant to exercises
of stock options and 130,000 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.
2000 Employee Stock Purchase Plan
Our board of directors adopted our 2000 Employee Stock Purchase Plan in
April 2000. This purchase plan provides our employees with an opportunity to
purchase our common stock through accumulated payroll deductions.
A total of 1,000,000 shares of common stock has been reserved for issuance
under the purchase plan. In addition, the purchase plan provides for annual
increases in the number of shares available for issuance under the purchase plan
on January 1 of each year, beginning in
49
<PAGE> 52
2001, equal to the lesser of 2,500,000 shares, or 5% of the outstanding shares
of common stock on January 1, or a lesser number of shares to be determined by
the administrator of the purchase plan.
Under the plan, the board of directors from time to time may resolve to
appoint the full board to administer the plan, or delegate the administration of
the plan to a committee. In either case, the administrator has full and
exclusive authority to interpret and apply the terms of the purchase plan and
determine who may be eligible to participate in it.
Employees are generally eligible to participate in the purchase plan if
they are customarily employed by us or any participating subsidiary for at least
20 hours per week and more than five months in any calendar year. However, an
employee may not be granted an option to purchase stock under the purchase plan
if, by participating in the plan, the employee would:
- own stock constituting five percent or more of the total combined voting
power or value of all classes of our capital stock, or
- obtain rights to purchase stock under all of our employee stock purchase
plans accruing at a rate in excess of $25,000 worth of stock per year.
The purchase plan, which is intended to qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended, contemplates consecutive, overlapping six-month offering periods. The
offering periods generally will start on the first trading day on or after
February 15 and August 15 of each year, except for the first such offering
period, which will commence on the first trading day on or after the effective
date of this offering and will end on the last trading day on or before February
14, 2001.
The purchase plan permits participants to purchase up to 750 shares of
common stock per offering period through payroll deductions of between 1% and
15% of the participant's compensation, which for purposes of the purchase plan
is comprised of the participant's base salary, overtime, commissions and cash
bonuses from the company. Amounts deducted and accumulated by the participant
are used to purchase shares of common stock at the end of each offering period,
at a price of 85% of the lower of the fair market value of the common stock at
the beginning or end of the offering period. Participants may end their
participation at any time during an offering period, whereupon they will receive
all amounts deducted pursuant to the plan in cash, their payroll deductions to
date. Participation ends automatically upon termination of employment with us.
A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.
The purchase plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, a successor corporation may
either assume or substitute for each outstanding purchase right. If the
successor corporation refuses to assume or substitute for the outstanding
purchase rights, the offering period then in progress may be shortened, and an
accelerated exercise date will be set, by the administrator in its sole
discretion.
The administrator may set and change all applicable offering periods,
exchange rates, and procedural rules of the purchase plan in its sole
discretion. The administrator may also amend any part of the purchase plan
provided that no optionholders would be adversely affected by such amendment.
Lastly, the administrator may terminate the purchase plan, provided that its
participants are allowed a final opportunity to exercise their remaining accrued
purchase rights. The purchase plan will terminate automatically in 2020 if not
sooner terminated by the administrator.
50
<PAGE> 53
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, which was $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.
51
<PAGE> 54
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, each a beneficial owner of more than
5% of our outstanding common stock, 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 the 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 upon 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 under 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 sold an aggregate of 2,000,000 shares of our Series B
Preferred Stock to the following investors, each a beneficial owner of more than
5% of our outstanding common stock, 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 the 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 upon 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 under 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.
52
<PAGE> 55
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 90,000 $1.50
Martin Wright....................................... 01/27/97 400,000 $0.25
07/09/98 100,000 0.63
12/21/98 600,000 0.88
Jerry N. Grant...................................... 01/27/97 400,000 $0.25
12/21/98 400,000 0.88
Mark Markowitz...................................... 08/29/97 40,000 $0.63
02/13/98 160,000 0.63
07/09/98 40,000 0.63
12/21/98 100,000 0.88
07/16/99 30,000 1.25
01/10/00 30,000 4.00
Jim S. Gruher....................................... 02/01/99 120,000 $0.88
07/16/99 40,000 1.25
08/27/99 10,000 1.50
01/10/00 30,000 4.00
Michael W. Bealmear................................. 08/25/99 60,000 $1.50
Charles Scott Gibson................................ 08/25/99 60,000 $1.50
Paul G. Mardesich................................... 08/25/99 60,000 $1.50
</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.
53
<PAGE> 56
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 his sale of 1,333,333 shares at $4.50 per share of his Emerald
Solutions founders' common stock to the following investors, each a beneficial
owner of more than 5% of our outstanding common stock:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON STOCK AGGREGATE
PURCHASED FROM PURCHASE
NAME OF PURCHASER STEVEN L. DARROW PRICE
----------------- ---------------- ----------
<S> <C> <C>
TCV III (GP).............................................. 6,454 $ 21,784
TCV III, L.P. ............................................ 30,659 137,965
TCV III (Q), L.P. ........................................ 814,874 3,666,933
TCV III Strategic Partners, L.P. ......................... 36,902 166,057
Rho Management Trust I.................................... 444,444 2,000,000
</TABLE>
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 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 which
provides that, 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 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 120,000 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 March 25,
2000, there was $150,000 plus interest outstanding on the promissory note.
54
<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 25, 2000, 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; and
- all directors and executive officers as a group.
This table lists applicable percentage ownership based on 26,718,193 shares
of common stock outstanding as of March 25, 2000, as adjusted to reflect the
conversion upon the closing of this offering of all outstanding shares of
redeemable convertible preferred stock and also lists applicable percentage
ownership based on 30,718,193 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 March
25, 2000 are deemed outstanding.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING AFTER OFFERING
NAME OR GROUP OF BENEFICIAL OWNERS ----------------------- -----------------------
AND ADDRESS NUMBER PERCENTAGE NUMBER PERCENTAGE
---------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Technology Crossover Management II, L.L.C.(1)..... 6,554,864 24.5% 6,554,864 21.3%
575 High Street
Suite 400
Palo Alto, CA 94301
Technology Crossover Management III, L.L.C.(2).... 3,346,028 12.5 3,346,028 10.9
575 High Street
Suite 400
Palo Alto, CA 94301
Rho Management Trust I(3)......................... 5,246,928 19.6 5,246,928 17.1
765 Fifth Avenue
New York, NY 10153
Steven L. Darrow(4)............................... 3,255,908 12.2 3,255,908 10.6
Martin Wright(5).................................. 1,199,971 4.4 1,199,971 3.8
Jerry N. Grant(6)................................. 986,629 3.6 986,629 3.2
Mark Markowitz(7)................................. 259,950 * 259,950 *
Jim S. Gruher(8).................................. 153,152 * 153,152 *
Michael W. Bealmear(9)............................ 10,000 * 10,000 *
Charles Scott Gibson(10).......................... 10,000 * 10,000 *
Paul G. Mardesich(11)............................. 470,991 1.8 470,991 1.5
C. Toms Newby(12), (13)........................... 9,900,892 37.1 9,900,892 32.2
All directors and executive officers as a group
(8 persons)(12)............................... 16,247,493 58.7 16,247,493 51.3
</TABLE>
- -------------------------
* Less than 1% of the outstanding shares of common stock.
55
<PAGE> 58
(1) Includes 3,135,674 shares held by Technology Crossover Ventures II, L.P.,
2,410,750 shares held by TCV II (Q), L.P., 478,755 shares held by
Technology Crossover Ventures II, C.V., 427,823 shares held by TCV II
Strategic Partners, L.P., 101,862 shares held by TCV II V.O.F. C. Toms
Newby, a director of the company, is a general partner of Technology
Crossover Management II, L.L.C.
(2) Includes 3,067,418 shares held by TCV III (Q), L.P., 138,908 shares held by
TCV III Strategic Partners, L.P., 115,407 shares held by TCV III, L.P. and
24,295 shares held by TCV III (GP). C. Toms Newby, a director of the
company, is a general partner of Technology Crossover Management III,
L.L.C.
(3) Joshua Ruch controls Rho Management Company, Inc., an investment advisory
company exercising voting and investment power over all the shares held by
Rho Management Trust I. Mr. Ruch disclaims all beneficial ownership over
such shares, except to the extent of his pecuniary interest therein.
(4) Mr. Darrow has agreed to sell 600,000 shares of our common stock upon
exercise of the underwriters' option to acquire additional shares to cover
over-allotments. The table assumes no exercise of the underwriters'
over-allotment option.
(5) Includes 466,715 shares issuable upon exercise of stock options held by Mr.
Wright exercisable within 60 days of March 25, 2000.
(6) Includes 100,000 shares held by the Grant II Trust and 5,000 shares held by
the Grant Irrevocable Trust. Also includes 330,042 shares issuable upon
exercise of stock options held by Mr. Grant exercisable within 60 days of
March 25, 2000.
(7) Includes 123,604 shares held by the Markowitz Living Trust. Also includes
136,346 shares issuable upon exercise of stock options held by Mr.
Markowitz exercisable within 60 days of March 25, 2000.
(8) Includes 6,002 shares issuable upon exercise of stock options held by Mr.
Gruher exercisable within 60 days of March 25, 2000.
(9) Includes 10,000 shares issuable upon exercise of stock options held by Mr.
Bealmear exercisable within 60 days of March 25, 2000.
(10) Includes 10,000 shares issuable upon exercise of stock options held by Mr.
Gibson exercisable within 60 days of March 25, 2000.
(11) Includes 10,000 shares held by John E. Mardesich, 10,000 shares held by
Karen C. Mardesich, and 113,829 shares held by Mary Mardesich. Also
includes 10,000 shares issuable upon exercise of stock options held by Mr.
Mardesich exercisable within 60 days of March 25, 2000.
(12) Includes 3,135,674 shares held by Technology Crossover Ventures II, L.P.,
2,410,750 shares held by TCV II (Q), L.P., 478,755 shares held by
Technology Crossover Ventures II, C.V., 427,823 shares held by TCV II
Strategic Partners, L.P., 101,862 shares held by TCV II V.O.F., 3,067,418
shares held by TCV III (Q), L.P., 138,908 shares held by TCV III Strategic
Partners, L.P., 115,407 shares held by TCV III, L.P. and 24,295 shares held
by TCV III (GP). C. Toms Newby, a director of the Company, is a general
partner of both Technology Crossover Management II, L.L.C. and Technology
Crossover Management III, L.L.C., the two entities which together control
all of the above funds. Mr. Newby disclaims beneficial ownership of all
shares held by these entities except to the extent of his pecuniary
interest therein.
(13) Includes an aggregate of 984,105 shares issuable upon exercise of stock
options held by our directors and executive officers exercisable within 60
days of March 25, 2000.
56
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
80,000,000 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,
73,866,667 shares shall be designated as common stock and 6,133,333 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, material provisions of
which are summarized below, and, which are included as exhibits to the
registration statement of which this prospectus forms a part, and the provisions
of applicable Delaware law.
COMMON STOCK
As of March 25, 2000, there were 26,718,193 shares of common stock
outstanding on a pro forma basis which were held of record by approximately 222
stockholders. There will be 30,718,193 shares of common stock outstanding
assuming no exercise of outstanding options after March 25, 2000 after giving
effect to the sale of our common stock in this offering. There are 5,966,966
shares issuable upon exercise of outstanding options under our 1997 Stock
Incentive Compensation Plan and 270,000 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 current holders of our common stock are subject to the terms of a
stockholders' agreement and a rights and restrictions agreement.
PREFERRED STOCK
As of March 25, 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 5,333,332 shares of common stock automatically
upon completion of this offering.
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. 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.
57
<PAGE> 60
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.
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.
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.
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 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, until the holders of Series A Preferred Stock receive
assets valued at 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.
As of March 25, 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 800,000 shares of common stock automatically upon
completion of this offering.
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, have a
different conversion ratio and have a liquidation price of $3.50 per share for
the first twelve months after issuance and $4.50 per share thereafter. In
addition, the holders of Series B Preferred Stock 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.
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 restrictions of these
shares of preferred stock. 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
58
<PAGE> 61
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 the holders of our preferred stock, the holders of 15,147,818 shares
of common stock on an as converted basis are entitled to 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
may 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
Upon the closing of this offering, some provisions of Delaware law and our
certificate of incorporation and bylaws could make the following more difficult:
- acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise; or
- removal of our incumbent officers and directors.
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. 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.
59
<PAGE> 62
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 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 American Stock
Transfer & Trust Co., Inc.
NASDAQ STOCK MARKET NATIONAL MARKET LISTING
We have applied to list our common stock on the Nasdaq National Market
under the symbol "EMSO."
60
<PAGE> 63
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 30,718,193 shares of common
stock outstanding. Of these shares, the 4,000,000 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 defined in Rule 144 of the
Securities Act.
Of these shares, the remaining 26,718,193 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, no shares will become
eligible for sale, subject to the provisions of Rules 144 and 701;
- beginning 181 days after the effective date, 23,139,504 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;
- thereafter, the remaining 3,578,689 shares held for one year or more will
become eligible for sale, subject to the provisions of Rule 144.
Beginning 181 days after the date of this prospectus, approximately
2,168,431 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, or approximately 307,181 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" for additional information regarding limitations on the sale of
our common stock.
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.
61
<PAGE> 64
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated as
of the date of this prospectus, 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............................................. 4,000,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock being sold in this offering
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 underwriting agreement provides that, in the event of a default
by an underwriter, in certain circumstances the purchase commitments of
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated.
We have been advised by the representatives that the underwriters propose
to offer the shares of common stock to the public initially at the public
offering price set forth on the cover page of this prospectus and, through the
representatives, to selling group members at such price less a concession of
$ . per share and the underwriters and such selling group
members may allow a discount of $ . per share on sales to
certain other brokers-dealers. After the offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
The selling stockholder has granted to the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the public offering
price less underwriting discounts and commissions. Such option may be exercised
only to cover over-allotments in the sale of shares of common stock being sold
in this offering. To the extent such option is exercised, each underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares of common stock as the number of
shares of common stock to be purchased by it in the above table bears to
4,000,000.
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
62
<PAGE> 65
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 $1.1
million. 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 this offering.
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.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters of this offering. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the representatives to underwriters that may make Internet distributions on the
same basis as other allocations. Any underwriters making such Internet
distributions will follow the procedures for online distributions previously
cleared with the Securities and Exchange Commission.
The representatives have advised us that they do not expect discretionary
sales by the underwriters to exceed 5% of the shares being offered hereby.
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
63
<PAGE> 66
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 400,000 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. 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;
- 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 being sold in this offering 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, and upon the authority of that firm as experts in accounting and
auditing.
The financial statements of Z/COM Incorporated as of December 31, 1998 and
1999, and for each of the years then ended have been included in this prospectus
and in the registration statement in reliance upon the report of KPMG LLP,
independent auditors, and upon the authority of that firm as experts in
accounting and auditing.
64
<PAGE> 67
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 being sold in this offering. This prospectus does
not contain all the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to us and our common stock, reference is made to the registration
statement and to the exhibits and schedules to the registration statement.
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 www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
------------------------------------
"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.
65
<PAGE> 68
EMERALD -- DELAWARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EMERALD -- DELAWARE, INC.
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statement of Stockholders' Equity (Deficit)................. F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-8
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
Overview.................................................... F-26
Pro Forma Condensed Consolidated Statements of Operations... F-27
Notes to Pro Forma Condensed Consolidated Statements of
Operations................................................ F-29
Z/COM INCORPORATED
Independent Auditors' Report................................ F-30
Balance Sheets.............................................. F-31
Statements of Operations.................................... F-32
Statements of Stockholders' Deficiency...................... F-33
Statements of Cash Flows.................................... F-34
Notes to Financial Statements............................... F-35
</TABLE>
F-1
<PAGE> 69
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, except for note 14, which is as of April 3, 2000.
F-2
<PAGE> 70
EMERALD -- DELAWARE, INC.
BALANCE SHEETS
DECEMBER 26, 1998, DECEMBER 25, 1999 AND MARCH 25, 2000
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 25, MARCH 25, PRO
1998 1999 2000 FORMA
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 302,733 $ 1,708,355 $ 3,138,660
Trade accounts receivable, net of allowance for doubtful
accounts of $50,000 in 1998, $249,999 in 1999 and
$287,900 in 2000......................................... 2,167,626 6,234,715 9,415,549
Receivable from related party.............................. 54,947 1,774,140 323,333
Prepaid expenses........................................... 261,135 392,297 214,137
----------- ----------- ------------
Total current assets................................. 2,786,441 10,109,507 13,091,679
----------- ----------- ------------
Property and equipment, net................................. 1,688,089 4,453,632 6,412,728
Intangibles................................................. -- -- 6,999,428
Other assets................................................ 171,188 321,691 742,707
----------- ----------- ------------
$ 4,645,718 $14,884,830 $ 27,246,542
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 652,960 $ 1,661,043 $ 1,648,927
Accrued compensation....................................... 626,918 2,864,762 4,434,457
Other accrued liabilities.................................. 169,126 828,302 1,571,974
Line of credit............................................. -- 5,000,000 4,695,099
Deferred revenue........................................... 375,322 374,415 131,252
Notes payable.............................................. -- -- 1,350,000
Current portion of capital lease obligations............... 69,438 163,882 447,235
----------- ----------- ------------
Total current liabilities............................ 1,893,764 10,892,404 14,278,944
----------- ----------- ------------
Capital lease obligations, excluding current portion........ 74,328 210,717 757,798
Other long-term liabilities................................. 31,416 31,416 392,899
Series A redeemable convertible preferred stock, $.001 par
value, 13,333,334 shares authorized, issued, and
outstanding at December 25, 1999 and March 25, 2000.
Aggregate liquidation preference of $7,000,000 at December
25, 1999 and March 25, 2000. Aggregate redemption value of
$7,583,333 and $7,764,167 at December 25, 1999 and March
25, 2000................................................... -- 7,207,422 7,421,215 --
Series B redeemable convertible preferred stock, $.001 par
value, 2,000,000 shares authorized, issued and outstanding
at March 25, 2000. Aggregate liquidation preference of
$7,000,000 at March 25, 2000. Aggregate redemption value of
$5,062,500 at March 25, 2000............................... -- -- 5,062,500 --
Stockholders' equity (deficit):
Common stock, $.001 par value. 40,000,000 shares
authorized, at December 25, 1999, 40,800,000 shares
authorized, at March 25, 2000, 19,805,200, 20,017,032 and
20,584,861 shares issued and outstanding at December 26,
1998, December 25, 1999 and March 25, 2000, respectively,
(26,718,193 shares issued and outstanding pro-forma)..... 19,805 20,017 20,585 26,718
Additional paid-in capital................................. 5,867,611 5,400,614 19,289,572 31,767,154
Deferred compensation...................................... -- (86,259) (7,805,041) (7,805,041)
Accumulated deficit........................................ (3,145,036) (8,570,219) (11,952,742) (11,952,742)
----------- ----------- ------------ -----------
2,742,380 (3,235,847) (447,626) 12,036,089
Less stock subscriptions receivable........................ 96,170 221,282 219,188 219,188
----------- ----------- ------------ -----------
Total stockholders' equity (deficit)................. 2,646,210 (3,457,129) (666,814) 11,816,901
Commitments, contingencies and subsequent events
----------- ----------- ------------
$ 4,645,718 $14,884,830 $ 27,246,542
=========== =========== ============
</TABLE>
See accompanying Notes to Financial Statements.
F-3
<PAGE> 71
EMERALD -- DELAWARE, INC.
STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND
QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
------------------------------------------ ------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 25,
1997 1998 1999 1999 2000
------------ ------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (includes related party
revenues of $55,000 and
$3,384,000 during fiscal years
1998 and 1999, respectively, and
$301,694 and $1,962,835 during
the 1999 and 2000 quarters,
respectively)................... $ 2,720,750 $15,010,608 $34,710,594 $5,928,769 $14,830,293
Expenses:
Cost of revenues -- professional
services (excluding stock
compensation)................. 2,417,697 7,742,208 19,280,517 3,328,052 7,884,812
Cost of revenues -- AT&T
warrant....................... -- -- -- -- 74,644
Sales and marketing (excluding
stock compensation)........... 406,561 2,400,561 6,589,529 988,647 3,045,721
General and administrative
(excluding stock
compensation)................. 3,473,581 4,091,416 14,261,204 2,320,888 5,874,307
Stock compensation*............. -- -- 18,921 -- 1,221,503
Loss on investment in subsidiary
held for disposal............. 238,650 -- -- -- --
----------- ----------- ----------- ---------- -----------
Total operating expenses.......... 6,536,489 14,234,185 40,150,171 6,637,587 18,100,987
----------- ----------- ----------- ---------- -----------
Income (loss) from operations..... (3,815,739) 776,423 (5,439,577) (708,818) (3,270,694)
----------- ----------- ----------- ---------- -----------
Interest income (expense), net.... (37,306) (8,707) (20,006) (15,489) (111,829)
----------- ----------- ----------- ---------- -----------
Income (loss) before income
taxes......................... (3,853,045) 767,716 (5,459,583) (724,307) (3,382,523)
----------- ----------- ----------- ---------- -----------
Income taxes...................... -- 59,707 (34,400) -- --
----------- ----------- ----------- ---------- -----------
Net income (loss)............... (3,853,045) 708,009 (5,425,183) (724,307) (3,382,523)
----------- ----------- ----------- ---------- -----------
Accretion of redemption value of
redeemable convertible
preferred stock............... -- -- 691,535 69,138 276,293
Effect of beneficial conversion
feature of Series B Preferred
Stock......................... -- -- -- -- 1,840,000
Net income (loss) applicable to
common stockholders........... $(3,853,045) $ 708,009 $(6,116,718) $ (793,445) $(5,498,816)
=========== =========== =========== ========== ===========
Net earnings (loss) per share
applicable to common
stockholders:
Basic earnings (loss) per
share......................... $ (0.23) $ 0.04 $ (0.31) $ (0.04) $ (0.27)
Diluted earnings (loss) per
share......................... $ (0.23) $ 0.03 $ (0.31) $ (0.04) $ (0.27)
Shares used to calculate:
Basic earnings (loss) per
share....................... 16,739,028 19,488,361 19,930,206 19,826,022 20,089,820
Diluted earnings (loss) per
share....................... 16,739,028 20,364,229 19,930,206 19,826,022 20,089,820
(*)Stock compensation
Cost of revenues -- professional
services...................... -- -- -- -- 72,554
Sales and marketing............. -- -- -- -- 542,233
General and administrative...... -- -- 18,921 -- 606,716
</TABLE>
See accompanying Notes to Financial Statements.
F-4
<PAGE> 72
EMERALD -- DELAWARE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTER ENDED MARCH 25, 2000
<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........................ 10,300,000 $10,300 $ 2,049,700 $ -- $(2,060,000) $ -- $ --
Sale of common stock........... 7,786,957 7,787 2,746,697 -- (2,754,484) -- --
Payment of stock subscriptions
receivable.................... -- -- -- -- 4,618,899 -- 4,618,899
Stock issued in acquisitions... 615,883 616 384,312 -- -- -- 384,928
Net loss....................... -- -- -- -- -- (3,853,045) (3,853,045)
---------- ------- ----------- ----------- ----------- ------------ -----------
Balances at December 27,
1997.......................... 18,702,840 18,703 5,180,709 -- (195,585) (3,853,045) 1,150,782
Sale of common stock........... 1,176,000 1,176 733,825 -- (95,250) -- 639,751
Payment of stock subscriptions
receivable.................... -- -- -- -- 194,665 -- 194,665
Stock repurchased.............. (432,000) (432) (270,788) -- -- -- (271,220)
Options exercised.............. 207,350 207 129,635 -- -- -- 129,842
Settlement of a liability with
common stock.................. 151,010 151 94,230 -- -- -- 94,381
Net income..................... -- -- -- -- -- 708,009 708,009
---------- ------- ----------- ----------- ----------- ------------ -----------
Balances at December 26,
1998.......................... 19,805,200 19,805 5,867,611 -- (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.............. 206,832 207 99,363 -- -- -- 99,570
Stock issued for services
rendered...................... 5,000 5 19,995 -- -- -- 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.......................... 20,017,032 20,017 5,400,614 (86,259) (221,282) (8,570,219) (3,457,129)
Sales of stock and issuance of
stock options(unaudited)...... -- -- 3,208,071 (2,616,104) -- -- 591,967
Amortization of deferred
compensation (unaudited)...... -- -- -- 271,678 -- -- 271,678
Options exercised
(unaudited)................... 136,087 136 111,842 -- -- -- 111,978
Payment of stock subscriptions
receivable (unaudited)........ -- -- -- -- 2,094 -- 2,094
Stock issued in acquisition
(unaudited)................... 431,742 432 5,396,338 -- -- 5,396,770
Accretion of redemption value
of redeemable convertible
preferred stock (unaudited)... -- -- (276,293) -- -- -- (276,293)
Beneficial conversion feature
of Series B redeemable
convertible preferred stock
(unaudited)................... -- -- 1,840,000 -- -- -- 1,840,000
Recognition of beneficial
conversion feature of Series B
redeemable convertible
preferred stock (unaudited)... -- -- (1,840,000) -- -- -- (1,840,000)
Issuance of warrant to
AT&T (unaudited).............. -- -- 5,449,000 (5,449,000) -- -- --
Amortization of
AT&T warrant(unaudited)....... -- -- -- 74,644 -- -- 74,644
Net loss (unaudited)........... -- -- -- -- -- (3,382,523) (3,382,523)
---------- ------- ----------- ----------- ----------- ------------ -----------
Balances at March 25, 2000
(unaudited)................... 20,584,861 $20,585 $19,289,572 $(7,805,041) $ (219,188) $(11,952,742) $ (666,814)
========== ======= =========== =========== =========== ============ ===========
</TABLE>
See accompanying Notes to Financial Statements.
F-5
<PAGE> 73
EMERALD -- DELAWARE, INC.
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
------------------------------------------ -------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 25,
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $(3,853,045) $ 708,009 $(5,425,183) $ (793,445) $(3,382,523)
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation and amortization... 106,610 296,867 819,871 113,016 353,114
Loss on disposal of equipment... -- -- 40,013 -- --
Stock compensation expense...... -- -- 38,921 -- 1,295,789
Loss on investment in subsidiary
held for disposal............. 238,650 -- -- -- --
Changes in certain assets and
liabilities, net of
acquisition:
Accounts receivable........... (566,482) (1,409,480) (4,067,089) (1,109,974) (3,033,811)
Receivable from related
party....................... -- (54,947) (1,719,193) 54,947 1,450,807
Prepaid expenses.............. (97,828) (143,672) (131,162) 60,384 180,663
Other assets.................. (80,577) (5,280) (233,684) (101,799) (387,442)
Accounts payable, accrued
compensation and other
accrued liabilities......... 1,271,255 40,592 3,905,103 1,111,321 1,601,996
Deferred revenue.............. 71,768 292,860 (907) (277,089) (243,163)
----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities................ (2,909,649) (275,051) (6,773,310) (942,639) (2,164,570)
----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchases of property and
equipment....................... (755,925) (1,028,939) (3,220,316) (749,459) (1,177,940)
Proceeds from disposition of
subsidiary...................... -- 472,413 -- -- --
Cash paid for acquisition......... (911,493) -- -- -- --
Cash obtained through
acquisition..................... 174,930 -- -- -- 103,597
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities.................. (1,492,488) (556,526) (3,220,316) (749,459) (1,074,343)
----------- ----------- ----------- ----------- -----------
Cash provided by financing
activities:
Proceeds from issuance of common
stock........................... 4,618,899 639,751 -- -- --
Payment of stock subscriptions
receivable...................... -- 194,665 74,888 56,711 2,094
Proceeds from issuance of
preferred stock................. -- -- 6,515,887 6,515,887 5,000,000
Exercise of stock options......... -- 129,842 99,570 1,008 111,978
Proceeds from line of credit,
net............................. -- -- 5,000,000 -- (304,901)
Increase in other long-term
liabilities..................... -- 31,416 -- -- 3,983
Repayment of capital lease
obligations..................... (13,229) (64,897) (91,097) (16,920) (143,936)
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 6,556,686 4,669,218
----------- ----------- ----------- ----------- -----------
</TABLE>
F-6
<PAGE> 74
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
------------------------------------------ -------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 25,
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net increase in cash and cash
equivalents................. 203,533 99,200 1,405,622 4,864,588 1,430,305
Cash and cash equivalents at
beginning of period............... -- 203,533 302,733 302,733 1,708,355
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period............................ $ 203,533 $ 302,733 $ 1,708,355 $ 5,167,321 $ 3,138,660
=========== =========== =========== =========== ===========
Supplemental disclosures of cash
flow information:
Cash paid during the period for
income taxes.................... $ -- $ 59,707 $ -- $ -- $ --
Cash paid during the period for
interest........................ -- -- 80,017 15,867 113,480
=========== =========== =========== =========== ===========
Supplemental schedule of noncash
investing and financing
activities:
Equipment acquired through capital
lease obligations............... 221,892 -- 321,930 -- 914,270
Common stock issued in
acquisitions.................... 384,928 -- -- -- 5,396,770
Notes payable issued in
acquisition..................... -- -- -- -- 1,350,000
Reacquisition of common stock in
conjunction with sale of
subsidiary...................... -- 271,220 -- -- --
Liability in connection with
restricted stock to be issued to
employees....................... -- -- -- -- 357,500
Recognition of beneficial
conversion feature of Series B
redeemable convertible preferred
stock........................... -- -- -- -- 1,840,000
Stock subscriptions receivable.... 195,585 95,250 -- -- --
Stock issued in settlement of a
liability....................... -- 94,381 -- -- --
Accretion of redemption value of
redeemable convertible preferred
stock........................... $ -- $ -- $ 691,535 $ 69,138 $ 276,293
=========== =========== =========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
F-7
<PAGE> 75
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
(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.
Fiscal year 1997 includes the accounts of the Company and its subsidiary,
ServerLogic Corporation ("ServerLogic"), which was disposed of in 1998.
The March 27, 1999 and March 25, 2000 quarters included 13 weeks. On March
25, 2000, the Company completed its acquisition of Z/COM Incorporated ("Z/COM").
The balances at March 25, 2000 include the accounts of the Company and Z/COM.
(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.
F-8
<PAGE> 76
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
(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) 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 and
for the effect of the beneficial conversion feature of redeemable convertible
preferred stock. The calculation of
F-9
<PAGE> 77
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
diluted net income (loss) per share excludes potential common shares if the
effect is antidilutive.
(I) INTANGIBLE ASSETS
Intangible assets consist of goodwill, which represents costs in excess of
the fair value of the net assets acquired and other identifiable intangibles.
Intangible assets are amortized on a straight-line basis generally over four
years. The Company assesses the recoverability of intangible assets by
determining whether the amortization of the intangible balance over its
remaining life can be recovered through undiscounted future cash flows. The
amount of intangible asset impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the recoverability of the
intangible assets will be impacted if estimated future operating cash flows are
not achieved.
(J) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
(K) 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.
(L) SEGMENT INFORMATION
Revenues consist almost entirely 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 has 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.
(M) 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
F-10
<PAGE> 78
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
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 and the quarters ended March 27, 1999 and March 25,
2000:
<TABLE>
<CAPTION>
CUSTOMER ACCOUNTS
CUSTOMER AS A % OF RECEIVABLE AS A % OF TRADE
CUSTOMER REVENUE ACCOUNTS RECEIVABLE
-------- ------------------ ---------------------------
<S> <C> <C>
FISCAL YEAR
1997:
A.......................... 71% 25%
B.......................... 10 23
1998:
A.......................... 18 8
C.......................... 25 23
D.......................... 13 22
E.......................... 13 13
1999:
C.......................... 35 22
Quarter ended March 27,
1999: -- --
C.......................... 39 30
D.......................... 10 13
E.......................... 14 17
Quarter ended March 25,
2000: -- --
C.......................... 21 15
F.......................... 13 3
</TABLE>
(N) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities 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 adoption
of this statement is not expected to have a material impact on our financial
statements.
F-11
<PAGE> 79
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
In December 1999, the SEC released Staff Accounting Bulletin No. 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.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB opinion No. 25. The Interpretation
clarifies the application of APB opinion No. 25, Accounting for Stock Issued to
Employees for certain issues. The provisions of the Interpretation are effective
July 1, 2000. The Company does not expect Interpretation No. 44 will have a
material impact on its financial statements.
(o) 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, each
of the then outstanding shares of the Company's redeemable convertible preferred
stock will automatically convert into 0.4 shares of common stock 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 March 25, 2000.
(p) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the March 27, 1999 and March
25, 2000 unaudited interim financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation.
(2) ACCOUNTS RECEIVABLE
Trade accounts receivable at December 26, 1998, December 25, 1999 and March
25, 2000 consists of the following:
<TABLE>
<CAPTION>
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Trade accounts receivable...... $1,673,398 $4,649,471 $6,517,069
Revenues earned in excess of
billings..................... 544,228 1,835,243 3,186,380
---------- ---------- ----------
2,217,626 6,484,714 9,703,449
Less allowance for doubtful
accounts..................... 50,000 249,999 287,900
---------- ---------- ----------
Trade accounts
receivable, net.... $2,167,626 $6,234,715 $9,415,549
========== ========== ==========
</TABLE>
F-12
<PAGE> 80
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
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 had $857,545 in accounts receivable and $916,595
in revenues earned in excess of billings related to Greens.com. At March 25,
2000 the Company had $192,645 in accounts receivable and $130,688 in revenues 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, and for the quarters ended March 27, 1999 and March 25, 2000 is
approximately $301,694 and $1,962,835, respectively, of services fees charged to
Greens.com.
