-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CVzV75lXIkph0BB0aIQX8pwI5xo4T4W2AQ2PGvNnuAogW0EDFTSKaD+FJm7Sc7p4 1IfHwvyfmiLU1jE6vgos6g== 0001012870-99-003460.txt : 19991018 0001012870-99-003460.hdr.sgml : 19991018 ACCESSION NUMBER: 0001012870-99-003460 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19991001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORGANICNET INC CENTRAL INDEX KEY: 0001092693 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-88277 FILM NUMBER: 99721735 BUSINESS ADDRESS: STREET 1: 330 TOWNSEND STREET STREET 2: SUITE 206 CITY: SAN FRANCISCO STATE: CA ZIP: 94107 MAIL ADDRESS: STREET 1: 330 TOWNSEND STREET STREET 2: SUITE 206 CITY: SAN FRANCISCO STATE: CA ZIP: 94107 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on October 1, 1999 Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------- FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- ORGANICNET, INC. (Exact name of registrant as specified in its charter) --------------- Delaware 7372 68-0347739 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Code Number) Identification No.) incorporation --------------- or organization) 330 Townsend Street, Suite 206 San Francisco, CA 94107-1630 (415) 495-4741 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Jack D. Anderson Chief Executive Officer OrganicNet, Inc. 330 Townsend Street, Suite 206 San Francisco, CA 94107-1630 (415) 495-4741 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Patrick A. Pohlen, Esq. Rodd M. Schreiber, Esq. Cooley Godward LLP Skadden, Arps, Slate, Meagher & Flom (Illinois) Five Palo Alto Square 333 West Wacker Drive 3000 El Camino Real Chicago, IL 60606 Palo Alto, CA 94306-2155 --------------- Approximate date of commencement of the proposed sale to the public: as soon as practicable after the effective date of the 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, please check the following box. [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Maximum Aggregate Amount of Title of Each Class of Offering Price Registration Securities to be Registered (1) Fee - -------------------------------------------------------------------------------- Common Stock, $.001 par value per share............ $51,750,000 $14,386.50 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the Registration Fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. + +OrganicNet 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 October 1, 1999 Preliminary Prospectus Shares OrganicNet, Inc. [COMPANY LOGO] Common Stock ------------ This is OrganicNet, Inc.'s initial public offering of common stock. We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. We have applied to have our common stock approved for listing on the Nasdaq National Market under the symbol "OGNT." Investing in our common stock involves risks which are described in the "Risk Factors" section beginning on page 5 of this prospectus. ------------
Per Share Total --------- ----- Public offering price.................................... $ $ Underwriting discounts................................... $ $ Proceeds, before expenses, to OrganicNet................. $ $
The underwriter may also purchase up to an additional shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. 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. ------------ Punk, Ziegel & Company ------------ The date of this prospectus is , 1999 Description of Artwork: 1. Inside cover. Five overlapping circles. The circles are labelled Clinic Management, Practice Management, Credentialing, Clinical Drug Trials and Disease Management. The words The CoreModel appear in the center. 2. Gatefold. There is a box with three screens of the Organic Browser on the left side of the gatefold. On the right side of the gatefold is a diagram of the interaction of the Internet, our customers and our solutions. TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 5 Forward-Looking Statements............................................... 16 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 17 Dilution................................................................. 18 Capitalization........................................................... 19 Selected Consolidated Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 22 Business................................................................. 32 Management............................................................... 46 Certain Relationships and Related Transactions........................... 57 Principal Stockholders................................................... 61 Description of Capital Stock............................................. 63 Shares Eligible for Future Sale.......................................... 66 Underwriting............................................................. 68 Legal Matters............................................................ 70 Experts.................................................................. 70 Available Information.................................................... 70 Index to Financial Statements............................................ F-1
---------------- The terms "OrganicNet", "company", "we", "our" and "us" refer to OrganicNet, Inc. and its subsidiaries unless the context suggests otherwise. The term "you" refers to a prospective investor. OrganicNet, the OrganicNet logo, Organic Architecture, Object Products, CoreModel and Organic Browser are trademarks of OrganicNet, Inc. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. ---------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that investors should consider before investing in the common stock of OrganicNet. Investors should read the entire prospectus carefully. OrganicNet We are an application services provider (ASP) that develops software solutions for healthcare clinics and physician group practices using our proprietary technology platform. Our customers can access and use our solutions over the Internet or their local or wide area networks. We are developing integrated solutions designed to manage all elements of the business and clinical processes of our customers within a single system. We currently have developed and implemented solutions in three areas: disease management, clinical drug trials recruitment and workers' compensation. We charge our customers a monthly subscription fee for our solutions. Our software solutions are built using our object-oriented Organic Architecture, which we believe is a significant advancement over traditional technologies. Central to our Organic Architecture is our CoreModel, which is comprised of objects that represent a universal set of clinical and business processes. This proprietary technology provides a platform for rapid development and deployment of codeless software solutions to meet our customers' specific needs. To develop our CoreModel and solutions, we selectively acquired companies with healthcare domain expertise and enabling technologies. These acquisitions also provided near-term products, customers and revenues. The growth of the managed care, risk sharing and other alternative payment and reimbursement mechanisms, increased government regulation and the rise of healthcare delivery networks have increased the need for information technology products and services. In order to reduce unnecessary spending and manage costs while delivering quality care, healthcare providers are increasingly demanding software solutions that enable them to effectively extract and analyze data located throughout their enterprises, measure clinical results, evaluate operational efficiency and support process improvement. The Internet has emerged as an accessible, low-cost and flexible means of accessing and distributing information, making it particularly well-suited for deploying software solutions for the healthcare industry. We believe that the ASP model addresses many of the shortcomings of traditional healthcare information technology solutions. Customers rent, rather than own the applications they require, reducing the capital commitment necessary for information technology and reducing the need for a dedicated staff of information technology personnel. Our objective is to become the leading ASP serving clinics and group practices by capitalizing on our early market entrance, extending our technology and implementing a subscription-based business model that generates recurring revenue. We intend to achieve this objective by: . leveraging our proprietary technology platform by rapidly developing additional solutions, functions and features; . achieving rapid market penetration by focusing on customers within our target market segments and cross-selling our ASP software solutions to our existing installed base of customers; and . enhancing our capabilities by forming strategic alliances that provide us with specific expertise and access to new customer channels. 1 Our ASP software solutions provide the following advantages: Comprehensive. Our solutions are designed to enable our customers to rely on us as the single source for their software solutions, whether these solutions are deployed over the Internet or their local or wide area network. Cost-effective. Our solutions eliminate the need for our customers to incur significant capital expenditures for hardware, operating systems and application software and significantly reduce the costs for technical support and training. Adaptable. Our solutions are built with data instead of code, which makes them easier and less expensive to tailor to accommodate the practice variation and workflow of each user. Integrated. Information and applications are stored on a single remote database and can be accessed simultaneously by multiple users in geographically dispersed locations. As part of our strategy, we have entered into relationships with strategic partners for distribution, consulting and implementation services, Internet infrastructure and application hosting. Our initial ASP software solution, which manages patient-reported health and clinical data, is being distributed as part of our strategic relationship with Pfizer Health Solutions Inc, with whom we have had a relationship since 1997. We also have entered into an alliance with Superior Consultant Holdings Corporation. Under this agreement, Superior will introduce and outline the advantages of our ASP software solutions based on client interests, as well as provide systems integration, process improvement, consulting and implementation services to healthcare organizations. Superior is a leading provider of business solutions, including consulting, systems integration, e-Health and outsourcing to the healthcare industry. Superior serves clients nationally and internationally and has over 1,500 professionals located throughout the United States. We also have entered into agreements with Conxion Corporation, which provides us with application hosting, Internet infrastructure and data centers. Conxion invested $550,000 in our preferred stock in April 1999. We were incorporated in California in January 1995 under the name Object Products, Inc. and reincorporated in Delaware in April 1996. The company changed its name to OrganicNet, Inc. in May 1999. Our principal executive offices are located at 330 Townsend Street, Suite 206, San Francisco, California, 94107-1630. Our telephone number is (415) 495-4741. Our website is www.organic-net.com. Information contained on our website is not a part of this prospectus. 2 The Offering Shares offered by OrganicNet.................. shares Total shares outstanding after this offering.. shares Use of proceeds............................... To repay short-term debt, including amounts owed to or guaranteed by certain of our directors, officers and stockholders, to continue development of our solutions and architecture, expand our sales and marketing efforts, expand our administrative infrastructure, and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol........ OGNT
The common stock to be outstanding after this offering is based on the shares outstanding as of August 31, 1999 and excludes: . 1,619,168 shares of common stock issuable as of August 31, 1999 upon the exercise of outstanding stock options issued at a weighted average exercise price of $1.16 per share under our stock option plans; . 821,263 shares of common stock reserved for issuance under our stock option plans as of August 31, 1999; . 16,667 shares of our preferred stock issued in connection with the acquisition of PSI-Med Corporation after August 31, 1999, which will convert into 333,340 shares of our common stock upon the closing of this offering; and . 200,000 shares of common stock issuable upon the exercise of outstanding options issued at an exercise price of $6.00 per share to Superior Consultant Holdings Corporation on September 17, 1999 in connection with the formation of our strategic alliance with Superior. Except as otherwise indicated, information in this prospectus assumes the following: . the conversion of all outstanding shares of preferred stock into common stock upon consummation of this offering; . the filing of our amended and restated certificate of incorporation, the provisions of which are summarized in "Description of Capital Stock;" and . no exercise of the underwriter's over-allotment option. Risk Factors You should consider the risk factors before investing in OrganicNet's common stock and the impact from various events which could adversely affect our business. 3 Summary Financial Data The following table summarizes our consolidated statements of operations for the years ended December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999, as well as our unaudited pro forma combined statements of operations for the year ended December 31, 1998 and the six months ended June 30, 1999 that gives effect to our acquisition of PSI-Med Corporation as if the acquisition occurred at the beginning of the periods. The unaudited pro forma information is not necessarily indicative of the results that would have occurred had the acquisition taken place as of the beginning of the periods presented, nor is it necessarily indicative of results that may occur in the future. The table also includes our consolidated balance sheet as of June 30, 1999 on an actual and pro forma as adjusted basis. See the consolidated financial statements and related notes included elsewhere in this prospectus.
Years Ended December 31, Six Months Ended June 30, -------------------------------------- -------------------------------- Pro Forma Pro Forma 1996 1997 1998 1998 1998 1999 1999 ------- ------- ------- ----------- ----------- ------- ----------- (unaudited) (unaudited) (unaudited) (in thousands, except per share information) Consolidated Statement of Operations: Revenue: License................ $ -- $ 424 $ 571 $ 1,087 $ 113 $ 370 $ 654 Product development.... -- 1,238 565 565 530 227 227 Service................ 371 1,310 3,488 5,182 2,053 2,112 2,938 ------- ------- ------- ------- ------- ------- ------- Total revenue.......... 371 2,972 4,624 6,834 2,696 2,709 3,819 ------- ------- ------- ------- ------- ------- ------- Cost of revenue: License................ -- 475 756 756 387 336 336 Product development.... -- 320 209 209 128 63 63 Service................ 238 892 2,314 3,850 1,249 1,230 1,928 ------- ------- ------- ------- ------- ------- ------- Total cost of revenue.. 238 1,687 3,279 4,815 1,764 1,629 2,327 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 133 1,285 1,345 2,019 932 1,080 1,492 ------- ------- ------- ------- ------- ------- ------- Operating expense: Sales and marketing.... 24 1,395 1,644 1,812 834 672 734 Research and development........... 724 1,345 1,833 2,070 783 1,204 1,321 General and administrative........ 1,690 3,332 3,768 4,597 1,663 1,762 2,001 ------- ------- ------- ------- ------- ------- ------- Total operating expense............... 2,438 6,072 7,245 8,479 3,280 3,638 4,056 ------- ------- ------- ------- ------- ------- ------- Operating loss.......... (2,305) (4,787) (5,900) (6,460) (2,348) (2,558) (2,564) Interest expense........ (2) (20) (93) (93) (43) (76) (76) Other income (expense).. -- 14 (9) (95) (6) (5) (56) ------- ------- ------- ------- ------- ------- ------- Loss before income taxes.................. (2,307) (4,793) (6,002) (6,648) (2,397) (2,639) (2,696) Provision for income taxes.................. 4 6 4 5 2 4 5 ------- ------- ------- ------- ------- ------- ------- Net loss................ $(2,311) $(4,799) $(6,006) $(6,653) $(2,399) $(2,643) $(2,701) ======= ======= ======= ======= ======= ======= ======= Net loss per share: basic and diluted...... $ (0.45) $ (0.88) $ (1.10) $ (1.22) $ (0.44) $ (0.48) $ (0.49) ======= ======= ======= ======= ======= ======= ======= Weighted average shares outstanding: basic and diluted................ 5,189 5,426 5,448 5,448 5,432 5,485 5,485 ======= ======= ======= ======= ======= ======= =======
As of June 30, 1999 -------------------- Pro Forma Actual As Adjusted ------- ----------- (unaudited) (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents.................................. $ 1,680 $ Working capital (deficit).................................. (3,704) Total assets............................................... 3,445 Total stockholders' equity (deficit)....................... (2,733)
The preceding consolidated balance sheet data is shown on a pro forma as adjusted basis to give effect to: . the acquisition of PSI-Med Corporation as if the acquisition occurred on June 30, 1999; . the conversion of all outstanding shares of preferred stock into shares of common stock upon consummation of this offering, including shares of preferred stock issued in connection with our acquisition of PSI-Med; and . the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses and application of the net proceeds therefrom. 4 RISK FACTORS You should carefully consider the following risk factors, in addition to the other information set forth in this prospectus, before purchasing shares of common stock of OrganicNet. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock. This investment involves a high degree of risk. Risks Related To Our Business Our business is difficult to evaluate because we have a limited operating history. We were incorporated in January 1995 and have a limited operating history, which makes an evaluation of our business and prospects difficult. Since our inception, we have been developing our object-oriented technology and marketing the legacy software products developed by the companies we acquired. In February 1999, we delivered our first ASP software solution. As a result, we only have a limited number of ASP software solutions currently in use. Revenue to date from our ASP software solutions has not been material. You must consider our business and prospects in light of the risks, uncertainties and difficulties frequently encountered by companies in their early stages of development, particularly those in new and rapidly evolving markets such as ours, which use new and unproven business models. We cannot assure you that our business strategy will be successful or that we will be able to complete the development of and sell our ASP software solutions. Our historical revenue was derived primarily from products and services that we do not expect to be the focus of our business in the future, which makes it difficult to evaluate our current and future financial performance. We currently derive substantially all of our revenue from the sale of our legacy software products and services. These software products and related services are substantially different from the ASP software solutions that will be our focus. We intend to phase out sales of legacy products and related services and expect the associated revenue to decline substantially. As a result, our historical financial information does not reflect the results of the current and future focus of our business and cannot be used to predict our future revenue or results of operations. We expect to continue to incur operating losses and net cash outflow and may never achieve profitability, which may cause our stock price to decline. We have experienced net losses in each quarterly and annual period since inception. We recorded net operating losses of approximately $4.8 million for the year ended December 31, 1997, approximately $5.9 million for 1998 and approximately $2.6 million as of June 30, 1999. As of June 30, 1999, we had an accumulated deficit of approximately $16.0 million. We intend to increase our operating expenses substantially, particularly expenses related to development of our solutions and architecture, expansion of our sales and marketing efforts, and expansion of our administrative infrastructure. Therefore, we expect to incur significant operating losses and to record significant net cash outflow for the foreseeable future. We cannot assure you that we will achieve significant revenues from our solutions or achieve, sustain or improve profitability on a quarterly or annual basis in the future. Our quarterly operating results are expected to fluctuate and could cause our stock price to decline. Our quarterly operating results have varied in the past and we expect them to continue to fluctuate in future periods. These fluctuations depend on a number of factors described below and elsewhere in this "Risk Factors" section of the prospectus, many of which are outside our control. In particular, the sale and implementation of our software solutions are subject to delay due to our potential customers' internal procedures for approving expenditures and deploying new technologies within their clinics or group practices. 5 We provide our solutions to customers on a monthly subscription basis. We cannot predict subscription fees accurately because we have limited experience selling our solutions. In addition, our customers may decide to stop using our solutions at any time with very little notice. We may spend substantial time and resources developing or tailoring solutions for channel partners or customers prior to the time that we have entered into subscription agreements with them. If we do not enter into agreements with these channel partners and customers or if our customers do not subscribe for these solutions for a sufficient period of time, we will not be able to achieve revenue to recoup our investment. For these and other reasons, our stock price could decline. Our business model is unproven and may not effectively address our market. Providing software solutions over the Internet to the healthcare industry is a business that has only recently begun to develop. It is difficult to value our business and evaluate our prospects because our business model and our revenue and income potential are unproven. Our business model depends on our ability to generate usage by a large number of clinics and group practices. Growth in demand for and acceptance of business software applications, including our ASP offerings, by clinics and group practices is highly uncertain. This uncertainty is due in part to the possibility that customers using existing systems may refuse to adopt new systems when they have made extensive investment in hardware, software, and training for existing systems, or if they perceive that our ASP solutions will not adequately or cost- effectively address their requirements. In order to successfully sell our software solutions, we may need to convince potential customers that the features and functionality of our solutions justify their cost, as well as the time and administrative expense required to switch to our solutions. Achieving market acceptance for our software solutions will require substantial marketing efforts and expenditure of significant funds to increase awareness and demand by our target customers. We cannot assure you that we will be able to succeed in positioning our ASP offerings as appropriate solutions to address the clinical and business needs of potential users, or that our ASP model will be economically viable or acceptable to clinics and group practices. If our strategy does not prove successful or if the market for our solutions does not grow or grows more slowly than we currently anticipate, achieving profitability could take longer than expected or we may never achieve profitability, either of which could harm our business. If we cannot develop additional software solutions, we may be unable to achieve or sustain profitability. We are unlikely to achieve or sustain profitability unless we offer and successfully market a broad range of software solutions. Our business strategy depends on developing solutions to manage the entire clinical and business process for clinics and group practices. We have only completed development of solutions for a limited number of applications and have not commenced development of the full range of applications required to provide such a solution. We cannot assure you that we will be able to develop the applications we need to keep our ASP software solutions competitive and to meet our business plan objectives. If we cannot develop these additional applications, our sales may suffer and achieving profitability could take longer than expected or we may never achieve profitability, either of which could cause our stock price to decline. We depend on third parties to provide our Internet infrastructure and application hosting. We do not intend to develop or maintain Internet infrastructure or application hosting capabilities to support delivery of our software solutions over the Internet. Therefore, we are dependent on obtaining those capabilities from third parties. We currently obtain Internet infrastructure and application hosting services from Conxion Corporation and include them as part of our ASP software solutions. The ability to deliver our software solutions over the Internet is central to our business strategy and depends on the efficient and uninterrupted operation of the computer and Internet network systems at Conxion. Conxion's operations are vulnerable to damage or interruption from fire, flood, tornado, hurricane, earthquake, power loss, telecommunications or Internet failure, viruses, physical and electronic break-ins, or 6 other similar events and they have recently suffered a service disruption at one of their data centers related to a system upgrade. The ability of Conxion or any other third party we might use to prevent system failures or manage the effects of system failures which occur in computer and Internet network systems is limited. If Conxion or another third party suffers a system failure, it would prevent us from maintaining our service standards. The occurrence of such a failure could harm our reputation, business and prospects. If Conxion fails to perform its obligations under this agreement or if this agreement is terminated or not renewed and we are unable to obtain comparable services on favorable financial terms, or at all, our business would be harmed. Our systems may be vulnerable to security breaches and viruses. Our success depends on the confidence of our customers in our ability to securely transmit confidential information over the Internet. Any failure to provide secure online communication services could harm our business and reputation. Our systems and those of our hosting services provider rely on encryption, authentication and other security technology licensed from third parties to achieve secure transmission of confidential information. Neither we nor any third party may be able to stop unauthorized attempts to gain access to or disrupt the transmission of communications by our customers. Anyone who is able to circumvent our security measures could misappropriate confidential user information or interrupt our, or our customers', operations. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments could result in a compromise or breach of the security measures taken to protect our systems and the systems we use. In addition, our servers at Conxion's data centers may be vulnerable to viruses, physical or electronic break-ins, and similar disruptions. We depend on Conxion to prevent these disruptions and its failure to do so could limit use of our solutions and otherwise harm our business. Computer viruses, break-ins and other disruptions could lead to interruptions, delays or loss of data. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose us to litigation, damage our reputation or otherwise harm our business. Although we generally limit warranties and liabilities relating to security in our customer contracts, our customers may seek to hold us liable for any losses suffered as a result of unauthorized access to their information. We may not have adequate insurance to cover these losses. We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate the problems they cause and to defend any lawsuits or claims. Moreover, concerns over the security of transactions conducted on the Internet and commercial online services, which may be heightened by publicized compromises of security, may also deter future customers from using our solutions or cause current customers to terminate their solution subscriptions. In either case, this could harm our business and prospects. Our security measures may not be sufficient to prevent security breaches, and failure to prevent security breaches could harm our reputation, business and prospects. Errors in our Organic Architecture or software solutions may harm our reputation and cause us to lose customers. Our Organic Architecture and software solutions may contain undetected errors resulting in performance problems. Such errors are most frequently found during the period immediately following introduction of new software solutions or enhancements to existing solutions. Despite extensive product testing prior to introduction, our software has in the past contained errors that were discovered after commercial introduction. We cannot assure you that errors or performance problems will not be discovered in the future with respect to any of our products. Errors and mistakes in the processing of client data may result in loss of data, inaccurate information and delays. Such errors could cause us to lose clients and incur liability. Any errors in our Organic Architecture and software solutions could harm our reputation, business and prospects. We plan to expand rapidly and it may be difficult to manage our growth. We intend to rapidly grow our business. However, we cannot be sure that we will successfully manage our growth. In order to successfully manage our growth, we must: . expand and enhance our administrative infrastructure; 7 . improve our management, financial and information systems and controls; and . expand, train and manage our employees effectively. Continued growth could place a further strain on our management, operational and financial resources. There will also be additional demands on our sales, marketing and administrative resources as we increase our solutions offerings and expand our target markets and customers. We cannot assure you that our operating and financial control systems, administrative infrastructure, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth. If we cannot manage our growth effectively, our business may be harmed. We may undertake additional acquisitions which may pose risks to our business. Our strategy contemplates the possibility of completing additional acquisitions. There are risks and uncertainties associated with our completing additional acquisitions, including: . we might pay more than the acquired company is worth; . we might not fully understand the business we acquire; . we might be entering markets in which we have little or no direct prior experience; . our ongoing business may be disrupted and resources and management time may be diverted; . our accounting for acquisitions could require us to amortize substantial goodwill, which would adversely affect our reported results of operations; . we might issue equity or debt securities that are dilutive to our stockholders; and . we might incur debt or contingent liabilities in connection with acquisitions. In addition, once we have made an acquisition we will face additional risks and uncertainties, including: . it may be difficult to assimilate acquired operations and personnel; . we may not be able to retain the management and other key personnel of the acquired business; . we may not be able to maintain uniform standards, controls, procedures and policies; and . changing management may impair relationships with an acquired business' employees or customers. Any of these risks and uncertainties associated with completing additional acquisitions could harm our business. Others may seize the market opportunity we have identified because we may not effectively execute our strategy. If we fail to execute our strategy in a timely or effective manner, our competitors may be able to seize the marketing opportunities we have identified. Our strategy is complex and requires that we successfully and simultaneously complete many tasks, including: . developing and protecting our technology; . developing economically attractive solutions; . negotiating and maintaining effective channel partnerships; . selling and marketing our solutions; . attracting and retaining highly skilled employees; and . integrating acquired companies into our operations. 8 We cannot assure you that we will be able to successfully execute any or all elements of our strategy. If we are unable to do so, our business could be harmed and our stock price could decline. We may be unable to attract and retain qualified personnel and we depend on certain personnel. We believe that our success depends largely on our ability to attract and retain highly skilled technical, managerial and marketing personnel. Individuals with information technology skills are in short supply and competition for qualified personnel is particularly intense. We may not be able to hire the necessary personnel to implement our business strategy, or we may need to pay higher compensation for employees than we currently expect. We cannot assure you that we will succeed in attracting and retaining the personnel we need to continue to grow and to implement our business strategy. If we are unable to do so, our business could be harmed. We depend on the performance of our executive officers and other key employees. The loss of any member of our senior management or other key employees could negatively impact our ability to execute our strategy. We do not maintain "key person" life insurance policies on any of our employees. We are dependent upon a third party database management system. We use a database management system to store our data and software solutions, which we license from a third party. If we change our database management system or if the license of our current database management system is terminated, we would need to secure a license to use another database management system. If we were to use a different database management system, we would need to modify the interface with our application server to recognize that system, which could take several weeks. If modifying that interface took longer than expected or if there was insufficient time to obtain and implement the new system before we lost the use of our current system, we would be unable to provide uninterrupted service to our customers, and our business and reputation would be harmed. If we are unable to protect our intellectual property rights from third party challenges, it may significantly impair our competitive position. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We cannot assure you that the patent applications we have filed on aspects of our technology will be successful. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring use of our products is difficult, and we cannot assure you that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Intellectual property infringement claims against us could cost a significant amount of money to defend and could divert management's attention away from our business. As the number of software products in our target markets increases and as the functionality of these products further overlaps, software industry participants may become increasingly subject to infringement claims. Any infringement claims alleged against us, even if without merit, can be time consuming and expensive to defend. Any such claims may divert management's attention and resources, and could also cause service implementation delays. Settlement of any such claims could also require us to enter into costly royalty or licensing agreements. If such a claim of product infringement against us was successful and we were unable to license the infringing or similar technology, our business, financial condition and results of operations could be harmed and our stock price could decline. 9 Risks Related To Our Industry Our success depends on Internet acceptance. Our success depends, in part, on the adoption of Internet solutions by commercial users. Our business could suffer dramatically if Internet solutions are not accepted or are not perceived to be effective. The recent growth in Internet use has resulted in frequent periods of poor performance. Internet service providers and other organizations with links to the Internet have responded by upgrading routers and switches, telecommunications links and other components forming the Internet infrastructure. Any perceived degradation in the performance of the Internet as a whole could undermine the value of the solutions we provide over the Internet. Performance improvements in our solutions partly depend upon, and are ultimately limited by, the speed and reliability of networks. In order for the market for our solutions to emerge and grow, improvements must be made to the entire Internet infrastructure to ease overloading and congestion. Several telecommunications carriers are supporting regulation of the Internet by the Federal Communications Commission (FCC) in the same manner that the FCC regulates other telecommunications services. If the FCC regulates the Internet in the manner it regulates other telecommunications services and imposes fees, it could increase the cost of doing business on or through the Internet, slow the growth of the Internet and adversely affect the demand for our products and services or increase our cost of doing business. Technology solutions may change faster than we are able to update our technology. The market in which we compete is characterized by rapidly changing technology, evolving industry standards, emerging competition and the frequent introduction of new services, software and other products. Our success depends partly on our ability to: . develop new or enhance existing solutions, software and services that meet changing customer needs in a timely and cost-effective way; . respond effectively to technological changes and new product offerings of our competitors; and . maintain and continue to develop relationships with providers of Internet infrastructure and application hosting capabilities. We cannot assure you that we will be able to accomplish any or all of these goals. Many of our competitors may develop products or technologies that are better or more attractive than ours or that may render our technology or solutions obsolete. If we do not succeed in adapting our technology, our business could be harmed. Our business may be harmed if our software solutions are not compatible with other products and services. Our ability to compete successfully also depends on the continued compatibility of our software solutions with products, services and architectures offered by other software vendors, particularly for customers who have installed software applications. We cannot assure you that other products will be compatible with our software solutions. Although we currently plan to support emerging standards, we cannot anticipate what new industry standards will develop. In addition, we cannot assure you that we will be able to conform to these new standards quickly enough to stay competitive. If our software solutions are not compatible with other products and services, our business could be harmed and our stock price could decline. The markets we serve are highly competitive and many of our competitors have much greater resources. The business of providing application software and services to clinics and group practices is extremely competitive. In addition, the market for Internet- based application service providers is relatively new and 10 evolving, and we anticipate that competition will continue to intensify as the use of the Internet grows. Our competitive position in the healthcare software application market is difficult to evaluate due to the variety of current and potential competitors and the evolving nature of our market and the ASP model. Our primary competitors include legacy software vendors, application service providers, and healthcare e-commerce and portal companies. Each of these types of companies either competes or in the future can be expected to compete with us in delivering software solutions to the clinic and group practice markets, including the delivery of software applications over the Internet. Furthermore, major software companies and other entities, including those specializing in the healthcare industry that are not currently offering applications, products or services that compete with our solutions, may enter our markets. In addition, our existing and future strategic partners may compete with us from time to time by selling, consulting on or hosting other software that competes with our software solutions. Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we have. We cannot assure you that we will have the resources or expertise to compete successfully in the future. Our competitors may be able to: . develop and expand their service offerings more quickly; . develop products or services that are more attractive to customers; . adapt to new or emerging technologies and changing customer needs more effectively; . take advantage of acquisitions and other opportunities more readily; . devote greater resources to the marketing and sales of their products; and . adopt more aggressive pricing policies. Finally, there are few barriers to entry in our market. The principal competitive factors in our market include: . features and functionality; . fit with the user's practice, processes and needs; . cost; . ease of implementation and use; . level of service; . business and technical expertise; . integration of applications; . quality of customer service and support; . reliability; and . scalability. We cannot assure you that we will have the resources or expertise to compete successfully in the future based on these or any other criteria or that competitive pressures we face will not harm our business. Government regulation and legal uncertainties could add additional costs to doing business on the Internet and could limit our customers' use of the Internet. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. Laws and regulations may be adopted with respect to the Internet or other online services 11 covering issues such as user privacy, pricing, content, copyrights, distribution and characteristics, and quality of products and services. The adoption of any additional laws or regulations may impede the growth of the Internet, which could, in turn, decrease the demand for our applications and services and increase our cost of doing business, or otherwise harm our business. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could harm our business. The confidentiality of patient records and the circumstances under which records may be released for inclusion in our databases are subject to substantial regulation by state governments. These state laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the healthcare provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of this information to implement security measures. Such legislation might require us to make substantial expenditures to implement such measures. We cannot assure you that changes to state or federal laws will not materially restrict the ability of healthcare providers to submit information from patient records using our applications. Legislation currently being considered at the federal level could impact the manner in which we conduct our business. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) mandates the use of standard transactions, standard identifiers, security and other provisions by the year 2000. We are designing our solutions to enable compliance with the proposed regulations but cannot assure you that we will be able to comply with those proposed regulations in a timely manner or at all. Moreover, until the proposed regulations become final, they could change, which could require us to expend additional resources to comply with the revised standards and we may not be able to comply with the revised standards in a timely manner or at all. Based on our present business operations, we believe that the HIPAA requirements related to the maintenance and exchange of electronic health information may apply to legacy products sold by our wholly owned subsidiary, PSI-Med Corporation, but not to our other products, services or solutions. If any of our products, services or solutions are subject to those regulations, we may be required to incur additional expenses in order to comply with these requirements and we may not be able to comply with them in a timely manner or at all. In addition, the success of our compliance efforts may also be dependent on the success of healthcare participants in dealing with the standards. If we are unable to comply with regulations implementing HIPAA in a timely manner or at all, the sale of our solutions and business could be harmed. The United States Food and Drug Administration (FDA) is responsible for assuring the safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act. Computer applications and software are considered medical devices and are subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. We do not believe that any of our current applications or services are subject to FDA regulation as medical devices; however, we plan to expand our application and service offerings into areas that may be subject to FDA regulation. We have no experience in complying with FDA regulations. Our compliance with such FDA regulations could prove to be time consuming, burdensome and expensive, which could adversely affect our ability to introduce new applications or services in a timely manner. Changes in the regulatory and economic environment and consolidation in the healthcare industry could adversely affect our business. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. These factors affect the purchasing practices and operation of healthcare organizations. Changes in current healthcare financing and reimbursement systems could require us to make unplanned enhancements of 12 solutions or services, or result in delays or cancellations of orders or in the revocation of endorsement of our services by our channel partners and others. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our solutions and services. We do not know what effect any of these proposals would have on our business. Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense and the importance of establishing a relationship with each industry participant will become greater. These industry participants may try to use their market power to negotiate price reductions for our software solutions and services. If we were forced to reduce our prices, our operating results could suffer. Failure of computer systems and software products to be Year 2000 compliant could increase our costs, disrupt our services and reduce demand from our clients. Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. These date code fields will need to accept four-digit entries in order for 20th century dates to be distinguished from 21st century dates. As a result, before the end of this year, computer systems and software used by many companies may need to be upgraded to comply with these "Year 2000" requirements. We confront the Year 2000 problem in three contexts: Our Solutions. Because we sell computer-related solutions, our risk of lawsuits relating to Year 2000 issues is likely to be greater than that of companies in other industries. Because computer products and services may incorporate components from different providers, it may be difficult to determine which component may cause a Year 2000 problem. As a result, we may be subjected to Year 2000-related lawsuits whether or not our software solutions and services are Year 2000 compliant. There can be no assurance as to what the outcomes or impact of any such lawsuits may be. Our acquired subsidiaries have several contracts which make Year 2000 warranties. The potential liability arising from these warranties is not limited. Any Year 2000-related lawsuits or claims may divert management's attention and resources. If such lawsuits or claims are resolved against us, our business may be harmed. Our Suppliers. We rely on third party network infrastructure providers to gain access to the Internet. If such providers experience business interruptions as a result of their failure to achieve Year 2000 compliance, our ability to provide Internet connectivity could be impaired, which could harm our reputation and our business. We use and license software and hardware from third parties. If this software or hardware is not Year 2000 compliant, our business may suffer. We also rely on third parties for other products and services required to operate our business. If we cannot obtain products or services that are Year 2000 compliant, or if vendors and service suppliers cannot deliver their products or services because of Year 2000 compliance problems, our business may be harmed. Our Customers. Many of our customers and potential customers maintain their operations on computer hardware that may be impacted by Year 2000 complications. Many of our customers may not be Year 2000 compliant. Customer difficulties due to Year 2000 issues could interfere with healthcare transactions or the transmission of information, which might expose us to significant potential liability. If customer failures result in the failure of our systems, it could harm our reputation and our business. Furthermore, Year 2000 issues may affect the purchasing patterns of these customers or potential customers as companies expend significant resources to become Year 2000 compliant. The costs of becoming Year 2000 compliant for current or potential 13 customers may result in reduced funds being available to purchase and implement our solutions and services, which would harm our sales and our business. Risks Related To This Offering Our management will have broad discretion to allocate the net proceeds of this offering and the proceeds may not be used appropriately. Our management will retain broad discretion allocating the proceeds of this offering. We estimate the net proceeds from this offering to be approximately $41.1 million, after deducting estimated offering expenses. We plan to use these proceeds to repay short-term debt, including amounts owed to or guaranteed by certain of our directors, officers and stockholders, for development of our solutions and architecture, expansion of our sales and marketing efforts, and expansion of our administrative infrastructure. We have no specific allocations for any other net proceeds of this offering. Consequently, management will retain a significant amount of discretion over the application of these proceeds. Because of the number and variability of factors that will determine the use of these proceeds, how we spend the proceeds may vary substantially from our current intentions. We may need additional capital to fund our operations and finance our growth, and we may not be able to obtain it on terms acceptable to us or at all. We will require substantial additional capital to finance our future growth and solutions development activities. We expect that the net proceeds from this offering, together with our existing assets, anticipated debt and capital lease financing, and revenue from operations will be sufficient to fund our operations for at least the next 18 months. The timing and amount of our capital requirements will depend on many factors, including: . acceptance and demand for our solutions; . the costs of developing new solutions or enhancing existing solutions; . the costs associated with expanding our operations; and . the number and timing of acquisitions. If we issue additional stock to raise capital, your percentage ownership will be reduced. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business. Our existing principal stockholders, executive officers and directors will continue to control our company and the outcome of proposals put to a vote of stockholders after this offering. When this offering is completed, our executive officers, directors, existing 5% or greater stockholders and their affiliates will, in the aggregate, own shares representing approximately % of our outstanding voting capital stock. As a result, these persons, acting together, will be able to control all matters submitted to our stockholders for approval and to control our management and affairs. For example, these persons, acting together, will control the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. The market price of our common stock could be affected by the substantial number of shares that are eligible for future sale. After this offering is completed, shares of our common stock will be issued and outstanding, assuming no exercise of the underwriter's over- allotment option. There can be no assurance as to what effect, if any, future sales of shares or the availability of shares for future sale will have on the market price of the common stock. The market price of our common stock could drop due to sales of a large number of shares in 14 the market after this offering or the perception that sales of large numbers of shares could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. All of the shares of common stock sold in this offering will be freely tradable under the Securities Act of 1933, as amended, unless purchased by our "affiliates," as that term is defined in the Securities Act. Our officers, directors and stockholders have entered into lock-up agreements under which they have agreed not to, directly or indirectly, offer, sell, offer to sell, pledge, grant any option to purchase or otherwise sell or dispose of any shares of common stock or securities convertible into or exchange or exerciseable for shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of the underwriter. Upon expiration of this lock-up period and as set forth in the chart below, the shares owned by these persons prior to completion of this offering may be sold into the public market without a registration statement under the Securities Act in compliance with the volume limitations and other applicable restrictions of Rule 144 under the Securities Act. As these restrictions on resale end, the market price of our common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.
Date of availability for resale Number of shares into public market ---------------- ------------------------------- 180 days after the date of this prospectus due to a lock-up agreement our officers, directors and stockholders have with the underwriter. However, the underwriter can waive this restriction at any time and without notice. Between 180 and 365 days after the date of this prospectus due to the requirements of the federal securities laws.
After the date of this prospectus, we intend to file one or more registration statements under the Securities Act to register all shares of common stock issuable upon the exercise of outstanding stock options or reserved for issuance under our stock plans, of which 1,018,594 shares will be immediately exercisable upon the completion of this offering and an additional 15,933 shares will be exercisable within 60 days of August 31, 1999. Those registration statements are expected to become effective immediately upon filing, and subject to the vesting requirements and exercise of the related options as well as the terms of the lock-up agreements, shares covered by those registrations statements will be eligible for sale in the public markets, except for any shares held by our "affiliates." Our stock price could be volatile. The trading price of our common stock is likely to be volatile. The stock market in general, and the market for technology and Internet-related companies in particular, has experienced extreme volatility. This volatility has often been unrelated to the operating performance of particular companies. We cannot assure you that an active public market for our common stock will develop or continue after this offering. Investors may not be able to sell their common stock at or above our initial public offering price. Prices for the common stock will be determined in the marketplace and may be influenced by many factors, including variations in our financial results, changes in earnings estimates by industry research analysts, investors' perceptions of us and our financial prospects, and general economic, industry and market conditions. We believe that there are relatively few comparable companies that have publicly-traded equity securities. This may also affect the trading price of our common stock after this offering. In addition, the stock market has from time to time experienced extreme price and volume volatility, and this volatility may adversely affect the market price of our common stock. We have certain anti-takeover defenses that could delay or prevent a change of control and that could adversely affect the price of our common stock. Provisions of our amended and restated certificate of incorporation and bylaws and the provisions of Delaware law could delay, defer or prevent an acquisition or change of control of OrganicNet or otherwise 15 adversely affect the price of our common stock. For example, our board of directors is staggered in three classes, so that only one-third of the directors could be replaced at any annual meeting. Additionally, our bylaws limit the ability of stockholders to call a special meeting or act by written consent. Our certificate of incorporation also permits our board to issue shares of preferred stock without stockholder approval. In addition to delaying or preventing an acquisition, the issuance of a substantial number of preferred shares could adversely affect the price of the common stock. FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about OrganicNet, including, among other things: . general economic and business conditions, both nationally and in our markets; . our expectations and estimates concerning future financial performance, financing plans and the impact of competition; . anticipated trends in our business; . existing and future regulations affecting our business; and . other risk factors set forth under "Risk Factors" in this prospectus. In addition, in this prospectus, the words "believe", "may", "will", "estimate", "continue", "anticipate", "intend", "expect" and similar expressions, as they relate to OrganicNet, our business or our management, are intended to identify forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward- looking statements. 16 USE OF PROCEEDS Our net proceeds from the sale of the shares of common stock in this offering, assuming a public offering price of $ per share, are estimated to be $41.1 million ($47.3 million if the underwriter's over-allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses. Approximately $800,000 of the proceeds will be used to repay short-term debt, including amounts owed to or guaranteed by certain of our directors, officers and shareholders. See "Certain Relationships and Related Transactions." We intend to use the remaining net proceeds as follows: . to continue the development of our solutions and architecture; . to continue the expansion of our sales and marketing efforts; . to continue the expansion of our administrative infrastructure; and . for working capital and other general corporate purposes. In addition, the net proceeds may also be used to fund acquisitions or acquire complementary products, technologies or businesses; however, we currently have no commitments or agreements and are not involved in any negotiations to do so. Pending these uses, we may invest the net proceeds from this offering temporarily in short-term, investment-grade, interest bearing securities or guaranteed obligations of the United States government. DIVIDEND POLICY We have not declared or paid, and do not anticipate declaring or paying, any dividends on our common stock in the near future. We currently intend to retain future earnings, if any, to fund the expansion and growth of our business. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors considers relevant. 17 DILUTION Purchasers of our common stock in this offering will experience immediate and substantial dilution in the pro forma net tangible book value of their common stock from the initial public offering price. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding on a pro forma basis after giving effect to the conversion of all outstanding shares of our preferred stock upon the consummation of this offering and the acquisition of PSI-Med Corporation. The pro forma net tangible book value of our common stock on June 30, 1999 was $(4,263,220), or approximately $(0.33) per share. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. After giving effect to the sale of shares of common stock by us in this offering at an assumed initial public offering price of $ and after deducting the underwriting discounts and commissions and estimated offering expenses and the application of the estimated net proceeds therefrom, our pro forma net tangible book value would have been $ or approximately $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate and substantial dilution of $ per share to new investors. The following table illustrates this per share dilution. Assumed initial public offering price......................... $ Pro forma net tangible book value as of June 30, 1999....... $(0.33) Increase attributable to new investors...................... $ ------ Pro forma net tangible book value after this offering......... ---- Dilution in pro forma net tangible book value to new investors.................................................... $ ====
The following table sets forth, as of June 30, 1999, on the same pro forma basis, the number of shares of common stock purchased from us by existing stockholders and by the new investors at the assumed initial public offering price together with the total price and average price per share paid by each of these groups, before deducting underwriting discounts and commissions and estimated offering expenses.
Shares Purchased Total Consideration Average ------------------ ------------------- Price Number Percent Amount (1) Percent Per Share ---------- ------- ----------- ------- --------- Existing stockholders....... 12,778,107 % $13,887,489 % $1.09 New investors............... ---------- --- ----------- --- Total..................... 100% 100% ========== === =========== ===
- -------- (1) Includes $11,185,275 of cash consideration paid, $2,052,209 of stock issued in connection with acquisitions, including the PSI-Med acquisition, and $650,005 of stock issued for services, compensation and repayment of a loan. Except as noted above, the foregoing discussions and tables assume no exercise of any outstanding stock options or warrants. As of August 31, 1999, there were options outstanding to purchase 1,619,168 shares of common stock pursuant to our stock option plans at a weighted average exercise price of $1.16 per share. In addition, on September 17, 1999, we granted Superior Consultant Holdings Corporation an option to purchase 200,000 shares of common stock at $6.00 per share in connection with the formation of our strategic alliance with Superior. To the extent that any of these options are exercised, there will be further dilution to the new investors. 18 CAPITALIZATION The following table sets forth as of June 30, 1999: . our actual capitalization and short-term debt; . our pro forma capitalization after giving effect to the conversion of all outstanding shares of our preferred stock into a total of 7,278,494 shares of common stock upon the consummation of this offering, including shares of preferred stock issued in connection with our acquisition of PSI-Med Corporation completed after June 30, 1999; and . our pro forma as adjusted capitalization after giving effect to the sale of the shares of common stock sold in this offering at the assumed initial public offering price of per share, after deducting the underwriting discounts and commissions and the estimated offering expenses and the application of the estimated net proceeds therefrom. You should read the following table in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus.
As of June 30, 1999 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) Short-term debt, including line of credit, notes payable, advances from employees and current portion of capital leases............. $ 1,998 $ 2,413 $ Capital lease obligations, less current portion....................................... 40 186 -------- -------- ----- 2,038 2,599 -------- -------- ----- Stockholders' equity (deficit): Convertible preferred stock, all $0.01 par value, none pro forma and pro forma as adjusted: Series A, 1,500,000 shares authorized; 1,418,270 shares issued and outstanding actual...................................... 14 -- Series A-II, 115,000 shares authorized; 61,490 shares issued and outstanding actual...................................... 1 -- Series A-III, 5,416 shares authorized; 5,416 shares issued and outstanding actual ....... -- -- Series B, 1,250,000 shares authorized; 1,202,470 shares issued and outstanding actual...................................... 12 -- Series C, 4,000,000 shares authorized; 2,986,294 shares issued and outstanding actual...................................... 30 -- Receivable for shares purchased.............. (550) (550) Common stock, $0.001 par value, 29,500,000 shares authorized actual and pro forma, shares authorized pro forma as adjusted; 5,499,613 shares issued and outstanding actual, 12,778,107 shares issued and outstanding pro forma and shares issued and outstanding pro forma as adjusted........ 6 13 Additional paid-in capital.................... 13,815 14,531 Deferred compensation......................... (89) (89) Accumulated deficit........................... (15,972) (15,972) -------- -------- ----- Total stockholders' equity (deficit)........... (2,733) (2,067) -------- -------- ----- Total capitalization........................... $ (695) $ 532 $ ======== ======== =====
The shares of common stock outstanding in the actual, pro forma and pro forma adjusted columns exclude: . 1,619,168 shares of common stock issuable as of August 31, 1999 upon the exercise of outstanding stock options issued at a weighted average exercise price of $1.16 per share under our stock option plans; . 821,263 shares of common stock reserved for issuance under our stock option plans as of August 31, 1999; and . 200,000 shares of common stock issuable upon the exercise of outstanding options issued at an exercise price of $6.00 per share to Superior Consultant Holdings Corporation on September 17, 1999 in connection with the formation of our strategic alliance with Superior. 19 SELECTED CONSOLIDATED FINANCIAL DATA The selected data presented below under the captions "Consolidated Statement of Operation" and "Consolidated Balance Sheet Data" for, and as of the end of, each of the years in the four years ended December 31, 1995, 1996, 1997 and 1998, and for and as of the six months ended June 30, 1999, are derived from the consolidated financial statements of OrganicNet, Inc. and subsidiaries, which consolidated financial statements have been audited by KPMG LLP, independent certified public accountants. The consolidated financial statements as of December 31, 1997 and 1998 and June 30, 1999, and for each of the years in the three-year period ended December 31, 1998 and the six months ended June 30, 1999, and the independent auditors' report thereon, are included elsewhere in this prospectus. The pro forma selected data presented below for the year ended December 31, 1998 and the six months ended June 30, 1998 and 1999 are derived from the unaudited pro forma condensed combined financial statements of OrganicNet, Inc. and its subsidiaries, including PSI-Med Corporation, included elsewhere in this prospectus and give effect to our acquisition of PSI-Med Corporation as if such acquisition had occurred as of the beginning of the periods presented. The unaudited pro forma information is not necessarily indicative of the combined results that would have occurred had such acquisition taken place as of the beginning of the periods presented, nor is it necessarily indicative of results that may occur in the future. The selected data presented below for the six months ended June 30, 1998, and as of June 30, 1998, are derived from the unaudited consolidated financial statements of OrganicNet, Inc. and its subsidiaries included elsewhere in this prospectus.