(3) PROPERTY AND EQUIPMENT AND INTANGIBLES
Property and equipment, net, at December 26, 1998, December 25, 1999 and
March 25, 2000 consists of the following:
<TABLE>
<CAPTION>
1998 1999 2000
---------- ---------- -----------
<S> <C> <C> <C>
Office furniture.................................. $ 352,863 $ 706,102 $ 1,157,526
Computer equipment................................ 1,061,244 3,034,879 3,750,165
Computer software................................. 364,272 1,027,163 1,964,674
Leasehold improvements............................ 228,378 718,116 926,105
---------- ---------- -----------
2,006,757 5,486,260 7,798,470
Less accumulated depreciation and amortization.... 318,668 1,032,628 1,385,742
---------- ---------- -----------
Property and equipment, net............. $1,688,089 $4,453,632 $ 6,412,728
========== ========== ===========
</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, $113,016 and $353,114 for the quarters
ended March 27, 1999 and March 25, 2000, 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, December 25, 1999, and March 25, 2000
as follows:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
Office furniture....................................... $221,892 $208,662 $ 433,662
Computer equipment..................................... -- 321,930 1,011,200
-------- -------- ----------
221,892 530,592 1,444,862
Less accumulated amortization.......................... 69,554 147,601 242,827
-------- -------- ----------
$152,338 $382,991 $1,202,035
======== ======== ==========
</TABLE>
F-13
<PAGE> 81
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
Intangibles, net at December 26, 1998, December 25, 1999 and March 25, 2000
consist of the following:
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- ----------
<S> <C> <C> <C>
Workforce in place.................................... $ -- $ -- $ 148,000
Customer value........................................ -- -- 92,000
Goodwill.............................................. -- -- 6,759,428
------- ------- ----------
Intangibles, net............................ $ -- $ -- $6,999,428
======= ======= ==========
</TABLE>
Amortization expense excluding other assets totaled $40,339 for the year
ended December 27, 1997. There was no amortization expense for the years ended
December 26, 1998 and December 25, 1999 and for the quarters ended March 27,
1999 and March 25, 2000.
(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 11.25% at March 25, 2000) and are secured by substantially all
Company assets. At December 25, 1999 and March 25, 2000, amounts borrowed under
this facility were $5,000,000 and 4,695,099, respectively. In connection with
the facility, the bank requires the maintenance of certain financial covenants.
The Company cancelled this facility on March 31, 2000 and replaced it with a new
line of credit arrangement with a different bank.
The new line of credit agreement provides for borrowings of up to the
lesser of $7,000,000 or 85% of eligible accounts receivable and 50% of eligible
unbilled accounts receivable. Borrowings under this credit facility bear
interest at the bank's prime rate plus 1.75% and are secured by substantially
all Company assets. In connection with the facility, the bank requires the
maintenance of certain financial covenants. The credit arrangement has a
maturity date of March 29, 2001. The Company may not pay dividends without the
consent of the bank.
(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:
F-14
<PAGE> 82
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
<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, and $189,387 and $693,353 for
the quarters ended March 27, 1999 and March 25, 2000, respectively.
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK
(a) In February 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, net of issuance costs of $484,113.
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 $3.94 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.
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
F-15
<PAGE> 83
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
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, until the holders of Series A Preferred Stock receive
assets valued at 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-16
<PAGE> 84
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
(b) In February 2000, the Company amended its articles of incorporation and
designated 2,000,000 of its preferred shares as Series B redeemable convertible
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. The 2,000,000 shares of Series B
Preferred Stock were issued with a beneficial conversion feature, which was
valued at approximately $1.8 million. The beneficial conversion feature was
calculated as the difference between the conversion price and the fair value of
the common stock into which the preferred stock is convertible. This amount is
accounted for as an increase in additional paid-in capital and an in substance
dividend to the preferred stockholders in the first quarter of 2000 and,
accordingly, increases the loss applicable to common stockholders by
approximately $1.8 million.
(7) STOCKHOLDERS' EQUITY (DEFICIT)
(A) STOCK SUBSCRIPTIONS RECEIVABLE
The Company had common stock subscriptions receivables totaling $96,170,
$221,282 and $219,188 at December 26, 1998, December 25, 1999 and March 25,
2000, respectively. The receivables at December 25, 1999 and March 25, 2000
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 133,333 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 133,333
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
and March 25, 2000 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
F-17
<PAGE> 85
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
(loss) per share for the years ended December 27, 1997, December 26, 1998 and
December 25, 1999 and the quarters ended March 27, 1999 and March 25, 2000:
<TABLE>
<CAPTION>
YEAR ENDED QUARTERS ENDED
--------------------------------------- ---------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)................................. $(3,853,045) $ 708,009 $(5,425,183) $ (724,307) $ (3,382,523)
Accretion of redemption value of redeemable
convertible preferred stock...................... -- -- 691,535 69,138 276,293
Effect of beneficial conversion feature of Series
B Preferred Stock................................ -- -- -- -- 1,840,000
----------- ----------- ----------- ------------ ------------
Net income (loss) applicable to common
stockholders..................................... $(3,853,045) $ 708,009 $(6,116,718) $ (793,445) $ (5,498,816)
=========== =========== =========== ============ ============
Shares used to calculate basic earnings (loss) per
share............................................ 16,739,028 19,488,361 19,930,206 19,826,022 20,089,820
Basic earnings (loss) per share................... $ (0.23) $ 0.04 $ (0.31) $ (0.04) $ (0.27)
Dilutive effect of stock options.................. -- 875,869 --
Shares used to calculate dilutive earnings (loss)
per share........................................ 16,739,028 20,364,229 19,930,206 19,826,022 20,089,820
Diluted earnings (loss) per share................. $ (0.23) $ 0.03 $ (0.31) $ (0.04) $ (0.27)
</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 and the quarters ended March 27, 1999
and March 25, 2000 because the effect would be antidilutive:
<TABLE>
<CAPTION>
YEAR ENDED QUARTERS ENDED
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Shares of common stock.............................. 1,960,280 1,540,280 5,646,678 3,824,542 6,236,966
----------- ----------- ----------- ----------- ------------
Weighted average exercise price per share........... $ 0.38 $ 0.88 $ 1.10 $ 0.65 $ 1.58
</TABLE>
The computation of diluted earnings (loss) per share during the year ended
December 25, 1999 and the quarter ended March 25, 2000 excluded shares issuable
upon conversion of 5,333,332 and 6,133,332 shares, respectively, of redeemable
convertible preferred stock because the effect would be antidilutive. In
addition, the computation of diluted loss per share during the quarter ended
March 25, 2000, excludes a warrant to acquire 600,000 shares of common stock
because the effect would be antidilutive.
(C) AT&T STRATEGIC ALLIANCE
In March 2000, the Company entered into a strategic alliance with AT&T
Solutions to take advantage of both companies' sales channels and combined
business expertise in the area of e-business solutions. As part of the
agreement, the Company granted AT&T a warrant to purchase 600,000 shares of
common stock. 40,000 shares subject to the warrant are exercisable at a price of
$6.25 and the remainder are exercisable at the IPO price or if the Company has
not completed its IPO by August 1, 2000, the fair market value as of August 1,
2000. The warrants were immediately vested on the date of grant in that they are
not subject to forfeiture for any reason. 560,000 shares subject to the warrant
will become exercisable after seven years or, upon achievement of certain
performance thresholds, on the first and second anniversary of the grant. The
remaining 40,000 shares subject to the warrant are
F-18
<PAGE> 86
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
exercisable immediately. Although the agreement does not require AT&T to make
any performance commitments and the warrants are not subject to forfeiture for
any reason, the Company expects to recognize the fair value of the warrant of
approximately $5.449 million over the two year period of the arrangement.
Approximately $75,000 has been included in cost of revenues -- AT&T warrant for
the quarter ended March 25, 2000.
The fair value of the warrant was based on an option pricing model and the
following assumptions:
<TABLE>
<S> <C>
Stock price............................................... $12.50
Exercise price............................................ $6.25 - $12.50
Volatility................................................ 60%
Term...................................................... 2 - 9 years
Risk-free rate............................................ 6.5%
</TABLE>
(8) INTEREST INCOME AND EXPENSE, NET
Net other expense for the years ended December 27, 1997, December 26, 1998
and December 25, 1999 and the quarters ended March 27, 1999 and March 25, 2000
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED QUARTERS ENDED
------------------------------------ -------------------------
1997 1998 1999 1999 2000
-------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest income......................................... $ -- $ 3,514 $ 103,588 $ 378 $ 20,253
Interest expense........................................ (37,306) (12,221) (123,594) (15,867) (132,082)
-------- ----------- ----------- ----------- -----------
Net other expense................................ $(37,306) $ (8,707) $ (20,006) $ (15,489) $ (111,829)
======== =========== =========== =========== ===========
</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)
F-19
<PAGE> 87
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
(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>
There was no tax expense (benefit) for the quarters ended March 27, 1999
and March 25, 2000.
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) ACQUISITIONS
(a) ACQUISITION OF SERVERLOGIC CORPORATION
On September 8, 1997, the Company acquired all the outstanding shares of
common stock of ServerLogic, a Washington based provider of PowerBuilder add-on
products and
F-20
<PAGE> 88
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
client/server consulting solutions. The purchase price consisted of $900,000 in
cash and 430,176 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 432,000 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 $483,909 and net loss of $170,211
are included in the Company's financial statements.
(B) ACQUISITION OF Z/COM INCORPORATED
On March 25, 2000, the Company completed the acquisition of Z/COM
Incorporated (Z/COM), a consulting business offering internet marketing
solutions, branding strategies, digital advertising and Internet Web design
services to large and small corporations. Under terms of the acquisition, the
Company issued 431,742 shares of its common stock and notes payable totaling
$1,350,000 in exchange for all outstanding shares of Z/COM's common stock. The
notes bear interest at 8% and are due upon the earlier of March 25, 2001 or ten
business days after the closing of an IPO of the Company's common stocks. The
acquisition was accounted for using the purchase method of accounting, and,
accordingly, the results of Z/COM's operations are included in the Company's
consolidated financial statements beginning March 25, 2000. The purchase price
excludes performance-based contingent payments of up to $900,000 payable in
common stock or cash at the election of the former stockholders of Z/COM. The
contingent amounts will be accounted for as compensation if paid.
A summary of the consideration paid for the acquisition and liabilities
assumed is as follows:
<TABLE>
<S> <C>
Stock issued................................................ $5,396,770
Notes payable issued........................................ 1,350,000
Direct acquisition costs.................................... 50,000
Accrued liabilities assumed................................. 790,953
----------
Total............................................. $7,587,723
==========
</TABLE>
F-21
<PAGE> 89
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
Such amounts were allocated as follows:
<TABLE>
<S> <C>
Cash acquired............................................... $ 103,595
Other current assets acquired............................... 149,526
Property and equipment and other non-current assets......... 335,174
Goodwill and other intangibles.............................. 6,999,428
----------
Total............................................. $7,587,723
==========
</TABLE>
Goodwill represents the excess of the purchase price over the fair value of
identifiable tangible and intangible assets acquired. Goodwill and identifiable
intangible assets are being amortized using the straight-line method over their
estimated life of 4 years.
As part of employment agreements signed March 25, 2000 with employees of
Z/COM, a deferred non-cash stock compensation charge of $358,000 was recorded
associated with 28,600 shares subject to repurchase rights. As of March 25,
2000, the shares had not been issued therefore the Company has recorded a
liability for the value of the shares to be issued. The Company expects to
recognize compensation costs for the value of the shares over the associated two
year employment periods in which those shares vest.
In connection with the acquisition, 67,200 shares of common stock issued
were placed in escrow to secure indemnification obligations of former
shareholders of Z/COM.
The following table presents pro forma results of operations as if the
acquisition had occurred at the beginning of each of the periods presented. The
pro forma information is not necessarily indicative of the combined results that
would have occurred had the acquisition taken place at the beginning of 1999 or
at the beginning of 2000, nor is it necessarily indicative of results that may
occur in the future.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED -------------------------
DECEMBER 25, MARCH 27, MARCH 25,
1999 1999 2000
------------ ----------- -----------
<S> <C> <C> <C>
Total net revenues............................. $36,290,304 $ 6,176,820 $15,270,187
Net income (loss).............................. (7,472,138) (1,188,694) (3,996,309)
Net income (loss) applicable to common (8,163,673) (1,257,832) (6,112,602)
stockholders.................................
Net income (loss) per share applicable to
common stockholders:
Basic and diluted earnings (loss) per $ (0.40) $ (0.06) $ (0.30)
share.....................................
</TABLE>
(11) STOCK OPTION AND PURCHASE PLAN
(A) 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
F-22
<PAGE> 90
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
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
7,600,000 shares of common stock for issuance under the 1997 Plan and 400,000
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............................ 6,000,000 -- $ --
Options granted.............................. (2,655,360) 2,655,360 0.35
Options forfeited............................ 695,080 (695,080) 0.28
----------- ----------
Balances at December 27, 1997................ 4,039,720 1,960,280 0.38
Options granted.............................. (2,721,790) 2,721,790 0.80
Options forfeited............................ 633,443 (633,443) 0.63
Options exercised............................ -- (207,350) 0.63
----------- ----------
Balances at December 26, 1998................ 1,951,373 3,841,277 0.63
Plan amendment and adoption.................. 2,000,000 -- --
Options granted.............................. (2,541,014) 2,541,014 1.70
Options forfeited............................ 528,781 (528,781) 0.88
Options exercised............................ -- (206,832) 0.48
----------- ---------- -----
Balances at December 25, 1999................ 1,939,140 5,646,678 1.10
=========== ==========
Options granted.............................. (828,018) 828,018 4.95
Options forfeited............................ 101,642 (101,642) 2.83
Options exercised............................ -- (136,087) 0.80
----------- ---------- -----
Balances at March 25, 2000................... 1,212,765 6,236,966 $1.58
=========== ========== =====
</TABLE>
Options exercisable at December 27, 1997, December 26, 1998, December 25,
1999 and March 25, 2000 were 61,854, 698,424, 1,237,307 and 1,366,878
respectively.
Those individuals who purchased the outstanding stock of ServerLogic in
1997 became immediately vested in 180,000 employee stock options. No
compensation charge was recognized as the intrinsic value of the options was $0
at the time of this modification. Such individuals remain common stockholders of
the Company.
F-23
<PAGE> 91
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
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>
$0.25 940,000 6.4 years $0.25 593,392 $0.25
0.63 - 0.88 3,039,784 8.7 years 0.80 621,415 0.73
1.25 - 1.88 1,199,864 9.6 years 1.40 22,500 1.50
3.68 - 4.00 467,030 9.9 years 3.93 -- --
---------- ---------
5,646,678 $1.10 1,237,307 $0.53
========== =========
</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 earnings (loss) per share:
As reported............................. $ (0.23) $ 0.04 $ (0.31)
Pro forma............................... $ (0.24) $ 0.03 $ (0.33)
Diluted earnings (loss) per share:
As reported............................. $ (0.23) $ 0.03 $ (0.31)
Pro forma............................... $ (0.24) $ 0.03 $ (0.33)
</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 $0.08, $0.18 and $0.35 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 and the quarter ended March 25, 2000, the Company granted
certain options with exercise prices less than the then current fair market
value. The Company recorded deferred compensation of $105,180 in 1999 and an
additional $2,258,604 in the quarter
F-24
<PAGE> 92
EMERALD -- DELAWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 27, 1997, DECEMBER 26, 1998 AND DECEMBER 25, 1999
AND QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 (INFORMATION AS OF AND FOR
THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 25, 2000 IS UNAUDITED)
ended March 25, 2000 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 1999 options was $0.55 per share. Additionally,
during the quarter ended March 25, 2000 one of the Company's stockholders sold
417,547 shares at prices less than the current fair market value to employees or
directors for which the Company recorded $949,825 in non-cash stock
compensation.
(B) In April 2000, the board of directors approved the 2000 Employee Stock
Purchase Plan which provides employees the opportunity to purchase stock at 85%
of the lower of the fair value at the beginning or end of a six-month offering
period. 1,000,000 shares have been initially reserved under the plan.
(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, and $88,757 and
$238,445 during the quarters ended March 27, 1999 and March 25, 2000,
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) REVERSE STOCK SPLIT
In April 2000, the board of directors and stockholders approved, a 2.5 for
1 reverse split of its common stock and approved a change in the authorized
number of shares to the following:
<TABLE>
<S> <C>
Common Stock 73,666,666 shares
</TABLE>
The financial statements, including all shares and per share amounts, have been
restated to reflect the reverse stock split.
Additionally, the Company approved an amendment to the certificate of
incorporation that will become effective upon the IPO. Provisions include
changing the authorized number of shares of common stock to 80,000,000 and
preferred shares to 2,000,000 and eliminating the Series A and B Preferred Stock
designations and preferences.
F-25
<PAGE> 93
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
On March 25, 2000, Emerald-Delaware, Inc. ("Emerald" or the "Company")
acquired Z/COM, Incorporated ("Z/COM") by issuing notes payable totaling
$1,350,000 and 431,742 shares of Common Stock valued at $5,396,770 in exchange
for all of Z/COM's outstanding common stock. The promissory notes bear interest
at 8% and are due upon the earlier of March 25, 2001 or ten business days after
the closing of an initial public offering of the Company's Common Stock. The
acquisition is being accounted for under the purchase method of accounting
whereby the purchase price is allocated to the assets acquired and liabilities
assumed based on the their fair values at the acquisition date.
The fair value of the Common Stock issued in the acquisition was estimated
to be $12.50 per share. The amount of the total consideration paid to the former
shareholders of Z/COM was determined by arms-length negotiation between the
parties. The purchase price excludes performance-based contingent payments of up
to $900,000, payable in stock or cash at the election of the former stockholders
of Z/COM. The contingent amounts will be accounted for as compensation expense
when the performance measures have been met.
The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 25, 1999 and the quarter ended March 25,
2000 give effect to the acquisition of Z/COM as if it had occurred on December
27, 1998. The unaudited pro forma condensed consolidated statements of
operations are based on historical results of operations of Emerald for the year
ended December 25, 1999 and the quarter ended March 25, 2000 and historical
results of operations of Z/COM for the year-ended December 31, 1999 and the
quarter ended March 25, 2000. No adjustments have been made to conform Z/COM's
fiscal periods to Emerald's fiscal periods as the impact would not be
significant to the unaudited pro forma condensed consolidated financial
information. The unaudited pro forma condensed consolidated financial statements
and the accompanying notes should be read in conjunction with and are qualified
by the historical financial statements and notes thereto of Emerald and Z/COM.
The unaudited pro forma condensed consolidated financial information is
intended for illustrative purposes only and is not necessarily indicative of the
combined results that would have occurred had the acquisition taken place on
December 27, 1998, nor is it necessarily indicative of results that may occur in
the future.
F-26
<PAGE> 94
EMERALD -- DELAWARE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 25, 1999
<TABLE>
<CAPTION>
EMERALD- Z/COM, PRO FORMA PRO FORMA
DELAWARE, INC. INCORPORATED ADJUSTMENTS COMBINED
-------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................................. $34,710,594 $1,579,710 $ -- $36,290,304
----------- ---------- ----------- -----------
Expenses:
Cost of revenues -- professional
services (excluding stock
compensation)......................... 19,280,517 829,848 20,110,365
Sales and marketing (excluding stock
compensation)......................... 6,589,529 149,384 6,738,913
General and administrative (excluding
stock compensation)................... 14,261,204 539,462 14,800,666
Intangible amortization................. -- -- 1,749,857(a) 1,749,857
Stock compensation*..................... 18,921 -- 292,171(b) 311,092
----------- ---------- ----------- -----------
Total operating expenses.................. 40,150,171 1,518,694 2,062,428 43,710,893
----------- ---------- ----------- -----------
Loss from operations...................... (5,439,577) 61,016 (2,062,428) (7,420,589)
----------- ---------- ----------- -----------
Net other expense......................... (20,006) (65,943) -- (85,949)
----------- ---------- ----------- -----------
Loss before income taxes.............. (5,459,583) (4,927) (2,062,428) (7,506,538)
----------- ---------- ----------- -----------
Income taxes.............................. (34,400) -- -- (34,400)
----------- ---------- ----------- -----------
Net loss.............................. (5,425,183) (4,927) (2,062,428) (7,472,138)
----------- ---------- ----------- -----------
Accretion of redemption value of
redeemable convertible preferred
stock................................. (691,535) -- -- (691,535)
----------- ---------- ----------- -----------
Net loss applicable to common
stockholders........................ $(6,116,718) $ (4,927) $(2,062,428) $(8,163,673)
=========== ========== =========== ===========
Basic and diluted net loss per share...... $ (0.31) $ (0.40)
=========== ===========
Shares used to compute basic and diluted
net loss per share...................... 19,930,206 431,742(c) 20,361,948
=========== =========== ===========
(*) Stock compensation
Cost of revenues -- professional
services................................ -- -- 292,171 292,171
Sales and marketing....................... -- -- -- --
General and administrative................ 18,921 -- -- 18,921
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-27
<PAGE> 95
EMERALD -- DELAWARE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
QUARTER ENDED MARCH 25, 2000
<TABLE>
<CAPTION>
EMERALD- Z/COM, PRO FORMA PRO FORMA
DELAWARE, INC. INCORPORATED ADJUSTMENTS COMBINED
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues.............................. $14,830,293 $ 439,894 $ -- $15,270,187
----------- --------- ---------- -----------
Expenses:
Cost of revenues -- professional
services (excluding stock
compensation)..................... 7,884,812 261,140 -- 8,145,952
Cost of revenues -- AT&T warrant.... 74,644 -- -- 74,644
Sales and marketing (excluding stock
compensation)..................... 3,045,721 81,546 -- 3,127,267
General and administrative
(excluding stock compensation).... 5,874,307 157,510 -- 6,031,817
Intangible amortization............. -- -- 437,464(a) 437,464
Stock compensation*................. 1,221,503 -- 28,355(b) 1,249,858
----------- --------- ---------- -----------
Total operating expenses.............. 18,100,987 500,196 465,819 19,067,002
----------- --------- ---------- -----------
Loss from operations.................. (3,270,694) (60,302) (465,819) (3,796,815)
----------- --------- ---------- -----------
Net other expense..................... (111,829) (42,977) -- (154,806)
----------- --------- ---------- -----------
Loss before income taxes.......... (3,382,523) (103,279) (465,819) (3,951,621)
----------- --------- ---------- -----------
Income taxes.......................... -- -- -- --
----------- --------- ---------- -----------
Net loss.......................... (3,382,523) (103,279) (465,819) (3,951,621)
----------- --------- ---------- -----------
Accretion of redemption value of
redeemable convertible preferred
stock............................. 276,293 276,293
Beneficial conversion feature....... 1,840,000 -- -- 1,840,000
----------- --------- ---------- -----------
Net loss applicable to common
stockholders................. $(5,498,816) $(103,279) $ (465,819) $(6,067,914)
=========== ========= ========== ===========
Basic and diluted net loss per
share............................... $ (0.30)
===========
Shares used to compute basic and
diluted net loss per share.......... 20,089,820 431,742(c) 20,521,562
=========== ========== ===========
(*) Stock compensation
Cost of revenues -- professional
services............................ 72,554 -- 28,355 100,909
Sales and marketing................... 542,233 -- -- 542,233
General and administrative............ 606,716 -- -- 606,716
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-28
<PAGE> 96
EMERALD -- DELAWARE, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
PRO FORMA ADJUSTMENTS.
The following adjustments were applied to the historical financial
statements of the Company and Z/COM to arrive at the unaudited pro forma
condensed consolidated financial information:
(a) Represents the amortization expense related to goodwill and
intangibles, which is amortized over their estimated useful lives of four
years.
(b) Represents non-cash stock compensation charges associated with
shares of common stock issued to employees of Z/COM valued at $358,000 at
the transaction date. The Company is recognizing compensation costs for the
value of these shares over the associated employment periods in which these
shares vest and will recognize noncash charges of approximately $219,000 in
2000, $133,000 in 2001 and $6,000 in 2002.
(c) Unaudited pro forma basic and diluted net loss per share are
computed by dividing the unaudited pro forma net loss applicable to common
shareholders by the unaudited pro forma weighted average number of common
shares outstanding. Potentially dilutive securities were not included in
the computation of pro forma basic and diluted net loss per share because
their effects would be antidilutive. A reconciliation of shares used to
compute historical basic and diluted net loss per share to shares used to
compute pro forma basic and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 25, MARCH 25,
1999 2000
------------ -------------
<S> <C> <C>
Shares used to compute historical basic and
diluted net loss per share..................... 19,930,206 20,089,820
Shares issued in acquisition..................... 431,742 431,742
---------- ----------
Shares used to compute pro forma basic and
diluted net loss per share..................... 20,361,948 20,521,562
========== ==========
</TABLE>
(d) Other Information
The purchase price excludes performance based contingent payments of up
to $900,000 payable in stock or cash at the election of the former
stockholders of Z/COM. The contingent amounts will be accounted for as
compensation expense when the performance measures have been met.
F-29
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Z/COM Incorporated:
We have audited the accompanying balance sheets of Z/COM Incorporated as of
December 31, 1999 and 1998, and the related statements of operations,
stockholders' deficiency and cash flows for the years then ended. 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 Z/COM Incorporated as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Portland, Oregon
March 29, 2000
F-30
<PAGE> 98
Z/COM INCORPORATED
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 24,415 $ --
Trade accounts receivable, net of allowance for doubtful
accounts of $62,000 and $6,000 in 1999 and 1998,
respectively (note 4).................................. 158,411 117,540
Revenue in excess of billings............................. 130,262 24,823
Prepaid expenses.......................................... 17,140 228
--------- ---------
Total current assets.............................. 330,228 142,591
Property and equipment, net (note 2)........................ 171,929 82,763
Other assets................................................ 14,146 2,763
--------- ---------
$ 516,303 $ 228,117
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 108,920 $ 81,827
Accrued compensation...................................... 105,159 46,195
Other liabilities (note 4)................................ 198,000 117,483
Payable to related parties (note 5)....................... 88,562 88,662
Deferred revenue.......................................... 62,910 --
Current portion of capital lease obligations (note 3)..... 47,563 6,703
--------- ---------
Total current liabilities......................... 611,114 340,870
--------- ---------
Capital lease obligations, excluding current portion (note
3)........................................................ 23,803 --
Stockholders' deficiency:
Common stock, no par value. Authorized 1,000 shares;
issued and outstanding 500 shares...................... 7,000 7,000
Accumulated deficit....................................... (113,218) (108,291)
--------- ---------
(106,218) (101,291)
Less stockholder receivable (note 5)...................... (12,396) (11,462)
--------- ---------
Total stockholders' deficiency.................... (118,614) (112,753)
Commitments and subsequent event (notes 3 and 6)
--------- ---------
$ 516,303 $ 228,117
========= =========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 99
Z/COM INCORPORATED
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Professional services..................................... $1,532,190 $1,019,044
Product sales............................................. 47,520 --
---------- ----------
1,579,710 1,019,044
---------- ----------
Expenses:
Cost of professional services revenue..................... 798,948 512,530
Cost of products.......................................... 30,900 --
Sales and marketing....................................... 149,384 91,867
General and administrative................................ 539,462 402,603
---------- ----------
1,518,694 1,007,000
---------- ----------
Other income (expense):
Interest income -- stockholder............................ 934 790
Other interest income..................................... 344 293
Interest expense.......................................... (71,284) (55,436)
Other income.............................................. 4,063 --
---------- ----------
Net other expense................................. (65,943) (54,353)
---------- ----------
Net loss.......................................... $ (4,927) $ (42,309)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 100
Z/COM INCORPORATED
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- STOCKHOLDER ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT RECEIVABLE DEFICIT DEFICIENCY
------ ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997.... 500 $7,000 $(10,672) $ (65,982) $ (69,654)
Net loss......................... -- -- -- (42,309) (42,309)
Increase in note receivable...... -- -- (790) -- (790)
--- ------ -------- --------- ---------
Balances at December 31, 1998.... 500 7,000 (11,462) (108,291) (112,753)
Net loss......................... -- -- -- (4,927) (4,927)
Increase in note receivable...... -- -- (934) -- (934)
--- ------ -------- --------- ---------
Balances at December 31, 1999.... 500 $7,000 $(12,396) $(113,218) $(118,614)
=== ====== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 101
Z/COM INCORPORATED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (4,927) $(42,309)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 47,732 48,468
Interest earned on stockholder receivable.............. (934) (790)
Related party interest expense......................... 2,336 2,252
Changes in certain assets and liabilities:
Accounts receivable.................................. (40,871) 18,068
Revenue in excess of billings........................ (105,439) (24,823)
Prepaid expenses..................................... (43,212) 812
Other assets......................................... (11,383) 1,291
Accounts payable and accrued liabilities............. 86,057 (14,959)
Payable to related parties........................... (2,436) 58,260
Increase in deferred revenue......................... 89,210 --
--------- --------
Net cash provided by operating activities......... 16,133 46,270
--------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (29,032) (13,883)
--------- --------
Net cash used in investing activities............. (29,032) (13,883)
--------- --------
Cash provided by financing activities:
Repayment of capital lease obligations.................... (43,203) (64,320)
Proceeds from secured borrowings, net..................... 80,517 2,252
--------- --------
Net cash provided by (used in) financing
activities...................................... 37,314 (62,068)
--------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 24,415 (29,681)
Cash and cash equivalents at beginning of year.............. -- 29,681
--------- --------
Cash and cash equivalents at end of year.................... $ 24,415 $ --
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 69,948 $ 53,184
========= ========
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired through capital lease obligations...... $ 107,866 $ --
========= ========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 102
Z/COM INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Z/COM Incorporated (the Company) is a consulting agency in the business of
developing corporate Web pages. The Company offers Internet marketing solutions,
branding strategies, digital advertising and Internet Web design services to
commercial customers. The Company is focused on the West Coast market although
at present its customers are predominately based in the greater Portland area.
The Company was incorporated in the State of Oregon in 1991. The Company is
headquartered in Portland, Oregon.
(B) REVENUE RECOGNITION
Revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of hours incurred to
date in relation to the estimated total hours of completion. This method is used
because management considers hours to be the best available measure of progress
on these contracts. Billings in excess of earnings are classified as deferred
revenues. Revenues recognized prior to billing are classified as revenue in
excess of billings.
Revenues from time and materials contracts are recognized during the period
in which the services are provided.
The cumulative impact of any revision in estimates in the percentage of
completion is reflected in the period in which the change becomes known. Losses
on projects in progress are recognized when known.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital leases
are stated at fair value at the inception of the lease. Depreciation is provided
using the straight-line method over the assets' estimated useful lives of three
to five years. Equipment held under capital leases are amortized using the
straight-line method over the shorter of the lease term or estimated useful
lives of the assets. Leasehold improvements are amortized over the shorter of
estimated useful lives or the respective lease term. Depreciation expense
includes amortization on capitalized leases.
(D) OTHER ASSETS
Other assets are stated at cost. The balance is comprised of security
deposits required on operating leases.
(E) INCOME TAXES
No provision has been made for federal and state income taxes. Under
Subchapter S of the Internal Revenue Code, the Company has elected not to be
taxed as a corporation and the stockholders have consented to include the
Company's income or loss in their individual returns.
F-35
<PAGE> 103
Z/COM INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(F) ADVERTISING
Advertising costs are expensed as incurred and are included in sales and
marketing expense. Advertising expense was $26,167 and $10,804 for the years
ended December 31, 1999 and 1998, respectively.
(G) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions affecting 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 in future periods could differ from those estimates used.
(H) FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. The fair
value of the Company's financial instruments approximates their carrying amount
due to their short-term nature. 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. In 1999, two customers represented 22% and
16%, respectively, of the Company's sales and accounted for 27% and 20% of the
total of accounts receivable and revenue in excess of billings. In 1998, two
customers represented 35% and 12% of sales and 52% and 26% of total accounts
receivable and revenue in excess of billings.
(2) PROPERTY AND EQUIPMENT
Property and equipment, net at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Computer equipment.......................................... $ 351,905 $ 220,448
Office furniture and other equipment........................ 39,398 37,560
Computer software........................................... 25,778 16,189
Leasehold improvements...................................... 8,029 28,872
--------- ---------
425,110 303,069
Less accumulated depreciation and amortization.............. (253,181) (220,306)
--------- ---------
Property and equipment, net............................... $ 171,929 $ 82,763
========= =========
</TABLE>
Depreciation expense, including amortization of capitalized leases, was
$47,732 and $48,468 for the years ended December 31, 1999 and 1998,
respectively.
F-36
<PAGE> 104
Z/COM INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
Included in property and equipment is the gross amount of computer
equipment and related accumulated amortization recorded under capital leases at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Computer equipment................................ $107,863 $ 71,509
Less accumulated amortization..................... (17,194) (35,714)
-------- --------
$ 90,669 $ 35,795
======== ========
</TABLE>
(3) COMMITMENTS
(A) LEASES
The Company leases office space and equipment under long-term noncancelable
operating and capital leases with various expirations through 2005. Future
minimum lease payments under operating and capital leases at December 31, 1999
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000................................................ $56,412 $130,206
2001................................................ 20,472 148,165
2002................................................ 7,020 143,534
2003................................................ -- 140,088
2004................................................ -- 143,081
Thereafter.......................................... -- 26,947
------- --------
Total minimum lease payments.............. 83,904 $732,021
========
Less amounts representing interest at 11% to 23%.... 12,538
-------
Present value of future minimum lease payments.... 71,366
Less current portion of capital lease obligations... 47,563
-------
Long-term capital lease obligations, excluding
current portion................................ $23,803
=======
</TABLE>
Total rent expense for operating leases during the years ended December 31,
1999 and 1998 amounted to approximately $56,506 and $27,691, respectively.
(B) PROFIT-SHARING PLANS
The Company sponsors a 401(k) profit-sharing plan that covers all employees
that meet a minimum service requirement. The Company is required to contribute
an employee match up to 3% of the employee's salary. The Company contributed
$11,767 and $8,432 during the years ended December 31, 1999 and 1998,
respectively.
(C) PRODUCT WARRANTY
The Company provides a standard 30-day warranty for any errors, omissions
or functionality not matching specifications outlined in the contract. There
were no significant warranty claims by customers at December 31, 1999 and 1998.
F-37
<PAGE> 105
Z/COM INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(4) OTHER LIABILITIES
The Company has a financing agreement with an unrelated third party under
which the Company transfers its accounts receivables to the third party for
cash. The obligation is secured by the underlying accounts receivable. The third
party acts as servicer for collection of the accounts receivable. The third
party will advance 90% of the unpaid balance of the receivables. The third party
has the right to require repayment of amounts advanced prior to collection of
amounts from the related receivables and charges interest and service fees equal
to 1/10 of 1% per calendar day for the average total of all outstanding gross
receivables for each settlement period. At December 31, 1999 and 1998, the
receivables subject to this arrangement were included in trade accounts
receivables of $158,411 and $117,540. The interest and service fees charged for
the services were $46,876 in 1999 and $35,054 in 1998.
(5) RELATED PARTY TRANSACTIONS
(A) PAYABLE TO STOCKHOLDER
At December 31, 1999 and 1998, the Company owed $55,824 and $58,260 to a
stockholder for expenses incurred on behalf of the Company. Such amounts are
non-interest bearing. The Company also has a note payable to a relative of a
stockholder with no maturity date that bears interest at 8%. Interest expense on
this note was $2,336 and $2,252 during 1999 and 1998, respectively.
(B) NOTE RECEIVABLE FROM STOCKHOLDER
At December 31, 1999 and 1998, the Company had a note receivable in the
amount of $12,396 and $11,462, respectively, from a stockholder with no stated
maturity date that bears interest at 5.77%. The note has been classified as a
component of stockholders' deficiency. Interest income was $934 and $790 during
1999 and 1998, respectively.
(6) SUBSEQUENT EVENT
On March 25, 2000, the Company entered into an Agreement and Plan of Merger
with Emerald -- Delaware, Inc. (Emerald). The consideration will be in the form
of cash and promissory notes to the principals of the Company totaling
$1,350,000 and 1,079,354 shares of Emerald common stock. The shares issued by
Emerald have not been adjusted to reflect any stock splits.
F-38
<PAGE> 106
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.......................... 5
Special Note Regarding Forward-
Looking Statements.................. 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 30
Management............................ 42
Certain Relationships and Related
Transactions........................ 52
Principal Stockholders................ 55
Description of Capital Stock.......... 57
Shares Eligible for Future Sale....... 61
Underwriting.......................... 62
Legal Matters......................... 64
Experts............................... 64
Additional Information................ 65
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.
EMERALD LOGO
4,000,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
ADAMS, HARKNESS & HILL, INC.
PACIFIC CREST
PROSPECTUS
, 2000
<PAGE> 107
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........................................ $ 15,788
NASD filing fee............................................. 6,480
Nasdaq National Market listing fee.......................... 5,000
Printing and engraving costs................................ 250,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 450,000
Blue Sky fees and expenses.................................. 5,000
Transfer Agent and Registrar fees........................... 5,000
Miscellaneous expenses...................................... 22,632
----------
Total............................................. $1,100,000
==========
</TABLE>
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 the following
unregistered securities on a post-split basis described below.
(1) In March 1997, we issued and sold an aggregate of 348,400 shares
of our common stock to officers, directors and employees in exchange for
cash in the aggregate amount of $522,600.
(2) In July 1997, we issued and sold an aggregate of 92,854 shares of
our common stock to an employee in exchange for cash in the aggregate
amount of $58,034.
(3) In September 1997, we issued and sold an aggregate of 108,567
shares of our common stock to an employee in exchange for cash in the
aggregate amount of $54,284.
II-1
<PAGE> 108
(4) In October 1997, we issued and sold an aggregate of 524,000 shares
of our common stock to officers, directors and employees in exchange for
cash in the aggregate amount of $327,500.
(5) In December 1997, we issued and sold an aggregate of 1,311,575
shares of our common stock to officers and directors in exchange for cash
in the aggregate amount of $819,735.
(6) In February 1998, we issued and sold an aggregate of 981,545
shares of our common stock to officers, directors and employees in exchange
for cash in the aggregate amount of $613,466.
(7) In March 1998, we issued and sold an aggregate of 363,115 shares
of our common stock to officers, directors and employees in exchange for
cash in the aggregate amount of $453,894.
(8) In April 1998, we issued and sold an aggregate of 2,494 shares of
our common stock to an employee in exchange for cash in the aggregate
amount of $1,559.
(9) In June 1998, we issued and sold an aggregate of 320,000 shares of
our common stock to a director and an employee in exchange for cash in the
aggregate amount of $400,000.
(10) In July 1998, we issued and sold an aggregate of 240,000 shares
of our common stock to an officer and a director in exchange for cash in
the aggregate amount of $300,000.
(11) In August 1998, we issued and sold an aggregate of 5,000 shares
of our common stock to an employee in exchange for cash in the aggregate
amount of $8,000.
(12) In December 1999, we issued and sold an aggregate of 5,000 shares
of our common stock to a vendor in payment of an invoice in the amount of
$8,000.
(13) Since our inception and through March 25, 2000, we have granted
options to purchase an aggregate of 8,746,182 shares of common stock to
employees, directors and consultants under our 1997 Stock Incentive
Compensation Plan and the 1999 Non-Employee Director Stock Option Plan at
exercise prices ranging from $0.25 to $6.25 per share.
(14) Since our inception, we have granted options to purchase an
aggregate of 270,000 shares of common stock to non-employee directors under
our 1999 Non-Employee Director Stock Option Plan at an exercise price of
$1.50 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.
(15) In September 1997, we issued 430,176 shares of our common stock
valued at $268,861 in exchange for all outstanding shares of the common
stock of ServerLogic Corporation.
(16) 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 each of whom is a
beneficial owner of more than 5% of our outstanding common stock.
(17) In March 2000, we issued a warrant for an aggregate of 600,000
shares of our common stock to AT&T Solutions for an exercise price per
share equal to one of the following: (i) if the common stock is listed on a
national securities exchange, the average
II-2
<PAGE> 109
of the daily closing sale prices of our common stock on a national
securities exchange, subject to certain events, (ii) if the common stock is
not listed on a national securities exchange, the average of the closing
sales price on the Nasdaq National Market, subject to certain events, or
(iii) if the common stock is not listed on a national securities exchange
or quoted on the Nasdaq National Market, the fair market value of our
common stock as determined by our board of directors, subject to certain
events.
(18) In March 2000, we issued 431,742 shares of our common stock and
notes payable totaling $1,350,000 in exchange for all outstanding shares of
the common stock of Z/Com Incorporated.
(19) 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 each of whom is a
beneficial owner of more than 5% of our outstanding common stock.
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-3
<PAGE> 110
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-4
<PAGE> 111
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended,
Emerald -- Delaware, Inc. has duly caused this amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Portland, State of Oregon, on the 7th day of April,
2000.
Emerald -- Delaware, Inc.
By /s/ MARTIN WRIGHT
------------------------------------
Martin Wright
President and Chief Executive
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the 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 April 7, 2000
- ------------------------------------------------ Officer and Director (Principal
(Martin Wright) Executive Officer)
JERRY N. GRANT* Senior Vice President of April 7, 2000
- ------------------------------------------------ Finance, Chief Financial
(Jerry N. Grant) Officer, Secretary and Director
(Principal Financial Officer)
/s/ NOGI ASP Vice President -- Finance April 7, 2000
- ------------------------------------------------ (Principal Accounting Officer)
(Nogi Asp)
STEVEN L. DARROW* Chairman of the Board April 7, 2000
- ------------------------------------------------
(Steven L. Darrow)
MICHAEL W. BEALMEAR* Director April 7, 2000
- ------------------------------------------------
(Michael W. Bealmear)
CHARLES SCOTT GIBSON* Director April 7, 2000
- ------------------------------------------------
(Charles Scott Gibson)
PAUL G. MARDESICH* Director April 7, 2000
- ------------------------------------------------
(Paul G. Mardesich)
C. TOMS NEWBY, III* Director April 7, 2000
- ------------------------------------------------
(C. Toms Newby, III)
/s/ MARTIN WRIGHT* April 7, 2000
- ------------------------------------------------
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 112
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> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Amended 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 to be filed upon completion of the offering
3.3 Bylaws of the Registrant as currently in effect
3.4** Bylaws of the Registrant as in effect upon completion of the
offering
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
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
10.6+ Professional Services Agreement between the Registrant and
golfgateway.com (n/k/a Greens.com) dated as of September 15,
1999
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
10.9 2000 Employee Stock Purchase Plan
10.10+ General Agreement for Information Technology Projects
between AT&T Corp. and the Registrant effective as of April
15, 1998
10.11+ Strategic Alliance Agreement by and between the Registrant
and AT&T Solutions Inc., effective as of March 15, 2000
23.1 Consent and report on schedule of KPMG LLP, independent
auditors
23.2 Consent of Counsel (see Exhibit 5.1)
23.3 Consent of KPMG LLP, independent auditors
24.1 Power of Attorney (Registration Statement signature page)
27.1 Financial Data Schedules
</TABLE>
- -------------------------
+ We have requested confidential treatment by the Commission of those portions
of the exhibit omitted and marked with an asterisk. The omitted portions have
been separately filed with the Commission.
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
4,600,000 Shares
Emerald-Delaware, Inc.
Common Stock
($0.001 Par Value)
EQUITY UNDERWRITING AGREEMENT
________________, 2000
Deutsche Bank Securities Inc.
FleetBoston Robertson Stephens Inc.
Adams, Harkness & Hill, Inc.
Pacific Crest Inc.
As Representatives of the
Several Underwriters
c/o Deutsche Bank Securities Inc.
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Emerald-Delaware, Inc., a Delaware corporation (the "Company"), proposes
to sell to the several underwriters (the "Underwriters") named in Schedule I
hereto for whom you are acting as representatives (the "Representatives") an
aggregate of 4,000,000 shares of the Company's Common Stock, $0.001 par value
(the "Firm Shares") to be sold by the Company. The respective amounts of the
Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto. The Company and a certain shareholder
of the Company (the "Selling Shareholder") propose to sell at the Underwriters'
option an aggregate of up to 600,000 additional shares of the Company's
Common Stock (the "Option Shares") as set forth below. The Company and the
Selling Shareholder are sometimes referred to herein collectively as the
"Sellers."
As the Representatives, you have advised the Company and the Selling
Shareholder (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the
<PAGE> 2
numbers of Firm Shares set forth opposite their respective names in Schedule I,
plus their pro rata portion of the Option Shares if you elect to exercise the
over-allotment option in whole or in part for the accounts of the several
Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."
The Company and the Underwriters agree that up to 400,000 shares of the
Common Stock to be purchased by the Underwriters (the "Reserved Shares") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Shares by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. (the "NASD") and all other applicable
laws, rules and regulations. To the extent that such Reserved Shares are not
orally confirmed for purchase by such eligible employees and persons having
business relationships with the Company by the end of the first business day
after the date of this Agreement, such Reserved Shares may be offered to the
public as part of the public offering contemplated hereby.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDER.
(a) The Company represents and warrants to each of the
Underwriters as follows:
(i) A registration statement on Form S-1 (File No.
333-30574) with respect to the Shares has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission and the registration statement filed by electronic
transmission pursuant to the Commission's Electronic Data Gathering, Analysis
and Retrieval System ("EDGAR") (except as may be permitted by Regulation S-T
under the Act) was identical to the copy thereof delivered to the Underwriters
for use in connection with the offer and sale of the Shares. Copies of such
registration statement, including any amendments thereto, the preliminary
prospectuses (meeting the requirements of the Rules and Regulations) contained
therein and the exhibits, financial statements and schedules, as finally amended
and revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by the
Company pursuant to Rule 462 (b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the Prospectus
referred to below, has become effective under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date of this
Agreement. "Prospectus" means the form of prospectus first filed with the
Commission pursuant to Rule 424(b). Each preliminary prospectus included in the
-2-
<PAGE> 3
Registration Statement prior to the time it becomes effective is herein referred
to as a "Preliminary Prospectus." Any reference herein to any Prospectus shall
be deemed to include any supplements or amendments thereto filed with the
Commission after the date of filing of the Prospectus under Rules 424(b) or
430A, and prior to the termination of the offering of the Shares by the
Underwriters.
(ii) The Company has not distributed and will not
distribute, prior to the later of the Option Closing Date (as defined below) and
the completion of the Underwriters' distribution of the Shares, any offering
material in connection with the offering and sale of the Shares other than the
Preliminary Prospectus, the Prospectus or the Registration Statement.
(iii) This Agreement has been duly authorized, executed
and delivered by the Company.
(iv) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement and to enter
into and perform its obligations under this Agreement. Each of the subsidiaries
of the Company as listed in Exhibit 21 to Item 16(a) of the Registration
Statement (collectively, the "Subsidiaries") has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and authority to own or
lease its properties and conduct its business as described in the Registration
Statement. The Subsidiaries are the only subsidiaries, direct or indirect, of
the Company and the Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the Subsidiaries. The
Company and each of the Subsidiaries are duly qualified to transact business in
all jurisdictions in which the conduct of their business requires such
qualification, except where the failure to so qualify would not in the aggregate
have a material adverse effect on the condition (financial or other), business,
properties or results of operations of the Company. The outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued, are fully paid and non-assessable and are owned by the Company or
another Subsidiary free and clear of all liens, encumbrances and equities and
claims; and no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiaries are
outstanding.
(v) The outstanding shares of Common Stock of the Company,
including all Shares, if any, to be sold by the Selling Shareholder, have been
duly authorized and validly issued and are fully paid and non-assessable; the
Shares to be issued and sold by the Company have been duly authorized and when
issued and paid for as contemplated herein will be validly issued, fully paid
and non-assessable; and no preemptive rights of stockholders exist with respect
to any of the Shares or the issue and sale thereof. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other rights to subscribe for or purchase securities of the
Company. There are no authorized or
-3-
<PAGE> 4
outstanding options, warrants, preemptive rights, rights of first refusal or
other rights to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company or any of the
Subsidiaries other than those described in the Prospectus. Neither the filing of
the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any shares
of Common Stock, which rights, if any, are described in the Prospectus under the
heading "Shares Eligible for Future Sale." The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the options
or other rights granted thereunder, set forth in the Prospectus accurately and
fairly presents in all material respects the information required to be shown
with respect to such plans, arrangements, options and rights.
(vi) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. All of the Shares
conform to the description thereof contained in the Registration Statement. The
form of certificates for the Shares conforms to the corporate law of Delaware.
(vii) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Shares nor instituted proceedings for that purpose. The Registration Statement
conforms to, and the Prospectus and any amendments or supplements thereto will
conform to, in all material respects, the requirements of the Act and the Rules
and Regulations. The Registration Statement and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact and do
not omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus and any amendments and supplements thereto do not contain, and will
not contain, any untrue statement of material fact; and do not omit, and will
not omit, to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
(viii) The financial statements of the Company, together
with related notes and schedules as set forth in the Registration Statement,
present fairly the financial position and the results of operations and cash
flows of the Company at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance with
generally accepted accounting principles, consistently applied throughout the
periods involved, except as disclosed therein, and all adjustments necessary for
a fair presentation of results for such periods have been made. The summary
financial and statistical data included in the Registration Statement presents
fairly the information shown therein and such data has been compiled on a basis
consistent with the financial statements presented therein
-4-
<PAGE> 5
and the books and records of the company. The pro forma financial statements and
other pro forma financial information included in the Registration Statement and
the Prospectus present fairly the information shown therein, have been prepared
in accordance with the Commission's rules and guidelines with respect to pro
forma financial statements, have been properly compiled on the pro forma bases
described therein, and, in the opinion of the Company, the assumptions used in
the preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(ix) KPMG LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations.
(x) There is no action, suit, claim or proceeding pending
or, to the knowledge of the Company, threatened against the Company or any of
the Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of its Subsidiaries might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and of the Subsidiaries taken as a whole or to prevent the
consummation of the transactions contemplated hereby, except as set forth in the
Registration Statement.
(xi) The Company has good and marketable title to all of
the properties and assets reflected in the financial statements hereinabove
described (or as described in the Registration Statement), and such properties
and assets are not subject to any lien, mortgage, pledge, charge or encumbrance
of any kind except those reflected in such financial statements (or as described
in the Registration Statement) or which are not material, individually or in the
aggregate, in amount. The Company and the Subsidiaries occupy their leased
properties under valid and binding leases conforming in all material respects to
the description thereof set forth in the Registration Statement.
(xii) The Shares have been approved for quotation on the
Nasdaq National Market, subject only to official notice of issuance.
(xiii) The Company has filed all federal, state, local and
foreign tax returns which have been required to be filed and have paid all taxes
indicated by said returns and all assessments received by them or any of them to
the extent that such taxes have become due. All tax liabilities have been
adequately provided for in the financial statements of the Company, and the
Company does not know of any actual or proposed additional material tax
assessments.
(xiv) Since the respective dates as of which information
is given in the Registration Statement, as it may be amended or supplemented,
there has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company and its Subsidiaries taken as a whole,
-5-
<PAGE> 6
whether or not occurring in the ordinary course of business, and there has not
been any material transaction entered into or any material transaction that is
probable of being entered into by the Company or any Subsidiary, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or supplemented.
The Company and the Subsidiaries have no material contingent obligations which
are not disclosed in the Company's financial statements which are included in
the Registration Statement.
(xv) The Company is not, and to the Company's knowledge
there exists no current condition that, with the giving of notice or lapse of
time or both will cause the Company to be, in violation of or in default under
its certificate of incorporation or by-laws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a party or
by which it, or any of its properties or assets, is bound and which default is
of material significance in respect of the condition, financial or otherwise, of
the Company or the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company. The execution
and delivery of this Agreement and the consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict with or
result in a breach of (i) the certificate of incorporation or by-laws of the
Company, or (ii) any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust or other material agreement or
instrument to which the Company is a party or by which its properties or assets
are bound, or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction and, in the case of clause (ii)
only, which conflict, breach or default would be of material significance in
respect of the condition, financial or otherwise, of the Company or the
business, management, properties, assets, rights, operations or prospects of the
Company.
(xvi) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the NASD or such additional steps as may be necessary to qualify the Shares for
public offering by the Underwriters under state securities or Blue Sky laws) has
been obtained or made and is in full force and effect.
(xvii) The Company holds all licenses, certificates and
permits from governmental authorities which are necessary to the conduct of
their businesses except where the failure to hold such licenses, certificates
and permits would not in the aggregate have a material adverse effect on the
condition (financial or other), business, properties, or results of operations
of the Company, and to the Company's knowledge, the Company has not infringed
any patents, patent rights, trade names, trademarks or copyrights, which
infringement is material to the business of the Company. The Company knows of no
material infringement by others of patents, patent rights, trade names,
trademarks or copyrights owned by or licensed to the Company.
-6-
<PAGE> 7
(xviii) The Company owns or possesses sufficient
trademarks, trade names, service marks, patents, patent rights, copyrights,
licenses, approvals, inventions, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures) and other similar rights and intellectual property necessary to
conduct its businesses as now conducted, except where the failure to own or
possess such rights or intellectual property would not in the aggregate have a
material adverse effect on the business or financial condition of the Company,
and has taken all steps reasonably necessary to secure assignments of such
intellectual property from its employees and contractors; to the knowledge of
the Company none of the technology employed by the Company has been obtained or
is being used by the Company in violation of any contractual or fiduciary
obligation binding on the Company, any of its respective directors or executive
officers or, to the Company's knowledge, any of its employees or consultants;
and the Company has taken and will maintain reasonable measures to prevent the
unauthorized dissemination or publication of its confidential information.
(xix) Neither the Company, nor to the Company's knowledge,
any of its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares. The Company acknowledges that the Underwriters may engage in stabilizing
and passive market making transactions in the Shares on The Nasdaq National
Market in accordance with Regulation M under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
(xx) The Company is not an "investment company" within the
meaning of such term under the Investment Company Act of 1940, as amended (the
"1940 Act") and the rules and regulations of the Commission thereunder.
(xxi) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxii) The Company is covered by insurance from
recognized, financially sound and reputable institutions in such amounts and
covering such risks as is adequate for the conduct of their respective
businesses and the value of their respective properties and as is customary for
companies engaged in similar industries.
-7-
<PAGE> 8
(xxiii) The Company is in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
(xxiv) To the Company's knowledge, there are no
affiliations or associations between any member of the NASD and any of the
Company's officers, directors or securityholders, except as set forth in the
Registration Statement.
(xxv) There are no business relationships or related-party
transactions involving the Company or any Subsidiary or any other person
required to be described in the Prospectus which have not been described as
required.
(xxvi) Neither the Company nor, to the best of the
Company's knowledge, any employee or agent of the Company, has made any
contribution or other payment to any official of, or candidate for, any federal,
state or foreign office in violation of any law or of the character required to
be disclosed in the Prospectus.
(xxvii) The Registration Statement, the Prospectus and any
Preliminary Prospectus comply, and any amendments or supplements thereto will
comply in all material respects, with any applicable laws or regulations of
foreign jurisdictions in which the Prospectus or any Preliminary Prospectus, as
amended or supplemented, if applicable, are distributed in connection with the
offering, issuance and sale of Reserved Shares.
(xxviii) No consent, approval, authorization or order of,
or qualification with, any governmental body or agency, other than those
obtained, is required in connection with the offering of the Reserved Shares in
any jurisdiction where the Reserved Shares are being offered.
(xxix) The Company has not offered, or caused Deutsche
Bank Securities Inc. or its affiliates to offer, nor will it offer or cause
Deutsche Bank Securities Inc. or its affiliates to offer, any Reserved Shares to
any person with the specific intent to unlawfully influence (i) a customer or
supplier of the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to write or
publish favorable information about the Company or its products.
-8-
<PAGE> 9
(xxx) The Company has reviewed its operations and that of
its Subsidiaries and any third parties with which the Company or any of its
Subsidiaries has a material relationship to evaluate the extent to which the
business or operations of the Company or any of its Subsidiaries will be
affected by the Year 2000 Problem. As a result of such review, the Company has
no reason to believe, and does not believe, that the Year 2000 Problem will
result in a material adverse change in the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and of the Subsidiaries taken as a whole or result in
any material loss or interference with the Company's business or operations. The
"Year 2000 Problem" as used herein means any significant risk that computer
hardware or software used in the receipt, transmission, processing,
manipulation, storage, retrieval, retransmission or other utilization of data or
in the operation of mechanical or electrical systems of any kind will not, in
the case of dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
(xxxi) Any certificate signed by an officer of the Company
or any of its Subsidiaries delivered to the Representatives or to counsel for
the Underwriters shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters covered thereby.
(xxxii) Notices in the form substantially similar to the
letter previously reviewed by the Representatives pursuant to Section 2 of the
Shareholder's Agreement dated as of March 5, 1999 (the "Shareholder's
Agreement"), have been delivered to each party to the Shareholder's Agreement.
(b) The Selling Shareholder represents and warrants as follows:
(i) The Selling Shareholder now has and at the Option
Closing Date (as such date is hereinafter defined) will have good and marketable
title to the Option Shares to be sold by the Selling Shareholder, free and clear
of any liens, encumbrances, equities and claims, and full right, power and
authority to effect the sale and delivery of such Option Shares; and upon the
delivery of, against payment for, such Option Shares pursuant to this Agreement,
the Underwriters will acquire good and marketable title thereto, free and clear
of any liens, encumbrances, equities and claims.
(ii) The Selling Shareholder has full right, power and
authority to execute and deliver this Agreement, the Power of Attorney, and the
Custodian Agreement referred to below and to perform its obligations under such
Agreements, including the sale, transfer and delivery of the Option Shares. The
execution and delivery of this Agreement and the consummation by the Selling
Shareholder of the transactions herein contemplated and the fulfillment by the
Selling Shareholder of the terms hereof will not require any consent, approval,
authorization, or other order of any court, regulatory body, administrative
agency or other
-9-
<PAGE> 10
governmental body (except as may be required under the Act, state securities
laws or Blue Sky laws) and will not result in violation of any indenture,
mortgage, deed of trust or other agreement or instrument to which the Selling
Shareholder is a party, or of any order, rule or regulation applicable to the
Selling Shareholder of any court or of any regulatory body or administrative
agency or other governmental body having jurisdiction.
(iii) The Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Common Stock of the Company and, other than as
permitted by the Act, the Selling Shareholder will not distribute any prospectus
or other offering material in connection with the offering of the Shares.
(iv) Without having undertaken to determine independently
the accuracy or completeness of either the representations and warranties of the
Company contained herein or the information contained in the Registration
Statement, the Selling Shareholder has no reason to believe that the
representations and warranties of the Company contained in this Section 1 are
not true and correct. The information pertaining to the Selling Shareholder
under the caption "Selling Shareholders" in the Prospectus is complete and
accurate in all material respects.
(v) The Selling Shareholder (a) has reviewed and is
familiar with the Registration Statement and Prospectus and, to his knowledge,
neither the Prospectus nor any amendments or supplements thereto includes any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, and (b) is not prompted to sell the Option
Shares hereunder by any information concerning the Company or any subsidiary of
the Company which is not set forth in the Prospectus.
(vi) The Custodian (as defined below) is authorized to
deliver the Option Shares to be sold by each Selling Stockholder hereunder and
to accept payment therefor; and the Attorneys-in-Fact are authorized to execute
and deliver this Agreement and the certificate referred to in Section 6(h) on
behalf of the Selling Shareholder, to sell, assign, and transfer to the
Underwriters the Option Shares to be sold by the Selling Shareholder hereunder,
to determine the purchase price to be paid by the Underwriters to the Selling
Shareholder, as provided in Section 2 hereof, to authorize the delivery of the
Option Shares to be sold by the Selling Shareholder hereunder, to accept payment
therefor, and otherwise to act on behalf of the Selling Shareholder in
connection with this Agreement.
(vii) Neither the Selling Shareholder nor, to his
knowledge any of his affiliates directly or indirectly through one or more
intermediaries control, or are controlled by, or are under common control with,
or have any other association with (within the meaning of Article I, Section
1(m) of the by-laws of the NASD), any member firm of the NASD.
-10-
<PAGE> 11
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $_____ per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof. The number of Firm
Shares to be purchased by each Underwriter from the Company shall be as nearly
as practicable in the same proportion to the total number of Firm Shares being
sold by the Company as the number of Firm Shares being purchased by each
Underwriter bears to the total number of Firm Shares to be sold hereunder. The
obligations of the Company and of the Selling Shareholder shall be several and
not joint.
(b) Payment for the Firm Shares to be sold hereunder is to be
made in Federal (same day) funds to an account designated by the Company for the
shares to be sold by it against delivery of certificates therefor to the
Representatives for the several accounts of the Underwriters. Such payment and
delivery are to be made through the facilities of the Depository Trust Company
at 10:00 a.m., New York time, on the third business day after the date of this
Agreement or at such other time and date not later than five business days
thereafter as you and the Company shall agree upon, such time and date being
herein referred to as the "Closing Date." (As used herein, "business day" means
a day on which the New York Stock Exchange is open for trading and on which
banks in New York are open for business and not permitted by law or executive
order to be closed.) The certificates for the Firm Shares, if any, will be
delivered in such denominations and in such registrations as the Representatives
request in writing not later than the second full business day prior to the
Closing Date, and will be made available for inspection by the Representatives
at least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and the Selling Shareholder listed on Schedule II hereto
hereby grant an option to the several Underwriters to purchase the Option Shares
at the price per share as set forth in the first paragraph of this Section 2.
The maximum number of Option Shares to be sold by the Company and the Selling
Shareholder is set forth opposite their respective names on Schedule II hereto.
The option granted hereby may be exercised in whole or in part by giving written
notice (i) at any time before the Closing Date and (ii) only once thereafter
within 30 days after the date of this Agreement, by you, as Representatives of
the several Underwriters, to the Company, the Attorney-in-Fact, and the
Custodian setting forth the number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in which the
Option Shares are to be registered and the time and date at which such
certificates are to be delivered. If the option granted hereby is exercised in
part, the respective number of Option Shares to be sold by the Company and the
Selling Shareholder listed in Schedule II hereto shall be determined on a pro
rata basis in accordance with the percentages set forth opposite their names on
Schedule II hereto, adjusted by you in such manner as to avoid fractional
shares. The time and date at which
-11-
<PAGE> 12
certificates for Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The number of Option Shares to be purchased by each Underwriter
shall be in the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by such Underwriter bears
to the total number of Firm Shares, adjusted by you in such manner as to avoid
fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several Underwriters,
may cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company and the Attorney-in-Fact. To the
extent, if any, that the option is exercised, payment for the Option Shares
shall be made on the Option Closing Date in Federal (same day) funds drawn to
the order of the Company for the Option Shares to be sold by it and to the order
of "____________________, as Custodian" for the Option Shares to be sold by the
Selling Shareholder against delivery of certificates therefor through the
facilities of the Depository Trust Company, New York, New York.
(d) Certificates in negotiable form for the total number of the
Shares to be sold hereunder by the Selling Shareholder have been placed in
custody with ____________________ as custodian (the "Custodian") pursuant to the
Custodian Agreement executed by the Selling Shareholder for delivery of any
Option Shares to be sold hereunder by the Selling Shareholder. The Selling
Shareholder specifically agrees that the Option Shares represented by the
certificates held in custody for the Selling Shareholder under the Custodian
Agreement are subject to the interests of the Underwriters hereunder, that the
arrangements made by the Selling Shareholder for such custody are to that extent
irrevocable, and that the obligations of the Selling Shareholder hereunder shall
not be terminable by any act or deed of the Selling Shareholder (or by any other
person, firm or corporation including the Company, the Custodian or the
Underwriters) or by operation of law (including the death of an individual
Selling Shareholder or the dissolution of a corporate Selling Shareholder) or by
the occurrence of any other event or events, except as set forth in the
Custodian Agreement. If any such event should occur prior to the delivery to the
Underwriters of the Option Shares hereunder, certificates for the Options Shares
shall be delivered by the Custodian in accordance with the terms and conditions
of this Agreement as if such event has not occurred. The Custodian is authorized
to receive and acknowledge receipt of the proceeds of sale of the Shares held by
it against delivery of such Shares.
(e) If on the Option Closing Date the Selling Shareholder fails
to sell the Option Shares which the Selling Shareholder has agreed to sell on
such date as set forth in Schedule II hereto, the Company agrees that it will
sell or arrange for the sale of that number of shares of Common Stock to the
Underwriters which represents Option Shares which the Selling
-12-
<PAGE> 13
Shareholder has failed to so sell, as set forth in Schedule II hereto, or such
lesser number as may be requested by the Representatives.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a
public offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the public at
the initial public offering price set forth in the Prospectus. The
Representatives may from time to time thereafter change the public offering
price and other selling terms. To the extent, if at all, that any Option Shares
are purchased pursuant to Section 2 hereof, the Underwriters will offer them to
the public on the foregoing terms.
It is further understood that you will act as the Representatives
for the Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDER.
(a) The Company covenants and agrees with the several
Underwriters that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
(ii) The Company will advise the Representatives promptly
(A) when the Registration Statement or any post-effective amendment thereto
shall have become effective, (B) of receipt of any comments from the Commission,
(C) of any request of the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, and (D)
of the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the use of the Prospectus or of the institution
of any proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use of
the Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives
in endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file
-13-
<PAGE> 14
such documents, and furnish such information as may be reasonably required for
that purpose, provided the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction where it is not now so qualified or required to file such a
consent. The Company will, from time to time, prepare and file such statements,
reports, and other documents, as are or may be required to continue such
qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of,
the Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period when
delivery of a Prospectus is required under the Act, as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representatives may reasonably request. The Company will deliver to the
Representatives at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits filed
therewith, and will deliver to the Representatives such number of copies of the
Registration Statement (including such number of copies of the exhibits filed
therewith that may reasonably be requested), and of all amendments thereto, as
the Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the distribution of the
Shares as contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters, it
becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading, or, if it is necessary
at any time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus so that
the Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the Prospectus
will comply with the law.
(vi) The Underwriters will notify the Company as to which
persons receiving Reserved Shares will need to be restricted as required by the
NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation
for a period of three months following the date of this Agreement. At the
request of the Underwriters, the Company will direct the transfer agent to place
a stop transfer restriction upon such securities for such period of time. Should
the Company release, or seek to release, from such restrictions any of the
Reserved Shares, the Company agrees to reimburse the Underwriters for any
reasonable expenses (including, without limitation, legal expenses) they incur
in connection with such release.
-14-
<PAGE> 15
(vii) The Company will make generally available to its
security holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration Statement, an
earning statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date of
the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so made
available.
(viii) Prior to the Closing Date, the Company will furnish
to the Underwriters, as soon as they have been prepared by or are available to
the Company, a copy of any unaudited interim financial statements of the Company
for any period subsequent to the period covered by the most recent financial
statements appearing in the Registration Statement and the Prospectus.
(ix) No offering, sale, short sale or other disposition of
any shares of Common Stock of the Company or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 180 days after
the date of this Agreement, directly or indirectly, by the Company otherwise
than hereunder or with the prior written consent of Deutsche Bank Securities
Inc. except for (i) issuances of the Company's securities pursuant to the
conversion or exchange of convertible or exchangeable securities or the exercise
of warrants or options in each case outstanding on the date hereof; (ii) grants
of employee stock options pursuant to the [INSERT PLANS] (iii) issuances of
stock pursuant to [INSERT PLANS] and (iv) issuances of securities in connection
with any business combination.
(x) The Company will use its best efforts to list, subject
to notice of issuance, the Shares on The Nasdaq National Market.
(xi) The Company has caused each officer, director and
specific shareholders of the Company to furnish to you, on or prior to the date
of this agreement, a letter or letters, in form and substance satisfactory to
the Underwriters, pursuant to which each such person shall agree not to offer,
sell, sell short or otherwise dispose of any shares of Common Stock of the
Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or derivative of
Common Shares owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to direct
the disposition of) for a period of 180 days after the date of this Agreement,
directly or indirectly, except with the prior written consent of Deutsche Bank
Securities Inc. (the "Lockup Agreements").
(xii) The Company shall apply the net proceeds of its sale
of the Shares as set forth in the Prospectus and shall file such reports with
the Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
-15-
<PAGE> 16
(xiii) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the 1940 Act.
(xiv) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
for the Common Stock.
(xv) The Company will not take, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
(xvi) The Company will, upon any exercise of an option to
purchase the Common Stock of the Company, cause to be delivered to such
shareholder a notice pursuant to Section 2 of the Shareholder's Agreement (in a
form substantially similar to the letter previously reviewed by the
Representatives).
(b) The Selling Shareholder covenants and agrees with the several
Underwriters that:
(i) No offering, sale, short sale or other disposition of
any shares of Common Stock of the Company or other capital stock of the Company
or other securities convertible, exchangeable or exercisable for Common Stock or
derivative of Common Stock owned by the Selling Shareholder or request the
registration for the offer or sale of any of the foregoing (or as to which the
Selling Shareholder has the right to direct the disposition of) will be made for
a period of 180 days after the date of this Agreement, directly or indirectly,
by the Selling Shareholder otherwise than hereunder or with the prior written
consent of Deutsche Bank Securities Inc.
(ii) In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of
1983 with respect to the transactions herein contemplated, the Selling
Shareholder agrees to deliver to you prior to or at the Option Closing Date a
properly completed and executed United States Treasury Department Form W-8 or
W-9 (or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(iii) The Selling Shareholder will not take, directly or
indirectly, any action designed to cause or result in, or that has constituted
or might reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company .