Years Ended December 31, Six Months Ended June 30, ---------------------------------------------- -------------------------------- Pro Forma Pro Forma 1995 1996 1997 1998 1998 1998 1999 1999 ------ ------- ------- ------- ----------- ----------- ------- ----------- (unaudited) (unaudited) (unaudited) (in thousands, except per share information) Consolidated Statement of Operations: Revenue: License................ $ -- $ -- $ 424 $ 571 $ 1,087 $ 113 $ 370 $ 654 Product development.... -- -- 1,238 565 565 530 227 227 Service................ 525 371 1,310 3,488 5,182 2,053 2,112 2,938 ------ ------- ------- ------- -------- ------- ------- ------- Total revenue.......... 525 371 2,972 4,624 6,834 2,696 2,709 3,819 ------ ------- ------- ------- -------- ------- ------- ------- Cost of revenue: License................ -- -- 475 756 756 387 336 336 Product development.... -- -- 320 209 209 128 63 63 Service................ -- 238 892 2,314 3,850 1,249 1,230 1,928 ------ ------- ------- ------- -------- ------- ------- ------- Total cost of revenue.. -- 238 1,687 3,279 4,815 1,764 1,629 2,327 ------ ------- ------- ------- -------- ------- ------- ------- Gross profit........... 525 133 1,285 1,345 2,019 932 1,080 1,492 ------ ------- ------- ------- -------- ------- ------- ------- Operating expense: Sales and marketing.... 7 24 1,395 1,644 1,812 834 672 734 Research and development........... 508 724 1,345 1,833 2,070 783 1,204 1,321 General and administrative........ 212 1,690 3,332 3,768 4,597 1,663 1,762 2,001 ------ ------- ------- ------- -------- ------- ------- ------- Total operating expense............... 727 2,438 6,072 7,245 8,479 3,280 3,638 4,056 ------ ------- ------- ------- -------- ------- ------- ------- Operating loss.......... (202) (2,305) (4,787) (5,900) (6,460) (2,348) (2,558) (2,564) Interest expense........ (9) (2) (20) (93) (93) (43) (76) (76) Other income (expense).. 1 -- 14 (9) (95) (6) (5) (56) ------ ------- ------- ------- -------- ------- ------- ------- Loss before income taxes.................. (210) (2,307) (4,793) (6,002) (6,648) (2,397) (2,639) (2,696) Provision for income taxes.................. 1 4 6 4 5 2 4 5 ------ ------- ------- ------- -------- ------- ------- ------- Net loss................ $ (211) $(2,311) $(4,799) $(6,006) $(6,653) $(2,399) $(2,643) $(2,701) ====== ======= ======= ======= ======== ======= ======= ======= Net loss per share: basic and diluted...... $(0.05) $ (0.45) $ (0.88) $ (1.10) $ (1.22) $ (0.44) $ (0.48) $ (0.49) ====== ======= ======= ======= ======== ======= ======= ======= Weighted average shares outstanding: basic and diluted................ 4,000 5,189 5,426 5,448 5,448 5,432 5,485 5,485 ====== ======= ======= ======= ======== ======= ======= =======
20
As of December 31, As of June 30, --------------------------- ------------------------------------------- Pro Forma Pro Forma As Adjusted 1995 1996 1997 1998 1998 1999 1999 1999 ---- ----- ------ ------ ----------- ------ ----------- ----------- (unaudited) (unaudited) (unaudited) Consolidated Balance Sheet Data: (in thousands) Cash and cash equivalents........... $ 25 $ -- $ 47 $ 41 $ 109 $1,680 $1,726 $ Working capital (deficit)............. 223 (524) (3,149) (6,290) (3,842) (3,704) (4,610) Total assets........... 144 754 2,904 2,215 2,650 3,445 5,245 Total stockholders' equity (deficit)...... (205) (55) (1,257) (5,047) (2,181) (2,733) (2,066)
The preceding consolidated balance sheet data is shown on a pro forma basis to give effect to: . the acquisition of PSI-Med Corporation as if the acquisition occurred on June 30, 1999; and . the conversion of all outstanding shares of preferred stock into shares of common stock upon consummation of this offering, including shares of preferred stock issued in connection with our acquisition of PSI-Med. The preceding consolidated balance sheet data is shown on a pro forma as adjusted basis to give effect to: . the acquisition of PSI-Med Corporation as if the acquisition occurred on June 30, 1999; . the conversion of all outstanding shares of preferred stock into shares of common stock upon consummation of this offering, including shares of preferred stock issued in connection with our acquisition of PSI-Med; and . the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses and application of the net proceeds therefrom. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the "Selected Consolidated Financial Data" and the accompanying financial statements and related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to, those discussed below and elsewhere in this prospectus, particularly in "Risk Factors." Overview We are an application services provider that develops software solutions for clinics and group practices using our proprietary technology platform. Our customers can access and use our solutions over the Internet or their local or wide area networks. We charge our customers a monthly subscription fee for our ASP software solutions. We also market and support legacy software products that were developed by the companies we acquired, as discussed below. Our software solutions and acquired legacy products are sold by our own direct sales force and through third parties. We currently provide the following range of services principally related to our acquired legacy products: post-contract customer support, maintenance, technical support, consulting, software customization, training, credentialing and case management services. Historically, we derived substantially all of our revenue from the sale of legacy software products and services. Our legacy products address credentialing, scheduling, resource management, case management and disease/outcomes management. From our inception in January 1995, we have been developing our Organic Architecture, a flexible platform for creating codeless software applications. As a part of our development strategy, we have acquired companies which provided us with enabling technologies and domain expertise, as well as near-term products, customers and revenues. In February 1999, we delivered our first ASP software solution using our Organic Architecture to customers, and in April 1999, we deployed our first ASP software solution over the Internet. With the introduction of our ASP software solutions, we are de- emphasizing the sale of legacy systems and expect sales of these systems and related service revenue to substantially decline in future periods. We will market these ASP software solutions as an upgrade to our existing legacy products. Due to the anticipated substantial decline in revenue associated with these legacy systems and the costs associated with the development and commercialization of our ASP software solutions, as well as the development of sales and marketing support for these solutions, we expect that our operating losses will increase substantially in future periods and continue for at least the next several years. Our ability to achieve profitability will depend on our successful development and marketing of our solutions. With our strategy, we are subject to the risks inherent in both the ASP business model and the entry into a new and uncertain market. Our solutions may not achieve market acceptance. Accordingly, the extent of future losses and the time required to achieve profitability, if any, is highly uncertain. We have generated and will continue to generate revenue from software license, product development and service fees from our legacy products. Software license fees are derived from the licensing of acquired legacy products and are expected to decline substantially in future periods. Product development fees have been and will continue to be generated from co- development agreements with Pfizer Health Solutions Inc, but we expect these revenues and their related costs to substantially decline in the future. Revenue received under these co-development agreements with Pfizer Health Solutions Inc represented 46% of total revenue in 1997, 14% of total revenue in 1998 and 31% of total revenue for the six months ended June 30, 1999. Service fees are derived from post-contract software support, case management, credentialing, training, installation and software application customization for legacy products, which we expect to decline substantially as sales of our legacy systems decline. In the future, we expect to generate revenue from subscription and service fees from the sale of our ASP software solutions. Subscription fees will be derived from our ASP software solutions on a monthly basis. We 22 will generate subscription fees for these solutions beginning in the third quarter of 1999. We cannot predict subscription fees accurately because we have limited experience selling our solutions. In addition, our customers may decide to stop using our solutions at any time with very little notice. We may spend substantial time and resources developing or tailoring solutions for channel partners or customers prior to the time we have entered into subscription agreements with them. If we do not enter into agreements with these channel partners and customers do not subscribe for these solutions for a sufficient period of time, we will not be able to achieve revenue to recoup our investment. Service fees related to our solutions will increase as we deploy them. License revenue is recognized when the related contract has been executed, the product has been shipped, collectibility is probable and the software license fees are fixed and determinable. In the event that the contract provides for multiple elements (e.g., training, application customization or post-contract customer support), the total fee is allocated to these elements based on vendor-specific objective evidence of fair value. If any portion of the license fee is subject to forfeiture, refund or other contractual contingencies, we will postpone revenue recognition until these contingencies have been removed. Subscription fees for our ASP software solutions will be recognized on a monthly basis. We recognize product development revenue from our co-development agreements using a percentage-of-completion method based on meeting key milestone events over the term of the contracts. Service revenue from post- contract customer support and maintenance is recognized ratably over the term of the maintenance period. Revenue from case management, credentialing, training, installation and customization services is recorded as the services are performed. Historically, cost of revenue consisted of the cost of license, product development and service. In the future, we expect cost of revenue to consist of the cost of subscription, license and service related to our ASP software solutions. Cost of subscription revenue will include the charges paid to our Internet service, application host and data center provider, as well as the amortization of the costs of third party database licenses and ongoing annual fees for these licenses. Cost of license revenue consists of personnel salaries, benefits and related overhead expenses, as well as the amortization of acquired technologies. Cost of service revenue includes direct costs, such as salaries and benefits, and related overhead expenses, such as occupancy charges. As we focus on our ASP solutions, we expect the cost of subscription revenue and services related to our ASP solutions to increase and the cost of license revenue and services related to our legacy products to decrease. Sales and marketing expense consists of salaries, related benefits, commissions, printing of promotional material, public relations, attendance at industry trade shows, advertising and other costs associated with our sales and marketing efforts. We expect to incur substantial expenditures related to sales and marketing as we build our direct sales force and expand our distribution channels. Research and development expense consists primarily of salaries, related benefits, third party consultant fees and other costs. With respect to software development, we establish technological feasibility once a working model has been created. The time between establishment of a working model and general release is short. Development costs incurred subsequent to technological feasibility have not been material. We expect to continue to make substantial investments in research and development activities as we seek to advance our technology and broaden our ASP software solutions. General and administrative expense consists primarily of salaries and related benefits, amortization of goodwill and workforce-in-place, and fees for professional services, such as legal and accounting. We expect general and administrative expense to increase as we add personnel, including select senior management personnel, and incur additional costs related to the anticipated growth of our business and operation as a public company. We were incorporated in January 1995 as a California corporation and reincorporated in Delaware in 1996. Since our inception, we have incurred significant losses and as of June 30, 1999, had an accumulated deficit of approximately $16.0 million. 23 Acquisitions As a result of our experience with healthcare information systems, we concluded that the legacy software applications used by the healthcare industry could not provide the adaptable, cost-effective solutions needed by clinics and group practices. To develop solutions that could address these needs, we decided to pursue a strategy of selectively acquiring companies with healthcare domain expertise and enabling technologies. In April 1996, we completed our first acquisition, a company with technology tools for the development of object-oriented software. With our second acquisition, we acquired a company with expertise in modeling and business process reengineering methodology. Using this methodology, we created a map of the core processes involved in managing a clinic or group practice. This map became the process map of the Organic Clinic and it was used to identify the tasks needed to deliver a software solution that could manage the entire clinical and business process. We then targeted and acquired six small software and service companies, each representing specialized healthcare domains that had been identified in the process map. In our first three years of operations, we completed the following acquisitions:
Company Acquisition date Expertise - ------- ----------------- ------------------------------ First Principles, Inc. ...... April 22, 1996 Object Technology RiteLine Systems, Inc. ...... April 30, 1996 Business Methodology Comprehensive Provider Credentialing Services, Inc. ....................... May 23, 1996 Credentialing Service Velocity Healthcare Informatics, Inc. .......... December 20, 1996 Outcomes/Disease Management Res-Q, Inc., formerly MMS, Inc. ....................... May 14, 1997 Scheduling/Resource Management Intedata, Inc. .............. June 4, 1997 Marketing Service L.I.N.C., Inc. .............. June 23, 1997 Case Management Healthcheck, Incorporated ... November 14, 1997 Credentialing Service
All of our acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of the acquired companies' operations are included in our consolidated financial statements from their respective effective dates forward. Under terms of the acquisition agreements, the consideration included preferred shares, notes payable, common shares and cash. We acquired all of the outstanding common stock for each of the acquired companies except for Velocity Healthcare Informatics. This acquisition was structured as an asset purchase. Total consideration for our acquisitions, completed through December 31, 1998, was approximately $1.7 million. For each of the acquired companies, the purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. Amounts allocated to acquired technology and workforce-in-place are amortized on a straight-line basis over an approximately three-year period. Amounts allocated to goodwill are amortized on a straight-line basis over seven years. PSI-Med Corporation Subsequent to June 30, 1999, we completed our acquisition of PSI-Med Corporation, which sells and services practice management software and is engaged as a full service provider of medical insurance billing and accounts receivable collection services. The PSI-Med acquisition will become effective upon the acceptance of the Certificate of Merger filed with the California Secretary of State on September 7, 1999. We have acquired all of the capital stock of PSI-Med Corporation in exchange for 16,667 shares of preferred stock, which will convert into 333,340 shares of our common stock upon the closing of this offering. These shares have been valued at approximately $667,000. Our acquisition was accounted for using the purchase method of accounting, resulting in approximately $1.6 million of goodwill to be amortized using the straight-line method over its estimated life of seven years. 24 Results of Operations Six Months Ended June 30, 1999 and 1998 License revenue License revenue includes fees from the licensing of our acquired legacy products. License revenue increased 227% to approximately $370,000 for the six months ended June 30, 1999 from approximately $113,000 for the six months ended June 30, 1998. The increase in license revenue was primarily the result of increased sales and installation of our legacy products. Product development revenue Product development revenue is primarily generated from co-development agreements addressing outcomes, credentialing and survey software and services with Pfizer Health Solutions Inc. Product development revenue decreased 57% to approximately $227,000 for the six months ended June 30, 1999 from approximately $530,000 for the six months ended June 30, 1998 due to having earned less milestone revenue under our co-development agreements with Pfizer Health Solutions Inc in the six months ended June 30, 1999. Service revenue Service revenue is comprised of fees from post-contract software support, case management services, credentialing services, training, installation and software application customization. Service revenue increased 3% to approximately $2.1 million for the six months ended June 30, 1999 from approximately $2.0 million for the six months ended June 30, 1998. The increase in service revenue was primarily the result of increases in the volume of credentialing services and development of patient surveys. Cost of license revenue Cost of license revenue consists of personnel salaries, benefits and related overhead expenses, as well as the amortization of acquired technologies. Cost of license revenue decreased 13% to approximately $336,000 for the six months ended June 30, 1999 from approximately $387,000 for the six months ended June 30, 1998 due to the redirection of our resources from our legacy products to the development of our ASP software solutions. Cost of product development revenue Cost of product development includes direct costs, such as personnel salaries and benefits, and related overhead expenses, such as occupancy charges. Cost of product development revenue decreased 51% to approximately $63,000 for the six months ended June 30, 1999 from approximately $128,000 for the six months ended June 30, 1998, primarily due to a decreased level of development efforts associated with the Pfizer Health Solutions Inc co- development agreements. Cost of service revenue Cost of service revenue includes direct costs, such as personnel salaries and benefits, and related overhead expenses, such as occupancy charges. Cost of service revenue decreased 2% to approximately $1.2 million in the six months ended June 30, 1999 from approximately $1.3 million for the six months ended June 30, 1998, primarily due to two of our subsidiaries merging operations. Sales and marketing expense Sales and marketing expense consists primarily of salaries, related benefits, commissions, printing of promotional material, public relations, attendance at industry trade shows, advertising and other costs associated 25 with our sales and marketing efforts. Sales and marketing expenses decreased 19% to approximately $672,000 for the six months ended June 30, 1999 from approximately $834,000 for the six months ended June 30, 1998, primarily due to decreased spending for trade show and third party marketing activities. Research and development expense Research and development expense consists primarily of salaries, related benefits, third party consultant fees and other costs. Research and development expense increased 54% to approximately $1.2 million for the six months ended June 30, 1999 from approximately $783,000 for the six months ended June 30, 1998, primarily due to increasing development costs associated with our ASP software solutions. General and administrative expense General and administrative expense consists primarily of salaries and related benefits, amortization of intangible assets for goodwill and workforce- in-place, and fees for professional services, such as legal and accounting. General and administrative expense increased 6% to approximately $1.8 million for the six months ended June 30, 1999 from approximately $1.7 million for the six months ended June 30, 1998, primarily due to professional fees associated with our acquisition and financing activities. Interest expense Interest expense increased 78% to approximately $76,000 for the six months ended June 30, 1999 from approximately $43,000 for the six months ended June 30, 1998, primarily due to increased borrowings used to fund our operations. Income taxes Income taxes paid to state taxing authorities consisted of minimum payments of $4,000 for the six months ended June 30, 1999 and $2,000 for the six months ended June 30, 1998. As a result of operating losses, no provision or benefit for income taxes has been recorded for either period. Deferred tax assets associated with net operating losses generated have not been recognized as there is substantial uncertainty as to the likelihood of the realization of those net operating losses. Years Ended December 31, 1998 and 1997 License revenue License revenue increased 34% to approximately $571,000 in 1998 from approximately $424,000 in 1997, primarily due to the increased volume of sales of our scheduling, resource management and case management products. Product development revenue Product development revenue decreased 54% to approximately $565,000 in 1998 from approximately $1.2 million in 1997, due to the completion of Outcomes Partners III under our co-development agreements with Pfizer Health Solutions Inc in 1998. Service revenue Service revenue increased 166% to approximately $3.5 million in 1998 from approximately $1.3 million in 1997, primarily due to increased sales of service and support contracts and, to a lesser extent, an increase in consulting and training services. Cost of license revenue Cost of license revenue increased 59% to approximately $756,000 in 1998 from approximately $475,000 in 1997, primarily due to 1998 being the first full year of amortization of our acquired technologies. 26 Cost of product development revenue Cost of product development revenue decreased 35% to approximately $209,000 in 1998 from approximately $320,000 in 1997 due to the decreased level of development under our Pfizer Health Solutions Inc co-development agreements. Cost of service revenue Cost of service revenue increased 159% to approximately $2.3 million in 1998 from approximately $892,000 in 1997, primarily due to the full year impact of acquisitions made in 1997 and to growth in credentialing service and additional services, such as customer support and maintenance, training, installation and customization, which were delivered. Sales and marketing expense Sales and marketing expense increased 18% to approximately $1.6 million in 1998 from approximately $1.4 million in 1997, primarily due to the inclusion of a full year of salaries and benefits associated with sales and marketing personnel gained through our acquisitions made in 1997. Research and development expense Research and development expense increased 36% to approximately $1.8 million in 1998 from approximately $1.3 million in 1997, primarily due to the growth in personnel costs through additional headcount and facilities expense for the development of our Organic Architecture and ASP software solutions. In addition, 1998 includes a full year of salaries and benefits associated with the development activities of the companies we acquired in 1997. General and administrative expense General and administrative expense increased 13% to approximately $3.8 million in 1998 from approximately $3.3 million in 1997, primarily due to increased personnel and facility costs as a result of a full year of operations from the businesses we acquired in 1997. Interest expense Interest expense increased 371% to approximately $93,000 in 1998 from approximately $20,000 in 1997, primarily due to increased borrowings used to fund our operations. Income taxes Income taxes paid to state tax authorities consisted of minimum payments of $4,000 in 1998 and $6,400 in 1997. As a result of operating losses, no provision or benefit for income taxes has been recorded. Deferred tax assets associated with net operating losses generated have not been recognized as there is substantial uncertainty as to the likelihood of the realization of those net operating losses. Years Ended December 31, 1997 and 1996 License revenue License revenue of approximately $424,000 in 1997 was attributable to the software products of the companies we acquired in 1997. We had no license revenue in 1996. Product development revenue Product development revenue was approximately $1.2 million in 1997, the first year of our co-development agreements with Pfizer Health Solutions Inc. 27 Service revenue Service revenue increased 253% to approximately $1.3 million in 1997 from approximately $371,000 in 1996. This increase was primarily due to the inclusion of a full year of credentialing revenue associated with a 1996 acquisition and the acquisition of a second credentialing company in 1997, as well as an increase in the service and support contracts associated with the acquisition of our legacy software products. Cost of license revenue Cost of license revenue was approximately $475,000 in 1997. We had no cost of license revenue in 1996. Cost of product development revenue Cost of product development revenue was approximately $320,000 in 1997, the first year of our co-development agreements with Pfizer Health Solutions Inc. Cost of service revenue Cost of service revenue increased 274% to approximately $892,000 in 1997 from approximately $238,000 in 1996, primarily due to the full year impact of acquisitions made in 1997 and to growth in credentialing service and additional services, such as customer support and maintenance, training, installation and customization, which were delivered. Sales and marketing expense Sales and marketing expense increased to approximately $1.4 million in 1997 from approximately $24,000 in 1996, primarily due to the increase in salaries and benefits of the sales and marketing personnel acquired through our 1997 acquisitions. Research and development expense Research and development expense increased 86% to approximately $1.3 million in 1997 from approximately $724,000 in 1996. This increase was primarily due to the growth in personnel costs as a result of increased headcount and facilities expense for the development of Organic Architecture and ASP software solutions, as well as an increase in salaries and benefits of personnel, third party development efforts and facility charges associated with the development activities of the companies we acquired in 1997. General and administrative expense General and administrative expense increased 97% to approximately $3.3 million in 1997 from approximately $1.7 million in 1996, primarily due to increased personnel and facility costs as a result of a full year of operations from the businesses we acquired in 1996. Interest expense Interest expense increased to approximately $20,000 in 1997 from approximately $2,000 in 1996, primarily due to increased borrowings used to fund our operations. Income taxes Income taxes paid to state tax authorities consisted of minimum payments of $6,400 in 1997 and $4,000 in 1996. As a result of operating losses, no provision or benefit for income taxes has been recorded. Deferred tax assets associated with net operating losses generated have not been recognized as there is substantial uncertainty as to the likelihood of the realization of those net operating losses. 28 Pro Forma Financial Information The unaudited condensed combined financial statements included elsewhere herein give effect to our business combination with PSI-Med Corporation. See "Unaudited Pro Forma Condensed Combined Financial Information, OrganicNet, Inc. and PSI-Med Corporation." Pro Forma Six Months Ended June 30, 1999 On a pro forma basis, our revenue for the six months ended June 30, 1999 was approximately $3.8 million, compared to actual revenue of approximately $2.7 million. Pro forma total revenue of PSI-Med includes sales of medical accounting software and service revenue from post-contract customer support agreements, accounts receivable management and collection services, and rental arrangements for medical accounting software on a shared computer system maintained at PSI-Med. Our pro forma operating loss for the six months ended June 30, 1999 was approximately $2.6 million, compared to actual operating loss of approximately $2.6 million. The operating loss remained unchanged as a result of PSI-Med's operating income of $115,000 being offset by the additional goodwill amortization from the business combination of approximately $121,000. Our pro forma net loss for the six months ended June 30, 1999 was approximately $2.7 million, which reflects the increase in the operating loss from the additional goodwill amortization resulting from the business combination. Pro Forma Year Ended December 31, 1998 Our pro forma total revenue for 1998 was approximately $6.8 million compared to our actual revenue of approximately $4.6 million. Our pro forma operating loss in 1998 was approximately $6.5 million compared to our actual operating loss of approximately $5.9 million. The increase in our operating loss on a pro forma basis was primarily the result of the addition of approximately $317,000 in pro forma PSI-Med operating losses and the additional goodwill amortization of approximately $241,000 resulting from the business combination. Our pro forma net loss for 1998 was approximately $6.7 million compared to our actual net loss of approximately $6.0 million. The increase in our net loss was for the same reasons as the increase in our operating loss. Liquidity and Capital Resources Since inception, we have spent approximately $11.1 million primarily for the development of our Organic Architecture and ASP software solutions. We have financed these operating and development activities through approximately $12.9 million raised from the sale of our capital stock and the issuance of notes to employees and stockholders. Investing activities included receipt of an aggregate approximately $191,000 in cash from acquired businesses offset by an aggregate approximately $371,000 investment in capital assets. As of June 30, 1999, we have approximately $1.7 million in cash reserves and a working capital deficit of approximately $3.7 million. Net cash used in operating activities was approximately $2.5 million for the six months ended June 30, 1999, approximately $3.2 million in 1998, approximately $3.3 million in 1997 and approximately $2.1 million in 1996. Cash used in operating activities for the six months ended June 30, 1999 resulted primarily from the funding of our operations and our payment of current liabilities. Our investing activities used approximately $58,000 for the six months ended June 30, 1999, used approximately $32,000 in 1998, provided approximately $6,000 in 1997 and used approximately $97,000 in 1996. Investing activities during those periods consisted primarily of the cash obtained from acquisitions of 29 approximately $191,000 and capital expenditures of approximately $58,000 for the six months ended June 30, 1999, approximately $32,000 in 1998, approximately $207,000 in 1997 and approximately $75,000 in 1996. We have no significant capital spending or purchase commitments other than normal commitments under facilities and equipment leases. Financing activities provided cash of approximately $4.2 million during the six months ended June 30, 1999, approximately $3.3 million in 1998, approximately $3.3 million in 1997 and approximately $2.2 million in 1996, primarily from the aggregate net proceeds from sales of capital stock and the issuance of notes to stockholders. We used cash from financing activities to make aggregate payments under lease obligations of approximately $51,000 during these periods. As of June 30, 1999, we had net operating loss carryforwards for federal income tax purposes of approximately $14.4 million expiring in the years 2013 through 2019. We had net operating loss carryforwards for state income tax purposes of approximately $8.0 million expiring primarily in 2003. The difference between federal and state net operating loss carryforwards is due primarily to a 50% limitation on net operating loss carryforwards for California income tax purposes. Due to the "change in ownership" provisions of the Tax Reform Act of 1986, utilization of the net operating loss carryforwards will be subject to an annual limitation regarding their utilization against taxable income in future periods. We expect that the net proceeds from this offering, together with our existing assets, anticipated debt and capital lease financing, and revenue from operations will be sufficient to fund our operations for at least the next 18 months. Thereafter, we may seek to raise additional funds through public or private equity financings or from other sources. If we raise additional funds by issuing equity securities, dilution to stockholders may result. There can be no assurance that additional financing will be available on favorable terms or at all. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business. Year 2000 Preparedness Many currently installed computer systems and software products are written using two digits rather than four to define the applicable year. These systems may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in systems failures or miscalculations causing disruptions of operations for any company using such computer systems or software, including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. As a result, many companies' computer systems may need to be upgraded or replaced in order to avoid this "Year 2000" issue. The majority of the software and hardware we use to manage our business has been purchased or developed in the last five years. Generally, hardware and software design within the current decade and the past several years in particular have addressed the Year 2000 issue. All of the solutions we have developed are written with four digits to define the applicable year. Testing has been completed on our internal information technology systems and based on that testing, we believe that our information technology systems are Year 2000 compliant. In addition to our internally developed software, we use and license software and hardware from third parties. We have obtained certifications from our key suppliers of hardware and networking equipment for our data centers that such hardware and networking equipment is Year 2000 compliant. Based upon an initial evaluation of our broader list of software and hardware providers, we are aware that all of these providers are in the process of reviewing and implementing their own Year 2000 compliance programs, and we are working with these providers to address and remediate any exposure to the Year 2000 issue and continue to seek assurances from them that their products are Year 2000 compliant. We also rely on third party network infrastructure providers to gain access to the Internet. If such providers experience business interruptions as a result of their failure to achieve Year 2000 compliance, our ability to provide Internet connectivity and deliver our ASP software solutions could be impaired, which could harm our reputation and our business. 30 Many of our customers may not be Year 2000 compliant. Customer difficulties due to Year 2000 issues could interfere with healthcare transactions or the transmission of information, which might expose us to significant potential liability. If customer failures result in the failure of our systems, it could harm our reputation and business. Furthermore, Year 2000 issues may affect the purchasing patterns of customers or potential customers as companies expend significant resources to become Year 2000 compliant. The costs of becoming Year 2000 compliant for current or potential customers may result in reduced funds being available to purchase and implement our software solutions. We have not incurred any significant costs to date with respect to our Year 2000 compliance efforts, and we do not anticipate that future costs associated with Year 2000 remediation efforts will be material. However, if our customers, our providers of hardware and software, our third party network providers or we fail to remedy any Year 2000 issues, our services and certain transactions could be interrupted and we could experience a material loss of revenue that could harm our business, financial condition and operating results. We would consider such an interruption to be the most reasonably likely unfavorable result of any failure by us, or failure by the third parties upon which we rely, to achieve Year 2000 compliance. Presently, we believe we are unable to reasonably estimate the duration and extent of any such interruption or quantify the effect it may have on our future revenue. We have yet to develop a comprehensive contingency plan to address the issues that could result from Year 2000 issues. We are prepared to develop such a plan if our ongoing assessment leads us to conclude we have significant exposure based upon the likelihood of such an event. For more information about Year 2000 risks, see "Risk Factors--Failure of computer systems and software products to be Year 2000 compliant could increase our costs, disrupt our services and reduce demand from our clients." Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), and in July 1999 issued Financial Accounting Standard No. 137, "Accounting For Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133" (SFAS 137). SFAS 137 delayed the effective date for SFAS 133 to fiscal years beginning after June 15, 2000. We do not believe that the impact of this statement will have a material effect on our financial position or results of operations upon the adoption of this accounting standard. Quantitative and Qualitative Disclosure about Market Risk We have considered the provision of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Investments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments." We had no holdings of derivative financial or commodity instruments at June 30, 1999, nor has the Company had any foreign currency denominated sales. However, we are exposed to financial market risks associated with interest rates. This exposure is directly related to our normal operating and funding activities. We manage interest rate exposure by investing excess funds in cash equivalents and short-term investments bearing variable interest rates, which are tied to various market indices. As a result, we do not believe that near- term changes in interest rates will result in a material effect on our future earnings, fair values or cash flows. 31 BUSINESS Overview We are an application services provider (ASP) that develops proprietary software solutions for clinics and group practices using our proprietary technology platform. Our customers can access and use our solutions over the Internet or their local or wide area networks. We are developing integrated solutions designed to manage all elements of the business and clinical processes of our customers within a single system. We currently have developed and implemented solutions in three areas: disease management, clinical drug trials recruitment and workers' compensation. We charge our customers a monthly subscription fee for our solutions. Industry Background According to the Health Care Financing Administration, the healthcare industry is the largest sector of the United States economy with annual expenditures reaching approximately $1.3 trillion by the year 2000. Rising costs have driven employers, insurers and the government sector to attempt to control expenses through managed care. Rising costs have also led to the creation of new payment mechanisms, including fixing fees, lowering reimbursement rates, restricting coverage for services, limiting access to a select group of providers, negotiating discounts and shifting the economic risk for the delivery of care through alternative reimbursement modes, such as capitation and risk pools. As a result, healthcare providers are bearing greater financial risk and need to contain costs and deliver care efficiently in order to operate profitably and remain competitive. Pressures to control costs have also contributed to the movement of care from relatively expensive inpatient settings to less costly outpatient settings. These outpatient care providers, particularly clinics and group practices, deliver the majority of healthcare services and are responsible for a substantial portion of total healthcare spending. In order to provide quality and cost-efficient healthcare while managing costs, hospitals and other large healthcare organizations, as well as individual physicians, physician groups and other outpatient care providers are forming affiliations with one another to take advantage of economies of scale. Although these affiliations have enhanced economies of scale, they have generally not addressed the inefficient delivery of healthcare services. Substantial resources are wasted in the healthcare industry through the delivery of unnecessary care, performance of redundant procedures and tests, or excessive administrative costs. We believe that a portion of this wasteful spending is attributable to the inefficient collection, management, sharing and storage of data. To operate efficiently, healthcare delivery networks must be able to manage patient care and workflow processes which may extend across multiple locations and member organizations. We anticipate that process and information management will become even more critical to healthcare organizations as new governmental regulations requiring greater documentation are adopted. For example, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposes additional regulatory compliance responsibilities on the healthcare industry relating to the storage, maintenance and transmission of healthcare information. Proposed regulations implementing HIPAA would impose new requirements on the healthcare industry to maintain the security of healthcare information. Demand for Information Services in Healthcare The growth of managed care, the increase in government regulation and the rise of healthcare delivery networks have increased the need for information technology products and services. Annual healthcare information systems expenses are expected to reach approximately $18 billion by the year 2000 according to industry sources. Healthcare providers increasingly demand integrated solutions that offer the core functions required to manage healthcare clinical and business processes. In addition, geographically dispersed healthcare delivery networks require central databases and analysis tools that permit them to effectively extract and analyze data located throughout the enterprise, measure clinical results, control costs, evaluate operational efficiency and support process improvement. 32 Traditional Healthcare Information Systems Traditional healthcare information systems, known as legacy systems, were built with specialized computer languages using "code." The first legacy systems were introduced in the 1970s. Building systems out of code requires highly trained technicians and can take anywhere from several months to several years to complete. Users' needs frequently change before code-based systems are completed from the initial design. Modifying the original code is a time- consuming and expensive process. As a result, legacy systems cannot be adapted easily to the changing functional requirements of end-users, such as the need to address practice variations within clinics and group practices. These factors contribute to the high cost of legacy systems, which often requires a significant commitment of capital for the initial acquisition of hardware and system infrastructure. In addition, healthcare providers may incur additional capital expenditures in expanding installed systems when increasing their internal capacity. Most legacy systems were originally developed to address the financial aspects of information management, such as capturing charges and generating bills. Most hospitals and managed care organizations have installed legacy systems that continue to perform the functions for which they were originally designed. As end-user information requirements expanded to include the need to manage clinical information, legacy vendors introduced code-based legacy applications that were either built by those legacy vendors or acquired from other software developers. Because these new applications generally were not included in the design of the original systems, these legacy vendors are required to develop complex system interfaces that permit the integrated exchange of information between applications and systems. The time and expense associated with building interfaces make legacy systems less adaptable to structural and organizational changes within healthcare organizations. The Emergence of the Internet and the ASP Model in Healthcare The Internet has emerged as an important means of accessing and distributing information, as well as a medium to facilitate the transfer of secure information between organizations. We believe the Internet's key attributes as an open, accessible, low-cost and flexible network make it particularly well- suited for the information technology and communication needs of the healthcare industry. We believe that the Internet will ultimately become the primary method of communication and commerce in the healthcare industry. The increasing acceptance of the Internet as a medium to access and exchange data has contributed to the development of a new business model for the delivery of mission-critical healthcare software solutions--the application service provider model. ASPs offer software applications deployed over the Internet from a remote facility. This eliminates the need for a customer to invest in complex and expensive software and hardware, such as installing network servers. Industry analysts estimate that the total cost of hosted applications under the ASP model can be significantly less than traditional licensing and internally managed software. Designing a Comprehensive Information Technology Solution Healthcare entities' information technology needs vary greatly and are dependent upon their range of operating activities, which can be impacted by frequent government and regulatory changes, ongoing margin pressures and Year 2000 challenges. Large, self-contained healthcare entities with significant information technology budgets have been able to keep up with the changing requirements. However, smaller healthcare entities, such as clinics and group practices, need sophisticated information technology solutions that can be accessed cost-effectively. We believe that a comprehensive information technology solution for the smaller healthcare provider should: . manage the entire clinical and business process in a single system; . expand easily to accommodate more users and applications; 33 . enable the creation of fully integrated solutions; . allow trained users to quickly and easily tailor solutions to accommodate their different needs; . offer a cost-effective alternative to currently available software applications; . permit Internet delivery or on-site installation; . provide different users simultaneous access and the ability to modify data in real time; . contain the requisite healthcare domain expertise; and . facilitate easy use. The OrganicNet Solution Our proprietary technology provides a platform for the rapid development and deployment of codeless software solutions designed to manage the entire clinical and business process for clinics and group practices. These processes include patient enrollment and patient health assessment, scheduling, diagnosis, selecting and monitoring treatment plans, billing and contract management. We design our software solutions to be deployed over the Internet or the user's intranet or local or wide area network with our ASP model. As an ASP, we charge our customers on a monthly subscription basis for the delivery of our software solutions. We provide integrated solutions that can be implemented incrementally, extended easily and tailored rapidly for each user's needs. Our solutions offer the following benefits: Comprehensive. We provide our customers with a comprehensive solution that combines our software applications with Internet infrastructure, application hosting, and consulting and implementation services provided by our strategic partners. Our software applications address a range of business and clinical processes, such as billing and claims, scheduling, credentialing and disease management. Our solutions are designed to enable our customers to rely on us as the single source for their software solutions, whether these solutions are deployed over the Internet or their local or wide area network. Cost-effective. We believe that our ASP model allows users to access sophisticated software solutions for a lower start-up cost and reduced operating cost. Our technology enables most customers to run our solutions using their existing computer equipment. Each user needs only a relatively modest desktop computer and a modem that allows the computer to connect to our remote servers over standard telephone lines. As a result, our solutions eliminate the need for the user to incur significant capital expenditures for hardware, operating systems, application software. In addition, our solutions are designed to significantly reduce the costs for technical support and training, thereby reducing the need for in-house information technology experts. Adaptable. Our applications are built with data instead of code. As a result, we can avoid many of the limitations of code-based software systems and more easily tailor any component of a solution to meet the needs of each user. Trained clients can quickly modify our software to adapt to practice variation and practice changes. Our clients do not have to conform their clinical and business processes to the fixed features and functions of rigidly-coded legacy systems. Scalable. Our solutions run on an object-oriented database management system designed to manage large and complex databases. In addition, we have partnered with Conxion Corporation to provide application hosting services, Internet infrastructure and data centers. The combination of our proprietary architecture and technology, the bandwidth capacity of Conxion's data centers and the storage capacity of our database management system minimizes the cost of adding incremental users and applications. 34 Integrated. Our software solutions are built on a single, integrated database so that information and applications are stored centrally and shared simultaneously by all users. As a result, data is entered once and shared across all applications on the system. We believe the single entry of patient and other data will increase efficiency and lower costs while reducing the errors that result from duplicative data entry. Changes to data made by a single user in one application are immediately shared by all authorized users across applications. Internet accessible. Our solutions can be provided over the Internet. Multiple users can simultaneously and continuously access the same software applications and data from geographically dispersed locations. Users access our software solutions using our Organic Browser, a proprietary, thin client browser that provides the interface between the user, the applications and the database. Easy to use. We design our software solutions in consultation with users to accommodate their workflow and processes. The appearance of the computer screen and the information that is displayed can be designed so that users see only those features that they need. Users are not required to navigate through features and applications they do not need or use. For example, schedulers will see only the scheduling tools and information they need on their screens. Embedded domain expertise. Our solutions incorporate the collective healthcare knowledge and experience of our personnel. We are highly experienced in each of the following domains: . outcomes and disease management; . clinical drug trials; . practice management; . credentialing and provider profiling; . scheduling and resource management; . business process reengineering; and . case management. We use our expertise in these areas to create comprehensive, integrated software solutions for our customers and to continually refine those solutions as the needs of our customers evolve. Security. To safeguard user data, we have designed our solutions to support the security options necessary to meet our user's requirements on an application by application basis. We offer the following security options: . client authentication: proprietary communication protocols that generate a public key infrastructure based key to uniquely identify each client; . user authentication: standard login ID/password identification and other more secure means to identify and authenticate users; . access control: system mechanisms to restrict a user's access to only the data they have clearance to see; . channel security: proprietary transmission protocol makes it difficult to intercept data during transmission; . database security: data in the database can be encrypted; and . physical site security: Conxion hosts our data and applications at government rated Class A data centers. To be rated as a Class A data center, Conxion must conform to government security requirements and be able to guarantee 72 hours of independent continuous operations. 35 Our Strategy Our objective is to become the leading ASP serving clinics and group practices. We believe that we are one of the first ASPs to deliver software solutions to clinics and group practices over the Internet. Our strategy is to capitalize upon our early market entrance, extend our technology and implement a subscription-based business model focused on recurring revenue. Elements of our strategy include: Leverage our proprietary technology platform. Our proprietary, object- oriented technology provides a platform for the rapid, codeless development of ASP software solutions for clinics and group practices. Our platform combines a universal set of clinical and business processes with the capability to quickly create a solution that can be easily tailored to meet the specific needs of each customer. Using this platform, we have delivered solutions for the disease management, clinical drug trials and workers' compensation markets. We are using our platform to complete development of a software solution that manages the entire clinical and business process for clinics and group practices. The scalable, adaptable and interactive design of our software solutions enables us to offer a customer an initial solution targeting a specific business or clinical need, with the opportunity to easily sell additional functions and features. Achieve rapid market penetration. We are using a sales and marketing strategy that focuses on identifying channels of customers with common needs and cross-selling our solutions to our existing installed customer base. We intend to establish relationships with specialty healthcare industry groups who will endorse and co-market our solutions to their customers and members in these channels. In addition, we have an existing base of over 500 customers using the legacy systems sold by the companies we have acquired. To capitalize on our installed customer base, we are developing ASP software solutions that will be sold as an upgrade to our existing systems. We use our Internet sales team to quickly reach many customers and increase our market penetration. Enhance our capabilities by forming strategic alliances. We believe that our ability to offer a complete, integrated and adaptable software solution to our customers will be an important element in their selection of us as their solutions provider. In order to continue to specialize in software solution development, we have formed and will continue to form strategic alliances with leading companies that can provide us with specific expertise in areas important to providing complete solutions, such as Internet infrastructure, application hosting, and consulting and implementation services. Given the significant time and financial and human resources required to internally develop our own Internet connectivity and data storage requirements, we believe that we can offer cost-effective software solutions by partnering with recognized leaders in these areas. Our strategic alliance with Conxion Corporation, a leader in network hosting, is an example of such a partnership. Selectively acquire complementary businesses and technologies. Historically, we have grown through acquisitions that brought us new personnel with domain knowledge of the healthcare industry, additional customers, software products and technology. In the future, we will continue to acquire businesses and domain knowledge, product lines or technologies that will enhance our solutions and domain expertise, and increase our customer base. Protect our intellectual property. We believe that our technology incorporates a unique approach to the codeless development of software applications. We believe that our software technology is a significant asset which we intend to actively protect. We have filed five patent applications relating to key elements of our architecture and intend to seek appropriate intellectual property protection for the technologies that we develop in the future. Our Technology Our solutions embody object-oriented technology. Object-oriented software is written using objects that represent components of real-world settings, such as a doctor or a clinic. Each component is represented by one object that is shared by all applications. Software applications are built by linking objects in various configurations. Because objects can be used simultaneously in multiple configurations, models representing 36 complex systems can be built easily. The self-contained nature of objects allows them to be tested, modified and maintained independently from the rest of the system. Historically, objects and the links between them have been built using code. After five years of development, we believe that we have achieved a significant advancement in object-oriented technology by building both objects and the links between them with data instead of code. We believe this advancement enables us to build, link and modify objects without the significant development time associated with code-based software. In February 1997, we filed patent applications on these advancements. Our CoreModel encompasses the classes of objects and relationships that represent the general elements and flow of the clinical and business processes in healthcare. The specialized knowledge of healthcare required to build the CoreModel originated from the experience of our employees as well as extensive interviews with our users and other healthcare professionals. If a customer chooses to deploy our solutions over the Internet, the CoreModel, user data and the applications are accessed on our servers at Conxion Corporation. The Organic Browser is our application browser that resides on the user's computer. Applications are delivered to the user by the interaction between our proprietary application server software and the Organic Browser. When a user logs on to the system and enters a user name and password, the Organic Browser requests the data required to display the user's software solutions from the application server. The application server communicates that request to our database management system, which retrieves the data required and delivers it to the application server. The application server then assembles the user's software solution and delivers it to the Organic Browser which renders it on the user's screen. Our Organic Browser is able to do this as quickly as traditional systems with modest computers and an Internet connection over standard telephone lines. The Organic Browser and our application server require relatively little hard disk space on the user's computer regardless of the size of the software applications they are running because of our data-based and object-oriented architecture. As a result, most users can run our software solutions on their existing computers and do not have to invest in additional hardware. The Organic Browser requires only four megabytes of hard disk space on the user's computer to run, which is less computing power than general purpose Internet browsers, which typically require about 80 megabytes. Applications, such as our browser, that require little disk space and are used to access applications stored on a server are referred to as "thin clients." Our software solutions can run on a thin client because they are built using data, which can be stored in a database on a server instead of on the user's computer. In contrast, typical software applications built with code must be stored and executed on the user's computer and therefore cannot be run with a thin client. Because our CoreModel is stored in the database, we can increase the total number of software applications and the functionality of any software application running on our system without changing the Organic Browser or the rest of the user's system. Our application server software requires only one megabyte of hard disk space. Typically, application server software requires at least 10 megabytes of storage space, but can require up to several hundred megabytes for more complex applications. Our application server software requires less disk space because the processes, generally referred to as "server side processes," are written in data rather than code and stored in the database. Server side processes generally include: . queries: used to locate and retrieve data elements from the database; . triggers: used to activate particular processes upon the occurrence of another process; and . constraints: used to limit acceptance of data entry to defined parameters. Our ability to store server side processes as data, instead of code, enables us to quickly and easily modify the server side processes for increased adaptability. We have applied for patents on our technology for storing processes as data. In September 1999, we received a Notice of Allowance from the United States Patent and Trademark Office on one of these applications. 37 Our Software Solutions We are in the process of developing the Organic Clinic, a software solution that will manage the entire clinical and business process for clinics and group practices. We are designing the Organic Clinic to be deployed over the Internet or the user's intranet or area network using our ASP model. In the interim, we are providing software solutions for use in specific practice areas, such as disease management, clinical drug trials recruitment and workers' compensation. We have targeted these areas to accelerate adoption of our technology based on our domain knowledge, the strength of our channel partner contacts and the potential of these markets. To build our solutions, we begin by spending a few days in a clinic interviewing users and modeling and mapping the processes of that clinic. We assemble a solution by using the library of healthcare tasks built by our domain experts as extensions of the CoreModel. These tasks share the same data objects and are integrated with all of our solutions. We have built and can utilize hundreds of healthcare specific tasks such as "enroll a patient," "schedule a patient" or "bill a patient." These tasks comprise the templates we use to tailor a solution for a particular clinic. Providing a tailored solution generally takes three to six weeks, depending on the complexity of the process and practice variation. We are delivering the following solutions to customers: Disease Management. Healthcare providers are increasingly employing disease management solutions to achieve favorable patient outcomes while controlling costs. Annually, an aggregate of over $50 billion is spent in the United States to treat the disease states of asthma, diabetes and congestive heart failure. A number of specialty healthcare providers have targeted the treatment of these specific disease states. These providers often contract to treat patients at a fixed cost and therefore depend on strict patient compliance with treatment plans to manage their costs and to deliver quality care to their patients. We have designed effective disease management solutions that have the following attributes: . Improved patient selection. Our solutions use patient questionnaires and clinical data to identify and select patients with specific chronic conditions who are most at risk for poor clinical outcomes. . Automated clinical process. Our solutions link all network users, including doctors, laboratories and pharmacies, track compliance, and provide real time and updated information. . Customized care plans. Our solutions allow healthcare providers to design and monitor care plans that meet the specific needs of individual at-risk patients using guidelines and predictive outcomes established at the clinic. We delivered our first disease management solution in February 1999. As of September 15, 1999, we deployed seven of our ASP software solutions for the disease management market. As part of our disease management solutions, we developed Outcomes Partner III, a healthcare outcomes management software solution. This solution was developed in collaboration with Pfizer Health Solutions Inc, a subsidiary of Pfizer Inc. that provides information technology solutions to Pfizer Inc. clients. Outcomes Partner III combines patient-reported health and functional status with outcomes program administration and reporting tools that evaluate the effectiveness of disease management. Through our relationship with Pfizer Inc., we have installed Outcomes Partner III at the American Medical Group Association's headquarters. The American Medical Group Association is a trade association representing over 230 medical groups composed of approximately 48,000 physicians. In conjunction with Pfizer Inc., we intend to market Outcomes Partner III to the American Medical Group Association's member clinics. Clinical Drug Trials Recruitment. We believe there is a significant market for a software solution that improves the efficiency of clinical drug trials management based on the level of expenditures spent on clinical trials to support drug development efforts. We believe there is not an adequate system for managing patient recruitment and enrollment in the clinical drug trials process. 38 A clinic's participation in the clinical drug trial process begins with patient recruitment and enrollment. Participation in clinical drug trials can be a significant revenue source for clinics and group practices. Pharmaceutical companies set compensation for investigators based on the number of patients enrolled and the time taken to complete recruitment. Clinical drug trials recruitment is conducted by various types of healthcare organizations including clinics and group practices. These organizations must conduct broad searches of their practice management systems to identify patients who meet general criteria. They then review patients' medical charts to find individuals who meet the trial's requirements. Manual chart review is a time consuming and expensive process. Even for simple studies, it can take a clinic site several months to identify, screen, recruit and enroll its target number of patients. We believe an effective patient recruitment solution can significantly reduce the time required to complete these tasks. Our patient recruitment solution provides a comprehensive set of easy-to-use tools for efficient patient screening, recruitment and enrollment. Our first solution was delivered in February 1999. Our solution offers clinics and group practices several important benefits, such as: . Simplified data management. Interfaces with a practice management system to eliminate the need to duplicate data entry. . Reduced number of chart reviews. Quickly queries system data to prioritize patients that are most likely to meet the inclusion criteria for a trial. . Customized patient screening. Uses adaptable tools to enable customized follow-up screening interviews and medical history questionnaires with no additional programming, and provides survey administration over the Internet. . Reduced enrollment time. Facilitates quick and efficient enrollment of patients who meet the inclusion criteria for a trial. . Integrated patient contact tracking. Includes user-friendly tools to help track and manage all contacts with patients from initial screening through the completion of their participation in a clinical drug trial. . Reduced computer hardware costs. Permits data input using scan forms, which enables clinic staff to interact with the system without a computer on their desk. Workers' Compensation. Annually, approximately $24 billion is spent to treat workers' compensation claims in the United States. Workers' compensation is a separate healthcare delivery system for employment-related injury and health issues. Patient treatment is funded through insurance premiums paid by the employer. When a job-related injury occurs, the employee is sent to either an industrial medicine clinic or a network of doctors contracted to treat workers' compensation injuries. We believe there is currently no clinical management software solution to handle these claims across a network of clinics and group practices. Moreover, we believe no reporting system is available to employers who are funding the system and want to track employee status and compliance with treatment protocols. Our clinical management solution links doctors, clinics and group practices to a single database and to a single and unique patient record. In addition, we are developing a solution with American Medical Information Systems, Inc. to integrate the management of clinical and business processes in occupational medicine. This solution would enable us to track progress and compliance during the course of a patient's treatment. Our solution will capture patient medical histories, help physicians determine diagnoses and suggest appropriate treatment protocols at the point of care. The criteria for diagnosis and treatment protocols will be established by the physicians at the treatment clinic. 39 The Internet enables different organizations, such as physical therapy centers, laboratories and pharmacies, to inexpensively link to the same system. Our solution allows employers to track the treatment of their employees on their desktop. Employers are linked to the same database the clinic network is using. The use of standard methods of treatment can then be monitored by all parties connected to the network, including employers. We have installed our first workers' compensation solution in a clinic running on a remote server over the Internet under an agreement with American Medical Information Systems. We expect that we will have the final version of this solution installed and that AMIS will accept it by the end of 1999. AMIS plans to offer employers a network of existing clinics that can treat those of their employees with workers' compensation claims and allow the employer to track the treatment of their employees using the Internet. AMIS is in the process of building this network and as of September 15, 1999, one clinic has agreed to participate in this network. Under our agreement with AMIS, they have the exclusive rights for 12 months from acceptance of the system to use and market the solution in California and in the United States with AMIS clinics and affiliate clinics so long as AMIS has paid us for a minimum number of AMIS clinics and affiliate clinics for a period of 12 months. If AMIS has not paid us for at least half of the minimum number of required users by the end of the first six months, then we may cancel the exclusive arrangement. Similarly, we may cancel the exclusive arrangement if AMIS has not paid us for an increased minimum number of users during each subsequent year. Our Software Solutions in Development. As part of our strategy of completing the Organic Clinic and targeting markets in which we have domain knowledge, channel partners or existing customers, we are currently developing the following solutions: . Patient Management. We are developing a patient management solution that will streamline claims processing by making eligibility information obtained at a clinic available to the billing service over the Internet. In September 1999, we entered into a letter of intent with California Medical Billing Association, an association of billing service bureaus, to market this solution to its 200 member billing services and their clinic customers. We cannot assure you that this letter of intent will result in a definitive agreement. . Medical Record Management. We are developing a medical record management solution to expand the process of managing clinical data by making electronic medical records available over the Internet to the association's entire network. This solution is covered by our letter of intent with California Medical Billing Association. . Practice Management. This solution will provide scheduling, billing and contract management features. We will initially market this solution as an upgrade to the traditional legacy products sold by PSI-Med Corporation, one of the companies we acquired. . Case Management. This solution will provide tracking, management and analysis of case-specific information required to manage a patient's treatment. We will initially market this solution as an upgrade to the traditional application sold by L.I.N.C., Inc., one of the companies we acquired. . Credentialing. We are developing this solution to provide credentialing capabilities to healthcare organizations over the Internet. . Urology Management. We are developing a clinical management solution for urology clinics and have a letter of intent with a urology association to market the solution. Our Legacy Software Products. We currently market traditional legacy software products for credentialing, scheduling, resource management, case management and outcomes management applications. These products were developed by the companies we have acquired since our inception in 1995. We acquired these companies primarily for their specific domain expertise and enabling technologies. Our acquired domain 40 expertise is incorporated into our CoreModel and has been used to build our current solutions and solutions in development. We intend to continue to market these legacy products until we have completed development of a comparable solution that can be delivered using our ASP model. As each of these solutions is completed, we will market it as an upgrade to our existing legacy products. For more information concerning our acquisitions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Strategic Relationships and Alliances We have entered into strategic relationships and alliances with companies to expand our sales distribution capabilities and improve our ability to deliver reliable, scalable ASP software solutions. We will continue to consider strategic relationships and alliances that enable us to leverage our core competencies in the development of advanced technologies and software solutions. These strategic relationships and alliances include the following: Pfizer Health Solutions Inc. We have had a strategic relationship with Pfizer Health Solutions Inc, a subsidiary of Pfizer Inc., since 1997. We have entered into agreements with Pfizer Health Solutions Inc that provide it with non-exclusive distribution rights to the solutions described below. Pursuant to these agreements, we cannot enter into distribution agreements for the same solutions with any competitor of Pfizer Inc. Since 1997, we have received over $2.9 million in revenue through this relationship. The solutions covered by these agreements include: . Outcomes Partner III. We are working to implement this quality measurement tool in innovative pilot projects, including several designed to use outcomes in support of disease management. This is a three-year agreement which expires on May 27, 2000. This agreement may be renewed by mutual agreement of the parties for additional periods of 12 months. . Surveys. We also collaborate with Pfizer Health Solutions Inc in marketing and implementing standard and tailored surveys for managed care organizations. This is a two-year agreement which expires on June 15, 2000. This agreement may be renewed by mutual agreement of the parties for additional periods of 12 months. . Credentialing. Along with Pfizer Health Solutions Inc, we offer credentialing services and software on a contract basis. This is a three-year agreement which expires on January 15, 2002, unless testing of the final version of the software extends beyond January 15, 2000, in which case the term of the agreement will be extended by the period by which such testing is extended. This agreement may be renewed by mutual agreement of the parties for additional periods of 12 months. Superior Consultant Holdings Corporation. In September 1999, we entered into a Distribution and Services Agreement, as amended, with Superior Consultant Holdings Corporation under which Superior agreed to introduce and outline the advantages of our ASP software solutions based on client interests, as well as providing systems integration, process improvement, consulting and implementation services to healthcare organizations. We agreed to market Superior's healthcare consulting services and business integration services, to promote Superior as our exclusive alliance partner for the provision of healthcare consulting services and not to offer distribution rights to our Organic Architecture and solutions to any direct competitor of Superior without Superior's prior written approval. Under the agreement, Superior has a non- exclusive worldwide license to market, use, install and display our Organic Architecture and solutions. We have also appointed Superior as our international provider of healthcare consulting services to our clients. The agreement entitles Superior to appoint a member to our board of directors and to receive a vested non-statutory stock option grant exercisable for 200,000 shares of our common stock at an exercise price of $6.00 per share. The initial term of the agreement runs through August 31, 2002 and may be renewed by Superior for up to two additional two-year terms. Conxion Corporation. We have entered into several agreements with Conxion Corporation, under which they supply us with application hosting services and Internet infrastructure for our ASP software solutions. Conxion houses the equipment for these services in government rated Class A data centers from which our ASP software solutions are deployed and run. We have been using Conxion's services to deploy our ASP 41 solutions since May 1999 and have been using them as our Internet service provider since June 1998. These agreements typically have terms of one year. Conxion has agreed to enter into extensions of these agreements and to enter into supplemental service agreements, as required by us on terms not less favorable to us as they offer to any of their customers. Conxion cannot terminate or suspend the services provided under these agreements even if a bona fide dispute exists so long as undisputed payments are paid. If we withhold an undisputed payment, Conxion must notify us of the breach in writing and provide us thirty days to cure the breach. In connection with these agreements, Conxion invested $550,000 in our Series C Preferred Stock. Sales and Marketing Our sales and marketing strategy is to increase acceptance of our ASP solutions in clinics and group practices by (1) entering into partnerships with specialty industry groups and associations who provide us access to customer channels and (2) selling our ASP solutions as upgrades to our installed base of over 500 customers that currently use legacy systems. We believe that our channel partner relationships will enable us to identify customers with common needs as a channel for our sales efforts. Our current channel partners, American Medical Information Systems and Pfizer Health Solutions Inc, endorse our ASP software solutions and provide for co-marketing to their members and customers. Our sales force is divided into Internet, strategic and tactical teams. The Internet team sells services and products over the Internet and telephone, which makes more efficient use of their time. The strategic sales team is focused on selling through our channel partners as well as through our strategic relationships with Superior and Pfizer Health Solutions Inc. The tactical sales team focuses on selling our legacy software products and services. Our tactical sales force is also responsible for selling our ASP software solutions as upgrades to our installed legacy products. We currently have nine employees in our sales force, five of which are in the tactical sales team. We intend to expand the Internet and strategic sales teams significantly following this offering. We market our solutions and services through our website, articles in industry publications, direct mail and participation in trade shows. From our website, prospective customers can obtain product information, and download and run demonstration software. We also use our website to identify and qualify prospective customers who request information. We believe that publication of relevant articles in key trade journals is an important method of building industry awareness. Since 1998, we have published 13 articles under the bylines of our staff. Research and Development Our research and development organization is comprised of development engineers who work on system architecture and solution development teams who work with our domain experts to build solutions for each domain incorporated in the CoreModel. As of September 15, 1999, we had 25 professionals dedicated to architecture and solutions development. We will continue to make substantial investments in research and development to enhance our proprietary architecture and support the development of additional solutions. Competition The business of providing application software and services to clinics and group practices is extremely competitive. In addition, the market for Internet- based ASPs is relatively new and evolving, and we anticipate that competition will continue to intensify as the use of the Internet grows. Our competitive position in the healthcare software application market is difficult to evaluate due to the variety of current and potential competitors and the evolving nature of our market and the ASP model. However, we believe that our ability to provide tailored, integrated and adaptable solutions to our customers over the Internet on a monthly subscription basis is a competitive advantage. Our primary competitors include: . Legacy software vendors such as Cerner Corporation, Eclipsys Corporation, IDX Systems Corporation, McKesson HBOC, Inc. and Medical Manager Corporation; 42 . Application service providers such as Confer Software, Inc., MedicaLogic, Inc. and The Trizetto Group, Inc.; and . Healthcare e-commerce and portal companies such as CareInsite, Inc. and Healtheon Corporation. Each of these types of companies either is or in the future can be expected to compete with us in delivering software solutions to the clinic and group practice markets, including the delivery of software applications over the Internet. Furthermore, major software companies and other entities, including those specializing in the healthcare industry that are not currently offering applications, products or services that compete with our products and services, may enter our markets. In addition, our existing and future strategic partners may compete with us from time to time by selling, consulting on or hosting other software that competes with our software solutions. We believe the principal differentiating characteristics upon which we compete are: . features and functionality; . fit with the user's practice, processes and needs; . cost; . ease of implementation and use; . business and technical expertise; . integration of applications; . quality of customer service and support; . reliability; and . scalability. To remain competitive, we must continue to enhance our software solutions, as well as expand our sales, marketing and distribution channels to respond promptly and effectively to: . changing needs of clinics and group practices; . advances in the delivery of software applications over the Internet; . technological innovation and change; . our competitors' new products, services and pricing models; and . challenges of hiring and retaining qualified information technology professionals. For additional information concerning risks associated with competition, see "Risk Factors--The markets we serve are highly competitive and many of our competitors have much greater resources." Intellectual Property Rights Our success and ability to compete are dependent in part upon our proprietary technology. We rely upon a combination of copyright, patent, trademark and trade secret laws and other means to protect our technology. However, the steps we have taken may not prevent the misappropriation of our products or technology. In addition, effective proprietary rights protection may be unavailable or limited in some foreign countries. We have five U.S. patent applications pending and have received a Notice of Allowance from the United States Patent and Trademark Office on one of them. In addition, we have five registered trademarks and have 13 trademark applications pending. We retain ownership of our CoreModel and the software applications we develop. In addition, we have entered into agreements for the right to use third party software components, such as our database program, in 43 our products on a non-exclusive basis. Our breach of these agreements could result in our loss of these rights and would harm our business. Our success will depend in part on our ability to continue to license additional third party software and upgrades to existing third party software in order to enhance our products. However, we may not be able to license additional rights for this software on commercially reasonable terms or at all. If we cannot obtain required licenses, we could encounter delays or unanticipated development expense while we attempt to internally develop substitute technology. We may become the target of intellectual property litigation. Although we have not been notified that any of our products infringe third party intellectual property rights, we may receive notices of these claims in the future. Any litigation to determine the validity of such claims, including claims arising from our contractual indemnification obligations to our customers, regardless of its merit or resolution, would likely be costly and may divert management's attention and resources, or cause service implementation delays. In the event of an adverse ruling in any such litigation, we could be required to pay substantial damages, cease the sale of infringing products or obtain a license of the intellectual property rights of the third party claiming infringement. There can be no assurance that such a license would be available to us on reasonable terms or at all. We also seek to protect our trade secrets and proprietary technology through confidentiality agreements with employees, customers, consultants and other appropriate parties. However, we may not have an adequate remedy in the event these agreements are breached or any remedy if our trade secrets are independently developed by others. For information concerning risks associated with intellectual property rights, see "Risk Factors." Government Regulation Government Regulation and Healthcare Reform. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. Laws and regulations may be adopted with respect to the Internet covering issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of products and services. The adoption of any additional laws or regulations may impede the growth of the Internet or other online services, which could, in turn, decrease the demand for our applications and services and increase our cost of doing business, or otherwise have an adverse effect on our business, financial condition and results of operations. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could harm our business. The confidentiality of patient records and the circumstances under which records may be released for inclusion in our databases are subject to substantial regulation by state governments. These state laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the hospital, physician or other healthcare provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of this information to implement security measures. Such legislation might require us to make substantial expenditures to implement such measures. We cannot assure you that changes to state or federal laws will not materially restrict the ability of healthcare providers to submit information from patient records using our applications. Legislation currently being considered at the federal level could impact the manner in which we conduct our business. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) mandates the use of standard transactions, standard identifiers, security and other provisions by the year 2000. We are designing our applications to enable compliance with the proposed regulations, but cannot assure you that we will be able to 44 comply with those proposed regulations in a timely manner or at all. Moreover, until the proposed regulations become final, they could change, which could require us to expend additional resources to comply with the revised standards and we may not be able to comply with the revised standards in a timely manner or at all. Based on our present business operations, we believe that the HIPAA requirements related to the maintenance and exchange of electronic health information may apply to legacy products sold by our wholly owned subsidiary, PSI-Med Corporation, but not to our other products, services or solutions. If any of our products, services or solutions are subject to those regulations, we may be required to incur additional expenses in order to comply with these requirements and we may not be able to comply with them in a timely manner or at all. In addition, the success of our compliance efforts may also be dependent on the success of healthcare participants in dealing with the standards. If we are unable to comply with regulations implementing HIPAA in a timely manner or at all, the sale of our solutions and business could be harmed. The United States Food and Drug Administration is responsible for assuring the safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act. Computer applications and software are considered medical devices and subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. We do not believe that any of our current applications or services are subject to FDA regulation as medical devices; however, we plan to expand our application and service offerings into areas that may subject it to FDA regulation. We have no experience in complying with FDA regulations. Our compliance with such FDA regulations could prove to be time consuming, burdensome and expensive, which could have a material adverse effect on our ability to introduce new applications or services in a timely manner. Employees As of September 15, 1999, we had approximately 130 employees. Our employees are not subject to any collective bargaining agreements and we generally have good relationships with our employees. Facilities We lease eight facilities, all of which are located within the United States. Our principal executive and corporate offices are located in San Francisco, California. In addition, we maintain offices in Berkeley, Santa Ana and Calabasas, California, Denver, Wheat Ridge and Ft. Collins, Colorado and Golden Valley, Minnesota. Our leases have expiration dates ranging from January 2000 to August 2002. We believe that our facilities are adequate for our current operations and that additional leased space can be obtained if needed. Legal Proceedings There are no legal proceedings pending to which we are a party and our management is unaware of any contemplated actions against us. 45 MANAGEMENT Directors and Executive Officers The following table presents information regarding each of our directors and executive officers as of September 15, 1999.
Name Age Position ---- --- -------- Jack D. Anderson...................... 55 Chairman of the Board; Chief Executive Officer William W. Shaw, III.................. 42 President, Secretary and Treasurer William H. Matthews................... 45 Chief Financial Officer Robert L. Anderson.................... 54 Director; Senior Vice President Michael J. Barry...................... 38 Chief Information Officer David W. McComb....................... 46 Director; Vice President, Research and Development Michael E. Meisel..................... 45 Chief Sales Officer; President and CEO of Res-Q, Inc., a wholly owned subsidiary of OrganicNet M. Jan Roughan........................ 53 Director; President and CEO of L.I.N.C., Inc., a wholly owned subsidiary of OrganicNet Robert S. Garvie...................... 50 Director Gail E. Oldfather..................... 64 Director Michael A. Wilson..................... 52 Director
Jack D. Anderson co-founded OrganicNet in January 1995. He has been Chairman of the Board and Chief Executive Officer since inception. Mr. Anderson has approximately 28 years of experience in healthcare management and approximately 20 years of experience in healthcare information systems. From 1993 to 1994, Mr. Anderson served as a Business Development Consultant for Velocity Healthcare Informatics, Inc., which was purchased by OrganicNet in December 1996. In 1978, he co-founded Cost Containment Systems, Inc., a healthcare software company, which was subsequently merged with Serving Software, Inc. Mr. Anderson served as a director of Serving Software from 1992, when it became a public company, until it was acquired by HBO & Company in 1994. William W. Shaw, III has been President of OrganicNet since February 1997 and Secretary and Treasurer since July 1996. From July 1996 to June 1999, he also served as Chief Financial Officer of OrganicNet. Mr. Shaw was a consultant to the Company from October 1995 to July 1996. Mr. Shaw has approximately 16 years of management experience in the healthcare industry. From February 1993 to July 1995, he was Executive Vice President, Vice President of Marketing and Research and Development for Aesculap, Inc., a surgical products company and wholly owned subsidiary of Aesculap AG. From 1983 to February 1993, Mr. Shaw held several other positions at Aesculap including Chief Operating Officer, Vice President Finance, Treasurer and Controller. From 1980 to 1983, Mr. Shaw was an Audit Supervisor with Coopers & Lybrand. William H. Matthews has been the Chief Financial Officer of OrganicNet since June 1999. He joined OrganicNet in February 1999 as a financial and accounting consultant. From October 1994 to February 1999, Mr. Matthews was the Chief Financial Officer for Imagicast, Inc., formerly Telescan Systems, Inc., a developer of software and hardware for interactive retail point of sale applications. From 1993 to 1994, Mr. Matthews served as the controller for Ravenswood Winery. From 1988 to 1992, Mr. Matthews was the Chief Financial Officer for Ocean Colony Partners, a real estate development firm. From 1981 to 1987, Mr. Matthews held financial management positions for various companies. From 1977 to 1981, he was a Senior Auditor for Coopers & Lybrand. Robert L. Anderson co-founded OrganicNet in January 1995 and has been Senior Vice President of OrganicNet since January 1996. He has served as a director since inception. Mr. Anderson has approximately 20 years of experience in the development of solutions for complex project and program management engagements. From August 1993 to October 1994, he served as Director of Practice Development of BSW Advanced Technology, Inc., an object-oriented project management software company. 46 Michael J. Barry joined OrganicNet as Chief Information Officer in January 1996. Mr. Barry has approximately 20 years of software development experience. From June 1993 to January 1996, he served as Vice President of Research and Development at Velocity Healthcare Informatics, Inc. From 1991 to 1993, Mr. Barry served as the Information Systems Manager for the Carlson Companies, Inc., a relationship marketing company. From 1985 to 1991, he was an independent software consultant. David W. McComb co-founded OrganicNet in January 1995. He has been Vice President of Research and Development and a director since June 1995. Mr. McComb has approximately 20 years of experience in software project management. From 1989 to 1994, he was President of First Principles, Inc., which he founded to develop an object-oriented business application framework. First Principles was acquired by OrganicNet in April 1996. From June 1993 to January 1995, Mr. McComb also served as Vice President of Research and Development for BSW Advanced Technology, where he developed object-oriented project management systems. From 1976 to 1989, he managed client software projects at Andersen Consulting. He is a frequent lecturer for systems development groups and has published numerous articles on the subject of systems development. Michael E. Meisel was appointed Chief Sales Officer of the Company in February 1999. Since 1987, Mr. Meisel has served as the President of Res-Q, Inc., formerly MMS, Inc., which became a wholly owned subsidiary of OrganicNet in May 1997. Mr. Meisel has approximately 20 years of experience in healthcare systems product development. M. Jan Roughan has been a director of OrganicNet since December 1998. She joined OrganicNet as the President and Chief Executive Officer of L.I.N.C., Inc. in connection with OrganicNet's acquisition of L.I.N.C. in June 1997. Ms. Roughan founded L.I.N.C. in 1987. From 1982 to 1987, she worked for the Equitable Life Assurance Society in various capacities including Vice President and Business Manager. Ms. Roughan is a Registered Nurse, a Certified Disability Management Specialist, a Certified Rehabilitation Registered Nurse, a Certified Case Manager and a Certified Developmental Disabilities Nurse. Robert S. Garvie has been a director of OrganicNet since March 1996. Mr. Garvie has served as a director for various private companies in the medical device and healthcare industries. In 1993, Mr. Garvie founded ArthroCare, a medical device company. From 1992 to 1993, Mr. Garvie served as the Vice President of Sales and Marketing for Citation Caliber, Inc., a diagnostic medical device company. From 1991 to 1992, Mr. Garvie was a consultant for Shaw Medical Management Group, an electrosurgical products company. From 1986 to 1991, Mr. Garvie served as Vice President, Surgical Products Division for Haemonetics, a medical device company. Prior to Haemonetics, Mr. Garvie co- founded Cost Containment Systems, Inc., a healthcare software company. Gail E. Oldfather has been a director of OrganicNet since October 1995. Since 1985, Mr. Oldfather has held various positions for GEO Communications, a financial consulting company. Mr. Oldfather is currently the President of GEO Communications. Michael A. Wilson has been a director of OrganicNet since March 1998. He is currently an independent healthcare consultant. From September 1997 to July 1999, he was President and Chief Executive Officer of the CHW Medical Foundation in San Francisco, a division of Catholic Healthcare West. Before joining CHW in September 1997, Mr. Wilson served for eight years as President and Chief Administrative Officer of the Dean Medical Clinic in Madison, Wisconsin. He is also a former president of the Medical Group Management Association and is a member of the board of directors of Physician Insurance Company of Wisconsin. Board Composition The board of directors currently consists of seven members. OrganicNet's Amended and Restated Certificate of Incorporation, as in effect immediately prior to the consummation of this offering, divides the board of directors into three classes. The members of each class of directors serve for staggered three-year terms. The board of directors is composed of (1) two Class II directors, Messrs. Robert S. Garvie and Gail E. 47 Oldfather, whose terms expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 1999; (2) three Class I directors, Messrs. Jack D. Anderson, Robert L. Anderson and David W. McComb, whose terms expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2000; and (3) two Class III directors, Mr. Michael A. Wilson and Ms. M. Jan Roughan, whose terms expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2001. Pursuant to our agreement with Superior Consultant Holdings Corporation, Superior has the right to appoint a member to our board of directors prior to this offering. Our executive officers are appointed by the board of directors and serve until their successors are qualified and appointed. There are no family relationships among any of our directors or executive officers. Director Compensation Directors who are also executive officers do not receive additional compensation for serving on the board or any board committee. Directors are reimbursed for reasonable travel expenses incurred in attending meetings. There are no formal arrangements for compensating non-employee directors. We have compensated non-employee directors with stock options for their service on the board. In December 1996, Robert S. Garvie received an option to purchase 10,000 shares of common stock at an exercise price of $.50 per share and Gail E. Oldfather received an option to purchase 18,000 shares of common stock at an exercise price of $.50 per share. In March 1998, Mr. Garvie and Mr. Oldfather each received options to purchase 4,500 shares of common stock at an exercise price of $1.50 per share. All of Mr. Garvie's and Mr. Oldfather's options are fully vested. Michael A. Wilson received an option in March 1998 to purchase 2,500 shares of common stock at an exercise price of $1.50, half of which are fully vested. In addition, the following directors received the following options to purchase common stock in consideration for granting bridge loans to us: . In October 1998, Robert S. Garvie received an option to purchase 1,000 shares of common stock at an exercise price of $2.00 per share; . In October 1998, Gail E. Oldfather received an option to purchase 1,200 shares of common stock at an exercise price of $2.00 per share; and . In December 1998, Gail E. Oldfather received an option to purchase 1,000 shares of common stock at an exercise price of $2.00 per share. See "Certain Relationships and Related Transactions" for a description of these bridge loans. Committees of the Board Of Directors In September 1999, the board of directors established an audit committee to review our internal accounting procedures and consult with, and review the services provided by, our independent auditors. The audit committee currently consists of Messrs. Oldfather, McComb and Wilson. In July 1997, the board of directors established a compensation committee. The compensation committee reviews and recommends to the board the compensation and benefits of all of our executive officers and establishes and reviews general policies relating to compensation and benefits of our employees and its subsidiaries. The compensation committee currently consists of Messrs. Garvie, Oldfather and Shaw. Compensation Committee Interlocks and Insider Participation Prior to July 1997, we did not have a separate compensation committee or other board committee performing equivalent functions. These functions were performed by Jack D. Anderson and William W. Shaw, III. No interlocking relationships exist between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any other interlocking relationship existed in the past. 48 Executive Compensation The following table sets forth the total compensation for services rendered by our Chief Executive Officer and each of our seven other most highly compensated executive officers including Ms. Roughan, who is an executive officer of one of our wholly owned subsidiaries during the fiscal year ended December 31, 1998. These individuals are referred to as the "named executive officers." The titles listed below are the titles of the named executive officers as of June 30, 1999. William H. Matthews joined OrganicNet in June 1999 and will be compensated at an annual base salary of $125,000 during the fiscal year ending on December 31, 1999. Summary Compensation Table
Long-Term Annual Compensation Compensation ------------------------ ---------------------- Securities Name and Principal Position Salary Bonus Underlying Options (#) - --------------------------- ---------- --------- ---------------------- Jack D. Anderson, Chairman of the Board and Chief Executive Officer....................... $ 120,000 (1) $ -- -- William W. Shaw, III, President, Secretary and Treasurer..................... 120,000 (1) -- 10,000 William H. Matthews, Chief Financial Officer............. -- -- -- Robert L. Anderson, Senior Vice President..................... 120,000 (1) -- -- Michael J. Barry, Chief Information Officer........... 120,000 (1) -- 10,000 David W. McComb, Vice President, Research and Development................... 120,000 (2) -- -- Michael E. Meisel, Chief Sales Officer; President and CEO of Res-Q, Inc.................... 150,000 (3) 11,877 5,000 M. Jan Roughan, President and Chief Executive Officer of L.I.N.C., Inc................. 175,000 12,472 --
- -------- (1) Includes $85,000 of salary accrued during fiscal year 1998 but has not yet been paid. (2) Includes $40,000 of salary accrued during fiscal year 1998 but has not yet been paid. (3) Includes $12,000 of salary accrued during fiscal year 1998 but has not yet been paid. Option Grants in Last Fiscal Year and the Six Months Ended June 30, 1999 The following table sets forth grants of stock options to each of the named executive officers during the fiscal year ended December 31, 1998. The potential realizable value is calculated by assuming that the initial public offering price appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price on the last day at the appreciated price. The 5% and 10% assumed annual rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term (2) ---------------------------------------------------- --------------------- Number of Percent of Securities Total Options Underlying Granted to Options Employees in Expiration Name Granted Fiscal Year (1) Exercise Price Date 5% 10% - ---- ---------- --------------- -------------- ---------- ---------- ---------- Jack D. Anderson........ -- -- -- -- -- -- William W. Shaw, III.... 5,000 1.26% $1.50 01/13/08 5,000 1.26% 2.00 09/25/08 William H. Matthews..... -- -- -- -- -- -- Robert L. Anderson...... -- -- -- -- -- -- Michael J. Barry........ 5,000 1.26% 1.50 01/13/08 5,000 1.26% 2.00 09/25/08 David W. McComb......... -- -- -- -- -- -- Michael E. Meisel....... 5,000 1.26% 1.50 01/13/08 M. Jan Roughan.......... -- -- -- -- -- --
49 - -------- (1) In 1998, we granted options to purchase an aggregate of 398,183 shares of common stock. (2) The potential realizable value is calculated by assuming that the initial public offering price of $ per share appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. The potential realizable value computation is net of the applicable exercise price, but does not take into account applicable federal or state income tax consequences and other expenses of option exercises or sales of appreciated stock. The values shown do not consider non-transferability or termination of the options upon termination of such employee's employment with OrganicNet. The following table sets forth option grants to the named executive officers for the time period of January 1, 1999 to June 30, 1999.
Individual Grants ----------------------------------- Number of Securities Underlying Options Name Granted Exercise Price Expiration Date - ---- -------------------- -------------- --------------- Jack D. Anderson............ -- -- -- William W. Shaw, III........ 7,500 $2.00 03/02/09 William H. Matthews......... 4,000 2.50 04/21/09 2,465 2.50 06/22/09 90,000 2.50 06/22/09 Robert L. Anderson.......... -- -- -- Michael J. Barry............ 7,500 2.00 03/02/09 David W. McComb............. -- -- -- Michael E. Meisel........... 4,000 2.00 03/02/09 M. Jan Roughan.............. 3,500 2.00 03/02/09
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth summary information with respect to exercisable and unexercisable stock options held as of December 31, 1998 by each of the named executive officers and with respect to the fiscal year ended December 31, 1998. None of the named executive officers exercised options in the fiscal year ended December 31, 1998.
Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options at at December 31, 1998 December 31, 1998 (2) ----------------------------- ------------------------- Name Exercisable (1) Unexercisable Exercisable Unexercisable - ---- --------------- ------------- ----------- ------------- Jack D. Anderson........ -- -- -- -- William W. Shaw, III.... 171,666 88,334 William H. Matthews..... -- -- -- -- Robert L. Anderson...... -- -- -- -- Michael J. Barry........ 171,666 88,334 David W. McComb......... -- -- -- -- Michael E. Meisel....... -- 5,000 M. Jan Roughan.......... -- -- -- --
- -------- (1) Exercisable refers to those options which will be vested and exercisable immediately upon completion of this offering, while "unexercisable" refers to those options which will be unvested at such time. (2) Value is determined by subtracting the exercise price from the fair market value of the common stock based on an assumed initial public offering price of $ , multiplied by the number of shares underlying the options. 50 Employment Agreements and Change of Control Arrangements Jack D. Anderson entered into an employment agreement with OrganicNet on January 1, 1996. Mr. Anderson's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Anderson or the company. Under the terms of his employment agreement, Mr. Anderson receives a base salary of $120,000, subject to change at the sole discretion of the board of directors. In addition, the board of directors, or a duly appointed committee thereof will, no less than once annually, determine if the award of a bonus is warranted and the amount of such bonus, if any. If we terminate Mr. Anderson's employment without cause or if Mr. Anderson resigns for good reason, upon a change of control or due to disability or death, he would be entitled to receive his then existing base salary for a period of 18 months from the date of termination. In addition, Mr. Anderson would be entitled to his annual bonus, prorated to his date of termination, and immediate and full vesting of all outstanding stock options granted through any termination date. The terms of Mr. Anderson's employment agreement also provide that Mr. Anderson will not, during the course of his employment and the 18 months following the date of the termination of his employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. William W. Shaw, III entered into an employment agreement with OrganicNet on June 1, 1996. Mr. Shaw's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Shaw or the company. Under the terms of his employment agreement, Mr. Shaw receives a base salary of $120,000, subject to change at the sole discretion of the board of directors. In addition, the board of directors, or a duly appointed committee thereof will, no less than once annually, determine if the award of a bonus is warranted and the amount of such bonus, if any. Pursuant to his employment agreement, we issued Mr. Shaw options to purchase up to 250,000 shares of our common stock and he is eligible for future issuances at the discretion of the board of directors. If we terminate Mr. Shaw's employment without cause or if Mr. Shaw resigns for good reason, upon a change of control or due to disability or death, he would be entitled to receive his then existing base salary for a period of 18 months from the date of termination. In addition, Mr. Shaw would be entitled to his annual bonus, including the cash value of shares issued, prorated to his date of termination, and immediate and full vesting of all outstanding stock options granted through the termination date. The terms of Mr. Shaw's employment agreement also provide that Mr. Shaw will not, during the course of his employment and the 18 months following the date of the termination of his employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. William H. Matthews entered into an employment agreement with OrganicNet on June 17, 1999. Mr. Matthew's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Matthews or the company. Under the terms of his employment agreement, Mr. Matthews receives a base salary of $125,000 which will be adjusted by the compensation committee within 45 days of the closing of this offering to an amount that represents a market range salary for a public company of our size and in our industry. Pursuant to his employment agreement, we issued to Mr. Matthews options to purchase up to 90,000 shares of our common stock at an option price of $2.50 per share and he is eligible for future issuances. Upon the occurrence of a change of control before June 20, 2000, fifty percent of Mr. Matthews' remaining unvested options will vest. Should a change of control occur after June 20, 2000, all of his remaining options will vest. Robert L. Anderson entered into an employment agreement with OrganicNet on January 1, 1996. Mr. Anderson's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Anderson or the company. Under the terms of his employment agreement, Mr. Anderson receives a base salary of $120,000, subject to change at the sole discretion of the board of directors. In addition, the board of directors, or a duly appointed committee thereof will, no less than once annually, determine if the award of a bonus is warranted and the amount of such bonus, if any. If we terminate Mr. Anderson's employment without cause or if Mr. Anderson resigns for good reason, upon a change of control or due to disability or death, he would be entitled to receive his then existing base salary for 51 a period of 18 months from the date of termination. In addition, Mr. Anderson will be entitled to his annual bonus, including the cash value of shares issued, prorated to his date of termination, and immediate and full vesting of all outstanding stock options granted through the termination date. The terms of Mr. Anderson's employment agreement also provide that Mr. Anderson will not, during the course of his employment and the 18 months following the date of the termination of his employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. Michael J. Barry entered into an employment agreement with OrganicNet on January 1, 1996. Mr. Barry's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Barry or the company. Under the terms of his employment agreement, Mr. Barry receives a base salary of $120,000, subject to change at the sole discretion of the board of directors. In addition, the board of directors, or a duly appointed committee thereof will, no less than once annually, determine if the award of a bonus is warranted and the amount of such bonus, if any. Pursuant to his employment agreement, we issued to Mr. Barry options to purchase up to 250,000 shares of our common stock and he is eligible for future issuances at the discretion of the board of directors. If we terminate Mr. Barry's employment without cause or if Mr. Barry resigns for good reason, upon a change of control or due to disability or death, he would be entitled to receive his then existing base salary for a period of 18 months from the date of termination. In addition, Mr. Barry would be entitled to his annual bonus, including the cash value of shares issued, prorated to his date of termination, and immediate and full vesting of all outstanding stock options granted through the termination date. The terms of Mr. Barry's employment agreement also provide that Mr. Barry will not, during the course of his employment and the 18 months following the date of the termination of his employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. M. Jan Roughan entered into an employment agreement with OrganicNet on January 1, 1997. Ms. Roughan's employment agreement ends on December 31, 1999. Under the terms of her employment agreement, Ms. Roughan receives a base salary of $175,000. In addition, incentive bonuses will be awarded to Ms. Roughan based upon net revenue realized from the sale of L.I.N.C., Inc. software products during the preceding year. Either OrganicNet or Ms. Roughan may terminate this agreement by giving written notice to the other party. Pursuant to the terms of her employment agreement, if Ms. Roughan is terminated for cause, as specified in the agreement, or upon her death, the company is obligated to pay her base salary and benefits through the effective date of termination, or the date of her death, as applicable, plus an additional 12 months of base salary and benefits. If Ms. Roughan is terminated without cause upon a majority vote of the board of directors, she is entitled to the greater of her base salary and benefits through the term of the agreement or 12 months of her then base salary and benefits. The terms of Ms. Roughan's employment agreement also provide that she will not, during the course of her employment and the 12 months following the date of the termination of her employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. Limitation of Liability and Indemnification Matters Our bylaws limit the personal liability of our directors to the fullest extent permitted by Delaware law. Section 145 of the Delaware General Corporation Law empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision does not eliminate or limit the liability of a director for the following: . any breach of the director's duty of loyalty to us or our 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 redemptions; . any transaction from which the director derived an improper personal benefit; 52 . if the officer or director did not act in good faith and in a manner reasonably believed to be in, or not opposed to, our best interests; or . with respect to any criminal action or proceeding, if the officer or director had reasonable cause to believe his conduct was unlawful. We believe that indemnification provisions under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. 1997 Stock Option/Stock Issuance Plan In November 1997, the board of directors adopted, and the stockholders approved, the 1997 Stock Option/Stock Issuance Plan. An aggregate of 1,478,513 shares of common stock currently are authorized for issuance under the incentive plan and the share reserve will automatically be increased on the first business day of each calendar year by an amount equal to 2% of the total outstanding shares of common stock on the last business day of the immediately preceding calendar year. No incentive stock option may be granted on the basis of the annual share increases. When a stock award expires, is terminated before it is exercised or is cancelled, the shares set aside for that award are returned to the pool of shares available for future awards. Shares that are issued when an award is exercised and that are subsequently repurchased by us will again become available for future awards. The 1997 Plan permits the grant of options to employees, non-employee directors, and consultants and other independent advisors to the company. Options may be either ISOs within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory stock options. In addition, the 1997 Plan permits the grant of stock bonuses and rights to purchase restricted stock. The 1997 Plan is administered by the board of directors. The board of directors may delegate its authority to administer the 1997 Plan to a committee of two or more board members appointed by the board of directors. The administrator has the authority to select the eligible persons to whom award grants are to be made, to designate the number of shares to be covered by each award, to determine whether an option is to be an ISO or nonstatutory stock option, to establish vesting schedules, to specify the exercise price of options and the type of consideration to be paid upon exercise and to specify other terms of awards. In general, the stock options granted under the 1997 Plan may not exceed 10 years. An optionholder may not transfer a stock option other than by will or the law of descent or distribution. The exercise price for an ISO cannot be less than 100% of the fair market value of the common stock on the date of grant. The exercise price for nonstatutory stock options cannot be less than 85% of the fair market value of the common stock on the date of grant. In the event the optionholder is a 10% stockholder, then the exercise price per share shall not be less than 110% of the fair market value of common stock on the date of grant. Unless the terms of an optionholder's stock option agreement provide for earlier termination, in the event an optionholder's service relationship with us, or any affiliate of ours, ceases due to disability or death, the optionholder (or his beneficiary) may exercise any vested options up to 12 months after the date such service relationship ends. If an optionholder's relationship with us, or any affiliate of ours, ceases for any reason other than disability or death, the optionholder may (unless the terms of the stock option agreement provide for earlier termination) exercise any vested options up to three months from cessation of service. Should an optionholder's relationship with us be terminated for misconduct, then all outstanding options held by the optionholder will terminate immediately and cease to remain outstanding. ISOs may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to which ISOs are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. If any ISO is granted to any employee who at the time of the grant owns or is deemed to own stock possessing more than 53 10% of the total combined voting power of the Company or any of its affiliates, the term of the ISO award may not exceed five years from the date of grant. In the event of certain changes in control, all outstanding options under the incentive plan either may be assumed, continued or substituted for by any surviving entity. If the surviving entity determines not to assume, continue or substitute for such awards, the vesting provisions of such stock options will be accelerated and such stock options will be terminated upon the change in control if not previously exercised. The portion of any ISO accelerated by a change in control will remain exercisable as an ISO only to the extent the $100,000 limitation is not exceeded. To the extent this dollar limitation is exceeded, the accelerated portion of such option will be exercisable as a nonstatutory stock option under the Federal tax laws. Even if the surviving entity does assume or substitute outstanding stock awards, if the holder of an award is terminated other than for misconduct, or constructively terminated, within a specified period not more than 18 months following the change in control, the holder's award will vest in full. The terms of any stock bonuses or restricted stock purchase awards granted under the 1997 Plan will be determined by the administrator. However, the administrator may not impose a vesting schedule which is more restrictive than 20% per year, with initial vesting to occur no later than one year after the issuance date. Such limitation shall not apply to any common stock issuance made to officers, non-employee directors or consultants. The administrator may award stock bonuses in consideration of past services without a purchase payment. Shares sold or awarded under the 1997 Plan may be subject to repurchase by us. The purchase price of restricted stock under any restricted stock purchase agreement will not be less than 85% of the fair market value of the company's common stock on the date of grant. However, the purchase price per share of common stock for a 10% stockholder shall not be less then 110% of the fair market value on the date of grant. Upon a change in control, all outstanding repurchase rights will terminate and the shares of common stock subject to those rights will immediately vest in full, except to the extent the repurchase rights are assigned to the successor entity or such accelerated vesting is precluded by limitations imposed by the administrator at the time the repurchase right was issued. In addition, the administrator will have full and complete discretion with regard to outstanding shares to provide that repurchase rights will automatically terminate on an accelerated basis and that the shares shall immediately vest in the event the participant's relationship with the company should terminate by reason of the change in control within no more than 18 months following the effective date of the change in control. The board of directors may amend or modify the 1997 Plan at any time. However, no such amendment or modification shall adversely affect the right and obligations with respect to options or unvested awards unless the participant consents to such an amendment or modification. In addition, certain amendments may require stockholder approval. As of August 31, 1999, the Company had issued and outstanding under the 1997 Plan options to purchase 792,732 shares of common stock. 1996 Stock Option/Stock Issuance On April 30, 1996, the board of directors adopted, and the stockholders approved, the 1996 Stock Option/Stock Issuance Plan. On April 22, 1997, the board of directors adopted, and on November 21, 1997, the stockholders approved, an amendment and restatement of the incentive plan. A maximum of 1,000,000 shares are authorized under the 1996 Plan. The authorized share reserve is comprised of (1) 750,000 shares originally available under the incentive plan and (2) an additional 250,000 shares of common stock authorized by the board on April 22, 1997, subject to stockholder approval. When a stock award expires, is terminated before it is exercised or is cancelled, the shares set aside for that award are returned to the pool of shares available for future awards. Awards may be granted in excess of the number of shares of common stock then available for issuance under the 1996 Plan, provided any excess shall be held in escrow until stockholder approval is obtained increasing the number of shares of common stock available for issuance. If approval is not obtained 54 within 12 months after the issuance of the excess is made, then (1) any unexercised options granted on the basis of the excess will terminate and cease to be outstanding and (2) the company will refund the exercise or purchase price plus interest. The 1996 Plan permits the grant of options to employees, non-employee directors and consultants. Options may be either ISOs within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory stock options. In addition, the 1996 Plan permits the grant of stock bonuses and rights to purchase restricted stock. The 1996 Plan is administered by the board of directors. The board of directors may delegate its authority to administer the 1996 Plan to a committee of two or more board members appointed by the board of directors. The administrator has the authority to select the eligible persons to whom award grants are to be made, to designate the number of shares to be covered by each award, to determine whether an option is to be an ISO or nonstatutory stock option, to establish vesting schedules, to specify the exercise price of options and the type of consideration to be paid upon exercise and to specify other terms of awards. In general, the stock options granted under the 1996 Plan may not exceed 10 years. An optionholder may not transfer a stock option other than by will or the law of descent or distribution. However, a nonstatutory option may be assigned in whole or in part during optionholder's lifetime in accordance with the terms of a qualified domestic relations order. The exercise price for an ISO cannot be less than 100% of the fair market value of the common stock on the date of grant. The exercise price for nonstatutory stock options cannot be less than 85% of the fair market value of the common stock on the date of grant. In the event the optionholder is a 10% stockholder, then the exercise price per share will not be less than 110% of the fair market value of common stock on the date of grant. Unless the terms of an optionholder's stock option agreement provide for earlier termination, in the event an optionholder's service relationship with us, or any affiliate of ours, ceases due to death, the optionholder's beneficiary may exercise any vested options up to 12 months after the date such service relationship ends. In the event an optionholder's service relationship with us, or any affiliate of ours, ceases due to disability, the optionholder may exercise any vested option up to six months (12 months for permanent disability) after the cessation of service. If an optionholder's relationship with us, or any affiliate of ours, ceases for any reason other than disability or death, the optionholder may (unless the terms of the stock option agreement provide for earlier termination) exercise any vested options up to three months from cessation of service. Should an optionholder's relationship with us be terminated for misconduct, then all outstanding options held by the optionholder will terminate immediately and cease to remain outstanding. ISOs may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to which incentive stock options are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. If any ISO is granted to any employee who at, the time of the grant, owns or is deemed to own stock possessing more than 10% of the total combined voting power of the Company or any of its affiliates, the term of the ISO award may not exceed five years from the date of grant. In the event of certain changes in control, all outstanding options under the incentive plan may be assumed by any surviving entity. If the surviving entity determines not to assume the options, they will terminate and no longer be outstanding on the effective date of such change in control. The terms of any stock bonuses or restricted stock purchase awards granted under the 1996 Plan will be determined by the administrator. However, the administrator may not impose a vesting schedule which is more restrictive than 20% per year, with initial vesting to occur no later than one year after the issuance date. Such limitation shall not apply to any common stock issuance made to officers, non-employee directors or consultants. The administrator may award stock bonuses in consideration of past services without a purchase payment. Shares sold or awarded under the 1996 Plan may be subject to repurchase by the company. The 55 purchase price of restricted stock under any restricted stock purchase agreement will not be less than 85% of the fair market value of the company's common stock on the date of grant. However, the purchase price per share of common stock for a 10% stockholder will not be less then 110% of the fair market value on the date of grant. Upon a change in control, all outstanding repurchase rights will terminate to the extent the surviving entity does not accept the assignment of the repurchase rights. The board of directors may amend or modify the 1996 Plan at any time. However, no such amendment or modification shall adversely affect the right and obligations with respect to options or unvested awards unless the participant consents to such an amendment or modification. In addition, the board of directors will not without the approval of the stockholders (1) increase the maximum number of shares issuable under the 1996 Plan (except for permissible adjustments in the event of certain changes in the Company's capitalization), (2) materially modify the eligibility requirements for participation or (3) materially increase the benefits accruing to participants. As of August 31, 1999, the Company had issued and outstanding under the 1996 Plan options to purchase 826,436 shares of common stock. 401(k) Plan We sponsor a 401(k) plan, a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended. All employees who exceed 20 hours per week and 1,000 hours per year and who complete one month of service are eligible to participate. Participants may make pre-tax contributions to the 401(k) plan of up to 20% of their eligible earnings, subject to a statutorily prescribed annual limit ($10,000 in calendar year 1999). Under the 401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the 401(k) plan's trustee. The 401(k) plan also permits us to make matching contributions and profit-sharing contributions, subject to established limits. Each participant's contributions and the corresponding investment earnings are generally not taxable to the participants until withdrawn. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. 56 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since January 1, 1998, some of our directors, executive officers and affiliates have entered into transactions with us as follows: Purchase Of Capital Stock
Date of Number of Name Purchase Type of Security Price per Share Shares - ---- -------- ------------------------ --------------- --------- Jack D. Anderson (1).... 08/10/99 Series C Preferred Stock $2.75 51,789 William H. Matthews..... 04/17/98 Series C Preferred Stock 2.75 10,909 01/06/99 Series C Preferred Stock 2.75 7,143 06/30/99 Series C Preferred Stock 2.75 5,000 08/02/99 Series C Preferred Stock 2.75 20,000 Michael E. Meisel....... 04/01/99 Series C Preferred Stock 2.75 5,000 Robert S. Garvie (2).... 02/19/99 Series C Preferred Stock 2.75 31,110 04/05/99 Common Stock (4) 0.50 10,000 04/05/99 Common Stock (4) 1.50 4,500 04/05/99 Common Stock (4) 2.00 1,000 04/05/99 Series C Preferred Stock 2.75 11,581 08/05/99 Series C Preferred Stock 2.75 36,363 Gail E. Oldfather (3)... 03/10/98 Series C Preferred Stock 2.75 17,945 11/25/98 Series C Preferred Stock 2.75 29,753 12/28/98 Series C Preferred Stock 2.75 1,800 03/31/99 Series C Preferred Stock 2.75 10,000 07/20/99 Series C Preferred Stock 2.75 75,000
- -------- (1) Includes shares purchased on behalf of Mr. Anderson's spouse. (2) Includes shares purchased by Omeah Ltd. Partnership. Mr. Garvie is a General Partner of Omeah Ltd. Partnership. (3) Includes shares purchased on behalf of Mr. Oldfather's spouse and relatives. (4) Shares purchased pursuant to the exercise of stock options. 57 Since January 1, 1998, we have granted options to purchase common stock to some of our directors, executive officers and affiliates as follows: Issuance Of Stock Options
Name Date Granted Exercise Price Options - ---- ------------ -------------- ------- William W. Shaw, III........................ 01/13/98 $1.50 5,000 09/25/98 2.00 5,000 03/02/99 2.00 7,500 08/06/99 2.50 10,000 William E. Matthews......................... 04/21/99 2.50 4,000 06/22/99 2.50 2,465 06/22/99 2.50 90,000 Michael J. Barry............................ 01/13/98 1.50 5,000 09/25/98 2.00 5,000 03/02/99 2.00 7,500 08/06/99 2.50 10,000 Michael E. Meisel........................... 01/13/98 1.50 5,000 03/02/99 2.00 4,000 M. Jan Roughan.............................. 03/02/99 2.00 3,500 Robert S. Garvie............................ 03/12/98 1.50 2,500 03/12/98 1.50 2,000 10/29/98 2.00 1,000 Gail E. Oldfather........................... 03/12/98 1.50 2,500 03/12/98 1.50 2,000 10/29/98 2.00 1,200 12/10/98 2.00 1,000 08/06/99 2.50 27,000 Michael A. Wilson........................... 03/12/98 1.50 2,500
Lock-Up Agreements Each of the individuals listed above have entered into lock-up agreements pursuant to which they have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose of any shares of common stock, preferred stock or any substantially similar securities or securities convertible into or exchangeable or exercisable for shares of common stock, preferred stock or any substantially similar securities for a period of 180 days from the date of this prospectus without the prior written consent of the underwriter. The underwriter may, at any time and without notice, waive the terms of these lock-up agreements. ASP Agreement with Conxion Corporation We have entered into several agreements with Conxion Corporation under which Conxion supplies us with application hosting services and Internet infrastructure for our ASP software solutions. In connection with these agreements, Conxion invested $550,000 in our Series C preferred stock. See "Business--Strategic Relationships and Alliances" for a description of these agreements. Loan From Jack D. Anderson and Peggy L. Anderson to OrganicNet On September 30, 1997, Mr. and Mrs. Anderson loaned $60,000 to us at an interest rate of 6.5% per annum. As of September 15, 1999, the Company has repaid a total of approximately $56,371 of the loan, approximately $31,453 of which was repaid in cash and approximately $24,917 of which was repaid in the form of 9,061 shares of Series C preferred stock. The remaining balance on this loan is approximately $10,994. 58 Agreement with Superior Consultant Holdings Corporation We entered into a marketing alliance with Superior Consulting Holdings Corporation in September 1999, under which Superior will introduce, promote and demonstrate our ASP software solutions. Pursuant to this agreement, we granted Superior an option to purchase 200,000 shares of our common stock at an exercise price of $6.00 per share. See "Business--Strategic Relationships and Alliances" for a description of this agreement. Indemnity and Subrogation Agreement between Michael E. Meisel and OrganicNet On January 1, 1998, Michael E. Meisel entered into an Indemnity and Subrogation Agreement with us in connection with a line of credit agreement between our wholly owned subsidiary Res-Q, Inc. (formerly MMS, Inc.) and Wells Fargo Bank. This line of credit was assigned to and assumed by us upon the acquisition of MMS, Inc. In connection with this line of credit, Mr. Meisel provided a personal guaranty. OrganicNet agreed to indemnify Mr. Meisel for a maximum amount of $200,000, the current amount of Mr. Meisel's guaranty plus accrued interest, for any deficiency in repayment that he may suffer after making a claim for reimbursement from the principal borrower. Promissory Note dated April 1, 1999 between Michael E. Meisel and OrganicNet In connection with our acquisition of Res-Q, Inc. (formerly MMS, Inc.), OrganicNet and Mr. Meisel executed two $50,000 promissory notes on April 4, 1997 and December 1, 1997, respectively. These notes were consolidated on April 1, 1999. Under this consolidated promissory note, we were obligated to pay Mr. Meisel approximately $105,187, plus interest at the rate of 10% per annum, compounded monthly. This note becomes due and payable on December 31, 1999 and can be prepaid at any time in whole or in part without premium or penalty. As of June 30, 1999, the outstanding balance of this note was approximately $107,832. In August 1999, we repaid $5,000 of this note. We will repay the entire outstanding balance of this note from the proceeds of this offering. Line of Credit Agreement between First National Bank and Jack D. Anderson, David W. McComb and Robert L. Anderson On October 28, 1997, First National Bank extended a line of credit in the amount of $100,000 to three of our executive officers and directors, Jack D. Anderson, David W. McComb and Robert L. Anderson. The terms of the line of credit are for a term for one year at a variable rate of interest, currently 10%. The line of credit has been extended to September 30, 1999. Messrs. Anderson, McComb and Anderson have borrowed $100,000 under this line of credit for our benefit. We have assumed the obligation to repay this loan. Messrs. Anderson, McComb and Anderson have executed promissory notes with First National Bank and have personally guaranteed this loan. Promissory Notes dated June 1, 1997 and December 1, 1997 between M. Jan Roughan and OrganicNet In connection with our acquisition of L.I.N.C., Inc. on June 23, 1997, OrganicNet and Ms. Roughan executed two promissory notes in the amount of $50,000 each on June 1, 1997 and December 1, 1997. As of June 30, 1999, the total balance of these notes was approximately $120,045. In August 1999, we repaid a total of $5,000 of these notes. We will repay the entire outstanding balance of these notes from the proceeds of this offering. Promissory Note dated October 2, 1998 between Robert S. Garvie and OrganicNet On October 2, 1998, Mr. Garvie loaned us $20,000 at an interest rate of 12% per annum. As consideration for this loan, we granted Mr. Garvie options to purchase 1,000 shares of common stock at an exercise price of $2.00 per share. We have repaid this loan. 59 Promissory Note dated November 25, 1998 between Gail B. Oldfather and OrganicNet On November 25, 1998, Mr. Oldfather loaned us $20,000 at an interest rate of 12% per annum. As consideration for this loan, we granted Mr. Oldfather options to purchase 1,000 shares of common stock at an exercise price of $2.00 per share. We have repaid this loan. Promissory Note dated October 19, 1998 between Gail B. Oldfather and OrganicNet On October 19, 1998, Mr. Oldfather loaned us $24,000 at an interest rate of 12% per annum. As consideration for this loan, we granted Mr. Oldfather options to purchase 1,200 shares of common stock at an exercise price of $2.00 per share. We have repaid this loan. Other Related Party Transactions We have entered into an employment agreement with William H. Matthews, a named executive officer. See "Management--Employment Agreements and Change of Control Arrangements." Indemnification Agreements We intend to enter into indemnification agreements with our officers and directors containing provisions that require us, among other things, to indemnify our officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors, other than liabilities arising from willful misconduct of a culpable nature, and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. We believe that all transactions described in this section "Certain Relationships and Related Transactions" were made on terms no less favorable to us than would have been obtained from unaffiliated third parties. All future transactions, if any, with our executive officers, directors and affiliates will be on terms no less favorable to us than could be obtained from unrelated third parties and will be approved by a majority of the board of directors and by a majority of the disinterested members of the board of directors. 60 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of our common stock as of August 31, 1999 and as adjusted to reflect the sale of common stock offered by us pursuant to this offering. The following table lists: . each person known by us to beneficially own more than 5% of our outstanding common stock; . each director; . each named executive officer; and . all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. The address for each listed director and officer is OrganicNet, Inc., 330 Townsend Street, Suite 206, San Francisco, California, 94107-1630. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options that are exercisable within 60 days of August 31, 1999, but excludes shares of common stock underlying options held by any other persons and the preferred stock issued in the acquisition of PSI-Med Corporation. Percentage of beneficial ownership prior to the offering is based on 13,460,389 shares of common stock outstanding as of August 31, 1999 after giving effect to the conversion of our currently outstanding preferred stock. Percentage of beneficial ownership after the offering is based on shares outstanding after the offering.
Percentage of Shares Shares Beneficially Owned Beneficially -------------------------------- Name of Beneficial Owner Owned Prior to Offering After Offering - ------------------------ ------------ ----------------- -------------- Jack D. Anderson............ 2,287,813 (1) 17.00% William W. Shaw, III........ 343,889 (2) 2.51% William H. Matthews......... 90,160 (3) * Robert L. Anderson.......... 1,353,986 (4) 10.06% Michael J. Barry............ 330,505 (5) 2.41% David W. McComb............. 923,139 (6) 6.86% Michael E. Meisel........... 517,658 (7) 3.85% M. Jan Roughan.............. 260,233 1.93% Robert S. Garvie............ 236,904 (8) 1.76% Gail E. Oldfather........... 701,812 (9) 5.19% Michael A. Wilson........... 1,250 (10) * All directors and executive officers as a group (11 persons)................... 7,047,349 (11) 50.14%
- -------- * Represents beneficial ownership of less than one percent of the common stock. (1) Includes 228,170 shares of common stock owned by Mr. Anderson's spouse and held in trust for the benefit of Mr. Anderson and his spouse. (2) Includes 266,667 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of August 31, 1999. (3) Includes 6,465 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of August 31, 1999. (4) Includes 46,000 shares of common stock owned by Mr. Anderson's spouse and children and held in trust for the benefit of Mr. Anderson's children. (5) Includes 266,667 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of August 31, 1999. (6) Includes 28,652 shares of common stock owned by Mr. McComb's spouse. 61 (7) Includes 213,966 shares of common stock owned by Mr. Meisel's spouse and held in trusts established for the benefit of Mr. Meisel's children, and 1,667 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of August 31, 1999. (8) Includes 3,636 shares of common stock held in trust for the benefit of Mr. Garvie's family and 233,268 shares owned by Omeah Ltd. Partnership. Mr. Garvie is a General Partner of Omeah Ltd. Partnership. (9) Includes 367,112 shares held in trusts established for the benefit of Mr. Oldfather's family, and 51,700 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of August 31, 1999. (10) Includes 1,250 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of August 31, 1999. (11) Includes shares described in the notes above, as applicable. 62 DESCRIPTION OF CAPITAL STOCK Following the closing of the sale of the shares offered by this prospectus, our authorized capital stock will consist of shares of common stock, $0.001 par value, and shares of preferred stock, $0.01 par value. Common Stock As of August 31, 1999, there were 13,460,389 shares of common stock outstanding held of record by approximately 460 stockholders, on an as- converted basis. There will be shares of common stock outstanding after giving effect to the sale of the shares of common stock offered in this prospectus. This number assumes no exercise of the underwriter's over-allotment option and no exercise of options after August 31, 1999. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of legally available funds. In the event of our liquidation, dissolution or winding up, holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive rights or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. Preferred Stock Effective upon the closing of this offering, we will be authorized to issue shares of undesignated preferred stock. Our board of directors will have the authority to issue the undesignated preferred stock in one or more series and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued series of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing any change in control may adversely affect the voting and other rights of holders of common stock, and the likelihood that the holders will receive dividend payments and payments upon liquidation. At present, we have no plans to issue any shares of preferred stock. Registration Rights The Amended and Restated Investor Rights Agreement dated October 31, 1997, provides holders of the preferred stock rights to register shares of our capital stock. At any time after the later of six months after the effective date of the first registration statement that we file under the Securities Act or December 31, 2001, holders of a majority of the registrable securities, as defined in the Investor Rights Agreement, may require us to effect registration under the Securities Act of their Registrable Securities, subject to the board of directors' right to defer the registration for a period of up to 120 days. The investors also have the right, upon demand made by 25% of the holders of registrable securities, to cause us to register their securities on Form S-3 when it becomes available to us if they propose to register securities having a value of at least $1 million. In addition, if we propose to register securities under the Securities Act, other than registrations on Form S-4 or Form S-8, then any of the investors has a right, subject to quantity limitations, as determined by the underwriter if the offering is underwritten to request that we register such holder's registrable securities. We will bear all registration expenses incurred in connection with registrations. We have agreed to indemnify the investors against liabilities related to the accuracy of the registration statement used in connection with any registration effected pursuant to the foregoing. 63 Effect of Selected Provisions of the Certificate of Incorporation and Bylaws, and the Delaware Anti-takeover Statute Amended and Restated Certificate of Incorporation and Bylaws Upon the closing of this offering, our amended and restated certificate of incorporation will provide that our board of directors be classified into three classes of directors and all stockholder action must be effected at a duly called meeting of stockholders and not by a consent in writing. The amended and restated certificate of incorporation and bylaws provide that only our Chief Executive Officer, the Chairman of the board of directors or a majority of the members of the board of directors may call a special meeting of the stockholders. Directors may not be removed without cause. The amended and restated bylaws establish procedures including advance notice with regard to the nomination of directors and stockholder proposals. These provisions of the amended and restated certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions also may have the effect of preventing changes in our management. The board of directors has authority to issue up to shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by the stockholders. The rights of the holders of the common stock will be subject to, and may be harmed by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control. Delaware Takeover Statute We are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: . prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned: . by persons who are directors and also officers; and . by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines "business combination" to include the following: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, plan or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; 64 . subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; . any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons. Transfer Agent and Registrar The transfer agent and registrar for the common stock is . Listing We have applied for our common stock to be quoted on the Nasdaq National Market under the trading symbol "OGNT." 65 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. The market price of our common stock could drop due to sales of a large number of shares of our common stock or the perception that such sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. After this offering, shares of common stock will be outstanding, shares if the underwriter exercises its over-allotment options in full. Of these shares, the shares sold in this offering, shares if the underwriter's over-allotment options are exercised in full, will be freely tradable without restriction under the Securities Act except for shares purchased by our "affiliates" as defined in Rule 144 under the Securities Act. The remaining 13,793,729 shares are "restricted securities" within the meaning of Rule 144 under the Securities Act. The restricted securities generally may not be sold unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. Our officers, directors and stockholders holding shares of common stock have entered into lock-up agreements under which they have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose of, any shares of common stock, preferred stock or any substantially similar securities or securities convertible into or exchangeable or exercisable for shares of common stock, preferred stock or any substantially similar securities for a period of 180 days after the date of this prospectus without the prior written consent of the underwriter. Following the lock-up period and as set forth in the chart below, these shares will be eligible for sale in the public market without registration under the Securities Act if such sales meet the applicable conditions and restrictions of Rule 144 as described above. As these restrictions on resale end, the market price of our common stock could drop significantly if the holders of these restricted shares sell them, or are perceived by the market as intending to sell them.
Date of availability for resale Number of shares into public market ---------------- ------------------------------- 180 days after the date of this prospectus due to a lock-up agreement our officers, directors and stockholders have with the underwriter. However, the underwriter can waive this restriction at any time and without notice. Between 180 and 365 days after the date of this prospectus due to the requirements of the federal securities laws.
In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, any person, or persons whose shares are aggregated, including an affiliate, who has beneficially owned shares for a period of at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: . 1% of the then-outstanding shares of common stock; and . the average weekly trading volume in the common stock during the four calendar weeks immediately preceding the date on which the notice of such sale on Form 144 is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to provisions relating to notice and manner of sale and the availability of current public information about us. In addition, a person or persons whose shares are aggregated who has not been an affiliate of us at any time during the 90 days immediately preceding a sale, and who has beneficially owned the shares for at least two years, would be entitled to sell such shares under Rule 144(k) without regard to the volume limitation and other conditions described above. The above summary of Rule 144 is not intended to be a complete description. 66 In addition, our employees, directors, officers, advisors or consultants who were issued shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, which permits nonaffiliates 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 this prospectus. As soon as practicable following the closing of this offering, we intend to file a registration statement under the Securities Act to register shares of common stock issuable upon the exercise of outstanding stock options or reserved for issuance under our stock option plans and our stock purchase plans, of which 1,018,594 shares subject to options under our stock option plans will be exercisable immediately upon the closing of this offering and an additional 15,933 shares subject to options under our stock option plans will be exercisable within 60 days of August 31, 1999. After the effective date of such registration statement, these shares will be available for sale in the open market subject to the lock-up agreements described above and, for our affiliates, to the conditions and restrictions of Rule 144. 67 UNDERWRITING We have entered into an underwriting agreement with the underwriter named below. We are obligated to sell, and the underwriter is obligated to purchase, all of the shares offered on the cover page of this prospectus, if any are purchased. Subject to certain conditions of the underwriting agreement, the underwriter has agreed to purchase the shares indicated opposite its name:
Number Underwriter of Shares - ----------- --------- Punk, Ziegel & Company, L.P........................................... ---- Total............................................................... ====
The underwriter may sell more shares than the total number of shares offered on the cover page of this prospectus and it has for a period of 30 days from the date of this prospectus, an over-allotment option to purchase up to additional shares from us. If any additional shares are purchased, the underwriter will purchase the shares in the same proportion as per the table above. The underwriter has advised us that the shares will be offered to the public at the offering price indicated on the cover page of this prospectus. The underwriter may allow selected dealers a concession not in excess of $ per share and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the shares are released for sale to the public, the underwriter may change the offering price and the concessions. The underwriter has informed us that it does not intend to sell shares to any investor who has granted it discretionary authority. We have agreed to pay to the underwriter the following fees, assuming both no exercise and full exercise of the underwriter's over-allotment option to purchase additional shares:
Total Fees ------------------------------------------- Fee Without Exercise of Full Exercise of Per Share Over-Allotment Option Over-Allotment Option --------- --------------------- --------------------- Fees paid by us........... $ $ $
In addition, we estimate that we will spend approximately $ in expenses for this offering. We have agreed to indemnify the underwriter against certain liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriter may be required to make in respect of these liabilities. We, our officers and directors, and our stockholders have entered into lock- up agreements pursuant to which we and they have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose of any shares of common stock, preferred stock or any substantially similar securities or securities convertible into or exchangeable or exercisable for shares of common stock, preferred stock or any substantially similar securities for a period of 180 days from the date of this prospectus without the prior written consent of the underwriter. The underwriter may, at any time and without notice, waive the terms of these lock-up agreements as specified in such agreements. Prior to this offering, there has been no public market for the common stock of OrganicNet. The initial public offering price, negotiated between OrganicNet and the underwriter, will be based upon various 68 factors such as our financial and operating history and condition, our prospects, the prospects for our industry and prevailing market conditions. The underwriter, may engage in the following activities in accordance with applicable securities rules: . Over-allotments involving sales in excess of the offering size, creating a short position. The underwriter may elect to reduce this short position by exercising some or all of the over-allotment option. . Stabilizing and short covering; stabilizing bids to purchase the shares are permitted if they do not exceed a specified maximum price. After the distribution of shares has been completed, short covering purchases in the open market may also reduce the short position. These activities may cause the price of the shares to be higher than would otherwise exist in the open market. . Penalty bids permitting the underwriter to reclaim concessions from a syndicate member for the shares purchased in the stabilizing or short- covering transactions. Such activities, which may be commenced or discontinued at any time, may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. The underwriter has represented that it has complied and will comply with all applicable laws and regulations in connection with the offer, sale or delivery of the shares and related offering materials in the United Kingdom, including: . the Public Offers of Securities Regulation 1995; . the Financial Services Act 1986; and . the Financial Services Act 1986, (Investment Advertisements) (Exemptions) Order 1996 (as amended). In March 1998, certain entities and persons affiliated with Punk, Ziegel & Company, L.P. purchased an aggregate of 60,227 shares of our Series C preferred stock at a purchase price of $2.75 per share for an aggregate amount of approximately $165,624. Such shares will convert into 60,227 shares of common stock upon the closing of this offering. We have asked the underwriter to reserve shares for sale at the offering price to our officers, directors, employees and other business affiliates or related third parties. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase the reserved shares. 69 LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California. Certain legal matters will be passed upon for the underwriter by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois. EXPERTS The consolidated financial statements and the related consolidated financial statement schedule of OrganicNet, Inc. as of December 31, 1997 and 1998 and as of June 30, 1999, and for each of the years in the three-year period ended December 31, 1998 and for the six months ended June 30, 1999, and the financial statements of PSI-Med Corporation as of May 31, 1998 and 1999, and for each of the years in the three-year period ended May 31, 1999, have been included herein and in the registration statement in reliance upon the reports of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission (the "Commission"), a registration statement on Form S-1, including the exhibits and schedules thereto, under the Securities Act of 1933, as amended, with respect to the common stock offered hereby. This prospectus does not contain all of the information contained in the registration statement and the exhibits and schedules to the registration statement. Some items are omitted in accordance with the rules and regulations of the Commission. For further information about OrganicNet and the common stock offered under this prospectus, you should review the registration statement and the exhibits and schedules filed as a part of the registration statement. Descriptions of contracts or other documents referred to in this prospectus are not necessarily complete. If the contract or document is filed as an exhibit to the registration statement, you should review that contract or document. You should be aware that when we discuss these contracts or documents in the prospectus we are assuming that you will read the exhibits to the registration statement for a more complete understanding of the contract or document. The registration statement and its exhibits and schedules may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, and the Commission's regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661 and Seven World Trade Center, 13th Floor, New York, New York, 10048. Copies of all or any portion of the registration statement may be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, or by calling the Commission at 1-800-SEC-0330, at prescribed rates. The Commission also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, such as OrganicNet, that make electronic filings with the Commission. We intend to furnish to our stockholders annual reports containing financial statements audited by an independent public accounting firm. 70 INDEX TO FINANCIAL STATEMENTS
Page ---- Consolidated Financial Statements, OrganicNet, Inc. Independent Auditors' Report........................................... F-2 Consolidated Balance Sheets............................................ F-3 Consolidated Statements of Operations.................................. F-4 Consolidated Statements of Stockholders' Deficit....................... F-5 Consolidated Statements of Cash Flows.................................. F-6 Notes to Consolidated Financial Statements............................. F-7 Unaudited Pro Forma Condensed Combined Financial Information, OrganicNet, Inc. and PSI-Med Corporation Financial Information.................................................. F-23 Condensed Combined Balance Sheet....................................... F-23 Condensed Combined Statement of Operations............................. F-24 Notes to Pro Forma Condensed Combined Financial Statements............. F-26 Financial Statements, PSI-Med Corporation Independent Auditors' Report........................................... F-27 Balance Sheets......................................................... F-28 Statements of Operations............................................... F-29 Statements of Stockholders' Deficit.................................... F-30 Statements of Cash Flows............................................... F-31 Notes to Financial Statements.......................................... F-32
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors OrganicNet, Inc.: We have audited the accompanying consolidated balance sheets of OrganicNet, Inc. (a Delaware Corporation) and subsidiaries (the Company) as of December 31, 1997 and 1998 and June 30, 1999, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1998, and for the six-month period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of OrganicNet, Inc. and subsidiaries as of December 31, 1997 and 1998 and June 30, 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, and for the six-month period ended June 30, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP San Francisco, California August 27, 1999, except as to note 14 which is as of September 20, 1999 F-2 OrganicNet, Inc. CONSOLIDATED BALANCE SHEETS
December 31, June 30, 1999 ------------------------- ------------------------------ Pro forma stockholders' 1997 1998 Actual deficit (note 1) ----------- ------------ ------------ ---------------- (unaudited) ASSETS ------ Current assets: Cash and cash equivalents.......... $ 46,558 $ 41,104 $ 1,680,135 Accounts receivable, net of allowance for doubtful accounts of $113,000, $128,800 and $196,945 in 1997, 1998 and 1999, respectively......... 805,687 732,370 647,523 Prepaids and other current assets....... 119,340 158,186 105,578 ----------- ------------ ------------ Total current assets.............. 971,585 931,660 $ 2,433,236 Property and equipment, net of accumulated depreciation of $426,475, $615,402 and $711,580 in 1997, 1998 and 1999, respectively........... 504,867 348,134 309,483 Intangible assets, net of accumulated amortization of $364,110, $928,094 and $1,242,560 in 1997, 1998 and 1999, respectively........... 1,392,291 884,970 570,504 Other noncurrent assets................. 35,598 50,284 131,407 ----------- ------------ ------------ $ 2,904,341 $ 2,215,048 $ 3,444,630 =========== ============ ============ Current liabilities: Accounts payable...... $ 1,289,354 $ 2,359,263 $ 1,416,523 Deferred revenue...... 1,589,817 2,372,162 2,329,020 Advances from employees............ 516,180 1,162,895 971,711 Notes payable to employees............ 331,373 444,124 552,948 Notes payable to stockholders......... 133,106 474,768 405,356 Current portion of capital leases....... 39,342 19,506 10,801 Other current liabilities.......... 221,912 388,592 450,877 ----------- ------------ ------------ Total current liabilities......... 4,121,084 7,221,310 6,137,236 Long-term portion of capital leases......... 40,742 40,742 40,117 ----------- ------------ ------------ Total liabilities.... 4,161,826 7,262,052 6,177,353 Commitments, contingencies and subsequent events Stockholders' deficit: Series A, A-II, A-III, B and C preferred stock, $0.01 par value, authorized 14,000,000 shares; issued and outstanding 2,904,712, 3,679,446 and 5,673,940 shares in 1997, 1998 and 1999, respectively; none pro forma; with an aggregate liquidation preference of $4,725,880, $6,856,398 and $12,341,257 in 1997, 1998 and 1999, respectively......... 29,047 36,794 56,739 $ -- Common stock, $0.001 par value, 29,500,000 shares authorized; 5,425,672, 5,463,447 and 5,499,613 shares issued and outstanding in 1997, 1998 and 1999, respectively; 12,778,107 shares pro forma................ 5,426 5,464 5,500 12,778 Additional paid-in capital.............. 6,030,273 8,238,670 13,815,209 14,531,350 Receivable related to sale of stock........ -- -- (550,000) (550,000) Deferred compensation......... -- -- (88,635) (88,635) Accumulated deficit... (7,322,231) (13,327,932) (15,971,536) (15,971,536) ----------- ------------ ------------ ------------ Total stockholders' deficit............. (1,257,485) (5,047,004) (2,732,723) $ (2,066,043) ----------- ------------ ------------ ============ $ 2,904,341 $ 2,215,048 $ 3,444,630 =========== ============ ============
[CAPTION] LIABILITIES AND STOCKHOLDERS' DEFICIT --------------------- See accompanying notes to consolidated financial statements. F-3 OrganicNet, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June Years Ended December 31, 30, ------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (unaudited) Revenue: License............... $ -- $ 424,340 $ 570,694 $ 113,092 $ 369,769 Product development... -- 1,237,500 564,560 530,245 227,402 Service............... 371,054 1,309,645 3,488,397 2,052,986 2,112,049 ----------- ----------- ----------- ----------- ----------- Total revenue....... 371,054 2,971,485 4,623,651 2,696,323 2,709,220 ----------- ----------- ----------- ----------- ----------- Cost of revenue: License............... -- 474,849 756,156 387,129 336,031 Product development... -- 319,974 208,533 128,163 63,072 Service............... 238,431 892,183 2,314,026 1,249,097 1,230,311 ----------- ----------- ----------- ----------- ----------- Total cost of revenue............ 238,431 1,687,006 3,278,715 1,764,389 1,629,414 ----------- ----------- ----------- ----------- ----------- Gross profit............ 132,623 1,284,479 1,344,936 931,934 1,079,806 ----------- ----------- ----------- ----------- ----------- Operating expense: Sales and marketing... 24,335 1,394,852 1,643,868 833,592 672,109 Research and development.......... 724,231 1,344,640 1,832,783 782,991 1,204,494 General and administrative....... 1,689,723 3,332,443 3,768,388 1,662,940 1,761,776 ----------- ----------- ----------- ----------- ----------- Total operating expense............ 2,438,289 6,071,935 7,245,039 3,279,523 3,638,379 ----------- ----------- ----------- ----------- ----------- Operating loss.......... (2,305,666) (4,787,456) (5,900,103) (2,347,589) (2,558,573) Interest expense........ (2,068) (19,752) (92,955) (42,772) (76,018) Other income (expense).. -- 13,596 (8,643) (5,509) (5,013) ----------- ----------- ----------- ----------- ----------- Loss before income taxes.................. (2,307,734) (4,793,612) (6,001,701) (2,395,870) (2,639,604) Provision for income taxes.................. 4,000 6,400 4,000 2,000 4,000 ----------- ----------- ----------- ----------- ----------- Net loss................ $(2,311,734) $(4,800,012) $(6,005,701) $(2,397,870) $(2,643,604) =========== =========== =========== =========== =========== Loss per share: Basic and diluted..... $ (0.45) $ (0.88) $ (1.10) $ (0.44) $ (0.48) =========== =========== =========== =========== =========== Weighted average shares outstanding: Basic and diluted..... 5,188,513 5,425,672 5,447,820 5,431,968 5,484,663 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 OrganicNet, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT Years Ended December 31, 1996, 1997 and 1998 and Six Months Ended June 30, 1999
Receivable Preferred Stock Common Stock Additional related to Total ------------------ ---------------- paid-in Deferred Accumulated sale of stockholders' Shares Amount Shares Amount capital compensation deficit stock deficit --------- -------- --------- ------ ----------- ------------ ------------ ---------- ------------- Balances at December 31, 1995............. -- $ -- 4,000,000 $4,000 $ 6,000 $ -- $ (210,485) $ (5,000) $ (205,485) Issuance of Series A preferred stock............ 1,333,270 13,333 -- -- 1,319,937 -- -- -- 1,333,270 Issuance of Series B preferred stock............ 401,182 4,012 -- -- 898,648 -- -- -- 902,660 Paydown of notes receivable....... -- -- -- -- -- -- -- 5,000 5,000 Common stock issued upon the acquisition of FPI.............. -- -- 1,385,533 1,386 158,220 -- -- -- 159,606 Series A-II preferred stock issued upon the acquisition of CPCS ............ 1,783 18 -- -- 3,951 -- -- -- 3,969 Common stock issued upon the acquisition of CPCS............. -- -- 40,139 40 3,974 -- -- -- 4,014 Series A-II and A- III preferred stock issued upon the acquisition of Velocity...... 10,832 108 -- -- 48,636 -- -- -- 48,744 Series A-II preferred stock issued upon the acquisition of RiteLine......... 2,333 23 -- -- 5,109 -- -- -- 5,132 Net loss.......... -- -- -- -- -- -- (2,311,734) -- (2,311,734) --------- -------- --------- ------ ----------- -------- ------------ ---------- ----------- Balances at December 31, 1996............. 1,749,400 17,494 5,425,672 5,426 2,444,475 -- (2,522,219) -- (54,824) Issuance of Series A preferred stock in lieu of compensation..... 85,000 850 -- -- 84,150 -- -- -- 85,000 Issuance of Series B preferred stock............ 761,288 7,613 -- -- 1,710,361 -- -- -- 1,717,974 Issuance of Series B preferred stock in lieu of compensation..... 40,000 400 -- -- 89,600 -- -- -- 90,000 Issuance of Series C preferred stock............ 217,066 2,171 -- -- 594,805 -- -- -- 596,976 Series A-II preferred stock issued upon the acquisition of Res-Q............ 23,333 233 -- -- 497,227 -- -- -- 497,460 Series A-II preferred stock issued upon the acquisition of LINC............. 13,333 133 -- -- 284,393 -- -- -- 284,526 Series A-II preferred stock issued upon the acquisition of Healthcheck...... 8,624 86 -- -- 183,055 -- -- -- 183,141 Series A-II preferred stock issued upon the acquisition of Intedata......... 6,668 67 -- -- 142,207 -- -- -- 142,274 Net loss.......... -- -- -- -- -- -- (4,800,012) -- (4,800,012) --------- -------- --------- ------ ----------- -------- ------------ ---------- ----------- Balances at December 31, 1997............. 2,904,712 29,047 5,425,672 5,426 6,030,273 -- (7,322,231) -- (1,257,485) Issuance of Series C preferred stock............ 774,734 7,747 -- -- 2,122,771 -- -- -- 2,130,518 Stock options granted to non- employees........ -- -- -- -- 29,001 -- -- -- 29,001 Common shares issued for purchase price adjustment for CPCS............. -- -- 37,775 38 56,625 -- -- -- 56,663 Net loss.......... -- -- -- -- -- -- (6,005,701) -- (6,005,701) --------- -------- --------- ------ ----------- -------- ------------ ---------- ----------- Balances at December 31, 1998............. 3,679,446 36,794 5,463,447 5,464 8,238,670 -- (13,327,932) -- (5,047,004) Issuance of Series C preferred stock............ 1,621,765 16,218 -- -- 4,346,447 -- -- -- 4,362,665 Issuance of Series C preferred stock to Conxion....... 200,000 2,000 -- -- 548,000 -- -- -- 550,000 Receivable related to sale of stock............ -- -- -- -- -- -- -- (550,000) (550,000) Issuance of Series C preferred stock in exchange for legal services... 150,000 1,500 -- -- 411,000 -- -- -- 412,500 Issuance of Series C preferred stock in exchange for other services... 12,729 127 -- -- 34,878 -- -- -- 35,005 Issuance of Series C preferred stock to repay loan to related parties.. 10,000 100 -- -- 27,400 -- -- -- 27,500 Issuance of common stock pursuant to exercise of stock options.......... -- -- 36,166 36 33,987 -- -- -- 34,023 Stock options granted to non- employees........ -- -- -- -- 58,192 -- -- -- 58,192 Deferred compensation related to stock option grants.... -- -- -- -- 116,635 (116,635) -- -- -- Amortization of deferred compensation..... -- -- -- -- -- 28,000 -- -- 28,000 Net loss.......... -- -- -- -- -- -- (2,643,604) -- (2,643,604) --------- -------- --------- ------ ----------- -------- ------------ ---------- ----------- Balances at June 30, 1999......... 5,673,940 $ 56,739 5,499,613 $5,500 $13,815,209 $(88,635) $(15,971,536) $(550,000) $(2,732,723) ========= ======== ========= ====== =========== ======== ============ ========== ===========
See accompanying notes to consolidated financial statements. F-5 OrganicNet, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended Years Ended December 31, June 30, ------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (unaudited) Cash flows from operating activities: Net loss............... $(2,311,734) $(4,800,012) $(6,005,701) $(2,397,870) $(2,643,604) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......... 76,535 522,506 752,911 399,762 410,644 Provision for bad debts................ -- 113,000 15,800 12,000 68,145 Noncash compensation expense.............. -- 175,000 29,001 16,600 86,192 Changes in operating assets and liabilities: Accounts receivable... 154,699 (61,920) 57,517 49,012 16,702 Prepaid expenses and other current and non-current assets... (16,450) (28,079) (53,532) 15,476 (28,515) Accounts payable and other current liabilities.......... (78,060) 5,645 1,184,988 782,927 (326,009) Deferred revenue...... 78,030 805,558 782,345 (121,073) (43,142) ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities.......... (2,096,980) (3,268,302) (3,236,671) (1,243,166) (2,459,587) ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures... (74,752) (206,916) (32,194) (83,706) (57,527) Cash (paid for) received from acquisitions.......... (22,032) 212,822 -- -- -- ----------- ----------- ----------- ----------- ----------- Net cash (used in) provided by investing activities.......... (96,784) 5,906 (32,194) (83,706) (57,527) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Proceeds from notes payable to and advances from related parties............... (71,720) 903,492 1,101,128 8,428 (124,272) Borrowings (payments) under line of credit, net................... -- 92,790 71,107 -- (106,941) Proceeds from preferred stock issued in private placements.... 2,235,930 2,314,950 2,130,518 1,400,694 4,362,665 Repayment of note receivable............ 5,000 -- -- -- -- Proceeds from exercise of stock options...... -- -- -- -- 34,023 Repayment of capital lease obligations..... -- (2,278) (39,342) (20,164) (9,330) ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities.......... 2,169,210 3,308,954 3,263,411 1,388,958 4,156,145 ----------- ----------- ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents............ (24,554) 46,558 (5,454) 62,086 1,639,031 Cash and cash equivalents at beginning of period.... 24,554 -- 46,558 46,558 41,104 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period................. $ -- $ 46,558 $ 41,104 $ 108,644 $ 1,680,135 =========== =========== =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes................ $ 4,000 $ 6,400 $ 4,000 $ 2,000 $ 4,000 Supplemental schedule of noncash investing and financing activities: Summary of the acquisitions described in note 2: Fair value of assets acquired............. $ 781,900 $ 2,435,357 $ -- $ -- $ -- Net cash (paid) received............. (22,032) 212,822 -- -- -- Stock issued.......... (221,465) (1,107,401) (56,663) -- -- Notes issued.......... -- (200,000) -- -- -- ----------- ----------- ----------- ----------- ----------- Liabilities assumed.. $ 538,403 $ 1,340,778 $ (56,663) $ -- $ -- =========== =========== =========== =========== =========== Receivable related to sale of stock........ $ -- $ -- $ -- $ -- $ 550,000 Stock issued in exchange for legal services............. -- -- -- -- 412,500 Stock issued in exchange for other services............. -- -- -- -- 35,005 Stock issued to repay loan to related parties.............. -- -- -- -- 27,500 Assets acquired under capital lease obligations.......... -- 114,524 33,620 19,019 --
See accompanying notes to consolidated financial statements. F-6 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1997 and 1998, and June 30, 1998 and 1999 (Information as of and for the Six Months Ended June 30, 1998 is unaudited) (1) Nature of Business and Summary of Significant Accounting Policies Business of the Company We are an application services provider (ASP) that develops proprietary software solutions for healthcare clinics and physician group practices using our proprietary technology platform. Our customers can access and use our solutions over the Internet or their local or wide area networks. We are developing integrated solutions designed to manage all elements of the business and clinical processes of our customers within a single system. Our software solutions are built using our object-oriented Organic Architecture. Central to our Organic Architecture is our CoreModel, which is comprised of objects that represent a universal set of clinical and business processes. To develop our CoreModel and solutions, we selectively acquired companies with healthcare domain expertise and enabling technologies. These acquisitions also provided near term products, customers and revenues. We were incorporated in January 1995 as a California corporation and reincorporated in Delaware in April 1996. We changed our name to OrganicNet, Inc. in May 1999. We are headquartered in San Francisco, California. Basis of Presentation Our consolidated financial statements include the accounts of OrganicNet, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Interim Financial Information The consolidated financial statements and related notes for the six months ended June 30, 1998 are unaudited, but include all adjustments (consisting solely of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation. The results of operations for the six months ended June 30, 1998 and 1999 are not necessarily indicative of operating results to be expected in any future period. Accounting Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires us 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 consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Revenue Recognition License revenue includes fees from the licensing of our acquired legacy products. Product development revenue consists of revenue derived from development of customer requested software or customer satisfaction surveys and development of the related database. Service revenue is composed of post- contract software support, case management, credentialing, training, installation and software application customization for legacy products. Beginning January 1, 1998, we have recognized revenue in accordance with the American Institute of Certified Public Accountants' Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software Revenue Recognition with Respect to Certain Transactions. Revenue is recognized from licenses of our software application products when the contract has been executed, the product has been shipped, collectibility is probable and the software license fees are fixed and determinable. In the F-7 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) event that the contract provides for multiple elements (e.g., training, application customization or post-contract customer support), the total fee is allocated to these elements based on vendor-specific objective evidence of fair value. If any portion of the license fee is subject to forfeiture, refund or other contractual contingencies, we will postpone revenue recognition until these contingencies have been removed. We recognize product development revenue from co-development contracts using a percentage-of-completion method based on meeting key milestone events over the term of the contracts. Service revenue from post-contract customer support and maintenance is recognized ratably over the term of the maintenance period. Revenue from case management, credentialing, training, installation and customization services is recorded as the services are performed. Our adoption of SOP 97-2 did not have a material effect on our revenue recognition or our results of operations. Prior to adoption of SOP 97-2, we accounted for software and related revenues in accordance with SOP 91-1, Software Revenue Recognition. Research and Development Research and development expenditures are charged to expense in the period incurred. Advertising Costs All costs associated with advertising and promoting products are charged to expense in the period incurred. Income Taxes We account for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Loss per Share We compute net loss per share based upon SFAS No. 128, Earnings per Share. The basic net loss per share is computed by dividing the net loss available to common stockholders by the weighted-average number of common shares outstanding. Potential common shares relating to stock options of 590,333, 860,936, 1,243,769 and 1,569,309 in 1996, 1997 and 1998, and for the six months ended June 30, 1999 are anti-dilutive due to the net losses sustained by us. Convertible preferred stock of 1,749,400, 2,904,712, 3,679,446 and 5,673,940 shares in 1996, 1997, 1998 and for the six months ended June 30, 1999 has also been excluded from the calculation of net loss per share as the impact would be anti-dilutive. Thus, the diluted net loss per share in these years is the same as the basic net loss per share. Stock-Based Compensation We account for our stock option plans under SFAS No. 123, Accounting for Stock-Based Compensation. This statement establishes financial accounting and reporting standards for stock-based compensation, including employee stock purchase plans and stock option plans. As allowed by SFAS No. 123, we continue to measure compensation expense for options granted to employees under the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. F-8 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) We have recorded deferred compensation for the difference between the exercise price and the deemed fair market value for financial reporting purposes of stock options granted to employees. The compensation expense related to such grants is amortized over the vesting period of the related stock options. Comprehensive Loss We have no components of other comprehensive loss other than our net loss and, accordingly, our comprehensive loss is equivalent to our net loss for all periods presented. Cash and Cash Equivalents We consider all highly liquid investments purchased with an original maturity of three months or less from the date of purchase to be cash equivalents. Long-Lived Assets, Including Intangible Assets We account for long-lived assets under SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. We estimate fair value based on the best information available, making judgments and projections as considered necessary. Intangible assets consist of items related to our business combinations during the years ended December 31, 1996 and 1997. Goodwill is amortized over a seven-year period. Acquired technology is being amortized over its estimated useful life of approximately three years. Workforce-in-place is being amortized over the lesser of the employment tenure of the employee or the agreement term. Software Development Costs Software development costs are accounted for in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. This statement provides for capitalization of certain software development costs once technological feasibility is established. We establish technological feasibility once a working model has been created. The time between establishment of a working model and general release is short. Therefore, we believe that software development costs incurred subsequent to technological feasibility have not been material. Property and Equipment Property and equipment is stated at cost. Computer and related equipment is depreciated over a useful life of three years using the straight-line method. Office furniture and fixtures are depreciated over useful lives ranging from three to five years using the straight-line method. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life or remaining lease term. Concentrations of Credit Risk Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of trade receivables. We control credit risk through credit approvals, credit limits, a reserve for doubtful accounts, and monitoring procedures. F-9 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) We have several product development and collaborative agreements with Pfizer Health Solutions Inc to co-develop, market, license and distribute various OrganicNet products and services. Co-development and marketing agreements to date include development of OrganicNet's Outcomes Partner III, care management and credentialing applications. Additionally, we have together co-developed and marketed several survey products including the National Committee for Quality Assurance Member Satisfaction Survey, disenrollment and patient satisfaction surveys. Sales to Pfizer Health Solutions Inc amounted to approximately $0, $1,375,000, $652,000, $598,000 and $837,000 for the years ended December 31, 1996, 1997 and 1998, and the six months ended June 30, 1998 and 1999, respectively. These sales represented approximately 0%, 46%, 14%, 22% and 31%, respectively, of our total revenue for those periods. A different customer accounted for 15% and 10% of total revenue and accounts receivable for the six months ended and as of June 30, 1999, respectively. Fair Value of Financial Instruments The carrying amounts of cash, trade receivables, accounts payable and other current liabilities approximate fair value due to the short maturities of these instruments. The advances and loans from employees and stockholders are not traded on any public market and approximate our best estimate of fair value. Pro Forma Stockholders' Deficit (Unaudited) The unaudited pro forma stockholders' deficit gives effect to the issuance of 16,667 shares of our Series A-II preferred stock in conjunction with the purchase of PSI-Med Corporation, the conversion of these PSI-Med shares into 333,340 shares of common stock at a conversion rate of 20 common shares for each preferred share, and the conversion of 5,673,940 shares of Series A, A-II, A-III, B and C convertible preferred stock outstanding as of June 30, 1999 into 6,945,154 shares of common stock, at a conversion rate of 20 common shares for each preferred share of Series A-II and A-III and at a conversion rate of one common share for each preferred share of Series A, B and C, upon closing of our initial public offering. (2) Business Combinations During the years ended December 31, 1996 and 1997, we completed the following acquisitions:
Company Acquisition Date Expertise - ------- ----------------- ------------------------------ First Principles, Inc. (FPI)....................... April 22, 1996 Object Technology RiteLine Systems, Inc. (RiteLine).................. April 30, 1996 Business Methodology Comprehensive Provider Credentialing Services, Inc. (CPCS)...................... May 23, 1996 Credentialing Service Velocity Healthcare Informatics, Inc. (Velocity).................. December 20, 1996 Outcomes/Disease Management Res-Q, Inc., formerly MMS, Inc. (Res-Q)................ May 14, 1997 Scheduling/Resource Management Intedata, Inc. (Intedata).... June 4, 1997 Marketing Service L.I.N.C., Inc. (LINC)........ June 23, 1997 Case Management Healthcheck, Incorporated (Healthcheck)............... November 14, 1997 Credentialing Service
F-10 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) We acquired all of the outstanding stock of each of the above companies, with the exception of Velocity. We purchased certain assets of Velocity, including all of its intellectual property. Under terms of the acquisition agreements, we paid cash and issued notes payable and the following shares of common, Series A-II preferred and Series A-III preferred stock, valued at the fair market value of the stock on the respective acquisition dates:
Series A-II Series A-III Common preferred preferred Acquired company stock stock stock ---------------- --------- ----------- ------------ FPI....................................... 1,596,066 -- -- RiteLine.................................. -- 2,333 -- CPCS...................................... 77,914 1,783 -- Velocity.................................. -- 5,416 5,416 Intedata.................................. -- 6,668 -- LINC...................................... -- 13,333 -- Res-Q..................................... -- 23,333 -- Healthcheck............................... -- 8,624 --
The acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of the companies' operations are included in our consolidated financial statements from their respective acquisition dates forward. Summaries of the consideration paid and the allocation of the purchase price to the assets acquired and liabilities assumed are as follows: Common stock.................................................... $ 220,283 Series A-II preferred stock..................................... 1,140,874 Series A-III preferred stock.................................... 24,372 Cash paid (CPCS)................................................ 74,900 Notes payable (LINC and Res-Q).................................. 200,000 ----------- $ 1,660,429 =========== The purchase price was allocated to the assets acquired and liabilities assumed as follows: Cash............................................................ $ 265,690 Accounts receivable............................................. 874,855 Other current assets............................................ 145,719 Property and equipment.......................................... 440,283 Goodwill........................................................ 492,964 Workforce-in-place.............................................. 142,274 Acquired technology............................................. 1,177,826 Liabilities..................................................... (761,456) Customer deposits and deferred maintenance...................... (1,117,726) ----------- $ 1,660,429 ===========
In conjunction with the Intedata acquisition, we entered into two employment agreements with the former founders of Intedata. As there were no assets to be acquired or liabilities to be assumed in the Intedata acquisition, the full purchase price has been allocated to those agreements as workforce-in-place and is being amortized over the lesser of the employment tenure of the employee or the agreement term of three years from the acquisition date. F-11 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) We acquired certain software technology in the LINC and Res-Q acquisitions. The fair value of this technology was determined using a discounted cash flow analysis of the revenue stream to be derived from such technology. Acquired software technology is being amortized on a straight-line basis over its expected economic life of approximately three years, which is when we expect to release our ASP software version of the legacy product. Goodwill, which arose from the FPI, CPCS and Healthcheck acquisitions, represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, and is amortized using the straight-line method over its estimated life of seven years. The above purchase price includes $56,663 of contingent payments made in September 1998 for CPCS through the issuance of 37,775 shares of our common stock. This amount has been allocated to goodwill and is being amortized using the straight-line method over five years, which is the remaining estimated life of the goodwill. Effective March 1998, the operations of CPCS were combined with Healthcheck. Effective December 31, 1996, the operations of FPI and RiteLine were combined with our Corporate Headquarters. We issued four $50,000 notes to the former shareholders of LINC and Res-Q in conjunction with the LINC and Res-Q acquisitions. The notes are due on December 31, 1999 and bear interest at 10% per year. The results of operations for all of the acquired entities are included in the 1998 results of operations of the Company for the full year. The following table presents unaudited pro forma results of operations as if the acquisitions had occurred on the first day of the earliest period presented. The unaudited pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisitions taken place on the first day of the period presented, nor is it necessarily indicative of results that may occur in the future:
Years Ended December 31, ------------------------ 1996 1997 ----------- ----------- (unaudited) Pro forma basis: Total net revenues............................... $ 4,480,048 $ 5,040,332 Net loss......................................... (2,877,036) (4,980,815) Net loss per share basic and diluted............. (0.53) (0.92) Weighted average shares outstanding: Basic and diluted................................ 5,425,672 5,425,672
(3) Property and Equipment Property and equipment consists of the following:
December 31, -------------------- June 30, 1997 1998 1999 --------- --------- ---------- Computers and related equipment.......... $ 746,195 $ 752,400 $ 801,278 Furniture and fixtures................... 176,114 201,076 209,725 Leasehold improvements................... 9,033 10,060 10,060 --------- --------- ---------- 931,342 963,536 1,021,063 Less accumulated depreciation and amortization............................ (426,475) (615,402) (711,580) --------- --------- ---------- $ 504,867 $ 348,134 $ 309,483 ========= ========= ==========
Depreciation and amortization expense on property and equipment was approximately $60,000, $175,000, $189,000, $121,000 and $96,000 for the years ended December 31, 1996, 1997 and 1998, and for the six months ended June 30, 1998 and 1999, respectively. F-12 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (4) Intangible Assets Intangible assets consist of the following:
December 31, ------------------------ June 30, 1997 1998 1999 ----------- ----------- ----------- Goodwill.............................. $ 436,301 $ 492,964 $ 492,964 Acquired technology................... 1,177,826 1,177,826 1,177,826 Workforce-in-place.................... 142,274 142,274 142,274 ----------- ----------- ----------- 1,756,401 1,813,064 1,813,064 Less accumulated amortization......... (364,110) (928,094) (1,242,560) ----------- ----------- ----------- $ 1,392,291 $ 884,970 $ 570,504 =========== =========== =========== (5) Other Current Liabilities The following items are included in other current liabilities: December 31, ------------------------ June 30, 1997 1998 1999 ----------- ----------- ----------- Accounts payable, non-trade........... $ -- $ 15,000 $ 15,000 Line of credit........................ 92,790 163,897 56,956 Bank overdraft........................ 119,596 62,025 -- Accrued payroll taxes................. -- -- 304,642 Other accrued expenses................ 9,526 147,670 74,279 ----------- ----------- ----------- $ 221,912 $ 388,592 $ 450,877 =========== =========== ===========
We have a $200,000 revolving line of credit with Wells Fargo Bank, which bears interest at a rate of 1.0% above the prime rate. The weighted average interest rate was approximately 9.50%, 8.75% and 7.75% for the years ended December 31, 1997 and 1998, and for the six months ended June 30, 1999, respectively. We are required to make regular monthly payments of accrued interest. The line of credit is collateralized by all accounts receivable, inventory and furniture and equipment of Res-Q. In addition, an officer of Res- Q has provided a guaranty in connection with this line of credit. We agreed to indemnify the officer for a maximum amount of $200,000.00 (the amount of the officer's guaranty plus accrued interest) for any deficiency that may be suffered after making a claim for reimbursement from the principal borrower. (6) Notes Payable to Employees and Stockholders The notes payable to employees and stockholders consist of notes with interest rates generally ranging from 9% to 12%. One note to a stockholder for $85,000 bears a 3% interest rate. All notes are due on December 31, 1999. Certain of the notes to stockholders provided for the borrower to receive options for shares of the Company's common stock at a rate of 10% times the principal loaned divided by $2.00, which was the fair market value of our common stock when the notes were issued. Options to purchase 10,400 shares of the Company's common stock were granted in conjunction with this provision. A portion of the proceeds of the notes was allocated to the value of the options based on the Black-Scholes option pricing model and was amortized into the statement of operations during the year ended December 31, 1998. F-13 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (7) Commitments and Contingencies Leases We lease office facilities and equipment under noncancelable operating and capital leases. The leases provide for us to pay property taxes, insurance and other operating costs of the leased property and generally contain renewal provisions. Future minimum lease payments under all noncancelable capital and operating leases as of June 30, 1999 are as follows:
Capital Operating leases leases ------- --------- Year ending December 31: 1999..................................................... $13,873 $219,444 2000..................................................... 27,747 293,113 2001..................................................... 15,530 226,280 2002..................................................... 4,502 162,630 2003 and thereafter...................................... -- -- ------- -------- Total minimum payments.................................... 61,652 $901,467 ======== Less amount representing interest......................... (10,734) ------- Present value of capital lease obligations................ 50,918 Less current portion...................................... (10,801) ------- Lease obligations, long term.............................. $40,117 =======
Equipment recorded under capital leases is included in property and equipment as follows:
June December 31, 30, ----------------- ------- 1997 1998 1999 -------- ------- ------- Computers and related equipment.................. $114,524 $62,968 $62,968 Accumulated depreciation......................... (32,991) (31,540) (38,721) -------- ------- ------- $ 81,533 $31,428 $24,247 ======== ======= =======
Rent expense for operating leases totaled approximately $33,000, $248,000, $428,000, $193,000 and $201,000 for the years ended December 31, 1996, 1997 and 1998, and for the six months ended June 30, 1998 and 1999, respectively. F-14 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (8) Capital Stock We are authorized to issue 14,000,000 shares of preferred stock. The preferred shares are automatically convertible into common shares upon an initial public offering of our common stock. A summary of preferred stock follows:
December 31, June 30, --------------------- ----------- 1997 1998 1999 ---------- ---------- ----------- Series A, 1,500,000 shares designated, $.01 par value per share, 1,418,270 shares issued and outstanding, liquidation preference of $1,418,270 in 1997, 1998 and 1999.................... $1,418,270 $1,418,270 $ 1,418,270 Series A-I, 1,500,000 shares designated, $.01 par value per share, none issued and outstanding........................ -- -- -- Series A-II, 115,000 shares designated, $.01 par value per share, 61,490 shares issued and outstanding in 1997, 1998 and 1999............................... 1,140,874 1,140,874 1,140,874 Series A-III, 5,416 shares designated, $.01 par value per share, 5,416 shares issued and outstanding in 1997, 1998 and 1999............................... 24,372 24,372 24,372 Series B, 1,250,000 shares designated, $.01 par value per share, 1,202,470 shares issued and outstanding, liquidation preference of $2,710,634 in 1997, 1998 and 1999.................... 2,710,634 2,710,634 2,710,634 Series B-I, 1,250,000 shares designated, $.01 par value per share, none issued and outstanding........................ -- -- -- Series C-I, 4,000,000 shares designated, $.01 par value per share, none issued and outstanding........................ -- -- -- ---------- ---------- ----------- $5,891,126 $8,021,644 $13,409,314 ========== ========== ===========
Series C, 4,000,000 shares designated, $.01 par value per share, 217,066, 991,800 and 2,986,294 shares issued and outstanding in 1997, 1998 and 1999, respectively, liquidation preference of $596,976, $2,727,494 and $8,212,353 in 1997, 1998 and 1999, respectively, net of transaction costs of $97,189 in 1999................................... 596,976 2,727,494 8,115,164 The Series A-II and Series A-III preferred shares have been issued in conjunction with our acquisitions as discussed in note 2. Series A shares were issued at $1.00 per share, Series B shares were issued at $2.25 per share, and Series C shares were issued at $2.75 per share. F-15 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The rights, preferences, and privileges of preferred stockholders are as follows: . Series A, B and C stockholders are entitled to cumulative dividends, if declared by the Board of Directors, of $.08 per share per annum, payable in preference to the payment of any dividends on the common stock (other than a common stock dividend). No such dividends have been declared. Series A-II and A-III stockholders are not entitled to receive dividends. . Series, A, B and C stockholders have a liquidation preference of an amount equal to the original price of the preferred stock plus any declared but unpaid dividends. Any remaining liquidation proceeds are distributed pro rata to the common, Series A-II and Series A-III stockholders. . Each share of Series A, A-II, B and C votes equally with shares of common stock. Series A-III shares have no voting rights. . Each share of Series A, A-II, A-III, B and C is convertible at any time into common stock at the original issue price, with automatic conversion upon an initial public offering, upon the consolidation or merger of the Company, or upon the sale of substantially all of the assets of the Company. The conversion rate is one for one for Series A, B and C shares and 20 shares of common stock for each share of Series A-II and A-III. The conversion price will be equal to the issue price of the shares. (9) Stock Option Plans We have been authorized to issue options to purchase up to 1,000,000 and 1,478,513 shares of our common stock in connection with our 1996 and 1997 stock option plans (the Plans) to employees, directors, and consultants. The number of shares of common stock available for issuance under the 1997 stock option plan automatically increases on the first business day of each calendar year during the term of the 1997 stock option plan, beginning with the 1999 calendar year, by an amount equal to two percent (2%) of the shares of common stock outstanding on the last business day of the immediately preceding calendar year. The Plans provide for the issuance of stock purchase rights, incentive stock options, or nonstatutory stock options. Under the Plans, the exercise price for incentive stock options is at least 100% of the stock's fair market value on the date of the grant for employees owning less than 10% of the voting power of all classes of stock, and at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock. For nonqualified stock options, the exercise price is also at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock and no less than 85% for employees owning less than 10% of the voting power of all classes of stock. Options granted under the Plans generally expire in 10 years. However, the term of the options may be limited to 5 years if the optionee owns stock representing more than 10% of the voting power of all classes of stock. Vesting periods are determined by the Board of Directors and generally provide for shares to vest at a rate of 1/3 of the shares at the end of each subsequent anniversary of the initial vesting date, subject to continued service as an employee. As of June 30, 1999, options to purchase 827,436 and 741,873 shares of our common stock were outstanding under the 1996 and 1997 stock option plans, respectively. As of June 30, 1999, there were 873,038 additional shares available for grant under the 1997 stock option plan. With the creation of the 1997 stock option plan, no further issuance of options under the 1996 stock option plan are allowed. F-16 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-Based Compensation We continue to apply APB Opinion No. 25 in accounting for our employee stock-based compensation plans and use the intrinsic-value method in accounting for options granted to employees. Accordingly, compensation cost has only been recognized in the accompanying consolidated statements of operations for any stock options granted to employees where the exercise price of the option was less than the fair value of the underlying common stock as of the grant date. Had we determined compensation cost based on the fair value at the grant date for stock options under SFAS No. 123 for our stock-based compensation plans, net loss and basic and diluted net loss per share would have been as follows:
Years Ended December 31, ------------------------- Six Months Ended 1996 1997 1998 June 30, 1999 ------- ------- ------- ---------------- (in thousands) Net loss: As reported..................... $(2,312) $(4,800) $(6,006) $(2,644) Pro forma....................... (2,319) (4,837) (6,116) (2,745) Basic and diluted net loss per share: As reported..................... $ (0.45) $ (0.88) $ (1.10) $ (0.48) Pro forma....................... (0.45) (0.89) (1.12) (0.50)
These pro forma results assume that we began recording compensation expense for option grants to employees subsequent to January 1, 1995 and may not be indicative of pro forma results to be expected in future periods. The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Years Ended December 31, ----------------------- Six Months Ended 1996 1997 1998 June 30, 1999 ------- ------- ------- ---------------- Expected volatility.................... 40% 40% 40% 40% Average life........................... 5 years 5 years 5 years 5 years Risk-free interest rate................ 6.82% 6.89% 5.64% 6.27% Dividends.............................. -- -- -- --
Compensation cost recognized in the accompanying consolidated statements of operations for stock options granted to nonemployees was $0, $0, $29,001 and $58,192 for the years ended December 31, 1996, 1997, 1998, and for the six months ended June 30, 1999, respectively. Compensation cost recognized in the accompanying consolidated statements of operations for stock options granted to employees at less than the fair market value of the underlying common stock was $28,000 for the six months ended June 30, 1999. F-17 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of the activity within our stock option plans is as follows:
Years Ended December 31, --------------------------------------------------------- Six Months Ended 1996 1997 1998 June 30, 1999 ----------------- ------------------ -------------------- -------------------- Weighted- Weighted- Weighted- Weighted- average average average average exercise exercise exercise exercise Shares price Shares price Shares price Shares price ------- --------- ------- --------- --------- --------- --------- --------- Outstanding at beginning of period.............. -- $ -- 590,333 $0.15 860,936 $0.42 1,243,769 $0.78 Granted................. 590,333 0.15 286,256 1.00 398,183 1.56 379,472 2.19 Exercised............... -- -- -- -- -- -- (36,166) 0.94 Canceled................ -- -- (15,653) 0.69 (15,350) 1.24 (17,766) 1.80 ------- ----- ------- ----- --------- ----- --------- ----- Outstanding at end of period................. 590,333 $0.15 860,936 $0.42 1,243,769 $0.78 1,569,309 $1.10 ======= ===== ======= ===== ========= ===== ========= ===== Options exercisable at end of period.......... 67,333 $0.50 234,602 $0.24 539,466 $0.46 919,952 $0.68 ======= ===== ======= ===== ========= ===== ========= ===== Weighted average fair value of options granted at fair value during the period...... $0.06 $0.46 $0.68 $1.19 ===== ===== ===== ===== Weighted average fair value of options granted below fair value during the period................. $ -- $ -- $ -- $0.95 ===== ===== ===== =====
The following table summarizes information about stock options outstanding as of June 30, 1999:
Options Options Outstanding Exercisable ----------------------------------------------------------------------- Weighted- Weighted- average Weighted-average average exercise remaining exercise Option price Shares price contractual life Shares price ------------ ---------- --------- ---------------- ------- --------- $ 0.10 520,000 $0.10 6.8 500,000 $0.10 0.50 43,062 0.50 7.4 43,562 0.50 1.00 264,374 1.00 7.7 174,702 1.00 1.50 322,800 1.50 8.6 86,986 1.50 2.00 278,870 2.00 9.5 81,000 2.00 2.50 140,203 2.50 9.9 33,702 2.50 ---------- ---------- ----- --- ------- ----- $0.10-2.50 1,569,309 $1.10 8.1 919,952 $0.68 ========== ===== === ======= =====
(10) Employee Retirement and Savings Plan We sponsor an employee savings plan (the Plan) pursuant to Section 401(k) of the Internal Revenue Code. All employees who work at least 20 hours per week with one month of service may defer a portion of their salary. The Plan allows us to make discretionary contributions. However, we have not made any discretionary contributions for the periods presented. (11) Internet Hosting Agreements In fiscal year 1999, we have entered into several agreements with Conxion Corporation under which it will supply us with application hosting services and Internet infrastructure for our ASP software solutions. These agreements typically have terms of one year. Conxion has agreed to enter into extensions of these agreements and to enter into supplemental service agreements, as required by us on terms not less favorable to us as they F-18 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) offer to any of their customers. In addition, they have agreed not to terminate or suspend the services provided under these agreements in the event of a bona fide dispute so long as undisputed payments are not withheld. In connection with these agreements, we have issued 200,000 shares of our Series C preferred stock to Conxion and recorded a receivable in the amount of $550,000. In addition, we have agreed to purchase $550,000 of future application hosting services from Conxion. (12) Income Taxes The provision for income taxes consists of the following components:
Years Ended December 31, -------------------- Six Months Ended 1996 1997 1998 June 30, 1999 ------ ------ ------ ---------------- Current portion: Federal.............................. $ -- $ -- $ -- $ -- State................................ 4,000 6,400 4,000 4,000 Deferred portion....................... -- -- -- -- ------ ------ ------ ------ $4,000 $6,400 $4,000 $4,000 ====== ====== ====== ======
A reconciliation from the federal tax assuming the statutory rate to the total provision for the income taxes is as follows:
Years Ended December 31, ----------------------------------- Six Months Ended 1996 1997 1998 June 30, 1999 --------- ----------- ----------- ---------------- Tax at statutory rate... $(784,629) $(1,629,828) $(2,040,578) $(897,465) State income taxes, net of federal taxes....... 2,640 4,224 2,640 2,640 Permanent differences, including goodwill..... 5,327 35,449 59,310 44,493 Net operating losses not benefited.............. 780,662 1,596,555 1,982,628 854,332 --------- ----------- ----------- --------- $ 4,000 $ 6,400 $ 4,000 $ 4,000 ========= =========== =========== =========
The components of our net deferred tax asset are as follows:
December 31, ------------------------ June 30, 1997 1998 1999 ----------- ----------- ----------- Deferred tax liabilities: Property and equipment................ $ 58,460 $ 26,617 $ 40,338 Intangibles........................... 172,819 48,982 -- State taxes........................... 139,074 253,107 286,725 ----------- ----------- ----------- Total deferred tax liabilities...... 370,353 328,706 327,063 ----------- ----------- ----------- Deferred tax assets: Various accruals and reserves not deductible for tax purposes.......... 222,032 790,659 724,725 Intangibles........................... -- -- 11,342 Net operating loss carryforwards...... 3,101,362 4,696,158 5,591,650 Tax credit carryforwards.............. 16,073 16,073 16,073 ----------- ----------- ----------- Total deferred tax assets........... 3,339,467 5,502,890 6,343,790 ----------- ----------- ----------- Net deferred tax assets............... 2,969,114 5,174,184 6,016,727 Valuation allowance................... (2,969,114) (5,174,184) (6,016,727) ----------- ----------- ----------- Net deferred tax assets after valuation allowance................ $ -- $ -- $ -- =========== =========== ===========
F-19 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The net changes in the valuation allowance for the years ended December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1999 were increases of $1,950,719, $2,205,070 and $842,543, respectively. We believe sufficient uncertainty exists regarding our ability to realize our deferred tax assets and, accordingly, a valuation allowance has been established against the net deferred tax assets. As of June 30, 1999, we had approximately $14,400,000 and $8,000,000 of net operating loss carryforwards for federal and state purposes, respectively. The federal net operating loss carryforwards expire between 2013 and 2019 and the state net operating loss carryforwards expire primarily in 2003. The difference between the federal and state net operating loss carryforwards is due primarily to a 50% limitation on net operating loss carryforwards for California income tax purposes. Federal and state laws impose substantial restrictions on the utilization of net operating loss carryforwards in the event of an "ownership change," as defined in Section 382 of the Internal Revenue Code. We have not yet determined whether an ownership change occurred due to significant stock transactions in each of the reported years. If an ownership change has occurred, utilization of the net operating loss carryforwards could be significantly reduced. Additionally, the utilization of the net operating loss carryforwards of approximately $1.0 million acquired in the acquisition of Healthcheck is limited to the taxable income generated by the operations of Healthcheck. (13) Segment Information We have adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. Our chief operating decision maker is considered to be the Company's President. The President reviews discrete financial information regarding profitability of our five segments: Corporate Headquarters, Healthcheck, Velocity, LINC, and Res-Q. The corporate headquarters manages the corporate business, oversees all of the segments and performs research and development for our organic product. Healthcheck specializes in a service that researches the history and credentials of healthcare professionals. LINC offers software used by hospitals to monitor costs of patient care and offers expert testimony services related to management of medical cases. Velocity provides services that survey and track the effectiveness of medical procedures as well as services related to development of customized software and patient satisfaction surveys. Res-Q offers scheduling software to hospitals. We do all of our business in the United States. F-20 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the accompany notes to the consolidated financial statements. Information about our segments as of and for the years ended December 31, 1996, 1997, and 1998, and as of and for the six months ended June 30, 1999 are as follows:
Corporate Head- quarters Velocity Healthcheck Res-Q LINC Consolidated ----------- ---------- ----------- ---------- --------- ------------ 1996 Revenue from external customers: Service............... $ -- $ 3,755 $ 367,299 $ -- $ -- $ 371,054 Depreciation and amortization........... 33,218 1,392 41,925 -- -- 76,535 Interest expense........ 2,017 -- 51 -- -- 2,068 Income tax expense...... 4,000 -- -- -- -- 4,000 Net loss................ (1,994,958) (41,851) (274,925) -- -- (2,311,734) Total assets............ 300,476 319,706 133,585 -- -- 753,767 1997 Revenue from external customers: License............... $ -- $ 15,693 $ -- $ 347,166 $ 61,481 $ 424,340 Product development... -- 1,237,500 -- -- -- 1,237,500 Service............... -- 491,018 171,721 497,597 149,309 1,309,645 Depreciation and amortization........... 133,161 60,159 40,326 135,797 153,063 522,506 Interest expense........ 18,605 -- 1,147 -- -- 19,752 Income tax expense...... 6,400 -- -- -- -- 6,400 Net loss................ (4,037,950) 289,569 (308,826) (284,200) (458,605) (4,800,012) Total assets............ 673,289 354,953 649,612 736,730 489,757 2,904,341 1998 Revenue from external customers: License............... $ -- $ 25,460 $ -- $ 421,395 $ 123,839 $ 570,694 Product development... -- 564,560 -- -- -- 564,560 Service............... 73,000 637,067 1,022,937 1,024,324 731,069 3,488,397 Depreciation and amortization........... 219,489 65,453 17,155 216,176 234,638 752,911 Interest expense........ 90,344 -- -- 2,611 -- 92,955 Income tax expense...... 4,000 -- -- -- -- 4,000 Net loss................ (4,674,652) (443,703) (113,242) (372,191) (401,913) (6,005,701) Total assets............ 380,061 450,414 558,704 465,208 360,661 2,215,048 1999 Revenue from external customers: License............... $ -- $ 7,995 $ -- $ 308,619 $ 53,155 $ 369,769 Product development... -- 227,402 -- -- -- 227,402 Service............... 29,765 527,406 818,138 294,599 442,141 2,112,049 Depreciation and amortization........... 94,401 33,951 48,591 116,384 117,317 410,644 Interest expense........ 71,008 -- 5,010 -- -- 76,018 Income tax expense...... 4,000 -- -- -- -- 4,000 Net loss................ (2,363,504) (9,254) 145,988 (346,912) (69,922) (2,643,604) Total assets............ 1,774,696 269,545 533,654 581,363 285,372 3,444,630
F-21 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 1996, we had not acquired LINC and Res-Q and the information for Healthcheck reflects CPCS only as Healthcheck was not acquired until 1997. The information for Healthcheck reflects the combined operations of Healthcheck and CPCS in 1997 and 1998 as those operations were combined in early 1998. CPCS was also in the business of providing credentialing services. (14) Subsequent Events PSI-Med Corporation Acquisition Subsequent to June 30, 1999, we completed our acquisition of PSI-Med in exchange for 16,667 shares of our Series A-II preferred stock. PSI-Med Corporation sells and services practice management software and is engaged as a full service provider of medical insurance billing and accounts receivable collection services. The Series A-II preferred stock has been valued at $666,680. We will account for the acquisition under the purchase method of accounting and, accordingly, the results of PSI-Med's operations will be included in our consolidated financial statements beginning with the effective date of the acquisition. Since June 7, 1998, we have committed to fund the salary of PSI-Med's President. The portion of the President's salary attributable to PSI-Med's business totals $90,000 and has been paid by us and charged to expense by PSI- Med in the 1999 PSI-Med financial statements. The following table shows unaudited pro forma results of operations assuming the acquisition of PSI-Med had been consummated at the beginning of the earliest period presented. The unaudited pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisitions taken place as of the beginning of the periods presented, nor is it necessarily indicative of results that may occur in the future:
Year Ended Six Months December 31, Ended June 30, 1998 1999 ------------ -------------- (unaudited) Pro forma basis: Total net revenues............................ $ 6,834,242 $ 3,819,223 Net loss...................................... (6,651,008) (2,701,349) Net loss per share: Basic and diluted......... (1.22) (0.49) Weighted average shares outstanding: Basic and diluted........................... 5,447,820 5,484,663
Superior Consultant Holdings Corporation In September 1999, we entered into a Distribution and Services Agreement, as amended, with Superior Consultant Holdings Corporation under which Superior agreed to market our product as a preferred ASP solution for healthcare organizations. We agreed to market Superior's healthcare consulting services and business integration services, to promote Superior as our exclusive alliance partner for the provision of healthcare consulting services and not to offer distribution rights to our Organic Architecture and solutions to any direct competitor of Superior without Superior's prior written approval. Superior has a non-exclusive worldwide license to market, use, install and display our Organic Architecture and solutions. We have also appointed Superior as our exclusive international provider of healthcare consulting services to our clients. The agreement also entitles Superior to appoint a member to our board of directors and to receive a vested non-statutory stock option grant exercisable for 200,000 shares of our common stock at an exercise price of $6.00 per share. The initial term of the agreement runs through August 31, 2002 and may be renewed by Superior for up to two additional two-year terms. F-22 OrganicNet, Inc. and PSI-Med Corporation UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma condensed combined financial statements have been prepared to illustrate the effect of our acquisition of PSI-Med Corporation and include in this prospectus an Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 1999 and Unaudited Pro Forma Condensed Combined Statements of Operations for the six months ended June 30, 1999 and the year ended December 31, 1998. The pro forma condensed combined financial statements are based on the historical consolidated financial statements of OrganicNet, Inc. and the historical financial statements of PSI-Med Corporation. The Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 1999 assumes that the acquisition was consummated on June 30, 1999 and the Unaudited Pro Forma Condensed Combined Statements of Operations for the six months ended June 30, 1999 and the year ended December 31, 1998 assume that the acquisition had been consummated as of the first day of the earliest period presented. OrganicNet, Inc. and PSI-Med Corporation UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET June 30, 1999
Pro forma Pro forma OrganicNet PSI-Med adjustments combined ------------ ----------- ----------- ------------ ASSETS ------ Current assets: Cash and cash equivalents.......... $ 1,680,135 $ 46,059 $ -- $ 1,726,194 Accounts receivable, net.................. 647,523 109,929 (74,777)(E) 682,675 Prepaids and other current assets....... 105,578 804 -- 106,382 ------------ ----------- ---------- ------------ Total current assets............. 2,433,236 156,792 (74,777) 2,515,251 Property and equipment, net.................... 309,483 81,824 -- 391,307 Intangibles, net........ 570,504 51,022 1,575,651 (A) 2,197,177 Other noncurrent assets................. 131,407 9,784 -- 141,191 ------------ ----------- ---------- ------------ $ 3,444,630 $ 299,422 $1,500,874 $ 5,244,926 ============ =========== ========== ============ LIABILITIES AND STOCKHOLDERS' DEFICIT --------------------- Current liabilities: Accounts payable and accrued expenses..... $ 1,416,523 $ 373,697 $ (24,668)(C) $ 1,765,552 Deferred revenue...... 2,329,020 70,163 -- 2,399,183 Loans and other payables to related parties.............. 1,930,015 1,020,582 (622,837)(C)(E) 2,327,760 Current portion of long-term obligations and other current liabilities.......... 461,678 171,154 -- 632,832 ------------ ----------- ---------- ------------ Total current liabilities........ 6,137,236 1,635,596 (647,505) 7,125,327 Long-term obligations, less current portion... 40,117 145,525 -- 185,642 ------------ ----------- ---------- ------------ Total liabilities... 6,177,353 1,781,121 (647,505) 7,310,969 ------------ ----------- ---------- ------------ Stockholders' deficit: Preferred stock....... 56,739 -- 167 (D) 56,906 Common stock.......... 5,500 -- -- 5,500 Additional paid-in capital.............. 13,815,209 367,204 299,309 (D) 14,481,722 Receivable related to sale of stock........ (550,000) -- -- (550,000) Deferred compensation......... (88,635) -- -- (88,635) Accumulated deficit... (15,971,536) (1,848,903) 1,848,903 (D) (15,971,536) ------------ ----------- ---------- ------------ Total stockholders' deficit............ (2,732,723) (1,481,699) 2,148,379 (2,066,043) ------------ ----------- ---------- ------------ $ 3,444,630 $ 299,422 $1,500,874 $ 5,244,926 ============ =========== ========== ============
See accompanying notes to unaudited pro forma condensed combined financial statements. F-23 OrganicNet, Inc. and PSI-Med Corporation UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999
Pro forma Pro forma OrganicNet PSI-Med adjustments combined ----------- ---------- ----------- ----------- Revenue: License................ $ 369,769 $ 283,995 $ -- $ 653,764 Product development.... 227,402 -- -- 227,402 Service................ 2,112,049 826,008 -- 2,938,057 ----------- ---------- --------- ----------- Total revenue........ 2,709,220 1,110,003 -- 3,819,223 ----------- ---------- --------- ----------- Cost of revenue: License................ 336,031 -- -- 336,031 Product development.... 63,072 -- -- 63,072 Service................ 1,230,311 697,787 -- 1,928,098 ----------- ---------- --------- ----------- Total cost of revenue............. 1,629,414 697,787 -- 2,327,201 ----------- ---------- --------- ----------- Gross profit ............ 1,079,806 412,216 -- 1,492,022 ----------- ---------- --------- ----------- Operating Expense: Sales and marketing.... 672,109 61,996 -- 734,105 Research and development........... 1,204,494 116,631 -- 1,321,125 General and administrative........ 1,761,776 118,894 120,613 (B) 2,001,283 ----------- ---------- --------- ----------- Total operating expense............. 3,638,379 297,521 120,613 4,056,513 ----------- ---------- --------- ----------- Operating loss........... (2,558,573) 114,695 (120,613) (2,564,491) Interest expense......... (76,018) -- -- (76,018) Other expense............ (5,013) (51,027) -- (56,040) ----------- ---------- --------- ----------- Net (loss) income before income taxes............ (2,639,604) 63,668 (120,613) (2,696,549) Provision for income taxes................... 4,000 800 -- 4,800 ----------- ---------- --------- ----------- Net loss................. $(2,643,604) $ 62,868 $(120,613) $(2,701,349) =========== ========== ========= =========== Net loss per share: Basic.................. $ (0.48) $ 0.74 $ (0.49) =========== ========== =========== Diluted................ $ (0.48) $ 0.68 $ (0.49) =========== ========== =========== Weighted average shares outstanding: Basic.................. 5,484,663 84,693 5,484,663 =========== ========== =========== Diluted................ 5,484,663 92,971 5,484,663 =========== ========== ===========
See accompanying notes to unaudited pro forma condensed combined financial statements. F-24 OrganicNet, Inc. and PSI-Med Corporation UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998
Pro forma Pro forma OrganicNet PSI-Med adjustments combined ----------- ---------- ----------- ----------- Revenue: License................ $ 570,694 $ 516,559 $ -- $ 1,087,253 Product development.... 564,560 -- -- 564,560 Service................ 3,488,397 1,694,032 -- 5,182,429 ----------- ---------- --------- ----------- Total revenue........ 4,623,651 2,210,591 -- 6,834,242 ----------- ---------- --------- ----------- Cost of revenue: License................ 756,156 -- -- 756,156 Product development.... 208,533 -- -- 208,533 Service................ 2,314,026 1,535,514 -- 3,849,540 ----------- ---------- --------- ----------- Total cost of revenue............. 3,278,715 1,535,514 -- 4,814,229 ----------- ---------- --------- ----------- Gross profit............. 1,344,936 675,077 -- 2,020,013 ----------- ---------- --------- ----------- Operating Expense: Sales and marketing.... 1,643,868 168,135 -- 1,812,003 Research and development........... 1,832,783 237,105 -- 2,069,888 General and administrative........ 3,768,388 587,077 241,225 (B) 4,596,690 ----------- ---------- --------- ----------- Total operating expense............. 7,245,039 992,317 241,225 8,478,581 ----------- ---------- --------- ----------- Operating loss........... (5,900,103) (317,240) (241,225) (6,458,568) Interest expense......... (92,955) -- -- (92,955) Other expense............ (8,643) (86,042) -- (94,685) ----------- ---------- --------- ----------- Loss before income taxes................... (6,001,701) (403,282) (241,225) (6,646,208) Provision for income taxes................... 4,000 800 -- 4,800 ----------- ---------- --------- ----------- Net loss................. $(6,005,701) $ (404,082) $(241,225) $(6,651,008) =========== ========== ========= =========== Net loss per share: Basic and diluted...... $ (1.10) $ (4.77) $ (1.22) =========== ========== =========== Weighted average share outstanding: Basic and diluted...... 5,447,820 84,693 5,447,820 =========== ========== ===========
See accompanying notes to unaudited pro forma condensed combined financial statements. F-25 OrganicNet, Inc. and PSI-Med Corporation NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (A) To reflect the excess of acquisition costs over the estimated fair value of net assets acquired (goodwill). The purchase price and purchase-price allocation are summarized as follows: Purchase price: Stock issued................................................ $ 666,680 ----------- Allocated to: Cash........................................................ 46,059 Accounts receivable, net.................................... 35,152 Property and equipment...................................... 81,824 Other assets................................................ 10,588 Liabilities assumed and acquisition costs incurred.......... (1,063,453) Deferred revenue............................................ (70,163) ----------- Total allocation.......................................... (959,993) ----------- Excess of purchase price over identifiable assets and liabilities (goodwill)................................... $ 1,626,673 ===========
(B) To reflect the amortization expense due to the amortization of goodwill on a straight-line basis over seven years. (C) To reflect the purchase price adjustment for payables which were not assumed by OrganicNet as part of the acquisition. (D) To reflect the issuance of 16,667 shares of Series A-II preferred stock in exchange for all PSI-Med stock outstanding. The shares have been valued at $666,680 based on the market price of the stock on the date the two companies reached agreement on the purchase price and the proposed transaction was announced. (E) To eliminate intercompany financing. F-26 INDEPENDENT AUDITORS' REPORT The Board of Directors PSI-Med Corporation: We have audited the accompanying balance sheets of PSI-Med Corporation as of May 31, 1998 and 1999 and the related statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended May 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PSI-Med Corporation as of May 31, 1998 and 1999 and the results of its operations and its cash flows for each of the years in the three-year period ended May 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Orange County, California August 4, 1999, except as to note 10, which is as of September 7, 1999 F-27 PSI-Med Corporation BALANCE SHEETS May 31, 1998 and 1999
1998 1999 ----------- ----------- ASSETS Current assets: Cash and cash equivalents........................... $ 17,158 $ 38,850 Accounts receivable, net of allowances for doubtful accounts of $182,518 and $56,607 for 1998 and 1999, respectively....................................... 112,417 126,720 Prepaid expenses.................................... 2,145 10,801 ----------- ----------- Total current assets............................. 131,720 176,371 Furniture, fixtures and equipment, net............... 102,902 85,214 Goodwill, net of accumulated amortization of $12,413 as of May 31, 1999.................................. -- 53,713 Other assets......................................... 11,588 9,738 ----------- ----------- $ 246,210 $ 325,036 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.................................... $ 491,142 $ 395,762 Accrued liabilities................................. 141,851 140,680 Advances from affiliate............................. 8,000 22,000 Current portion of notes payable to related parties............................................ 353,057 576,673 Notes payable....................................... 67,639 46,459 Deferred compensation payable to related parties.... 300,000 300,000 Unearned revenue.................................... 68,487 66,807 Sales taxes payable................................. 133,926 130,988 Current portion of capital lease obligations........ 15,673 17,021 ----------- ----------- Total current liabilities........................ 1,579,775 1,696,390 Capital lease obligations, excluding current portion............................................. 44,110 28,880 Notes payable to related parties, less current maturities.......................................... 299,329 123,408 ----------- ----------- Total liabilities................................ 1,923,214 1,848,678 ----------- ----------- Commitments and subsequent events Stockholders' deficit: Common stock, no par value, 200,000 shares authorized; 84,693 shares issued and outstanding as of May 31, 1998 and 1999........................... 367,204 367,204 Additional paid-in capital.......................... -- 90,000 Accumulated deficit................................. (2,044,208) (1,980,846) ----------- ----------- Total stockholders' deficit...................... (1,677,004) (1,523,642) ----------- ----------- $ 246,210 $ 325,036 =========== ===========
See accompanying notes to financial statements. F-28 PSI-Med Corporation STATEMENTS OF OPERATIONS Years Ended May 31, 1997, 1998 and 1999
1997 1998 1999 ---------- ---------- ---------- Revenue: Software................................ $ 651,119 $ 122,199 $ 102,500 Service and support..................... 1,939,766 2,128,828 2,151,167 ---------- ---------- ---------- Total revenue......................... 2,590,885 2,251,027 2,253,667 ---------- ---------- ---------- Cost of revenue: Software................................ 162,465 118,812 179,721 Service and support..................... 1,602,554 1,188,153 1,241,428 ---------- ---------- ---------- Total cost of revenue................. 1,765,019 1,306,965 1,421,149 ---------- ---------- ---------- Gross profit.............................. 825,866 944,062 832,518 Operating expense--selling, general and administrative........................... 1,676,594 1,459,107 743,457 ---------- ---------- ---------- Operating income (loss)................... (850,728) (515,045) 89,061 Other income (expense), net............... (61,106) 63,604 (24,899) ---------- ---------- ---------- Earnings (loss) before income taxes....... (911,834) (451,441) 64,162 Income tax expense........................ 800 800 800 ---------- ---------- ---------- Net earnings (loss)....................... $ (912,634) $ (452,241) $ 63,362 ========== ========== ========== Basic net earnings (loss) per share....... $ (11.88) $ (5.34) $ 0.75 ========== ========== ========== Weighted average number of shares outstanding.............................. 76,813 84,693 84,693 ========== ========== ========== Diluted net earnings (loss) per share..... $ (11.88) $ (5.34) $ 0.70 ========== ========== ========== Weighted average number of shares outstanding.............................. 76,813 84,693 90,884 ========== ========== ==========
See accompanying notes to financial statements. F-29 PSI-Med Corporation STATEMENTS OF STOCKHOLDERS' DEFICIT Years Ended May 31, 1997, 1998 and 1999
Common stock Additional --------------- paid-in Accumulated Shares Amount capital deficit Total ------ -------- ---------- ----------- ----------- Balances at May 31, 1996.................... 54,118 $ 5,086 $ -- $ (679,333) $ (674,247) Issuance of common stock................... 30,575 362,118 -- -- 362,118 Net loss................. -- -- -- (912,634) (912,634) ------ -------- ------- ----------- ----------- Balances at May 31, 1997.................... 84,693 367,204 -- (1,591,967) (1,224,763) Net loss................. -- -- -- (452,241) (452,241) ------ -------- ------- ----------- ----------- Balances at May 31, 1998.................... 84,693 367,204 -- (2,044,208) (1,677,004) Contribution of executive compensation ........... -- -- 90,000 -- 90,000 Net earnings............. -- -- -- 63,362 63,362 ------ -------- ------- ----------- ----------- Balances at May 31, 1999.................... 84,693 $367,204 $90,000 $(1,980,846) $(1,523,642) ====== ======== ======= =========== ===========
See accompanying notes to financial statements. F-30 PSI-Med Corporation STATEMENTS OF CASH FLOWS Years Ended May 31, 1997, 1998 and 1999
1997 1998 1999 --------- --------- -------- Cash flows from operating activities: Net earnings (loss)........................... $(912,634) $(452,241) $ 63,362 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................ 47,871 45,677 59,414 Contribution of executive compensation....... -- -- 90,000 Provision for deferred employee compensation................................ 45,756 -- -- Changes in operating assets and liabilities: Accounts receivable......................... (23,016) 67,943 (14,303) Other assets................................ (7,621) 3,118 (6,806) Accounts payable............................ 347,015 39,118 (95,380) Accrued liabilities......................... 230,655 (88,804) (1,171) Advance from affiliates..................... -- 8,000 14,000 Unearned revenue............................ 58,702 9,785 (1,680) Sales taxes payable......................... 168,182 (160,529) (2,938) --------- --------- -------- Net cash (used in) provided by operating activities................................ (45,090) (527,933) 104,498 --------- --------- -------- Cash flows from investing activities: Purchase of furniture, fixtures and equipment.................................... (134,483) (30,371) (29,313) Acquisition of Physicians Management Services, Inc.......................................... -- -- (6,000) --------- --------- -------- Net cash used in investing activities...... (134,483) (30,371) (35,313) --------- --------- -------- Cash flows from financing activities: Proceeds from issuance of capital stock....... 362,118 -- -- Increase in borrowings from related parties... (48,306) 320,264 (12,431) Net increase in borrowings.................... 60,050 (31,911) (21,180) Principal payments on lease obligations....... 10,077 47,493 (13,882) --------- --------- -------- Net cash provided by (used in) financing activities................................ 383,939 335,846 (47,493) --------- --------- -------- Increase (decrease) in cash and cash equivalents............................... 204,366 (222,458) 21,692 --------- --------- -------- Cash and cash equivalents at beginning of year.......................................... 35,250 239,616 17,158 --------- --------- -------- Cash and cash equivalents at end of year....... $ 239,616 $ 17,158 $ 38,850 ========= ========= ======== Supplemental disclosure of cash flow information: Cash paid for income taxes.................... $ 800 $ 800 $ 800 Cash paid for interest........................ 29,952 24,286 37,234 ========= ========= ======== Supplemental disclosure of noncash investing activities: Promissory note issued in exchange for the acquisition of Physical Management Services, Inc.......................................... $ -- $ -- $ 77,116 ========= ========= ========
See accompanying notes to financial statements. F-31 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS May 31, 1997, 1998 and 1999 (1) Organization and Summary of Significant Accounting Policies Business Description We are a California corporation which develops and distributes medical accounting software for medical facilities such as health maintenance organizations, independent physicians associations, medical groups, and medical accounting service bureaus located throughout the United States. The software has been sold as stand alone systems with customers maintaining the HP3000 hardware required to run the software at their site. We also maintain our own computer system at our corporate offices in order to service physicians requiring complete accounts receivable management and collection services. Additionally, we offer local clients the use of our medical accounting software through our computer system in a time share mode. These models have been the prevailing methods because of the high cost of communication lines and equipment. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires us 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. Cash and Cash Equivalents Cash and cash equivalents include cash on deposit with banks with original maturities of three months or less. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are stated at cost. Depreciation of furniture, fixtures and equipment is provided using the straight-line method over the estimated useful lives of the assets of three to five years. Revenue Recognition The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue Recognition." Under SOP 97-2, if a software sales arrangement does not require significant modification or customization of the software, revenue from the sale of the software is recognized when evidence of an arrangement exists, the fee is fixed and determinable, the license agreement has been delivered and collection of any resulting receivable is probable. As a result of certain issues raised in applying SOP 97-2, in March 1998, the AICPA issued an SOP which delayed for one year the effective date of certain provisions of SOP 97-2 with respect to what constitutes vendor-specific objective evidence of fair value of the delivered software element in certain multiple-element arrangements that include service elements entered into by entities that never sell the software elements separately. In December 1998, the AICPA issued SOP 98-9, which amended certain paragraphs of SOP 97-2 to require recognition of revenue using the residual method under certain circumstances, and is effective for fiscal F-32 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) years beginning after March 15, 1999. We do not expect the adoption of this SOP to have a material impact on our financial statements. Revenue from the sales of software is recognized when delivery has occurred, the fee is fixed and determinable and collection of any resulting receivable is probable. Revenue from servicing and support is recognized as the related services are performed. Adoption of Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 130 and SFAS No. 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively (collectively, the Statements). The Statements are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting of comprehensive income and its components in annual financial statements. SFAS No. 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. Reclassification or restatement of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS No. 130 and SFAS No. 131, respectively. For the years ended May 31, 1997, 1998 and 1999, comprehensive income (loss) is equal to our net earnings (loss). The Company operates in one segment and all operations and customers are within the United States. Application of the Statements' requirements did not have a material impact on our financial position or results of operations. In 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee ("AcSEC) issued SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires certain costs incurred in connection with developing or obtaining internal-use software to be capitalized and other costs to be expensed. Application of this SOP's requirements did not have a material impact on our financial position or results of operations. Stock-Based Compensation We adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the service period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and provide pro forma net income (loss) disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. We have elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of cash and cash equivalents, accounts receivable, unbilled accounts receivable, other assets, notes payable, notes payable to related parties, advances from affiliate, accounts payable and accrued expenses, approximate fair value because of the short maturity of these instruments. We use market prices, when available, or discounted cash flows to calculate these fair values. The fair value of our notes payable is estimated based on the current rates offered to us for notes payable of the same remaining maturities and approximates its carrying value. F-33 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) Year 2000 We recognize the need to ensure our operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. We are addressing this risk to the availability and integrity of financial systems and products and the reliability of operational systems. We have tested our Integrated Provider Network System and have completed the Year 2000 conversion of this system. We are in the process of assessing the system's Year 2000 compliance identifying Year 2000 remaining compliance issues in its other systems, equipment and processes. In addition to a review of internal systems, we have initiated formal communications with third parties with which we do business in order to determine whether or not they are Year 2000 compliant and the extent to which we may be vulnerable to third parties' failure to become Year 2000 compliant. Additionally, we are making changes to such systems, updating or replacing such equipment and modifying such processes to make them Year 2000 compliant. The total cost of compliance and its effect on our future results of operations are not expected to be material. However, due to the complexities of estimating the cost of modifying applications to become Year 2000 compliant and the difficulties in assessing third parties' ability to become Year 2000 compliant, estimates may be subject to change. We have not developed a Year 2000 contingency plan and believe that our information systems will be Year 2000 compliant; however, there can be no assurance that all of our systems will be Year 2000 compliant, that the costs to be Year 2000 compliant will not exceed our current expectations, or that the failure of such systems to be Year 2000 compliant will not have a material adverse effect on our business. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Long-lived assets and certain identifiable intangibles (including goodwill) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted 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 by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Capitalized Software Development Costs Software development costs incurred after the establishment of technological feasibility are capitalized and later amortized using the greater of the straight-line method or based on the estimated revenue distribution over the remaining estimated economic life of the products. Such policy results in our amortizing our capitalized software development costs over an estimated economic life of three to seven years. Software development costs were fully amortized as of May 31, 1996. Goodwill Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired company at the date of acquisition. Goodwill is amortized on a straight-line basis over two years. The Company periodically assesses the recoverability of goodwill based on an analysis of the cash flows generated by the underlying assets. In the opinion of management, no impairment of goodwill has occurred as of May 31, 1999. Income Taxes We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the F-34 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) financial reporting basis and the tax basis of our assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted. Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist principally of accounts receivable. Revenue from one customer accounted for 19% and 13% of total revenues for the year ended May 31, 1998 and 1999, respectively. Net Earnings (loss) Per Share We compute net earnings (loss) per share based upon SFAS No. 128, "Earnings per Share." The basic net earnings (loss) per share is computed by dividing the net earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Potential common shares relating to stock options have been included in the calculation of diluted net earnings per share in the year ended May 31, 1999. Potential common shares relating to stock options in each of the years ended May 31, 1997 and 1998 are anti-dilutive, thus the diluted net earnings (loss) per share in these years is the same as the basic net earnings (loss) per share. (2) Acquisition of Physician Management Services, Inc. On January 15, 1999, we acquired the fixed assets and customer base of Physician Management Services, Inc. (PMS). The PMS purchase price totaled $83,116, payable in $6,000 in cash and $77,116 evidenced by an unsecured promissory note. The acquisition was accounted for as a purchase. PMS is an accounts receivable management company which performs the total collection process for doctors and medical groups. The primary client's of PMS are the University of California, Irvine (UCI) departments and doctors affiliated with UCI. The purchase price of $83,116 will be reduced if 12% of the collections for 24 months, related to the acquired customer base, are less than $83,116. The goodwill recorded in conjunction with the purchase is being amortized over two years, the life of the purchase contract. Select unaudited pro forma financial data for the years ended May 31, 1998 and 1999, assuming the PMS acquisition occurred on June 1, 1997, are presented as follows:
Unaudited ------------------------ 1998 1999 ----------- ----------- Revenue............................................ $ 2,761,306 $ 2,564,768 =========== =========== Net earnings (loss)................................ $ (392,102) $ 159,785 =========== =========== Stockholders' deficit.............................. $(1,634,516) $(1,474,832) =========== ===========
These pro forma results of operations and equity have been prepared for comparative purposes only and do not purport to be indicative of the results of operations and equity which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future. F-35 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) (3) Furniture, Fixtures and Equipment Furniture, fixtures and equipment consist of the following:
1998 1999 --------- --------- Furniture and fixtures................................. $ 70,004 $ 78,320 Computer equipment..................................... 375,489 393,911 Office equipment....................................... 1,177 3,752 --------- --------- 446,670 475,983 Accumulated depreciation............................... (343,768) (390,769) --------- --------- $ 102,902 $ 85,214 ========= =========
(4) Commitments We lease office space and equipment under noncancelable operating and capital leases with various expiration dates through the year 2002. Future minimum lease payments under noncancelable leases are as follows:
Capital Operating leases leases -------- --------- Period ending May 31: 2000................................................. $ 26,834 $117,877 2001................................................. 20,460 4,009 2002................................................. 7,994 -- -------- -------- Total minimum lease payments....................... 55,288 $121,886 ======== Less amounts representing interest..................... (9,387) -------- Present value of minimum lease payments............ 45,901 Less current portion of obligations under capital leases................................................ (17,021) -------- Obligations under capital leases, excluding current portion............................................... $ 28,880 ========
Rent expense for the years ended May 31, 1997, 1998 and 1999 was $169,196, $143,487 and $130,967, respectively. F-36 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) (5) Notes Payable
1998 1999 -------- -------- Notes payable to related parties consist of the following (see note 10): Note payable to stockholder for $25,000; bearing fixed interest rate of 12%; principal and interest payable at maturity; due on demand........................... $ 29,166 $ 32,864 Note payable to affiliate for $14,000; bearing fixed interest rate of 12%; principal and interest payable at maturity; due on demand........................... 14,317 16,014 Note payable to affiliate for $32,000; bearing fixed interest rate of 12%; principal and interest payable at maturity; due on demand........................... 32,483 36,240 Notes payable to related party for $90,000; bearing interest rate of 8% until December 31, 1997 and 12% thereafter; principal and interest payable at maturity; due on demand.............................. 106,155 119,618 Note payable to related party for $30,000; bearing fixed interest rate of 12%; interest payable monthly; due on demand........................................ 30,000 30,000 Note payable to majority stockholder for $147,284; bearing fixed interest rate of 11%; interest payable quarterly; due June 1, 2000.......................... 85,629 60,506 Note payable to related party for $162,996; bearing fixed interest rate of 10%; principal and interest due monthly; due February 16, 2004................... 159,699 138,725 Unsecured note payable to PMS for $77,116; bearing no interest rate; principal payable monthly calculated as 12% of gross billings collected; due January 15, 2001................................................. -- 66,684 Note payable to related party for $150,000; bearing no interest; due October 11, 1999....................... 150,000 150,000 -------- -------- Note payable to stockholder for $15,000; bearing fixed interest rate of 10%; interest and principal payable at maturity; due on demand........................... 44,937 49,430 Note payable to a bank secured by the Company's assets and a personal guarantee by an officer of the Company; bearing interest rate of prime plus 6.25% (14% at May 31, 1999); principal and interest due monthly; due June 15, 2000......................................... 67,639 46,459 -------- -------- 720,025 746,540 Less current portion................................... (420,696) (623,132) -------- -------- Total notes payable, less current maturities......... $299,329 $123,408 ======== ========
Total notes payable to related parties............. 652,386 700,081 Principal maturities of the notes payable at May 31, 1999 are as follows: 1999.............................................................. $623,132 2000.............................................................. 56,684 2001.............................................................. 36,000 2002.............................................................. 30,724 -------- $746,540 ========
F-37 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) (6) Related Party Transactions Accounts Payable to Related Parties At May 31, 1998 and 1999, we had the following accounts payable to related parties recorded within accounts payable in the accompanying balance sheet:
1998 1999 -------- ------- Accounts payable to related parties...................... $116,595 $73,129 ======== =======
Deferred Compensation Payable to Related Parties At May 31, 1998 and 1999, we had the following deferred compensation payable to related parties: Deferred compensation payable to related parties........ $300,000 $300,000 ======== ========
Executive Compensation Since June 7, 1998, OrganicNet, Inc. has committed to fund the salary of our President. The portion of the President's salary attributable to the Company's business totals $90,000 and has been charged to expense in the accompanying 1999 financial statements and credited to additional paid-in capital. (7) Income Taxes Income tax expense for the years ended May 31, 1997, 1998 and 1999, respectively, consists of the following:
1997 1998 1999 ---- ---- ---- Current: Federal..................................................... $-- $-- $-- State and local............................................. 800 800 800 Deferred: Federal..................................................... -- -- -- State and local............................................. -- -- -- ---- ---- ---- $800 $800 $800 ==== ==== ====
F-38 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) The following table summarizes the tax effects of temporary differences which give rise to significant portions of the deferred tax assets and liabilities as of May 31, 1998 and 1999, respectively:
1998 1999 --------- --------- Deferred tax assets: Current assets: Accrued liabilities and other deferred tax assets.......................................... $ 331,645 $ 283,768 --------- --------- Total.......................................... 331,645 283,768 Less valuation allowance for current deferred tax assets.......................................... (331,645) (283,768) --------- --------- Net current deferred tax assets................ -- -- --------- --------- Noncurrent assets: Net operating loss carryforward.................. 402,286 386,458 Depreciation and amortization.................... 7,422 16,722 --------- --------- Total.......................................... 409,708 403,180 Less valuation allowance for non-current deferred tax assets........................................ (409,708) (403,180) --------- --------- Net noncurrent deferred tax assets................. -- -- --------- --------- Net deferred tax assets............................ $ -- $ -- ========= =========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss carryforward. Realization of the deferred tax assets is dependent on generating future taxable income. For financial reporting purposes, a valuation allowance was recorded at May 31, 1998 and 1999 to reflect the uncertainty of generating taxable income sufficient to utilize the gross deferred tax asset. In addition, the utilization of the net operating loss carryforwards may be limited due to restrictions imposed under applicable Federal and state tax law due to a change in ownership. The valuation allowance decreased by $239,809 and increased by $54,405 for the years ended May 31, 1998 and 1999, respectively. As of May 31, 1999, we have net operating loss carryforwards for federal and state income tax purposes of approximately $1,038,000 and $470,000, respectively, which are available to offset future taxable income, if any, through 2019. Due to the uncertainty surrounding the realization of the benefits of our favorable tax attributes in future tax returns, we have fully reserved our deferred tax assets as of May 31, 1998 and 1999, respectively. In assessing the potential realization of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. (8) Liquidity OrganicNet, Inc. has expressed its intent to provide continuing support to us such that we can meet our obligations as they come due during the next twelve months. F-39 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) (9) Stock Options A summary of the activity of our stock options are as follows:
Weighted- average Shares of exercise price options per option --------- -------------- Outstanding as of May 31, 1996...................... 3,000 $20.00 Granted during the year ended May 31, 1997.......... 5,278 44.47 ----- Outstanding at May 31, 1997......................... 8,278 35.60 Granted during the year ended May 31, 1998.......... -- -- ----- Outstanding at May 31, 1998......................... 8,278 35.60 Granted during the year ended May 31, 1999.......... -- -- ----- Outstanding at May 31, 1999......................... 8,278 35.60 -----
The following table summarizes information about stock options exercisable at May 31, 1999:
Number of Options Weighted-average Weighted-average Range of Exercisable at exercise price remaining exercise prices May 31, 1999 at date of grant contractual life --------------- ----------------- ---------------- ---------------- $ 20.00 3,000 $20.00 9 yrs. 39.71 1,939 39.71 4 yrs. 47.23 3,339 47.23 4.75 yrs. ----- 8,278 =====
The Company applies APB No. 25 in accounting for its employee stock based compensation plan and uses the intrinsic value method in accounting for options granted to employees. Accordingly, no compensation costs have been recognized in the accompanying statements of operations for any of its stock options granted to employees because the exercise price of each option equaled or exceeded the fair value of the underlying common stock. Had we determined compensation costs based on the fair value at the grant date for our stock options under SFAS No. 123, pro forma net earnings (loss) would have been as follows:
1997 1998 1999 ----------- --------- ------- Net earnings (loss): As reported............................... $ (912,634) $(452,241) $63,362 Assumed stock compensation cost........... 119,252 -- -- ----------- --------- ------- Pro forma, adjusted..................... $(1,031,886) $(452,241) $63,362 =========== ========= ======= Basic net earnings (loss) per share: As reported............................... $ (11.88) $ (5.34) $ 0.75 ----------- --------- ------- Pro forma, adjusted..................... $ (13.43) $ (5.34) $ 0.75 ----------- --------- ------- Diluted net earnings (loss) per share: As reported............................... $ (11.88) $ (5.34) $ 0.70 ----------- --------- ------- Pro forma, adjusted..................... $ (13.43) $ (5.34) $ 0.70 =========== ========= =======
The above pro forma results assume we began recording compensation expense for options granted to employees subsequent to June 1, 1996 and may not be indicative of pro forma results to be expected in future F-40 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) periods. The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
1997 1998 1999 ---- ---- ---- Expected volatility......................................... 40% -- -- Average life................................................ 7 yrs. -- -- Weighted-average risk-free rate............................. 6.80% -- -- Dividends................................................... -- -- --
The weighted-average fair value of options granted for the year ended May 31, 1997 was $22.59. (10) Subsequent Events As part of our plans to replace our debt obligations, agreements were signed to convert obligations to common stock at $30 per share:
Debt to Contract be Shares Date Converted of stock -------- --------- ------------ Accounts payable to stockholder............. 06/16/99 $ 25,000 833 shares Note payable to stockholders................ 06/28/99 32,864 1,095 shares Deferred compensation to related party...... 06/16/99 200,000 6,666 shares Note payable to related party............... 08/05/99 150,000 5,000 shares Deferred compensation to related party...... 08/16/99 50,000 1,667 shares
Additionally, management negotiated the following settlements to reduce the Company's obligations:
Final amount paid by Date Total the settled obligation Company -------- ---------- -------- Accounts payable to vendors.................... 08/10/99 $ 66,674 $ 39,474 Accounts payable to employees.................. 08/25/99 52,083 27,415 Note payable to related party.................. 09/13/99 133,147 70,151 -------- -------- $251,904 $137,040 ======== ========
Subsequent to June 30, 1999, our shareholders exchanged all of their shares of our common stock for 16,667 shares of Series A-II preferred stock of OrganicNet, Inc. F-41 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Through and including , 1999 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as underwriter and with respect to its unsold allotments or subscriptions. Shares [ORGANICNET LOGO] Common Stock ----------------------------- Preliminary Prospectus ----------------------------- Punk, Ziegel & Company , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the registration fee and the NASD filing fee. Registration fee................................................. $14,386.50 NASD filing fee.................................................. 5,675.00 Nasdaq National Market listing fee............................... * Printing and engraving........................................... * Legal fees and expenses.......................................... * Accounting fees and expenses..................................... * Transfer agent fees.............................................. * Blue sky fees and expenses....................................... * Miscellaneous.................................................... * ---------- Total.......................................................... * ==========
- -------- * To be filed by amendment. Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article VI of the Registrant's Amended and Restated Certificate of Incorporation provides for indemnification of its directors to the maximum extent permitted by the Delaware General Corporation Law and Section 43 of Article XI of the Registrant's Bylaws provides for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. In addition, the Registrant intends to enter into Indemnification Agreements with each director and certain officers containing provisions which are in some respects broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require the Company, among other things, to indemnify its directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities arising from willful misconduct of culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' insurance if available on reasonable terms. Reference is also made to indemnifying officers and directors of the Company against certain liabilities. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein: (1) the form of Underwriting Agreement, filed as Exhibit 1.1; (2) the Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1; (3) the Bylaws of the Registrant, filed as Exhibit 3.2; (4) the form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers, filed as Exhibit 10.25; and (5) the Indemnity and Subrogation Agreement, filed as Exhibit 10.7. Item 15. Recent Sales of Unregistered Securities Since August 1996, the Registrant issued and sold the following unregistered securities: (1) From August 1996 through August 1999, the Registrant granted stock options to employees and directors covering an aggregate of 1,210,053 shares of common stock, at a weighted average exercise price of $1.61 per share. The Registrant sold an aggregate of 38,082 shares of its common stock to employees and II-1 directors for consideration in the aggregate amount of $36,815 pursuant to the exercise of stock options granted under the Registrant's stock option plans. (2) From August 1996 to August 1999, the Registrant issued and sold an aggregate of 1,202,470 shares of Series B Preferred Stock at a price of $2.25 per share to a group of investors for an aggregate purchase price of approximately $2,705,558. Such shares of Series B preferred stock will convert into shares of common stock of the Registrant upon completion of this offering. (3) On December 20, 1996, the Registrant issued 5,416 shares of Series A- II preferred stock and 5,416 shares of Series A-III preferred stock to Velocity Healthcare Informatics, Inc. in exchange for substantially all of the assets of Velocity Healthcare Informatics, Inc. Such shares of Series A-II and Series A-III preferred stock will convert into 216,640 shares of common stock of the Registrant upon the closing of this offering. (4) On June 4, 1997, the Registrant issued 6,668 shares of Series A-II preferred stock to the shareholders of Intedata, Inc. for the acquisition of 100% of the voting securities of Intedata, Inc. Such shares of Series A-II preferred stock will convert into 133,360 shares of common stock of the Registrant upon the closing of this offering. (5) On June 23, 1997, the Registrant issued 13,333 shares of Series A-II preferred stock to the sole shareholder of L.I.N.C., Inc. For the acquisition of 100% of the voting securities of L.I.N.C., Inc. Such shares of Series A-II preferred stock will convert into 266,660 shares of common stock of the Registrant upon the closing of this offering. (6) On May 14, 1997, the Registrant issued 23,333 shares of Series A-II preferred stock to the shareholders of MMS, Inc. for the acquisition of 100% of the voting securities of MMS, Inc. Such shares of Series A-II preferred stock will convert into 466,660 shares of common stock of the Registrant upon the closing of this offering. (7) From October 1997 to August 1999, the Registrant issued and sold an aggregate of 4,000,000 shares of Series C preferred stock at a price of $2.75 per share to a group of investors for an aggregate purchase price of $11,000,000. Such shares of Series C preferred stock will convert into 4,000,000 shares of common stock of the Registrant upon completion of this offering. (8) On November 14, 1997, the Registrant issued 8,624 shares of Series A- II preferred stock to the shareholders of Healthcheck, Inc. for the acquisition of 100% of the voting securities of Healthcheck, Inc. Such shares of Series A-II preferred stock will convert into 172,480 shares of common stock of the Registrant upon the closing of this offering. (9) On September 9, 1998, the Registrant issued 37,775 shares of common stock to the former shareholders of Comprehensive Providers Credentialing Services, Inc. pursuant to an adjustment provision contained in the merger agreement by and between such shareholders and the Registrant, dated May 23, 1996. The issuances described in Items 2 through 9 were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. In addition, the issuances described in Item 1 were deemed exempt from registration under the Securities Act in reliance on Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each such transaction 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 other instruments issued in such transactions. All recipients either received adequate information about the Company or had access, through employment or other relationships, to such information. II-2 INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The Board of Directors OrganicNet, Inc.: The audits referred to in our report dated August 27, 1999, except as to note 14 which is as of September 20, 1999, included the related consolidated financial statement schedule for each of the years in the three-year period ended December 31, 1998, and for the six month period ended June 30, 1999, included in the registration statement. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ KPMG LLP San Francisco, California August 27, 1999 II-3 OrganicNet, Inc. SCHEDULE II-VALUATION & QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Deductions Period ----------- ------------ ---------- ---------- ---------- Year Ended 1996: Allowance for Doubtful Accounts...................... $ -- $ -- $ -- $ -- Year Ended 1997: Allowance for Doubtful Accounts...................... $ -- $113,000 $ -- $113,000 Year Ended 1998: Allowance for Doubtful Accounts...................... $113,000 $ 15,800 $ -- $128,800 Six Months Ended June 30, 1999: Allowance for Doubtful Accounts .............................. $128,800 $ 68,145 $ -- $196,945
II-4 Item 16. Exhibit and Financial Statement Schedule
Exhibit Number Description of Document ------- ----------------------- 1.1* Form of Underwriting Agreement 3.1(1)* Amended and Restated Certificate of Incorporation of Registrant 3.2(1)* Bylaws of Registrant 4.1* Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant 5.1* Legal Opinion of Cooley Godward LLP 8.1* Tax Opinion of Cooley Godward LLP 10.1 Amended and Restated Investor Rights Agreement, dated October 31, 1997, between Registrant and the Series A, B and C Investors 10.2 Indemnity and Subrogation Agreement, dated January 1, 1998, between the registrant and Michael Meisel 10.3 1996 Stock Option/Stock Issuance Plan 10.4 1997 Stock Option/Stock Issuance Plan 10.5 Employment Agreement with Jack D. Anderson dated January 1, 1996 10.6 Employment Agreement with Robert L. Anderson dated January 1, 1996 10.7 Employment Agreement with William W. Shaw, III dated June 1, 1996 10.8 Employment Letter Agreement with William H. Matthews dated June 17, 1999 10.9 Employment Agreement with M. Jan Roughan dated January 1, 1997 10.10 Employment Agreement with Michael J. Barry dated January 1, 1996 10.11* Form of Indemnification Agreement 10.12 Promissory Note, dated April 1, 1999, between Michael E. Meisel and the Registrant 10.13* Promissory Note, dated June 1, 1997 between M. Jan Roughan and the Registrant 10.14* Promissory Note, dated December 1, 1997 between M. Jan Roughan and the Registrant 10.15 Lease Agreement, dated January 5, 1999 between 1301 Evans Street Associates, LLC and the Registrant 10.16+ Dedicated Server Agreement between Conxion and the Registrant dated April 8, 1999 10.17+ Dedicated Server Agreement between Conxion and the Registrant dated May 3, 1999 10.18+ T1 Service Agreement between Conxion and the Registrant dated May 23, 1999 10.19+ Dedicated Server Agreement between Conxion and the Registrant dated June 1, 1999 10.20+ T1 Service Agreement between Conxion and the Registrant dated September 1, 1999 10.21* Application Infrastructure Provider Agreement between Conxion and the Registrant dated September 17, 1999 10.22* Distribution and Services Agreement between Superior Consultant Holdings Corporation and the Registrant dated September 20, 1999 21.1 Subsidiaries of Registrant 23.1 Consent of KPMG LLP, independent auditors 23.2 Consent of KPMG LLP, independent auditors 24.1 Power of Attorney (see signature page) 27.1 Financial Data Schedule
- -------- (1) As proposed to be filed with the Secretary of State of the State of Delaware prior to the effectiveness of this offering. * To be filed by amendment. + Confidential treatment requested on portions of this exhibit. Unredacted versions of this exhibit have been filed separately wih the Commission. II-5 Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has 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 the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matters have been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes 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. For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 479(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter or permit prompt delivery to each purchaser. II-6 SIGNATURES Pursuant to the requirements of the Securities Act, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of San Francisco, State of California, on October 1, 1999. ORGANICNET, INC. /s/ Jack D. Anderson By: _________________________________ Jack D. Anderson, Chief Executive Officer POWER OF ATTORNEY KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack D. Anderson and William W. Shaw, III as his attorney-in-fact, with full power of substitution for him in any and all capacities, to sign any and all amendments to this registration statement, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Jack D. Anderson Chairman of the Board and October 1, 1999 ______________________________________ Chief Executive Officer Jack D. Anderson (Principal Executive Officer) /s/ William W. Shaw, III President October 1, 1999 ______________________________________ William W. Shaw, III /s/ William H. Matthews Chief Financial Officer October 1, 1999 ______________________________________ (Principal Financial William H. Matthews Officer) /s/ Gail E. Oldfather Director October 1, 1999 ______________________________________ Gail E. Oldfather /s/ Michael A. Wilson Director October 1, 1999 ______________________________________ Michael A. Wilson /s/ Robert S. Garvie Director October 1, 1999 ______________________________________ Robert S. Garvie /s/ Robert L. Anderson Director October 1, 1999 ______________________________________ Robert L. Anderson /s/ M. Jan Roughan Director October 1, 1999 ______________________________________ M. Jan Roughan /s/ David W. McComb Director October 1, 1999 ______________________________________ David W. McComb
II-7
Exhibit Number Description of Document Page ------- ----------------------- ---- 1.1* Form of Underwriting Agreement 3.1(1)* Amended and Restated Certificate of Incorporation of Registrant 3.2(1)* Bylaws of Registrant 4.1* Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant 5.1* Legal Opinion of Cooley Godward LLP 8.1* Tax Opinion of Cooley Godward LLP 10.1 Amended and Restated Investor Rights Agreement, dated October 31, 1997, between Registrant and the Series A, B and C Investors 10.2 Indemnity and Subrogation Agreement, dated January 1, 1998, between the registrant and Michael Meisel 10.3 1996 Stock Option/Stock Issuance Plan 10.4 1997 Stock Option/Stock Issuance Plan 10.5 Employment Agreement with Jack D. Anderson dated January 1, 1996 10.6 Employment Agreement with Robert L. Anderson dated January 1, 1996 10.7 Employment Agreement with William W. Shaw, III dated June 1, 1996 10.8 Employment Letter Agreement with William H. Matthews dated June 17, 1999 10.9 Employment Agreement with M. Jan Roughan dated January 1, 1997 10.10 Employment Agreement with Michael J. Barry dated January 1, 1996 10.11* Form of Indemnification Agreement 10.12 Promissory Note, dated April 1, 1999, between Michael E. Meisel and the Registrant 10.13* Promissory Note, dated June 1, 1997 between M. Jan Roughan and the Registrant 10.14* Promissory Note, dated December 1, 1997 between M. Jan Roughan and the Registrant 10.15 Lease Agreement, dated January 5, 1999 between 1301 Evans Street Associates, LLC and the Registrant 10.16+ Dedicated Server Agreement between Conxion and the Registrant dated April 8, 1999 10.17+ Dedicated Server Agreement between Conxion and the Registrant dated May 3, 1999 10.18+ T1 Service Agreement between Conxion and the Registrant dated May 23, 1999 10.19+ Dedicated Server Agreement between Conxion and the Registrant dated June 1, 1999 10.20+ T1 Service Agreement between Conxion and the Registrant dated September 1, 1999 10.21* Application Infrastructure Provider Agreement between Conxion and the Registrant dated September 17, 1999 10.22* Distribution and Services Agreement between Superior Consultant Holdings Corporation and the Registrant dated September 20, 1999 21.1 Subsidiaries of Registrant 23.1 Consent of KPMG LLP, independent auditors 23.2 Consent of KPMG LLP, independent auditors 24.1 Power of Attorney (see signature page) 27.1 Financial Data Schedule
- -------- (1) As proposed to be filed with the Secretary of State of the State of Delaware prior to the effectiveness of this offering. * To be filed by amendment. + Confidential treatment requested on portions of this exhibit. Unredacted versions of this exhibit have been filed separately wih the Commission. EX-10.1 2 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ================================================================================ EXHIBIT 10.1 OBJECT PRODUCTS, INC., a Delaware Corporation AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT October 31, 1997 ================================================================================ TABLE OF CONTENTS
Page 1. REGISTRATION RIGHTS...................................... 1 1.1 Definitions......................................... 1 1.2 Demand Registration................................. 2 1.3 Piggyback Registrations............................. 3 1.4 Form S-3 Registration............................... 4 1.5 Obligations of the Company.......................... 5 1.6 Furnish Information................................. 6 1.7 Delay of Registration............................... 6 1.8 Indemnification..................................... 6 1.9 "Market Stand-Off" Agreement........................ 8 1.10 Rule 144 Reporting.................................. 8 1.11 Termination of the Company's Obligations............ 8 2. RIGHT OF FIRST REFUSAL................................... 9 2.1 General............................................. 9 2.2 New Securities...................................... 9 2.3 Procedures.......................................... 10 2.4 Failure to Exercise................................. 10 2.5 Termination......................................... 10 3. ASSIGNMENT AND AMENDMENT................................. 10 3.1 Assignment.......................................... 10 3.2 Amendment of Rights................................. 10 3.3 New Investors....................................... 11 4. GENERAL PROVISIONS....................................... 11 4.1 Notices............................................. 11 4.2 Entire Agreement.................................... 11 4.3 Governing Law....................................... 11 4.4 Severability........................................ 11 4.5 Third Parties....................................... 11 4.6 Successors And Assigns.............................. 11 4.7 Captions............................................ 11 4.8 Counterparts........................................ 11 4.9 Costs And Attorneys' Fees........................... 11 4.10 Adjustments for Stock Splits, Etc................... 12 4.11 Aggregation of Stock................................ 12 Schedule A - Schedule of Series A Preferred Stock Investors... 14 Schedule B - Schedule of Series B Preferred Stock Investors... 15 Schedule C - Schedule of Series C Preferred Stock Investors... 16