5. COSTS AND EXPENSES.
-16-
<PAGE> 17
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company and the
Selling Shareholder; the cost of printing and delivering to, or as requested by,
the Underwriters copies of the Registration Statement, Preliminary Prospectuses,
the Prospectus, this Agreement, the Underwriters' Selling Memorandum, if any,
the Underwriters' Invitation Letter, the Listing Application, the Blue Sky
Survey and any supplements or amendments thereto; the filing fees of the
Commission; the filing fees and expenses (including legal fees and
disbursements) incident to securing any required review by the NASD of the terms
of the sale of the Shares; the Listing Fee of the Nasdaq National Market; and
the expenses, including the fees and disbursements of counsel for the
Underwriters not to exceed $10,000, incurred in connection with the
qualification of the Shares under state securities or Blue Sky laws. The Selling
Shareholder has agreed with the Company to reimburse the Company for a portion
of such expenses. To the extent, if at all, that the Selling Shareholder engages
special legal counsel to represent it in connection with this offering, the fees
and expenses of such counsel shall be borne by such Selling Shareholder. Any
transfer taxes imposed on the sale of the Shares to the several Underwriters
will be paid by the Sellers pro rata. The Company agrees to pay all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, incident to the offer and sale of Reserved Shares. The
Sellers shall not, however, be required to pay for any of the Underwriters
expenses (other than those related to qualification under NASD regulation and
state securities or Blue Sky laws) except that, if this Agreement shall be
terminated because the conditions in Section 6 hereof (excluding subsection (c)
thereof) are not satisfied, or if the sale of the shares contemplated by this
Agreement is not consummated by reason of any failure, refusal or inability on
the part of the Company or the Selling Shareholder to perform any undertaking or
satisfy any condition of this Agreement or to comply with any of the terms
hereof on their part to be performed, unless such failure to satisfy said
condition or to comply with said terms be due to the default or omission of any
Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company and the Selling Shareholder shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option Closing
Date are subject to the accuracy, as of the Closing Date or the Option Closing
Date, as the case may be, of the representations and warranties of the Company
and the Selling Shareholder contained herein, and to the performance by the
Company and the Selling Shareholder of their covenants and obligations hereunder
and to the following additional conditions:
-17-
<PAGE> 18
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company or the Selling Shareholder, shall be
contemplated by the Commission and no injunction, restraining order, or order of
any nature by a federal or state court of competent jurisdiction shall have been
issued as of the Closing Date or the Option Closing Date, as the case may be,
which would prevent the issuance of the Shares. The NASD shall have confirmed
that it will not raise any objection to the fairness and reasonableness of the
underwriting terms and arrangements.
(b) The Representatives shall have received on the Closing Date
or the Option Closing Date, as the case may be, the opinion of Morrison &
Foerster LLP, counsel for the Company and the Selling Shareholder, dated the
Closing Date or the Option Closing Date, as the case may be, addressed to the
Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; the Company is
duly qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification, or in which the failure to qualify
would have a materially adverse effect upon the business of the Company.
(ii) The Company has authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Common Stock have been duly authorized; the
outstanding shares of the Company's Common Stock, including the Shares to be
sold by the Selling Shareholder, have been duly authorized and validly issued
and are fully paid and non-assessable; all of the Shares conform in all material
respects to the description thereof contained in the Prospectus; the
certificates for the Shares, assuming they are in the form filed with the
Commission, are in due and proper form; the shares of Common Stock, including
the Option Shares, if any, to be sold by the Company pursuant to this Agreement
have been duly authorized and will be validly issued, fully paid and
non-assessable when issued and paid for as contemplated by this Agreement; and
no preemptive rights of stockholders exist with respect to any of the Shares or
the issue or sale thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the Company
and there are no outstanding or authorized options, warrants or rights of any
-18-
<PAGE> 19
character obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under
the Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act. In rendering this opinion, such counsel may rely
solely on the oral advice of the staff of the Commission.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material respects with
the requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial
statements, any notes thereto or related schedules therein.
(vi) The statements (a) in the Prospectus under the
captions "Risk Factors -- Our charter documents could deter a financially
attractive takeover attempt," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Management -- Change of Control and Employment Agreements," "-- Stock Plans,"
"Certain Relationships and Related Parties," "Description of Capital Stock,"
"Shares Eligible for Future Sale," "Underwriting" and (b) in Item 14 and Item 15
of the Registration Statement, insofar as such statements constitute a summary
of documents referred to therein or matters of law, fairly summarize in all
material respects the information called for with respect to such documents and
matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are not so filed
or described as required, and such contracts and documents as are summarized in
the Registration Statement or the Prospectus are fairly summarized in all
material respects.
(viii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company or any of the
Subsidiaries except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the certificate of
-19-
<PAGE> 20
incorporation or by-laws of the Company, or any agreement or instrument filed as
an exhibit to the Registration Statement pursuant to Item 601(b)(10) of
Regulation S-K to which the Company or any of the Subsidiaries is a party or by
which the Company or any of the Subsidiaries may be bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the NASD or as required by state
securities and Blue Sky laws as to which such counsel need express no opinion)
except such as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result
of the consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
(xiii) This Agreement has been duly authorized, executed
and delivered on behalf of the Selling Shareholder.
(xiv) The Selling Shareholder has full legal right, power
and authority, and any approval required by law (other than as required by state
securities and Blue Sky laws as to which such counsel need express no opinion),
to sell, assign, transfer and deliver the portion of the Shares to be sold by
the Selling Shareholder.
(xv) The Custodian Agreement and the Power of Attorney
executed and delivered by the Selling Shareholder is valid and binding.
(xvi) The Underwriters (assuming that they are bona fide
purchasers within the meaning of the Uniform Commercial Code) have acquired good
and marketable title to the Shares being sold by the Selling Shareholder on the
Closing Date, and the Option Closing Date, as the case may be, free and clear of
all liens, encumbrances, equities and claims.
In rendering such opinion Morrison & Foerster LLP may rely as to
matters governed by the laws of states other than the State of California, the
General Corporation Law of the State of Delaware or Federal laws on local
counsel in such jurisdictions and as to the matters set forth in subparagraphs
(xiii), (xiv) and (xv) on opinions of other counsel representing the Selling
Shareholder, provided that in each case Morrison & Foerster LLP shall state that
they believe that they and the Underwriters are justified in relying on such
other counsel. In addition to the matters set forth above, such opinion shall
also include a statement to the effect that
-20-
<PAGE> 21
nothing has come to the attention of such counsel which leads them to believe
that (i) the Registration Statement, at the time it became effective under the
Act (but after giving effect to any modifications incorporated therein pursuant
to Rule 430A under the Act) and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements or schedules therein).
With respect to such statement, Morrison & Foerster LLP may state that their
belief is based upon the procedures set forth therein, but is without
independent check and verification.
(c) The Representatives shall have received from Ropes & Gray,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, with respect to the incorporation of the
Company, the validity of the Shares delivered on the Closing Date or the Option
Closing Date, as the case may be, this Agreement and other related matters as
the Representatives may reasonably request, and the Company shall have furnished
to such counsel such documents as they request for the purpose of enabling them
to pass upon such matters. In rendering such opinion Ropes & Gray may rely as to
all matters governed other than by the laws of the Commonwealth of
Massachusetts, the General Corporation Law of the State of Delaware or Federal
laws on the opinion of counsel referred to in Paragraph (b) of this Section 6.
In addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Prospectus, or any supplement thereto, on
the date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact, necessary in
order to make the statements, in the light of the circumstances under which they
are made, not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein). With
respect to such statement, Ropes & Gray may state that their belief is based
upon the procedures set forth therein, but is without independent check and
verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Ropes & Gray a memorandum or summary, in form and substance
reasonably satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under the
state securities or Blue Sky laws of such jurisdictions as the Representatives
may reasonably have designated to the Company.
-21-
<PAGE> 22
(e) You shall have received, on each of the date hereof, the
Closing Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may be, in
form and substance satisfactory to you, of KPMG LLP confirming that they are
independent public accountants within the meaning of the Act and the applicable
Rules and Regulations thereunder and stating that in their opinion the financial
statements and schedules examined by them and included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the related Rules and Regulations; and
containing such other statements and information as is ordinarily included in
accountants' "comfort letters" to Underwriters with respect to the financial
statements and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date
or the Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company to
the effect that, as of the Closing Date or the Option Closing Date, as the case
may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under
the Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have been taken
or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to
Rules 424 or 430A under the Act have been made;
(iv) The Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such closing date;
(v) He has carefully examined the Registration Statement
and the Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment; and
-22-
<PAGE> 23
(vi) To the knowledge of such officer, since the
respective dates as of which information is given in the Registration Statement
and Prospectus, there has not been any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company or the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company, whether or not arising in the ordinary
course of business.
(g) On each of the Closing Date and the Option Closing Date, if
any, the Representatives shall have received a certificate or certificates of
the Secretary of the Company in form and substance reasonably satisfactory to
the Representatives.
(h) The Company and the Selling Shareholder shall have furnished
to the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein and
related matters as the Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved
for designation upon notice of issuance on the Nasdaq National Market.
(j) The Lockup Agreements described in Section 4(a)(xi) are in
full force and effect.
The opinions and certificates mentioned in this Agreement shall
be deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Ropes & Gray,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section
6 shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company and the Selling Shareholder of such
termination in writing or by telegram at or prior to the Closing Date or the
Option Closing Date, as the case may be.
In such event, the Selling Shareholder, the Company and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of
the Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
-23-
<PAGE> 24
8. INDEMNIFICATION.
(a) The Company agrees:
(i) To indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, (ii) the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading or (iii) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection with, or relating
in any manner to, the Shares or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon matters covered by clause (i) or (ii) above
(provided that the Company shall not be liable under this clause (iii) to the
extent that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its gross negligence or willful misconduct);
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement, or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof; and provided,
further, that with respect to any untrue statement or alleged untrue statement
in or omission or alleged omission from any preliminary prospectus the indemnity
agreement contained in this subsection (a) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased the Offered Securities concerned, to the extent that a
prospectus relating to such Offered Securities was required to be delivered by
such Underwriter under the Act in connection with such purchase and any such
loss, claim, damage or liability of such Underwriter results from the fact that
there was not sent or given to such person, at or prior to the written
confirmation of the sale of such Offered Securities to such person, a copy of
the prospectus if the Company had previously furnished copies thereof to such
Underwriter.
(ii) To reimburse each Underwriter and each such
controlling person upon demand for any legal or other out-of-pocket expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding. In the event that it
is finally judicially
-24-
<PAGE> 25
determined that the Underwriters were not entitled to receive payments for legal
and other expenses pursuant to this subparagraph, the Underwriters will promptly
return all sums that had been advanced pursuant hereto.
(b) The Selling Shareholder agrees to indemnify the Underwriters
and each person, if any, who controls any Underwriter within the meaning of the
Act, against any losses, claims, damages or liabilities to which such
Underwriter or controlling person may become subject under the Act or otherwise
to the same extent as indemnity is provided by the Company pursuant to Section
8(a) above. In no event, however, shall the liability of the Selling Shareholder
for indemnification under this Section 8(b) exceed the net proceeds received by
the Selling Shareholder from the Underwriters in the offering. This indemnity
obligation will be in addition to any liability which the Company may otherwise
have.
(c) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Shareholder, and each person, if
any, who controls the Company or the Selling Shareholder within the meaning of
the Act, against any losses, claims, damages or liabilities to which the Company
or any such director, officer, Selling Shareholder or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, Selling Shareholder or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding or in responding to a subpoena or governmental inquiry related to the
offering of the Shares, whether or not the Company or such director, officer,
selling shareholder or controlling person is a party to any action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a), (b) or (c) shall be available to
any party who shall fail to give notice
-25-
<PAGE> 26
as provided in this Section 8(d) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a), (b) or (c). In case
any such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party and
shall pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred (or within 30 days of presentation) the
fees and expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) or (b) and by the Company and the Selling Shareholder
in the case of parties indemnified pursuant to Section 8(c). The indemnifying
party shall not be liable for any settlement of any proceeding effected without
its written consent but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. In addition, the indemnifying party will not, without
the prior written consent of the indemnified party, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action
or proceeding of which indemnification may be sought hereunder (whether or not
any indemnified party is an actual or potential party to such claim, action or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action or proceeding.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Selling Shareholder on the one hand and the Underwriters on
-26-
<PAGE> 27
the other from the offering of the Shares. If, however, the allocation provided
by the immediately preceding sentence is not permitted by applicable law then
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Selling
Shareholder on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholder on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Shareholder bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Shareholder on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Shareholder and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 8(e)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(e). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation, and (iii) the Selling Shareholder
shall be required to contribute any amount in excess of the net proceeds
received by the Selling Shareholder from the Underwriters in the offering. The
Underwriters' obligations in this Section 8(e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
-27-
<PAGE> 28
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
(h) In connection with the offer and sale of the Reserved Shares,
the Company agrees, promptly upon a request in writing, to indemnify and hold
harmless the Underwriters from and against any and all losses, liabilities,
claims, damages and expenses incurred by them as a result of the failure of
eligible employees and persons having business relationships with the Company to
pay for and accept delivery of Reserved Shares which, by the end of the first
business day following the date of this Agreement, were subject to a properly
confirmed agreement to purchase.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company or the
Selling Shareholder), you, as Representatives of the Underwriters, shall use
your reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company and the Selling
Shareholder such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Shareholder or you as
-28-
<PAGE> 29
the Representatives of the Underwriters will have the right, by written notice
given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company or of the Selling Shareholder except to the
extent provided in Section 8 hereof. In the event of a default by any
Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or
Option Closing Date, as the case may be, may be postponed for such period, not
exceeding seven days, as you, as Representatives, may determine in order that
the required changes in the Registration Statement or in the Prospectus or in
any other documents or arrangements may be effected. The term "Underwriter"
includes any person substituted for a defaulting Underwriter. Any action taken
under this Section 9 shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to Deutsche Bank Securities
Inc., 101 Federal Street, 15th Floor, Boston, MA 02110, Attention: Gregory J.
Burkus; with a copy to Deutsche Bank Securities Inc., One Bankers Trust Plaza,
130 Liberty Street, New York, New York 10006, Attention: General Counsel; if to
the Company or the Selling Shareholder, to Emerald Solutions, Inc., 1525 SW Park
Avenue, Ste. 200, Portland, OR 97201, Attention: President; with a copy to
Morrison & Foerster LLP, 755 Page Mill Road, Palo Alto, California 94304-1018,
Attention: Justin L. Bastian, Esq.
11. TERMINATION.
(a) This Agreement may be terminated by you by notice to the
Company and the Sellers at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which information
is given in the Registration Statement and the Prospectus, any material adverse
change or any development which is reasonably expected to have a material
adverse change in or affecting the condition, financial or otherwise, of the
Company and its Subsidiaries taken as a whole or the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and its Subsidiaries taken as a whole,
whether or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration, emergency,
calamity, crisis or change on the financial markets of the United States would,
in your reasonable judgment, make it impracticable or inadvisable to market the
Shares or to enforce contracts for the sale of the Shares, or (iii) suspension
of trading in securities generally on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market or limitation on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such Exchange or the
-29-
<PAGE> 30
Nasdaq National Market, (iv) the enactment, publication, decree or other
promulgation of any statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely affects or
may materially and adversely affect the business or operations of the Company,
(v) declaration of a banking moratorium by United States or New York State
authorities, (vi) the suspension of trading of the Company's common stock by the
Nasdaq National Market, the Commission, or any other governmental authority or,
(vii) the taking of any action by any governmental body or agency in respect of
its monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(b) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Shareholder and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Shareholder and the Underwriters
acknowledge and agree that the only information furnished or to be furnished by
any Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
Underwriters) and [the information set forth in the table after the first
paragraph and the third (insofar as it relates to concessions and allowances),
ninth and tenth] paragraphs under the caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
-30-
<PAGE> 31
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholder, the
Company and the several Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as Attorney-in-Fact
for the Selling Shareholder represents by so doing that he has been duly
appointed as Attorney-in-Fact by the Selling Shareholder pursuant to a validly
existing and binding Power of Attorney which authorizes such Attorney-in-Fact to
take such action.
Very truly yours,
EMERALD-DELAWARE, INC.
By:
------------------------------------------
Name:
Title:
The Selling Shareholder listed on Schedule II
By:
------------------------------------------
Name:
Title: Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
DEUTSCHE BANK SECURITIES INC.
FLEETBOSTON ROBERTSON STEPHENS INC.
ADAMS, HARKNESS & HILL, INC.
PACIFIC CREST INC.
As Representatives of the several
-31-
<PAGE> 32
Underwriters listed on Schedule I
By: Deutsche Bank Securities Inc.
By:
-------------------------------------
Authorized Officer
-32-
<PAGE> 33
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
<S> <C>
Deutsche Bank Securities Inc.
FleetBoston Robertson Stephens Inc.
Adams Harkness & Hill, Inc.
Pacific Crest Inc.
--------------
Total
--------------
</TABLE>
-33-
<PAGE> 34
SCHEDULE II
SCHEDULE OF OPTION SHARES
<TABLE>
<CAPTION>
Maximum Number
of Option Shares
Name of Seller to be Sold Percentage
-------------- ----------------- ----------
<S> <C> <C>
Emerald-Delaware, Inc.
------
Total 100%
</TABLE>
-34-
<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:
That the name of the Corporation is Emerald-Delaware, Inc. The
Corporation was originally incorporated under the same name, and the original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of Delaware on the 16th day of April, 1999.
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 Eighty-Nine Million (89,000,000) shares,
consisting of Seventy-Three Million Six Hundred Sixty-Six Thousand Six Hundred
Sixty-Six (73,666,666) 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 for any stock dividends, combinations or splits
with respect to such shares, and adding thereto an amount
2
<PAGE> 3
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 Stock shall automatically be converted into shares of Common Stock at
their respective Conversion
4
<PAGE> 5
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 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
5
<PAGE> 6
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;
(D) for which adjustment of the Series
A or Series B Conversion Price is made pursuant to
Section 3(e) hereof,
6
<PAGE> 7
(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, 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
7
<PAGE> 8
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 exercise thereof were issued at the time of issue of
such Options, and the consideration received by the
Corporation for the Additional Shares of
8
<PAGE> 9
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 number of such Additional Shares of Common Stock so issued.
9
<PAGE> 10
(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 are issued together with other shares or
securities or other assets of the Corporation for
consideration which covers both, be the proportion of
such
10
<PAGE> 11
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 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
11
<PAGE> 12
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:
(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
12
<PAGE> 13
(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.
(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
13
<PAGE> 14
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 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
14
<PAGE> 15
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.
(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
15
<PAGE> 16
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, each holder of Common Stock shall be entitled to one (1) vote for each
share of Common Stock held.
16
<PAGE> 17
(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 or Series B Preferred Stock;
17
<PAGE> 18
(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.
20
<PAGE> 21
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
Jerry N. Grant, its Secretary, this 5th day of April 2000.
/s/ JERRY N. GRANT
------------------------------------
Jerry N. Grant, Secretary
<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 Emerald - Delaware, Inc., 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
[MORRISON & FOERSTER LLP LETTERHEAD]
FORM OF OPINION
EXHIBIT 5.1
April 10, 2000
Emerald--Delaware, Inc.
111 SW 5th Avenue, 27th Floor
Portland, OR 97204
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 initially filed
by Emerald--Delaware, Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission on February 16, 2000 (Registration No.
333-30574) and Amendment No. 1 thereto filed on April 10, 2000 (collectively the
"Registration Statement"), relating to the registration under the Securities Act
of 1933, as amended, of up to 4,000,000 authorized but unissued shares of the
Company's Common Stock, $0.001 par value per share, being offered by the Company
(and up to an additional 600,000 outstanding shares that may be sold by a
selling stockholder upon exercise of the underwriters' over-allotment option)
(collectively, the "Shares"). The Shares are to be sold to the underwriters
named in the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by the
Company in connection with the issuance and sale of the Shares by the Company
and the selling stockholder.
We are of the opinion that the 4,000,000 Shares to be offered and sold
by the Company have been duly authorized and, when issued and sold by the
Company in the manner described in the Registration Statement and in accordance
with the resolutions adopted by the Board of Directors of the Company, will be
legally issued, fully paid and nonassessable; and the 600,000 Shares that may be
sold by the selling stockholder upon exercise of the over-allotment option have
been duly authorized and issued, and are fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the prospectus constituting a part thereof and any amendments
thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
--------------------------------
Morrison & Foerster LLP
<PAGE> 1
EXHIBIT 10.6
[EMERALD SOLUTIONS LOGO]
PROFESSIONAL SERVICES AGREEMENT
CLIENT: golfgateway.com
ADDRESS: 9977 N. 90th Street, Suite 150
Scottsdale, Arizona 85258
A. Client is a Delaware corporation.
B. Emerald Solutions, Inc., a Washington corporation ("Emerald")
provides systems integration and professional services in information
technology.
C. Client desires to retain Emerald to provide certain services as
described in the attached Statement of Work and all future Statements of Work.
NOW THEREFORE, for and in consideration of the mutual representations,
warranties, covenants and agreements set forth below, the parties agree as
follows:
1. SERVICES.
(a) Statement of Work.
Emerald shall perform for Client the services (the "Services")
described in the Statement of Work attached hereto for the period of time set
forth in the Statement of Work unless this Agreement is earlier terminated
pursuant to Section 10(b) hereof (the "Term").
(b) Additional or Replacement Services.
The parties may agree upon additional or replacement Services and
the terms and conditions upon which Emerald shall perform such additional or
replacement Services. Upon such agreement as to the additional or replacement
Services, the parties shall consider the additional or replacement Services to
be "Services" for all purposes of this Agreement and shall modify the Statement
of Work to reflect the additional or replacement Services.
(c) Emerald's Personnel and Obligations.
(i) Emerald shall staff the Services initially with those
individuals specified on the Statement of Work. Emerald may in its reasonable
discretion substitute or add other personnel, including subcontractors, and will
notify Client of such changes in writing and amend the Statement of Work hereto.
(ii) Client shall provide qualified personnel adequate to perform
those tasks for which Client is responsible as set forth in the Statement of
Work.
(iii) In developing estimates and time schedules, Emerald
considers all of its available consultants, regardless of location and including
Emerald's subcontractors. Emerald also plans that its consultants will work as
much as possible at Emerald's locations; therefore, Emerald's consultants may
perform billable work for Client even though they are not at Client's locations.
(iv) Emerald does not undertake to perform any obligation of
Client, whether regulatory or contractual, or to assume any responsibility for
Client's business or operations. Emerald has the sole right and obligation to
supervise, manage, contract, direct, procure, perform or cause to be performed
all Services.
(v) Client shall inform and Emerald shall comply with all
reasonable workplace standards and policies, applicable to Client's employees,
while Emerald personnel are physically located at Client's premises.
(vi) Emerald may subcontract the performance of any of the
Services. Emerald shall be responsible for
1
<PAGE> 2
all performances under this Agreement by its subcontractors as if they were
Emerald employees. For purposes of this Agreement, references to "Emerald
personnel" or similar words shall be deemed to include any subcontractor or any
subcontractor's personnel.
(d) Conformance to Law.
Emerald shall perform the Services in material compliance with all
applicable federal, state and local laws, regulations, ordinances and other
legal requirements applicable thereto (collectively, the "Laws").
(e) Changes in Laws Affecting Services.
During the Term, Client shall advise Emerald of any proposed law,
regulation or other requirement of which Client becomes aware which, if adopted,
would require modification of or change to any advice, program, plan,
specification, recommendation, report or other services to Client previously
made during the course of this Agreement. Emerald shall have the right to modify
or change the Services to conform to all Laws.
(f) Access to Facilities and Technical Materials.
Client shall provide access to Client's facilities for all
Emerald's personnel as required to perform the Services, and all source code,
associated macros and other relevant materials on which the Service is to be
performed. Client shall also provide work space, workstations, computer machine
time, software, security arrangements, modem and telephone connections, access
to photocopiers and facsimile equipment, and materials necessary for Emerald to
perform the Services at Client's facilities.
(g) Project Leaders.
Emerald and Client shall each designate a project leader (the
"Project Leader"), who shall act as the authorized representatives of the
parties for issues arising with respect to the Services and the "Procedures" (as
defined in Section 2(a)). The parties agree that directions given by any person
other than the Project Leader of a party shall be binding on the other party
only with the written approval of that party's Project Leader.
2. PROCEDURES.
(a) Procedures.
Emerald and Client shall establish the order in which Emerald will
perform the Services, the priorities with respect to each separate project
within the Services and other procedures to be followed by the parties
(collectively, the "Procedures"). The parties shall set forth the Procedures on
Exhibit A. Emerald and Client agree that they will hold regular meetings to
discuss the status of the projects and the priorities for the Services as set
forth on Exhibit A.
(b) Procedure Amendments.
The parties shall each retain the right to propose from time to
time amendments, modifications, changes, additions or other alterations (an
"Amendment") to the Procedures, which Amendments shall become effective only
upon the mutual agreement of the parties hereto. The parties shall add any
Amendment to Exhibit A. Client acknowledges that, due to the various factors and
requirements imposed on Emerald by fixed price or performance terms, Emerald
may, in its sole discretion, agree to an Amendment of any such fixed term in the
Agreement.
3. INDEPENDENT CONTRACTORS.
Emerald's relationship with Client shall be that of an independent
contractor and not that of an employee of Client or any affiliate. Each party
shall be solely responsible for wages, salaries and other amounts due to its
respective employees or subcontractors. Each party shall be responsible for all
reports and obligations respecting its employees concerning social security,
income tax, unemployment insurance, workers' compensation and security matters.
Neither party shall have the authority to enter into contracts that bind the
other party or create obligations on the part of the other party without the
prior written authorization of such other party.
4. PAYMENT FOR SERVICES.
(a) Payment Schedule.
Client shall pay to Emerald the rates (the "Rates") as set forth
in the payment schedule attached hereto as Exhibit B. The Rates cover Emerald's
fee, all costs of operations, including benefits attributable to payroll,
overhead, wages and salaries of employees. The Rates do not include, and Client
shall pay or reimburse Emerald separately for, the gross amount of any
2
<PAGE> 3
sales, use, excise, occupation, privilege, value-added or other similar tax
applicable to the price, sale or furnishing of any Services or associated
materials hereunder or to their use by either Client or Emerald. Emerald
reassesses the Rates from time to time and adjustments are made when Emerald
believes such adjustments are appropriate. These adjustments may be reflected in
the Rates utilized to determine Emerald's charges to Client during the Term.
(b) Terms of Payment.
Client shall pay Emerald for the Services performed within [*]
after receipt of an invoice from Emerald. Emerald shall submit invoices weekly
(or less often at Emerald's discretion) for reimbursable costs and expenses as
those costs and expenses are incurred by Emerald and Client shall reimburse
Emerald for such costs and expenses (without markup) within [*] after receipt of
such invoice. Client shall pay interest at the rate of [*] on any balance
outstanding beyond [*] after delivery of the invoice to Client.
Emerald retains the right to establish and enforce credit terms
that it deems prudent in its sole determination. These terms may include
guarantees and/or dollar limits and may be changed with 60 days written notice
to Client. Client agrees to abide by Emerald's terms and promptly cure credit
term defaults. Emerald retains the right (in addition to all other available
remedies) to cease work on any or all projects in progress until all applicable
credit terms are fully complied with. Client specifically waives the right to
all course of action at its disposal in the event of such work stoppage.
(c) Books and Records.
Emerald agrees to keep and maintain any directly pertinent books,
documents, papers and records of Emerald involving transactions related to this
Agreement for two (2) years after the expiration of the Term.
5. SECURITY AND CONFIDENTIALITY
(a) Security.
In providing the Services under this Agreement, Emerald shall
comply with all Client systems security, virus protection and other written
policies and procedures provided to Emerald by Client. Emerald shall be
responsible for the safekeeping of data, documentation and computer media
provided to Emerald by Client, and Emerald shall adhere to a standard of care no
less than the standard of care exercised by Client.
(b) Confidentiality.
(i) In connection with their respective obligations under this
Agreement, each party may disclose certain information to the other that
includes confidential or proprietary information, trade secrets, confidential
customer information, and other information concerning operations, policies and
procedures (collectively, "Information") pertaining to past, present and future
activities. Since it is often difficult to separate confidential and proprietary
information from that which is not, each party will regard all information
gained as a result of this Agreement as confidential, solely for the purpose of
carrying out its respective obligations under this Agreement, and not to be
disclosed to any third party. Further, each party shall not disclose the terms
and conditions of this Agreement, except as may be required by law or by
governmental regulation or order, or as may be necessary to assert its rights
hereunder.
(ii) Each party shall take whatever steps are necessary to
safeguard the confidentiality of all Information, including but not limited to,
(i) limiting the availability of the Information to only those employees or
personnel who have a need to know the Information, (ii) storing the Information
and any physical embodiments of it in a reasonably secure place when it is not
being used, (iii) returning all information removed from the premises of Client
or Emerald as soon as is reasonably possible, and (iv) maintaining reasonable
security procedures to safeguard the Information from theft or access by any
unauthorized person. Each party agrees to notify the other party immediately and
fully, in writing, of all circumstances surrounding any access to or possession
of the Information (or any physical embodiment thereof) by any person other than
those authorized by this Agreement.
(iii) Each party's duty of confidentiality shall not extend to
information that (i) is already known or has been developed independently by
such party prior to disclosure by the other party, (ii) is received from a third
party who has the right to hold and disclose it, (iii) is released in writing
from confidentiality protection by the other party, or (iv) is in the public
domain, except if as a result of a breach of this Agreement.
(iv) Upon the termination of this Agreement, each party shall
return all physical embodiments of the
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
3
<PAGE> 4
Information immediately to the other party and shall keep no copies of the
Information, except with the other party's specific written consent.
(v) Until two (2) years after the termination of this Agreement,
the parties hereby agree not to disclose the Information to any third party
without the other party's express written consent, and not to otherwise use the
Information for any purpose. The parties further agree to protect the
Information by using the same degree of care, but no less than a reasonable
degree of care, as the other party uses to protect its own similar confidential
information.
6. WARRANTIES.
(a) General Client Representations and Warranties.
Client represents and warrants that it has full power and
authority under any software licenses or other contracts relating to computer
software with regard to which Emerald is to deliver the Services, to permit
Emerald to provide such Services without liability to any third party. The
parties hereto recognize and agree that in providing the Services contemplated
hereunder, Emerald may have access to certain computer software licensed to
Client by third party licensors, and Client hereby agrees that, to the extent
necessary, Client shall be responsible for obtaining the written consent of any
licensors or other third parties necessary in connection with any software
licenses or other agreements to which Client is a party. If any such licensors
or third parties require the execution of a nondisclosure agreement or license
terms as a condition to allow Emerald to have access to computer software with
regard to which Emerald is to provide Services, Emerald shall execute, and
require any of its employees, subcontractors, consultants and contractors to
execute, any such reasonable nondisclosure or license terms.
(b) Software and Services Warranties.
(i) Developed Software.
Where the Services include tasks related to the development
of new software systems for Client, Emerald warrants that the programs developed
will perform in all material respects in accordance with the specifications
published by Emerald and approved by golfgateway.com.
(ii) Year 2000 Remediation Services.
Where the Services include tasks related to year 2000
analysis and remediation services, Emerald warrants that the computer software
performing "windowing logic" shall perform in accordance with that software's
published documentation.
(iii) General.
Emerald shall have no responsibility for performance problems
caused by alterations or modifications made by Client or a third party, or
arising out of the malfunction of Client's equipment or other software products
not supplied or analyzed and remediated by Emerald. Further, the warranties
provided only apply to the copy or version of source code upon which Emerald has
performed remediation services. If Client subsequently enhances or modifies the
program or copy books used in the program, Emerald's warranties will not apply,
to the extent the malfunction is caused by Client's enhancement or modification
or the programs affected.
(c) Services Warranties.
Emerald shall perform the Services in a professional and workmanlike
manner.
(d) WARRANTY EXCLUSION.
(i) THIS AGREEMENT PROVIDES FOR SERVICES AND IS NOT A SALE OF
GOODS.
(ii) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THERE ARE NO
WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
(e) Exclusive Remedies.
For any breach of warranties contained in Section 6 of this
Agreement, Client's exclusive remedy shall be as follows:
(i) For any new software systems Emerald develops for Client,
Client shall have ninety (90) days (the "Warranty Period") following delivery of
the software to Client's designated site to verify that the software conforms in
all material respects with specifications published by Emerald and approved by
golfgateway.com. Client shall provide written notice of any material
nonconformance to Emerald within the Warranty Period, including in such notice
sufficient detail to
4
<PAGE> 5
allow Emerald to duplicate the nonconformance. Emerald shall, at no additional
charge, provide a correction or workaround approved by golfgateway.com in the
software. Should Emerald fail to provide such correction or workaround approved
by golfgateway.com or reach a mutually acceptable plan for correction or
workaround with Client within sixty (60) business days after receipt of Client's
notice, Client's sole and exclusive remedy shall be to terminate this Agreement
as a default incapable of cure by written notice in accordance with the
termination provisions hereof delivered within ten (10) business following the
date for correction, workaround or plan for correction or workaround.
Notwithstanding the payment provisions hereof, Client shall be entitled to
receive a refund of any license or other fees paid to Emerald for the software.
(ii) For the Services, Client is entitled to re-performance of the
Services, or if Emerald cannot perform the Services as warranted, Client is
entitled to a refund of the fees paid to Emerald for the Services not in
conformance with the warranty.
EXCEPT FOR CLIENT'S REPRESENATIONS AND WARRANTIES SET FORTH IN SECTION 6(a), THE
REMEDIES SET FORTH IN THIS SECTION (`WARRANTY') SHALL BE THE SOLE AND EXCLUSIVE
REMEDY OF ANY PARTY FOR ANY BREACH BY THE OTHER PARTY OF WARRANTIES CONTAINED
HEREIN. EXCEPT FOR THE LIMITED WARRANTY IN THIS SECTION, EMERALD EXPRESSLY
DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, IN RELATION TO THE SOFTWARE
OR THE PROGRAMS DEVELOPED UNDER THIS AGREEMENT, INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NEITHER ITS EMPLOYEES,
AGENTS, OR REPRESENTATIVES HAS ANY RIGHT TO MAKE ANY REPRESENTATION, WARRANTY,
OR PROMISE ON BEHALF OF EMERALD WITH RESPECT TO THE SOFTWARE OR THE PROGRAMS. IN
NO EVENT SHALL EMERALD BE LIABLE TO CLIENT FOR A MONETARY AMOUNT GREATHER THAN
THE AMOUNTS PAID OR DUE PURSUANT TO THIS AGREEMENT. THE LIMITATIONS SET FORTH IN
THIS SECTION SHALL APPLY EVEN IF ANY OTHER REMEDIES FAIL OF THEIR ESSENTIAL
PURPOSE.
7. OWNERSHIP.
All work product, documentation, computer programs, source code,
software products or system design specifications reduced to writing or other
tangible form that are produced by Emerald for golfgateway.com pursuant to this
Agreement ("Software Product), shall be the exclusive property of
golfgateway.com.
All ideas, concepts, techniques, inventions, procedures, methods,
utilities, tools, discoveries or improvements, whether patentable or not, that
are conceived of or reduced to practice by Emerald or by one or more Emerald
employees or agents in the performance of services for Emerald or
golfgateway.com under this Agreement, whether acting alone or in conjunction
with golfgateway.com's employees, or others ("Inventions"), shall be the
exclusive property of Emerald. With respect to any Invention, Emerald hereby
grants to golfgateway.com and to any entity that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is under common
control with, golfgateway.com, a non-exclusive, non-transferable, limited,
perpetual, royalty-free license to use such Inventions in the normal course of
golfgateway.com's business.
8. INSURANCE.
Emerald will secure and maintain reasonably adequate worker's
compensation insurance in accordance with the law of the work site. Emerald will
also maintain comprehensive general liability and property damage insurance in
accordance with generally accepted industry standards.
9. INDEMNIFICATION
Each party will defend, indemnify, and hold the other party, its
officers, directors, agents and employees, harmless from any claims or
liabilities brought against it or its licensors, including attorneys' fees,
costs and expenses at trial, on appeal or on any petition for review, based on
any claim that any work or materials delivered to the party pursuant to this
Agreement violate or infringe upon the intellectual property rights of any other
party or a breach of the delivering party's contractual obligations hereunder;
provided, however, this subsection shall not apply where such injury or damage
is caused by the negligence or willful misconduct of the party claiming
indemnification, or that party's agents or employees. Notwithstanding the
foregoing, whether or not the possibility of such damages has been disclosed or
is reasonably foreseeable, neither party shall be liable to the other for
special, incidental, exemplary or consequential damages, including, but not
limited to, loss of data, sales, profits or revenue, loss of use of equipment or
data, cost of capital, cost of substitute equipment,
5
<PAGE> 6
facilities or services, downtime costs, or claims of customers of either party
for such damages.
10. TERM, EXTENSION AND TERMINATION.
(a) Term.
The term of the Agreement shall commence on the date set forth
above and shall remain in effect for the period set forth in one or more
Statements of Work.
(b) Extension.
In the event that Emerald has not completed the Services during
the Term, Emerald and Client shall extend this Agreement on the terms and
conditions mutually agreed to by the parties. If the parties cannot agree on the
terms of such extension, then this Agreement will expire on its terms.
(c) Termination.
(i) Either party may terminate this Agreement in the event of a
material breach by the other party of any representation, warranty, condition or
covenant of this Agreement. The non-breaching party shall give the breaching
party [*] prior written notice with an opportunity to cure the breach within
such [*] period. In the event that the breaching party fails to cure the breach
within the [*] period, the non-breaching party shall have the right to terminate
this Agreement.
(ii) This Agreement may be terminated by either party without
prior notice if:
(A) the other party files a petition for bankruptcy or is
adjudicated a bankrupt;
(B) a petition in bankruptcy is filed against the other
party;
(C) the other party becomes insolvent or makes an
assignment for the benefit of its creditors or an arrangement for its creditors
pursuant to bankruptcy law;
(D) the other party discontinues its business; or
(E) a receiver is appointed for the other party or its
business.
(iii) An individual Statement of Work may be terminated by
golfgateway.com at its discretion, at any time, provided that a reasonable ramp
down period is established and agreed to by both parties.
11. NONCOMPETITION, NONSOLICITATION, AND EXCLUSIVITY
(a) Noncompetition.
Each party agrees that during the Term and for a period of twelve
(12) months thereafter, neither it nor any person or entity affiliated with it,
will (i) induce or attempt to induce the other party or any customer, supplier,
licensee or business relation (each, a "Customer") of the other party to alter
in any way its business relationship with the other party, including without
limitation any attempt to induce a Customer to decrease the quantity of business
conducted with the other party or induce or encourage a Customer to not enter
into an expanded business relationship with the other party, or (ii) interfere
in any way with the relationship of the other party or any customer, supplier,
licensee or business relation.
(b) Nonsolicitation.
Each party agrees that during the term of this Agreement and for a
period of twelve (12) months thereafter, neither it nor any person or entity
affiliated with it, will directly or indirectly employ or otherwise engage in
any capacity any person who is or has been an employee of the other party at any
time during the term of this Agreement, nor will a party or any affiliate
solicit or encourage any such person of the other party to leave the employ of
the other party for any reason, unless authorized, in writing, by Emerald. Each
party agrees that the harm to the other party from any breach of this Section
11(b)may be difficult to determine and may be wholly or partially irreparable.
(c) Exclusivity
Based on golfgateway.com paying all invoices, in full, within 30
days of receipt, throughout the life of this agreement, both parties agree to
the following exclusivity provision. Both parties recognize that the
relationship between Emerald and golfgateway.com provides a critical competitive
advantage to golfgateway.com in their market. In recognition of this competitive
advantage Emerald agrees to not engage in consulting and project work for
golfgateway.com's competitors, [*]
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
6
<PAGE> 7
[*]
- --------------------------------------------------------------------------------
12. DISPUTE RESOLUTION.
All disputes involving this Agreement, except actions arising under the
patent and copyright provisions of the U.S. Code, shall be submitted to a panel
of three (3) arbitrators appointed and operating under Uniform Arbitration Act
and the procedural rules of the American Arbitration Association. Such panel
shall include only persons with experience in the areas of information
technology or computer software licensing, installation or implementation. Each
party shall choose one (1) arbitrator, and the third arbitrator shall be chosen
by the two- (2) arbitrators thus selected by the parties. The place of the
arbitration shall be Seattle, Washington. The written decision of the
arbitrators shall be final, binding and convertible to a court judgment in any
appropriate jurisdiction.
13. MISCELLANEOUS
(a) The section headings used in this Agreement are for convenience only
and are not intended to limit or to extend the meaning of any part of this
Agreement.
(b) Except as otherwise expressly provided in this Agreement, this
Agreement may not be amended, modified, altered or supplemented other than by
means of a written instrument duly executed and delivered on behalf of Emerald
and Client. The parties agree that the terms and conditions included in each
parties standard printed forms which purport to amend, alter, modify, change, or
supplement all or any part of this Agreement shall be of no force and effect.
(c) This Agreement, all associated Statements of Work, and
Nonsolicitation Exemptions, if any, constitute the entire agreement of the
parties hereto with respect to the matters contemplated hereby, and no other
agreement, statement or promise, made by any party hereto, that is not contained
herein shall be binding or valid.
(d) Each of the parties acknowledges and agrees that the other party
would be damaged irreparably in the event any of the provisions of Sections 5
and 11(a) are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the parties agrees that the other party shall
be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically this Agreement and the
terms and provisions hereof in any action instituted in any court located in the
state of Washington, in addition to any other remedy to which they may be
entitled, at law or in equity. Each of the parties submits to the jurisdiction
of any federal court, sitting in the state of Washington, in any action or
proceeding arising out of or relating to this Agreement and agrees that all
claims in respect of the action or proceeding may be heard and determined in any
such court.
(e) Any notice required or permitted to be given under this Agreement,
including, without limitation, all requests for approval or consent, shall be
personally delivered or sent by registered or certified first class U.S. Mail,
return receipt requested, by a recognized overnight courier service, by hand
delivery, or by confirmed facsimile transmission and shall be deemed given upon
receipt. All such notices shall be delivered to the Client at the address
following its signature, and to Emerald as follows:
If to Emerald: Emerald Solutions, Inc.
500 - 108th Avenue NE,
Suite 1800
Bellevue, Washington 98004
Attention: Jerry Grant,
Vice President and Chief
Financial Officer
Facsimile: (425) 586-4990
Telephone: (425) 586-3000
with a copy to:
Morrison & Foerster LLP
19900 MacArthur Boulevard, 12th Floor
Irvine, California 92612
Attention: William A. Wurch, Esquire
Facsimile: (949) 251-0900
Telephone: (949) 251-7500
(f) The waiver by any party hereto of any breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition herein contained. Any waiver of a term, covenant or
condition in this Agreement shall be valid only if in writing.
(g) In the event of any action or proceeding at law or in equity between
Client and Emerald to enforce or interpret any provision of this Agreement or to
protect or establish any right or remedy of either party hereunder, the party
not prevailing in such action or
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
7
<PAGE> 8
proceeding shall pay to the prevailing party all costs and expenses, including,
without limitation, reasonable attorneys' fees and expenses, incurred therein by
such prevailing party and if such prevailing party shall recover judgment in any
such action or proceeding, such costs, expenses and attorneys' fees shall be
included in and as part of such judgment.
(h) The language in all parts of this Agreement shall in all cases be
construed as a whole according to its fair meaning and not strictly for or
against either party. The parties acknowledge that each party and its counsel
have reviewed this Agreement and participated in its drafting and therefore that
any rule of construction to the effect that ambiguities are to be resolved
against the drafting party shall not be applied in the construction or
interpretation of this Agreement. In this Agreement, the neuter gender includes
the feminine and masculine, and the singular number includes the plural wherever
the context so requires.
(i) In the event that either party is unable to perform any of its
obligations under the Agreement or to enjoy any of its benefits because of, or
if loss of the product is caused by, natural disaster, actions or decrees of
governmental bodies or communications line failures not the fault of the
affected party ("Force Majeure Event"), the party who has been so affected
immediately shall give notice to the other party and shall do everything
possible to resume performance. Upon receipt of such notice, the Agreement shall
be immediately suspended. Delays in delivery due to a Force Majeure Event shall
automatically extend the delivery date(s) for the period equal to the duration
of such Force Majeure Events; any warranty period affected by a Force Majeure
Event shall likewise be extended for a period equal to the duration of such
Force Majeure Event.
(j) In the event that any provision of this Agreement, or the
application of any such provision to any person or set of circumstances, shall
be determined to be invalid, unlawful, void or unenforceable to any extent, the
remainder of this Agreement, and the application of such provision to persons or
circumstances other than those as to which it is determined to be invalid,
unlawful, void or unenforceable, shall not be impaired or otherwise affected and
shall continue to be valid and enforceable to the fullest extent permitted by
law.
(k) This Agreement shall be interpreted and construed under and pursuant
to the laws of the State of Washington, other than those laws that would require
the application of the laws of another forum.
(l) Client shall neither assign its rights nor delegate its duties under
this Agreement without prior written consent of Emerald. This prohibition of
assignment and delegations extends to all assignments and delegations that
lawfully may be prohibited by agreement. Assignment for purposes of this
Agreement shall include transfers by operation of law, merger, cessation of
operations, liquidation, acquisition or consolidation. Subject to the foregoing,
the provisions of this Agreement shall be binding upon and inure to the benefit
of both parties and their respective legal representatives, successors and
assigns.
(m) Unless otherwise specifically indicated, all provisions set forth in
this Agreement are independent of one another, and the obligations or duty of
either party hereto under any one provision is not dependent on either party
performing under the terms of any other provision.
(n) Time is hereby expressly declared to be of the essence of this
Agreement and of each and every term, covenant, agreement, condition and
provision hereof.
(o) Neither party shall publicly announce or disclose the terms and
conditions of this Agreement except that Emerald may use Client's name as a
reference in Emerald's sales calls and in lists of Emerald's customers. Emerald
shall be entitled to disclose detailed project related information and system
functionality descriptions as may be useful in sales presentations.
golfgateway.com agrees to allow Emerald an automated link (URL) on their website
denoting Emerald as the site developer. Such link will be designed and
maintained by Emerald. The size, location, and appearance of the automated link
must be approved by golfgateway.com. In the event this Agreement is terminated,
the provisions of this section shall survive only upon written consent of
golfgateway.com.
(p) 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.
(q) The parties agree that this Agreement is not subject to and shall
not be interpreted by the United Nations Convention on Contracts for the
International Sale of Goods.
(r) This Agreement or schedule or exhibit thereto may be accompanied by
Client's purchase order or other instrument covering the subject matter of this
8
<PAGE> 9
Agreement. Such purchase order or other instrument is for Client's internal use
and shall affect this Agreement.
***************
9
<PAGE> 10
IN WITNESS WHEREOF, the parties have hereunto set their hands by
proper persons duly authorized, the day and year first above written.
EMERALD SOLUTIONS, INC. CLIENT:
By: /s/ JERRY N. GRANT By: /s/ PAUL G. MARDESICH
----------------------------------- -----------------------------------
Print: Print: Paul G. Mardesich
-------------------------------- --------------------------------
Its: CFO Its: CFO
---------------------------------- ----------------------------------
Dated as of September 15, 1999
Address for Notices:
9977 N. 90th Street
-------------------------------
Suite 150
-------------------------------
Scottsdale, Arizona 85258
-------------------------------
<PAGE> 11
EXHIBIT A
PROCEDURE
PROJECT PRIORITIES:
- - Web Based, Golf Tee Time Reservation SySTEm
- - Golf School Module
- - ONYX Implementation
All three projects may be worked simultaneously.
11
<PAGE> 12
EXHIBIT B
1999 BILLING RATES
FOR GOLFGATEWAY.COM
<TABLE>
<CAPTION>
JOB LEVEL HOURLY RATE
--------- -----------
<S> <C>
EXECUTIVE/VP [*]
DIRECTOR [*]
PRINCIPAL
SENIOR MANAGER [*]
SENIOR TECHNICAL ARCHITECT
MANAGER [*]
TECHNICAL ARCHITECT
SENIOR CONSULTANT [*]
CONSULTANT [*]
ASSOCIATE [*]
</TABLE>
THE CLIENT WILL BE INVOICED WEEKLY FOR ACTUAL HOURS WORKED ON THE RESPECTIVE
PROJECTS ACCORDING TO THE RATES ESTABLISHED IN THE APPLICABLE STATEMENT OF WORK
OR AS LISTED ABOVE. EMERALD SOLUTIONS RESERVES THE RIGHT TO ADJUST CONSULTANT
BILLING RATES AFTER PROVIDING 30 DAYS NOTICE TO CLIENT.
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
<PAGE> 1
EXHIBIT 10.9
EMERALD-DELAWARE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 2000 Employee
Stock Purchase Plan of Emerald-Delaware, Inc.
1. Purpose. The purpose of the Plan is to provide employees of
the Company and its Designated Parents or Subsidiaries with an opportunity to
purchase Common Stock of the Company through accumulated payroll deductions. It
is the intention of the Company to have the Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Code. The provisions of the Plan,
accordingly, shall be construed so as to extend and limit participation in a
manner consistent with the requirements of that section of the Code.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Administrator" means either the Board or a committee of the
Board that is responsible for the administration of the Plan as is designated
from time to time by resolution of the Board.
(b) "Applicable Laws" means the legal requirements relating to
the administration of employee stock purchase 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 participation in the Plan by
residents therein.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Common Stock" means the common stock of the Company.
(f) "Company" means Emerald-Delaware, Inc., a Delaware
corporation.
(g) "Compensation" means an Employee's base salary, overtime,
commissions, and cash bonuses from the Company or one or more Designated Parents
or Subsidiaries, including such amounts of base salary, overtime, commissions,
and cash bonuses as are deferred by the Employee (i) under a qualified cash or
deferred arrangement described in Section 401(k) of the Code, or (ii) to a plan
qualified under Section 125 of the Code. Compensation does not include annual
awards, other incentive payments, reimbursements or other expense allowances,
fringe benefits (cash or noncash), moving expenses, deferred compensation,
contributions (other than contributions described in the first sentence) made on
the Employee's behalf by the Company or one or more Designated Parents or
Subsidiaries under any employee benefit or welfare plan now or hereafter
established, and any other payments not specifically referenced in the first
sentence.
1
<PAGE> 2
(h) "Corporate Transaction" means any of the following
transactions:
(1) a merger or consolidation in which the Company is not
the surviving entity, except for a transaction the principal
purpose of which is to change the state in which the Company is
incorporated;
(2) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the
capital stock of the Company's subsidiary corporations) in
connection with complete liquidation or dissolution of the
Company;
(3) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than
sixty-six and two-thirds percent (66 2/3%) of the total combined
voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held
such securities immediately prior to such merger; or
(4) acquisition by any person or related group of persons
(other than the Company or by a Company-sponsored employee
benefit plan) 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 total combined
voting power of the Company's outstanding securities, but
excluding any such transaction that the Administrator determines
shall not be a Corporate Transaction
(i) "Designated Parents or Subsidiaries" means the Parents or
Subsidiaries which have been designated by the Administrator from time to time
as eligible to participate in the Plan.
(j) "Effective Date" means the effective date of the Registration
Statement relating to the Company's initial public offering of its Common Stock.
However, should any Designated Parent or Subsidiary become a participating
company in the Plan after such date, then such entity shall designate a separate
Effective Date with respect to its employee-participants.
(k) "Employee" means any individual, including an officer or
director, who is an employee of the Company or a Designated Parent or Subsidiary
for purposes of Section 423 of the Code. For purposes of the Plan, the
employment relationship shall be treated as continuing intact while the
individual is on sick leave or other leave of absence approved by the
individual's employer. Where the period of leave exceeds ninety (90) days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship will be deemed to have terminated on the
ninety-first (91st) day of such leave, for purposes of determining eligibility
to participate in the Plan.
(l) "Enrollment Date" means the first day of each Offer Period.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2
<PAGE> 3
(n) "Exercise Date" means the last day of each Purchase Period.
(o) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(1) Where there exists a public market for the Common
Stock, the Fair Market Value shall be (A) the closing price for a
share of Common Stock for the last market trading day prior to
the time of the determination (or, if no closing price was
reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by
the Administrator to be the primary market for the Common Stock
or the Nasdaq National Market, whichever is applicable or (B) if
the Common Stock is not traded on any such exchange or national
market system, the average of the closing bid and asked prices of
a share of Common Stock on the Nasdaq Small Cap Market for the
day prior to the time of the determination (or, if no such prices
were reported on that date, on the last date on which such prices
were reported), in each case, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
or
(2) In the absence of an established market of the type
described in (1), above, for the Common Stock, and subject to
(3), below, the Fair Market Value thereof shall be determined by
the Administrator in good faith; or
(3) On the initial Effective Date of the Plan, the Fair
Market Value shall be the price at which the Board, or if
applicable, the Pricing Committee of the Board, and the
underwriters agree to offer the Common Stock to the public in the
initial public offering of the Common Stock.
(p) "Offer Period" means an Offer Period established pursuant to
Section 4 hereof.
(q) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(r) "Participant" means an Employee of the Company or Designated
Parent or Subsidiary who is actively participating in the Plan.
(s) "Plan" means this Employee Stock Purchase Plan.
(u) "Purchase Period" means a period specified as such pursuant
to Section 4(b) hereof.
(v) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(w) "Reserves" means the sum of the number of shares of Common
Stock covered by each option under the Plan which have not yet been exercised
and the number of
3
<PAGE> 4
shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
(x) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Eligibility.
(a) General. Any individual who is an Employee on a given
Enrollment Date shall be eligible to participate in the Plan for the Offer
Period commencing with such Enrollment Date.
(b) Limitations on Grant and Accrual. Any provisions of the Plan
to the contrary notwithstanding, no Employee shall be granted an option under
the Plan (i) if, immediately after the grant, such Employee (taking into account
stock owned by any other person whose stock would be attributed to such Employee
pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding
options to purchase stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or of any
Parent or Subsidiary, or (ii) which permits the Employee's rights to purchase
stock under all employee stock purchase plans of the Company and its Parents or
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the Fair Market Value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time. The determination of the accrual of the right to
purchase stock shall be made in accordance with Section 423(b)(8) of the Code
and the regulations thereunder.
(c) Other Limits on Eligibility. Notwithstanding Subsection (a),
above, the following Employees shall not be eligible to participate in the Plan
for any relevant Offer Period: (i) Employees whose customary employment is 20
hours or less per week; (ii) Employees whose customary employment is for not
more than 5 months in any calendar year; (iii) Employees who have been employed
for fewer than 10 business days; and (iv) Employees who are subject to rules or
laws of a foreign jurisdiction that prohibit or make impractical the
participation of such Employees in the Plan.
4. Offer Periods.
(a) The Plan shall be implemented through consecutive Offer
Periods until such time as (i) the maximum number of shares of Common Stock
available for issuance under the Plan shall have been purchased or (ii) the Plan
shall have been sooner terminated in accordance with Section 19 hereof. The
maximum duration of an Offer Period shall be six (6) months. Initially, the Plan
shall be implemented through Offer Periods of six (6) months' duration
commencing each February 15 and August 15 following the Effective Date (except
that the initial Offer Period shall commence on the Effective Date and shall end
on February 14, 2001).
4
<PAGE> 5
(b) A Participant shall be granted a separate option for each
Offer Period in which he or she participates. The option shall be granted on the
Enrollment Date and shall be automatically exercised on the last day of the
Offer Period. However, with respect to any Offer Period, the Administrator may
specify shorter Purchase Periods within an Offer Period, such that the option
granted on the Enrollment Date shall be automatically exercised in successive
installments on the last day of each Purchase Period ending within the Offer
Period.
(c) Except as specifically provided herein, the acquisition of
Common Stock through participation in the Plan for any Offer Period shall
neither limit nor require the acquisition of Common Stock by a Participant in
any subsequent Offer Period.
5. Participation.
(a) An eligible Employee may become a Participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the designated payroll office of
the Company at least ten (10) business days prior to the Enrollment Date for the
Offer Period in which such participation will commence, unless a later time for
filing the subscription agreement is set by the Administrator for all eligible
Employees with respect to a given Offer Period.
(b) Payroll deductions for a Participant shall commence with the
first partial or full payroll period beginning on the Enrollment Date and shall
end on the last complete payroll period during the Offer Period, unless sooner
terminated by the Participant as provided in Section 10.
6. Payroll Deductions.
(a) At the time a Participant files a subscription agreement, the
Participant shall elect to have payroll deductions made during the Offer Period
in amounts between one percent (1%) and not exceeding fifteen percent (15%) of
the Compensation which the Participant receives during the Offer Period.
(b) All payroll deductions made for a Participant shall be
credited to the Participant's account under the Plan and will be withheld in
whole percentages only. A Participant may not make any additional payments into
such account.
(c) A Participant may discontinue participation in the Plan as
provided in Section 10, or may increase or decrease the rate of payroll
deductions during the Offer Period by completing and filing with the Company a
change of status notice in the form of Exhibit B to this Plan authorizing an
increase or decrease in the payroll deduction rate. Any increase or decrease in
the rate of a Participant's payroll deductions shall be effective with the first
full payroll period commencing ten (10) business days after the Company's
receipt of the change of status notice unless the Company elects to process a
given change in participation more quickly. A Participant's subscription
agreement (as modified by any change of status notice) shall remain in effect
for successive Offer Periods unless terminated as provided in Section 10. The
5
<PAGE> 6
Administrator shall be authorized to limit the number of payroll deduction rate
changes during any Offer Period.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) herein, a
Participant's payroll deductions shall be decreased to 0%. Payroll deductions
shall recommence at the rate provided in such Participant's subscription
agreement, as amended, at the time when permitted under Section 423(b)(8) of the
Code and Section 3(b) herein, unless such participation is sooner terminated by
the Participant as provided in Section 10.
7. Grant of Option. On the Enrollment Date, each Participant
shall be granted an option to purchase (at the applicable Purchase Price) seven
hundred fifty (750) shares of the Common Stock, subject to adjustment as
provided in Section 18 hereof (except that, on the Enrollment Date of the
initial Offer Period, each Participant shall be granted an option to purchase
eighteen hundred (1800) shares of the Common Stock); provided that such option
shall be subject to the limitations set forth in Sections 3(b), 6 and 12 hereof.
Exercise of the option shall occur as provided in Section 8, unless the
Participant has withdrawn pursuant to Section 10, and the option, to the extent
not exercised, shall expire on the last day of the Offer Period.
8. Exercise of Option. Unless a Participant withdraws from the
Plan as provided in Section 10, below, the Participant's option for the purchase
of shares will be exercised automatically on each Exercise Date, by applying the
accumulated payroll deductions in the Participant's account to purchase the
number of full shares subject to the option by dividing such Participant's
payroll deductions accumulated prior to such Exercise Date and retained in the
Participant's account as of the Exercise Date by the applicable Purchase Price.
No fractional shares will be purchased; any payroll deductions accumulated in a
Participant's account which are not sufficient to purchase a full share shall be
carried over to the next Offer Period or returned to the Participant, if the
Participant withdraws from the Plan. Notwithstanding the foregoing, any amount
remaining in a Participant's account following the purchase of shares on the
Exercise Date due to the application of Section 423(b)(8) of the Code or Section
7, above, shall be returned to the Participant and shall not be carried over to
the next Offer Period. During a Participant's lifetime, a Participant's option
to purchase shares hereunder is exercisable only by the Participant.
9. Delivery. Upon receipt of a request from a Participant after
each Exercise Date on which a purchase of shares occurs, the Company shall
arrange the delivery to such Participant, as promptly as practicable, of a
certificate representing the shares purchased upon exercise of the Participant's
option.
10. Withdrawal; Termination of Employment.
(a) A Participant may either (i) withdraw all but not less than
all the payroll deductions credited to the Participant's account and not yet
used to exercise the Participant's option under the Plan or (ii) terminate
future payroll deductions, but allow accumulated payroll deductions to be used
to exercise the Participant's option under the Plan at any time by giving
written notice to the Company in the form of Exhibit B to this Plan. If the
Participant elects
6
<PAGE> 7
withdrawal alternative (i) described above, all of the Participant's payroll
deductions credited to the Participant's account will be paid to such
Participant as promptly as practicable after receipt of notice of withdrawal,
such Participant's option for the Offer Period will be automatically terminated,
and no further payroll deductions for the purchase of shares will be made during
the Offer Period. If the Participant elects withdrawal alternative (ii)
described above, no further payroll deductions for the purchase of shares will
be made during the Offer Period, all of the Participant's payroll deductions
credited to the Participant's account will be applied to the exercise of the
Participant's option on the next Exercise Date, and after such Exercise Date,
such Participant's option for the Offer Period will be automatically terminated.
If a Participant withdraws from an Offer Period, payroll deductions will not
resume at the beginning of the succeeding Offer Period unless the Participant
delivers to the Company a new subscription agreement.
(b) Upon termination of a Participant's employment relationship
(as described in Section 2(k)) at a time more than three (3) months from the
next scheduled Exercise Date, the payroll deductions credited to such
Participant's account during the Offer Period but not yet used to exercise the
option will be returned to such Participant or, in the case of his/her death, to
the person or persons entitled thereto under Section 14, and such Participant's
option will be automatically terminated. Upon termination of a Participant's
employment relationship (as described in Section 2(k)) within three (3) months
of the next scheduled Exercise Date, the payroll deductions credited to such
Participant's account during the Offer Period but not yet used to exercise the
option will be applied to the purchase of Common Stock on the next Exercise
Date, unless the Participant (or in the case of the Participant's death, the
person or persons entitled to the Participant's account balance under Section
14) withdraws from the Plan by submitting a change of status notice in
accordance with subsection (a) of this Section 10. In such a case, no further
payroll deductions will be credited to the Participant's account following the
Participant's termination of employment and the Participant's option under the
Plan will be automatically terminated after the purchase of Common Stock on the
next scheduled Exercise Date.
11. Interest. No interest shall accrue on the payroll deductions
credited to a Participant's account under the Plan.
12. Stock.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 18, the maximum number of shares of Common Stock
which shall be made available for sale under the Plan shall be 1,000,000 shares,
plus an annual increase to be added on January 1 of each year beginning in 2001
equal to the lesser of (i) 2,500,000 shares, (ii) five percent (5%) of the
outstanding shares of Common Stock on such date, or (iii) a lesser number of
shares determined by the Administrator. If the Administrator determines that on
a given Exercise Date the number of shares with respect to which options are to
be exercised may exceed (x) the number of shares then available for sale under
the Plan or (y) the number of shares available for sale under the Plan on the
Enrollment Date(s) of one or more of the Offer Periods in which such Exercise
Date is to occur, the Administrator may make a pro rata allocation of the shares
remaining available for purchase on such Enrollment Dates or Exercise Date, as
applicable, in as
7
<PAGE> 8
uniform a manner as shall be practicable and as it shall determine to be
equitable, and shall either continue all Offer Periods then in effect or
terminate any one or more Offer Periods then in effect pursuant to Section 19,
below.
(b) A Participant will have no interest or voting right in shares
covered by the Participant's option until such shares are actually purchased on
the Participant's behalf in accordance with the applicable provisions of the
Plan. No adjustment shall be made for dividends, distributions or other rights
for which the record date is prior to the date of such purchase.
(c) Shares to be delivered to a Participant under the Plan will
be registered in the name of the Participant or in the name of the Participant
and his or her spouse.
13. Administration. The Plan shall be administered by the
Administrator which shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine eligibility
and to adjudicate all disputed claims filed under the Plan. Every finding,
decision and determination made by the Administrator shall, to the full extent
permitted by Applicable Law, be final and binding upon all persons.
14. Designation of Beneficiary.
(a) Each Participant will file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
Participant's account under the Plan in the event of such Participant's death.
If a Participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the
Participant (and the Participant's spouse, if any) at any time by written
notice. In the event of the death of a Participant and in the absence of a
beneficiary validly designated under the Plan who is living (or in existence) at
the time of such Participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the Participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Administrator), the Administrator shall deliver such shares and/or cash to
the spouse (or domestic partner, as determined by the Administrator) of the
Participant, or if no spouse (or domestic partner) is known to the
Administrator, then to the issue of the Participant, such distribution to be
made per stirpes (by right of representation), or if no issue are known to the
Administrator, then to the heirs at law of the Participant determined in
accordance with Section 27.
15. Transferability. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 14 hereof) by the Participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Administrator may treat such act as an election to
withdraw funds from an Offer Period in accordance with Section 10.
8
<PAGE> 9
16. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each
Participant in the Plan. Statements of account will be given to Participants at
least annually, which statements will set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Corporate
Transactions.
(a) Adjustments Upon Changes in Capitalization. Subject to any
required action by the stockholders of the Company, the Reserves, the Purchase
Price, the maximum number of shares that may be purchased in any Offer Period or
Purchase Period, as well as any other terms that the Administrator determines
require adjustment shall be proportionately adjusted for (i) 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, (ii) any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company,
or (iii) as the Administrator may determine in its discretion, any other
transaction with respect to Common Stock to which Section 424(a) of the Code
applies; provided, however that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Administrator and its
determination shall be final, binding and conclusive. Except as the
Administrator determines, 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
Reserves and the Purchase Price.
(b) Corporate Transactions. In the event of a proposed Corporate
Transaction, each option under the Plan shall be assumed by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Administrator determines, in the exercise of its sole discretion and in lieu of
such assumption, to shorten the Offer Period then in progress by setting a new
Exercise Date (the "New Exercise Date"). If the Administrator shortens the Offer
Period then in progress in lieu of assumption in the event of a Corporate
Transaction, the Administrator shall notify each Participant in writing, at
least ten (10) days prior to the New Exercise Date, that the Exercise Date for
the Participant's option has been changed to the New Exercise Date and that the
Participant's option will be exercised automatically on the New Exercise Date,
unless prior to such date the Participant has withdrawn from the Offer Period as
provided in Section 10. For purposes of this Subsection, an option granted under
the Plan shall be deemed to be assumed if, in connection with the Corporate
Transaction, the option is replaced with a comparable option with respect to
shares of capital stock of the successor corporation or Parent thereof. The
determination of option comparability shall be made by the Administrator prior
to the Corporate Transaction and its determination shall be final, binding and
conclusive on all persons.
9
<PAGE> 10
19. Amendment or Termination.
(a) The Administrator may at any time and for any reason
terminate or amend the Plan. Except as provided in Section 18, no such
termination can affect options previously granted, provided that the Plan or any
one or more Offer Periods may be terminated by the Administrator on any Exercise
Date or by the Administrator establishing a new Exercise Date with respect to
any Offer Period and/or any Purchase Period then in progress if the
Administrator determines that the termination of the Plan or such one or more
Offer Periods is in the best interests of the Company and its stockholders.
Except as provided in Section 18 and this Section 19, no amendment may make any
change in any option theretofore granted which adversely affects the rights of
any Participant without the consent of affected Participants. To the extent
necessary to comply with Section 423 of the Code (or any successor rule or
provision or any other Applicable Law), the Company shall obtain stockholder
approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
Participant rights may be considered to have been "adversely affected," the
Administrator shall be entitled to limit the frequency and/or number of changes
in the amount withheld during Offer Periods, change the length of Purchase
Periods within any Offer Period, determine the length of any future Offer
Period, determine whether future Offer Periods shall be consecutive or
overlapping, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, establish additional terms, conditions, rules
or procedures to accommodate the rules or laws of applicable foreign
jurisdictions, permit payroll withholding in excess of the amount designated by
a Participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
Participant properly correspond with amounts withheld from the Participant's
Compensation, and establish such other limitations or procedures as the
Administrator determines in its sole discretion advisable and which are
consistent with the Plan.
20. Notices. All notices or other communications by a Participant
to the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Administrator at the
location, or by the person, designated by the Administrator for the receipt
thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be
issued with respect to an option unless the exercise of such option 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. As a condition to the exercise of an
option, the Company may require the Participant 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 of the aforementioned Applicable Laws. In addition, no options shall be
exercised or shares issued hereunder before the Plan shall have been approved by
stockholders of the Company as provided in Section 23.
10
<PAGE> 11
22. Term of Plan. The Plan shall become effective upon the
earlier to occur of its adoption by the Board or its approval by the
stockholders of the Company. It shall continue in effect for a term of twenty
(20) years unless sooner terminated under Section 19.
23. Stockholder Approval. Continuance of the Plan shall be
subject to approval by the stockholders of the Company within twelve (12) months
before or after the date the Plan is adopted. Such stockholder approval shall be
obtained in the degree and manner required under Applicable Laws.