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT ---------------------------------------------- This Amended and Restated Investor Rights Agreement (this "Agreement") is made and entered into as of October 31, 1997 by and among Object Products, a Delaware corporation (the "Company"), the person and entities listed on Schedule A attached hereto (the "Series A Investors"), the persons and entities listed on Schedule B attached hereto (the "Series B Investors") and the persons and entities listed on Schedule C attached hereto (the "Series C Investors"), together the "Investors." RECITALS A. The Company, Series A Investors and Series B Investors have entered into that certain Amended and Restated Investor Rights Agreement dated May 20, 1997 (the "Prior Agreement"). B. The Series C Investors have agreed to purchase from the Company, and the Company has agreed to sell to the Series C Investors, shares of the Company's Series C Preferred Stock on the terms and conditions set forth in that certain Series C Preferred Stock Purchase Agreement, dated as of October 31, 1997 by and among the Company and the Series C Investors (the "Series C Agreement"). C. As an inducement to the Series C Investors to complete such purchase of the Company's Series C Preferred Stock, the Company, Series A Investors and Series B Investors desire to amend and restate the Prior Agreement. NOW, THEREFORE, the parties hereto agree as follows: I. REGISTRATION RIGHTS. ------------------- 1.1 Definitions. For purposes of this Agreement: ----------- (a) Registration. The terms "register," "registered," and ------------ "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "1933 Act"), and the declaration or ordering of effectiveness of such registration statement. (b) Registrable Securities. The term "Registrable Securities" ---------------------- means: (1) all the shares of Common Stock of the Company (the "Common Stock") issued or issuable upon the conversion of any shares of the Series A Preferred Stock (the "Series A Stock"), the Series B Preferred Stock (the "Series B Stock") and the Series C Preferred Stock (the "Series C Stock") (including shares of Common Stock issued or issuable upon the conversion of any shares of the Series A-I Preferred Stock (the "Series A-I Stock"), the Series B-I Preferred Stock (the "Series B-I Stock") and the Series C-I Preferred Stock (the "Series C-I Stock") into which shares of Series A, Series B and Series C Stock, respectively, are in the future converted pursuant to the terms of the Company's Amended and Restated Certificate of Incorporation); and (2) any shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, all such shares of Common Stock described in clause (1) of this subsection (b); excluding --------- in all cases, however, any Registrable Securities sold by a person in a transaction in which rights under this Section 1 are not assigned in accordance with this Agreement or any Registrable Securities sold to the public or sold pursuant to Rule 144 promulgated under the 1933 Act at any time after the Company has become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"). (c) Registrable Securities Then Outstanding. The number of --------------------------------------- shares of "Registrable Securities then outstanding" shall mean the number of shares of Common Stock which are Registrable Securities and 1. (1) are then issued and outstanding or (2) are then issuable pursuant to the exercise or conversion of then outstanding and then exercisable options, warrants or convertible securities. (d) Holder. "Holder" means any person owning of record ------ Registrable Securities that have not been sold to the public or pursuant to Rule 144 promulgated under the 1933 Act or any assignee of record of such Registrable Securities to whom rights under this Section 1 have been duly assigned in accordance with this Agreement; provided, however, that for purposes of this -------- ------- Agreement, a record holder of shares of Series A, Series B or Series C Stock (or Series A-I, Series B-I or Series C-I Stock, respectively) convertible into such Registrable Securities shall be deemed to be the Holder of such Registrable Securities; and provided further that the Company shall in no event be ---------------- obligated to register shares of Series A, Series B or Series C Stock, or Series A-I, Series B-I or Series C-I Stock, and that Holders of Registrable Securities will not be required to convert their shares of Series A, Series B or Series C Stock or Series A-I, Series B-I or Series C-I Stock into Common Stock in order to exercise the registration rights granted hereunder, until immediately before the closing of the offering to which the registration relates. (e) Form S-3. The term "Form S-3" means such form under the -------- 1933 Act as is in effect on the date hereof or any successor registration form under the 1933 Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (f) SEC. The term "SEC" or "Commission" means the U.S. --- Securities and Exchange Commission. 1.2 Demand Registration ------------------- (a) Request by Holders. If the Company shall receive at any ------------------ time after the later of (i) December 31, 2001, or (ii) six (6) months after the effective date of the Company's initial public offering of its securities pursuant to a registration filed under the 1933 Act, a written request from the Holders of at least a majority of the Registrable Securities then outstanding that the Company file a registration statement under the 1933 Act covering the registration of Registrable Securities pursuant to this Section 1.2, then the Company shall, within ten (10) business days of the receipt of such written request, give written notice of such request ("Request Notice") to all Holders, and use its best efforts to effect, as soon as practicable, the registration under the 1933 Act of all Registrable Securities which Holders request to be registered and included in such registration by written notice given such Holders to the Company within twenty (20) days after receipt of the Request Notice, subject only to the limitations of this Section 1.2; provided that the -------- Registrable Securities requested by all Holders to be registered pursuant to such request must either (i) be at least fifty percent (50%) of all Registrable Securities then outstanding or (ii) have an anticipated aggregate public offering price (before any underwriting discounts and commissions) of not less than $2,500,000. The Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 1.2: (i) if the Company has, within a six (6) month period preceding the date of the Initiating Holders' (as defined below) request for registration, already affected a public offering of its securities pursuant to a registration filed under the Securities Act; or (ii) in any jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (b) Underwriting. If the Holders initiating the registration ------------ request under this Section 1.2 ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, then they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a). In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the managing underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 1.2, if the underwriter(s) advise(s) the Company in 2. writing that marketing factors require a limitation of the number of securities to be underwritten then the Company shall so advise all Holders of Registrable Securities which would otherwise be registered and underwritten pursuant hereto, and the number of Registrable Securities that may be included in the underwriting shall be reduced as required by the underwriter(s) and allocated among the Holders of Registrable Securities on a pro rata basis according to the number of Registrable Securities then outstanding held by each Holder requesting registration (including the Initiating Holders); provided, however, that the -------- ------- number of shares of Registrable Securities to be included in such underwriting and registration shall not be reduced unless all other securities of the Company are first entirely excluded from the underwriting and registration. Any Registrable Securities excluded and withdrawn from such underwriting shall be withdrawn from the registration. (c) Maximum Number of Demand Registrations. The Company is -------------------------------------- obligated to effect only one (1) such registration pursuant to this Section 1.2. (d) Deferral. Notwithstanding the foregoing, if the Company -------- shall furnish to Holders requesting the filing of a registration statement pursuant to this Section 1.2 a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders; provided, -------- however, that the Company may not utilize this right more than once in any - ------- twelve (12) month period. (e) Expenses. All expenses incurred in connection with a -------- registration pursuant to this Section 1.2, including without limitation all registration and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders (but excluding accounting fees for extraordinary audits and underwriters' or brokers' discounts and commissions), shall be borne by the Company. Each Holder participating in a registration pursuant to this Section 1.2 shall bear such Holder's proportionate share (based on the total number of shares sold in such registration other than for the account of the Company) of all discounts, commissions or other amounts payable to underwriters or brokers in connection with such offering and any accounting fees for extraordinary audits. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to this Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered, unless the Holders of a majority of the Registrable Securities then outstanding agree to forfeit their right to demand registration pursuant to this Section 1.2 (in which case such right shall be forfeited by all Holders of Registrable Securities); provided, further, -------- ------- however, that if at the time of such withdrawal, the Holders have learned of a - ------- material adverse change in the condition, business, or prospects of the Company not known to the Holders at the time of their request for such registration and have withdrawn their request for registration with reasonable promptness after learning of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to this Section 1.2. 1.3 Piggyback Registrations. The Company shall notify all Holders of ----------------------- Registrable Securities in writing at least thirty (30) days prior to filing any registration statement under the 1933 Act for purposes of effecting a public offering of securities of the Company (including, but not limited to registration statements relating to secondary offerings of securities of the Company but excluding registration statements relating to any registration under --------- Section 1.2 or Section 1.4 of this Agreement or to any employee benefit plan or a corporate reorganization) and will afford each such Holder an opportunity to include in such registration statement all or any part of the Registrable Securities then held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by such Holder shall, within twenty (20) days after receipt of the above-described notice from the Company, so notify the Company in writing, and in such notice shall inform the Company of the number of Registrable Securities such Holder wishes to include in such registration statement. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and 3. conditions set forth herein. (a) Underwriting. If a registration statement under which the ------------ Company gives notice under this Section 1.3 is for an underwritten offering, then the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder's Registrable Securities to be included in a registration pursuant to this Section 1.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the managing underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Agreement, if the managing underwriter(s) determine(s) in good faith that marketing factors require a limitation of the number of shares to be underwritten, then the managing underwriter(s) may exclude shares (including Registrable Securities) from the registration and the underwriting, and the number of shares that may be included in the registration and the underwriting shall be allocated, first, to the ----- Company, and second, to each of the Holders requesting inclusion of their ------ Registrable Securities in such registration statement on a pro rata basis based on the total number of Registrable Securities then held by each such Holder. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. For any Holder which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "Holder", and any pro rata reduction with respect to such "Holder" shall be based upon the aggregate amount of Registrable Securities owned by all entities and individuals included in such "Holder", as defined in this sentence. (b) Expenses. All expenses incurred in connection with a -------- registration pursuant to this Section 1.3 (excluding underwriters' and brokers' discounts and commissions), including, without limitation all federal and "blue sky" registration and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and reasonable fees and disbursements of one counsel for the selling Holders shall be borne by the Company. 1.4 Form S-3 Registration. In case the Company shall receive from --------------------- any Holder or Holders of at least twenty-five percent (25%) of all Registrable Securities then outstanding a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, then the Company will: (a) Notice. Promptly give written notice of the proposed ------ registration and the Holder's or Holders' request therefor, and any related qualification or compliance, to all other Holders of Registrable Securities; and (b) Registration. As soon as practicable, effect such ------------ registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within twenty (20) days after receipt of such written notice from the Company; provided, however, that the Company shall not be -------- ------- obligated to effect any such registration, qualification or compliance pursuant to this Section 1.4: (1) if Form S-3 is not available for such offering by the Holders; (2) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $1,000,000; 4. (3) if the Company shall furnish to the Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement no more than once during any twelve (12) month period for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Section 1.4; (4) if the Company has, within the twelve (12) month period from the date of such request, already effected one (1) registration on Form S-3 for the Holders pursuant to this Section 1.4; or (5) in any jurisdiction in which the Company would be required to quality to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Expenses. Subject to the foregoing, the Company shall file -------- a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered pursuant to this Section 1.4 as soon as practicable after receipt of the request or requests of the Holders for such registration. The Company shall pay all expenses incurred in connection with the first registration requested pursuant to this Section 2.4, (excluding accounting fees for extraordinary audits and underwriters' or brokers' discounts and commissions), including without limitation all filing, registration and qualification, printers' and accounting fees and the reasonable fees and disbursements of one counsel for the selling Holder or Holders and counsel for the Company. All expenses incurred in connection with any subsequent registration requested pursuant to this Section 1.4 shall be borne by the Holders who participate in such registration on a pro rata basis according to the number of Registrable Securities owned by the Holders that are included in such registration at the time it goes effective. (d) Not Demand Registration. Form S-3 registrations shall not ----------------------- be deemed to be demand registrations as described in Section 1.2 above. 1.5 Obligations of the Company. Whenever required to effect the -------------------------- registration of any Registrable Securities under this Agreement, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them that are included in such registration; (d) Use its best efforts to register and quality the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to quality to do business or to file a general consent to service of process in any such states or jurisdictions; 5. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the 1933 Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and (g) Furnish, at the request of any Holder requesting registration of Registrable Securities, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and (ii) a "comfort" letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.6 Furnish Information. It shall be a condition precedent to the ------------------- obligations of the Company to take any action pursuant to Sections 1.2, 1.3 or 1.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be required to timely effect the registration of their Registrable Securities. 1.7 Delay of Registration. No Holder shall have any right to obtain --------------------- or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.8 Indemnification. In the event any Registrable Securities are --------------- included in a registration statement under Sections 1.2, 1.3 or 1.4: (a) By the Company. To the extent permitted by law, the Company -------------- will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the 1933 Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements 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 violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any federal or state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or 6. any federal or state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the -------- ------- indemnity agreement contained in this subsection 1.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) By Selling Holders. To the extent permitted by law, each ------------------ selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the 1933 Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder within the meaning of the 1933 Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, partner or director, officer or controlling person of such other Holder may become subject under the 1933 Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained -------- ------- in this subsection 1.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further, that the total amounts payable in indemnity by a -------- ------- Holder under this Section 1.8(b) in respect of any Violation shall not exceed the net proceeds received by such Holder in the registered offering out of which such Violation arises. (c) Notice. Promptly after receipt by an indemnified party ------ under this Section 1.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided however, that an indemnified party shall -------- ------- have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.8. (d) Defect Eliminated in Final Prospectus. The foregoing ------------------------------------- indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) 7. (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the 1933 Act. (e) Contribution. In order to provide for just and equitable ------------ contribution to joint liability under the 1933 Act in any case in which either (i) any Holder exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for indemnification pursuant to this Section 1.8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 1.8 provides for indemnification in such case, or (ii) contribution under the 1933 Act may be required on the part of any such selling Holder or any such controlling person in circumstances for which indemnification is provided under this Section 1.8; then, and in each such case, the Company and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by and sold under the registration statement bears to the public offering price of all securities offered by and sold under such registration statement, and the Company and other selling Holders are responsible for the remaining portion; provided, however, -------- ------- that, in any such case, (A) no such Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (f) Survival. The obligations of the Company and Holders under -------- this Section 1.8 shall survive the completion of any offering of Registrable Securities in a registration statement, and otherwise. 1.9 "Market Stand-Off" Agreement. Each Holder hereby agrees that it ---------------------------- shall not, to the extent requested by the Company or an underwriter of securities of the Company, sell or otherwise transfer or dispose of any Registrable Securities or other shares of stock of the Company then owned by such Holder (other than to donees or partners of the Holder who agree to be similarly bound) for up to one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the 1933 Act; provided, however, that: - -------- ------- (a) such agreement shall be applicable only to the first such registration statement of the Company which covers securities to be sold on its behalf to the public in an underwritten offering but not to Registrable Securities sold pursuant to such registration statement. In order to enforce the foregoing covenant, the Company shall have the right to place restrictive legends on the certificates representing the shares subject to this Section and to impose stop transfer instructions with respect to the Registrable Securities and such other shares of stock of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 1.10 Rule 144 Reporting. With a view to making available the benefits ------------------ of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the 1933 Act, at all times after the effective date of the first registration under the 1933 Act filed by the Company for an offering of its securities to the general public; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act (at any time after it has become subject to such reporting requirements); and 8. (c) So long as a Holder owns any Registrable Securities, to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the 1933 Act and the 1934 Act (at any time after it has become subject to the reporting requirements of the 1934 Act), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration (at any time after the Company has become subject to the reporting requirements of the 1934 Act). 1.11 Termination of the Company's Obligations. The Company shall have ---------------------------------------- no obligations pursuant to Sections 1.2 through 1.4 with respect to: (i) any request or requests for registration made by any Holder on a date more than five (5) years after the closing date of the Company's initial public offering; or (ii) any Registrable Securities proposed to be sold by a Holder in a registration pursuant to Section 1.2, 1.3 or 1.4 if, in the opinion of counsel to the Company, all such Registrable Securities proposed to be sold by a Holder may be sold in a three-month period without registration under the 1933 Act pursuant to Rule 144 under the 1933 Act. 2. RIGHT OF FIRST REFUSAL. ---------------------- 2.1 General. Each Holder (as defined in Section 1.1(d)) and any party ------- to whom such Holder's rights under Section 3 have been duly assigned in accordance with Section 3.1(b) (each such Holder or assignee being hereinafter ---- referred to as a "Rights Holder") has the right of first refusal to purchase such Rights Holder's Pro Rata Share (as defined below), of all (or any part) of any "New Securities" (as defined in Section 2.2) that the Company may from time to time issue after the date of this Agreement. A Rights Holder's "Pro Rata Share" for purposes of this right of first refusal is the ratio of (a) the number of Registrable Securities as to which such Rights Holder is the Holder (and/or is deemed to be the Holder under Section 1.1(d)), to (b) a number of shares of Common Stock of the Company equal to the sum of (i) the total number of shares of Common Stock of the Company then outstanding plus (ii) the total number of shares of Common Stock of the Company into which all then-outstanding shares of Preferred Stock of the Company, or other then-outstanding convertible securities of the Company are then convertible, plus (iii) the total number of shares of Common Stock of the Company issuable upon the exercise of all outstanding options, warrants or other rights to acquire Common Stock, Preferred Stock or other convertible securities of the Company (assuming the conversion to Common Stock of such issuable shares of Preferred Stock or other convertible securities). 2.2 New Securities. "New Securities" shall mean any Common Stock or -------------- Preferred Stock of the Company, whether now authorized or not, and rights, options or warrants to purchase such Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible or exchangeable into such Common Stock or Preferred Stock; provided, however, that -------- ------- the term "New Securities" does not include: ---- --- ------- (i) any shares of the Company's Common Stock (and/or options, warrants or rights therefor) issued to employees, officers, directors, contractors, advisors or consultants of the Company pursuant to incentive agreements or plans approved by the Board of Directors of the Company; (ii) any shares of Series C Stock issued under the Series C Agreement as such agreement may be amended; (iii) any securities issuable upon conversion of or with respect to any then outstanding shares of Series A Stock, Series A-II Preferred Stock, Series A-III Preferred Stock, Series B Stock or Series C Stock, or Series A-I Stock, Series B-I Stock or Series C-I Stock of the Company or Common Stock or other securities issuable upon conversion thereof; (iv) any securities issuable upon exercise of any options, warrants or rights to purchase any securities of the Company outstanding on the date of this Agreement ("Warrant Securities") and any securities issuable upon the conversion of any Warrant Securities; 9. (v) shares of the Company's Common Stock or Preferred Stock issued in connection with any stock split or stock dividend; (vi) securities offered by the Company to the public pursuant to a registration statement filed under the 1933 Act; or (vii) any shares of the Company's capital stock (and/or options or warrants therefor) issued or issuable to parties providing the Company with equipment leases, real property leases, loans, credit lines, guaranties of indebtedness, cash price reductions or similar financing; or (viii) securities issued pursuant to the acquisition of another corporation or entity by the Company by consolidation, merger, purchase of all or substantially all of the assets, or other reorganization in which the Company acquires, in a single transaction or series of related transactions, all or substantially all of the assets of such other corporation or entity or fifty percent (50%) or more of the voting power of such other corporation or entity or fifty percent (50%) or more of the equity ownership of such other entity. 2.3 Procedures. In the event that the Company proposes to undertake ---------- an issuance of New Securities, it shall give to each Rights Holder written notice of its intention to issue New Securities (the "Notice"), describing the type of New Securities and the price and the general terms upon which the Company proposes to issue such New Securities. Each Rights Holder shall have ten (10) days from the date of mailing of any such Notice to agree in writing to purchase such Rights Holder's Pro Rata Share of such New Securities for the price and upon the general terms specified in the Notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased (not to exceed such Rights Holder's Pro Rata Share). If any Rights Holder fails to so agree in writing within such ten (10) day period to purchase such Rights Holder's full Pro Rata Share of an offering of New Securities (a "Nonpurchasing Holder"), then such Nonpurchasing Holder shall forfeit the right hereunder to purchase that part of his Pro Rata Share of such New Securities that he did not so agree to purchase. 2.4 Failure to Exercise. In the event that the Rights Holders fail to ------------------- exercise in full their rights of first refusal as set forth in this Section 2 within such 10-day period, then the Company shall have 120 days thereafter to sell the New Securities with respect to which the Rights Holders' rights of first refusal hereunder were not exercised, at a price and upon general terms not materially more favorable to the purchasers thereof than specified in the Company's Notice to the Rights Holders. In the event that the Company has not issued and sold the New Securities within such 120-day period, then the Company shall not thereafter issue or sell any New Securities without again first offering such New Securities to the Rights Holders pursuant to this Section 2. 2.5 Termination. This right of first refusal shall terminate (i) ----------- immediately before the closing of the first underwritten sale of Common Stock of the Company to the public pursuant to a registration statement filed with, and declared effective by, the SEC under the 1933 Act, covering the offer and sale of Common Stock to the public, or (ii) upon (a) the acquisition of all or substantially all the assets of the Company or (b) an acquisition of the Company by another corporation or entity by consolidation, merger or other reorganization in which the holders of the Company's outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) or more of the voting power of the corporation or other entity surviving such transaction. 3 ASSIGNMENT AND AMENDMENT. ------------------------ 3.1 Assignment. Notwithstanding anything herein to the contrary: ---------- (a) Registration Rights. Refusal Rights. The registration ------------------------------------ rights of a Holder under Section 1 hereof and the rights of first refusal of a Rights Holder under Section 2 hereof may be assigned only to a party 10. who acquires all of such Holder's shares of Series A Stock, Series B Stock or Series C Stock and/or all of such Holder's Registrable Securities issued upon conversion thereof; provided, however that a Holder may assign such registration -------- ------- rights and rights of first refusal to a transferee of less than all of such Holder's shares of Series A Stock, Series B Stock or Series C Stock and/or Registrable Securities if such transferee is a partner or shareholder of such Holder or is a member of such Holder's "immediate family" (as defined below) or a trust for the benefit of Holder or Holder's immediate family; and provided, -------- further, that no party may be assigned any of the foregoing rights unless the - ------- Company is given written notice by the assigning party at the time of such assignment stating the name and address of the assignee and identifying the securities of the Company as to which the rights in question are being assigned; and provided further that any such assignee shall receive such assigned rights -------- ------- subject to all the terms and conditions of this Agreement, including without limitation the provisions of this Section 3, and that such transferee or other recipient agrees in a writing satisfactory to the Company that the terms and conditions of this Agreement will apply to such transferee or other recipient. As used herein, the term "immediate family" will mean Holder's spouse, lineal descendant or antecedent, father, mother, brother or sister, adopted child or grandchild, or the spouse of any child, adopted child, grandchild or adopted grandchild of Holder. 3.2 Amendment of Rights. Subject to Section 3.3, any provision of ------------------- this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Holders holding a majority of the Registrable Securities (assuming conversion or exercise of all securities convertible into or exercisable for Registrable Securities) then held by all Holders. Any amendment or waiver effected in accordance with this Section 3.2 shall be binding upon each Holder and the Company. 11. 3.3 New Investors. Notwithstanding anything herein to the contrary, ------------- if pursuant to Section 2.2 of the Series C Agreement, additional parties purchase shares of Series C Stock as "New investors" thereunder, then each such New Investor shall become a party to this Agreement as an "Investor" hereunder, without the need of any consent, approval or signature of any Holder when such New Investor has both: (i) purchased shares of Series C Stock under the Series C Agreement and paid the Company all consideration payable for such shares and (ii) executed one or more counterpart signature pages to this Agreement as a "Series C Investor", with the Company's consent. 4. GENERAL PROVISIONS. ------------------ 4.1 Notices. Any notice, request or other communication required or ------- permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if deposited in the U.S. mail by registered or certified mall, return receipt requested, postage prepaid, as follows: (a) if to an Investor, at such Investor's respective address as set forth on Exhibit A hereto. (b) if to the Company, at 330 Townsend Street, Suite 206, San Francisco, California 94107. Any party hereto (and such party's permitted assigns) may by notice so given change its address for future notices hereunder. 4.2 Entire Agreement. This Agreement, together with all the Exhibits ---------------- hereto, constitutes and contains the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings, duties or obligations between the parties respecting the subject matter hereof. 4.3 Governing Law. This Agreement shall be governed by and construed ------------- exclusively in accordance with the internal laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California, excluding that body of law relating to conflict of laws and choice of law. 4.4 Severability. If one or more provisions of this Agreement are ------------ held to be unenforceable under applicable law, then such provision(s) shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms. 4.5 Third Parties. Nothing in this Agreement, express or implied, is ------------- intended to confer upon any person, other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Agreement. 4.6 Successors And Assigns. Subject to the provisions of Section 3.1, ---------------------- the provisions of this Agreement shall inure to the benefit of, and shall be binding upon, the successors and permitted assigns of the parties hereto. 4.7 Captions. The captions to sections of this Agreement have been -------- inserted for identification and reference purposes only and shall not be used to construe or interpret this Agreement. 4.8 Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 4.9 Costs And Attorneys' Fees. In the event that any action, suit or ------------------------- other proceeding is instituted concerning or arising out of this Agreement or any transaction contemplated hereunder, the prevailing party 12. shall recover all of such party costs and attorneys fees incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom. 4.10 Adjustments for Stock Splits, Etc. Wherever in this Agreement --------------------------------- there is a reference to a specific number of shares of Common Stock or Preferred Stock of the Company of any class or series, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement shall automatically be proportionally adjusted to reflect the affect on the outstanding shares of such class or series of stock by such subdivision, combination or stock dividend. 4.11 Aggregation of Stock. All shares held or acquired by affiliated -------------------- entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. [The remainder of this page has been intentionally left blank.] 13. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. THE COMPANY: THE INVESTORS: - ----------- ------------- OBJECT PRODUCTS, INC. (a Delaware corporation) By:_________________________________ ________________________________________ Name: Title:______________________________ ________________________________________ Name: ________________________________________ Name: ________________________________________ Name: ________________________________________ Name: ________________________________________ Name: ________________________________________ Name: ________________________________________ Name: [SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT] 14. Schedule A Schedule of Series A Investors (Schedule on file) 15. Schedule B Schedule of Series B Investors (Schedule on file) 16. Schedule C Schedule of Series C Investors (Schedule on file) 17. EX-10.2 3 INDEMNITY AND SUBROGATION AGREEMENT Exhibit 10.2 INDEMNITY AND SUBROGATION AGREEMENT THIS INDEMNITY AND SUBROGATION AGREEMENT (this "Agreement") is made and entered into as of January 1, 1998 by and between Object Products, Inc., a Delaware corporation ("OPI"), and Michael E. Meisel ("Mr. Meisel"). WHEREAS, Res-Q, Inc. ("Res-Q") merged with and into a wholly-owned subsidiary of OPI ("Sub"); WHEREAS, Res-Q had entered into a revolving line of credit agreement ("Loan Agreement") with Wells Fargo Bank (the "Bank") which was assigned to and assumed by Sub; WHEREAS, Mr. Meisel had provided a guaranty (the "Guaranty") in connection with the Loan Agreement; WHEREAS, Mr. Meisel has become a director of OPI and has provided additional services to OPI; WHEREAS, OPI desires, upon the terms and conditions set forth in this Agreement, to indemnify Mr. Meisel from any loss or damage, including, without limitation, reasonable attorneys' fees and costs, as a result of any claim, demand or action brought against him by the Bank (or any successor in interest thereto) in connection with the Guaranty; NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants contained herein and certain other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Indemnity. OPI shall indemnify Mr. Meisel for any deficiency that --------- he suffers after making a claim for reimbursement from the [principal borrower] (as such term is defined in the Guaranty) in connection with any claim by the Bank against Mr. Meisel under the Guaranty; provided, however, that OPI shall -------- ------- not be liable for any such loss or damage he may incur resulting from a settlement with respect to the Loan Agreement or the Guaranty effected by Mr. Meisel without OPI's prior written consent (which consent shall not be unreasonably withheld) or from any gross misconduct on the part of Mr. Meisel as employee of OPI or one of its subsidiaries. 2. Notice of Claims. Mr. Meisel shall promptly notify OPI of any ---------------- claim under and payment in respect of the Guaranty and shall promptly notify OPI of any claim he intends to make pursuant to this Agreement in such detail as OPI shall reasonably require. 3. Maximum Liability. It is understood by both parties to this ----------------- Agreement that the maximum liability of OPI under this indemnity shall be two hundred thousand dollars ($200,000.00) which is the current amount of Mr. Meisel's guarantee under the Loan Agreement with the Bank plus accrued interest on the outstanding amount. 4. No Modifications. It is further understood, and Mr. Meisel ---------------- agrees, that Mr. Meisel shall not accept or effect any modifications of terms of the Loan Agreement, as they apply to him or the Guaranty or any liability or obligation thereunder, or the Guaranty (which OPI's prior consent which consent shall not be unreasonably withheld). 5. Right of Subrogation. If OPI makes a payment to Mr. Meisel or any -------------------- third party pursuant to a claim for indemnification under this Agreement, or any liability or obligation incurred with respect to or arising out of the transactions contemplated by the Loan Agreement or the Guaranty, OPI shall be subrogated to the rights of the payee, to the extent of such payment against the Bank or any third party with respect to such payment to the extent of such payment. Mr. Meisel agrees to execute all documents required and to do all acts that may be necessary to secure such rights and to enable OPI effectively to bring suit to enforce or otherwise enforce such rights. 6. Negative Covenants. Mr. Meisel agrees that, without OPI's prior ------------------ written consent, he will not take any action that may impair OPI's right of subrogation. 7. Miscellaneous. ------------- a. Amendments; Waivers. No amendment or other modification, ------------------- forbearance or waiver of any provision of this Agreement nor any consent to any departure herefrom shall under any circumstances be effective unless the same shall be in writing and signed by both of the parties hereto, and then any such forbearance, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of any party hereto to exercise, and no delay in exercising, any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy under this Agreement preclude any other or further exercise thereof or the exercise of any other right or remedy. b. Notices. Notices and other communications required or permitted ------- to be given under this Agreement shall be in writing and delivered personally or sent by certified mail, postage prepaid, by facsimile or by reputable overnight courier service at the following addresses: (1) if to OPI: 330 Townsend Street, Suite 206 San Francisco, CA 94107-1630 Fax: 415-495-4748 Attention: William W. Shaw, III -2- (2) if to Mr. Meisel: Mr. Michael E. Meisel 1248 Dubonnet Court Agoura, CA 91301 Attention: Mike Meisel c. Severability. If any provision or provisions, or if any portion ------------ of any provision or provisions, in this Agreement is held to be illegal, void, voidable, invalid, nonbinding or unenforceable, in its entirety or partially, or as to any party, for any reason, then it is the intent of the parties hereto that such provision or provisions shall be given force to the fullest possible extent that they are legal, valid and enforceable, including by reducing the amount or degree of any obligation or waiver which is illegal, invalid or unenforceable by the minimum amount necessary in order to make the same legal, valid and enforceable, and that the remainder of this Agreement shall be construed as if such illegal, void, voidable, invalid, nonbinding or unenforceable provision or provisions were not contained therein, and that the rights, obligations and interest of the parties under the remainder of this Agreement shall continue in full force and effect. d. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. e. Integration. This Agreement constitutes the entire agreement ----------- among the parties hereto with respect to the subject matter hereof, and shall supersede and take the place of all drafts and other communications and any other instrument purporting to be an agreement of the parties hereto, with respect to the subject matter hereof. f. Governing Law. This Agreement, shall be governed by the laws of ------------- the State of California without giving effect to conflicts of laws provisions. g. Successors and Assigns. This Agreement is intended to be binding ---------------------- upon and inure to the parties hereto and their respective successors, heirs and assigns; provided that neither party shall assign any of his or its rights or obligations hereunder without the prior written consent of the other party. IN WITNESS WHEREOF, the parties hereto have executed this Indemnity and Subrogation Agreement effective as of the date first set forth above. Object Products, Inc. -3- By: /s/ William W. Shaw, III ------------------------ William W. Shaw, III President Mr. Meisel /s/ Michael E. Meisel --------------------- Michael E. Meisel -4- EX-10.3 4 1996 STOCK OPTION/STOCK INSURANCE PLAN EXHIBIT 10.3 OBJECT PRODUCTS, INC. 1996 STOCK OPTION/STOCK ISSUANCE PLAN ------------------------------------- (As amended and restated as of April 22, 1997) ARTICLE ONE GENERAL PROVISIONS ------------------ I. PURPOSE OF THE PLAN This 1996 Stock Option/Stock Issuance Plan is intended to promote the interests of Object Products, Inc., a Delaware corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into two (2) separate equity programs: (i) the Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, and (ii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary). B. The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by the Board. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee. B. The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any option or stock issuance thereunder. IV. ELIGIBILITY A. The persons eligible to participate in the Plan are as follows: (i) Employees, (ii) non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and (iii) consultants who provide services to the Corporation (or any Parent or Subsidiary). B. The Plan Administrator shall have full authority to determine, (i) with respect to the option grants under the Option Grant Program, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding, and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares. C. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 1,000,000 shares. Such share reserve includes (i) 750,000 shares originally reserved under the Plan, and (ii) an increase of 250,000shares authorized by the Board on April 22, 1997, subject to stockholder approval. B. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. All shares issued under the Plan, whether or not those shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. 2. C. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. In no event shall any such adjustments be made in connection with the conversion of one or more outstanding shares of the Corporation's preferred stock into shares of Common Stock. 3. ARTICLE TWO OPTION GRANT PROGRAM -------------------- I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document -------- shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. Exercise Price. --------------- 1. The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions: (i) The exercise price per share shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date. (ii) If the person to whom the option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Four and the documents evidencing the option, be payable in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12(g) of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows: (i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions (a) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required-to be withheld by the Corporation by reason of such exercise and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. 4. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. Exercise and Term of Options. Each option shall be exercisable at ---------------------------- such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. Effect of Termination of Service. The following provisions shall -------------------------------- govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Should the Optionee cease to remain in Service for any reason other than death, Disability or Misconduct, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. (ii) Should the Optionee die while holding one or more outstanding options, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution shall have a period of twelve (12)months following the date of the Optionee's death during which to exercise each such option. (iii) Should such Service terminate by reason of Disability, then the Optionee shall have a period of six (6) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. However, should such Disability be deemed to constitute Permanent Disability, then the period during which each outstanding option held by the Optionee is to remain exercisable shall be extended by an additional six (6) months so that the exercise period shall be the twelve (12)-month period following the date of the Optionee's cessation of Service by reason of such Permanent Disability. (iv) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term. (v) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent it is not exercisable for vested shares on the date of such cessation of Service. 5. (vi) Should the Optionee's Service be terminated for Misconduct, then all outstanding options at the time held by the Optionee shall immediately terminate and cease to be outstanding. D. Stockholder Rights. The holder of an option shall have no ------------------ stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. Unvested Shares. The Plan Administrator shall have the discretion --------------- to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, all or (at the discretion of the Corporation and with the consent of the Optionee) any of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. The Plan Administrator may not impose a vesting schedule upon any option grant or any shares of Common Stock subject to the option which is more restrictive than twenty percent (20%) per year vesting, with the initial vesting to occur one (1) year after the option grant date. However, this minimum vesting requirement shall not be applicable with respect to any option granted to an officer, director or consultant. All outstanding repurchase rights under the Plan shall be assignable to the successor corporation in any Corporate Transaction and shall terminate upon the occurrence of such Corporate Transaction to the extent the successor corporation does not accept such assignment. F. First Refusal Rights. Until such time as the Common Stock is -------------------- first registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock issued under the Option Grant Program. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right. G. Limited Transferability of Options. During the lifetime of the ---------------------------------- Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's' death. However, a Non-Statutory Option may be assigned in whole or in part during Optionee's lifetime in accordance with the terms of a Qualified Domestic Relations Order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to such Qualified Domestic Relations Order. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. 6. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Four shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options shall not be subject to the terms of this Section II. A. Eligibility. Incentive Options may only be granted to Employees. ----------- B. Exercise Price. The exercise price per share shall not be less -------------- than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. Dollar Limitation. The aggregate Fair Market Value of the shares ----------------- of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% Stockholder. If any Employee to whom an Incentive Option is --------------- granted is a 10% Stockholder, then the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION A. Each outstanding option shall be assumable by the successor corporation (or parent thereof) in any Corporate Transaction and shall, to the extent not so assumed, terminate and cease to be outstanding on the effective date of such Corporate Transaction. B. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in the consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii)the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. C. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Option Grant Program and to grant in substitution therefor new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date. V. ADDITIONAL AUTHORITY The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term. 8. ARTICLE THREE STOCK ISSUANCE PROGRAM ---------------------- I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. Purchase Price. --------------- 1. The purchase price per share shall be fixed by the Plan Administrator in accordance with the following provisions: (i) The purchase price per share shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the stock issuance date. (ii) If the person to whom the stock issuance is made is a 10% Stockholder, then the purchase price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the stock issuance date. 2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be issued under the Stock Issuance Program for one or both of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. Vesting Provisions. ------------------- 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be attained, 9. (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and (iv) the effect which death, Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. The Plan Administrator may not impose a vesting schedule upon any stock issuance effected under the Stock Issuance Program which is more restrictive than twenty percent (20%) per year vesting, beginning one (1) year after the stock issuance date. However, this minimum vesting requirement shall not be applicable with respect to any stock issued to an officer, director or consultant. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be 10. effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. C. First Refusal Rights. Until such time as the Common Stock is -------------------- first registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Participant (or any successor in interest) of any shares of Common Stock issued under the Stock Issuance Program. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right. II. CORPORATE TRANSACTION All of the outstanding repurchase rights under the Stock Issuance Program shall be assignable to the successor corporation in any Corporate Transaction and shall terminate upon the occurrence of such Corporate Transaction to the extent the successor corporation does not accept such assignment. III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 11. ARTICLE FOUR MISCELLANEOUS ------------- I. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price or the purchase price for shares issued to such person under the Plan by delivering a promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. Promissory notes may be authorized with or without security or collateral. In all events, the maximum credit available to the Optionee or Participant may not exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares (less the par value of such shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. II. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan became effective when adopted by the Board on April 30, 1996. On that same date, the Corporation's stockholders approved the Plan. The Plan Administrator may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan. B. On April 22, 1997, the Board authorized an increase to the number of shares available for issuance over the term of the Plan by 250,000 shares. Such 250,000-share increase is subject to stockholder approval. If such stockholder approval is not obtained within twelve (12) months after the date of the Board's adoption of the increase, then all options previously granted in reliance on such increase shall terminate and no further options shall be granted. Subject to such limitation, the Plan Administrator may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan. C. The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of options or the issuance of shares (whether vested or unvested) under the Plan or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon such Plan termination, all options and unvested stock issuances outstanding under the Plan shall continue to have full force and effect in accordance with the provisions of the documents evidencing such options or issuances. 12. III. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or' modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, the Board shall not, without the approval of the Corporation's stockholders, (i) increase the maximum number of shares issuable under the Plan, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) materially modify the eligibility requirements for Plan participation or (iii) materially increase the benefits accruing to Plan participants. B. Options to purchase shares of Common Stock may be granted under the Plan and shares of Common Stock may be issued under the Plan that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Plan are held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short-Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. IV. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. V. WITHHOLDING The Corporation's obligation to deliver shares of Common Stock upon the exercise of any options or upon the issuance or vesting of any shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. VI. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. 13. VII. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. VIII. FINANCIAL REPORTS The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under and each Participant in the Plan, unless such individual is a key Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such individual access to equivalent information. 14. APPENDIX The following definitions shall be in effect under the Plan: A. Board shall mean the Corporation's Board of Directors. ----- B. Code shall mean the Internal Revenue Code of 1986, as amended. ---- C. Committee shall mean a committee of two (2) or more Board members --------- appointed by the Board to exercise one or more administrative functions under the Plan. D. Common Stock shall mean the Corporation's common stock. ------------ E. Corporate Transaction shall mean either of the following --------------------- stockholder- approved transactions to which the Corporation is a party: (i) a merger or consolidation in which the Corporation's outstanding voting securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. Corporation shall mean Object Products, Inc., a Delaware ----------- corporation. G. Disability shall mean the inability of the Optionee or the ---------- Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute Permanent Disability in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12)months or more. H. Domestic Relations Order shall mean any judgment, decree or order ------------------------ (including approval of a property settlement agreement) which provides or otherwise conveys, pursuant to applicable State domestic relations laws (including community property laws), marital property rights to any spouse or former spouse of the Optionee. I. Employee shall mean an individual who is in the employ of the -------- Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. J. Exercise Date shall mean the date on which the Corporation shall ------------- have received written notice of the option exercise. K. Fair Market Value per sham of Common Stock on any relevant date ----------------- shall be determined in accordance with the following provisions: A-1. (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. L. Incentive Option shall mean an option which satisfies the ---------------- requirements of Code Section 422. M. Misconduct shall mean the commission of any act of fraud, ---------- embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee or Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). N. 1934 Act shall mean the Securities Exchange Act of 19-34, as -------- amended. O. Non-Statutory Option shall mean an option not intended to satisfy -------------------- the requirements of Code Section 422. P. Option Grant Program shall mean the option grant program in effect -------------------- under the Plan. Q. Optionee shall mean any person to whom an option is granted under -------- the Option Grant Program. A-2. R. Parent shall mean any corporation (other than the Corporation) in ------ an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. S. Participant shall mean any person who is issued shares of Common ----------- Stock under the Stock Issuance Program. T. Plan shall mean the Corporation's 1996 Stock Option/Stock Issuance ---- Plan, as set forth in this document. U. Plan Administrator shall mean either the Board or the Committee, ------------------ to the extent the Committee is at the time responsible for the administration of the Plan. V. Qualified Domestic Relations Order shall mean a Domestic Relations ---------------------------------- Order which substantially complies with the requirements of Code Section 414(p). The Plan Administrator shall have the sole discretion to determine whether a Domestic Relations Order is a Qualified Domestic Relations Order. W. Service shall mean the provision of services to the Corporation ------- (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non- employee member of the board of directors or a consultant, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. X. Stock Exchange shall mean either the American Stock Exchange or -------------- the New York Stock Exchange. Y. Stock Issuance Agreement shall mean the agreement entered into by ------------------------ the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. Z. Stock Issuance Program shall mean the stock issuance program in ---------------------- effect under the Plan. AA. Subsidiary shall mean any corporation (other than the Corporation) ---------- in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%)'or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. AB. 10% Stockholder shall mean the owner of stock (as determined --------------- under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). A-3. EX-10.4 5 1997 STOCK OPTION PLAN/STOCK INSURANCE PLAN EXHIBIT 10.4 OBJECT PRODUCTS, INC. 1997 STOCK OPTION/STOCK ISSUANCE PLAN ------------------------------------- ARTICLE ONE GENERAL PROVISIONS ------------------ I. PURPOSE OF THE PLAN This 1997 Stock Option/Stock Issuance Plan is intended to promote the interests of Object Products, Inc., a Delaware corporation, by providing eligible persons in the Corporation's employ or service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to continue in such employ or service. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into two (2) separate equity programs: (i) the Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, and (ii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary). B. The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by the Board. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee. B. The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any option thereunder. IV. ELIGIBILITY A. The persons eligible to participate in the Plan are as follows: (i) Employees, (ii) non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. The Plan Administrator shall have full authority to determine, (i) with respect to the grants under the Option Grant Program, which eligible persons are to receive the option grants, the time or times when those option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non- Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding, and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive such stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares. C. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed 1,370,000 shares. 2. B. The number of shares of Common Stock available for issuance under the Plan shall automatically increase on the first business day of each calendar year during the term of the Plan, beginning with the 1999 calendar year, by an amount equal to two percent (2%) of the shares of Common Stock outstanding on the last business day of the immediately preceding calendar year. No Incentive Options may be granted on the basis of the additional shares of Common Stock resulting from such annual increases. C. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at the option exercise price or direct issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. D. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. In no event shall any such adjustments be made in connection with the conversion of one or more outstanding shares of the Corporation's preferred stock into shares of Common Stock. 3. ARTICLE TWO OPTION GRANT PROGRAM -------------------- I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document -------- shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. Exercise Price. -------------- 1. The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions: (i) The exercise price per share shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date. (ii) If the person to whom the option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Four and the documents evidencing the option, be payable in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12(g) of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows: (i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or 4. (ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions (A) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (B) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. Exercise and Term of Options. Each option shall be exercisable at such ---------------------------- time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option grant. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. Effect of Termination of Service. -------------------------------- 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Should the Optionee cease to remain in Service for any reason other than death, Disability or Misconduct, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. (ii) Should Optionee's Service terminate by reason of Disability, then the Optionee shall have a period of twelve (12) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. (iii) If the Optionee dies while holding an outstanding option, then the personal representative of his or her estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance shall have a twelve (12)-month period following the date of the Optionee's death to exercise such option. 5. (iv) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term. (v) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding with respect to any and all option shares for which the option is not otherwise at the time exercisable or in which the Optionee is not otherwise at that time vested. (vi) Should Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to remain outstanding. 2. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to : (i) extend the period of time for which the option is to remain exercisable following Optionee's cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. D. Stockholder Rights. The holder of an option shall have no stockholder ------------------ rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. Unvested Shares. The Plan Administrator shall have the discretion to --------------- grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service 6. while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. The Plan Administrator may not impose a vesting schedule upon any option grant or the shares of Common Stock subject to that option which is more restrictive than twenty percent (20%) per year vesting, with the initial vesting to occur not later than one (1) year after the option grant date. However, such limitation shall not be applicable to any option grants made to individuals who are officers of the Corporation, non-employee Board members or independent consultants. F. First Refusal Rights. Until such time as the Common Stock is first -------------------- registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right. G. Limited Transferability of Options. During the lifetime of the ---------------------------------- Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. H. Withholding. The Corporation's obligation to deliver shares of Common ----------- Stock upon the exercise of any options granted under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of the Plan shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options shall not be subject to the --- terms of this Section II. A. Eligibility. Incentive Options may only be granted to Employees. ----------- B. Exercise Price. The exercise price per share shall not be less than one -------------- hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. Dollar Limitation. The aggregate Fair Market Value of the shares of ----------------- Common Stock (determined as of the respective date or dates of grant) for which one or more options granted 7. to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% Stockholder. If any Employee to whom an Incentive Option is --------------- granted is a 10% Stockholder, then the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION A. The shares subject to each option outstanding under the Plan at the time of a Corporate Transaction shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, the shares subject to an outstanding option shall not vest on such an accelerated basis if and to the extent: (i) such option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction and the Corporation's repurchase rights with respect to the unvested option shares are concurrently assigned to such successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those unvested option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be 8. appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such -------- securities shall remain the same. E. The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration (in whole or in part) of one or more outstanding options (and the immediate termination of the Corporation's repurchase rights with respect to the shares subject to those options), upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed in the Corporate Transaction. F. The Plan Administrator shall also have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure such option so that the shares subject to that option will automatically vest on an accelerated basis should the Optionee's Service terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which the option is assumed and the repurchase rights applicable to those shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested option shares until the earlier of (i) the expiration of the option term or (ii) the ------- expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate on an accelerated basis, and the shares subject to those terminated rights shall accordingly vest at that time. G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. H. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 9. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date. 10. ARTICLE THREE STOCK ISSUANCE PROGRAM ---------------------- I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. Purchase Price. -------------- 1. The purchase price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the issue date. However, the purchase price per share of Common Stock issued to a 10% Stockholder shall not be less than one hundred and ten percent (110%) of such Fair Market Value. 2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. Vesting Provisions. ------------------ 11. 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. However, the Plan Administrator may not impose a vesting schedule upon any stock issuance effected under the Stock Issuance Program which is more restrictive than twenty percent (20%) per year vesting, with initial vesting to occur not later than one (1) year after the issuance date. Such limitation shall not apply to any Common Stock issuances made to the officers of the Corporation, non-employee Board members or independent consultants. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non- completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, 12. whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. C. First Refusal Rights. Until such time as the Common Stock is first -------------------- registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Participant (or any successor in interest) of any shares of Common Stock issued under the Stock Issuance Program. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right. II. CORPORATE TRANSACTION A. Upon the occurrence of a Corporate Transaction, all outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation's repurchase rights with respect to those shares remain outstanding, to provide that those rights shall automatically terminate on an accelerated basis, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights are assigned to the successor corporation (or parent thereof). III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 13. ARTICLE FOUR MISCELLANEOUS ------------- I. EFFECTIVE DATE AND TERM OF PLAN A. The Plan shall become effective when adopted by the Board, but no option granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after the date of the Board's adoption of the Plan, then all options previously granted under the Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. Subject to such limitation, the Plan Administrator may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan. B. The Plan shall terminate upon the earliest of (i) November 20, 2007, -------- the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued as vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. All options and unvested stock issuances outstanding at that time under the Plan shall continue to have full force and effect in accordance with the provisions of the documents evidencing such options or issuances. II. AMENDMENT OF THE PLAN The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws and regulations. III. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. IV. WITHHOLDING 14. The Corporation's obligation to deliver shares of Common Stock upon the exercise of any options or upon the issuance or vesting of any shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. V. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. VI. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. VII. FINANCIAL REPORTS The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under the Plan, unless such individual is a key Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such individual access to equivalent information. 15. APPENDIX -------- The following definitions shall be in effect under the Plan: A. Board shall mean the Corporation's Board of Directors. ----- B. Code shall mean the Internal Revenue Code of 1986, as amended. ---- C. Committee shall mean a committee of two (2) or more Board members --------- appointed by the Board to exercise one or more administrative functions under the Plan. D. Common Stock shall mean the Corporation's common stock. ------------ E. Corporate Transaction shall mean either of the following --------------------- stockholder-approved transactions to which the Corporation is a party: (a) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (b) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. Corporation shall mean Object Products, Inc., a Delaware corporation. ----------- G. Disability shall mean the inability of the Optionee or the Participant ---------- to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. H. Employee shall mean an individual who is in the employ of the -------- Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. I. Exercise Date shall mean the date on which the Corporation shall have ------------- received written notice of the option exercise. A-1. J. Fair Market Value per share of Common Stock on any relevant date shall ----------------- be determined in accordance with the following provisions: (a) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (b) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (c) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. K. Incentive Option shall mean an option which satisfies the requirements ---------------- of Code Section 422. L. Involuntary Termination shall mean the termination of the Service of ----------------------- any individual which occurs by reason of: (a) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (b) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonuses under any corporate-performance based bonus or A-2. incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected without the individual's consent. M. Misconduct shall mean the commission of any act of fraud, embezzlement ---------- or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended. -------- O. Non-Statutory Option shall mean an option not intended to satisfy the -------------------- requirements of Code Section 422. P. Option Grant Program shall mean the option grant program in effect -------------------- under the Plan. Q. Optionee shall mean any person to whom an option is granted under the -------- Plan. R. Parent shall mean any corporation (other than the Corporation) in an ------ unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. S. Participant shall mean any person who is issued shares of Common Stock ----------- under the Stock Issuance Program. T. Plan shall mean the Corporation's 1997 Stock Option/Stock Issuance ---- Plan, as set forth in this document. U. Plan Administrator shall mean either the Board or the Committee acting ------------------ in its capacity as administrator of the Plan. V. Plan Effective Date shall mean November 20, 1997, the date on which ------------------- the Plan was adopted by the Board. A-3. W. Service shall mean the provision of services to the Corporation (or ------- any Parent or Subsidiary) by a person in the capacity of an Employee, a non- employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant. X. Stock Exchange shall mean either the American Stock Exchange or the -------------- New York Stock Exchange. Y. Stock Issuance Agreement shall mean the agreement entered into by the ------------------------ Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. Z. Stock Issuance Program shall mean the stock issuance program in effect ---------------------- under the Plan. AA. Subsidiary shall mean any corporation (other than the Corporation) in ---------- an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. BB. 10% Stockholder shall mean the owner of stock (as determined under --------------- Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). EX-10.5 6 EMPLOYMENT AGREEMENT W/JACK D. ANDERSON EXHIBIT 10.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Employment Agreement"), dated as of January 1, 1996 (the "Effective Date"), is entered into by and between Object Products, Inc. (the "Company") and Jack D. Anderson ("Executive"). In consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: WITNESSETH: ---------- WHEREAS, the Company desires to employ Executive as the Chief Executive Officer of the Company, and Executive desires to be employed by the Company, upon the terms and conditions set forth in this Employment Agreement; NOW, THEREFORE, in consideration of the promises and the mutual covenants hereinafter set forth, the Company and Executive hereby agree as follows: 1. EMPLOYMENT. ---------- 1.1 Position. During the Employment Term (as hereinafter defined) and -------- subject to the terms and conditions set forth herein, the Company agrees to employ Executive as its Chief Executive Officer, reporting directly to the Board of Directors of the Company. 1.2 Duties. Executive shall diligently, and to the best of his ability, ------ perform all such duties incident to his position and as may be assigned from time to time and to use his best efforts to promote the interests of the Company. 1.3 Time to be Devoted to Employment. During the Employment Term, -------------------------------- Executive shall devote his full time and energy to the business of the Company and shall not be engaged in any competitive business activity without the express written consent of the Company. Executive hereby represents that he is not a party to any agreement, which would be an impediment to entering into this Employment Agreement, and that he is permitted to enter into this Employment Agreement and perform the obligations hereunder. 2. COMPENSATION AND BENEFITS. ------------------------- 2.1 Annual Salary. In consideration of and as compensation for the ------------- services agreed to be performed by Executive hereunder, the Company agrees to pay Executive an annual base salary of $120,000, payable in accordance with the Company's regular payroll schedule ("Base Salary"), less applicable withholdings and deductions. The Base Salary will be subject to change at the sole discretion of the Board of Directors of the Company (the "Board"). 2.2 Bonus. The Board or a duly appointed committee thereof will no less ----- than once annually determine if the award of a bonus is warranted and the amount of such bonus, if any; the Board or any duly appointed committee thereof shall have sole discretion to grant or not grant a bonus. 1. 2.3 Participation in Benefit Plans. During the Employment Term, Executive ------------------------------ shall be entitled to participate in any pension, group insurance, medical hospitalization, annual physical, disability, or other similar benefit plan, to the extent permitted by law, that may from time to time be adopted by the Board, that is generally available to the other executive officers of the Company. The Company reserves the right to amend, modify or terminate any employee benefits at any time for any reason. The Company will cover 100% of the cost of such plans for the Executive and Executive's dependants. 2.4 Reimbursement of Expenses. The Company shall reimburse Executive for ------------------------- all reasonable business expenses incurred by Executive on behalf of the Company during the Employment Term, provided that: (i) such reasonable expenses are ordinary and necessary business expenses incurred on behalf of the Company, and (ii) Executive provides the Company with itemized accounts, receipts and other documentation for such reasonable expenses as are reasonably required by the Company. 2.5 Personal Time. During the Employment Term, Executive will be entitled ------------- to a maximum of twenty-five (25) days of paid personal time per annum, provided, however, that the Company and Executive must mutually agree as to the time during which such vacation may be taken. Paid personal time will be accrued and capped per Company policy. Executive's personal time accrual account will be credited with the full amount of personal time allowed per Company policy as of the signing of this Agreement. 3. EMPLOYMENT TERM. --------------- 3.1 At-Will Employment. Employment with the Company is employment at-will. ------------------ Employment at-will may be terminated with or without cause, and with or without notice at any time at the will of either the Executive or the Company. Terms and conditions of employment with the Company may be modified at the sole discretion of the Company with or without cause and with or without notice. Other than the Board of Directors of the Company, no one has the authority to make any agreement for employment other than for employment at-will or to make any agreement limiting the Company's discretion to modify the terms and conditions of employment. No implied contract concerning any employment related decision or term or condition of employment can be established by any other statement, conduct, policy or practice. 3.2 Employment Term. The "Employment Term" means the period commencing on --------------- the Effective Date and terminating as set forth in Section 4.1. 4. TERMINATION OF EMPLOYMENT. ------------------------- 4.1 Method of Termination. Executive has the right to terminate his --------------------- employment with the Company, for any reason at any time, with or without cause, and the Company retains the same right. Accordingly such Employment Term will upon the first of the following to occur: A. Executive's death; B. Date that written notice is deemed given or made by the Company to Executive that as a result of any physical or mental injury or disability, he is unable to perform 2. the essential functions of his job, with reasonable accommodation. Such notice may be issued when the Board has reasonably determined that Executive has become unable to perform substantially his services and duties hereunder with reasonable accommodation because of any physical or mental injury or disability, and that it is reasonably likely that he will not be able to resume substantially performing his services and duties on substantially the terms and conditions as set forth in this Employment Agreement; C. Date that written notice is deemed given or made by the Company to Executive of termination for "cause." For purposes of this Employment Agreement, "cause" shall mean any one of the following: 1. Gross negligence or the repeated failure of Executive to perform his duties and responsibilities to the reasonable satisfaction of the Board or any breach by Executive of his fiduciary duties to the Company or any material term of this Employment Agreement. For purposes of this Employment Agreement, any act or acts or omission or omissions by Executive that have a material adverse effect on the Company's operations, prospects, reputation or business shall be deemed to be a breach of his duties and responsibilities to the Company, or 2. The conviction of Executive for a felony, other than a first conviction under Section 23152 of the California Vehicle Code (Driving under the Influence) in which punishment is provided solely under Section 23160 (Punishment for First Offense of Driving Under the Influence) or Section 23161 (Conditions of Probation for First Offense of Driving Under the Influence) of the California Vehicle Code; D. Date that written notice is deemed given or made by Executive of his resignation without Good Reason (as hereinafter defined), his voluntary departure, or his departure pursuant to Sections 4.1.A. or 4.1B. of this Employment Agreement as an employee of the Company; E. Date that written notice is deemed given or made by Executive of his resignation from the Company for Good Reason. For purposes of this Employment Agreement, "Good Reason" shall mean Executive's resignation by reason of: 1. The material breach by the Company of one or more of its obligations under this Employment Agreement which are not otherwise corrected within the cure period provided under Section 4.2 following Executive's written notice to the Company of such breach; or 2. The occurrence of a Corporate Transaction; a. For purposes of this Employment Agreement, a "Corporate Transaction" shall mean either of the following stockholder-approved transactions to which the Company is a party if at the time the Company is a privately held corporation: 1). A merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's 3. outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or 2). The sale, transfer or other disposition of all or substantially all of the Company's assets in complete liquidation or dissolution of the Company. b. For purposes of this Employment Agreement, a "Corporate Transaction" shall mean the occurrence of any one of the following events if the company is a publicly held corporation at the time: 1). Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the Company's stockholders in substantially the same proportions as their ownership of the Company's stock, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the total combined voting power of the Company's then outstanding securities; 2). The majority of the members of the Board ceases to be comprised of individuals who are Continuing Members; for such purpose, a "Continuing Member" shall mean an individual who is a member of the Board on the date of this Employment Agreement and any successor of a Continuing Member who is elected to the Board or nominated for such election by action of a majority of Continuing Members then serving on the Board; 3). A merger, consolidation or other transaction in which the Company shall cease to be an independent publicly-owned corporation, or a sale or other disposition of all or substantially all of the Company's assets; 4). Any reverse merger or similar transaction in which the Company is the surviving entity but in which securities possessing fifty percent (50%) or more of the voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such merger or similar transaction; 5). A liquidation or dissolution of the Company. 3. The occurrence of any of the following events without Executive's express written consent, unless corrected prior to the Date of Termination specified in the Notice of Termination given by Executive pursuant to Section 4.3: a change in Executive's position with the Company which materially reduces Executive's level of responsibilities; a reduction in Executive's Level of compensation (including base salary, fringe benefits and any non-discretionary and objective-standard incentive payment or bonus award). F. Date that written notice is deemed given or made by the Company to Executive of Executive's termination without "cause." 4. 4.2 Notice of Termination. Any termination of Executive's employment --------------------- either by the Company or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7.1 hereof. In the case of resignation for Good Reason, the Notice of Termination must specify in reasonable detail the basis for such resignation and give the Company at least twenty (20) business days in which to correct the circumstances prompting the resignation before such resignation for Good Reason shall be deemed effective for purposes of this Employment Agreement 4.3 Date of Termination. "Date of Termination" shall mean the date ------------------- specified in the Notice of Termination. 4.4 Effect of Termination for Cause, Executive's Resignation Without Good --------------------------------------------------------------------- Reason or Other Events. Upon (i) the termination of Executive for cause; or - ---------------------- (ii) Executive's resignation without good reason or voluntary departure; Executive will not be entitled to any additional compensation or other rights or benefits from the Company, and, as a result, the Company shall be obligated to pay Executive only that portion of his Base Salary that Executive has earned and reasonable business expenses incurred prior to the effective date of the termination of Executive's employment with the Company. 4.5 Effect of Termination without Cause or Executive's Resignation for ------------------------------------------------------------------ Good Reason. In the event (i) the Company terminates Executives employment with - ----------- the Company without cause; or (ii) Executive resigns for Good Reason; or (iii) Executive's termination is due to death or disability, Executive shall be entitled to his then existing Base Salary for a period of eighteen (18) months from the date of termination payable in accordance with the Company's regular payroll schedule and reasonable business expenses incurred prior to the date of termination. In addition, Executive shall be entitled to (i) his annual bonus, including the cash value of shares issued, prorated to his date of termination, and (ii) immediate and full vesting of all outstanding stock options granted through the termination date. To the extent that Executive and/or any of his dependents is eligible to, and timely elects to receive continuation coverage under any group health plan providing medical, dental, vision, prescription drug, wellness or other health care or medical coverage which is subject to the provisions of part 6 of Title I of ERISA ("COBRA") the Company shall timely reimburse Executive and/or any of his dependents to the extent permitted by law for any premiums required for such coverage for up to eighteen (18) months from the date of termination. This payment of premiums by the Company is not intended to alter in any way the provisions of any group health plan of the Company, and all time limits, effects of subsequent coverage and all other relevant provisions of any such plan remain unchanged and shall control Executive's (and his dependent's) entitlement to coverage or benefits under such plan. Should any or all of the payments made pursuant to this Employment Agreement be determined by the Company to be a parachute payment under Section 280G of the Internal Revenue Code, then such payments shall be limited to an amount that will not cause a parachute excise tax. Upon the termination of Executive's employment without cause or Executive's Resignation for Good Reason, neither Executive nor his beneficiary or estate shall have any further rights or claims against the Company except as provided in this Section 4.5 and Executive's right to receive his unpaid portion of his Base Salary earned through the Date of Termination; reimbursement for any expenses; payment of all unused personal days accrued per company policy; and any rights pursuant to Company's benefit or retirement plans. 5. 4.6 Resignation as an Officer and Director. In the event Executive's -------------------------------------- employment with the Company terminates for any reason, Executive agrees, as evidenced by his signature on this Agreement, to immediately resign as an officer of the Company. If Executive is a director of the Company and in the event Executive's employment with the Company terminates due to death or under the terms of paragraph 4.1.C.2, Executive agrees, as evidenced by his signature on this Agreement, to immediately resign as a director of the Company. 5. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE. ----------------------------------------------------- 5.1 Proprietary Information and Inventions. Executive understands and agrees that he will execute and be bound by a Proprietary Information and Inventions Agreement in the form attached hereto as Exhibit 1. 5.2 Non-Competition --------------- A. During the Employment Term, and during any period for which Executive is receiving payments from the Company pursuant to Section 4.5, Executive shall not directly or indirectly: 1. Own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed by or connected in any manner with, any enterprise which is engaged in any business competitive with that which the Company is at the time conducting or proposing to conduct; provided, however, that such restriction shall not apply to any passive investment representing an interest of less than two percent (2%) of an outstanding claw of publicly traded securities of any corporation or other enterprise which is not, at the time of such investment, engaged in a business geographically competitive with the Company's business; or 2. During the Employment Term and for eighteen months following the Date of Termination, the Executive will not encourage or solicit any Company employee to leave the Company's employ for any reason or interfere in any material manner with employment relationships at the time existing between the Company and its current employees, except as may be required in any bona fide termination decision regarding any Company employee. In the event the Executive is determined by a court to have breached this covenant, the Executive will be responsible to return any payments made under the terms of paragraph 4.5 subsequent to the substantiated date of breech. 5.3 Acknowledgment. Executive acknowledges that the specialized nature of -------------- his knowledge of the Company's Proprietary Information, trade secrets and other intellectual property are such that a breach of his covenant not to compete or confidentiality obligations contained in this Section 5 of this Employment Agreement would necessarily and inevitably result in a disclosure, misappropriation and misuse of such Proprietary Information, trade secrets and other intellectual property. Accordingly, Executive acknowledges and agrees that such a breach would inflict unique and irreparable harm upon the Company and that the Company shall be entitled, in addition to its other rights and available remedies, to enforce, by injunction or decree of specific performance, Executive's obligations set forth herein. 6. 6. RESTRICTIVE COVENANT. -------------------- During the Employment Term: 6.1 Executive shall devote substantially all of his time and energy to the performance of Executive's duties described herein, except during periods of illness or vacation periods. 6.2 Executive shall not directly or indirectly provide services to or through any person, firm or other entity except the Company, unless otherwise authorized by the Company in writing. 6.3 Executive shall not render any services of any kind or character for Executive's own account or for any other person, firm or entity without first obtaining the Company's written consent. 6.4 Notwithstanding the foregoing, Executive shall have the right to perform such incidental services as are necessary in connection with (i) his private passive investments, but only if Executive is not obligated or required to (and shall not in fact) devote any managerial efforts which interfere with the services required to be performed by him hereunder, (ii) his charitable or community activities or (iii) participation in trade or professional organizations, but only if such incidental services do not significantly interfere with the performance of Executive's services hereunder. 7. MISCELLANEOUS ------------- 7.1 Notices. All notices, demands and requests required by this ------- Employment Agreement shall be in writing and shall be deemed to have been given or made for all purposes (i) upon personal delivery, (ii) one day after being sent, when sent by professional overnight courier service, (iii) five days after posting when sent by registered or certified mail, or (iv) on the date of transmission when sent by telegraph, telegram, telex, or other form of "hard copy" transmission, to either party hereto at the address set forth below or at such other address as either party may designate by notice pursuant to this Section: If to the Company, to: Object Products, Inc. 330 Townsend, Suite 206 San Francisco, CA 94107 Attention: Secretary And a Copy to: Thomas A. Bevilacqua Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, CA 94303 7. If to Executive, to: Jack D. Anderson 44 Diablo View Road Orinda, CA 94563 7.2 Assignment. This Employment Agreement shall be binding on, and shall ---------- inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that Executive may not assign, transfer or delegate his rights or obligations hereunder and any attempt to do so shall be void. 7.3 Deductions. All amounts paid to Executive hereunder are subject to all ---------- withholdings and deductions required by law, as authorized under this Employment Agreement, and as authorized from time to time. 7.4 Entire Agreement. This Employment Agreement contains the entire ---------------- agreement of the parties with respect to the subject matter hereof, and all prior agreements, written or oral, are merged herein and are of no further force or effect. 7.5 Amendment. This Employment Agreement may be modified or amended only --------- by a written agreement signed by a member of the Compensation Committee who is a member of the Board of Directors of the Company and Executive. 