24. No Employment Rights. The Plan does not, directly or
indirectly, create any right for the benefit of any employee or class of
employees to purchase any shares under the Plan, or create in any employee or
class of employees any right with respect to continuation of employment by the
Company or a Designated Parent or Subsidiary, and it shall not be deemed to
interfere in any way with such employer's right to terminate, or otherwise
modify, an employee's employment at any time.
25. No Effect on Retirement and Other Benefit Plans. Except as
specifically provided in a retirement or other benefit plan of the Company or a
Designated Parent or Subsidiary, participation in the Plan shall not be deemed
compensation for purposes of computing benefits or contributions under any
retirement plan of the Company or a Designated Parent or Subsidiary, and shall
not affect any benefits under any other benefit plan of any kind or any benefit
plan subsequently instituted under which the availability or amount of benefits
is related to level of compensation. The Plan is not a "Retirement Plan" or
"Welfare Plan" under the Employee Retirement Income Security Act of 1974, as
amended.
26. Effect of Plan. The provisions of the Plan shall, in
accordance with its terms, be binding upon, and inure to the benefit of, all
successors of each Participant, including, without limitation, such
Participant's estate and the executors, administrators or trustees thereof,
heirs and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such Participant.
27. Governing Law. The Plan is to be construed in accordance with
and governed by the internal laws of the State of Washington 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 Washington to the
rights and duties of the parties, except to the extent the internal laws of the
State of Washington are superseded by the laws of the United States. Should any
provision of the Plan be determined by a court of law to be illegal or
unenforceable, the other provisions shall nevertheless remain effective and
shall remain enforceable.
28. Dispute Resolution. The provisions of this Section 28 (and as
restated in the Subscription Agreement) shall be the exclusive means of
resolving disputes arising out of or relating to the Plan. The Company and the
Participant, or their respective successors (the "parties"), shall attempt in
good faith to resolve any disputes arising out of or relating to the Plan by
negotiation between individuals who have authority to settle the controversy.
Negotiations shall be commenced by either party by notice of a written statement
of the party's position and the name and title of the individual who will
represent the party. Within thirty (30) days of the
11
<PAGE> 12
written notification, the parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to resolve the
dispute. If the dispute has not been resolved by negotiation, the parties agree
that any suit, action, or proceeding arising out of or relating to the Plan
shall be brought in the United States District Court for the District of
Washington (or should such court lack jurisdiction to hear such action, suit or
proceeding, in a Washington state court in King County) and that the parties
shall submit to the jurisdiction of such court. The parties irrevocably waive,
to the fullest extent permitted by law, any objection the party may have to the
laying of venue for any such suit, action or proceeding brought in such court.
THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL
OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this
Section 28 shall for any reason be held invalid or unenforceable, it is the
specific intent of the parties that such provisions shall be modified to the
minimum extent necessary to make it or its application valid and enforceable.
12
<PAGE> 13
EXHIBIT A
Emerald - Delaware, Inc. 2000 Employee Stock Purchase Plan
SUBSCRIPTION AGREEMENT
Effective with the Offer Period beginning on:
[ ] ESPP Effective Date [ ] FEBRUARY 15, 200__ [ ] AUGUST 15, 200__
1. PERSONAL INFORMATION
<TABLE>
<S> <C>
Legal Name (Please Print) __________________________________________ _______________ ___________
(Last) (First) (MI) Location Department
Street Address______________________________________________________ ___________________________
Daytime Telephone
City, State/Country, Zip____________________________________________ ___________________________
E-Mail Address
Social Security No. __ __ __ - __ __ - __ __ __ __ Employee I.D. No. ___________________________
Manager Mgr. Location
</TABLE>
2. ELIGIBILITY Any Employee whose customary employment is more than 20
hours per week and more than 5 months per calendar year, who has been an
Employee for ten (10) business days or more, and who does not hold
(directly or indirectly) five percent (5%) or more of the combined
voting power of the Company, a parent or a subsidiary, whether in stock
or options to acquire stock, is eligible to participate in the
Emerald-Delaware, Inc. 2000 Employee Stock Purchase Plan (the "ESPP");
provided, however, that Employees who are subject to the rules or laws
of a foreign jurisdiction that prohibit or make impractical the
participation of such Employees in the ESPP are not eligible to
participate.
3. DEFINITIONS Each capitalized term in this Subscription Agreement shall
have the meaning set forth in the ESPP.
4. SUBSCRIPTION I hereby elect to participate in the ESPP and subscribe to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the ESPP. I have received a complete copy of
the ESPP and a prospectus describing the ESPP and understand that my
participation in the ESPP is in all respects subject to the terms of the
ESPP. The effectiveness of this Subscription Agreement is dependent on
my eligibility to participate in the ESPP.
5. PAYROLL DEDUCTION AUTHORIZATION I hereby authorize payroll deductions
from my Compensation during the Offer Period in the percentage specified
below (payroll reductions may not exceed 15% of Compensation nor $21,250
per calendar year):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage to Deduct (circle one) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
</TABLE>
6. ESPP ACCOUNTS AND PURCHASE PRICEI understand that all payroll deductions
will be credited to my account under the ESPP. No additional payments
may be made to my account. No interest will be credited on funds held in
the account at any time including any refund of the account caused by
withdrawal from the ESPP. All payroll deductions shall be accumulated
for the purchase of Company Common Stock at the applicable Purchase
Price determined in accordance with the ESPP.
7. WITHDRAWAL AND CHANGES IN PAYROLL DEDUCTION I understand that I may
discontinue my participation in the ESPP at any time prior to an
Exercise Date as provided in Section 10 of the ESPP, but if I do not
withdraw from the ESPP, any accumulated payroll deductions will be
applied automatically to purchase Company Common Stock. I may increase
or decrease the rate of my payroll deductions in whole percentage
increments to not less than one percent (1%) by completing and timely
filing a Change of Status Notice. Any increase or decrease will be
effective for the full payroll period occurring after ten (10) business
days from the Company's receipt of the Change of Status Notice.
8. PERPETUAL SUBSCRIPTION I understand that this Subscription Agreement
shall remain in effect for successive Offer Periods until I withdraw
from participation in the ESPP, or termination of the ESPP.
9. TAXES I have reviewed the ESPP prospectus discussion of the federal tax
consequences of participation in the ESPP and consulted with tax
consultants as I deemed advisable prior to my participation in the ESPP.
I hereby agree to notify
A-1
<PAGE> 14
the Company in writing within thirty (30) days of any disposition
(transfer or sale) of any shares purchased under the ESPP if such
disposition occurs within two (2) years of the Enrollment Date (the
first day of the Offer Period during which the shares were purchased) or
within one (1) year of the Exercise Date (the date I purchased such
shares), and I will make adequate provision to the Company for foreign,
federal, state or other tax withholding obligations, if any, which arise
upon the disposition of the shares. In addition, the Company may
withhold from my Compensation any amount necessary to meet applicable
tax withholding obligations incident to my participation in the ESPP,
including any withholding necessary to make available to the Company any
tax deductions or benefits contingent on such withholding.
10. DISPUTE RESOLUTION The provisions of this Section 10 and Section 28 of
the ESPP shall be the exclusive means of resolving disputes arising out
of or relating to the Plan. The Company and I, or our respective
successors (the "parties"), shall attempt in good faith to resolve any
disputes arising out of or relating to the Plan by negotiation between
individuals who have authority to settle the controversy. Negotiations
shall be commenced by either party by notice of a written statement of
the party's position and the name and title of the individual who will
represent the party. Within thirty (30) days of the written
notification, the parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to
resolve the dispute. If the dispute has not been resolved by
negotiation, the Company and I agree that any suit, action, or
proceeding arising out of or relating to the Plan shall be brought in
the United States District Court for the District of Washington (or
should such court lack jurisdiction to hear such action, suit or
proceeding, in a Washington state court in King County) and that we
shall submit to the jurisdiction of such court. The Company and I
irrevocably waive, to the fullest extent permitted by law, any objection
we may have to the laying of venue for any such suit, action or
proceeding brought in such court. THE COMPANY AND I ALSO EXPRESSLY WAIVE
ANY RIGHT WE HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION
OR PROCEEDING. If any one or more provisions of this Section 10 or
Section 28 of the ESPP shall for any reason be held invalid or
unenforceable, it is the specific intent of the Company and I that such
provisions shall be modified to the minimum extent necessary to make it
or its application valid and enforceable.
11. DESIGNATION OF BENEFICIARY In the event of my death, I hereby designate
the following person or trust as my beneficiary to receive all payments
and shares due to me under the ESPP: [ ] I am single [ ] I am married
Beneficiary (please print) ____________________________________________
(Last) (First) (MI)
Relationship to Beneficiary (if any)
Street Address ______________________________ ______________________
City, State/Country, Zip________________________________________________
12. TERMINATION OF ESPP I understand that the Company has the right,
exercisable in its sole discretion, to amend or terminate the ESPP at
any time, and a termination may be effective as early as an Exercise
Date, including the establishment of an alternative date for an Exercise
Date within each outstanding Offer Period.
Date: __________________________ Employee Signature:___________________
________________________________________________________
spouse's signature (if beneficiary is other than spouse)
A-2
<PAGE> 15
EXHIBIT B
Emerald-Delaware, Inc. 2000 Employee Stock Purchase Plan
CHANGE OF STATUS NOTICE
_________________________________________________
Participant Name (Please Print)
_________________________________________________
Social Security Number
================================================================================
WITHDRAWAL FROM ESPP
I hereby withdraw from the Emerald-Delaware Inc. 2000 Employee Stock
Purchase Plan (the "ESPP") and agree that my option under the applicable
Offer Period will be automatically terminated and all accumulated
payroll deductions credited to my account will be refunded to me or
applied to the purchase of Common Stock depending on the alternative
indicated below. No further payroll deductions will be made for the
purchase of shares in the applicable Offer Period and I shall be
eligible to participate in a future Offer Period only by timely delivery
to the Company of a new Subscription Agreement.
[ ] WITHDRAWAL AND PURCHASE OF COMMON STOCK
Payroll deductions will terminate, but your account balance will be
applied to purchase Common Stock on the next Exercise Date. Any
remaining balance will be refunded.
[ ] WITHDRAWAL WITHOUT PURCHASE OF COMMON STOCK
Entire account balance will be refunded to me and no Common Stock will
be purchased on the next Exercise Date provided this notice is submitted
to the Company ten (10) business days prior to the next Exercise Date.
================================================================================
[ ] CHANGE IN PAYROLL DEDUCTION
I hereby elect to change my rate of payroll deduction under the ESPP as
follows (select one):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage to Deduct (circle one) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
</TABLE>
An increase or a decrease in payroll deduction will be effective for the
first full payroll period commencing no fewer than ten (10) business
days following the Company's receipt of this notice, unless this change
is processed more quickly.
================================================================================
B-1
<PAGE> 16
================================================================================
[ ] CHANGE OF BENEFICIARY [ ] I am single [ ] I am married
This change of beneficiary shall terminate my previous beneficiary
designation under the ESPP. In the event of my death, I hereby designate
the following person or trust as my beneficiary to receive all payments
and shares due to me under the ESPP:
Beneficiary (please print) _________________________________________________
(Last) (First) (MI)
Relationship to Beneficiary (if any)
Street Address_________________________________ ___________________________
City, State/Country, Zip ______________________
================================================================================
Date: __________________________ Employee Signature:________________________
____________________________________________________________
spouse's signature (if new beneficiary is other than spouse)
B-2
<PAGE> 1
EXHIBIT 10.10
Agreement No. L4U215D
Page 1 of 24
GENERAL AGREEMENT
FOR
INFORMATION TECHNOLOGY PROJECTS
BETWEEN
AT&T CORP.
AND
EMERALD SOLUTIONS
<PAGE> 2
Agreement L4U215D
Page 2 of 24
TABLE OF CONTENTS
Page
ACCEPTANCE .................................................................. 13
ASSIGNMENT AND SUBCONTRACTING BY SUPPLIER ................................... 17
ASSIGNMENT BY COMPANY ....................................................... 13
AUDIT ....................................................................... 9
BANKRUPTCY AND TERMINATION FOR FINANCIAL INSECURITY ......................... 22
CHANGES ..................................................................... 24
CHOICE OF LAW ............................................................... 20
CLAUSE HEADINGS ............................................................. 23
COMPANY PROPERTY ............................................................ 19
COMPENSATION ................................................................ 8
COMPLIANCE WITH LAWS ........................................................ 22
CONTENTS OF ORDER ........................................................... 5
CONTINUING SUPPORT .......................................................... 14
DEFINITIONS ................................................................. 4
ENTIRE AGREEMENT ............................................................ 24
EXPORT CONTROL .............................................................. 22
FORCE MAJEURE ............................................................... 19
GOVERNMENT REQUIREMENTS ..................................................... 23
IDENTIFICATION CREDENTIALS .................................................. 18
IDENTIFICATION .............................................................. 17
IMPLEADER ................................................................... 23
INDEMNITY ................................................................... 12
INFRINGEMENT ................................................................ 11
INSURANCE ................................................................... 12
INVOICING ................................................................... 9
LICENSES .................................................................... 18
MAINTENANCE ................................................................. 15
MEDIATION ................................................................... 20
[*] ......................................................................... 10
NON-EXCLUSIVE RIGHTS ........................................................ 18
NOTICES ..................................................................... 21
ORDERS ...................................................................... 5
PERFORMANCE OF WORK - ACCEPTANCE PROCEDURE .................................. 14
PRICING ..................................................................... 8
PROGRESS REPORTS ............................................................ 21
PUBLICITY ................................................................... 18
RELEASES VOID ............................................................... 19
RIGHT OF ACCESS ............................................................. 19
RIGHT OF ENTRY AND PLANT RULES .............................................. 18
SCOPE OF AGREEMENT .......................................................... 4
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
<PAGE> 3
Agreement L4U215D
Page 3 of 24
SEVERABILITY ................................................................ 23
STAFFING CHANGES ............................................................ 8
SUPPLIER EMPLOYEES .......................................................... 7
SUPPLIER'S INFORMATION ...................................................... 11
SURVIVAL OF OBLIGATIONS ..................................................... 23
TERM AND TERMINATION ........................................................ 6
TIMELY PERFORMANCE .......................................................... 19
TITLE TO WORK PRODUCT ....................................................... 10
TOOLS AND EQUIPMENT ......................................................... 21
USE OF INFORMATION .......................................................... 11
WAIVER ...................................................................... 23
WARRANTY .................................................................... 15
WARRANTY AND REPRESENTATIONS ................................................ 16
WORK DONE BY OTHERS ......................................................... 17
APPENDIX A - PRICING
APPENDIX B - SUPPLIER PERFORMANCE
APPENDIX C - SUBCONTRACTOR PERFORMANCE
<PAGE> 4
Agreement No. L4U215D
Page 4 of 24
GENERAL AGREEMENT FOR INFORMATION TECHNOLOGY PROJECTS
This Agreement effective as of April 15, 1998 is between AT&T CORP. ("Company"),
a New York corporation, having offices at 295 North Maple Avenue, Basking Ridge,
New Jersey 07920 and Emerald Solutions ("Supplier"), a corporation, having its
principal office at 1011 Rte. 22, Bridgewater, NJ 08807.
In consideration of the terms and conditions contained herein, and other good
and valuable consideration, the parties hereto do mutually agree as follows:
1. SCOPE OF AGREEMENT
This Agreement is applicable to the procurement by Company of Technical Project
services (IT Projects) ("Projects") as indicated in Purchase Order or
Authorization Letters ("Orders").
2. DEFINITIONS
As used in this Agreement or an Order, in the event the Technical Project
involves software development, the following terms have the following meaning,
unless the context or an Order indicates otherwise:
"software" - The lower case noun "software" means any computer program(s),
data bases and/or other devised intellectual work(s) expressed in object code
or source code and primarily adapted to guide, subject data to, or otherwise
interact with the operations of a computer or other programmable means, and,
unless otherwise indicated, such term "software" also means any uncoded
documentary work(s) provided in conjunction with and supplementing any such
coded work(s).
"Software media" - The terms "Software media" or "software media" mean any
documents, tapes, discs, semiconductor memories or other material objects or
tangible entities primarily adapted to retain and communicate software fixed
therein and represented by details of such media, the terms including in their
meaning any copies of software.
"Object program" or "object code" - The term "object program" or "object code"
means the fully compiled or assembled series of instructions, written in
machine language, ready to be loaded into the computer, that guides the
operation of the computer, in printed out form as well as stored in software
media compatible with any equipment described in an Order.
"Source program" or "source code" - The term "source program" or "source code"
means the computer program expressed in a source language that operates on the
computers identified in the Specifications. Such source code shall consist of a
full source language statement of the programs comprising the Software and
complete program maintenance documentation, procedures, flow charts, schematic
diagrams and annotations which comprise the precoding detail design
specification, and all other material necessary to allow a reasonably skilled
programmer or analyst to maintain and enhance the Software without the
assistance of Supplier or reference to any other materials.
"Documentation" - The term "documentation" means any user manual or related
material as well as uncoded documentary works which are fixed in software media
or other media and supplement the Software as may be set forth in an Order.
<PAGE> 5
Agreement No. L4U215D
Page 5 of 24
"Material" - The term "material" includes Software and the other Deliverables
set forth in an Order.
"Pre-existing Software" - Supplier's software, in object code and source code
form, including all related documentation, as described in an Order.
"Developed Software" - The modifications to the Pre-existing Software, in
object code and source code form, including all related documentation, which
Supplier will develop under this Agreement in accordance with the
Specifications set forth in an Order.
"Software" - The upper case term "Software" means the software, in object code
and source code form, including all related documentation, developed by
Supplier under this Agreement or an Order, in accordance with the
Specifications set forth in an Order.
3. ORDERS
Supplier shall perform technical services or IT Projects, ("Technical
Services", "Services" or "Work") to Company as specified in purchase orders or
authorization letters ("Orders") issued from time to time by a designated
representative within AT&T Supplier Management Division IT Professional
Services, substantially as described in the clause CONTENTS OF ORDER. If
written notice of rejection of an Order is not received by Company within
twenty (20) days from the date of issuance of an Order, such Order shall be
deemed to have been accepted by Supplier. Orders shall constitute the only
authorization for Supplier to take any action or to expend money. Estimates
furnished by Company shall not constitute commitments. The terms of this
Agreement shall also apply to any Technical Services of the type covered under
this Agreement performed by Supplier for Company unless covered under a
separately executed agreement. Supplier acknowledges and agrees that no
Technical Services shall begin and Supplier shall refuse to fill any requests
to start Services unless and until a properly executed Order or authorization
letter is issued by the designated representative within AT&T Supplier
Management Division (SMD). AT&T reserves the right to refuse to compensate
Supplier for any services started prior to the issuance of a properly executed
Order.
4. CONTENTS OF ORDER
Each order shall be substantially in the form described below and shall contain
the following information as applicable:
A. Agreement:
(i) The incorporation, by reference, of this Agreement and a unique
identifying number assigned by a designated representative within AT&T
SMD.
<PAGE> 6
Agreement No. L4U215D
Page 6 of 24
B. Scope of Work:
(i) A detailed Statement of Work (SOW) including milestones and
deliverables, Company's standards or requirements, conditions
of acceptance and required status reports;
(ii) The dates at which Technical Services are to commence and
terminate;
(iii) On-site or off-site project
(iv) The dates on which the Technical Services are to
commence and terminate and work products to be delivered.
C. Payment Terms:
Each Order shall contain the rate of compensation and may contain the following
additional information, as applicable:
(i) The fixed price for each deliverable specified in the SOW;
(ii) The rates and skill classifications applicable to the Technical Services;
(iii) An enumeration of any items of special or unusual expense authorized for
reimbursement to Supplier, as well as the basis for such reimbursement;
(iv) The maximum total expenditure authorized, with conditions and terms of
payment, if applicable;
D. Administration:
(i) The name, address, and telephone number of the Company Technical
Representative;
(ii) The name, address, and telephone number of a designated representative
within AT&T SMD.
(iii) The name and telephone number for the Supplier's Representative
responsible for the Technical Service.
E. Authorization:
Signature of a designated representative within AT&T SMD and the Supplier's
Representative.
F. Revisions:
In the event that the General Terms and/or Payment Terms are modified, a
designated representative within AT&T IT Professional Services shall issue a
written amendment to the original Order.
5. TERM AND TERMINATION
This Agreement shall be effective as of April 15, 1998 and shall continue in
effect thereafter unless terminated by the parties in accordance with the
provisions contained herein. This Agreement may be terminated by either party
upon thirty (30) days written notice to the other party with or without cause,
provided, however, that such termination shall not affect the obligations of
either party to the other under any Orders issued pursuant to this Agreement,
but such Orders shall continue in effect as though this Agreement had not been
terminated.
<PAGE> 7
Agreement No. L4U215D
Page 7 of 24
Company, without prejudice to any right or remedy on account of any failure of
Supplier to perform its obligations under this Agreement, may at any time
terminate the performance of the Work under any Order, in whole or in part, by
written notice to Supplier specifying the date upon which such termination
becomes effective. In the event of any such termination, other than for a
breach or failure of Supplier to perform its obligations under this Agreement,
Supplier shall be entitled to payment for Technical Services rendered and for
expenses properly reimbursable under an Order prior to the effective date of
termination; provided, however, that payment of any such amounts by Company
shall be subject to any provision for the limit of expenditures set forth in
the Order. The payment of such amounts by Company shall be in full settlement
of any and all claims of Supplier of every description, including profit.
In the event of termination of this Agreement or any Order, all Company property
and all Work in Supplier's possession shall be forwarded promptly to Company.
6. SUPPLIER EMPLOYEES
The term "Supplier Employee" means anyone performing the Work or furnished by
Supplier under this Agreement, including but not limited to the Supplier's
employees, consultants, representatives, agents, subcontractors, and
subcontractors' subcontractors at all tiers. It is agreed that all persons
provided by Supplier to perform the Work are not employees or agents of
Company, and Company shall not exercise any direct control or supervision over
Supplier Employees but Company's Technical Representative will be available for
consultation. Supplier shall be responsible for monitoring the quality of Work
of Supplier's Employees.
Supplier shall be responsible for its own labor relations with any trade or
union which represents its employees and shall be responsible for negotiating
and adjusting all disputes. Supplier shall be the sole entity responsible for
receiving complaints from Supplier Employees regarding their assignments and
for notifying Supplier Employees of the termination or change of their
assignments.
Supplier further agrees that any Supplier Employee, who is or becomes a "leased
employee" (as defined in Section 414(n) of the Internal Revenue code) of
Company during the term of this Agreement, shall not be covered by, and shall
be excluded from participation in, any employee benefit plan maintained by
Company.
Supplier shall indemnify and save Company harmless from and against any losses,
damages, claims, demands, suits and liabilities that arise out of, or result
from, any failure by Supplier to perform its obligations under this clause.
Supplier shall also indemnify and save Company harmless from any entitlement,
assertion or claim, which any of the Supplier's Employees might have or might
make relative to rights or privileges in any Company employee benefit plan and
which arises, in whole or in part, out of Work rendered under this Agreement
and each Order.
<PAGE> 8
Agreement NO. L4U215D
Page 8 of 24
7. STAFFING CHANGES
Company has the right at any time and for any reason to reject or have Supplier
remove Supplier's Employees from the Work under this Agreement upon reasonable
notice to Supplier. Upon such notice, Supplier shall, at Company's request,
replace the Supplier Employee(s). In the event of any staffing change, Company
shall not be charged for the time required to train the replacement. The amount
of non-compensatory training time, if any, shall be mutually determined by
Supplier and the Company Technical Representative.
8. PRICING
Prices charged to Company by Supplier under this Agreement shall be subject to
the provisions shown in Appendix A. PRICING, to this Agreement.
9. COMPENSATION
Company shall pay Supplier for Technical Services as specific in Orders issued
by Company during the term of this Agreement. Supplier's rates as specified in
an Order shall remain fixed and may not be increased without the written
approval of a designated representative of IT Professional Services. Supplier's
rates include the cost of all labor, equipment, materials and other
disbursements required to complete the Technical Services provided under this
Agreement or an Order and Company shall not pay Supplier for any other charges,
costs or expenses except as specifically authorized by Company in this Agreement
or an Order. Supplier or Supplier's Employees shall not be paid bonuses for
Technical Services performed under this Agreement or any Order. If Work is
performed on Company's premises, Company may require that Supplier Employees'
Work week coincide with the Company Work week. Supplier shall schedule vacations
for its Supplier Employees so as not to interfere with or delay the Technical
Services to be provided to Company.
Company shall specify a maximum monetary amount in each Order issued. Supplier
shall not perform Technical Services and Company shall not be required to pay
for Technical Services beyond the point where billing would exceed the specified
maximum unless Supplier shall have first secured an amendment to the Order
authorizing the increased expenditure.
Company's Technical Representative shall approve Supplier's authorized charges
for Work performed under this Agreement.
In addition to payment of the above fee or rates, reasonable expenses for
transportation and living while on approved travel assignments outside the area
may be reimbursable, if authorized in an Order. Supplier shall submit invoices
for reimbursable transportation and living expenses promptly upon completion of
the travel events. Supplier shall list the transportation and living charges as
separate items on each invoice for the period covered, and such items shall be
in the same detail and accompanied by the same receipts as are required for
Company's on-roll employees. All authorized travel and living expenses will be
reimbursed in accordance with the provisions set forth below. All invoices shall
be certified as approved by Company's Technical Representative prior to
submission for payment. Supplier shall retain all such records for a period of
not less than one calendar year after the expiration of this Agreement.
<PAGE> 9
Agreement No. L4U215D
Page 9 of 24
A. Transportation - Economy class airfare will be reimbursed upon
representation of an airline ticket related to Company assignments hereunder.
Reasonable taxi, bus or car rental expenses and associated tolls, tips and
parking fees shall be reimbursed by Company. Reimbursement for car rental
expenses shall be made upon presentation of the car rental agreement.
B. Lodging - Company shall reimburse reasonable lodging expenses incurred by
Supplier Employee upon presentation of the appropriate receipts.
C. Meals - Company shall reimburse reasonable meal expenses not exceeding
$25.00 daily which shall include room service and gratuities incurred by
Supplier Employee upon presentation of the appropriate receipts.
D. Telephone Calls - Business calls made in connection with the Work
described herein shall be reimbursed. Non-Company related business calls placed
from Supplier Employee's hotel will not be reimbursed.
E. Personal Expenses - Company will not reimburse personal expenses of
Supplier Employee. If expenses of a personal nature (i.e., hotel/ship purchase,
alcoholic beverages, in-room movies, sundry items, etc.) are charged against
the room, the amount will be deducted from the invoice presented to Company.
For trips which extend beyond four days, reasonable valet and laundry charges
will be reimbursed. Company will reimburse reasonable gratuities.
10 INVOICING
Invoices shall be sent as specified in an Order, and a final invoice shall be
sent upon completion and acceptance or termination of Work under an Order to
the address provided in the Order.
Each invoice shall reference the applicable Order and list all chargeable items
in units and dollar amounts. The invoice shall list each Deliverable and price
as noted on the Order as well as any approved expenses incurred. At AT&T's
option, all invoices are payable [*] from the date of receipt of invoices or
services, whichever is later. The Work shall be delivered free from all claims,
liens and charges whatsoever. Company reserves the right to require, before
making payment, proof that all parties furnishing labor and materials for the
Work have been paid.
Company shall reimburse Supplier only for state and local sales and use taxes,
as applicable to transactions under this Agreement or any Order. Taxes payable
by Company shall be billed as separate items on Supplier's invoices and shall
not be included in Supplier's prices.
11. AUDIT
Supplier shall maintain complete and accurate accounting records, in a form in
accordance with standard accounting practices, to substantiate Supplier's
charges under each Order. Such records shall include, but not be limited to,
time cards, job cards, attendance cards, job summaries and travel and living
expense reports. All payments, if any, made by Company shall be subject to
final adjustments as determined by such audit(s). Supplier shall retain such
records relating to each Order for a period of two (2) years from the date of
final payment for Work covered by each Order.
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
<PAGE> 10
Agreement No. L4U215D
Page 10 of 24
Company and its authorized agents and representatives shall have access to such
records during normal business hours during the term of this Agreement and
during the respective periods in which Supplier is required to maintain such
records as provided in this clause.
12. [*]
13. TITLE TO WORK PRODUCT
All right, title and interest in and to all tangible and intangible work and
work products developed or produced under this Agreement by or on behalf of
Supplier for Company, whether comprising or incorporated in specifications,
drawings, sketches, models, samples, data, computer programs, reports,
documentation or other technical or business information, and all right, title
and interest in and to patents, copyrights, trade secrets, trademarks and other
intellectual property derived from such work and work products are hereby
assigned by Supplier to Company and are hereby agreed by Supplier to be
transferred to Company or otherwise vested therein, effective when first
capable of being so assigned, transferred or vested. Supplier shall obligate its
employees, subcontractors and others to provide, and shall supply to Company at
no extra cost, all such assignments, rights and covenants as Company deems
appropriate to assure and perfect such transfer or other vesting. All work and
work products shall be provided to Company as required herein or on termination
or completion of this Agreement, whichever is earlier, unless Supplier is
requested in writing to do otherwise. All such work and work products shall be
considered and arranged to be a "work made for hire" to the extent allowed by
law.
The work and work products developed or produced under this Agreement shall be
the original work of Supplier, unless Company's Technical Representative has
consented in writing to the inclusion of work or work products owned or
copyrighted by others (hereafter "included works"). In requesting such consent,
Supplier shall notify Company of the scope of the rights and permissions
Supplier intends to obtain for Company with respect to such included works and
modify the scope of same as requested by Company. Copies of all rights and
permissions, clearly identifying the included works to which they apply, shall
be supplied to Company promptly after their acquisition.
Supplier shall mark any such development work(s) with the notice "Copyright(c),
1998, AT&T Corp., All Rights Reserved". If any Preexisting Material is
employed in any developed work(s) Supplier shall provide for such developed
work(s) one or more additional copyright notices identifying such material and
the owner(s) of copyright in such material. Any such copyright notice shall be
in accordance with Regulation 201.10 of the U.S. Copyright Office.
Company shall not acquire title hereunder to any intangible work or work
products preexisting execution of this Agreement and not developed or produced
in anticipation hereof.
Supplier agrees, for itself and its affiliates, not to assert patents and
copyrights owned or controlled by Supplier or any parent thereof or subsidiary
of either against Company, its affiliates, and its or
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
<PAGE> 11
Agreement L4U215D
Page 11 of 24
their direct or indirect customers, in connection with any work product or other
subject matter directly or indirectly derived from work done hereunder.
14. USE OF INFORMATION
Supplier shall view as Company's property any idea, data, program, technical,
business or other intangible information, however conveyed, and any document,
print, tape, disc, tool, or other tangible information-conveying or performance-
aiding article owned or controlled by Company, and provided to, or acquired by,
Supplier under or in contemplation of this Agreement ("Information"). Supplier
shall, at no charge to Company, and as Company directs, destroy or surrender to
Company promptly at its request any such article or any copy of such
Information. Supplier shall keep Information confidential and use it only in
performing under this Agreement and obligate its employees, subcontractors and
others working for it to do so, provided that the foregoing shall not apply to
information previously known to Supplier free of obligation, or made public
through no fault imputable to Supplier.
15. SUPPLIER'S INFORMATION
Except for information owned by Company under the clause TITLE TO WORK PRODUCT,
no specifications, drawings, sketches, models, samples, tools, computer or other
apparatus programs, technical or business information or data, written, oral, or
otherwise, furnished by Supplier to Company under this Agreement or order, or in
contemplation of this Agreement or order shall be considered by Supplier to be
confidential or proprietary.
16. INFRINGEMENT
Supplier shall indemnify and save harmless Company, its affiliates, its and
their customers, and each of their officers, directors, employees, successors
and assigns (all hereinafter referred to in this clause as Company) from and
against any losses, damages, liabilities, fines, penalties, and expenses
(including reasonable attorneys' fees) that arise out of or result from any
proved or unproved claim (1) of infringement of any patent, copyright, trademark
or trade secret right, or other intellectual property right, private right, or
any other proprietary or personal interest, and (2) related by circumstances to
the existence of this Agreement or performance under or in contemplation of it
(an "Infringement Claim"). If the Infringement Claim arises solely from
Supplier's adherence to Company's written instructions regarding services or
tangible or intangible goods provided by Supplier ("Items") and if the items are
not (1) commercial items available on the open market or the same as such items,
or (2) items of Supplier's designated origin, design or selection, Company shall
indemnify Supplier. Company or Supplier (at Company's request) shall defend or
settle, at its own expense, any demand, action or suit on any Infringement Claim
for which it is the indemnitor under the preceding provisions and each shall
timely notify the other of any assertion against it of any Infringement Claim
and shall cooperate in good faith with the other to facilitate the defense of
any such claim.
<PAGE> 12
Agreement L4U215D
Page 12 of 24
17. INSURANCE
Supplier shall maintain and cause Supplier's subcontractors to maintain during
the term of this Agreement: (1) Workers' Compensation insurance as prescribed by
the law of the state or nation in which the Work is performed; (2) employer's
liability insurance with limits of at least $500,000 for each occurrence; (3)
comprehensive automobile liability insurance if the use of motor vehicles is
required, with limits of at least $1,000,000 combined single limit for bodily
injury and property damage for each occurrence; (4) Commercial General Liability
("CGL") insurance, including Blanket Contractual Liability and Broad Form
Property Damage, with limits of at least $1,000,000 combined single limit for
bodily injury and property damage for each occurrence; (5) if the furnishing to
Company (by sale or otherwise) of products or material is involved, CGL
insurance endorsed to include products liability and completed operations
coverage in the amount of $5,000,000 for each occurrence; and (6) Errors and
Omissions Insurance in the amount of at least $2,000,000 per claim with an
annual aggregate of at least $3,000,000 inclusive of legal defense costs. All
CGL and automobile liability insurance shall designate AT&T Corp., its
affiliates, and each of their officers, directors and employees (all hereinafter
referred to in this clause as "Company") as an additional insured. All such
insurance must be primary and required to respond and pay prior to any other
available coverage. Supplier agrees that Supplier, Supplier's insurer(s) and
anyone claiming by, through, under or in Supplier's behalf shall have no claim,
right of action or right or subrogation against Company and its customers based
on any loss or liability insured against under the foregoing insurance. Supplier
and Supplier's subcontractors shall furnish prior to the start of Work
certificates or adequate proof of the foregoing insurance including, if
specifically requested by Company, copies of the endorsements and insurance
policies. Company shall be notified in writing at least thirty (30) days prior
to cancellation of or any change in the policy.