7.6 Waivers. No waiver of any term or provision of this Employment ------- Agreement will be valid unless such waiver is in writing signed by the party against whom enforcement of the waiver is sought. The waiver of any term or provision of this Employment Agreement shall not apply to any subsequent breach of this Employment Agreement. 7.7 Counterparts. This Employment Agreement may be executed in several ------------ counterparts, each of which shall be deemed an original, but together they shall constitute one and the same instrument. 7.8 Severability. The provisions of this Employment Agreement shall be ------------ deemed severable, and if any part of any provision is held illegal, void or invalid under applicable law, such provision may be changed to the extent reasonably necessary to make the provision, as so changed, legal, valid and binding. If any provision of this Employment Agreement is held illegal, void or invalid in its entirety, the remaining provisions of this Employment Agreement shall not in any way be affected or impaired but shall remain binding in accordance with their terms. 7.9 Governing Law. THIS EMPLOYMENT AGREEMENT AND THE RIGHTS AND ------------- OBLIGATIONS OF THE COMPANY AND EXECUTIVE HEREUNDER SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA AS APPLIED TO AGREEMENTS AMONG CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN CALIFORNIA. 8. 7.10 Arbitration. The Executive understands and agrees that, as a ----------- condition of his employment with the Company, any and all disputes that the Company may have with Executive or Executive may have with the Company, or any of its employees, officers, directors, agents or assigns, which arise out of the Executive's employment with the Company shall be resolved through final and binding arbitration, as specified in this Employment Agreement. This shall include, without limitation, any controversy, claim or dispute of any kind, including disputes relating to any employment by the Company or the termination thereof, claims for breach of contract or breach of the covenant of good faith and fair dealing, infliction of emotional distress, defamation and any claims of discrimination, harassment or other claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans With Disabilities Act, the Employee Retirement income Securities Act, or any other federal, state or local law or regulation now in existence or hereinafter enacted and as amended from time to time concerning in any way the subject of the Executive's employment with the Company or its termination. The only claims not covered by this Employment Agreement are claims for benefits under the unemployment insurance or workers' compensation laws, and any claims pursuant to paragraph 5 of this Employment Agreement, which will be resolved pursuant to those laws. Any disputes and/or claims covered by this Employment Agreement shall be submitted to final and binding arbitration to be conducted in Palo Alto, California, in accordance with the rules and regulations of the American Arbitration Association. Each side will bear its own attorneys' fees, and the arbitrator will not have authority to award attorneys' fees unless a statutory section at issue in the dispute authorizes the award of attorneys' fees to the prevailing party, in which case the arbitrator has authority to make such award as permitted by the statute in question. The arbitration shall be instead of any civil litigation; this means that the Executive is waiving any right to a jury trial, and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. OBJECT PRODUCTS, INC. By: /s/ William W. Shaw, III ---------------------------------------- William W. Shaw, III Secretary /s/ Gail E. Oldfather ---------------------------------------- Gail E. Oldfather Director & Compensation Committee Member EXECUTIVE /s/ Jack D. Anderson ---------------------------------------- Jack D. Anderson 9. EX-10.6 7 EMPLOYMENT AGREEMENT W/ROBERT L. ANDERSON EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Employment Agreement"), dated as of January 1, 1996 (the "Effective Date"), is entered into by and between Object Products, Inc. (the "Company") and Robert L. Anderson ("Executive"). In consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: WITNESSETH: ---------- WHEREAS, the Company desires to employ Executive as the Senior Vice President of the Company, and Executive desires to be employed by the Company, upon the terms and conditions set forth in this Employment Agreement; NOW, THEREFORE, in consideration of the promises and the mutual covenants hereinafter set forth, the Company and Executive hereby agree as follows: 1. EMPLOYMENT. ---------- 1.1 Position. During the Employment Term (as hereinafter defined) and -------- subject to the terms and conditions set forth herein, the Company agrees to employ Executive as its Senior Vice President, reporting directly to the Chief Executive Officer of the Company. 1.2 Duties. Executive shall diligently, and to the best of his ------ ability, perform all such duties incident to his position and as may be assigned from time to time and to use his best efforts to promote the interests of the Company. 1.3 Time to be Devoted to Employment. During the Employment Term, -------------------------------- Executive shall devote his full time and energy to the business of the Company and shall not be engaged in any competitive business activity without the express written consent of the Company. Executive hereby represents that he is not a party to any agreement, which would be an impediment to entering into this Employment Agreement, and that he is permitted to enter into this Employment Agreement and perform the obligations hereunder. 2. COMPENSATION AND BENEFITS. ------------------------- 2.1 Annual Salary. In consideration of and as compensation for the ------------- services agreed to be performed by Executive hereunder, the Company agrees to pay Executive an annual base salary of $120,000, payable in accordance with the Company's regular payroll schedule ("Base Salary"), less applicable withholdings and deductions. The Base Salary will be subject to change at the sole discretion of the Board of Directors of the Company (the "Board"). 2.2 Bonus. The Board or a duly appointed committee thereof will no ----- less than once annually determine if the award of a bonus is warranted and the amount of such bonus, if any; the Board or any duly appointed committee thereof shall have sole discretion to grant or not grant a bonus. Executive is eligible for future issuances of options at the discretion of the Board. 1. 2.3 Participation in Benefit Plans. During the Employment Term, ------------------------------ Executive shall be entitled to participate in any pension, group insurance, medical hospitalization, annual physical, disability, or other similar benefit plan, to the extent permitted by law, that may from time to time be adopted by the Board, that is generally available to the other executive officers of the Company. The Company reserves the right to amend, modify or terminate any employee benefits at any time for any reason. The Company will cover 100% of the cost of such plans for the Executive and Executive's dependants. 2.4 Reimbursement of Expenses. The Company shall reimburse Executive ------------------------- for all reasonable business expenses incurred by Executive on behalf of the Company during the Employment Term, provided that: (i) such reasonable expenses are ordinary and necessary business expenses incurred on behalf of the Company, and (ii) Executive provides the Company with itemized accounts, receipts and other documentation for such reasonable expenses as are reasonably required by the Company. 2.5 Personal Time. During the Employment Term, Executive will be ------------- entitled to a maximum of twenty-five (25) days of paid personal time per annum, provided, however, that the Company and Executive must mutually agree as to the time during which such vacation may be taken. Paid personal time will be accrued and capped per Company policy. 3. EMPLOYMENT TERM. --------------- 3.1 At-Will Employment. Employment with the Company is employment ------------------ at-will. Employment at-will may be terminated with or without cause, and with or without notice at any time at the will of either the Executive or the Company. Terms and conditions of employment with the Company may be modified at the sole discretion of the Company with or without cause and with or without notice. Other than the Board of Directors of the Company, no one has the authority to make any agreement for employment other than for employment at-will or to make any agreement limiting the Company's discretion to modify the terms and conditions of employment. No implied contract concerning any employment related decision or term or condition of employment can be established by any other statement, conduct, policy or practice. 3.2 Employment Term. The "Employment Term" means the period --------------- commencing on the Effective Date and terminating as set forth in Section 4.1. 4. TERMINATION OF EMPLOYMENT. ------------------------- 4.1 Method of Termination. Executive has the right to terminate his --------------------- employment with the Company, for any reason at any time, with or without cause, and the Company retains the same right. Accordingly such Employment Term will end upon the first of the following to occur: A. Executive's death; B. Date that written notice is deemed given or made by the Company to Executive that as a result of any physical or mental injury or disability, he is unable to perform the essential functions of his job, with reasonable accommodation. Such notice may be issued when the Board has reasonably determined that Executive has become unable to perform 2. substantially his services and duties hereunder with reasonable accommodation because of any physical or mental injury or disability, and that it is reasonably likely that he will not be able to resume substantially performing his services and duties on substantially the terms and conditions as set forth in this Employment Agreement; C. Date that written notice is deemed given or made by the Company to Executive of termination for "Cause." For purposes of this Employment Agreement, "Cause" shall mean any one of the following: 1. Gross negligence or the repeated failure of Executive to perform his duties and responsibilities to the reasonable satisfaction of the Board or any breach by Executive of his fiduciary duties to the Company or any material term of this Employment Agreement. For purposes of this Employment Agreement, any act or acts or omission or omissions by Executive that have a material adverse effect on the Company's operations, prospects, reputation or business shall be deemed to be a breach of his duties and responsibilities to the Company; or 2. The conviction of Executive for a felony, other than a first conviction under Section 23152 of the California Vehicle Code (Driving under the Influence) in which punishment is provided solely under Section 23160 (Punishment for First Offense of Driving Under the Influence) or Section 23161 (Conditions of Probation for First Offense of Driving Under the Influence) of the California Vehicle Code; D. Date that written notice is deemed given or made by Executive of his resignation without Good Reason (as hereinafter defined), his voluntary departure, or his departure pursuant to Sections 4.1.A. or 4.1B. of this Employment Agreement as an employee of the Company; E. Date that written notice is deemed given or made by Executive of his resignation from the Company for Good Reason. For purposes of this Employment Agreement, "Good Reason" shall mean Executive's resignation by reason of: 1. The material breach by the Company of one or more of its obligations under this Employment Agreement which are not otherwise corrected within the cure period provided under Section 4.2 following Executive's written notice to the Company of such breach; or 2. The occurrence of a Corporate Transaction; a. For purposes of this Employment Agreement, a "Corporate Transaction" shall mean either of the following stockholder-approved transactions to which the Company is a party if at the time the Company is a privately held corporation: 1). A merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or 3. 2). The sale, transfer or other disposition of all or substantially all of the Company's assets in complete liquidation or dissolution of the Company. b. For purposes of this Employment Agreement, a "Corporate Transaction" shall mean the occurrence of any one of the following events if the company is a publicly held corporation at the time: 1). Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the Company's stockholders in substantially the same proportions as their ownership of the Company's stock, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the total combined voting power of the Company's then outstanding securities; 2). The majority of the members of the Board ceases to be comprised of individuals who are Continuing Members; for such purpose, a "Continuing Member" shall mean an individual who is a member of the Board on the date of this Employment Agreement and any successor of a Continuing Member who is elected to the Board or nominated for such election by action of a majority of Continuing Members then serving on the Board; 3). A merger, consolidation or other transaction in which the Company shall cease to be an independent publicly-owned corporation, or a sale or other disposition of all or substantially all of the Company's assets; 4). Any reverse merger or similar transaction in which the Company is the surviving entity but in which securities possessing fifty percent (50%) or more of the voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such merger or similar transaction; 5). A liquidation or dissolution of the Company. 3. The occurrence of any of the following events without Executive's express written consent, unless corrected prior to the Date of Termination specified in the Notice of Termination given by Executive pursuant to Section 4.3: a change in Executive's position with the Company which materially reduces Executive's level of responsibilities; a reduction in Executive's Level of compensation (including base salary, fringe benefits and any non-discretionary and objective-standard incentive payment or bonus award). F. Date that written notice is deemed given or made by the Company to Executive of Executive's termination without "cause." 4.2 Notice of Termination. Any termination of Executive's employment --------------------- either by the Company or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7.1 hereof. In the case of resignation for 4. Good Reason, the Notice of Termination must specify in reasonable detail the basis for such resignation and give the Company at least twenty (20) business days in which to correct the circumstances prompting the resignation before such resignation for Good Reason shall be deemed effective for purposes of this Employment Agreement. 4.3 Date of Termination. "Date of Termination" shall mean the date ------------------- specified in the Notice of Termination. 4.4 Effect of Termination for Cause, Executive's Resignation Without ---------------------------------------------------------------- Good Reason or Other Events. Upon (i) the termination of Executive for cause; - --------------------------- or (ii) Executive's resignation without good reason or voluntary departure; Executive will not be entitled to any additional compensation or other rights or benefits from the Company, and, as a result, the Company shall be obligated to pay Executive only that portion of his Base Salary that Executive has earned and reasonable business expenses incurred prior to the effective date of the termination of Executive's employment with the Company. 4.5 Effect of Termination without Cause or Executive's Resignation -------------------------------------------------------------- for Good Reason. In the event (i) the Company terminates Executive's employment - --------------- with the Company without cause; or (ii) Executive resigns for Good Reason; or (iii) Executive's termination is due to death or disability, Executive shall be entitled to his then existing Base Salary for a period of eighteen (18) months from the date of termination payable in accordance with the Company's regular payroll schedule and reasonable business expenses incurred prior to the date of termination. In addition, Executive shall be entitled to (i) his annual bonus, including the cash value of shares issued, prorated to his date of termination, and (ii) immediate and full vesting of all outstanding stock options granted through the termination date. To the extent that Executive and/or any of his dependents is eligible to, and timely elects to receive continuation coverage under any group health plan providing medical, dental, vision, prescription drug, wellness or other health care or medical coverage which is subject to the provisions of part 6 of Title I of ERISA ("COBRA") the Company shall timely reimburse Executive and/or any of his dependents to the extent permitted by law for any premiums required for such coverage for up to eighteen (18) months from date of termination. This payment of premiums by the Company is not intended to alter in any way the provisions of any group health plan of the Company, and all time limits, effects of subsequent coverage and all other relevant provisions of any such plan remain unchanged and shall control Executive's (and his dependent's) entitlement to coverage or benefits under such plan. Should any or all of the payments made pursuant to this Employment Agreement be determined by the Company to be a parachute payment under Section 280G of the Internal Revenue Code, then such payments shall be limited to an amount that will not cause a parachute excise tax. Upon the termination of Executive's employment without cause or Executive's Resignation for Good Reason, neither Executive nor his beneficiary or estate shall have any further rights or claims against the Company except as provided in this Section 4.5 and Executive's right to receive his unpaid portion of his Base Salary earned through the Date of Termination; reimbursement for any expenses; payment of all unused personal days accrued per Company policy; and any rights pursuant to Company's benefit or retirement plans. 4.6 Resignation as an Officer and Director. In the event Executive's -------------------------------------- employment with the Company terminates for any reason, Executive agrees, as evidenced by his signature on this Agreement, to immediately resign as an officer of the Company. If Executive is 5. a director of the Company and in the event Executive's employment with the Company terminates due to death or under the terms of paragraph 4.1.C.2, Executive agrees, as evidenced by his signature on this Agreement, to immediately resign as a director of the Company. 5. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE. ----------------------------------------------------- 5.1 Proprietary Information and Inventions. Executive understands and agrees that he will execute and be bound by a Proprietary Information and Inventions Agreement in the form attached hereto as Exhibit 1. 5.2 Non-Competition --------------- A. During the Employment Term, and during any period for which Executive is receiving payments from the Company pursuant to Section 4.5, Executive shall not directly or indirectly: 1. Own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed by or connected in any manner with, any enterprise which is engaged in any business competitive with that which the Company is at the time conducting or proposing to conduct; provided, however, that such restriction shall not apply to any passive investment representing an interest of less than two percent (2%) of an outstanding class of publicly traded securities of any corporation or other enterprise which is not, at the time of such investment, engaged in a business geographically competitive with the Company's business; or 2. During the Employment Term and for eighteen months following the Date of Termination, the Executive will not encourage or solicit any Company employee to leave the Company's employ for any reason or interfere in any material manner with employment relationships at the time existing between the Company and its current employees, except as may be required in any bona fide termination decision regarding any Company employee. In the event the Executive is determined by a court to have breech this covenant, the Executive will be responsible to return any payments made under the terms of paragraph 4.5 subsequent to the substantiated date of breech. 5.3 Acknowledgment. Executive acknowledges that the specialized -------------- nature of his knowledge of the Company's Proprietary Information, trade secrets and other intellectual property are such that a breach of his covenant not to compete or confidentiality obligations contained in this Section 5 of this Employment Agreement would necessarily and inevitably result in a disclosure, misappropriation and misuse of such Proprietary Information, trade secrets and other intellectual property. Accordingly, Executive acknowledges and agrees that such a breach would inflict unique and irreparable harm upon the Company and that the Company shall be entitled, in addition to its other rights and available remedies, to enforce, by injunction or decree of specific performance, Executive's obligations set forth herein. 6. RESTRICTIVE COVENANT. -------------------- During the Employment Term: 6. 6.1 Executive shall devote substantially all of his time and energy to the performance of Executive's duties described herein, except during periods of illness or vacation periods. 6.2 Executive shall not directly or indirectly provide services to or through any person, firm or other entity except the Company, unless otherwise authorized by the Company in writing. 6.3 Executive shall not render any services of any kind or character for Executive's own account or for any other person, firm or entity without first obtaining the Company's written consent. 6.4 Notwithstanding the foregoing, Executive shall have the right to perform such incidental services as are necessary in connection with (i) his private passive investments, but only if Executive is not obligated or required to (and shall not in fact) devote any managerial efforts which interfere with the services required to be performed by him hereunder, (ii) his charitable or community activities or (iii) participation in trade or professional organizations, but only if such incidental services do not significantly interfere with the performance of Executive's services hereunder. 7. MISCELLANEOUS ------------- 7.1 Notices. All notices, demands and requests required by this ------- Employment Agreement shall be in writing and shall be deemed to have been given or made for all purposes (i) upon personal delivery, (ii) one day after being sent, when sent by professional overnight courier service, (iii) five days after posting when sent by registered or certified mail, or (iv) on the date of transmission when sent by telegraph, telegram, telex, or other form of "hard copy" transmission, to either party hereto at the address set forth below or at such other address as either party may designate by notice pursuant to this Section: If to the Company, to: Object Products, Inc. 330 Townsend, Suite 206 San Francisco, CA 94107 Attention: Jack D. Anderson And a Copy to: Thomas A. Bevilacqua Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, CA 94303 If to Executive, to: Robert L. Anderson 124 California Avenue Mill Valley, CA 94941 7. 7.2 Assignment. This Employment Agreement shall be binding on, and ---------- shall inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that Executive may not assign, transfer or delegate his rights or obligations hereunder and any attempt to do so shall be void. 7.3 Deductions. All amounts paid to Executive hereunder are subject ---------- to all withholdings and deductions required by law, as authorized under this Employment Agreement, and as authorized from time to time. 7.4 Entire Agreement. This Employment Agreement contains the entire ---------------- agreement of the parties with respect to the subject matter hereof, and all prior agreements, written or oral, are merged herein and are of no further force or effect. 7.5 Amendment. This Employment Agreement may be modified or amended --------- only by a written agreement signed by a member of the Compensation Committee who is a member of the Board of Directors of the Company and Executive. 7.6 Waivers. No waiver of any term or provision of this Employment ------- Agreement will be valid unless such waiver is in writing signed by the party against whom enforcement of the waiver is sought. The waiver of any term or provision of this Employment Agreement shall not apply to any subsequent breach of this Employment Agreement. 7.7 Counterparts. This Employment Agreement may be executed in ------------ several counterparts, each of which shall be deemed an original, but together they shall constitute one and the same instrument. 7.8 Severability. The provisions of this Employment Agreement shall ------------ be deemed severable, and if any part of any provision is held illegal, void or invalid under applicable law, such provision may be changed to the extent reasonably necessary to make the provision, as so changed, legal, valid and binding. If any provision of this Employment Agreement is held illegal, void or invalid in its entirety, the remaining provisions of this Employment Agreement shall not in any way be affected or impaired but shall remain binding in accordance with their terms. 7.9 Governing Law. THIS EMPLOYMENT AGREEMENT AND THE RIGHTS AND ------------- OBLIGATIONS OF THE COMPANY AND EXECUTIVE HEREUNDER SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA AS APPLIED TO AGREEMENTS AMONG CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN CALIFORNIA. 7.10 Arbitration. The Executive understands and agrees that, as a ----------- condition of his employment with the Company, any and all disputes that the Company may have with Executive or Executive may have with the Company, or any of its employees, officers, directors, agents or assigns, which arise out of the Executive's employment with the Company shall be resolved through final and binding arbitration, as specified in this Employment Agreement. This shall include, without limitation, any controversy, claim or dispute of any kind, including disputes relating to any employment by the Company or the termination thereof, claims for 8. breach of contract or breach of the covenant of good faith and fair dealing, infliction of emotional distress, defamation and any claims of discrimination, harassment or other claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans With Disabilities Act, the Employee Retirement Income Securities Act, or any other federal, state or local law or regulation now in existence or hereinafter enacted and as amended from time to time concerning in any way the subject of the Executive's employment with the Company or its termination. The only claims not covered by this Employment Agreement are claims for benefits under the unemployment insurance or workers' compensation laws, and any claims pursuant to paragraph 5 of this Employment Agreement, which will be resolved pursuant to those laws. Any disputes and/or claims covered by this Employment Agreement shall be submitted to final and binding arbitration to be conducted in Palo Alto, California, in accordance with the rules and regulations of the American Arbitration Association. Each side will bear its own attorneys' fees, and the arbitrator will not have authority to award attorneys' fees unless a statutory section at issue in the dispute authorizes the award of attorneys' fees to the prevailing party, in which case the arbitrator has authority to make such award as permitted by the statute in question. The arbitration shall be instead of any civil litigation; this means that the Executive is waiving any right to a jury trial, and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. OBJECT PRODUCTS, INC. By: /s/ Jack D. Anderson ---------------------------------------- Jack D. Anderson Chairman & CEO /s/ Gail E. Oldfather ---------------------------------------- Gail E. Oldfather Director & Compensation Committee Member EXECUTIVE /s/ Robert L. Anderson ---------------------------------------- Robert L. Anderson 9. EX-10.7 8 EMPLOYMENT AGREEMENT W/WILLIAM W. SHAW EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Employment Agreement"), dated as of June 1, 1996 (the "Effective Date"), is entered into by and between Object Products, Inc. (the "Company") and William W. Shaw, III ("Executive"). In consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: WITNESSETH: ---------- WHEREAS, the Company desires to employ Executive as the Chief Executive Officer of the Company, and Executive desires to be employed by the Company, upon the terms and conditions set forth in this Employment Agreement; NOW, THEREFORE, in consideration of the promises and the mutual covenants hereinafter set forth, the Company and Executive hereby agree as follows: 1. EMPLOYMENT. ---------- 1.1 Position. During the Employment Term (as hereinafter defined) and -------- subject to the terms and conditions set forth herein, the Company agrees to employ Executive as its President and Chief Financial Officer, reporting directly to the Chief Executive Officer of the Company. 1.2 Duties. Executive shall diligently, and to the best of his ability, ------ perform all such duties incident to his position and as may be assigned from time to time and to use his best efforts to promote the interests of the Company. 1.3 Time to be Devoted to Employment. During the Employment Term, -------------------------------- Executive shall devote his full time and energy to the business of the Company and shall not be engaged in any competitive business activity without the express written consent of the Company. Executive hereby represents that he is not a party to any agreement, which would be an impediment to entering into this Employment Agreement, and that he is permitted to enter into this Employment Agreement and perform the obligations hereunder. 2. COMPENSATION AND BENEFITS. ------------------------- 2.1 Annual Salary. In consideration of and as compensation for the ------------- services agreed to be performed by Executive hereunder, the Company agrees to pay Executive an annual base salary of $120,000, payable in accordance with the Company's regular payroll schedule ("Base Salary"), less applicable withholdings and deductions. The Base Salary will be subject to change at the sole discretion of the Board of Directors of the Company (the "Board"). 2.2 Bonus. The Board or a duly appointed committee thereof will no less ----- than once annually determine if the award of a bonus is warranted and the amount of such bonus, if any; the Board or any duly appointed committee thereof shall have sole discretion to grant or not 1. grant a bonus. Executive has been granted an option to acquire two hundred and fifty thousand (250,000) shares of the Company's common stock pursuant to the Company's stock option plan and is eligible for future issuances at the discretion of the Board. 2.3 Participation in Benefit Plans. During the Employment Term, Executive ------------------------------ shall be entitled to participate in any pension, group insurance, medical hospitalization, annual physical, disability, or other similar benefit plan, to the extent permitted by law, that may from time to time be adopted by the Board, that is generally available to the other executive officers of the Company. The Company reserves the right to amend, modify or terminate any employee benefits at any time for any reason. The Company will cover 100% of the cost of such plans for the Executive and Executive's dependants. 2.4 Reimbursement of Expenses. The Company shall reimburse Executive for ------------------------- all reasonable business expenses incurred by Executive on behalf of the Company during the Employment Term, provided that: (i) such reasonable expenses are ordinary and necessary business expenses incurred on behalf of the Company, and (ii) Executive provides the Company with itemized accounts, receipts and other documentation for such reasonable expenses as are reasonably required by the Company. 2.5 Personal Time. During the Employment Term, Executive will be entitled ------------- to a maximum of twenty-five (25) days of paid personal time per annum, provided, however, that the Company and Executive must mutually agree as to the time during which such vacation may be taken. Paid personal time will be accrued and capped per Company policy. Executive's personal time accrual account will be credited with the full amount of personal time allowed per Company policy as of the signing of this Agreement. 3. EMPLOYMENT TERM. --------------- 3.1 At-Will Employment. Employment with the Company is employment at-will. ------------------ Employment at-will may be terminated with or without cause, and with or without notice at any time at the will of either the Executive or the Company. Terms and conditions of employment with the Company may be modified at the sole discretion of the Company with or without cause and with or without notice. Other than the Board of Directors of the Company, no one has the authority to make any agreement for employment other than for employment at-will or to make any agreement limiting the Company's discretion to modify the terms and conditions of employment. No implied contract concerning any employment related decision or term or condition of employment can be established by any other statement, conduct, policy or practice. 3.2 Employment Term. The "Employment Term" means the period commencing on --------------- the Effective Date and terminating as set forth in Section 4.1. 4. TERMINATION OF EMPLOYMENT. ------------------------- 4.1 Method of Termination. Executive has the right to terminate his --------------------- employment with the Company, for any reason at any time, with or without cause, and the Company retains the same right. Accordingly such Employment Term will end upon the first of the following to occur: 2. A. Executive's death; B. Date that written notice is deemed given or made by the Company to Executive that as a result of any physical or mental injury or disability, he is unable to perform the essential functions of his job, with reasonable accommodation. Such notice may be issued when the Board has reasonably determined that Executive has become unable to perform substantially his services and duties hereunder with reasonable accommodation because of any physical or mental injury or disability, and that it is reasonably likely that he will not be able to resume substantially performing his services and duties on substantially the terms and conditions as set forth in this Employment Agreement; C. Date that written notice is deemed given or made by the Company to Executive of termination for "Cause." For purposes of this Employment Agreement, "Cause" shall mean any one of the following: 1. Gross negligence or the repeated failure of Executive to perform his duties and responsibilities to the reasonable satisfaction of the Board or any breach by Executive of his fiduciary duties to the Company or any material term of this Employment Agreement. For purposes of this Employment Agreement, any act or acts or omission or omissions by Executive that have a material adverse effect on the Company's operations, prospects, reputation or business shall be deemed to be a breach of his duties and responsibilities to the Company; or 2. The conviction of Executive for a felony, other than a first conviction under Section 23152 of the California Vehicle Code (Driving under the Influence) in which punishment is provided solely under Section 23160 (Punishment for First Offense of Driving Under the Influence) or Section 23161 (Conditions of Probation for First Offense of Driving Under the Influence) of the California Vehicle Code; D. Date that written notice is deemed given or made by Executive of his resignation without Good Reason (as hereinafter defined), his voluntary departure, or his departure pursuant to Sections 4.1.A. or 4.1B. of this Employment Agreement as an employee of the Company; E. Date that written notice is deemed given or made by Executive of his resignation from the Company for Good Reason. For purposes of this Employment Agreement, "Good Reason" shall mean Executive's resignation by reason of: 1. The material breach by the Company of one or more of its obligations under this Employment Agreement which are not otherwise corrected within the cure period provided under Section 4.2 following Executive's written notice to the Company of such breach; or 2. The occurrence of a Corporate Transaction; a. For purposes of this Employment Agreement, a "Corporate Transaction" shall mean either of the following stockholder-approved transactions to which the Company is a party if at the time the Company is a privately held corporation: 3. 1). A merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or 2). The sale, transfer or other disposition of all or substantially all of the Company's assets in complete liquidation or dissolution of the Company. b. For purposes of this Employment Agreement, a "Corporate Transaction" shall mean the occurrence of any one of the following events if the company is a publicly held corporation at the time: 1). Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the Company's stockholders in substantially the same proportions as their ownership of the Company's stock, becomes the beneficial owner- (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the total combined voting power of the Company's then outstanding securities; 2). The majority of the members of the Board ceases to be comprised of individuals who are Continuing Members; for such purpose, a "Continuing Member" shall mean an individual who is a member of the Board on the date of this Employment Agreement and any successor of a Continuing Member who is elected to the Board or nominated for such election by action of a majority of Continuing Members then serving on the Board; 3). A merger, consolidation or other transaction in which the Company shall cease to be an independent publicly-owned corporation, or a sale or other disposition of all or substantially all of the Company's assets; 4). Any reverse merger or similar transaction in which the Company is the surviving entity but in which securities possessing fifty percent (50%) or more of the voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such merger or similar transaction; 5). A liquidation or dissolution of the Company. 3. The occurrence of any of the following events without Executive's express written consent, unless corrected prior to the Date of Termination specified in the Notice of Termination given by Executive pursuant to Section 4.3: a change in Executive's position with the Company which materially reduces Executive's level of responsibilities; a reduction in Executive's Level of compensation (including base salary, fringe benefits and any non-discretionary and objective-standard incentive payment or bonus award). 4. F. Date that written notice is deemed given or made by the Company to Executive of Executive's termination without "cause." 4.2 Notice of Termination. Any termination of Executive's employment --------------------- either by the Company or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7.1 hereof. In the case of resignation for Good Reason, the Notice of Termination must specify in reasonable detail the basis for such resignation and give the Company at least twenty (20) business days in which to correct the circumstances prompting the resignation before such resignation for Good Reason shall be deemed effective for purposes of this Employment Agreement. 4.3 Date of Termination. "Date of Termination" shall mean the date ------------------- specified in the Notice of Termination. 4.4 Effect of Termination for Cause, Executive's Resignation Without Good --------------------------------------------------------------------- Reason or Other Events. Upon (i) the termination of Executive for cause; or - ---------------------- (ii) Executive's resignation without good reason or voluntary departure; Executive will not be entitled to any additional compensation or other rights or benefits from the Company, and, as a result the Company shall be obligated to pay Executive only that portion of his Base Salary that Executive has earned and reasonable business expenses incurred prior to the effective date of the termination of Executive's employment with the Company. 4.5 Effect of Termination without Cause or Executive's Resignation for ------------------------------------------------------------------ Good Reason. In the event (i) the Company terminates Executive's employment - ----------- with the Company without cause; or (ii) Executive resigns for Good Reason; or (iii) Executive's termination is due to death or disability, Executive shall be entitled to his then existing Base Salary for a period of eighteen (18) months from the date of termination payable in accordance with the Company's regular payroll schedule and reasonable business expenses incurred prior to the date of termination. In addition, Executive shall be entitled to (i) his annual bonus, including the cash value of shares issued, prorated to his date of termination, and (ii) immediate and full vesting of all outstanding stock options granted through the termination date. To the extent that Executive and/or any of his dependents is eligible to, and timely elects to receive continuation coverage under any group health plan providing medical, dental, vision, prescription drug, wellness or other health care or medical coverage which is subject to the provisions of part 6 of Title I of ERISA ("COBRA") the Company shall timely reimburse Executive and/or any of his dependents to the extent permitted by law for any premiums required for such coverage for up to eighteen (18) months from date of termination. This payment of premiums by the Company is not intended to alter in any way the provisions of any group health plan of the Company, and all time limits, effects of subsequent coverage and all other relevant provisions of any such plan remain unchanged and shall control Executive's (and his dependent's) entitlement to coverage or benefits under such plan. Should any or all of the payments made pursuant to this Employment Agreement be determined by the Company to be a parachute payment under Section 280G of the Internal Revenue Code, then such payments shall be limited to an amount that will not cause a parachute excise tax. Upon the termination of Executive's employment without cause or Executive's Resignation for Good Reason, neither Executive nor his beneficiary or estate shall have any further rights or claims against the Company except as provided in this Section 4.5 and Executive's right to receive his unpaid portion of his Base Salary earned through the Date of 5. Termination; reimbursement for any expenses; payment of all unused personal days accrued per Company policy; and any rights pursuant to Company's benefit or retirement plans. 4.6 Resignation as an Officer and Director. In the event Executive's -------------------------------------- employment with the Company terminates for any reason, Executive agrees, as evidenced by his signature on this Agreement, to immediately resign as an officer and/or director of the Company unless otherwise requested by the Board. 5. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE. ----------------------------------------------------- 5.1 Proprietary Information and Inventions. Executive understands and agrees that he will execute and be bound by a Proprietary Information and Inventions Agreement in the form attached hereto as Exhibit 1. 5.2 Non-Competition --------------- A. During the Employment Term, and during any period for which Executive is receiving payments from the Company pursuant to Section 4.5, Executive shall not directly or indirectly: 1. Own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed by or connected in any manner with, any enterprise which is engaged in any business competitive with that which the Company is at the time conducting or proposing to conduct; provided, however, that such restriction shall not apply to any passive investment representing an interest of less than two percent (2%) of an outstanding class of publicly traded securities of any corporation or other enterprise which is not, at the time of such investment, engaged in a business geographically competitive with the Company's business; or 2. During the Employment Term and for eighteen months following the Date of Termination, the Executive will not encourage or solicit any Company employee to leave the Company's employ for any reason or interfere in any material manner with employment relationships at the time existing between the Company and its current employees, except as may be required in any bona fide termination decision regarding any Company employee. In the event the Executive is determined by a court to have breech this covenant, the Executive will be responsible to return any payments made under the terms of paragraph 4.5 subsequent to the substantiated date of breech. 5.3 Acknowledgment. Executive acknowledges that the specialized nature of -------------- his knowledge of the Company's Proprietary Information, trade secrets and other intellectual property are such that a breach of his covenant not to compete or confidentiality obligations contained in this Section 5 of this Employment Agreement would necessarily and inevitably result in a disclosure, misappropriation and misuse of such Proprietary Information, trade secrets and other intellectual property. Accordingly, Executive acknowledges and agrees that such a breach would inflict unique and irreparable harm upon the Company and that the Company shall be entitled, in addition to its other rights and available remedies, to enforce, by injunction or decree of specific performance, Executive's obligations set forth herein. 6. 6. RESTRICTIVE COVENANT. -------------------- During the Employment Term: 6.1 Executive shall devote substantially all of his time and energy to the performance of Executive's duties described herein, except during periods of illness or vacation periods. 6.2 Executive shall not directly or indirectly provide services to or through any person, firm or other entity except the Company, unless otherwise authorized by the Company in writing. 6.3 Executive shall not render any services of any kind or character for Executive's own account or for any other person, firm or entity without first obtaining the Company's written consent. 6.4 Notwithstanding the foregoing, Executive shall have the right to perform such incidental services as are necessary in connection with (i) his private passive investments, but only if Executive is not obligated or required to (and shall not in fact) devote any managerial efforts which interfere with the services required to be performed by him hereunder, (ii) his charitable or community activities or (iii) participation in trade or professional organizations, but only if such incidental services do not significantly interfere with the performance of Executive's services hereunder. 7. MISCELLANEOUS ------------- 7.1 Notices. All notices, demands and requests required by this Employment ------- Agreement shall be in writing and shall be deemed to have been given or made for all purposes (i) upon personal delivery, (ii) one day after being sent, when sent by professional overnight courier service, (iii) five days after posting when sent by registered or certified mail, or (iv) on the date of transmission when sent by telegraph, telegram, telex, or other form of "hard copy" transmission, to either party hereto at the address set forth below or at such other address as either party may designate by notice pursuant to this Section: If to the Company, to: Object Products, Inc. 330 Townsend, Suite 206 San Francisco, CA 94107 Attention: Jack D. Anderson And a Copy to: Thomas A. Bevilacqua Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, CA 94303 7. If to Executive, to: William W. Shaw, III 108 Casa Vieja Place Orinda, CA 94563 7.2 Assignment. This Employment Agreement shall be binding on, and shall ---------- inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that Executive may not assign, transfer or delegate his rights or obligations hereunder and any attempt to do so shall be void. 7.3 Deductions. All amounts paid to Executive hereunder are subject to ---------- all withholdings and deductions required by law, as authorized under this Employment Agreement, and as authorized from time to time. 7.4 Entire Agreement. This Employment Agreement contains the entire ---------------- agreement of the parties with respect to the subject matter hereof, and all prior agreements, written or oral, are merged herein and are of no further force or effect. 7.5 Amendment. This Employment Agreement may be modified or amended only --------- by a written agreement signed by a member of the Compensation Committee who is a member of the Board of Directors of the Company and Executive. 7.6 Waivers. No waiver of any term or provision of this Employment ------- Agreement will be valid unless such waiver is in writing signed by the party against whom enforcement of the waiver is sought. The waiver of any term or provision of this Employment Agreement shall not apply to any subsequent breach of this Employment Agreement. 7.7 Counterparts. This Employment Agreement may be executed in several ------------ counterparts, each of which shall be deemed an original, but together they shall constitute one and the same instrument. 7.8 Severability. The provisions of this Employment Agreement shall be ------------ deemed severable, and if any part of any provision is held illegal, void or invalid under applicable law, such provision may be changed to the extent reasonably necessary to make the provision, as so changed, legal, valid and binding. If any provision of this Employment Agreement is held illegal, void or invalid in its entirety, the remaining provisions of this Employment Agreement shall not in any way be affected or impaired but shall remain binding in accordance with their terms. 7.9 Governing Law. THIS EMPLOYMENT AGREEMENT AND THE RIGHTS AND ------------- OBLIGATIONS OF THE COMPANY AND EXECUTIVE HEREUNDER SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA AS APPLIED TO AGREEMENTS AMONG CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN CALIFORNIA. 8. 7.10 Arbitration. The Executive understands and agrees that, as a ----------- condition of his employment with the Company, any and all disputes that the Company may have with Executive or Executive may have with the Company, or any of its employees, officers, directors, agents or assigns, which arise out of the Executive's employment with the Company shall be resolved through final and binding arbitration, as specified in this Employment Agreement. This shall include, without limitation, any controversy, claim or dispute of any kind, including disputes relating to any employment by the Company or the termination thereof, claims for breach of contract or breach of the covenant of good faith and fair dealing, infliction of emotional distress, defamation and any claims of discrimination, harassment or other claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans With Disabilities Act, the Employee Retirement Income Securities Act, or any other federal, state or local law or regulation now in existence or hereinafter enacted and as amended from time to time concerning in any way the subject of the Executive's employment with the Company or its termination. The only claims not covered by this Employment Agreement are claims for benefits under the unemployment insurance or workers' compensation laws, and any claims pursuant to paragraph 5 of this Employment Agreement, which will be resolved pursuant to those laws. Any disputes and/or claims covered by this Employment Agreement shall be submitted to final and binding arbitration to be conducted in Palo Alto, California, in accordance with the rules and regulations of the American Arbitration Association. Each side will bear its own attorneys' fees, and the arbitrator will not have authority to award attorneys' fees unless a statutory section at issue in the dispute authorizes the award of attorneys' fees to the prevailing party, in which case the arbitrator has authority to make such award as permitted by the statute in question. The arbitration shall be instead of any civil litigation; this means that the Executive is waiving any right to a jury trial, and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. OBJECT PRODUCTS, INC. By: /s/ Jack D. Anderson ------------------------------------------------ Jack D. Anderson Chairman & CEO /s/ Gail e. Oldfather ------------------------------------------------ Gail E. Oldfather Director & Compensation Committee Member EXECUTIVE /s/ William W. Shaw, III ------------------------------------------------ William W. Shaw, III 9. EX-10.8 9 EMPLOYMENT LETTER AGREEMENT W/WILLIAM H. MATTHEWS EXHIBIT 10.8 June 17, 1999 William H. Matthews 300 West 42nd Avenue San Mateo, CA 94403 Dear Bill: On behalf of Object Products, Inc. (the "Company"), it is with great pleasure that we present you with the following offer of employment. We are pleased to offer you the position of Chief Financial Officer at a monthly salary of $10,416.66 ($125,000.00 annualized). Your salary will be adjusted within 45 days of an IPO to an amount that represents a market range salary for a public company of our size and in our industry. The Company's compensation committee will base your new salary on a survey the Company will perform immediately after completing the IPO process. Your adjustment will become effective on the same effective day used for the other officers of the Company. Your start date will be June 21, 1999. You will be entitled to a maximum of twenty-five (25) days of paid personal time per annum, provided, however, that we must mutually agree as to the time during which such personal time may be taken. Paid personal time will be accrued and capped per Company policy. You will become eligible to participate in our health plan under the terms set forth in the documents governing the plan. You will also be eligible to participate in the Company's stock option plan. Pending proper approvals by the Company's Board of Directors, you will be granted 90,000 option shares at an option price of approximately $2.50 per share. The granted options will vest as follows: 22,500 at the end of your first year of service, 22,500 at the end of your second year of service, 22,500 at the end of your third year of service, and 22,500 at the end of your fourth year of service. You will also, remain eligible for additional grants under the terms and conditions of the Company's option plan(s). The terms and conditions of your participation in our stock option plan are set forth in detail in the plan documents. The vesting of your options will be accelerated by a Corporate Transaction. Should a Corporate Transaction occur on or before June 20, 2000, fifty percent (50%) of your un-vested options would become vested. Should a Corporate Transaction occur after June 20, 2000 one hundred percent (100%) of your un- vested options will become vested. A "Corporate Transaction" shall mean either of the following stockholder- approved transactions to which the Company is a party if, at the time, the Company is a privately held corporation: 1). A merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, with the exception of an IPO or other equity financing event, or, 2). The sale, transfer or other disposition of all or substantially all of the Company's assets in complete liquidation or dissolution of the Company. Your employment and other benefits will be governed by our personnel policies and procedures, which are set forth in our employee handbook. A copy is attached with this letter. This offer is contingent upon our receiving: 1. documentation of U.S. citizenship or authorized alien work status, 2. acceptable reference checks, 3. a signed copy of this letter indicating your acceptance of our offer; and 4. a signed employee invention agreement. If you accept this offer, your employment with the Company shall be "at-will." That means that your employment is not for any specified period of time and can be terminated by yourself or the Company for any or no particular reason or cause, and at any time, with or without advance notice. Furthermore, you can be promoted, demoted, have your title, duties, compensation or other terms or conditions of your employment changed with or without cause or notice at the will of the Company. We look forward to having you start on June 21, 1999. If you accept this offer, please return to me a signed copy of this letter. This offer will remain open until June 20, 1999. Any representations or agreements contrary to what is set forth above are superseded by this offer. If you have any questions about the contents of this letter or employment at Object Products, Inc., please feel free to contact me. Sincerely, /s/ Sheilah P. Yearwood - ------------------------------------ Sheilah P. Yearwood Human Resources Manager I accept the offer of employment with Object Products, Inc. pursuant to the terms and conditions set forth above. Dated: 6/17/99 /s/ Bill Matthews Bill Matthews ----------- --------------------- ------------- Signature Print name EX-10.9 10 EMPLOYMENT AGREEMENT W/M. JAN ROUGHAN EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of January 1, 1997, by and between OBJECT PRODUCTS, INC., a California corporation ("Employer"), and Jan Roughan, a California resident (hereinafter referred to as "Employee"). RECITALS WHEREAS, LINC, Inc. and Employee are each signatories to that certain Agreement and Plan of Merger dated January 1, 1997 (the "LINC Merger Agreement") providing for, among other things, the merger of LINC, Inc., a California corporation, with and into LINC Acquisition Corporation, Inc., a wholly-owned subsidiary of Employer ("LAC"), and delivery of this Agreement by the parties hereto; WHEREAS, Employer desires to employ Employee, and Employee desires to be employed by Employer, upon the terms and conditions set forth in this Employment Agreement; and WHEREAS, Employee acknowledges that she has had an opportunity to consult with independent legal counsel of his choosing with regard to the terms of this Agreement, and enters this agreement voluntarily and with a full understanding of its terms; NOW, THEREFORE, in consideration of the promises and the mutual covenants hereinafter set forth and as additional consideration for each party's execution and delivery of the Merger Agreement, Employer and Employee hereby agree as follows: 1. Employment and Term. Employer agrees to employ Employee for a period of thirty six (36) months commencing on January 1, 1997 and ending on December 31, 1999 unless terminated prior thereto in accordance with Section 5 hereof (the "Employment Period"); provided, however, that if the Merger Agreement is terminated for any reason, this Agreement shall be deemed to have been terminated as of the date of such termination of the Merger Agreement. Each full twelve (12) month period Employee is employed by Employer shall be referred to herein as an "Employment Year." 2. Description of Position and Effort Required. As President and Chief Executive Officer of LAC, Employee shall perform such duties and undertake such responsibilities as are reasonably assigned to her by the Employer's Board of Directors or its designated representative. Employee shall perform such duties as are consistent with his assigned position and devote his full time and attention, with undivided loyalty, to the business and affairs of Employer during the Employment Period; provided, that the foregoing does not prohibit the Employee from making investments or serving on the boards of directors of non- profit entities, provided that such service or activities do not unreasonably interfere with the performance of his duties with the Employer. Employee shall not engage in any other business or job activity during the Employment Period without Employees prior written consent. Employee shall in good faith perform those duties and functions as are required by his position and as are determined and assigned to her from time to time by the Board of Directors of Employer or by their duly appointed representative or officer. Employee shall be required to report to the Chief Executive 1. Officer of Employer and the Employer's Board of Directors. Employee shall not be required to relocate his present residence in order to perform his duties hereunder. Employer shall not relocate LAC to a distance which would either force Employee to relocate or require a commute of greater than twenty (20) miles from Employee's current place of residence, without Employee's written consent, for as long as Employee is directly involved with LAC. As President and Chief Executive Officer of LAC, Employee shall be entitled to full membership in the Presidents Council and shall in all cases be entitled to compensation, powers and privileges associated therewith which are at least equivalent to that received by any other member thereof. 3. Compensation. During the Employment Period, Employee shall receive compensation from Employer for his services hereunder determined as follows: (A) Base Salary. Employee during the Employment Period shall receive a base salary (hereafter referred to as the "Base Salary") in the amount of One Hundred Seventy Five Thousand Dollars ($ 175,000) per Employment Year, payable no less frequently than monthly in accordance with Employer's usual payroll practices. (B) Bonuses. Employee shall be entitled to the incentives outlined in Exhibit A. Employee incentives for Employment Year 1 shall be calculated from a base consisting of the Net Revenues realized from of the exploitation of the LINC software products during LINC's 1996 year. Employee incentives for Employment Years 2 and 3 shall be calculated from a base of seventy five per cent (75%) of the Net Revenues realized from the exploitation of the LINC software products (as such products are upgraded or evolve from time to time) of the prior Employment year. For the purposes of this incentive calculation and this agreement Net Revenues shall be defined a invoiced sales, less credits actually given, returns and uncollectable accounts written off as bad debts. Employee shall be included in all stock option programs made available to Employer's other executive employees in 1997. If LAC achieves annual service revenue of $500,000 or more in Year 1, Employee shall be entitled to a cash bonus of $20,000. 4. Benefits. During the Employment Period, Employer agrees to provide Employee with the following benefits: (A) Business Expense Reimbursement. Employee shall be authorized to incur reasonable business expenses in performing his duties under this Agreement, including, but not limited to, expenses for entertainment, long distance telephone calls, lodging, meals, ordinary auto, auto insurance, health club membership, air fare, transportation and travel. Employer will reimburse Employee for all such reasonable expenses upon presentation by Employee, from time to time, of an itemized account or other appropriate documentation of such expenses as may be required by Employer. (B) Vacation. Employee shall be entitled to accrue four (4) weeks of paid vacation during each Employment Year I and 2 and five weeks of paid vacation during Employment Year 3; provided, however, that Employer and Employee must mutually agree as to the time during any Employment Year when such vacation may be taken. Employee will be allowed to accrue a vacation bank per Employer policy when issued. Employer anticipates the 2 limit on this bank will be up to the amount Employee would accrue over a two (2) year employment period. (C) Additional Benefits. In addition to the foregoing, Employee will be entitled to receive family health benefits equivalent to what the Employee enjoyed previous to employment with Employer or, at Employee's option, equivalent to that provided to any officer of Employer, a long-term disability policy, a life insurance policy (equivalent to what the Employee enjoyed previous to employment with Employer or, at Employee's option, equivalent to that provided to any officer of Employer), a 401(k) plan and the benefits provided to the other employees of Employer under established non-discriminating employee benefit plans. Employee will receive the use of a company car or a monthly car allowance in the amount of four hundred fifty dollars ($450.00) paid at the beginning of each calendar month. 5. Termination. Either Employer or Employee may terminate Employee's employment by written notice given to the other party in accordance with the following provisions: (A) Termination by the Employer. The employment of Employee with Employer may be terminated by Employer for cause or justification immediately upon written notice to Employee, if any of the following events occur: (i) Employee's conviction of or plea of nolo contendere to any felony charges brought in any Court of competent jurisdiction; or (ii) following a determination by the Board of Directors of the Company made in good faith that Employee committed, engaged in or conspired to commit any crime involving fraud, misrepresentation or gross misconduct against Employer which resulted, or if successful, would have resulted in material harm to the Employer or substantial pecuniary gain to Employee; (iii) as a result of nonperformance caused by the Employee's material breach of this Agreement (including a good faith determination by the Board that Employee is not performing in accordance with Employee's job description); (iv) the Employee breaches a fiduciary duty owed to the Employer which could reasonably be expected to materially adversely affect the business, prospects or reputation of the Company or engages in acts of gross misconduct or personal dishonesty toward the Employer; or (v) due to death. Employer's total liability to Employee for termination (other than for statutory liabilities) shall be limited to payment of Employee's Base Salary and Benefits through the effective date of termination plus an additional 12 months of base salary and benefits, and Employee shall not be entitled to any further compensation or benefits provided under this Agreement, except as may be required by law. If the alleged cause for termination is based upon Section 5(A)(iii), in addition to Employee receiving notice, Employee shall either have been given a reasonable opportunity to take remedial action but failed or refused to do so or an opportunity to take remedial action would not have been reasonable or appropriate under the circumstances. If the alleged cause for termination is based upon Sections 5(A)(ii) or 5(A)(iv), in addition to Employee receiving notice, Employee shall be entitled to a full hearing before a quorum of the Board of Directors prior to any termination of his Employment; provided however, that if Employee is then a Director on the Board of Directors such Employee shall not be entitled to vote at any such hearing or with respect to any decision in connection with Employee's employment with Employer. 3 In the event Employee's employment with Employer is terminated by Employer for any other reason upon a majority vote of the Board of Directors or if Employee's employment is terminated upon a good faith determination of the Board that Employee had performed an act described in Sections 5(A)(ii) or 5A(A)(iii), and such determination is subsequently held by a court of competent jurisdiction to have been made in error, then Employer will pay the greater of Employee's Base Salary and Benefits through the term of this agreement or twelve (12) months of Base Salary and Benefits as calculated based on the Base Salary in the Employment Year in which the termination or expiration of the Employee's employment becomes effective, plus all benefits defined in Paragraph 4 above ----- through the tam of Employee's severance. Employer's total liability to Employee for such termination (other than statutory liability) shall be limited to payment of the aforesaid amounts; provided, Employee shall not be under any duty to mitigate damages in connection with the payment of the aforesaid amount. (B) Termination by Employee. If Employee's employment with Employer pursuant to this Agreement is terminated by Employee for any reason, Employee shall be entitled only to his Base Salary and Benefits, including accrued vacation, through the date of termination and shall not be entitled to any further compensation or benefits pursuant to this Agreement, except as may be required by law; provided, however, if Employee's employment with Employer pursuant to this Agreement is terminated by Employee following a material breach of this Agreement by Employer or constructive termination of Employee by Employer (consisting only of a failure to pay as specified in Section 3 hereof within 20 days of written notice by Employee that Employer is in breach of such payment provision), such termination shall be treated as a termination pursuant to the second paragraph of Section 5(A), and Employee shall be entitled to the compensation set forth in such Section. Employee agrees to give Employer at least ninety (90) days' prior written notice of his decision to terminate his employment with Employer. Employer shall have the right in its sole discretion to continue to employ Employee on a full or lesser than basis for ninety (90) days, or for a shorter period with pay in lieu of notice to Employee in the amount to which Employee would have been entitled to if employed for such ninety (90) day notice period. During such ninety (90) day period, Employer shall not be obligated to pay Employee if Employee accepts employment or becomes an independent contractor or consultant of any other person, entity or corporation. (C) Reimbursement of Expenses. In the event Employee is terminated pursuant to either (A) or (B), above, Employee shall be entitled to reimbursement for all standard and customary unreimbursed expenses incurred in connection with Employee's service to Employer prior to the effectiveness of the termination of Employee's employment. 6. Maintenance of Confidentiality and Duty of Loyalty. Employee acknowledges that, pursuant to his employment with Employer, she will necessarily have access to trade secrets and information that is confidential and proprietary to Employer in connection with the performance of his duties on behalf of Employer. In consideration for the disclosure to Employee of, and the grant to Employee of access to, such valuable and confidential information and in consideration of his employment, Employee shall comply in all respects with the provisions of this Section 6. 4 (A) Nondisclosure. During the Employment Period and thereafter, Confidential Information of Employer and/or Parent of which Employee gains knowledge before or during the Employment Period shall be used by Employee only for the benefit of Employer and/or Parent in connection with Employee's performance of his employment duties, and Employee shall not, and shall not allow any other person that gains access to such information in any manner or form, to disclose, communicate, divulge or otherwise make available, or use, any such information without the prior written consent of Employer. For purposes of this Agreement, the term "Confidential Information" means any information, materials or documents not generally known to the public and which is proprietary to Employer or Parent and relates to Employer's or Parent's existing or reasonably foreseeable business or technology including trade secrets, business plans, computer programs and/or code, advertising or public relations strategies, customer information and lists, and information pertaining to research, development, manufacturing, engineering, processing, product designs (whether or not patented or patentable), purchasing and licensing, and may be embodied in reports or other writings, in blue prints or in other tangible forms such as equipment, models and/or schematics, drawings or diagrams. Employee will refrain from any acts or omissions that would jeopardize or compromise the confidentiality or reduce the value of any Employer and/or Parent Confidential Information. Employee understands that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the Employment Period and thereafter, Employee will hold Third Parry Information in the strictest confidence and will not disclose (to anyone other than Company personnel who need to know such information in connection with their work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. Upon the termination of Employee's employment or upon the termination or expiration of this Agreement, Employee agrees to return and not to retain any originals, reproductions or copies of any materials or documents provided to Employee or Employer. (B) Covenant of Loyalty. During the Employment Period and for the twelve (12) month period thereafter, or in the event of earlier termination, for the twelve (12) month period following the date the termination of Employee's employment becomes effective, Employee shall not, on his own account or as an employee, agent, promoter, consultant, partner, officer, director, or shareholder of any other person, firm, entity, partnership or corporation, own, operate, lease, franchise, conduct, participate or engage in, be connected with, have any interest in, or assist any person or entity engaged in any business, corporation, division or other entity which derives a majority of its revenue from the sale, development or distribution of healthcare information software products designed or used for the healthcare industry or which are in direct competition with Employer or LAC, including products in planning by management and subject to or having received the approval of the Board of Directors of the Employer. Nothing contained herein shall prevent Employee from purchasing an interest in a mutual fund or other similar investment vehicle which may hold interests in such companies, or from purchasing publicly traded shares of stock in such companies, so long as Employee shall not own more than 10% of such company's issued and outstanding common stock. 5 Direct competition means the development, promotion, serving as a purchasing agent or being involved directly in the sale of products competitive with those of Employer or LAC. Without limiting the generality of the foregoing, Employee does hereby covenant not to, during the Employment Period: (i) solicit, accept or receive any compensation from any customer of Employer or LAC or any business competitive to that of Employer or LAC; or (ii) contact, solicit or call upon any customer or supplier of Employer or LAC on behalf of any person or entity other than Employer or LAC for the purpose of selling, providing or performing any services of the type normally provided or performed by Employer or LAC; or (iii) induce or attempt to induce any person or entity to curtail or cancel any business or contracts which such person or entity had with Employer or LAC; or (iv) induce or attempt to induce any person or entity to terminate, cancel or breach any contract which such person or entity has with Employer or LAC, or receive or accept any benefits from such termination, cancellation or breach. (C) No Solicitation. During the Employment Period and for the twelve month period thereafter, or in the event of earlier termination, for the twelve (12) month period following the date the termination of Employee's employment becomes effective, Employee agrees not to solicit, induce or attempt to solicit or induce any employee of Employer to terminate such employee's employment with Employer in order to become employed by any other person or entity, without the consent of a majority of Employer's Board of Directors. (D) Injunctive Relief. Employee expressly agrees that the covenants set forth in this Section 6 are reasonable and necessary to protect Employer and its legitimate business interests, and to prevent the unauthorized dissemination of Confidential Information to competitors of Employer. Employee also agrees that Employer will be irreparably harmed and that damages alone cannot adequately compensate Employer if there is a violation of this Section 6 by Employee, and that injunctive relief against Employee is essential for the protection of Employer. Therefore, in the event of any such breach, it is agreed that, in addition to any other remedies available, Employer shall be entitled as a matter of right to injunctive relief in any court of competent jurisdiction, plus attorneys' fees actually incurred for the securing of such relief. Furthermore, Employee agrees that Employer shall not be required to post a bond or other collateral security with the court if Employer seeks injunctive relief. To the extent any provision of this Section 6 is deemed unenforceable by virtue of its scope or limitation, Employee and Employer agree that the scope and limitation provisions shall nevertheless be enforceable to the fullest extent permissible under the laws and public policies applied in such jurisdiction where enforcement is sought. In the event of a material breach by Employer of its obligations to make payments under Sections 3 or 5 hereof (which is not cured within five (5) days of notice of such breach), Employee's obligations under this Section 6 shall terminate ten (10) days following 6 written notice (provided in accordance with Section 7 hereof) to Employer that Employer is in breach of its obligation to make payments under such sections; provided, however, that Employee's obligations under Section 6 shall not terminate as a result of Employer's failure to pay under Section 5 hereof where such failure to make payments follows a material breach of Employee's obligations set forth in this Section 6. (E) Recognition of Company's Rights. Employee agrees that any works prepared or developed by Employee during the term of Employee's employment with Employer are "works made for hire" and agrees to and hereby assigns, transfers and conveys to Employer any rights now or potentially owned or held in Proprietary Information. Employee acknowledges and agrees that all Proprietary Information is the sole property of Employer. The term "Proprietary Information" shall mean any and all trade secrets, confidential knowledge, data or other proprietary information of Employee (including proprietary information held or owned by Employee prior to Employee's employment with Employer provided such proprietary information has been or is currently used in connection with the business of the Employer or its predecessor). By way of illustration but not limitation, "Proprietary Information" includes (a) inventions, mask works, trade secrets, idea, processes, formulas, source and object codes, data, programs, other works of authorship, cell lines, know-how, improvements, discoveries, developments, designs and techniques; and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and information regarding the skills and compensation of employees. Employee agrees that all inventions which Employee makes, conceives, reduces to practice or develops (in whole or in part, either alone or jointly with others) during her employment shall be the sole property of Employer to the maximum extent permitted by Section 2870 of the California Labor Code (or other similar law of another state), a copy of which is attached and hereby assign such inventions and all rights therein to Employer. No assignment in this Agreement shall extend to inventions, the assignment of which is prohibited by Labor Code section 2870 (or other similar law of another state). The Company shall be the sole owner of all patents, copyrights and other intellectual property or other rights in connection therewith. (F) Compliance with Other Agreements. During the Employment Period and any period Employee is being paid severance pay by Employer, Employee shall comply with all terms and conditions of any employment, severance, separation or other similar agreement with any prior employer of Employee. Employee represents that her performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by her in confidence or in trust prior to Employee's employment by Employer. Employee has not entered into, and agrees to not enter into, any agreement either written or oral in conflict herewith or in conflict with Employee's employment with Employer. (G) Article 6 of the LINC Merger Agreement provides that, under certain circumstances, Employee may purchase certain assets which were owned by LINC, Inc. prior to the date of the LINC Merger Agreement, with the intention of conducting business in a manner substantially similar to the business currently conducted by LINC, Inc. In the event that Employee exercises her rights under that Article, she shall not be deemed in breach of this Section 6 to the extent that she conducts business in substantially the same markets and with substantially the same products and services (as such products and services are modified from 7 time to time during the course of this Agreement) as she conducted his (or LINC, Inc.'s) business prior to entering into this Agreement. 7. Notices. Any notice which either party may wish or be required to give to the other party pursuant to this Agreement shall be in writing and shall be either personally served, deposited with a nationally recognized overnight courier service or deposited in the United States mail, registered or certified and with proper postage prepaid, addressed as follows: To Employer. OBJECT PRODUCTS, INC. 330 Townsend, Suite 206 San Francisco, CA 94107 Attention: Jack D. Anderson To Employee: Jan Roughan c/o LAC 4224 North Lake Avenue Pasadena, CA 91101-1202 or to such other address as the parties may designate from time to time by written notice to the other party given in the above manner. Notice given by personal service shall be deemed effective upon service. Notice given by registered or certified mail shall be deemed effective three (3) days after deposit in the mail. 8. Miscellaneous. (A) Modifications. This Agreement supersedes all prior agreements and understandings between the parties relating to the employment of Employee by Employer, and it may not be changed, modified, amended or terminated orally. No modification, termination, or attempted waiver of any other provisions of this Agreement shall be valid unless in writing signed by the party against whom the same is sought to be enforced. (B) Enforceability and Severability. If any term of this agreement is deemed void, voidable, invalid or unenforceable for any reason, such term shall be deemed severable from all other terms of this Agreement, which shall continue in full force and effect. (C) Successors. This Agreement shall extend to and be binding upon Employee, his legal representatives, heirs and distributees, and upon Employer, its successors and assigns. (D) Assignment. This Agreement shall not be assigned by either party except in connection with (i) a merger of Employer with or into any other corporation or corporations, or (ii) a sale, transfer or lease of all or substantially all of the assets of this corporation. (E) Governing Law. This Agreement and all remedies hereunder or shall be construed and enforced in accordance with the laws of the State of California. 8 (F) Jurisdiction; Venue; Attorneys' Fees. In connection with any action for relief pursuant to Section 6(D), the parties do hereby agree and submit to personal jurisdiction in the State of California, County of San Francisco, for the purposes of any proceedings brought to enforce or construe the terms of this Agreement or to resolve any dispute or controversy arising under, as a result of, or in connection with this Agreement, and do hereby agree and stipulate that any such proceedings shall be venued and held in the Sate of California, County of San Francisco. The prevailing party in any such proceeding shall be entitled to recover from the losing party all costs that it has incurred as a result of such proceeding including but not limited to all travel costs and attorneys' fees. (G) Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. (H) Effective Date/Term. This Agreement shall be effective as of the date first above written. 9 In Witness Whereof, the parties have caused this Agreement to be executed effective as of the date first set forth above. OBJECT PRODUCTS, INC. By: /s/ William W. Shaw, III ------------------------------------ William W. Shaw, III Secretary EMPLOYEE: By: /s/ Jan Roughan ------------------------------------ Jan Roughan 10 EXHIBIT A To Employment Agreement Between Object Products, Inc. And Jan Roughan January 1, 1997 Incentive Schedule Based on the Incremental Sales of Existing Products Net Revenue Incremental % Applied Growth Against Over Net Sales Increase over Prior Year Prior Year Audited Sales -------------------------------- --------------------------- Sales Increase up to 20% 11.00% Sales Increase greater than 20% 16.00% Sales Increase greater tha 40% 20.00% Calendar 1997 Example: Net Percent Approximate Revenues Increase Incentive ----------- ---------- ---------- Assume 100% of '96 Net Audited Revenues = $ 100,000 - $ - Assume 1997 Net Audited Revenues = $ 100,500 5% $ 550 $ 110,000 10% $ 1,100 $ 115,000 15% $ 1,650 $ 120,000 20% $ 2,200 $ 125,000 25% $ 3,000 $ 130,000 30% $ 3,800 $ 135,000 35% $ 4,600 $ 140,000 40% $ 5,400 $ 145,000 45% $ 6,400 $ 150,000 50% $ 7,400 $ 155,000 55% $ 8,400 $ 160,000 60% $ 9,400 $ 165,000 65% $ 10,400 $ 170,000 70% $ 11,400 $ 175,000 75% $ 12,400 $ 180,000 80% $ 13,400 $ 185,000 85% $ 14,400 $ 190,000 90% $ 15,400 $ 195,000 95% $ 16,400 $ 200,000 100% $ 17,400 $ 205,000 105% $ 18,400 $ 210,000 110% $ 19,400 $ 215,000 115% $ 20,400 $ 220,000 120% $ 21,400 $ 225,000 125% $ 22,400 1
Calendar 1997 Example: Net Percent Approximate Revenues Increase Incentive ------------------- -------- ----------------- $ 230,000 130% $ 23,400 $ 235,000 135% $ 24,400 $ 240,000 140% $ 25,400 $ 245,000 145% $ 26,400 $ 250,000 150% $ 27,400 $ 255,000 155% $ 28,400 $ 260,000 160% $ 29,400 $ 265,000 165% $ 30,400 $ 270,000 170% $ 31,400 $ 275,000 175% $ 32,400 $ 280,000 180% $ 33,400 $ 285,000 185% $ 34,400 $ 290,000 190% $ 35,400 $ 295,000 195% $ 36,400 $ 300,000 200% $ 37,400 $ 305,000 205% $ 38,400 $ 310,000 210% $ 39,400 $ 315,000 215% $ 40,400 $ 320,000 220% $ 41,400 $ 325,000 225% $ 42,400 $ 330,000 230% $ 43,400 $ 335,000 235% $ 44,400 $ 340,000 240% $ 45,400 $ 345,000 245% $ 46,400 $ 350,000 250% $ 47,400 $ 355,000 255% $ 48,400 $ 360,000 260% $ 49,400 $ 365,000 265% $ 50,400 $ 370,000 270% $ 51,400 $ 375,000 275% $ 52,400 $ 380,000 280% $ 53,400 $ 385,000 285% $ 54,400 $ 390,000 290% $ 55,400 $ 395,000 295% $ 56,400 $ 400,000 300% $ 57,400 $ 405,000 305% $ 58,400 $ 410,000 310% $ 59,400 $ 415,000 315% $ 60,400 $ 420,000 320% $ 61,400 $ 425,000 325% $ 62,400 $ 430,000 330% $ 63,400 $ 435,000 335% $ 64,400 $ 440,000 340% $ 65,400 $ 445,000 345% $ 66,400 $ 450,000 350% $ 67,400 $ 455,000 355% $ 68,400 $ 460,000 360% $ 69,400 $ 465,000 365% $ 70,400 $ 470,000 370% $ 71,400
5
Calendar 1997 Example: Net Percent Approximate Revenues Increase Incentive ------------------- -------- ----------------- $ 475,000 375% $ 72,400 $ 480,000 380% $ 73,400 $ 485,000 385% $ 74,400 $ 490,000 390% $ 75,400 $ 495,000 395% $ 76,400 $ 500,000 400% $ 77,400
3 EXHIBIT A To Employment Agreement Between Object Products, Inc. And Jan Roughan January 1, 1997 Incentive Schedule Based on the Incremental Sales of Existing Products Net Revenue Incremental % Applied Growth Against Over Net Sales Increase over Prior Year Prior Year Audited Sales ----------------------------------- ------------------------ Sales Increase up to 20% 11.00% Sales Increase greater than 20% 16.00% Sales Increase greater than 40% 20.00%
Calendar 1998 Example: Net Percent Approximate Revenues Increase Incentive ------------------- -------- ----------------- Assume 75% of '97 Net Audited Revenues = $ 375,000 - $ - Assume 1998 Net Audited Revenues = $ 393,750 5% $ 2,063 $ 412,500 10% $ 4,125 $ 431,250 15% $ 6,187 $ 450,000 20% $ 8,250 $ 468,750 25% $ 11,250 $ 487,500 30% $ 14,250 $ 506,250 35% $ 17,250 $ 525,000 40% $ 20,250 $ 543,750 45% $ 24,000 $ 562,500 50% $ 27,750 $ 581,250 55% $ 31,500 $ 600,000 60% $ 35,250 $ 618,750 65% $ 39,000 $ 637,500 70% $ 42,750 $ 656,250 75% $ 46,500 $ 675,000 80% $ 50,250 $ 693,750 85% $ 54,000 $ 712,500 90% $ 57,750 $ 731,250 95% $ 61,500 $ 750,000 100% $ 65,250 $ 768,750 105% $ 69,000 $ 787,500 110% $ 72,750 $ 806,250 115% $ 76,500
1
Calendar 1998 Example: Net Percent Approximate Revenues Increase Incentive ------------------- -------- ----------------- $ 825,000 120% $ 80,250 $ 843,750 125% $ 84,000 $ 862,500 130% $ 87,750 $ 881,250 135% $ 91,500 $ 900,000 140% $ 95,250 $ 918,750 145% $ 99,000 $ 937,500 150% $ 102,750 $ 956,250 155% $ 106,500 $ 975,000 160% $ 110,250 $ 993,750 165% $ 114,000 $ 1,012,500 170% $ 117,750 $ 1,031,250 175% $ 121,500 $ 1,050,000 190% $ 125,250 $ 1,068,750 185% $ 129,000 $ 1,087,500 190% $ 132,750 $ 1,106,250 195% $ 136,500 $ 1,125,000 200% $ 140,250 $ 1,143,750 205% $ 144,000 $ 1,162,500 210% $ 147,750 $ 1,181,250 215% $ 151,500 $ 1,200,000 220% $ 155,250 $ 1,218,750 225% $ 159,000 $ 1,237,500 230% $ 162,750 $ 1,256,250 235% $ 166,500 $ 1,275,000 240% $ 170,250 $ 1,293,750 245% $ 174,000 $ 1,312,500 250% $ 177,750 $ 1,331,250 253% $ 181,500 $ 1,350,000 260% $ 185,250 $ 1,368,750 265% $ 189,000 $ 1,387,500 270% $ 192,750 $ 1,406,250 275% $ 196,500 $ 1,425,000 280% $ 200,250 $ 1,443,750 285% $ 204,000 $ 1,462,500 290% $ 207,750 $ 1,481,250 295% $ 211,500 $ 1,500,000 300% $ 215,250 $ 1,518,750 305% $ 219,000 $ 1,537,500 310% $ 222,750 $ 1,556,250 315% $ 226,500 $ 1,575,000 320% $ 230,250 $ 1,593,750 325% $ 234,000 $ 1,612,500 330% $ 237,750 $ 1,631,250 335% $ 241,500 $ 1,650,000 340% $ 245,250 $ 1,668,750 345% $ 249,000 $ 1,687,500 350% $ 252,750
2
Calendar 1998 Example: Net Percent Approximate Revenues Increase Incentive ------------------- -------- ----------------- $ 1,706,250 355% $ 256,500 $ 1,725,000 360% $ 260,250 $ 1,743,750 365% $ 264,000 $ 1,762,500 370% $ 267,750 $ 1,781,250 375% $ 271,500 $ 1,800,000 380% $ 275,250 $ 1,818,750 385% $ 279,000 $ 1,837,500 390% $ 282,750 $ 1,856,250 395% $ 286,500 $ 1,875,000 400% $ 290,250
3 EXHIBIT A To Employment Agreement Between Object Products, Inc. And Jan Roughan January 1, 1997 Incentive Schedule Based on the Incremental Sales of Existing Products Net Revenue Incremental % Applied Growth Against Over Net Sales Increase over Prior Year Prior Year Audited Sales ----------------------------------- ------------------------ Sales Increase up to 20% 11.00% Sales Increase greater than 20% 16.00% Sales Increase greater than 40% 20.00%
Calendar 1999 Example: Net Percent Approximate Revenues Increase Incentive ------------------- -------- ----------------- Assume 75% of '98 Net Audited Revenues = $ 750,000 - $ - Assume 1999 Net Audited Revenues = $ 787,550 5% $ 4,125 $ 825,000 10% $ 8,250 $ 862,500 15% $ 12,375 $ 900,000 20% $ 16,500 $ 937,500 25% $ 22,500 $ 975,000 30% $ 28,500 $ 1,012,500 35% $ 34,500 $ 1,050,000 40% $ 40,500 $ 1,087,500 45% $ 48,000 $ 1,125,000 50% $ 55,500 $ 1,162,500 55% $ 63,000 $ 1,200,000 60% $ 70,500 $ 1,237,500 65% $ 78,000 $ 1,275,000 70% $ 85,500 $ 1,312,500 75% $ 93,000 $ 1,350,000 80% $ 100,500 $ 1,387,500 85% $ 108,000 $ 1,425,000 90% $ 115,500 $ 1,462,500 95% $ 123,000 $ 1,500,000 100% $ 130,500 $ 1,537,500 105% $ 138,000 $ 1,575,000 110% $ 145,500 $ 1,612,500 115% $ 153,000
1.