18. INDEMNITY
All persons furnished by Supplier shall be considered solely Supplier's
employees or agents, and Supplier shall be responsible for payment of all
unemployment, social security and other payroll taxes, including contributions
when required by law. Supplier agrees to indemnify and save harmless Company,
its affiliates, its and their customers and each of their officers, directors,
employees, successors and assigns (all hereinafter referred to in this clause as
"Company") from and against any losses, damages, claims, demands, suits,
liabilities, fines, penalties and expenses (including reasonable attorneys'
fees) that arise out of or result from: (1) injuries or death to persons or
damage to property, including theft, in any way arising out of or occasioned by,
caused or alleged to have been caused by or on account of the performance of the
Work or Services performed by Supplier or persons furnished by Supplier, (2)
assertions under Workers' Compensation or similar acts made by persons furnished
by Supplier or by any subcontractor, or by reason of any injuries to such
persons for which Company would be responsible under Workers' Compensation or
similar acts if the persons were employed by Company, (3) any failure on the
part of Supplier to satisfy all claims for labor, equipment, materials and other
obligations relating to performance of the Work, (4) any claim by any company
selected as a subcontractor by Supplier that they were wrongfully excluded from
performing work under this Agreement or (5) any failure by Supplier to perform
Supplier's obligations under this clause or the INSURANCE clause. Supplier
agrees to defend Company, at Company's request, against any such claim, demand
or suit. Company agrees to notify Supplier within a reasonable time of any
written claim or demands against Company for which Supplier is responsible under
this clause.
<PAGE> 13
Agreement No. L4U215D
Page 13 of 24
20. ASSIGNMENT BY COMPANY
Company shall have the right to assign this Agreement and to assign its rights
and delegate its duties under this Agreement either in whole or in part (an
"Assignment"), including, but not limited to, software licenses and other grants
in intellectual property rights, at any time and without Supplier's consent, to
(i) any present or future affiliate (including any subsidiary or affiliated
entity thereof) of Company; (ii) any unaffiliated new entities that may be
formed by Company pursuant to a corporate reorganization, including any
subsidiary or affiliated entity thereof; or (iii) any third party which by
purchase, lease, outsourcing agreement or otherwise, assumes the operation,
administration and/or management of any substantial portion of the business of
Company affected by this Agreement. Company shall give Supplier written notice
of any Assignment, including (i) the effective date of the Assignment
("Effective Date"), and (ii) the entity or entities receiving rights and/or
assuming obligations under the Agreement ("Entities"). Upon the Effective Date
and to the extent of the Assignment, Company shall be released and discharged
from all further duties under this Agreement as to materials, services, or
intellectual property rights transferred to assignee, ordered from or provided
by Supplier prior to, on or after the Effective Date. Notwithstanding that an
Assignment has been made, Company, at its sole option, shall continue to have
the right to purchase, lease, or license material or services under this
Agreement as if an Assignment had not been made. If this Agreement includes a
commitment to purchase a stated or determinable quantity of goods, services or
rights, or prices that vary based on the quantities purchased, the aggregate of
purchases by the Entities under this Agreement will be included in determining
the quantity.
21. ACCEPTANCE
If the Technical Services to be provided under an Order involve the development
of Software, the following will apply:
A. Company shall evaluate the Software and each other Deliverable
(individually and collectively referred to in this clause as "Deliverable")
furnished under this Agreement for compliance with the Specifications and shall
submit a written acceptance or rejection to Supplier within thirty (30) days
after the receipt by Company of the complete Deliverable associated with each
task. Such written acceptance or rejection shall be made only by Company's
Technical Representative. In no event shall early turnover of the Deliverable by
Supplier to Company or use of such Deliverable by Company or its customers for
business, profit, revenue or any other lawful use constitute acceptance of such
Deliverable by Company. Company shall have the right to accept portions of the
Software or of any other Deliverable. Company's acceptance of the Software or of
any other Deliverable or any portion thereof shall occur only upon a formal
written acceptance sent by the aforementioned Company Representative.
B. If a Deliverable evaluated pursuant to paragraph A of this clause is
rejected, Supplier agrees to correct, at its expense, each error leading to such
rejection and resubmit the corrected Deliverable to Company within thirty (30)
days after receipt of notice from Company of such corrected Deliverable to
accept or reject such Deliverable. If the corrected Deliverable complies with
the Specifications, Supplier shall incorporate the corrections in the
Deliverables.
<PAGE> 14
Agreement No. L4U215D
Page 14 of 24
C. If the errors in a rejected Deliverable are not corrected within the
thirty (30) day period specified in paragraph B of this clause or if a
resubmitted Deliverable re-tested or re-evaluated by Company during the thirty
(30) day re-evaluation period is again rejected, then Company may, at its
option: (1) retain the Deliverable at an equitable adjustment in price as may
be agreed by the parties, in which case that Deliverable shall be deemed
accepted; (2) afford Supplier one or more correction extensions for a period or
periods to be specified by Company without prejudice to Company's rights to
thereafter exercise its option under either clause (1) or (3) of this paragraph
without further notice to Supplier, if the errors have not been corrected; or
(3) be entitled to a prompt and full refund of all monies previously paid under
this Agreement or an Order. If option (3) is exercised, Company shall have no
further obligation to Supplier under this Agreement or the Order as to such
Software or any other Deliverable and may elect to terminate this Agreement or
an Order at any time by written notice to Supplier.
22. PERFORMANCE OF WORK - ACCEPTANCE PROCEDURE
Upon the completion of the Technical Services and/or project deliverables
described in an Order or under this Agreement, Company shall have an acceptance
period of thirty (30) days, unless otherwise specified in an Order or under
this Agreement, from the date of receipt of the completed deliverables in which
to determine if the Technical Services have been completed in accordance with
the specifications. For Technical Projects, Supplier shall provide written
notification of such completion to Company's Technical Representative. On or
prior to the expiration of such acceptance period, Company shall provide notice
to Supplier of either (1) satisfactory performance and Company's acceptance of
same, or (2) notice of unsatisfactory performance and Company's rejection of
same.
Supplier shall supply the appropriate personnel to investigate any reported
deficiencies found by Company during the acceptance period. Deficiencies found
to be of Supplier's causing shall be corrected by Supplier at its expense. Such
correcting activities shall commence immediately and be completed as quickly as
is reasonably possible. The period from the time Supplier is notified to make
investigation and corrections until Supplier completes those activities shall
not be counted as part of the acceptance period. If corrections are required,
upon receipt of Supplier's notice that the deficiencies have been remedied, the
acceptance period shall continue subject to the acceptance requirements as
specified above. However, in no event shall the continuation of an acceptance
period after correction of Supplier caused deficiencies be less than two (2)
weeks.
23. CONTINUING SUPPORT
If the Technical Services to be provided under an Order involve the development
of Software, the following will apply:
Supplier agrees to promptly provide Company with all assistance reasonably
requested by Company in connection with Company's use and operation of the
Software and other Deliverables furnished under this Agreement. During the
development and acceptance testing period and after Company's final acceptance
of the Software and other Deliverables during the Warranty Period set forth in
the clause WARRANTY, such Supplier support shall be provided at no additional
charge and shall include, but not be limited to, installation of Software and
related equipment, training, design, programming, software support and
modification, database design and, if required, data conversion for the
Software together with other support services set forth in this Agreement.
Supplier represents that any personnel it supplies to assist Company shall be
fully qualified to provide the necessary assistance. Supplier agrees to provide
support for [*] of any and all portions of the
Software.
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
<PAGE> 15
Agreement No. L4U215D
Page 15 of 24
24. MAINTENANCE
If the Technical Services to be provided under an Order involve the development
of Software, the following will apply:
Supplier agrees to promptly provide Company with all modifications, in object
and source code form, to the Software made by Supplier where such modifications
have been announced by Supplier to be generally available. During the Software
Warranty Period, Supplier shall furnish such modifications at no charge to
Company. After such Warranty Period, Supplier shall offer such modifications to
Company at Supplier's then current charges. At least sixty (60) days prior to
the expiration of the Warranty Period or the applicable maintenance term,
Supplier shall provide Company with written notice of the impending maintenance
expiration date and the changes for the subsequent maintenance term. Company
may discontinue maintenance of the Software at any time.
As used in this clause, the term "modifications" or "maintenance" shall include
updates, enhancements and new releases. Supplier agrees to notify Company of
the pending availability of all such modifications no later than sixty (60)
days prior to the public announcement by Supplier of such availability.
Supplier shall promptly provide to Company, at no charge, all revisions to the
associated documentation to reflect the modifications. All such modifications
shall be considered Background Information Software subject to the terms and
conditions (including acceptance) of this Agreement. Company may incorporate
the modifications into the Software in its possession or continue using
previous releases of the Software at Company's option. Supplier agrees to
provide, at Company's request, maintenance for [*] of the Software.
25. WARRANTY
If the Technical Services involve the development of software, the following
shall apply:
Supplier warrants to Company and its customers all of the following:
1. The Software will be free from significant errors, will conform to and
perform in accordance with the specifications and will function properly. The
media conveying the Software will be free from defects in material and
workmanship. The Software will be compatible with and may be used in conjunction
with other software as described in the specifications. If this Agreement states
that the Software is to be used in conjunction with certain data processing
equipment, the Software shall be compatible with that equipment. The foregoing
warranties extend to the future performance of the Software and shall continue
for the longer of (a) the warranty period applicable to Company's sublicense to
its customers of the Software or of products which incorporate the Software, (b)
[*] after the Software is accepted by Company, or (c) a greater
period specified elsewhere in this Agreement.
2. Work will be performed in a first-class, workmanlike manner.
3. There are no copy protection or similar mechanisms within the Software
which will, either now or in the future, interfere with the grants made in this
Agreement.
4. Company and its customers shall have quiet enjoyment of the Software.
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
<PAGE> 16
Agreement No. L4U215D
Page 16 of 24
5. As to Software for which Supplier does not solely own all intellectual
property rights, Supplier has full right, power and authority to license the
Software to Company and its customers as provided in this Agreement.
6. If the Software, or any portion thereof, is or becomes unusable, totally,
or in any respect during the applicable warranty period, or if the Work fails
to meet the warranties, Supplier will reperform Work, correct errors, defects
and non-conformities and restore the Software to conforming condition free of
significant errors at no cost to Company or its customers. Corrected Software
shall be warranted as set forth in this clause.
7. The Software does not contain any malicious code, program, or other
internal component (e.g. computer virus, computer worm, computer time bomb, or
similar component), which could damage, destroy or alter software, firmware, or
hardware or which could, in any manner, reveal, damage, destroy, or alter any
data or other information accessed through or processed by the Software in any
manner. Supplier shall immediately advise Company, in writing, upon reasonable
suspicion or actual knowledge that the Software provided under this Agreement
may result in the harm described above. Supplier shall indemnify and hold
Company and its customers harmless from any damage resulting from the harm
described above.
8. Supplier warrants that any computer software or routing services supplied
or delivered by or for Supplier under the agreement (i) will handle date
information before, during and after January 1,2000, including but not limited
to accepting date input, providing date output and performance calculations on
dates or portions of dates (ii) will function accurately and without
interruption before, during and after January 1, 2000, without any change in
operations associated with the advent of the new century, (iii) will respond to
two-digit year input in a way that resolves the ambiguity as to century in a
disclosed, defined and predetermined manner, and (iv) will store and provide
output of date information in ways that are unambiguous as to century.
9. All warranties shall survive inspection, acceptance and payment.
26. WARRANTY AND REPRESENTATIONS
Supplier represents to Company and its customers that Services will proceed
with promptness and diligence and will be performed in a first class,
workmanlike manner in accordance with the highest professional standards in the
field and to Company's satisfaction. Supplier warrants that it has or shall
obtain prior to completion of the Technical Services the right to grant the
licenses and rights granted hereunder. Supplier warrants to Company and its
customers that material furnished will be free from defects in design (except
to the extent designed by Company), material and workmanship and will conform
to and perform in accordance with the specifications, drawings and samples. In
addition, if material furnished contains one or more manufacturers' warranties,
Supplier hereby assigns such warranties to Company and its customers. All
warranties shall survive inspection, acceptance and payment. Material or
Services not meeting the warranties will be, at Company's option, repaired,
adjusted, replaced or performed again by Supplier at no cost to Company and its
customers.
<PAGE> 17
Agreement No. L4U215D
Page 18 of 24
30. PUBLICITY
Supplier agrees to submit to Company all advertising, sales promotion, press
releases, and other publicity matters relating to the material furnished or the
services performed by Supplier under this Agreement wherein Company's names or
marks are mentioned or language from which the connection of said names or
marks therewith may be inferred or implied; and Supplier further agrees not to
publish or use such advertising, sales promotion, press releases, or publicity
matters without Company's prior written approval. This does not reduce or
modify Supplier's obligations under the clause IDENTIFICATION.
31. IDENTIFICATION CREDENTIALS
Company may, at its discretion, require Supplier Employees to exhibit
identification credentials, which Company may issue, in order to gain access
to Company's premises for the performance of the Work. When Supplier Employees
are no longer performing Work, Supplier shall ensure the prompt delivery to
Company's Technical Representative of the identification credentials involved
or a written statement of the reasons why the identification credentials
cannot be returned. Supplier shall be liable for any damage or loss sustained
by Company if such credentials are not returned to Company.
32. LICENSES
No licenses, express or implied, under any patents are granted by Company to
Supplier under this Agreement or an Order.
33. NON-EXCLUSIVE RIGHTS
It is expressly understood and agreed that this Agreement neither grants to
Supplier an exclusive right or privilege to provide to Company any or all
Technical Services of the type described in this Agreement which Company may
require, not requires the purchase of such Services from Supplier by Company.
It is, therefore, understood that Company may contract with other Suppliers for
the procurement of comparable Technical Services and related materials. In
addition, Company shall at its sole discretion, decide the extent to which
Company will market, advertise, promote, support, or otherwise assist in
further offerings of the material or services.
Supplier agrees that purchases by Company under this Agreement shall neither
restrict the right of Company to cease purchasing nor require Company to
continue any level of such purchases.
34. RIGHT OF ENTRY AND PLANT RULES
Each party shall have the right to enter the premises of the other party during
normal business hours with respect to the performance of this Agreement,
subject to all plant rules and regulations, security regulations and
procedures and U.S. government clearance requirements if applicable. Company
is not responsible for the safekeeping of Supplier's property on Company
premises. Supplier shall not stop, delay or interfere with Company's work
schedule without the prior approval of Company's Technical Representative.
<PAGE> 18
Agreement L4U215D
Page 19 of 24
35. RELEASES VOID
Neither party shall require (i) waivers of releases of any personal rights or
(ii) execution of documents which conflict with the terms of this Agreement,
from employees, representatives or customers of the other in connection with
visits to its premises and both parties agree that no such releases, waivers or
documents shall be pleaded by them or third persons in any action or proceeding.
36. RIGHT OF ACCESS
Each party shall permit the other party reasonable access to its facilities in
connection with work under this Agreement. No charge shall be made for such
visits. It is agreed that prior notification will be given when access is
required. Supplier agrees to remove any of Supplier's Employees from Company's
facilities at Company's request.
37. TIMELY PERFORMANCE
If Supplier has knowledge that anything prevents or threatens to prevent the
timely performance of the Work under this Agreement, Supplier shall immediately
notify Company's Technical Representative thereof, in writing, and include all
relevant information concerning the delay or potential delay.
38. COMPANY PROPERTY
Should Supplier use any property owned or rented by Company or its customers,
Supplier shall have risk of loss and damage to such property. Supplier agrees
not to remove the property from Company's or its customers' premises and to
return the property to Company upon completion of use, or at such earlier time
as Company may request, in the same condition as when received by Supplier,
reasonable wear and tear excepted. Such use shall be controlled by the clauses
INSURANCE and INDEMNITY.
39. FORCE MAJEURE
Neither party shall be held responsible for any delay or failure in performance
of any part of this Agreement to the extent such delay or failure is caused by
fire, flood, explosion, war, strike, embargo, government requirement, civil or
military authority, act of God, or other similar causes beyond its control and
without the fault or negligence of the delayed or non-performing party or its
subcontractors ("force majeure conditions"). Notwithstanding the foregoing,
Supplier's liability for loss or damage to Company's material in Supplier's
possession or control shall not be modified by this clause. If any force majeure
condition occurs, the party delayed or unable to perform shall give immediate
notice to the other party, stating the nature of the force majeure condition and
any action being taken to avoid or minimize its effect. The party affected by
the other's delay or inability to perform may elect to: (1) suspend this
Agreement or an Order for the duration of the force majeure condition and (i) at
its option buy, sell, obtain or furnish elsewhere material or services to be
bought, sold, obtained or furnished under this Agreement or an Order (unless
such
<PAGE> 19
Agreement No. L4U215D
Page 20 of 24
sale or furnishing is prohibited under this Agreement) and deduct from any
commitment the quantity bought, sold, obtained or furnished or for which
commitments have been made elsewhere and (ii) once the force majeure condition
ceases, resume performance under this Agreement or an Order with an option in
the affected party to extend the period of this Agreement or Order up to the
length of time the force majeure condition endured and/or (2) when the delay or
nonperformance continues for a period of at least [*], terminate,
at no charge, this Agreement or an Order or the part of it relating to material
not already shipped, or services not already performed. Unless written notice
is given within [*] after the affected party is notified of
the force majeure condition, (1) shall be deemed selected.
40. CHOICE OF LAW
The construction, interpretation and performance of this Agreement and all
transactions under it shall be governed by the laws of the State of New Jersey
excluding its choice of law rules and excluding the Convention for the
International Sale of Goods. The parties agree that the provisions of the New
Jersey Uniform Commercial Code apply to this Agreement and all transactions
under it, including agreements and transactions relating to the furnishing of
Services, the lease or rental of equipment or material, and the license of
software. Supplier agrees to submit to the jurisdiction of any court wherein an
action is commenced against Company based on a claim for which Supplier has
agreed to indemnify Company under this Agreement.
41. MEDIATION
If a dispute arises out of or relates to this Agreement, or its breach, and the
parties have not been successful in resolving such dispute through negotiation,
the parties agree to attempt to resolve the dispute through mediation by
submitting the dispute to a sole mediator selected by the parties or, at any
time at the option of a party, to mediation by the American Arbitration
Association ("AAA"). Each party shall bear its own expenses and an equal share
of the expenses of the mediator and the fees of the AAA. The parties, or their
representatives, other participants and the mediator shall hold the existence,
content and result of the mediation in confidence. If such dispute is not
resolved by such mediation, the parties shall have the right to resort to any
remedies permitted by law. All defenses based on passage of time shall be tolled
pending the termination of the mediation. Nothing in this clause shall be
construed to preclude any party from seeking injunctive relief in order to
protect its rights pending mediation. A request by a party to a court for such
injunctive relief shall not be deemed a waiver of the obligation to mediate.
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
<PAGE> 20
Agreement No. L4U215D
Page 21 of 24
42. NOTICES
All notices under this Agreement and under each Order shall be deemed duly
given upon delivery, if delivered by hand or by facsimile, overnight carrier or
three (3) days after posting, if sent by certified mail, postage prepaid,
return receipt requested, as set forth below or to such other address as either
party may designate by notice pursuant hereto.
For Company: AT&T CORP.
Room 1N71
150 Mt. Airy Road
Basking Ridge, NJ 07920
Attn: Supplier Manager
For Supplier: Emerald Solutions
1011 Rte 22
Suite 301
Bridgewater, NJ 08807
Attn: Mr. Mark Markowitz
The above addresses may be changed at any time by giving prior written notice
as above provided.
43. PROGRESS REPORTS
If requested by Company's Technical Representative as defined in an Order, upon
the completion of each phase of the project, Supplier shall submit to Company a
progress report certifying that Supplier has completed all tasks required to be
completed in such phase. The progress report shall be signed by an authorized
representative of Supplier who shall certify that the representations contained
therein are complete and accurate. The progress report also shall set forth in
detail any recommended changes with respect to remaining phases of the Work in
view of Supplier's experience with the completed phases.
44. TOOLS AND EQUIPMENT
Unless otherwise specifically provided in an Order, Supplier shall provide all
labor, tools, software programs, materials and equipment (the "tools") for
performance of the Work. Should Supplier actually use tools owned, rented or
licensed by Company, Supplier acknowledges that Supplier accepts the tools "as
is where is", that Company has no responsibility for the condition of state of
repair of the tools and that Supplier shall have risk of loss and damage to
such tools. Unless otherwise specifically provided in this Agreement or
authorized in writing by Company's Representative, Supplier agrees not to
remove tools from Company premises and Supplier agrees to use the tools only in
the performance of this Agreement.
Supplier agrees to return the tools to Company upon completion of use, or at
such earlier time as Company may request, in the same condition as when
received by Supplier, reasonable wear and tear excepted.
<PAGE> 21
Agreement No. L4U215D
Page 22 of 24
45. COMPLIANCE WITH LAWS
Supplier and all persons furnished by Supplier shall comply at their own expense
with all applicable federal, state, local and foreign laws, ordinances,
regulations and codes, including those relating to the use of
chlorofluorocarbons, and including the identification and procurement of
required permits, certificates, licenses, insurance, approvals and inspections,
in performance under this Agreement. Supplier agrees to indemnify, defend (at
Company's request) and save harmless Company, its affiliates, its and their
customers and each of their officers, directors and employees from and against
any losses, damages, claims, demands, suits, liabilities, fines, penalties and
expenses (including reasonable attorneys' fees) that arise out of or result from
any failure to do so.
46. EXPORT CONTROL
Supplier will not use, distribute, transfer or transmit any products, software
or technical information (even if incorporated into other products) provided
under this agreement except in compliance with U.S. export laws and regulations
(the "Export Laws"). Supplier will not, directly or indirectly, export or
re-export the following items to any country which is in the then current list
of prohibited countries specified in the applicable Export Laws: (a) software
or technical data disclosed or provided to Supplier by Company or Company's
subsidiaries or affiliates; or (b) the direct product of such software or
technical data. Supplier agrees to promptly inform Company in writing of any
written authorization issued by the U.S. Department of Commerce Office of
Export Licensing to export of re-export any such items referenced in (a) or
(b). Supplier also will not, without the prior written consent of company,
export or re-export, directly or indirectly, any technical data or software
furnished hereunder from the country in which Company first provided the
technical data or software to Supplier hereunder, except to the United States.
The obligations stated above in this clause will survive the expiration,
cancellation or termination of this Agreement or any other related agreement.
If requested by Company, Supplier also agrees to sign written assurances and
other export-related documents as may be required for Company to comply with
U.S. export regulations. Such written assurance and other export-related
documents constitute part of this Agreement.
47. BANKRUPTCY AND TERMINATION FOR FINANCIAL INSECURITY
Either party may terminate this Agreement by notice in writing:
1) if the other party makes an assignment for the benefit of creditors (other
than solely an assignment of monies due); or
2) if the other party evidences an inability to pay debts as they become due,
unless adequate assurance of such ability to pay is provided within thirty (30)
days of such notice.
If a proceeding is commenced under any provisions of the United States
Bankruptcy Code, voluntary or involuntary, by or against either party, and this
Agreement has not been terminated, the non-debtor party may file a request with
the Bankruptcy Court to have the court set a date within sixty (60) days after
the commencement of the case, by which the debtor party will assume or reject
this Agreement, and the debtor party shall cooperate and take whatever steps
necessary to assume or reject the Agreement by such date.
<PAGE> 22
Agreement No. L4U215D
Page 24 of 24
54. CHANGES
Company may at any time during the progress of the Work require additions to or
alterations of or deductions or deviations (all hereinafter referred to as a
"Change") from the Work called for by the specifications, drawings and samples.
No Change shall be considered as an addition or alteration to or deduction or
deviation from the Work called for by the specifications, drawings and samples
nor shall Supplier be entitled to any compensation for work done pursuant to or
in contemplation of a Change, unless made pursuant to a written Change Order
issued by Company. Within ten (10) days after a request for a Change, Supplier
shall submit a proposal to Company which includes any increases or decreases in
Supplier's costs or changes in the delivery or Work schedule necessitated by
the Change. Company shall, within ten (10) days of receipt of the proposal,
either (i) accept the proposal, in which event Company shall issue a written
Change Order directing Supplier to perform the Change or (ii) advise Supplier
not to perform the Change in which event Supplier shall proceed with the
original Work.
55. ENTIRE AGREEMENT
This Agreement shall incorporate the typed or written provisions on Company's
Orders issued pursuant to this Agreement, and shall constitute the entire
Agreement between the parties with respect to the subject matter of this
Agreement and the Order(s) and shall not be modified or rescinded, except by a
writing signed by Supplier and Company. All references in these terms and
conditions to this Agreement or to Work, Services, material, equipment,
products, software or Information furnished under, in performance of, pursuant
to, or in contemplation of, this Agreement shall also apply to Orders issued
pursuant to this Agreement. Printed provisions on the reverse side of Company's
Orders and all provisions on Supplier's forms shall be deemed deleted.
Additional or different terms inserted in this Agreement by Supplier, or
deletions thereto, whether by alterations, addenda, or otherwise, shall be of
no force and effect, unless expressly consented to by Company in writing.
Estimates or forecasts furnished by Company shall not constitute commitments.
The provisions of this Agreement supersede all contemporaneous oral agreements
and all prior oral and written quotations, communications, agreements and
understandings of the parties with respect to the subject matter of this
Agreement. The term "Work" as used in this Agreement may also be referred to as
"Services."
Accepted by: Accepted by:
Emerald Solutions AT&T CORP.
By: /s/ MARK MARKOWITZ By: /s/ CLARK CARSON
------------------------------ ------------------------------
Name: Mark Markowitz Name: Clark Carson
----------------------------
Title: Vice President Title: District Manager -
--------------------------- IT Professional Services
Date: [illegible] Date: 4/2/98
---------------------------- -----------------------------
<PAGE> 23
Agreement No. L4U215D
Appendix A
Page No. 1 of 2
PRICING
1. RATES
Company shall issue on a periodic basis Company's IT Professional Services Rate
Schedule ("Rate Schedule"). In response to Requests for Proposal (RFPs) issued
by Company, Supplier agrees to offer Company services at rates not to exceed the
Rate Schedule for time and materials projects or for calculating fixed price
projects. The actual price paid by Company will be stated in Orders issued by
Company and will not be affected by subsequent issues of the Rate Schedule.
In the event Supplier offers Company services other than through a RFP issued
by Company's Supplier Management Division, the services shall be at the rates
in the Rate Schedule. In the event services are offered at rates higher
than those in the then-current Rate Schedule, the rates shall be reduced to
those in the Rate Schedule. Supplier shall promptly credit or refund to Company,
at Company's option, any billing to Company at the higher rates.
2. VOLUME DISCOUNTS
Supplier will provide Company a volume discount or rebate (each hereinafter
referred to as "discount"), at Company's option, on an annual basis, with the
discount based upon Supplier's total volume of business with Company, i.e.,
Technical Staff Supplementation Services as well as other services offered by
Supplier which may include, by way of example, project related services and
outsourced services. The initial discount period will be the calendar year
beginning January 1, 1998. The base for the initial discount period will be
Company's [*], as reported in Company's
Vendor Payment Tracking (VPT) System. This base number will be reported to
Supplier by Company in January 1998 and will be referred to as the "Discount
Base."
For the calendar year 1998, discounts, if any, for the Discount Base will be
the discounts as shown in Appendix A, VOLUME DISCOUNTS, of Company's General
Agreement with Supplier, Agreement No. Not applicable, as amended, that was in
effect during the period January 1, 1996 through December 31, 1997.
Once Company's payments to Supplier EXCEED the Discount Base, discounts will be
determined as follows:
Discounts applied for payments ABOVE the Discount Base will be the greater of
(1) or (2) as follows:
(1) The discounts as shown in Agreement No. Not applicable, referenced above,
OR
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
<PAGE> 24
Agreement L4U215D
Appendix A
Page 2 of 2
(2) The "Additional Discount Percentage" shown below will be added to the
discount percentage associated with the Discount Base in the
above-referenced Agreement. However, in no event will the discount level
for volumes above the Discount Base be less than [*].
<TABLE>
<CAPTION>
================================================================================
Payment Volume Additional Discount Percentage
- --------------------------------------------------------------------------------
<S> <C>
[*] [*]
- --------------------------------------------------------------------------------
[*] [*]
- --------------------------------------------------------------------------------
[*] [*]
- --------------------------------------------------------------------------------
[*] [*]
================================================================================
</TABLE>
The discounts earned will be payable to Company's Supplier Management Division
in the form of a rebate [*] after the close of each calendar
quarter, based upon payment information in Company's VPT System. At Company's
option, the discounts may be deducted from Supplier's invoices.
3. PAYMENTS TO MWBE SUBCONTRACTORS
To encourage Supplier's use of certified Minority and Women-Owned Business
Enterprises (MWBEs) as subcontractors under this Agreement, Supplier's payments
to MWBE subcontractors under this Agreement will be excluded from Company's
total payments to Supplier for the purposes of determining volume discounts, as
described in the above clause entitled VOLUME DISCOUNTS.
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
<PAGE> 25
Agreement L4U215D
Appendix B
Page 1 of 1
APPENDIX B - SUPPLIER PERFORMANCE
1. SUPPLIER VALUE ADDED METRICS
Company may elect to establish performance standards for Supplier and other
suppliers of Technical Services to Company. Company shall provide feedback to
Supplier on a periodic basis measuring Supplier's performance against these
standards. The standards will measure performance in such areas as service,
access to technology, delivery/flexibility, quality/reliability, and other areas
as may be established by the Company.
In the event Supplier materially fails to provide services or Supplier
repeatedly fails to provide services in accordance with the performance
standards, Company shall notify Supplier in writing of such failure. Within
thirty (30) days of receipt of this notice, Supplier shall perform a root cause
analysis to identify the cause of such failure, correct such failure, provide
Company with a written report detailing the cause of, and procedure for
correcting such failure, and provide Company with reasonable evidence that such
failure will not reoccur.
2. INFORMATION STANDARDS
Company may utilize electronic means to communicate with Supplier in the
performance of this Agreement. To ensure the effective utilization of this
electronic communication Company may establish standards for the information to
be transmitted and the means of communication, which may include standards for
software, data interchanges, transfer speeds, etc. Supplier agrees to conform
with such standards at its own expense and to implement at its expense
reasonable changes and upgrades that may be specified by Company from time to
time.
Company may specify certain standard forms and documents which will be
transmitted electronically between Company and Supplier. Supplier agrees to
utilize the software and communications packages as specified by Company and
take all other actions necessary to enable to transmission and receipt of forms
and documents without additional formatting or processing by Company.
In the event Company utilizes electronic transmission of Requests for Proposal
(RFPs), Company shall not be responsible if Supplier is delayed in receiving
RFPs due to the performance of Supplier's internet provider. If Supplier is so
delayed, Company shall not grant Supplier additional time to respond.
3. SUPPLIER PROFILES
Company will utilize profile information provided by Supplier to develop
forecasts, route requirements, and perform on-going communications with
Supplier. This profile information will be provided by Supplier to Company on a
quarterly basis, not later than the first day of each calendar quarter. It shall
be the responsibility of Supplier to ensure that its profile information is
current and provided on a timely basis. Company shall have no responsibility to
Supplier based upon Supplier's failure to provide profile information on a
timely basis.
<PAGE> 26
Agreement No. L4U215D
Appendix C
Page 1 of 2
APPENDIX C - SUBCONTRACTOR PERFORMANCE
1. SUBCONTRACTOR CRITERIA
Supplier shall insure that any company selected by Supplier to be a
subcontractor to Supplier under this Agreement is a bona fide consulting company
that publicly represents itself as being engaged in providing technical
consulting services to Supplier and other companies on a contract basis. All
work performed by a subcontractor shall be in accordance with the Article --
Assignment and Subcontracting by Supplier. All subcontracts shall provide that
subcontractors are subject to the terms and conditions of this Agreement,
including but not limited to Use of Information and Export Control.
In the event Supplier elects to subcontract any portion of the Work, Supplier
must adhere to the following guidelines:
A) Supplier must provide a detailed plan for managing the subcontractor
relationship and verify its implementation.
B) Supplier's proposals or statements of work for any technical projects must
clearly specify which portions of the project will be subcontracted.
C) Supplier must provide in detail the Work and the specific deliverables to be
provided by the subcontractor.
D) Supplier shall provide the name and contact for any subcontractor.
E) If Supplier elects to subcontract any portion of the Work on an offshore
basis (i.e., Work performed outside the United States) Supplier must have the
specific prior written consent from Company's Technical Representative and
SMD Representative.
Any work performed by a subcontractor which is not in accordance with the above
guidelines shall be considered a breach by Company.
2. SUBCONTRACTOR CONSULTANTS
Supplier shall ensure that its contracts with its subcontractors contain all
necessary provisions to ensure the transfer to Company all the rights contained
in Article -- Title to Work Product.
3. UTILIZATION OF MINORITY AND WOMEN-OWNED BUSINESSES
It is Company's policy that minority and women-owned business enterprises
(MWBEs) as defined in Attachment A shall have the maximum practicable
opportunity to participate in the performance of contracts. Supplier agrees to
use its good faith efforts to award subcontracts and/or utilize MWBEs to carry
out this policy to the fullest extent consistent with the efficient performance
of this Agreement and without compromise of quality and reliability
expectations.
In addition to these general conditions for MWBE support, Supplier agrees to
(a) use its good faith efforts to utilize MWBEs in support of this Agreement
and strive to increase the percentage of total expenditures from MWBEs to
fulfill Company's purchases each successive year of the Agreement; (b) support
Company's state and regional goals for MWBE and service-disabled veterans
(SDVs) spending in California and other states/regions as may be defined in
<PAGE> 27
Agreement No. L4U215D
Appendix C
Page No. 2 of 2
the future; and (c) work with Company to develop opportunities for the
utilization of MWBEs for first tier procurement by Company.
Supplier shall submit to AT&T quarterly reports of work with known MWBEs in the
form of Attachment B in such manner and at such time as Company's
representative may prescribe. Such quarterly reports shall state separately for
minority-owned business enterprises (MBEs), women-owned business enterprises
(WBEs), and, for California, service-disabled veterans (SDVs), the third-party
work which is attributable to Company. In instances where direct correlation
cannot be determined, such MWBE payments may be established by Supplier
comparing Company's payments to Supplier, in that period, to total payments to
Supplier from all of its customers, in that period, and then arriving at
Company's apportionment of such MWBE payments. Nothing in this clause shall
affect or diminish Supplier's obligations as set forth in the assignment and
subcontracting provisions or any other provisions of this Agreement. If
Supplier complies with the provisions of this clause, that will be a factor
Company will consider favorably in making procurement decisions about future
business with Supplier.
4. SUBCONTRACTOR REPORTS
Supplier shall on a quarterly basis provide Company with a report which lists
all payments made by Supplier to its subcontractors during the preceding
calendar quarter. The subcontractor company must be clearly identified. The
report must also identify any subcontractor company which has been certified as
a Minority or Woman-Owned Business. Supplier shall be responsible for providing
satisfactory evidence of certification of its MWBE subcontractors.
Company reserves the right to establish objectives for Supplier regarding
Supplier's utilization of Minority and Women-Owned Businesses as subcontractors.
<PAGE> 28
Agreement No. L4U215D
Appendix C
Attachment A
Page No. 1 of 1
MINORITY AND WOMEN-OWNED BUSINESS ENTERPRISES DEFINITION
DEFINITION OF MWBEs:
An MWBE is defined as a business which is owned, controlled and operated by
minority or women's group members. MWBE ownership exists in a business which is
at least 51% owned by minority or women group members, or in the case of a
publicly held company, a firm which at least 51% of the stock is owned by
minority or women group members. MWBE companies must be located within the
United States, its territories or possessions; and the owners must be United
States citizens. (In California only, legal aliens with permanent resident
status in the United States are also eligible.)
OPERATE/CONTROL:
OPERATE is defined as being actively involved in the day-to-day management.
CONTROL is defined as exercising the power to make policy decisions.
CERTIFICATION PROCESS:
AT&T utilizes a self-certification process in addition to recognizing
certification of MWBEs by agencies such as: Regional affiliates of the National
Minority Supplier Development Council, Small Business Administration 8(a)
certification, State government agencies, municipal government agencies, Women
Business Owners Corporation, Women's Business Enterprise National Council, and
the California Clearinghouse. AT&T accepts certification only from those
agencies who recognize MWBEs as defined in this document.
GROUPS CONSIDERED MINORITIES:
NATIVE AMERICANS: Persons having origins in any of the original peoples of North
America or the Hawaiian Islands, in particular, American Indians, Eskimos,
Aleuts, and Native Hawaiians.
ASIAN PACIFIC AMERICANS: Persons having origins in Asia including, but not
limited to, Japan, China, Vietnam, Korea, Samoa, Guam, the US Trust Territories
of the Pacific, The Philippines, Northern Mariana Islands, Laos, Cambodia,
Taiwan, Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, Republic of the
Marshall Islands, or the Federated States of Micronesia.
ASIAN INDIAN AMERICANS: Persons having origins in the Indian subcontinent
including, but not limited to India, Pakistan, Bangladesh, Sri Lanka, Bhutan,
or Nepal.
AFRICAN AMERICANS: Persons having origin in any Black racial groups of Africa.
HISPANIC AMERICANS: All persons of Mexican, Puerto Rican, Cuban, South or
Central American, or other Spanish culture or origin.
WOMEN OWNED: A minority women-owned business as defined above is reported in
the minority owned business category. Non-minority women owned businesses are
reported separately.
DISABLED VETERANS: (CALIFORNIA ONLY) A veteran of the military, naval, or air
service of the United States with a service-connected disability who is a
resident of the State of California, and whose disabled veteran status has been
certified by the State Treasurer (in the case of business enterprises seeking
contracts to supply utilities with professional bond services), or the Office
of Small and Minority Business (OSMB) (in the case of business enterprises
seeking contracts to supply utilities with any other type of products or
services.
<PAGE> 29
Agreement No. L4U215D
Page 1 of 4
[AT&T LOGO]
ATTACHMENT B: AT&T MWBE SECOND TIER REPORTING FORM
(Required for National and California Reporting)
PART 1: NATIONAL REPORTING
Indirect and Direct Reporting Options
INDIRECT METHOD
1 - Revenues from AT&T $________________________________________________________
2 - AT&T % of Total Revenues____________________________________________________
(Revenues from AT&T/Total or Domestic Revenues)
3 - Total MBE Dollars $_________________________________________________________
(Total Payments to MBEs)
4 - Total WBE Dollars $_________________________________________________________
(Total Payments to WBEs)
5 - Total AT&T Attributable MBE $_______________________________________________
(AT&T % of Total Revenues x Total MBE $)
6 - Total AT&T Attributable WBE $_______________________________________________
(AT&T % of Total Revenues x Total WBE $)
7 - Total AT&T Attributable MWBE $______________________________________________
(Line 5 + Line 6)
8 - Goals: MBE $ or %________ WBE $ or %________ Total MWBE $ or %________
DIRECT METHOD
1 - Total AT&T Attributable MBE $_______________________________________________
2 - Total AT&T Attributable WBE $_______________________________________________
3 - Total AT&T Attributable MWBE $______________________________________________
4 - Goals: MBE $ or %________ WBE $ or %________ Total MWBE $ or %________
Reporting Period:_________________________________ Date:_______________________
Company Name:__________________________________ Name of CEO:___________________
Address:________________________________________________________________________
________________________________________________________________________
Preparer's Name:________________________________________ Phone:________________
Title:__________________________________________________ Fax:__________________
<PAGE> 30
Agreement No. L4U215D
Page 2 of 4
AT&T MWBE SECOND TIER REPORTING FORM
PART II: CALIFORNIA REPORTING ONLY
Indirect and Direct Reporting Options
INDIRECT METHOD
- ---------------
1 - Revenues from AT&T $
--------------------------------------------------------
2 - AT&T % of Total Revenues
----------------------------------------------------
(Revenues from AT&T/Total Domestic Revenues)
3 - Total MBE Dollars $
---------------------------------------------------------
4 - Total WBE Dollars $
---------------------------------------------------------
5 - Total SDV Dollars $
---------------------------------------------------------
6 - Total AT&T Attributable MBE $
-----------------------------------------------
(AT&T % of Total Revenues x Total MBE $)
7 - Total AT&T Attributable WBE $
-----------------------------------------------
(AT&T % of Total Revenues x Total WBE $)
8 - Total AT&T Attributable SDV $
-----------------------------------------------
(AT&T % of Total Revenues x Total SDV $)
9 - Total AT&T Attributable MWSDVBE $
-------------------------------------------
Line 6 - Line 7 + Line 8)
10 - Goals: MBE$ or % WBE $ or % SDV $ or % Total MWSDVBE $ or %
--- --- --- ---------
DIRECT METHOD
- -------------
1 - Total AT&T Attributable MBE $
-----------------------------------------------
2 - Total AT&T Attributable WBE $
-----------------------------------------------
3 - Total AT&T Attributable SDV $
-----------------------------------------------
4 - Total AT&T Attributable MWSDVBE $
-------------------------------------------
5 - Goals: MBE $ or % WBE $ or % SDV $ or % Total MWSDVBE $ or %
--- --- --- ---------
Reporting Period: Date:
--------------------------------------- ------------------
Company Name: Name of CEO:
------------------------------ ------------------------
Address:
-------------------------------------------------------------------------
Preparer's Name: Phone:
----------------------------------------- -----------------
Title: Fax:
--------------------------------------------------- -------------------
<PAGE> 31
Agreement No. L4U215D
Page 3 of 4
[AT&T LOGO]
AT&T MWBE SECOND TIER REPORTING FORM
SECOND TIER REPORTING SUPPLIER LISTING
--------------------------------------
CALIFORNIA REPORTING ONLY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VON NUMBER
OR OSMB ETHNIC
SERVICE REFERENCE CODE/ YEAR TO
SUPPLIER ADDRESS PHONE DESCRIPTION NUMBER SDV DATES
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
If additional space is needed to list suppliers, please make copies of this
page.
Mail or fax return report: Jackie Sherrod
P.O. Box 25000
Room GC1 - 3E10
Greensboro, NC 27420-5000
910-279-2434 (Fax)
<PAGE> 32
Agreement No. L4U215D
Page 4 of 4
[AT&T LOGO]
Form(s) Completion Instructions
If a supplier can not track direct MWBE content, the INDIRECT METHOD portion of
the report should be completed.
If a supplier has the capability to track MWBE content directly attributable to
the product they sell to AT&T, the DIRECT METHOD portion of the report should
be completed.
If a supplier does business with AT&T in multiple states, including California,
then both parts of the report should be completed - Part I for all states
combined and Part II for California alone. In the California report, SDV
sub-contracting dollars should also be provided.
CALIFORNIA REPORTING
If a supplier ships to an AT&T organization located in California, only MWBEs
verified by the California Clearinghouse should be reported and the SECOND TIER
REPORTING SUPPLIER LISTING must also be completed. This information is
furnished to the California PUC along with our annual filing. If the supplier
does not have any dollars to report in California with verified MWSDVBE
suppliers, the supplier should mark "NONE" across Part II of the form.
Service Description = brief description of products & services provided by
company
VON Number = California Clearinghouse Verification Order Number
OSMB Reference Number = State of California's Office of Small & Minority
Business Reference Number
CALIFORNIA CLEARING HOUSE
The California Clearinghouse is responsible for verifying that WMBE applicants
meet the established eligibility criteria. The Clearinghouse solely verifies
that a business meets eligibility criteria and maintains the information in
its database, which is available by participating utilities and the California
Public Utilities Commission. The verification process entails the thorough
review of a firm's Verification Application with required documents
demonstrating evidence of minority, ownership, management and control.
Questions concerning the Clearinghouse Verification process can be directed to
their San Francisco office on (800) 359-7998.
COMPARABLE AGENCY VERIFICATION PROCEDURE (CALIFORNIA)
Business which have been certified as MBEs, WBEs, or Disadvantage Enterprises
(DBEs) by any of the comparable agencies may apply for WMBE Verification to the
California Clearinghouse by simply submitting 1) a fully executed "WMBE
Clearinghouse Verification Application" and 2) a copy of a current letter or
certification which grants MBE, WBE, or DBE status from any of the following
agencies. No other documents are needed.
COMPARABLE AGENCIES
California Department of Transportation (Caltrans) City of Fresno
City of San Diego, Equal Opportunity
Contracting Program (EOCP) City of Oakland
Los Angeles County Metropolitan
Transportation Authority (MTA) Los Angeles County
Los Angeles Unified School District Contra Costa County
Regional Transit Coordinating Council
of the Bay Area (RTCC) Port of Oakland
Small Business Administration (SBA) 8(a)
Questions regarding the AT&T form should be directed to Jackie Sherrod at
910-279-2430.
The completed AT&T form should be mailed or faxed to: Jackie Sherrod
AT&T Supplier Management
P.O. Box 25000
Room GC1 - 3E10
Greensboro, NC 27420-5000
910-279-2434 (Fax)
<PAGE> 1
EXHIBIT 10.11
STRATEGIC ALLIANCE AGREEMENT
BY AND BETWEEN
EMERALD-DELAWARE, INC.,
A DELAWARE CORPORATION
AND
AT&T SOLUTIONS INC.,
A DELAWARE CORPORATION
EFFECTIVE AS OF
MARCH 15, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. PREAMBLE............................................................................................ 1
2. THE STRATEGIC ALLIANCE.............................................................................. 2
2.1 PURPOSE OF STRATEGIC ALLIANCE.............................................................. 2
2.2 TERM OF THE STRATEGIC ALLIANCE............................................................. 2
2.3 PARTIES' DUTIES............................................................................ 2
(a) Joint Duties......................................................................... 2
(b) AT&T Solutions Specific Duties....................................................... 3
(c) Emerald Solutions' Specific Duties................................................... 3
2.4 PRINCIPAL PLACE OF STRATEGIC ALLIANCE...................................................... 3
2.5 INDEPENDENCE; INDEPENDENT ACTIVITIES; TRANSACTIONS WITH AFFILIATES......................... 3
(a) Parties Otherwise Independent........................................................ 3
(b) Independent Activities............................................................... 4
(c) Appointment of contact person........................................................ 4
3. WARRANT TO PURCHASE EMERALD SOLUTIONS' STOCK........................................................ 4
4. TERMINATION OF STRATEGIC ALLIANCE................................................................... 4
(a) TERMINATION EVENTS......................................................................... 4
(b) EFFECT ON RIGHTS OF PARTIES................................................................ 5
(C) EFFECT OF TERMINATION...................................................................... 5
5. COVENANTS........................................................................................... 6
6. LIMITATION OF LIABILITY............................................................................. 8
7. MISCELLANEOUS....................................................................................... 9
7.1 EACH PARTY TO PAY OWN COSTS................................................................ 9
7.2 NO THIRD-PARTY BENEFICIARIES............................................................... 9
7.3 ENTIRE AGREEMENT........................................................................... 9
7.4 SUCCESSION AND ASSIGNMENT.................................................................. 9
7.5 COUNTERPARTS............................................................................... 9
7.6 HEADINGS................................................................................... 9
7.7 NOTICES.................................................................................... 10
7.8 GOVERNING LAW.............................................................................. 10
7.9 AMENDMENTS AND WAIVERS..................................................................... 11
7.10 SEVERABILITY............................................................................... 11
7.11 CONSTRUCTION............................................................................... 11
7.12 INCORPORATION OF EXHIBIT................................................................... 11
7.13 DISPUTE RESOLUTION......................................................................... 11
</TABLE>
EXHIBITS:
Exhibit A - Form of Warrant
<PAGE> 3
STRATEGIC ALLIANCE AGREEMENT
THIS STRATEGIC ALLIANCE AGREEMENT ("Agreement") is made as of this 15th
day of March, 2000, by and between Emerald-Delaware, Inc., a Delaware
corporation ("Emerald Solutions"), and AT&T Solutions Inc., a Delaware
corporation ("AT&T Solutions"), based on the following facts:
RECITALS
A. Emerald Solutions is an Internet and information technology consulting
firm that provides an array of information technology services to its clients,
ranging from technology infrastructure planning to enterprise resource planning
package selection to Web application development.
B. AT&T Solutions has many lines of business, including networking
professional services.
C. To take full advantage of certain goodwill, efficiencies and expertise,
as well as certain market conditions that presently exist, the parties desire to
engage jointly in a strategic business relationship (the "Strategic Alliance")
to focus on leveraging their respective sales channels and functional expertise
in several areas, with a focus on e-business solutions.
D. Each party has expended substantial time and expense to develop the
necessary expertise in their respective businesses and a significant presence in
their respective business community and to develop a client and customer base
and goodwill. Further, each party maintains as confidential its methods of doing
business, and each party desires to maintain such confidentiality except to the
extent that disclosure of it to the other party is necessary for it to perform
its duties hereunder. The parties acknowledge and agree that, as a result of
their joint operation of the Strategic Alliance, and the operation by each of
their respective business, any breach of the restrictive covenants and other
terms and conditions hereof would be severely detrimental to the their separate
business, and that, without agreeing to the restrictive covenants contained in
this Agreement, neither party would enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants herein contained, the parties agree as follows:
1. PREAMBLE.
The foregoing recitals are hereby incorporated into this Agreement
by this reference.
1
<PAGE> 4
2. THE STRATEGIC ALLIANCE.
2.1 PURPOSE OF STRATEGIC ALLIANCE.
The parties acknowledge and agree that the purpose of the
Strategic Alliance is to leverage each party's respective sales channels and
functional expertise in the area of e-business solutions among others.
2.2 TERM OF THE STRATEGIC ALLIANCE.
The term of the Strategic Alliance shall commence on the date
hereof and shall continue until the termination of the Strategic Alliance as
provided in Section 4 below.
2.3 PARTIES' DUTIES.
(a) JOINT DUTIES.
Each party shall, in addition to the other agreements
and covenants each makes in this Agreement, perform the following duties for the
Strategic Alliance:
(i) provide a minimum of [*] new customers for
joint account planning by the parties;
(ii) appoint one (1) contact person to facilitate the
Strategic Alliance pursuant to Section (c) below;
(iii) wherever possible for each project undertaken
by the Strategic Alliance, determine that party who will assume the prime
contractor status based upon the appropriate account and strategic relationship,
and the existing branding within the individual joint account. Notwithstanding
the foregoing, AT&T Solutions will be the prime contractor for those customers
it provides unless, at AT&T Solutions' sole discretion, it determines otherwise,
and Emerald Solutions will be the prime contractor for those customers it
provides unless, at Emerald Solutions' sole discretion, it determines otherwise;
(iv) maintain reasonable staffing levels sufficient to
meet the requirements of the business contemplated by this Strategic Alliance in
a timely manner; and
(v) make no representations, guarantees or warranties on
behalf of the other party or any of its suppliers, or regarding the performance
or functional characteristics of the services beyond those stated in the other
party's agreements.
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
2
<PAGE> 5
(b) AT&T SOLUTIONS SPECIFIC DUTIES.
AT&T Solutions shall, in addition to the other
agreements and covenants each makes in this Agreement, make reasonable efforts
to bring to Emerald Solutions leads for potential business with partners and
prospective and current customers of AT&T Solutions. AT&T Solutions shall
further provide Emerald Solutions with networking professional services bid
opportunities on those requests for proposal ("RFP") that AT&T Solutions issues,
in support of AT&T Solutions' customers or prospective customers, that AT&T
Solutions reasonably believes Emerald Solutions to be qualified to undertake and
to have the resources to complete. Emerald Solutions will promptly respond to,
or decline interest in, RFPs issued by AT&T Solutions. If Emerald Solutions
declines interest in a particular AT&T Solutions RFP, then AT&T Solutions may
use any other solutions providers.
(c) EMERALD SOLUTIONS' SPECIFIC DUTIES.
Emerald Solutions shall, in addition to the other
agreements and covenants each makes in this Agreement, make reasonable efforts
to bring to AT&T Solutions leads for potential business with partners and
prospective and current customers of Emerald Solutions. Emerald Solutions shall
further provide AT&T Solutions with network management and
bandwidth/connectivity professional services bid opportunities on those RFPs
that Emerald Solutions issues, in support of Emerald Solutions' customers or
prospective customers, that Emerald Solutions reasonably believes AT&T Solutions
to be qualified to undertake and to have the resources to complete. AT&T
Solutions will promptly respond to, or decline interest in, RFPs issued by
Emerald Solutions. If AT&T Solutions declines interest in a particular Emerald
Solutions RFP, then Emerald Solutions may use any other solutions providers. In
addition, Emerald Solutions shall grant AT&T Solutions the first right of offer
for Emerald Solutions internal telecommunications needs.
2.4 PRINCIPAL PLACE OF STRATEGIC ALLIANCE.
The parties agree to conduct the Strategic Alliance from their
respective places of business unless and until they may otherwise agree.
2.5 INDEPENDENCE; INDEPENDENT ACTIVITIES; TRANSACTIONS WITH
AFFILIATES.
(a) PARTIES OTHERWISE INDEPENDENT.
Except for the purposes set forth in this Agreement,
the parties shall not otherwise be considered to have entered into a partnership
or joint venture, it being intended and understood that each party is an
independent contractor of the other party.
3
<PAGE> 6
(b) INDEPENDENT ACTIVITIES.
Each party, and any of their respective affiliates
may, notwithstanding this Agreement, engage in whatever activities it may
choose, without having or incurring any obligation to offer any interest in such
activities to the Strategic Alliance or the other party. Neither this Agreement
nor any activity undertaken pursuant hereto shall prevent the parties or any of
their respective affiliates from engaging in such activities, or require a party
or any of its affiliates to permit the Strategic Alliance or the other party to
participate in any such activities, and as a material part of the consideration
for the execution of this Agreement by each party, the parties and their
respective affiliates hereby waive, relinquish, and renounce any such right or
claim of participation.
(c) APPOINTMENT OF CONTACT PERSON.
Each party shall appoint one (1) person to act as a
contact person. The two (2) contact persons shall coordinate all work to be
performed by the Strategic Alliance. Each party may change its contact person by
not less than ten (10) business days advance written notice.
3. WARRANT TO PURCHASE EMERALD SOLUTIONS' STOCK.
Emerald Solutions, for and in additional consideration of the
covenants and agreements of AT&T Solutions under this Agreement, hereby grants
to AT&T Solutions warrants to purchase up to one million five hundred thousand
shares of Emerald Solutions' common stock, at the exercise price per share and
subject to the terms and provisions provided in the form of warrant agreement
(the "Warrant Agreement") attached hereto as Exhibit A.
4. TERMINATION OF STRATEGIC ALLIANCE.
(a) TERMINATIONS EVENTS.
This Agreement shall terminate immediately upon the occurrence
of any of the following events:
(i) after March 15, 2002, upon six (6) months prior written
notice by either party to the other of the notifying party's intent to terminate
this Agreement;
(ii) at the option of either party, upon the filing of a
petition in bankruptcy by or against the other party, whether voluntary or
involuntary, unless such petition is dismissed or discharged within sixty (60)
days from the date of such filing;
(iii) at the option of AT&T Solutions, in the event of a
material breach by Emerald Solutions of this Agreement or the Warrant, that has
not been cured by Emerald So-
4
<PAGE> 7
lutions within thirty (30) days after receipt of written notice from AT&T
Solutions setting forth the nature of the breach;
(iv) at the option of Emerald Solutions, in the event of a
material breach by AT&T Solutions of this Agreement which has not been cured by
AT&T Solutions within thirty (30) days after receipt of written notice from
Emerald Solutions setting forth the nature of the breach;
(v) at the option of AT&T Solutions, in the event of a sale of
twenty percent (20%) or more of the voting power of Emerald Solutions to a
material competitor of AT&T or AT&T Solutions;
(vi) AT THE OPTION OF AT&T SOLUTIONS, IN THE EVENT OF THE
APPOINTMENT OF AN INDIVIDUAL TO THE BOARD OF DIRECTORS OF EMERALD SOLUTIONS WHO
IS AN EMPLOYEE, OFFICER OR DIRECTOR OF A MATERIAL COMPETITOR OR AN AFFILIATE OF
A MATERIAL COMPETITOR OF AT&T OR AT&T SOLUTIONS.
For purposes of this Agreement, "Affiliate" of any person shall mean any person
that directly or indirectly controls, or is under common control with, or is
controlled by, such person. As used in this definition, "control" (including its
correlative meanings, "controlled by" and "under common control with") shall
mean the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a person (whether through ownership
of securities or partnership or other ownership interests, by contract or
otherwise).
(b) EFFECT ON RIGHTS OF PARTIES.
Termination of this Agreement by either party will not act as
a waiver of any breach of this Agreement and will not act as a release of either
party from any liability for breach of such party's obligations under this
Agreement. Except where otherwise specified, the rights and remedies granted to
a party under this Agreement are cumulative and in addition to, and not in lieu
of, any other rights or remedies which the party may possess at law or in
equity, including without limitation rights or remedies under applicable patent,
copyright, trade secrets, or proprietary rights laws, rules or regulations.
(c) EFFECT OF TERMINATION.
Within thirty (30) calendar days after any termination of this
Agreement, each party will either deliver to the other party or destroy all
copies of the "Confidential Information" (as defined in Section 5 below) and any
other materials provided by the other party hereunder in the delivering party's
possession or under its control, and will furnish to the other party an
affidavit signed by an officer of the delivering party certifying that, to the
best of its knowledge, such delivery or destruction has been fully effected. The
covenants contained in this
5
<PAGE> 8
Agreement that, by their terms, require or contemplate performance by the
parties after the termination of this Agreement will be enforceable
notwithstanding said termination.
5. COVENANTS.
During the term of this Agreement and for the two (2) year period
following the termination of this Agreement, neither party shall, directly or
indirectly, for the benefit of anyone other than the Strategic Alliance:
(a) directly solicit the employment of any management employee of
the other party which the party met during the duration of the Alliance. With
respect to nonmanagement employees, the parties shall undertake reasonable
efforts to refrain from soliciting the employment of non management employees of
the other party, and, to accomplish this objective, the parties shall cooperate
with each other's efforts to comply with this provision and, as part of this
effort, Emerald Solutions shall periodically provide AT&T Solutions with a list
of its employees. However, the foregoing prohibition shall not apply to
solicitations via, or employment resulting from, general advertisements for
employment appearing in newspapers, trade journals or other broadly circulated
media or search firms not directed to the management employees; or
(b) improperly solicit, induce or influence any supplier, lender,
lessor or any other person that has a business relationship with the other party
to discontinue or reduce the extent of such relationship with the other party;
or
(c) disclose to anyone, or use or otherwise exploit for its own
benefit or for the benefit of anyone other than the other party, any
Confidential Information; provided, however, neither party shall have any
obligation hereunder to keep confidential any Confidential Information if and to
the extent disclosure of any thereof is required by law, or determined in good
faith by the party to be necessary or appropriate to comply with any legal or
regulatory order, regulation or requirement; further, provided, however, that in
the event disclosure is required by law, the party compelled to disclose the
Confidential Information shall provide the other party with prompt notice of
such requirement, prior to making any disclosure, so that party may seek an
appropriate protective or restrictive order. A party may disclose Confidential
Information to its subcontractors, representatives or agents that have a need to
know the Confidential Information in order to further the purposes of the
Strategic Alliance; provided, however, that any such disclosure, use or
exploitation of Confidential Information by such subcontractor, representative
or agent in violation of this Agreement shall be deemed a breach of this
Agreement by the party. Each party agrees to deliver to the other party upon its
request all Confidential Information that it may possess or control.
For purposes of this Agreement, "Confidential Information" means any
trade secret or proprietary or confidential information, including, without
limitation, records, files, memoranda, reports, price lists, software, customer
lists, drawings, sketches, documents, equipment, and the like relating to a
party's business. Any information known generally to the public
6
<PAGE> 9
or any information of a type not otherwise generally considered confidential by
persons engaged in the same business will not be treated as confidential.
(d) Each party shall cooperate and consult with each other with
respect to press releases. No party may issue a press release without the
consent of the other party, which consent shall not be unreasonably withheld.
AT&T Solutions agrees that Emerald Solutions may include an accurate description
of the Strategic Alliance, including a description of the terms of this
Agreement and of the Warrant Agreement, in any registration statement filed with
the Securities and Exchange Commission in connection with any public offering of
common stock of Emerald Solutions.
(e) [*]
i. [*]
ii. [*]
(x) [*]
(y) [*]
iii. [*]
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
7
<PAGE> 10
iv. [*]
v. [*]
vi. [*]
vii. [*]
viii. [*]
6. LIMITATION OF LIABILITY.
To the extent allowed by applicable law, under no circumstances will either
party be liable to the other party or to any other person or entity under any
legal theory for any indirect, incidental, special or consequential damages or
substitute goods, lost profits or anticipated revenues, or on account of
expenditures, investments, leases or commitments in connection with the business
or goodwill of the other party or any other party arising in connection with
this agreement or termination hereof, even if
* We have requested confidential treatment by the Commission of those
portions of the exhibit omitted and marked with an asterisk.
8
<PAGE> 11
advised of the possibility of such damages and notwithstanding any failure of
essential purpose of any limited remedy.
The foregoing provisions of this Section 6 will not affect either party's
liability, if any, with respect to contribution or indemnity for third party
claims for personal injury, death, or for breach of its confidentiality
obligations hereunder.
7. MISCELLANEOUS.
7.1 EACH PARTY TO PAY OWN COSTS.
Each party shall pay all of its own costs and expenses to
perform its obligations under this Agreement.
7.2 NO THIRD-PARTY BENEFICIARIES.
This Agreement shall not confer any rights or remedies upon
any person other than the parties and their respective successors and permitted
assigns.
7.3 ENTIRE AGREEMENT.
This Agreement (including the documents referred to herein)
constitutes the entire agreement among the parties and supersedes any prior
understandings, agreements, or representations by or among the parties, written
or oral, to the extent they related in any way to the subject matter hereof.
7.4 SUCCESSION AND ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit
of the parties named herein and their respective successors and permitted
assigns. No party may assign either this Agreement or any of its rights,
interests, or obligations hereunder without the prior written approval of the
other party.
7.5 COUNTERPARTS.
This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together will
constitute one and the same instrument.
7.6 HEADINGS.
The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9
<PAGE> 12
7.7 NOTICES.
All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to AT&T Solutions: Copy to:
AT&T Solutions Inc. Randy Johnston
15 Vreeland Road Managing Partner
Florham Park, New Jersey 07932 Interactive Networking Applications
Attention: General Attorney AT&T Solutions Inc.
15 Vreeland Road
Florham Park, New Jersey 07932
If to Emerald Solutions: Copy to:
Emerald-Delaware, Inc. William A. Wurch, Esquire
500 - 108th Avenue NE Morrison & Foerster LLP
Suite 1800 19900 MacArthur Boulevard
Bellevue, Washington 98004 Suite 1200
Attention: David Stewart Irvine, California 92612
General Counsel
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other parties
notice in the manner herein set forth.
7.8 GOVERNING LAW.
This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of New York without giving effect
to any choice or conflict of law provision or rule that would cause the
application of the laws of any jurisdiction other than the State of New York.
10
<PAGE> 13
7.9 AMENDMENTS AND WAIVERS.
No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by the parties. No waiver by any
party of any default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
7.10 SEVERABILITY.
Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or
in any other jurisdiction.
7.11 CONSTRUCTION.
The parties have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any of the provisions of
this Agreement. Any reference to any federal, state, local, or foreign statute
or law shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word "including" shall
mean including without limitation. The parties intend that each representation,
warranty, and covenant contained herein shall have independent significance. If
any party has breached any representation, warranty, or covenant contained
herein in any respect, the fact that there exists another representation,
warranty, or covenant relating to the same subject matter (regardless of the
relative levels of specificity) which the party has not breached shall not
detract from or mitigate the fact that the party is in breach of the first
representation, warranty, or covenant.
7.12 INCORPORATION OF EXHIBIT.
The Exhibit identified in this Agreement is incorporated
herein by reference and made a part hereof.
7.13 DISPUTE RESOLUTION.
(a) If a dispute arises between the parties in connection with
this Agreement or any document or instrument delivered in connection herewith,
including without limitation an alleged breach of any representation, warranty
or covenant, or a disagreement regarding the interpretation of any provision
(the "Dispute"), the parties agree to use the following
11
<PAGE> 14
procedure in good faith prior to any party pursuing other available judicial or
non-judicial remedies: The parties shall meet in New York City within ten (10)
business days after either party gives written notice of the Dispute to each
other party (the "Dispute Notice") attended by a representative of each party
having decision-making authority regarding the Dispute to attempt in good faith
to negotiate a resolution of the Dispute. If, within ten (10) business days
after the Dispute Notice, the parties have not succeeded in negotiating a
written resolution of the Dispute, either party may commence binding arbitration
as provided in subsection (b), below.
(b) If a dispute arises out of or relates to this Agreement or
its breach and the dispute cannot be settled through negotiation within ten (10)
business days, either party may submit the dispute to binding arbitration.
Unless otherwise agreed by the parties, such arbitration shall be conducted by a
mutually acceptable neutral panel of three individuals designated by the parties
(the "Panel"), or failing agreement, by the CPR Institute for Dispute Resolution
("CPR"). The arbitration will be conducted in accordance with CPR's arbitration
rules, with one (1) of the arbitrators chosen by each of the parties, and the
third arbitrator chosen by the other two arbitrators. The arbitration will be
held at a neutral site in New York City selected by the Panel that is reasonably
convenient to both parties. The Panel will determine issues of arbitrability,
including the applicability of any statute of limitation, but may not limit,
expand or otherwise modify the terms of the Agreement. None of the arbitrators
shall have the power to order pre-hearing discovery of documents or the taking
of depositions, but may compel the attendance of witnesses and production of
documents at the hearing, to the extent provided by the United States
Arbitration Act. The Panel's decision and award will be in writing, setting
forth the legal and factual basis therefor (except with respect to the validity,
infringement or misappropriation of any patents or other proprietary rights of
any party, with respect to which such award will be without findings or any
statement of legal or factual basis.) An arbitration decision and award will not
be subject to review because of errors of law. Each party will bear its own
expenses in connection with the arbitration, but those related to the site and
compensation of the Arbitrator will be borne equally. The parties, other
participants and the arbitrators will hold the existence, content and result of
the arbitration in confidence, except to the extent necessary to enforce a final
settlement agreement or to obtain and enforce a judgment on an arbitration
award. This Section will be governed by and enforced in accordance with the
United States Arbitration Act.
****
12
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
AT&T SOLUTIONS INC.
/s/ MICHEAL D. WAKS
--------------------------------------
By: Michael D. Waks
Title: Director, Strategy & Alliances
EMERALD - DELAWARE, INC.
/s/ JAMES SERAFIN
--------------------------------------
By: James Serafin
Title: Vice President
13
<PAGE> 16
EXHIBIT A
FORM OF WARRANT
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors
Emerald -- Delaware, Inc.:
The audits referred to in our report dated February 15, 2000 except for
note 14, which is as of April 3, 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.
/s/ KPMG LLP
Seattle, Washington
April 6, 2000
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Z/COM Incorporated:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Portland, Oregon
April 6, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-25-1999 MAR-25-2000
<PERIOD-START> DEC-27-1999 DEC-26-1999
<PERIOD-END> DEC-25-1999 MAR-25-2000
<CASH> 1,708 3,139
<SECURITIES> 0 0
<RECEIVABLES> 8,259 9,703
<ALLOWANCES> 250 288
<INVENTORY> 0 0
<CURRENT-ASSETS> 10,110 13,092
<PP&E> 5,486 7,798
<DEPRECIATION> 1,033 1,386
<TOTAL-ASSETS> 14,885 27,247
<CURRENT-LIABILITIES> 10,892 14,279
<BONDS> 0 0
7,207 12,484
0 0
<COMMON> 20 21
<OTHER-SE> (3,477) (688)
<TOTAL-LIABILITY-AND-EQUITY> 14,885 27,247
<SALES> 34,711 14,830
<TOTAL-REVENUES> 34,711 14,830
<CGS> 19,281 7,959
<TOTAL-COSTS> 19,281 7,959
<OTHER-EXPENSES> 20,870 10,142
<LOSS-PROVISION> 229 38
<INTEREST-EXPENSE> 124 132
<INCOME-PRETAX> (5,460) (3,383)
<INCOME-TAX> 34 0
<INCOME-CONTINUING> (5,425) (3,383)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,117) (5,499)
<EPS-BASIC> (.31) (.27)
<EPS-DILUTED> (.31) (.27)
</TABLE>