Calendar 1999 Example: Net Percent Approximate Revenues Increase Incentive ------------------- -------- ----------------- $ 1,650,000 120% $ 160,500 $ 1,687,500 125% $ 168,000 $ 1,725,000 130% $ 175,500 $ 1,762,500 135% $ 183,000 $ 1,800,000 140% $ 190,500 $ 1,837,500 145% $ 198,000 $ 1,875,000 150% $ 205,500 $ 1,912,500 155% $ 213,000 $ 1,950,000 160% $ 220,500 $ 1,987,500 165% $ 228,000 $ 2,025,000 170% $ 235,500 $ 2,062,500 175% $ 243,000 $ 2,100,000 190% $ 250,500 $ 2,137,500 185% $ 258,000 $ 2,175,000 190% $ 265,500 $ 2,212,500 195% $ 273,000 $ 2,250,000 200% $ 280,500 $ 2,287,500 205% $ 288,000 $ 2,325,000 210% $ 295,500 $ 2,362,500 215% $ 303,000 $ 2,400,000 220% $ 310,500 $ 2,437,500 225% $ 318,000 $ 2,475,000 230% $ 325,500 $ 2,512,550 235% $ 333,000 $ 5,550,000 240% $ 340,500 $ 2,587,500 245% $ 348,000 $ 2,625,000 250% $ 355,500 $ 2,662,500 253% $ 363,000 $ 2,700,000 260% $ 370,500 $ 2,737,500 265% $ 378,000 $ 2,775,000 270% $ 385,500 $ 2,812,500 275% $ 393,000 $ 2,850,000 280% $ 400,500 $ 2,887,500 285% $ 408,000 $ 2,925,000 290% $ 415,500 $ 2,962,500 295% $ 423,000 $ 3,000,000 300% $ 430,500 $ 3,037,500 305% $ 438,000 $ 3,075,000 310% $ 445,500 $ 3,112,500 315% $ 453,000 $ 3,150,000 320% $ 460,500 $ 3,187,500 325% $ 468,000 $ 3,225,000 330% $ 475,500 $ 3,262,500 335% $ 483,000 $ 3,300,000 340% $ 490,500 $ 3,337,500 345% $ 498,000 $ 3,375,000 350% $ 505,500
2
Calendar 1999 Example: Net Percent Approximate Revenues Increase Incentive ------------------- -------- ----------------- $ 3,412,500 355% $ 513,000 $ 3,450,000 360% $ 520,500 $ 3,487,500 365% $ 528,000 $ 3,525,000 370% $ 535,500 $ 3,562,500 375% $ 543,000 $ 3,600,000 380% $ 550,500 $ 3,637,500 385% $ 558,000 $ 3,675,000 390% $ 565,500 $ 3,712,500 395% $ 573,000 $ 3,750,000 400% $ 580,500
3 EXHIBIT 10.9 EMPLOYMENT AGREEMENT BETWEEN OBJECT PRODUCTS, INC. AND JAN ROUGHAN JANUARY 1, 1997 TABLE OF CONTENTS
Page 1. Employment and Term................................................................................... 1 2. Description of Position and Effort Required........................................................... 1 3. Compensation.......................................................................................... 2 (A) Base Salary.................................................................................. 2 (B) Bonuses...................................................................................... 2 4. Benefits.............................................................................................. 2 (A) Business Expense Reimbursement............................................................... 2 (B) Vacation..................................................................................... 2 (C) Additional Benefits.......................................................................... 3 5. Termination........................................................................................... 3 (A) Termination by the Employer.................................................................. 3 (B) Termination by Employee...................................................................... 4 (C) Reimbursement of Expenses.................................................................... 4 6. Maintenance of Confidentiality and Duty of Loyalty.................................................... 4 (A) Nondisclosure................................................................................ 5 (B) Covenant of Loyalty.......................................................................... 5 (C) No Solicitation.............................................................................. 6 (D) Injunctive Relief............................................................................ 6 (E) Recognition of Company's Rights.............................................................. 7 (F) Compliance with Other Agreements............................................................. 7 7. Notices............................................................................................... 8 8. Miscellaneous......................................................................................... 8 (A) Modifications................................................................................ 8 (B) Enforceable and Severability................................................................. 8 (C) Successors................................................................................... 8 (D) Assignment................................................................................... 8 (E) Governing Law................................................................................ 8 (F) Jurisdiction; Venue; Attorneys' Fees......................................................... 9 (G) Counterparts................................................................................. 9 (H) Effective Date/Term.......................................................................... 9
An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. EX-10.10 11 EMPLOYMENT AGREEMENT Exhibit 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Employment Agreement"), dated as of January 1, 1996 (the "Effective Date"), is entered into by and between Object Products, Inc. (the "Company") and Michael J. Barry ("Executive"). In consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: WITNESSETH: ----------- WHEREAS, the Company desires to employ Executive as the Chief Information Officer of the Company, and Executive desires to be employed by the Company, upon the terms and conditions set forth in this Employment Agreement; NOW, THEREFORE, in consideration of the promises and the mutual covenants hereinafter set forth, the Company and Executive hereby agree as follows: 1. EMPLOYMENT. ---------- 1.1 Position. During the Employment Term (as hereinafter defined) and -------- subject to the terms and conditions set forth herein, the Company agrees to employ Executive as its Chief Information Officer, reporting directly to the Chief Executive Officer of the Company. 1.2 Duties. Executive shall diligently, and to the best of his ability, ------ perform all such duties incident to his position and as may be assigned from time to time and to use his best efforts to promote the interests of the Company. 1.3 Time to be Devoted to Employment. During the Employment Term, -------------------------------- Executive shall devote his full time and energy to the business of the Company and shall not be engaged in any competitive business activity without the express written consent of the Company. Executive hereby represents that he is not a party to any agreement, which would be an impediment to entering into this Employment Agreement, and that he is permitted to enter into this Employment Agreement and perform the obligations hereunder. 2. COMPENSATION AND BENEFITS. ------------------------- 2.1 Annual Salary. In consideration of and as compensation for the ------------- services agreed to be performed by Executive hereunder, the Company agrees to pay Executive an annual base salary of $120,000, payable in accordance with the Company's regular payroll schedule ("Base Salary"), less applicable withholdings and deductions. The Base Salary will be subject to change at the sole discretion of the Board of Directors of the Company (the "Board"). 2.2 Bonus. The Board or a duly appointed committee thereof will no less ----- than once annually determine if the award of a bonus is warranted and the amount of such bonus, if any; the Board or any duly appointed committee thereof shall have sole discretion to grant or not grant a bonus. Executive has been granted an option to acquire two hundred and fifty thousand 1. (250,000) shares of the Company's common stock pursuant to the Company's stock option plan and is eligible for future issuances at the discretion of the Board. 2.3 Participation in Benefit Plans. During the Employment Term, Executive ------------------------------ shall be entitled to participate in any pension, group insurance, medical hospitalization, annual physical, disability, or other similar benefit plan, to the extent permitted by law, that may from time to time be adopted by the Board, that is generally available to the other executive officers of the Company. The Company reserves the right to amend, modify or terminate any employee benefits at any time for any reason. The Company will cover 100% of the cost of such plans for the Executive and Executive's dependants. 2.4 Reimbursement of Expenses. The Company shall reimburse Executive for ------------------------- all reasonable business expenses incurred by Executive on behalf of the Company during the Employment Term, provided that: (i) such reasonable expenses are ordinary and necessary business expenses incurred on behalf of the Company, and (ii) Executive provides the Company with itemized accounts, receipts and other documentation for such reasonable expenses as are reasonably required by the Company. 2.5 Personal Time. During the Employment Term, Executive will be entitled ------------- to a maximum of twenty-five (25) days of paid personal time per annum, provided, however, that the Company and Executive must mutually agree as to the time during which such vacation may be taken. Paid personal time will be accrued and capped per Company policy. Executive's personal time accrual account will be credited with the full amount of personal time allowed per Company policy as of the signing of this Agreement. 3. EMPLOYMENT TERM. --------------- 3.1 At-Will Employment. Employment with the Company is employment at-will. ------------------ Employment at-will may be terminated with or without cause, and with or without notice at any time at the will of either the Executive or the Company. Terms and conditions of employment with the Company may be modified at the sole discretion of the Company with or without cause and with or without notice. Other than the Board of Directors of the Company, no one has the authority to make any agreement for employment other than for employment at-will or to make any agreement limiting the Company's discretion to modify the terms and conditions of employment. No implied contract concerning any employment related decision or term or condition of employment can be established by any other statement, conduct, policy or practice. 3.2 Employment Term. The "Employment Term" means the period commencing on --------------- the Effective Date and terminating as set forth in Section 4.1. 4. TERMINATION OF EMPLOYMENT. ------------------------- 4.1 Method of Termination. Executive has the right to terminate his --------------------- employment with the Company, for any reason, at any time, with or without cause, and the Company retains the same right. Accordingly such Employment Term will upon the first of the following to occur: 2 A. Executive's death; B. Date that written notice is deemed given or made by the Company to Executive that as a result of any physical or mental injury or disability, he is unable to perform the essential functions of his job, with reasonable accommodation. Such notice may be issued when the Board has reasonably determined that Executive has become unable to perform substantially his services and duties hereunder with reasonable accommodation because of any physical or mental injury or disability, and that it is reasonably likely that he will not be able to resume substantially performing his services and duties on substantially the terms and conditions as set forth in this Employment Agreement; C. Date that written notice is deemed given or made by the Company to Executive of termination for "cause." For purposes of this Employment Agreement, "cause" shall mean any one of the following: 1. Gross negligence or the repeated failure of Executive to perform his duties and responsibilities to the reasonable satisfaction of the Board or any breach by Executive of his fiduciary duties to the Company or any material term of this Employment Agreement. For purposes of this Employment Agreement, any act or acts or omission or omissions by Executive that have a material adverse effect on the Company's operations, prospects, reputation or business shall be deemed to be a breach of his duties and responsibilities to the Company; or 2. The conviction of Executive for a felony, other than a first conviction under Section 23152 of the California Vehicle Code (Driving under the Influence) in which punishment is provided solely under Section 23160 (Punishment for First Offense of Driving Under the Influence) or Section 23161 (Conditions of Probation for First Offense of Driving Under the Influence) of the California Vehicle Code; D. Date that written notice is deemed given or made by Executive of his resignation without Good Reason (as hereinafter defined), his voluntary departure, or his departure pursuant to Sections 4.1.A. or 4.1.B. of this Employment Agreement as an employee of the Company; E. Date that written notice is deemed given or made by Executive of his resignation from the Company for Good Reason. For purposes of this Employment Agreement, "Good Reason" shall mean Executive's resignation by reason of: 1. The material breach by the Company of one or more of its obligations under this Employment Agreement which are not otherwise corrected within the cure period provided under Section 4.2 following Executive's written notice to the Company of such breach; or 2. The occurrence of a Corporate Transaction; 3 a. For purposes of this Employment Agreement, a "Corporate Transaction" shall mean either of the following stockholder-approved transactions to which the Company is a party if at the time the Company is a privately held corporation: 1). A merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or 2). The sale, transfer or other disposition of all or substantially all of the Company's assets in complete liquidation or dissolution of the Company. b. For purposes of this Employment Agreement, a "Corporate Transaction" shall mean the occurrence of any one of the following events if the company is a publicly held corporation at the time: 1). Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the Company's stockholders in substantially the same proportions as their ownership of the Company's stock, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the total combined voting power of the Company's then outstanding securities; 2). The majority of the members of the Board ceases to be comprised of individuals who are Continuing Members; for such purpose, a "Continuing Member" shall mean an individual who is a member of the Board on the date of this Employment Agreement and any successor of a Continuing Member who is elected to the Board or nominated for such election by action of a majority of Continuing Members then serving on the Board; 3). A merger, consolidation or other transaction in which the Company shall cease to be an independent publicly-owned corporation, or a sale or other disposition of all or substantially all of the Company's assets; 4). Any reverse merger or similar transaction in which the Company is the surviving entity but in which securities possessing fifty percent (50%) or more of the voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such merger or similar transaction; 5). A liquidation or dissolution of the Company. 3. The occurrence of any of the following events without Executive's express written consent, unless corrected prior to the Date of Termination specified in the Notice of Termination given by Executive pursuant to Section 4.3: a change in Executive's position 4 with the Company which materially reduces Executive's level of responsibilities; a reduction in Executive's level of compensation (including base salary, fringe benefits and any non-discretionary and objective-standard incentive payment or bonus award). F. Date that written notice is deemed given or made by the Company to Executive of Executive's termination without "cause." 4.2 Notice of Termination. Any termination of Executive's employment --------------------- either by the Company or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7.1 hereof. In the case of resignation for Good Reason, the Notice of Termination must specify, in reasonable detail the basis for such resignation and give the Company at least twenty (20) business days in which to correct the circumstances prompting the resignation before such resignation for Good Reason shall be deemed effective for purposes of this Employment Agreement. 4.3 Date of Termination. "Date of Termination" shall mean the date ------------------- specified in the Notice of Termination. 4.4 Effect of Termination for Cause, Executive's Resignation Without Good --------------------------------------------------------------------- Reason or Other Events. Upon (i) the termination of Executive for cause; or - ---------------------- (ii) Executive's resignation without good reason or voluntary departure; Executive will not be entitled to any additional compensation or other rights or benefits from the Company, and, as a result, the Company shall be obligated to pay Executive only that portion of his Base Salary that Executive has earned and reasonable business expenses incurred prior to the effective date of the termination of Executive's employment with the Company. 4.5 Effect of Termination without Cause or Executive's Resignation for ------------------------------------------------------------------ Good Reason. In the event (i) the Company terminates Executive's employment - ----------- with the Company without cause; or (ii) Executive resigns for Good Reason; or (iii) Executive's termination is due to death or disability, Executive shall be entitled to his then existing Base Salary for a period of eighteen (18) months from the date of termination payable in accordance with the Company's regular payroll schedule and reasonable business expenses incurred prior to the date of termination. In addition, Executive shall be entitled to (i) his annual bonus, including the cash value of shares issued, prorated to his date of termination, and (ii) immediate and full vesting of all outstanding stock options granted through the termination date. To the extent that Executive and/or any of his dependents is eligible to, and timely elects to, receive continuation coverage under any group health plan providing medical, dental, vision, prescription drug, wellness or other health care or medical coverage which is subject to the provisions of part 6 of Title 1 of ERISA ("COBRA"), the Company shall timely reimburse Executive and/or any of his dependents to the extent permitted by law for any premiums required for such coverage for up to eighteen (18) months from the date of termination. This payment of premiums by the Company is not intended to alter in any way the provisions of any group health plan of the Company, and all time limits, effects of subsequent coverage and all other relevant provisions of any such plan remain unchanged and shall control Executive's (and his dependent's) entitlement to coverage or benefits under such plan. Should any or all of the payments made pursuant to this Employment Agreement be determined by the Company to be a parachute payment under Section 280G of the Internal Revenue Code, then such payments shall be limited to an amount that will not cause a 5 parachute excise tax. Upon the termination of Executive's employment without cause or Executive's Resignation for Good Reason, neither Executive nor his beneficiary or estate shall have any further rights or claims against the Company except as provided in this Section 4.5 and Executive's right to receive his unpaid portion of his Base Salary earned through the Date of Termination; reimbursement for any expenses; payment of all unused personal days accrued per company policy; and any rights pursuant to Company's benefit or retirement plans. 4.6 Resignation as an Officer and Director. In the event Executive's -------------------------------------- employment with the Company terminates for any reason, Executive agrees, as evidenced by his signature on this Agreement, to immediately resign as an officer and/or director of the Company unless otherwise requested by the Board. 5. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE. ---------------------------------------------------- 5.1 Proprietary Information and Inventions. Executive understands and -------------------------------------- agrees that he will execute and be bound by a Proprietary Information and Inventions Agreement in the form attached hereto as Exhibit 1. 5.2 Non-Competition. --------------- A. During the Employment Term, and during any period for which Executive is receiving payments from the Company pursuant to Section 4.5, Executive shall not directly or indirectly: 1. Own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed by or connected in any manner with, any enterprise which is engaged in any business competitive with that which the Company is at the time conducting or proposing to conduct; provided, however, that such restriction shall not apply to any passive investment representing an interest of less than two percent (2%) of an outstanding class of publicly traded securities of any corporation or other enterprise which is not, at the time of such investment, engaged in a business geographically competitive with the Company's business; or 2. During the Employment Term and for eighteen months following the Date of Termination, the Executive will not encourage or solicit any Company employee to leave the Company's employ for any reason or interfere in any material manner with employment relationships at the time existing between the Company and its current employees, except as may be required in any bona fide termination decision regarding any Company employee. In the event the Executive is determined by a court to have breech this covenant, the Executive will be responsible to return any payments made under the terms of paragraph 4.5 subsequent to the substantiated date of breech. 5.3 Acknowledgment. Executive acknowledges that the specialized nature of -------------- his knowledge of the Company's Proprietary Information, trade secrets and other intellectual property are such that a breach of his covenant not to compete or confidentiality obligations contained in this Section 5 of this Employment Agreement would necessarily and inevitably result in a disclosure, misappropriation and misuse of such Proprietary Information, trade secrets 6 and other intellectual property. Accordingly, Executive acknowledges and agrees that such a breach would inflict unique and irreparable harm upon the Company and that the Company shall be entitled, in addition to its other rights and available remedies, to enforce, by injunction or decree of specific performance, Executive's obligations set forth herein. 6. RESTRICTIVE COVENANT. -------------------- During the Employment Term: 6.1 Executive shall devote substantially all of his time and energy to the performance of Executive's duties described herein, except during periods of illness or vacation periods. 6.2 Executive shall not directly or indirectly provide services to or through any person, firm or other entity except the Company, unless otherwise authorized by the Company in writing. 6.3 Executive shall not render any services of any kind or character for Executive's own account or for any other person, firm or entity without first obtaining the Company's written consent. 6.4 Notwithstanding the foregoing, Executive shall have the right to perform such incidental services as are necessary in connection with (i) his private passive investments, but only if Executive is not obligated or required to (and shall not in fact) devote any managerial efforts which interfere with the services required to be performed by him hereunder, (ii) his charitable or community activities or (iii) participation in trade or professional organizations, but only if such incidental services do not significantly interfere with the performance of Executive's services hereunder. 7. MISCELLANEOUS. ------------- 7.1 Notices. All notices, demands and requests required by this Employment ------- Agreement shall be in writing and shall be deemed to have been given or made for all purposes (i) upon personal delivery, (ii) one day after being sent, when sent by professional overnight courier service, (iii) five days after posting when sent by registered or certified mail, or (iv) on the date of transmission when sent by telegraph, telegram, telex, or other form of "hard copy" transmission, to either party hereto at the address set forth below or at such other address as either party may designate by notice pursuant to this Section: If to the Company, to: Object Products, Inc. 330 Townsend, Suite 206 San Francisco, CA 94107 Attention: Jack D. Anderson 7 And a Copy to: Thomas A. Bevilacqua Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, CA 94303 If to Executive, to: Michael J. Barry 47 Lagoon Vista Tiburon, CA 94920 7.2 Assignment. This Employment Agreement shall be binding on, and shall ---------- inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that Executive may not assign, transfer or delegate his rights or obligations hereunder and any attempt to do so shall be void. 7.3 Deductions. All amounts paid to Executive hereunder are subject to all ---------- withholdings and deductions required by law, as authorized under this Employment Agreement, and as authorized from time to time. 7.4 Entire Agreement. This Employment Agreement contains the entire ---------------- agreement of the parties with respect to the subject matter hereof, and all prior agreements, written or oral, are merged herein and are of no further force or effect. 7.5 Amendment. This Employment Agreement may be modified or amended only --------- by a written agreement signed by a member of the Compensation Committee who is a member of the Board of Directors of the Company and Executive. 7.6 Waivers. No waiver of any term or provision of this Employment ------- Agreement will be valid unless such waiver is in writing signed by the party against whom enforcement of the waiver is sought. The waiver of any term or provision of this Employment Agreement shall not apply to any subsequent breach of this Employment Agreement. 7.7 Counterparts. This Employment Agreement may be executed in several ------------ counterparts, each of which shall be deemed an original, but together they shall constitute one and the same instrument. 7.8 Severability. The provisions of this Employment Agreement shall be ------------ deemed severable, and if any part of any provision is held illegal, void or invalid under applicable law, such provision may be changed to the extent reasonably necessary to make the provision, as so changed, legal, valid and binding. If any provision of this Employment Agreement is held illegal, void or invalid in its entirety, the remaining provisions of this Employment Agreement shall not in any way be affected or impaired but shall remain binding in accordance with their terms. 8 7.9 Governing Law. THIS EMPLOYMENT AGREEMENT AND THE RIGHTS AND ------------- OBLIGATIONS OF THE COMPANY AND EXECUTIVE HEREUNDER SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA AS APPLIED TO AGREEMENTS AMONG CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN CALIFORNIA. 7.10 Arbitration. The Executive understands and agrees that, as a ----------- condition of his employment with the Company, any and all disputes that the Company may have with Executive or Executive may have with the Company, or any of its employees, officers, directors, agents or assigns, which arise out of the Executive's employment with the Company shall be resolved through final and binding arbitration, as specified in this Employment Agreement. This shall include, without limitation, any controversy, claim or dispute of any kind, including disputes relating to any employment by the Company or the termination thereof, claims for breach of contract or breach of the covenant of good faith and fair dealing, infliction of emotional distress, defamation and any claims of discrimination, harassment or other claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans With Disabilities Act, the Employee Retirement Income Securities Act, or any other federal, state or local law or regulation now in existence or hereinafter enacted and as amended from time to time concerning in any way the subject of the Executive's employment with the Company or its termination. The only claims not covered by this Employment Agreement are claims for benefits under the unemployment insurance or workers' compensation laws, and any claims pursuant to paragraph 5 of this Employment Agreement, which will be resolved pursuant to those laws. Any disputes and/or claims covered by this Employment Agreement shall be submitted to final and binding arbitration to be conducted in Palo Alto, California, in accordance with the rules and regulations of the American Arbitration Association. Each side will bear its own attorneys' fees, and the arbitrator will not have authority to award attorneys' fees unless a statutory section at issue in the dispute authorizes the award of attorneys' fees to the prevailing party, in which case the arbitrator has authority to make such award as permitted by the statute in question. The arbitration shall be instead of any civil litigation; this means that the Executive is waiving any right to a jury trial, and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof. 9 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. OBJECT PRODUCTS, INC. By: /s/ Jack D. Anderson ---------------------------------------- Jack D. Anderson /s/ Gail E. Oldfather ---------------------------------------- Gail E. Oldfather Director & Compensation Committee Member EXECUTIVE /s/ Michael J. Barry ---------------------------------------- Michael J. Barry 10 EX-10.12 12 PROMISSORY NOTE - MICHAEL E. MEISEL EXHIBIT 10.12 PROMISSORY NOTE $ 105,187.80 Amount Date: April 1, 1999 San Francisco, California FOR VALUE RECEIVED, Object Products, Inc., a Delaware corporation ("Obligor"), hereby promises to pay to the order of Michael E. Meisel, a California resident ("Payee"), in lawful money of the United States, at the address of Payee set forth below, the principal sum of One Hundred Five Thousand One Hundred Eighty-Seven Dollars and 80/100 ($105,187.80). This Promissory Note (the "Note") shall be due and payable December 31, 1999 (the "Maturity Date") and shall be subject to an interest rate of ten percent (10%) per annum, compounded monthly. This Note may be prepaid at any time in whole or in part without premium or penalty. Interest may be paid at any time prior to maturity at the option of the Obligor. Obligor waives presentment, demand for performance, notice of nonperformance, protest, notice of protest, and notice of dishonor. No delay on the part of Payee in exercising any right hereunder shall operate as a waiver of such right under this Note. This Note is being delivered in and shall be construed in accordance with the laws of the State of California. If the indebtedness represented by this Note or any part thereof is collected at law or in equity or in bankruptcy, receivership or other judicial proceedings, or if this Note is placed in the hands of attorneys for collection after default, Obligor agrees to pay, in addition to the principal and interest payable hereon, reasonable attorneys' fees and costs incurred by Payee. This Note may be amended only with the written consent of the Obligor and the Payee. Any amendment effected in accordance with this paragraph shall be binding upon the Payee and the Obligor. Obligor and Payee agree that if any legal action is necessary to enforce or collect this Note or any other obligations for nonpayment at maturity, the prevailing party shall be entitled to reasonable attorney's fees in addition to costs and any other relief to which that party may be entitled. Any notice or other communication (except payment) required or permitted hereunder shall be in writing and shall be deemed to have been given upon delivery if personally delivered or upon deposit if deposited in the United States mail for mailing by certified mail, postage prepaid, and addressed as follows: If to Obligor: Object Products, Inc. Attention: William W. Shaw 330 Townsend Street, Suite 206 San Francisco, CA 94107-1630 If to Payee: Michael E. Meisel 1248 Dubonnet Court Agoura, CA 91301 Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressee notice in conformance with this paragraph of such new address. Any payment shall be deemed made upon receipt by Payee. IN WITNESS WHEREOF, the parties hereto have executed this Note as of the date first written above. Obligor: /s/ William w. Shaw, III -------------------------------- Object Products, Inc. William W. Shaw, III President Payee: /s/ Michael E. Meisel -------------------------------- Michael E. Meisel EX-10.15 13 LEASE AGREEMENT DATED JANUARY 5, 1999 Exhibit 10.15 BASIC LEASE INFORMATION 330 Townsend Street Lease Date: January 5, 1999 Landlord: 1301 Evans Street Associates, LLC. Tenant: Object Products, Inc. Address of Tenant: 330 Townsend Street, Suites 205 & 206 San Francisco, CA 94107 Contact for Tenant: Name: Skip Shaw Phone: 415 495-4741, ext. 103 Fax: 415 495-4748 Premises: 330 Townsend Street, Suites 205 & 206 The Building: 330 Townsend Street San Francisco, CA 94107 Rentable Square Feet: 2,840 Rent: $5,680.00 per month, $68,160 per year Lease Term: Twelve (12) months Commencement Date: February 1, 1999 Expiration Date: January 31, 2000 Use: General office purposes Tenant's Expense Share: 4.50% Security Deposit: Equal to one month's rent. Note: the existing deposit is $2,950.00, the difference will be $2,730.00. Landlord's Broker: CAC Real Estate Management Co., Inc. Tenant Broker: N/A TABLE OF CONTENTS ----------------- 1. PREMISES..................................................... 3 2. TERM......................................................... 3 3. DELIVERY OF POSSESSION....................................... 3 4. BASE RENT.................................................... 4 5. SECURITY DEPOSIT............................................. 4 6. TENANT'S SHARE OF INCREASED COSTS............................ 5 7. USE.......................................................... 6 8. COMPLIANCE WITH LAW.......................................... 7 9. ALTERATIONS.................................................. 8 10. REPAIRS...................................................... 8 11. ASSIGNMENT AND SUBLETTING.................................... 9 12. INDEMNIFICATIONS............................................. 11 13. SERVICES AND UTILITIES....................................... 12 14. RULES AND REGULATIONS........................................ 14 15. HOLDING OVER................................................. 14 16. ENTRY BY LANDLORD............................................ 14 17. DAMAGE AND DESTRUCTION....................................... 15 18. DEFAULT BY TENANT............................................ 15 19. LANDLORD'S REMEDIES ON DEFAULT BY TENANT..................... 16 20. EMINENT DOMAIN............................................... 16 21. ESTOPPEL CERTIFICATE......................................... 16 22. SALE......................................................... 17 23. BROKERS...................................................... 17 24. FUTURE CONSTRUCTION WORK..................................... 17 25. GENERAL PROVISIONS........................................... 17
OFFICE LEASE Basic Lease Information ----------------------- THIS LEASE is entered into by and between the landlord and tenant specified in the Basic Lease information (hereinafter "Landlord" and "Tenant" respectively), who hereby agree as follows: BASIC LEASE INFORMATION ----------------------- Date: January 5, 1999 Building: 330 Townsend Street, San Francisco, CA 94107 Landlord: 1301 Evans Street Associates, LLC. Landlord's Address For Notices: 1301 Evans Street Associates, LLC. c/o CAC REAL ESTATE MANAGEMENT CO., INC. 330 Townsend Street, Suite 107B San Francisco, CA 94107 Attention: Deidre Gee Telephone: (415) 541-9991 Facsimile: (415) 541-9992 Tenant: Object Products, Inc. Tenant's Address: 330 Townsend Street, Suites 205 & 206 San Francisco, CA 94107 Attention: Skip Shaw Phone: 415 495-4741, ext. 103 Fax: 415 495-4748 Tenant's Address Prior to Occupancy: 330 Townsend Street, Suites 205 & 206 San Francisco, CA 94107 Attention: Skip Shaw Phone: 415 495-4741, ext. 103 Fax: 415 495-4748 Section Page - ------- ---- 1.01 2 Premises: Rentable --------- Square Suites Footage ------ ------- 205 & 206 2,840 2.01 2 Term: Twelve (12) Months ---- 2.01 2 Scheduled Date for Tender of February 1, 1999 ---------------------------- Possession of the Premises: -------------------------- 2.01 2 Commencement Date: February 1, 1999 ----------------- 2.01 2 Expiration Date: January 31, 2000 --------------- 4.01 2 Base Rent: $5,680.00 --------- Five Thousand Six Hundred Eighty Dollars 4.03 3 Advance Base Rent: $5,680.00 ----------------- Five Thousand Six Hundred Eighty Dollars 5.01 3 Security Deposit: $2,730.00 Note: Tenant ---------------- has existing deposit of $2,950.00. The total amount is equal to $5,680.00. 6.01 3 Tenant's Expense Share: 4.50% ---------------------- 6.04 3 Tenant's Tax Share: 4.50% ------------------ 6.04 3 Base Year: 1999 --------- ATTACHMENTS: Exhibit A - Floor Plan Exhibit B - Rules and Regulations Each reference in this Lease to any of the Basic Lease Information shall mean the respective information hereinabove set forth and shall be construed to incorporate all of the terms provided under the particular Lease section pertaining to such information. In the event of any conflict between any Basic Lease Information and this Lease, the latter shall control. 1. PREMISES 1.1. Premises. Landlord leases to Tenant and Tenant leases from -------- Landlord those certain premises (the "Premises"), located in the building (the "Building") identified in the Basic Lease Information, and shown on the floor plan attached hereto as Exhibit "A" and incorporated herein by reference. The Premises contain the area specified in the Basic Lease Information, and Tenant accepts the area as specified in the Basic Lease Information as the area of the Premises and such area shall not be subject to recalculation. The exterior walls of the Building and any space in the Premises used for shafts, stacks, pipes, conduits, ducts, electric or other utilities, or other Building facilities, and the use thereof and access thereto through the Premises for the purposes of operation, maintenance and repairs, are reserved to Landlord. 1.2. Floor Plan. The purpose of Exhibit "A" is to show the approximate ---------- location of the Premises in the Building only, and such Exhibit is not meant to constitute an agreement as to the construction or rentable area of the Premises, or the specific location of elements of the Common Areas, or of the accessways to the Premises or the Building. Landlord reserves the right, at any time and from time to time, to construct other improvements in the Building and to enlarge, make alterations in or make additions to, the Building. The Building, the land upon which the Building stands and the land and improvements surrounding the Building and designated from time to time by Landlord as land or common areas appurtenant to the Building (the "Common Areas"), together with the utilities, facilities, drives, walkways and other amenities appurtenant to or servicing the Building, are herein sometimes collectively called the "Real Property." 2. TERM 2.1. Term. The term of this Lease (the "Term") shall commence on that ---- date (the "Commencement Date") which is the earlier to occur of the date of substantial completion of any Tenant Improvements to be constructed by Landlord in accordance with this Lease, or the date on which Tenant accepts possession of the Premises. Unless sooner terminated as hereinafter provided, the Term shall end on the "Expiration Date" specified in the Basic Lease Information. If Landlord does not tender possession of the Premises to Tenant in the condition required by this Lease on or before the Scheduled Date for Tender of Possession, for any reason whatsoever, Landlord shall not be rendered liable for any damage thereby and this Lease shall not be rendered void or voidable thereby, but Tenant shall not be liable for any rent until such time as Landlord tenders possession of the Premises to Tenant in the condition required by this Lease. No failure to tender possession of the Premises on or before the Scheduled Date for Tender of Possession shall: (a) in any way affect any other obligations of Tenant hereunder, or (b) extend the Term Expiration Date. Once the Commencement Date has been determined, Landlord shall forward a notice to Tenant stating the Commencement Date. 3. DELIVERY OF POSSESSION 3.1 Condition of Premises On Delivery. Landlord shall deliver --------------------------------- possession of the Premises to Tenant, and Tenant shall accept the same, in its "AS IS" condition. Tenant agrees that Landlord has no obligation and has made no promise to alter, remodel, improve, or repair the Premises or any part thereof or to repair, bring into compliance with applicable laws, or improve any condition existing in the Premises as of the Commencement Date. Tenant agrees that neither Landlord nor any of Landlord's employees or agents has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Tenant's business therein. Any improvements or personal property located in the Premises are delivered without any representation or warranty from Landlord, either express or implied, of any kind, including merchantability or suitability for a particular. 4. BASE RENT 4.1. Base Rent. Beginning on the Commencement Date, Tenant shall pay --------- to Landlord for the Premises the sum specified in the Basic Lease Information as "Base Rent." Base Rent shall be payable in equal monthly installments on or before the first day of the Term and on or before the first day of each and every successive calendar month thereafter during the Term. If the Term commences on a day other than the first day of a calendar month, then the monthly Base Rent for such fractional month shall be prorated on a daily basis based upon a thirty (30) day calendar month. Base Rent shall be paid to Landlord, without any prior demand and without any deduction or offset whatsoever, in lawful money of the United States of America at the address for Landlord specified in the Basic Lease Information, or to such other person or at such other place as Landlord may from time to time designate by notice to Tenant. 4.2. Additional Charges. Tenant shall pay to Landlord as additional ------------------ rent all fees, costs, expenses, charges, and other amounts required to be paid by Tenant under this Lease other than Base Rent ("Additional Charges"). Additional Charges shall be payable to Landlord at the place where the Base Rent is payable. Landlord shall have the same remedies for a default in the payment of Additional Charges as for a default in the payment of Base Rent. The terms "Base Rent" and "Additional Charges" are sometimes collectively referred to herein as "Rent." 4.3. Advance Base Rent. In addition, upon execution of this Lease, ----------------- Tenant shall pay to Landlord the sum specified in the Basic Lease Information as "Advance Base Rent." Advance Base Rent shall be applied to the first amounts of Base Rent due under this Article 4. 4.4. Late Charge. Tenant acknowledges that late payment by Tenant to ----------- Landlord of Rent or any other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Landlord by the terms of any note secured by any encumbrance covering the Premises. Therefore, if any installment of Rent or any other sum due from Tenant is not received by landlord when due, Tenant shall pay to Landlord on demand an additional sum equal to ten percent (10%) of the overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of such late payment by Tenant. 4.5. Specified Interest Rate. All delinquent rent and/or other sums ----------------------- due Landlord under the terms of this Lease shall bear interest from the date due until paid, at eighteen percent (18%) per annum, not to exceed, however, the maximum rate permitted by law (the "Specified Rate"). 5. SECURITY DEPOSIT 5.1. Security Deposit. Concurrently with the execution and delivery of ---------------- this Lease by Tenant, Tenant shall deposit with Landlord the sum specified in the Basic Lease Information as the "Security Deposit." The Security Deposit shall be held by Landlord as security for the performance by Tenant of all of the covenants of this Lease to be performed by Tenant, including, without limitation, defaults by Tenant in the payment of rent, the repair of damage to the Premises caused by Tenant, and the cleaning of the Premises upon termination of the tenancy created hereby, and to reimburse Landlord for the unamortized cost (over the Term) of any improvements constructed, and expenses incurred, by Landlord in connection with entering into this Lease. If Tenant defaults with respect to any provision of this Lease, including, without limitation, provisions relating to the payment of Rent, Landlord may, but shall not be required to, use, apply or retain all or any part of the Security Deposit for the payment of any Rent or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used, applied or retained, Tenant shall within five (5) days after demand from Landlord, deposit funds with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds, no trust relationship shall be created with respect to the Security Deposit and Tenant shall not be entitled to interest on the Security Deposit. If Tenant fully and faithfully performs every provision of this Lease, the remaining balance of the Security Deposit, if any, shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days after the Expiration Date. In the event of termination of Landlord's interest in this Lease, Landlord may transfer the Security Deposit to Landlord's successor in interest and, upon such transfer, Landlord shall be relieved of any and all liability for or obligation with respect to the Security Deposit. Tenant shall look solely to such successor in interest of Landlord for return of the remaining balance, if any, of the Security Deposit. 6. TENANT'S SHARE OF INCREASED COSTS 6.1. General. During the Term, Tenant shall pay to Landlord as ------- Additional Charges (i) Tenant's Expense Share (as defined below) of the total dollar increase, if any, in Expenses (as defined below) attributable to each Computation Year (as defined below) over Base Expenses (as defined below), and (ii) Tenant's Tax Share (as defined below) of the total dollar increase, if any, in Taxes (as defined below) attributable to each Computation Year over Base Taxes (as defined below). 6.2. Estimated Payments. During the last month of each Computation ------------------ Year or as soon thereafter as practicable, Landlord shall give to Tenant notice of Landlord's estimate of the amounts payable by Tenant under Section 6.1 for the following Computation Year. On or before the first day of each month during the following Computation Year, Tenant shall pay to Landlord one-twelfth (1/12th) of such estimated amounts, provided that if Landlord fails to give such notice in the last month of the prior Commencement Year, then Tenant shall continue to pay on the basis of the prior year's estimate until the first day of the calendar month next succeeding the date such notice is given by Landlord. If at any time or times Landlord determines that the amounts payable under Section 6.1 for the current Computation Year will vary from its estimate given to Tenant, Landlord, by notice to Tenant, may revise its estimate for such Computation Year, and subsequent payments by Tenant for such Computation Year shall be based upon such revised estimate. 6.3. Annual Reconciliation. Following the end of each Computation --------------------- Year, Landlord shall deliver to Tenant a statement of amounts payable under Section 6.1 for such Computation Year (the "Annual Statement"). If the Annual Statement shows an amount owing by Tenant that is less than the payments for such Computation Year previously made by Tenant, and if no Event of Default (as define din Section 18.1) is outstanding at the time the Annual Statement is delivered, Landlord shall credit such amount to the next payments of Base Rent falling due under this Lease. If the Annual Statement shows an amount owing by Tenant that is more than the estimated payments for such Computation Year previously made by Tenant, Tenant shall pay the deficiency to Landlord within thirty (30) days after delivery of the Annual Statement. The respective obligations of Landlord and Tenant under this Section 6.3 shall survive the Expiration Date, and, if the Expiration Date is a day other than the last day of a Computation Year, the increase in Base Rent pursuant to Section 6.1 for the Computation Year preceding the Expiration Date bears to 360. Following the expiration or termination of this Lease, Landlord may deliver to Tenant an estimate of the final statement for such partial calendar year. If Tenant's Expense Share and/or Tenant's Tax Share for such partial calendar year as shown on such estimated statement is greater than the total amount of Expenses and Taxes actually paid by tenant during such partial calendar year, Landlord shall have the right to deduct the amount of the deficiency from any Deposit held by Landlord. If there is no Deposit, or if all of such Deposit has previously been applied by Landlord, Tenant shall, within fifteen (15) days after receipt of such estimated final statement, pay to landlord the amount of the deficiency. If Tenant's share of any Expenses and/or taxes as shown on the final statement is greater or less than the total amount of Expenses and Taxes actually paid by Tenant during the year covered by the final statement, then within fifteen (15) days after receipt of the statement, the appropriate party shall pay to the other party any sums owed. 6.4. Definitions. As used in this Lease, the following terms shall ----------- have the meanings specified below: (a) "Base Expenses" shall mean the amount of Expenses for the Base Year. (b) "Base Taxes" shall mean the amount of Taxes for the Base Year. (c) "Base Year" shall mean the calendar year specified in the Basic Lease Information. (d) "Computation Year" shall mean each twelve (12) consecutive month period commencing January 1st of each year during the Term following the Base Year. (e) "Expenses" shall mean all costs and expenses paid or incurred by Landlord in connection with the ownership, management, operation, maintenance and repair of the Building, including, without limitation, the costs and expenses identified in Exhibit "B" hereto. (f) "Taxes" (and "Tax" individually) shall have the meaning given the term in Exhibit "B' hereto. (g) "Tenant's Expense Share" shall mean the percentage figure so specified in the Basic Lease Information. This percentage figure has been obtained by dividing the rentable area of the Premises by the total rentable area of the office space in the Building. (h) "Tenant's Tax Share" shall mean the percentage figure so specified in the basic Lease Information. This percentage figure has been obtained by dividing the rentable area of the Premises by the total rentable area of the Building. 6.5. Additional Taxes. In addition to Tenant's Tax Share Tenant shall ---------------- reimburse Landlord upon demand for any and all taxes, surcharges, levies, assessments, fees and charges payable by Landlord, whether now customary or within the contemplation of the parties hereto: (a) upon, measured by or reasonably attributable to the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or the cost or value of any leasehold improvements, regardless of whether title to such improvements shall be in Tenant's or Landlord's name; (b) upon, or measured by, any rent or other amounts payable hereunder, including, without limitation, any gross income tax, gross receipts tax or excise tax levied by the City and County of San Francisco, the State of California, the federal government of the United States or any other governmental body with respect to the receipt of such rent or other amounts; (c) upon, or with respect to, the possession, leasing, operation, management, alteration, repair, restoration, use or occupancy by Tenant of the Premises or any portion thereof; or (d) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. 7. USE 7.1. Use. --- (a) The Premises shall be used for general office purposes only, except as limited by Section 7.1(b), and, subject to the terms of this Lease, uses incidental thereto, and shall be used for no other purpose without the prior written consent of Landlord. The use of an existing kitchen facility located in the Premises, subject to the terms of this Lease, is deemed an incidental use. (b) Tenant may not use any part or all of the Premises for any retail operations; a medical or dental office; an office providing any type of psychological, parole, drug or employment counseling; telemarketing operations; consulate, foreign mission or trade office; government or regulatory agency office; educational institution with classrooms, or similar uses. Solicitations or promotions by Tenant to other tenants in the Building are prohibited. 7.2. Prohibitions. Tenant shall take no action, nor permit any action ------------ to be taken, in or about the Premises that will in any way injure, annoy, obstruct or interfere with the rights of other tenants or occupants of the Building. Tenant shall neither commit nor suffer to be committed any waste in, on or upon the Premises. 7.3. Common Areas. Tenant shall have a non-exclusive right to use the ------------ Common Areas, provided, however, that Tenant's use of the Common Areas shall be subject to such rules and regulations as Landlord shall make from time to time. 7.4. Hazardous Substances. Tenant shall not keep, use or permit to be -------------------- kept or used on the Premises any flammable fluids, toxic or hazardous materials (other than reasonable amounts of such materials necessary for the operation of Tenant's business in the Premises) or explosives without the prior written consent of Landlord. The covenants contained herein shall survive the expiration or earlier termination of the Lease. 7.5. Services. All services to be provided to the Premises including, -------- without limitation, moving, messenger and catering services shall be subject to Landlord's approval, which approval may be withheld in Landlord's sole discretion. Landlord shall have the right at any time to exclude any or all messenger services from the Building. 8. COMPLIANCE WITH LAW 8.1. Compliance. Tenant shall not use the Premises or permit anything ---------- to be done in or about the Premises which will in any way conflict (a) with any law, statute, ordinance or governmental rule or regulation now in force or hereafter enacted or promulgated, or (b) with any provision of any declaration of covenants, conditions and restrictions, or other rules that now or hereafter affect the Premises, the Building, or any portion of either (collectively, "CC&R's"). Tenant shall, at its sole expense, promptly comply with (i) all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in force (including, without limitation, the Americans With Disabilities Act), and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to or affecting the condition, use or occupancy of the Premises, and (ii) with all CC&R's. 9. ALTERATIONS 9.1. General. Tenant shall neither make nor cause to be made any ------- alterations, additions or improvements (collectively, "Alterations") in, on or to any portion of the Building or the Common Areas outside the interior of the Premises. Tenant shall neither make nor permit to be made any Alterations to or of all or any part of the Premises, or attach any fixtures or equipment to the Premises, without Landlord's prior approval. If Tenant desires that any Alterations be made, Tenant shall provide Landlord with all information required so as to permit Landlord's architect to produce reasonably detailed plans and specifications for the proposed Alterations. All costs of preparing and modifying the plans shall be reimbursed by Tenant upon demand. 9.2. Construction. If Landlord approves the plans and specifications, ------------ the Alterations shall be constructed in strict accordance with such plans and specifications by Landlord, or at Landlord's option, by a contractor selected by Tenant and approved by Landlord. In either event, all Alterations shall be made at Tenant's sole expense, and Tenant shall reimburse Landlord for all expenses incurred by Landlord with respect to such Alterations, including, without limitation, a reasonable charge for Landlord's overhead, if such Alterations are made by Landlord, or a reasonable charge for Landlord's cost of inspecting the Alterations prior to or upon their completion, if such Alterations are made by Tenant's contractor. Tenant shall reimburse Landlord for all such expenses within ten (10) days after receipt of any invoice from Landlord. If the Alterations which Tenant causes to be constructed result in Landlord being required to make any alterations and/or improvements to other portions of the Building including structural members in order to comply with any applicable statutes, laws, ordinances, regulations, rules, orders or requirements (e.g., ordinances intended to provide full access to handicapped persons), then Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in making such alterations and/or improvements. Any Alterations made by Tenant shall remain on and be surrendered with the Premises upon the expiration or sooner termination of the Term, except Tenant shall, upon demand by Landlord, at Tenant's sole cost and expense, forthwith and with all due diligence remove all or any portion of any alterations made by Tenant which are designated by Landlord to be removed, and Tenant shall forthwith and with all due diligence, and at its sole cost and expense, repair and restore the Premises to their original condition, reasonable wear and tear excepted. 9.3. Labor Relations. No construction, alteration, addition, --------------- improvement or decoration of the Premises by Tenant shall interfere with the harmonious labor relations in existence in the Building, and should such interference occur all such work shall be halted immediately until such time as construction can proceed without any such interference. 9.4. Indemnity. Tenant shall indemnify Landlord against any and all --------- loss, cost, damage, injury and expense arising out of or in any way related to claims for work or labor performed, or materials or supplies furnished, in or at the request of Tenant or in connection with performance of any work done for the account of Tenant in the Premises, the Common Areas or the Building, whether or not Tenant obtained Landlord's permission to have such works done, labor performed, or materials or supplies furnished. 10. REPAIRS 10.1. Tenant's Obligations. Tenant shall, at all times during the -------------------- Term, and at Tenant's sole expense, keep all of the Premises in good condition and repair, except for ordinary wear and tear or damage by fire, earthquake, act of God or the elements. Tenant waives all rights to make repairs at the expense of Landlord or in lieu of such repairs to vacate the Premises as provided by California Civil Code Sections 1941 and 1942 or any other law, statute or ordinance now or hereafter in effect. Tenant shall at the end of the Term surrender the Premises to landlord in the same condition as when received, except for ordinary wear and tear, damage by fire, earthquake, act of God or the elements, and Alterations approved by Landlord. 10.2. Landlord's Obligations. Landlord shall not be liable for any failure ---------------------- to make any such repairs or to perform any such maintenance unless Landlord receives notice of the need for such repairs or maintenance from Tenant and fails to make such repairs or perform such maintenance within a reasonable period of time following such notice by Tenant. Rent shall not abate nor shall Landlord be liable as a result of any injury to or interference with Tenant's business arising from the making of any repairs, or the performance of any maintenance, in or to any portion of the Building or the Premises. 10.3. Liens. Tenant shall keep the Premises and the building free from any ----- liens arising out of any act or omission of Tenant, including, without limitation, any work performed, materials furnished or obligations incurred by Tenant. Landlord shall have the right to post and keep posted on the Premises any notices that may be provided by law or that the Landlord may deem to be proper for the protection of Landlord, the Premises and the Building, from such liens. Tenant shall give to Landlord at least fifteen (15) days prior notice of the date of commencement of any Alterations on the Premises in order to permit the posting of such notices by Landlord. 11. ASSIGNMENT AND SUBLETTING 11.1. General Rule Regarding Tenant Transfer Transactions. --------------------------------------------------- (a) Tenant will not assign, mortgage or hypothecate this Lease, or any interest therein, or permit the use of the Premises by any person or persons other than the Tenant, or sublet the Premises, or any part thereof, without the prior written consent of Landlord. Consent to any such assignment or sublease shall not operate as a waiver of the necessity for a consent to any subsequent assignment or sublease, and the terms of such consent shall be binding upon any person holding by, under or through Tenant. Notwithstanding anything in this Lease to the contrary, Tenant shall be permitted to assign this Lease or sublet all or a portion of the Premises to any entity (each a "Tenant Affiliate") that is controlled by Tenant without requiring the consent of Landlord, provided Tenant shall give written notice of such transfer to Landlord prior to its effective date and shall comply with the other terms of this Article 11. Any assignment or subletting by said Tenant Affiliate shall be subject to the terms of this Article 11. (b) If Tenant desires to assign its interest in this Lease or to sublease all or any part of the Premises, Tenant shall notify Landlord in writing at least thirty (30) days in advance of the proposed transaction. This notice shall be accompanied by: (i) a statement setting forth the name and business of the proposed assignee or subtenant; (ii) a copy of the proposed form of assignment or sublease (and any collateral agreements) setting forth all of the material terms and the financial details of the sublease or assignment (including, without limitation, the term, the rent and any security deposit, "key money," and amounts payable for Tenant's Property and the common use of any personnel or equipment); (iii) financial statements and other information requested by Landlord relating to the proposed assignee or subtenant; and (iv) any other information concerning the proposed assignment or sublease which Landlord may reasonably request. If Tenant proposes to assign this Lease or sublet all or substantially all of the Premises, Landlord shall have the right, in its sole and absolute discretion, to terminate this Lease on written notice to Tenant within thirty (30) days after receipt of Tenant's notice and the information described above or the receipt of any additional information requested by Landlord. If Landlord elects to terminate this Lease, this Lease shall terminate as of the effective date of the proposed assignment or commencement of the term of the proposed sublease as set forth in Tenant's notice, and Landlord shall have the right (but no obligation) to enter into a direct lease with the proposed assignee or subtenant. Tenant may withdraw its request for Landlord's consent at any time prior to, but not after, Landlord delivers a written notice of termination. (c) If Landlord elects not to terminate this Lease pursuant to Section 11.1(b) above, or if a proposed sublease is for less than substantially all of the Premises, Landlord shall not unreasonably withhold its consent to an assignment or subletting. (For purposes of this Article 11, an assignment shall not include an assignment for security purposes, which shall only be permitted with the prior consent of Landlord in its sole and absolute discretion). Tenant agrees that the withholding of Landlord's consent shall be deemed reasonable if all of the following conditions are not satisfied : (i) The proposed assignee or subtenant shall use the Premises only for the permitted use, and the business of the proposed assignee or subtenant is consistent with the other uses and the standards of the Building, in Landlord's reasonable judgment. (ii) The proposed assignee or subtenant is reputable and has a net worth not less than the net worth of Tenant on the execution of this Lease, has a credit rating reasonably acceptable to Landlord, and otherwise has sufficient financial capabilities to perform all of its obligations under this Lease or the proposed sublease, in Landlord's reasonable judgment. (iii) Neither the proposed assignee or subtenant nor any person or entity that directly or indirectly controls, is controlled by, or is under common control with, the proposed assignee or subtenant is a party (including, without limitation, an existing occupant of any part of the Building) to whom Landlord has, during the six (6) month period prior to the delivery of Tenant's written notice, marketed space in the Building that would generally fit such party's leasing requirements. (iv) Tenant is not in default and has not committed acts or omissions which with the running of time or the giving of notice or both would constitute a default under this Lease. (v) All of the other terms of this Article 11 are complied with. The conditions described above are not exclusive and shall not limit or prevent Landlord from considering additional factors in determining if it should reasonably withhold its consent. (d) Each permitted assignee, transferee or subtenant, other than Landlord, shall assume and be deemed to have assumed this Lease and shall be and remain liable jointly and severally with Tenant for the payment of the rent and for the due performance or satisfaction of all of the provision, covenants, conditions and agreements herein contained on Tenant's part to be performed or satisfied. Regardless of Landlord's consent, no subletting or assignment shall release or alter Tenant's obligation or primary liability to pay the rent and perform all other obligations under this Lease. No permitted assignment or sublease shall be binding on Landlord unless such assignee, subtenant or Tenant shall deliver to Landlord a counterpart of such assignment or sublease which contains a covenant of assumption by the assignee or subtenant, but the failure or refusal of the assignee or subtenant to execute such instrument of assumption shall not release or discharge the assignee or subtenant from its liability as set forth above. (e) If Tenant is a partnership, a transfer of the interest of any general partner, a withdrawal of one or more general partner(s) from the partnership, or the dissolution of the partnership, shall be deemed to be an assignment of this Lease. If Tenant is currently a partnership (either general or limited), joint venture, co-tenancy, joint tenancy or an individual, the conversion of the Tenant entity or person into any type of entity which possesses the characteristics of limited liability such as, by way of example only, a corporation, a limited liability company, limited liability partnership, or limited liability limited partnership, shall be deemed an assignment for purposes of this Lease. If Tenant is a corporation or limited liability company, unless Tenant is a public corporation, that is to say, a corporation whose stock is regularly traded on a national stock exchange, or is regularly traded in the over-the-counter market and quoted on NASDAQ, any merger, consolidation, or other reorganization of Tenant, or the sale or other transfer of any of the voting stock or membership interests of Tenant in one or more transactions that in the aggregate results in a transfer of forty-five percent (45%) or more of the voting equity or membership interest(s) in Tenant, or the sale or other transfer of substantially all of the assets of Tenant, shall be deemed to be an assignment of this Lease. (f) Any notice by Tenant to Landlord pursuant to this Article 11 of a proposed assignment or sublease shall be accompanied by a payment of $750 as a non-refundable fee for the processing of Tenant's request for Landlord's consent. In addition to said fee, Tenant shall reimburse Landlord for reasonable attorneys' fees incurred by Landlord in connection with such review and the preparation of documents in connection therewith. Tenant shall pay to Landlord monthly on or before the first (1st) of each month one-half (1/2) of the rent or other consideration received from such assignee(s) or subtenant(s) over and above the concurrent underlying rent payable by Tenant to Landlord for that portion of the Premises being assigned or sublet, and after deduction for the amortized portion of the reasonable expenses actually paid by Tenant to unrelated third parties for brokerage commissions, legal fees, tenant improvements to the Premises, or design fees incurred as a direct consequence of the assignment or sublease. Tenant shall furnish Landlord with a true signed copy of such assignment(s) or sublease(s) and any supplementary agreements or amendments thereto, within five (5) days after their respective execution.. 12. INDEMNIFICATION/INSURANCE 12.1. Waiver of Liability. Landlord shall not be liable to Tenant, and ------------------- Tenant hereby waives all claims against Landlord, for any damage to or loss or theft of any property or for any bodily or personal injury, illness or death of any person in, on or about the Premises or the Building arising at any time and from any cause whatsoever, except to the extent caused by the gross negligence or willful misconduct of Landlord. In no event shall Landlord be liable for any consequential or punitive damages (including, but not limited to, damage or injury to persons, property and the conduct of Tenant's business and any loss of revenue therefrom). 12.2. Indemnity. Tenant shall indemnify and defend Landlord against and --------- hold Landlord harmless from all claims, demands, liabilities, damages, losses, costs and expenses, including reasonable attorneys' fees and disbursements, arising from or related to any use or occupancy of the Premises, or any condition of the Premises, or any default in the performance of Tenant's obligations, or any damage to any property (including property of employees and invitees of Tenant) or any bodily or personal injury, illness or death of any person (including employees and invitees of Tenant) occurring in, on or about the Premises or any part thereof arising at any time and from any cause whatsoever (except to the extent caused by the gross negligence or willful misconduct of Landlord) or occurring in, on or about any part of the Building other than the Premises when such damage, bodily or personal injury, illness or death is caused by any act or omission of Tenant or its agents, officers, employees, contractors, invitees or licensees. This Section 12.2 shall survive the termination of this Lease with respect to any damage, bodily or personal injury, illness or death occurring prior to such termination. 12.3. Subrogation. The parties release each other, and their respective ----------- authorized representatives, from any claims for injury to any person or damage to the Premises, fixtures, personal property, Tenant's improvements and alterations of either Landlord or Tenant in or on the Premises or the building that are caused by or result from risks insured against under any insurance policies carried or required to be carried by the parties. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by such policy. 12.4. Insurance. Tenant shall, at all times during the Term of this Lease --------- and at Tenant's sole cost and expense, obtain and keep in force workers' compensation insurance as required by law, including an employers' liability endorsement; business interruption insurance in an amount equal to all rent payable under this Lease for a period of twelve (12) months (at the then current rent charged); and commercial general liability insurance, including contractual liability (specifically covering this Lease), fire legal liability, and premises operations, with a minimum combined single limit of Two Million Dollars ($2,000,000) per occurrence for bodily or personal injury to, illness of, or death of persons and damage to property occurring in, on or about the Premises or the Building. Tenant shall, at Tenant's sole cost and expense, be responsible for insuring Tenant's furniture, equipment, fixtures, computers, office machines and personal property ("Tenant's Property"). 12.5. Policy Requirements. Each policy shall expressly provide that the ------------------- policy shall not be canceled or altered without thirty (30) days' prior written notice to Landlord and shall remain in effect notwithstanding any such cancellation or alteration until such notice shall have been given to Landlord and such period of thirty (30) days shall have expired. All liability insurance shall name Landlord and any other parties designated by Landlord as an additional insured, shall be primary and noncontributing with any insurance which may be carried by Landlord, shall afford coverage for all claims based on any act, omission, event or condition that occurred or arose (or the onset of which occurred or arose) during the policy period, and shall expressly provide that Landlord, although named as an insured, shall nevertheless be entitled to recover under the policy for any loss, injury or damage to Landlord. Upon the issuance thereof, Tenant shall deliver each such policy or a certified copy and a certificate thereof to Landlord for retention by Landlord. If Tenant fails to insure or fails to furnish to Landlord upon notice to do so any such policy or certified copy and certificate thereof as required, Landlord shall have the right from time to time to effect such insurance for the benefit of Tenant or Landlord or both of them and all premiums paid by Landlord shall be payable by Tenant as additional rent on demand. 13. SERVICES AND UTILITIES 13.1. General. So long as Tenant is not in default in the performance of ------- its obligations under this Lease, Landlord shall: (a) Operate or cause the operation in season of the heating, ventilating and air-conditioning ("HVAC") system serving the Premises during the ordinary business hours specified in the rules and regulations attached hereto as Exhibit "C" and incorporated herein by reference ("Ordinary Business Hours"), at such temperatures and in such amounts as Landlord deems appropriate, in its sole discretion. Any HVAC provided by Landlord to Tenant during other than Ordinary Business Hours shall be furnished only upon at least twenty-four (24) hours prior written request of Tenant and Tenant shall pay Landlord's customary charges for such services. Tenant shall also be responsible for and shall pay Landlord any additional costs (including, without limitation, the costs of installation of additional HVAC equipment, if required by Landlord) incurred because of the failure of the HVAC system to perform its function due to (i) arrangement of partitioning in the Premises or changes or alterations, thereto, (ii) or from any use of heat-generating machinery or equipment, or (iii) from occupancy of the Premises exceeding one person per one hundred (100) square feet of rentable area, of (iv) from failure of Tenant to keep all HVAC vents within the Premises free of obstruction. Landlord, its contractors and agents throughout the Term, shall have free access to any and all mechanical installations of Landlord or Tenant, including, without limitation, air-cooling, fan, ventilating and machine rooms and electrical and telephone closets; and there shall be no construction of partitions or other obstructions which may interfere with Landlord's free access thereto, or interfere with the moving of Landlord's equipment to and from the enclosures containing such installations. Neither Tenant, nor its agents, employees or contractors shall at any time enter such enclosures or tamper with, adjust, touch or otherwise in any manner affect such mechanical installations. (b) Subject to any applicable provisions of Title 24 of the California Administrative Code or any similar governmental, municipal or public utility rules or regulations governing energy consumption, make, or cause to be made, customary arrangements with public utilities and/or public agencies to furnish electric current to the Premises for Tenant's use during Ordinary Business Hours, in amounts Landlord deems appropriate, in its sole discretion. Landlord shall have no obligation to install dedicated circuits or other special circuitry or writing. Landlord shall have the right to install an electric current meter in the Premises to measure the amount of electric current consumed on the Premises. The cost of such meter, special conduits, wiring and panels needed in connection therewith and the installation, maintenance and repair thereof shall be paid for by Tenant, and Tenant shall pay Landlord promptly upon demand for all such costs, in addition to the costs of excess electric current as shown by such meter. (c) Tenant waives all claims against Landlord for losses due to theft or burglary, or for damages done by unauthorized persons in the Building. Landlord shall provide passenger elevator service in the Building at all times determined by Landlord, in its sole discretion. (d) Provide janitorial service, subject to access being granted to the person or persons employed or retained by Landlord to perform such work. Landlord shall not be required to provide janitorial services for portions of the Premises used for preparing or consuming food or beverages, for storage, as a mailroom, or for a lavatory (other than the Common Area lavatory rooms). Any extermination services required in the Premises shall be provided by Landlord at Tenant's cost. (e) Provide such security service as Landlord deems reasonably necessary including, without limitation, at Landlord's election, establishment of a card key access system. 13.2. Supplementary Services. Tenant shall pay Landlord, at the charges ---------------------- established by Landlord from time to time, for all supplementary services provided by Landlord or its agents to Tenant, which charges shall be payable by Tenant upon demand by Landlord. 13.3. Modification of Services. Landlord reserves the right, at any time ------------------------ and from time to time during the term, to modify, delete from or add to all or any of the services provided to Tenant. 13.4. Interruption of Access, Use or Services. Landlord shall not be --------------------------------------- liable for any failure to provide access to the Premises, to assure the beneficial use of the Premises or to furnish any services or utilities. If any governmental entity promulgates or revises any statute, ordinance or building, fire or other code, or imposes mandatory or voluntary controls or guidelines on Landlord or the Building or any part thereof, relating to the use or conservation of energy, water, gas, steam, light or electricity or the provision of any other utility or service provided with respect to this Lease, or if Landlord is required or elects to make alterations to the Building in order to comply with such mandatory or voluntary controls or guidelines, Landlord may, in its sole discretion, comply with such mandatory or voluntary controls or guidelines, or make such alterations to the Building. Neither such compliance nor the making of such alterations shall in any event entitle Tenant to any damages, relieve Tenant of the obligation to pay any of the sums due hereunder, or constitute or be construed as a constructive or other eviction of Tenant. 13.5. Telecommunications. Tenant shall not alter, modify, add to or ------------------ disturb any telecommunications wiring or cabling in the Premises or elsewhere in the Building without Landlord's prior written consent. Landlord shall provide and maintain, at no expense to Tenant (other than as an item of Operating Expenses), telephone riser space in the Building core adequate to accommodate the telecommunications needs of a general office tenant, and lines and conduit in Building risers or pathways that provide a continuous connection of intrabuilding telecommunications cabling from a telephone closet located on the floor of the Premises ("Tenant's Telephone Closet") to the main telephone closet located in the ground or basement level floors of the Building. Subject to such reasonable rules and regulations as may be adopted by Landlord for uniform application to all tenants in the Building, Landlord shall permit Tenant reasonable access to Tenant's Telephone Closet and the Building's intrabuilding telecommunications cabling for the purposes permitted hereunder and agrees that Tenant may install, remove and maintain in the Premises such voice and data telecommunications equipment as is generally utilized by office tenants and, in connection therewith, to connect the same to the distribution frames located in Tenant's Telephone Closet. Tenant shall be liable to Landlord for any damage to the telecommunications cabling and wiring in the Building due to the act (negligent or otherwise) of Tenant or any employee, agent or contractor of Tenant. Landlord makes no representation to Tenant regarding the condition, security, availability or suitability for Tenant's purposes of existing intrabuilding network cabling or any telecommunications services presently located within the Building, and Tenant hereby waives any claim against Landlord for any damages if Tenant's telecommunications services are in any way interrupted, damaged or otherwise interfered with, except to the extent caused by the gross negligence or willful or criminal misconduct of Landlord, its agents or employees, provided that in no event shall any such interruption, damage or interference entitle Tenant to any consequential damages (including damages for loss of business) or relieve Tenant of any of its obligations under this Lease. Tenant shall maintain and repair all telecommunications cabling and wiring within or exclusively serving the Premises. Landlord reserves the right to limit the number of local exchange carriers and competitive alternative telecommunications providers (collectively "TSPs") having access to the Building's riser system and infrastructure, and Landlord reserves the right to charge TSPs for the use of Landlord's telecommunications riser system and infrastructure; provided, however, in all cases, Landlord will provide Building and riser access to at least one TSP for dial tone telecommunications service to tenants of the Building. 14. RULES AND REGULATIONS 14.1. Rules and Regulations. Tenant shall faithfully observe and comply --------------------- with the Rules and Regulations of the Building now in effect, a copy of which is attached hereto as Exhibit "C" and, after notice thereof, all reasonable modifications thereof and additions thereto from time to time promulgated in writing by Landlord, all of which are hereby incorporated herein by this reference. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the Building of any of the Rules and Regulations. 15. HOLDING OVER 15.1. Holding Over. If Tenant remains in possession after the expiration ------------ or sooner termination of this Lease without Landlord's consent (which Landlord may withhold in its sole and absolute discretion), the monthly Base Rent shall be two (2) times the monthly Base Rent and all additional rent payable for the last months of the Term. Tenant shall indemnify Landlord and Landlord's Agent against any and all claims, losses and liability for damages resulting from failure to surrender possession, including, without limitation, any claims made by any succeeding tenant. 16. ENTRY BY LANDLORD 16.1. Entry by Landlord. Landlord reserves, and shall at all times have, ----------------- the right to enter the Premises at all times for any purpose. Landlord's entry shall not be deemed an actual or constructive eviction of Tenant, shall not result in any liability of Landlord to Tenant, and shall not entitle Tenant to any reduction of Base Rent. 17. DAMAGE AND DESTRUCTION 17.1. Damage and Destruction. ---------------------- (a) In the event of a partial destruction of the Premises during the Term from any cause, Landlord shall forthwith repair the same (except as otherwise provided in this Paragraph 15 as to a casualty occurring during the last twelve (12) months of the Term), provided such repairs can be made within ninety (90) days under the laws and regulations of State, county, federal or municipal authorities, but such partial destruction shall not annul or void this Lease, except that Tenant shall be entitled to a proportional abatement in rent while such repairs are being made, such proportionate abatement to be based upon the amount of square footage in the Premises damaged and the length of time said area is not either actually being used by Tenant for business purposes or is not in a condition habitable for general office use. If such repairs cannot be made within ninety (90) days of such casualty, or if the casualty occurs during the last twelve (12) months of the Term and would result in any rent abatement for a period greater than thirty (30) days, Landlord may, at its option, elect to make such repairs within a reasonable time, this Lease continuing in full force and effect and the rent to be proportionately abated as provided hereinabove. In the event that Landlord does not so elect to make such repairs which cannot be made in ninety (90) days or which results from a casualty occurring during the last twelve months of the term, within a reasonable time following the casualty (but in no event not less than sixty days), this Lease may be terminated at the option of either party. In respect to any partial destruction which Landlord is obligated to repair or may elect to repair under the terms of this Paragraph, Tenant waives the provisions of California Civil Code Sections 1932(2) and 1933(4). In the event that any portion of the Building other than the Premises is destroyed to the extent of twenty percent (20%) or more of the replacement cost of the Building, Landlord may elect to terminate this Lease, whether the Premises be injured or not. A total destruction of the Building shall terminate this Lease. (b) If the Premises are to be repaired or restored by Landlord under this Section 17.1, Landlord shall repair or restore, at Landlord's cost, the Premises itself and any and all permanently affixed improvements in the Premises constructed or provided by Landlord as of the commencement of the Term, together with any permanently affixed Alterations approved by Landlord (unless at the time of construction Landlord informs Tenant that Tenant will be required to remove the same at the end of the Term). In no event shall Landlord repair, replace or restore any of Tenant's Property. 18. DEFAULT BY TENANT 18.1. Event of Default. The occurrence of any one or more of the following ---------------- events shall constitute a default and breach of this Lease by Tenant (collectively, an "Event of Default"): (a) Failure of Tenant to pay any installment of Base Rent or Additional Charges when and as the same becomes due and payable. (b) any assignment or subletting in violation of the terms of this Lease; (c) the taking of any action leading to, or the actual dissolution or liquidation of Tenant, if Tenant is other than an individual; (d) Failure by Tenant to observe or perform any of the provisions of this Lease to be observed or performed by Tenant (other than as provided in subparagraph (a) and (b) above), where such failure shall continue for more than ten (10) days after notice thereof from Landlord, and Tenant shall not within such period commence with due diligence and dispatch the curing of such default, or, having so commenced, thereafter shall fail or neglect to prosecute or complete with due diligence the curing of such default. 19. LANDLORD'S REMEDIES ON DEFAULT BY TENANT 19.1. Remedies. Upon the occurrence of any Event of Default, Landlord may -------- at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have by reason of such Event of Default and in addition to any other right or remedy Landlord may have at law or in equity. (a) Terminate this Lease and recover damages as provided by law, including California Civil Code Section 1951.2, and including, but not limited to, recovery of the worth at the time of award of the amount by which the unpaid Base Rent for the balance of the Term after the time of award exceeds the amount of rental loss for the same period that the Tenant proves could have been reasonably avoided, as computed pursuant to subsection (b) of Section 1951.2; (b) continue this Lease in effect and to enforce all of its rights and remedies under this Lease, as provided by California Civil Code Section 1951.4, as amended from time to time, including the right to recover Base Rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession; (c) Enter the Premises and remove therefrom all persons and property, store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and sell such property and apply the proceeds therefrom pursuant to applicable California law, all as attorney-in-fact for Tenant; and (d) Take all steps necessary or appropriate to have a receiver appointed for Tenant, upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord as attorney-in-fact for Tenant pursuant to Section 19.1(c). 19.2. Waiver of Redemption. Tenant hereby waives, for itself and all -------------------- persons claiming by and under Tenant, all rights and privileges which it might have under California Code of Civil Procedure Section 1174 and any present or future law to redeem the Premises or to continue the Lease after being disposed or ejected from the Premises. 20. EMINENT DOMAIN 20.1. General. If all or part of the Building or Premises is condemned or ------- taken in any manner for public or quasi-public use, including, without limitation, as a conveyance or assignment in lieu of a condemnation or taking, this Lease shall automatically terminate as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or other taking. 20.2. Award. Landlord shall be entitled to the entire award in any ----- condemnation proceeding or other proceeding for taking for public or quasi- public use. 21. ESTOPPEL CERTIFICATE 21.1. Estoppel. At any time and from time to time but on not less than five (5) days prior notice by Landlord, Tenant shall promptly execute, acknowledge and deliver to Landlord, and, at Landlord's request, to any prospective purchaser, ground lessor, or mortgagee, an estoppel certificate in the form required by Landlord. 22. SALE 22.1. If Landlord sells or conveys the Building containing the Premises and the successor-in-interest of Landlord assumes the terms, covenants and conditions of this Lease, Landlord shall be released thereby from any liability arising after the date of such transfer upon any of said terms, covenants and conditions, and Tenant agrees to look solely to such successor-in-interest of Landlord. 23. BROKERS 23.1. Brokers. Tenant warrants that it has had no dealings with any real ------- estate broker or agent in connection with the negotiation of this Lease excepting only the broker specified in the Basic Lease Information, and Tenant knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Tenant shall indemnify Landlord and hold Landlord harmless from and against any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including reasonable attorney's fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of Tenant's dealings with any real estate broker or agent other than as specified in the Basic Lease Information. 24. FUTURE CONSTRUCTION WORK 24.1 Future Construction Work. Landlord reserves the right (without the ------------------------ prior consent of Tenant) to make additions to, and/or expand the size of, the Building, including, without limitation, adding floors to, and/or adding floor area to one or more existing floors of, the Building, and to undertake major structural and seismic improvement projects in the Building. Such construction activity may result in columns, beams and other structural components being placed in the Premises to accommodate the construction work and/or the permanent additions and/or expansions to be constructed. Any such construction activity is entirely discretionary with Landlord, and Tenant agrees that no representation, express or implied, with respect to the future condition of the Building or any improvements thereto have been made to Tenant by Landlord or any Landlord representative. Tenant hereby waives any and all rights or claims of any kind for rent offsets or of constructive eviction, nuisance or interference with enjoyment which may arise in connection with, or result from, such construction activities; provided, however, Landlord shall use commercially reasonable efforts to minimize disruption to Tenant's business caused by such construction activities. Notwithstanding anything in this Lease to the contrary, if Landlord determines that any of the foregoing construction activity or activities will result in a material interference with or disruption to Tenant's business in the Premises, landlord, upon thirty (30) days' prior written notice to Tenant that Landlord intends to commence such construction activity, may terminate this Lease, without liability to Tenant. If this Lease is not terminated as hereinabove provided, Landlord agrees to remeasure the Premises following the completion of the improvements and to adjust Tenant's rental obligations hereunder based on the new square footage of the Premises, as determined by Landlord. 25. GENERAL PROVISIONS 25.1. Waiver. The waiver by Landlord of Tenant's failure to perform or ------ observe any provision of this Lease shall not be deemed a continuing waiver of such provision or a waiver of any subsequent failure of Tenant to perform or observe the same or any other such provision, and no custom or practice which may develop between the parties during the Term shall be deemed a waiver of, or in any way affect, the right of Landlord to insist upon performance and observance by the other party in strict accordance with the terms of the Lease. The subsequent acceptance of Base Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding failure of Tenant to perform or observe any provision of this Lease, other than the failure of Tenant to pay the particular Base Rent so accepted, irrespective of any knowledge on the part of Landlord of such preceding failure at the time of acceptance of such Base Rent. 25.2. Notices. All notices and demands which may or are required to be ------- given by either party to the other hereunder shall be in writing and shall be deemed to have been fully given when (a) delivered personally, (b) deposited in the United States mail, certified or registered, postage prepaid, or (c) delivered to a reputable and reliable courier, or (d) transmitted by facsimile machine (provided receipt of such facsimile is acknowledged by the addressee) and, in any event, addressed as follows: prior to the date on which Tenant accepts possession of the Premise, at Tenant's address prior to occupancy set out in the Basic Lease Information, and thereafter to Tenant at the Premises or the address for Tenant set out in the Basic Lease Information, or to such other place as Tenant may from time to time designate in a notice to Landlord; and to Landlord at the address specified in the Basic Lease Information, or to such other place as Landlord may from time to time designate in a notice to Tenant. Tenant hereby appoints as its agent to receive the service of all dispossessory or distraint proceedings and notices thereunder the person in charge of or occupying the Premises at the time, and if no person shall be in charge of or occupying the same, then such service may be made by attaching the same to the main entrance of the Premises. 25.3. Time. Time is of the essence of this Lease and all of its provisions ---- except with respect to the delivery of possession of the Premises at the commencement of the Term. 25.4. Successors and Assigns. The terms, covenants and conditions ---------------------- contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided herein, their respective personal representatives and successors and assigns. 25.5. Authority. If Tenant is a corporation or limited liability company, --------- Tenant and each person executing this Lease on behalf of Tenant represents and warrants to Landlord that (a) Tenant is duly incorporated or formed, as the case may be and validly existing under the laws of its state of incorporation or formation, (b) Tenant is qualified to do business in California, (c) Tenant has the full right, power and authority to enter into this Lease and to perform all of Tenant's obligations hereunder, and (d) each person signing this Lease on behalf of the corporation or company is duly and validly authorized to do so. If Tenant is a partnership (whether a general or limited partnership), each person executing this Lease on behalf of Tenant represents and warrants to Landlord that (i) he/she is a general partner of Tenant, (ii) he/she is duly authorized to execute and deliver this Lease on behalf of Tenant, (iii) this Lease is binding on Tenant (and each general partner of Tenant) in accordance with its terms, and (iv) each general partner of Tenant is personally liable for the obligations of Tenant under this Lease. 25.6. Prior Agreements. This Lease contains all of the agreements of the ---------------- Landlord and Tenant with respect to any matter recovered or mentioned in this Lease, and no prior agreements or understandings pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing, signed by the parties or their respective successors in interest. Tenant acknowledges that in executing and delivering this Lease, Tenant is not relying on any verbal or written understanding, promise or representation outside the scope of this Lease and not described or referred to herein. 25.7. Attorneys' Fees. In any action or proceeding brought by either party --------------- against the other under this Lease, the prevailing party shall be entitled to recover all costs and expenses including its attorneys' fees in such action or proceeding (whether at the administrative, trial or appellate levels) in such amount as the court or administrative body may adjudge reasonable. The prevailing party shall be determined by the court based upon an assessment of which party's major arguments made or positions taken in the proceedings could fairly be said to have prevailed over the other party's major arguments or positions on major disputed issues in the court's or arbitrator's decision. If Landlord is named as a defendant in any suit brought against Tenant in connection with or in any way arising out of this Lease or Tenant's use or occupancy of the Premises, Tenant shall pay Landlord's costs and expenses, including, without limitation, reasonable attorneys' fees, incurred in such suit or action. 25.8. Subordination; Attornment. This Lease shall be subject and ------------------------- subordinated at all times to: (i) all ground or underlying leases which may hereafter be executed affecting the Building, and (ii) the lien of all mortgages and deeds of trust in any amount or amounts whatsoever now or hereafter placed on or against the Building, on or against Landlord's interest or estate therein, and on or against all such ground or underlying leases, all without the necessity of having further instruments executed on the part of Tenant to effectuate such subordination. In the event any mortgage or deed of trust to which this Lease is subordinate is foreclosed or a deed in lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall attorn to the purchaser at the foreclosure sale or to the grantee under the deed in lieu of foreclosure. In the event of termination of any ground lease to which this Lease is subordinate, Tenant shall attorn to the ground lessor. Tenant agrees to execute any documents, in form and substance reasonably acceptable to Tenant, required to effectuate the subordination, to make this Lease prior to the lien of any mortgage or deed of trust or ground lease, or to evidence the attornment. 25.9. Separability. Any provision of this Lease which shall prove to ------------ be invalid, void, illegal or unenforceable shall in no way affect, impair or invalidate any other provisions of this Lease, and such other provisions and this Lease shall remain in full force and effect. 25.10. No Merger. The voluntary or other surrender of this Lease by --------- Tenant, or a mutual cancellation of this Lease, shall not constitute a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenancies. 25.11. Landlord's Fees. Whenever Tenant requests Landlord to take any --------------- action or give any consent required or permitted under this Lease, Tenant shall reimburse Landlord for all of Landlord's reasonable costs incurred in reviewing the proposed action or consent, including, without limitation, reasonable attorneys', engineers' or architects' fees within ten (10) days after Landlord's delivery to Tenant of a statement of such costs. Tenant shall be obligated to make such reimbursement without regard to whether Landlord consents to any such proposal action. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in multiple originals on the dates set forth below and this Lease shall be effective as of the latter of such dates. LANDLORD: 1301 EVANS STREET ASSOCIATES, LLC a California limited liability company By: Peter Sullivan Associates, Inc. General Manager By: /s/ Peter Sullivan ------------------------ Peter Sullivan President Date: January 5, 1999 -------------------------- TENANT: OBJECT PRODUCTS, INC. By: /s/ William W. Shaw, III ---------------------------- Its: President --------------------------- Date: January 5, 1999 -------------------------- EXHIBIT A FLOOR PLANS EXHIBIT B RULES AND REGULATIONS 1. The sidewalks, halls, passages, exits and entrances of the Building shall not be obstructed by Tenant or used by it for any purpose other than for ingress to and egress from the Premises. The halls, passages, exits, entrances, elevators, shopping malls, escalators and stairways are not for the use of the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. Tenant shall not go upon the roof of the Building, except in areas that Landlord may designate as "common areas" from time to time. 2. The Premises shall not be used for loading or sleeping, and unless ancillary to a restaurant or other food service use specifically authorized in Tenant's lease, no cooking shall be done or permitted by Tenant on the Premises, except that the preparation of coffee, tea, hot chocolate and similar items for Tenant and its employees shall be permitted. 3. All janitorial work for the Premises shall be paid for by the landlord. Any person or persons employed by Tenant to do janitorial work shall be subject to and under the control and direction of the Building Superintendent while in the Building and outside the Premises. 4. Landlord will furnish Tenant with two (2) keys to the Premises, free of charge. No additional locking devises shall be installed without the prior written consent of Landlord. Landlord may make reasonable charge for any additional lock or any bolt installed on any door of the Premises without the prior consent of Landlord. Tenant shall in each case furnish Landlord with a key for any such lock. Tenant, upon the termination of its tenancy, shall deliver to Landlord all keys to doors in the Building and the Premises that shall have been furnished to Tenant. 5. The freight elevator shall be available for use by Tenant, subject to such reasonable scheduling as Landlord shall deem appropriate. The persons employed by tenant to move equipment or other items in or out of the Building, must be acceptable to Landlord. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, supplies, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute the weight of such objects. Landlord will not be responsible for loss or damage to any such property from any cause, and all damage done to the Building by moving or maintaining Tenant's property shall be repaired at the expense of Tenant. 6. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or flammable or combustible fluid or materials or use any method of heating or air-conditioning other than that supplied by Landlord. Tenant shall not use, keep or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business in the Building. 7. In the case of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building during the continuance of same by such action as Landlord may deem appropriate, including closing entrances to the Building. 8. Tenant shall see that the doors of the Premises are closed and securely locked at such time as Tenant's employees leave the Premises. 9. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, no foreign substance of any kind whatsoever shall be deposited therein, and any damage resulting to same from Tenant's misuse shall be paid for by Tenant. 10. Except with the prior consent of Landlord, Tenant shall not sell, or permit the sale from the Premises of, or use or permit the use of any sidewalk or mall area adjacent to the Premises for the sale of, newspaper, magazines, periodicals, theatre tickets or any other goods, merchandise or service, nor shall Tenant carry on, or permit or allow any employee or other person to carry on, business in or from the Premises for the service or accommodation of occupants of any other portion of the Building, nor shall the Premises be used for manufacturing of any kind, or for any business or activity other than that specifically provided for in Tenant's lease. 11. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. 12. Tenant shall not use in any space, or in the common areas of the Building, any handtrucks except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. No other vehicles of any kind shall be brought by Tenant into the Building or kept in or about the Premises. 13. Tenant shall store all its trash and garbage within the Premises until daily removal of same by Tenant to such location in the Building as may be designated from time to time by Landlord. No material shall be placed in the Building trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the City of San Francisco without being in violation of any law or ordinance governing such disposal. 14. All loading and unloading of merchandise, supplies, materials, garbage and refuse and delivery of same to the Premises shall be made only during the time between 8:00 a.m. and 11:00 a.m. and only through such entryways and elevators as Landlord shall designate. 15. Canvassing, soliciting, peddling or distribution of handbills or any other written material in the Building is prohibited and Tenant shall cooperate to prevent same. 16. Tenant shall not permit the use of the operation of any coin operated machines on the Premises, including, without limitation, vending machines, video games, pinball machines, or pay telephones without the prior written consent of Landlord. 17. Landlord may direct the use of all pest extermination and scavenger contractors at such intervals as Landlord may require. 18. Tenant shall immediately, upon request from Landlord (which request need not be in writing), reduce its lighting in the Premises for temporary periods designated by Landlord, when required in Landlord's judgment to prevent overloads of the mechanical or electrical systems of the Building. 19. Landlord established the hours of 7:00 a.m. to 6:00 p.m., Monday through Friday, except generally recognized holidays ("business days"), as reasonable and usual business hours for purposes of this Lease. Janitorial services are provided between the hours of 6:00 p.m. and midnight on business days. 20. Landlord reserves the right to select the name of the Building and to make such change or changes of name as it may deem appropriate from time to time, and Tenant shall not refer to the Building by any name other than: (i) the names as selected by Landlord (as may be changed form time to time), or (ii) the postal address, approved by the United States Post Office. Tenant shall not use the name of the Building in any respect other than as an address of its operation in the Building without the prior written consent of Landlord. 21. The requirements of Tenant will be attended to only upon application by telephone or in person at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 22. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of these Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 23. Wherever the word "Tenant" occurs in these Rules and Regulations, it is understood and agreed that it shall mean Tenant's associates, agents, clerks, employees and visitors. Wherever the word "Landlord" occurs in these Rules and Regulations, it is understood and agreed that it shall mean Landlord's assigns, agents, clerks, employees and visitors. 24. These Rules and Regulations are in addition to, and shall not be construed in any way to modify, alter or amend, in whole or part, the terms, covenants, agreements and conditions of any lease of premises in the Building. 25. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building, and for the preservation of good order therein. 26. Tenant shall not affix or maintain upon the glass panes and supports of the show windows (and within twenty-four (24) inches of any window), doors and the exterior walls of the Premises, or any place within the Premises, any signs, advertising placards, names, insignia, trademarks, descriptive material or any other such like item or items, and Landlord shall have the right, without giving prior notice to Tenant and without any liability for damage to the Premises reasonably caused thereby, to remove any of the same from the Premises, except such as shall have first received written approval of Landlord as to size, type, color, location, copy, nature and display qualities. Anything to the contrary in this Lease notwithstanding Tenant shall not affix any sign to the roof of the Premises. 27. No awning or other projections shall be attached to the outside walls of the Premises or the building. 28. No auction, fire, bankruptcy or selling-out sales, except those which are lawful and bona fide, shall be conducted on or about the Premises without the prior written consent of Landlord. 29. The outside areas immediately adjoining the Premises shall be kept clear at all times by Tenant, and Tenant shall not place nor permit any obstructions, garbage, refuse, merchandise or displays in such areas. 30. Tenant shall not carry on any trade or occupation or operate any instrument or apparatus or equipment which emits an odor or causes a noise discernible outside of the Premises or which may be deemed offensive in nature. 31. Tenant shall not place or maintain any temporary fixture or fixtures (including portable trade fixtures, displays or folding tables) for the display of merchandise within three (3) feet of any entrance to the Premises without the written consent of Landlord, and in no event shall a merchandise display extend beyond the frontage line of the Premises. This shall not preclude the use of permanent fixed merchandise displays within the Premises provided such permanent displays do not in any manner block the entrance to the Premises. 32. In connection with any use of the common areas, no person shall: (i) Vend, peddle or solicit orders for sale or distribution of any merchandise, device, service, periodical, book, pamphlet or other matter whatsoever; (ii) Exhibit any sign, placard, banner, notice or other written material; (iii) Distribute any circular, booklet, handbill, placard or other material; (iv) Solicit membership in any organization, group or association or contribution for any purpose; (v) Parade, patrol, picket, demonstrate or engage in any conduct that might tend to interfere with or impede the use of any of the common areas by any customer, business invitee or employee, create a disturbance, attract attention or harass, annoy, disparage or be detrimental to the interest of any of the retail establishments within the Building; (vi) Use any common areas for any purpose when none of the retail establishments within the Building is open for business or employment; (vii) Use any soundmaking device (including sound trucks) of any kind or create or produce in any manner noise or sound that is annoying, unpleasant or distasteful to customers, business invitees or employees situated within the Building; (viii) Deface, damage or demolish any sign, light, standard or fixture, landscaping material or other improvement within the Building or the property of customers, business invitees, or employees situated within the Building; or (ix) Panhandle, beg or solicit funds. Landlord shall, for the enforcement of the covenants, conditions and agreements now or hereafter made a part of this Exhibit "C" have all remedies in this Lease provided for breach of the provisions hereof. Tenant shall not incur a charge nor shall the lease be terminated with respect to the first three (3) violations of the Rules and Regulations occurring during any twelve (12) consecutive month period provided each violation is remedied within twenty-four (24) hours of receipt of notice from Landlord. With regard to the fourth and any subsequent violations of the Rules and Regulations occurring during any twelve (12) consecutive month period Tenant shall pay Landlord an additional rental, in addition to and not in lieu of Landlord's other remedies, upon demand One Hundred Dollars ($100,00) per violation. EX-10.16 14 DEDICATED SERVER AGREEMENT DATED 04/08/99 EXHIBIT 10.16 Proposal No. DSv1.0 Date 04/08/99 [Logo of Conxion Corporation] Thursday, April 08, 1999 Michael Barry Object Products Mikeb@objectproducts.com - ------------------------ I. The Conxion Internetwork: - ---------------------------- Conxion is able to offer the highest performance and most reliable service because of our unique fault-tolerant architecture: . Each data center uses dual OC-48 circuits (over 300 Mbps) connected to diverse Network Access Points, over true SONET rings. . OC-3c/OC-12c Packet over SONET backbone. . All nodes utilize OC-48 SONET equipment, and are scalable to OC-768. . All Web servers reside on 100Mbps LANs, uplinked to Gigabit Ethernet. . Customers experience maximum exposure to the Internet as a result of our Tier 1 provider status and over 140 public and private peering agreements. . Conxion's robust data center architecture is interconnected by a fully meshed ATM OC-3/ OC12 backbone. . Customers receive "single-hop/no pop" connectivity to the Internet exchange points. . Conxion's present throughput capability is in excess of 10 Terabytes per day. . Conxion's nation-wide network includes PBNAP, MAE-WEST, ADDS-Chicago, and MAE-EAST. . Expansion plans call for eight domestic data centers, and 1-3 international locations by the middle of 1999. II. Conxion Web Hosting Service - -------------------------------- Labor, Services, and Maintenance provided by Conxion for Dedicated Server hosting: Data Center - ----------- . Class "A" data centers with industrial strength hosting environment, controlled access, raised floors, HVAC, fire detection and suppression systems. . Racks are mounted to the concrete floor in a locked facility in a secure building. . Up to 8 separate power devices per rack with a total draw not exceeding 20 AMPS/rack. . Fully conditioned electrical power. . UPS back-up power, with multiple separate UPS units. . Diesel generator back-up power (72 hour capacity; hot refillable from the street). Conxion Corporation . 4201 Burton Drive . Santa Clara, CA 95054-1512 www.conxion.com . phone 408.566.8500 . Fax 408.980.8240 --------------- Proposal No. DSv1.0 Date 04/08/99 [Logo of Conxion Corporation] Internet Connectivity - --------------------- . Full-time connectivity between the server complex and a backbone/edge router of no less than 100 Megabits/sec. . Full-time connectivity between backbone/edge router and the Internet of no less than OC-3. (155 Megabits/second). Maintenance & Support - --------------------- . Includes up to two hours of installation and standard configuration consulting for each server. . 7 x 24 maintenance of the server hardware. . Maintenance of the operating system and web server software, including as a minimum, revision levels and software patches. . Access to 7 x 24 consulting services (detailed description below) . File backup (daily incremental backup, weekly full backup). All backups are stored off-site in fireproof safes. . Access to the server(s), with the assistance of Conxion personnel. . Full root/administrative access to servers. Customers are only prevented from altering anything that will affect the log files. Conxion must have access to log files at all times. . Detailed log usage reports, custom per request. The usage reports are in WUSAGE format. An example may be viewed on the Boutell.Com, Inc. Web Site at the following URL: http://www.boutell.com/wusage/example/. -------------------------------------- Monitoring - ---------- . All servers and other network devices on Conxion's Internetwork are monitored every minute. If a server or device fails to respond for 5 minutes an email notification is sent. If a server or device fails to respond for 10 minutes a page notification is sent. Customers may opt to be included on the email notification for their server monitoring. Once the server has been restored a follow up email notification will be sent. . Standard monitoring includes A) Hardware B) Operating System C) HTTP & FTP requests. . Custom monitoring is available up on request. Depending on customer requirements, custom monitoring may require billable consulting time. Service and Performance Guarantee - --------------------------------- Service guarantee: (Excluding maintenance windows.) Conxion considers an "outage" to be any service degradation on Conxion's network that is greater than 50%, and lasts for more than 12 minutes. You will receive a free day of service for each day that you experience an outage. Five outages over a thirty-day rolling period and you will receive a free month of service. Two consecutive months of free service and you can cancel your contract without penalty. Performance guarantee: Conxion guarantees the facility you are connected to will always be at least three times bigger than the 100Mbit LAN, and will never exceed an average of 70% utilization. Conxion will increase bandwidth when the average utilization of Conxion's circuit is 70%. Customer Responsibilities - ------------------------- . Experience with the UNIX or NT platform being provided by Conxion. . Internet Access to remotely maintain and administer your site. (If needed, Conxion can provide Conxion Confidential DSv1.0 Page 2 Proposal No. DSv1.0 Date 04/08/99 [Logo of Conxion Corporation] Internet Access in the San Francisco Bay Area, Chicago, and Washington DC) . Maintenance of system security as you deem necessary. . Third party software licenses and installation, unless otherwise indicated. . Content installation and updates. . Conxion shares administrative access and retains rights to all server log files. Customer cannot alter the log files without Conxion approval. NOTE: **Any changes made to the log files without Conxion's approval will be corrected at your expense, billing will be based on Conxion's consulting services described herein. ** III. Conxion Proposed Solution(s): - ----- ----------------------------- Download Services: Conxion currently provides http:// download service for some of the biggest names in the industry including Microsoft, Intel and Oracle. Turnaround time for setting up a download site can be as fast as 24 hours under Conxion's Shared Server program. This service is offered on Conxion's shared servers and the customer pays only for throughput as calculated in the standard metered usage chart. The service can also be implemented on a dedicated machine under Conxion's Dedicated Server program, for which the quarterly server fee must be paid in addition to usage charges. Dedicated Server Offering: The Dedicated Server Offering from Conxion is for customers who wish to take advantage of Conxion's unmatched Web Hosting service and require dedicated servers for security, capacity, or manageability. Conxion Dedicated Server customers have the choice of using a high performance UNIX or NT machine, both on Conxion's standard 100Mbps Web Farm LAN. Dedicated Server customers pay a quarterly fee for the dedicated machine and throughput charges derived from the standard metered usage chart (below). NT Server: Compaq 1850R - Processor: Dual Pentium II, Twin 450 MHz - Memory: 320 MB RAM - Storage: 3 x 9 GB FAST WIDE SCSI HDDS, RAID 5 striped, hot pluggable/hot swappable - Network: 100 BaseT Ethernet / Full Duplex Mode - Conxion server service - Web Server: IIS/Netscape Enterprise server software - OS: Microsoft NT Server 4.0 - Standard Setup: PCAnywhere, FrontPage '98 Extensions, ASP, CGI, FTP, SMTP Conxion Confidential DSv1.0 Page 3 Proposal No. DSv1.0 Date 04/08/99 [Logo of Conxion Corporation] IV. Pricing Summary - ---- --------------- Conxion bills based upon actual usage. Please refer to the Dedicated Metered Usage Schedule provided below. If you anticipate your first quarter usage at lower or higher than that estimated below, please adjust the amount based upon your most recent projections.
Qty Item Monthly Initial Qtr. Contract Term - ----------------------------------------------------------------------------------------------------------------------------- Hosting Solution: Compaq 1850R - ----------------------------------------------------------------------------------------------------------------------------- 1 Server Fee: Compaq 1850R [*] [*] [*] - ----------------------------------------------------------------------------------------------------------------------------- 1 Server Colocation Fee [*] [*] [*] - ----------------------------------------------------------------------------------------------------------------------------- 1 24x7 Server Maintenance [*] [*] [*] - ----------------------------------------------------------------------------------------------------------------------------- Server Sub Total [*] [*] [*] - ----------------------------------------------------------------------------------------------------------------------------- 1 Usage:/2/ Usage 10GB/ Month [*] [*] [*] - ----------------------------------------------------------------------------------------------------------------------------- 1 Set Up Fee/3/ ($1500) - - - - ----------------------------------------------------------------------------------------------------------------------------- 1 Expedite Fee/4/ ($2000) - - - - ----------------------------------------------------------------------------------------------------------------------------- Total Cost [*] [*] [*] - -----------------------------------------------------------------------------------------------------------------------------
CONTRACT TERM: 12 Months 1. Payment is quarterly in advance. PO for full contract term required with order. 2. Minimum usage is [*]/10GB of usage per month per server. Usage pricing is based off of Conxion's Dedicated Server Metered Usage Schedule. Customers whose throughput estimations surpass actual activity will be credited for future service. If an underestimation of throughput is made, the difference will be billed the following quarter. 3. Set Up Fee applies for contract terms less than one year. $1500/server 4. Expedite Fee applies for service setup in less than two weeks from date accepted by Conxion Finance. $2000/server V. Technical Support - --------------------- Conxion understands that your Internet strategy is mission critical. That is why we put so much emphasis on our reliability, high performance and customized technical support. The $300 per month server support fee provides 24 x 7 monitoring of your server's performance and its network connectivity. Conxion proactively monitors network activity and behavior in order to be able to deal with issues before they become problems. Any problems with your server, it's operating system, or its Internet connectivity will be dealt with by our professional staff in a prompt and efficient manner, 24 hours a day, 7 days a week, at no charge to the customer. Any support requirements created by customer modification of the standard configuration will be considered a consulting service. * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential DSv1.0 Page 4 Proposal No. DSv1.0 Date 04/08/99 [Logo of Conxion Corporation] VI. Consulting Services - ------ ------------------- Conxion's expert technical staff is available to answer any of your questions, or help you solve any problem you may have with your server. Consulting services are billed at a rate of $150/hr during business hours (8 A.M to 6 P.M., M-F PST) and $350/hr during off-hours (6 P.M. to 8 A.M. M-F and all day Saturday Sunday PST). Any problems that you experience which are shown to have been caused by Conxion, will not be billed. If your business needs to pre-approve consulting service expenditures, we recommend that you include a line item in your initial Purchase Order covering an initial block of 10 hours of service. The service will be charged as a line item in your invoice as you accrue billable hours. Please be sure to include the names of employees at your company authorized to incur billable consulting services. VII. Ordering and Billing - -------------------------- All prices quoted within this proposal are valid for 30 (thirty) days from above date. Billing for all Conxion services is quarterly in advance. Dedicated Server customers pay throughput/month charges in addition to quarterly server fees. An estimate of the future quarter's throughput is necessary to determine the advance billing charge. Customers whose throughput estimations surpass actual activity will be credited for future service. If an underestimation of throughput is made, the difference will be billed the following quarter. To Order: . All orders are subject to the "TERMS AND CONDITIONS" as indicated below. . Ordering for all services requires a P.O. with "Net Due" terms, which must include an acknowledgment of the recurring nature of the ongoing Internet service for the duration of the contract. A physical purchase order is preferable; a faxed purchase order is acceptable. . Payment must be received prior to service activation. Please include a check for the first term of service with your purchase order if immediate service activation is required. Otherwise, Conxion will await payment on the first invoice before activating the service. . Please return the attached agreement and technical contact sheet with you order. . If your company requires pre-approval before accruing consulting expenses, please include a line item for consulting services, and the names of employees at your company authorized to accrue billable consulting services. Lead-Time: Lead-time for Conxion Dedicated Server service implementation is two weeks from receipt of payment. Payment for the first quarterly invoice must be received prior to service commencement. Dedicated server implementation can be expedited to less than 2 (two) weeks at a cost of $2,000 per dedicated server. Conxion Confidential DSv1.0 Page 5 Proposal No. DSv1.0 Date 04/08/99 [Logo of Conxion Corporation] Dedicated Server Metered Usage Schedule: All Dedicated Server prices are based on throughput/month as calculated in this chart.
Throughput/Month Monthly Rates Quarterly Rates - ---------------------------------------------------------------------------------------------------------------- 10.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 11.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 12.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 13.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 15.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 17.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 20.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 22.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 24.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 26.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 28.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 30.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 33.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 36.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 39.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 42.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 45.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 48.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 51.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 52.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 55.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 58.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 61.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 64.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 67.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 70.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 73.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 76.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 79.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 82.0 [*] [*] - ---------------------------------------------------------------------------------------------------------------- 85.0 $[*]/MB - ----------------------------------------------------------------------------------------------------------------
* Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential DSv1.0 Page 6 Proposal No. DSv1.0 Date 04/08/99 [Logo of Conxion Corporation] CONXION TERMS AND CONDITIONS 1. Conxion services may only be used for lawful purposes. Transmission of any material in violation of any US federal law is prohibited. This includes but is not limited to; copyrighted material, material legally judged to be threatening or obscene or material protected by trade secret. The customer agrees to indemnify and hold harmless Conxion from any claims resulting from the customer use of these services, which damages the customer or another party. 2. Access to any other networks connected to Conxion implies that the customer must comply with the rules appropriate for that other network. Conxion services may be used for any lawful purpose, including any lawful commercial purpose. Connectivity is provided for the customer organization only. 3. Conxion makes no warranties or conditions, either express or implied, including without limitation, warranties of title, non-infringement and the implied warranties of merchantability and fitness for a particular purpose, concerning the services provided or any information accessed using these services. 4. Conxion will not be liable for any direct or indirect damages, including without limitation, lost profits, lost savings, or any incidental, special, or indirect damages or other economic consequential damages, even if Conxion has been advised of the possibility of such damages, which may result from the use of these services by its customers or any related or unrelated third parties. This includes loss of data resulting from delays, non-deliveries, mis-deliveries or service interruptions caused by Conxion negligence or the customer's errors or omissions. 5. Conxion specifically denies any responsibility for the accuracy or quality of information obtained through its services. Use of any information obtained via Conxion services is at the customer's own risk. 6. Services are invoiced and payment is required in advance of the first day that services are available. The invoice amount shall be appropriate to the selected term (monthly, quarterly, or annually) in accordance with Conxion's price list. Ongoing services billed under a monthly or quarterly plan will be invoiced in advance on the first day of the month succeeding the month in which the term expired. Cancellation of service must be in writing with 60 days notice. Conxion reserves the right to change the service rates upon 60 days notice in advance of the effective date. 7. Conxion Dedicated/Web customers have root access to their servers, if desired. However, customers may not move, modify, or otherwise inhibit Conxion's access to the web server log files. 8. Terms of payment are 10 days from date of invoice. Accounts are in default if payment is not received by due date. Accounts unpaid 30 days from date of invoice may have their service interrupted. Such interruption does not relieve the customer from the obligation to pay amounts due. Accounts in default are subject to a service charge of 1.5% per month on the outstanding balance. If in payment default, the customer agrees to reimburse Conxion its reasonable expenses, including attorney and other fees, incurred in collecting amounts due. 9. These terms and conditions supersede all previous representations, understandings or agreements and shall prevail notwithstanding any variance with terms and conditions of any other submitted. Use of Conxion's services constitutes acceptance of these terms and conditions. Conxion Confidential DSv1.0 Page 7 Proposal No. DSv1.0 Date 04/08/99 DEDICATED SERVER AGREEMENT [Logo of Conxion Corporation]
Company: Object Products Billing Contact: Laurel Brown ----------------- ---------------------------- Billing Address: 330 Townsend Department: ----------------- ---------------------------- Suite #206 Phone Number: 415-495-4741 x106 ----------------- ---------------------------- City: SF Fax Number: 415-495-4748 ----------------- ---------------------------- State: CA Email Address: Laurelb@objectproducts.com ----------------- ---------------------------- Zip: 94107 Tax ID Number: 68-0347739 ----------------- ---------------------------- D&B Number: ---------------------------- Project Mgr: Michael Barry Phone Number: 415-495-4741 x104 ----------------- ---------------------------- Email Address: Mikeb@objectproducts.com ----------------------------
Estimated Charges as Per Proposal
Qty Item Monthly Initial Qtr. Contract Term - ---------------------------------------------------------------------------------------------------------------------------------- Hosting Solution: Compaq 1850R - ---------------------------------------------------------------------------------------------------------------------------------- 1 Server Fee: Compaq 1600 [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- 1 Server Colocation Fee [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- 1 24x7 Server Maintenance [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- Server Sub Total [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- 1 Usage:/2/ Usage 10GB/ Month [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- 1 Set Up Fee/3/ ($1500) - - - - ---------------------------------------------------------------------------------------------------------------------------------- 1 Expedite Fee/4/ ($2000) - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total Cost [*] [*] [*] - ----------------------------------------------------------------------------------------------------------------------------------
CONTRACT TERM: 12 Months 1. Payment is quarterly in advance. PO for full contract term required with order. 2. Minimum usage is [*]/10GB of usage per month per server. Usage pricing is based off of Conxion's Dedicated Server Metered Usage Schedule. Customers whose throughput estimations surpass actual activity will be credited for future service. If an underestimation of throughput is made, the difference will be billed the following quarter. 3. Set Up Fee applies for contract terms less than one year. $1500/server 4. Expedite Fee applies for service setup in less than two weeks from date accepted by Conxion Finance. $2000/server Object Products , hereafter referred to as "Customer", hereby orders - -------------------------- from Conxion Corporation, the Products and Services for the term specified in this Order Form and Agreement. This Order Form and Agreement is valid when accepted by an authorized representative of Conxion. The term begins on the day of installation of equipment by Conxion. CUSTOMER HAS READ AND AGREES TO BE BOUND BY THE "CONXION TERMS AND CONDITIONS" FOR THE SERVICES SPECIFIED IN THIS AGREEMENT. CUSTOMER AND CONXION AGREE THAT THE TERMS AND CONDITIONS OF THIS AGREEMENT REPLACE PROVISIONS OF ANY CUSTOMER DRAFTED PURCHASE ORDER AND SUPERSEDE ALL PROPOSALS, WRITTEN OR ORAL, AS WELL AS OTHER COMMUNICATIONS BETWEEN CUSTOMER AND CONXION RELATING TO THIS ORDER. Customer confirms that non-standard support services will be billed to customer account at the rate of $150/HR during business hours and $350/HR during non- business hours (subject to engineer availability). Such services will only be extended to parties designated as technical and administrative contacts. [ ] DNS Form Attached [ ] Custom Configuration/Consulting Form Attached [X] Technical Support Contact Sheet Attached
ACCEPTED BY CUSTOMER: ACCEPTED BY CONXION SALES: ACCEPTED BY CONXION FINANCE: Signature: /s/ Signature: Signature: ----------------------------- --------------------------- ---------------------------- Name: Michael Barry Name: --------------------------------- --------------------------- Title: Chief Information Officer Title: Name: --------------------------------- --------------------------- ---------------------------- Date: 4/8/99 PO# 9904001 Date: Order# Date: Customer # ------------ ----------------- ------------- ------------ ----------- -----------
*Material has been omitted pursuant to a request for confidential treatment. Such material has been filed spearately with the Securities and Exchange Commission. Conxion Confidential 04/08/99 Page 8 Proposal No. DSv1.0 Date 04/08/99 [Logo of Conxion Corporation] Support Services Information Form Please select one of the following billing options: [ ] Please add billable consulting services to my monthly invoice as they are accrued. [ ] Billable consulting services require a pre-approved Purchase Order. Please find Purchase Order # ___________________ attached as an open Purchase Order for consulting services. Authorized Contacts: Please identify the "Super User" and up to two other contacts for your company. The Super User is the primary point of contact and the only one authorized to call Conxion with updates to your company's list of "Authorized Contacts." Please identify the other two contacts as either "Technical Contacts" or "Reports-Only Contacts." Technical contacts have access to the full range of technical services. Reports-Only contacts can only access your website's online reports. Note that requests from un-authorized contacts from your company will not be provided service. Contact 1: Super User and designated primary point of contact. First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Department: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax No.: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 2: [ ]Technical contact [ ] Reports-Only contact First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Department: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax No.: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 3: [ ]Technical contact [ ] Reports-Only contact First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Deparatment: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Conxion Confidential 04/08/99 Page 9 EX-10.17 15 DEDICATED SERVER AGREEMENT DATED 05/03/99 EXHIBIT 10.17 Proposal No. DSv1.0 Date 05/03/99 [Logo of CONXION CORPORATION] Monday, May 03, 1999 Michael Barry Object Products Mikeb@objectproducts.com - ------------------------ I. The Conxion Internetwork: - ---------------------------- Conxion is able to offer the highest performance and most reliable service because of our unique fault-tolerant architecture: . Each data center uses dual OC-48 circuits (over 300 Mbps) connected to diverse Network Access Points, over true SONET rings. . OC-3c/OC-12c Packet over SONET backbone. . All nodes utilize OC-48 SONET equipment, and are scalable to OC-768. . All Web servers reside on 100Mbps LANs, uplinked to Gigabit Ethernet. . Customers experience maximum exposure to the Internet as a result of our Tier 1 provider status and over 140 public and private peering agreements. . Conxion's robust data center architecture is interconnected by a fully meshed ATM OC-3/ OC12 backbone. . Customers receive "single-hop/no pop" connectivity to the Internet exchange points. . Conxion's present throughput capability is in excess of 10 Terabytes per day. . Conxion's nation-wide network includes PBNAP, MAE-WEST, ADDS-Chicago, and MAE-EAST. . Expansion plans call for eight domestic data centers, and 1-3 international locations by the middle of 1999. II. Conxion Web Hosting Service - ------------------------------- Labor, Services, and Maintenance provided by Conxion for Dedicated Server hosting: Data Center - ----------- . Class "A" data centers with industrial strength hosting environment, controlled access, raised floors, HVAC, fire detection and suppression systems. . Racks are mounted to the concrete floor in a locked facility in a secure building. . Up to 8 separate power devices per rack with a total draw not exceeding 20 AMPS/rack. . Fully conditioned electrical power. . UPS back-up power, with multiple separate UPS units. . Diesel generator back-up power (72 hour capacity; hot refillable from the street). Conxion Corporation . 4201 Burton Drive . Santa Clara, CA 95054-1512 www.conxion.com . phone 408.566.8500 fax . 408.980.8240 --------------- Proposal No. DSv1.0 Date 05/03/99 [Logo of CONXION CORPORATION] III. Conxion Proposed Solution(s): - ----- ----------------------------- Download Services: Conxion currently provides http:// download service for some of the biggest names in the industry including Microsoft, Intel and Oracle. Turnaround time for setting up a download site can be as fast as 24 hours under Conxion's Shared Server program. This service is offered on Conxion's shared servers and the customer pays only for throughput as calculated in the standard metered usage chart. The service can also be implemented on a dedicated machine under Conxion's Dedicated Server program, for which the quarterly server fee must be paid in addition to usage charges. Dedicated Server Offering: The Dedicated Server Offering from Conxion is for customers who wish to take advantage of Conxion's unmatched Web Hosting service and require dedicated servers for security, capacity, or manageability. Conxion Dedicated Server customers have the choice of using a high performance UNIX or NT machine, both on Conxion's standard 100Mbps Web Farm LAN. Dedicated Server customers pay a quarterly fee for the dedicated machine and throughput charges derived from the standard metered usage chart (below). NT Server: Compaq 5550R - Processor: Quad Xeon PII 450 MHz - Memory: 2GB RAM - Storage: 3 x 18 GB FAST WIDE SCSI HDDS, RAID 5 striped, hot pluggable/hot swappable - Network: 100 BaseT Ethernet / Full Duplex Mode - Conxion server service - Web Server: IIS/Netscape Enterprise server software - OS: Microsoft NT Server 4.0 - Standard Setup: PCAnywhere, FrontPage '98 Extensions, ASP, CGI, FTP, SMTP Conxion Confidential DSv1.0 Page 2 Proposal No. DSv1.0 Date 05/03/99 [Logo of CONXION CORPORATION] IV. Pricing Summary - ---- --------------- Conxion bills based upon actual usage. Please refer to the Dedicated Metered Usage Schedule provided below. If you anticipate your first quarter usage at lower or higher than that estimated below, please adjust the amount based upon your most recent projections.
Qty Item Monthly Initial Qtr. Contract Term - ---------------------------------------------------------------------------------------------------------------------------------- Hosting Solution: Compaq 5550R Quad Xeon - ---------------------------------------------------------------------------------------------------------------------------------- 1 Server Fee: Compaq 5550R Quad Xeon [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- 1 2GB of Ram [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- 1 Server Colocation Fee [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- 1 24x7 Server Maintenance [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- Server Sub Total [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- 1 Usage:/2/ Usage 10GB/ Month [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------- 1 Set Up Fee/3/ ($1500) - - - - ---------------------------------------------------------------------------------------------------------------------------------- 1 Expedite Fee/4/ ($2000) $2,000 $2,000 $2,000 - ---------------------------------------------------------------------------------------------------------------------------------- Total Cost [*] [*] [*] - ----------------------------------------------------------------------------------------------------------------------------------
CONTRACT TERM: 12 Months 1. Payment is quarterly in advance. PO for full contract term required with order. 2. Minimum usage is [*]/10GB of usage per month per server. Usage pricing is based off of Conxion's Dedicated Server Metered Usage Schedule. Customers whose throughput estimations surpass actual activity will be credited for future service. If an underestimation of throughput is made, the difference will be billed the following quarter. 3. Set Up Fee applies for contract terms less than one year. $1500/server 4. Expedite Fee applies for service setup in less than two weeks from date accepted by Conxion Finance. $2000/server V. Technical Support - --------------------- Conxion understands that your Internet strategy is mission critical. That is why we put so much emphasis on our reliability, high performance and customized technical support. The $300 per month server support fee provides 24 x 7 monitoring of your server's performance and its network connectivity. Conxion proactively monitors network activity and behavior in order to be able to deal with issues before they become problems. Any problems with your server, it's operating system, or its Internet connectivity will be dealt with by our professional staff in a prompt and efficient manner, 24 hours a day, 7 days a week, at no charge to the customer. Any support requirements created by customer modification of the standard configuration will be considered a consulting service. * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential DSv1.0 Page 3 Proposal No. DSv1.0 Date 05/03/99 [Logo of CONXION CORPORATION] VI. Consulting Services - ------ ------------------- Conxion's expert technical staff is available to answer any of your questions, or help you solve any problem you may have with your server. Consulting services are billed at a rate of $150/hr during business hours (8 A.M to 6 P.M., M-F PST) and $350/hr during off-hours (6 P.M. to 8 A.M. M-F and all day Saturday Sunday PST). Any problems that you experience which are shown to have been caused by Conxion, will not be billed. If your business needs to pre-approve consulting service expenditures, we recommend that you include a line item in your initial Purchase Order covering an initial block of 10 hours of service. The service will be charged as a line item in your invoice as you accrue billable hours. Please be sure to include the names of employees at your company authorized to incur billable consulting services. VII. Ordering and Billing - -------------------------- All prices quoted within this proposal are valid for 30 (thirty) days from above date. Billing for all Conxion services is quarterly in advance. Dedicated Server customers pay throughput/month charges in addition to quarterly server fees. An estimate of the future quarter's throughput is necessary to determine the advance billing charge. Customers whose throughput estimations surpass actual activity will be credited for future service. If an underestimation of throughput is made, the difference will be billed the following quarter. To Order: . All orders are subject to the "TERMS AND CONDITIONS" as indicated below. . Ordering for all services requires a P.O. with "Net Due" terms, which must include an acknowledgment of the recurring nature of the ongoing Internet service for the duration of the contract. A physical purchase order is preferable; a faxed purchase order is acceptable. . Payment must be received prior to service activation. Please include a check for the first term of service with your purchase order if immediate service activation is required. Otherwise, Conxion will await payment on the first invoice before activating the service. . Please return the attached agreement and technical contact sheet with you order. . If your company requires pre-approval before accruing consulting expenses, please include a line item for consulting services, and the names of employees at your company authorized to accrue billable consulting services. Lead-Time: Lead-time for Conxion Dedicated Server service implementation is two weeks from receipt of payment. Payment for the first quarterly invoice must be received prior to service commencement. Dedicated server implementation can be expedited to less than 2 (two) weeks at a cost of $2,000 per dedicated server. Conxion Confidential DSv1.0 Page 4 Proposal No. DSv1.0 Date 05/03/99 [Logo of CONXION CORPORATION] Dedicated Server Metered Usage Schedule: All Dedicated Server prices are based on throughput/month as calculated in this chart.
Throughput/Month Monthly Rates Quarterly Rates - ------------------------------------------------------------------------------------------------------------------ 10.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 11.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 12.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 13.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 15.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 17.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 20.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 22.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 24.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 26.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 28.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 30.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 33.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 36.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 39.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 42.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 45.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 48.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 51.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 52.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 55.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 58.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 61.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 64.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 67.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 70.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 73.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 76.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 79.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 82.0 [*] [*] - ------------------------------------------------------------------------------------------------------------------ 85.0 $[*]/MB - ------------------------------------------------------------------------------------------------------------------
* Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential DSv1.0 Page 4 Proposal No. DSv1.0 Date 05/03/99 [Logo of CONXION CORPORATION] CONXION TERMS AND CONDITIONS 1. Conxion services may only be used for lawful purposes. Transmission of any material in violation of any US federal law is prohibited. This includes but is not limited to; copyrighted material, material legally judged to be threatening or obscene or material protected by trade secret. The customer agrees to indemnify and hold harmless Conxion from any claims resulting from the customer use of these services, which damages the customer or another party. 2. Access to any other networks connected to Conxion implies that the customer must comply with the rules appropriate for that other network. Conxion services may be used for any lawful purpose, including any lawful commercial purpose. Connectivity is provided for the customer organization only. 3. Conxion makes no warranties or conditions, either express or implied, including without limitation, warranties of title, non-infringement and the implied warranties of merchantability and fitness for a particular purpose, concerning the services provided or any information accessed using these services. 4. Conxion will not be liable for any direct or indirect damages, including without limitation, lost profits, lost savings, or any incidental, special, or indirect damages or other economic consequential damages, even if Conxion has been advised of the possibility of such damages, which may result from the use of these services by its customers or any related or unrelated third parties. This includes loss of data resulting from delays, non-deliveries, mis-deliveries or service interruptions caused by Conxion negligence or the customer's errors or omissions. 5. Conxion specifically denies any responsibility for the accuracy or quality of information obtained through its services. Use of any information obtained via Conxion services is at the customer's own risk. 6. Services are invoiced and payment is required in advance of the first day that services are available. The invoice amount shall be appropriate to the selected term (monthly, quarterly, or annually) in accordance with Conxion's price list. Ongoing services billed under a monthly or quarterly plan will be invoiced in advance on the first day of the month succeeding the month in which the term expired. Cancellation of service must be in writing with 60 days notice. Conxion reserves the right to change the service rates upon 60 days notice in advance of the effective date. 7. Conxion Dedicated/Web customers have root access to their servers, if desired. However, customers may not move, modify, or otherwise inhibit Conxion's access to the web server log files. 8. Terms of payment are 10 days from date of invoice. Accounts are in default if payment is not received by due date. Accounts unpaid 30 days from date of invoice may have their service interrupted. Such interruption does not relieve the customer from the obligation to pay amounts due. Accounts in default are subject to a service charge of 1.5% per month on the outstanding balance. If in payment default, the customer agrees to reimburse Conxion its reasonable expenses, including attorney and other fees, incurred in collecting amounts due. 9. These terms and conditions supersede all previous representations, understandings or agreements and shall prevail notwithstanding any variance with terms and conditions of any other submitted. Use of Conxion's services constitutes acceptance of these terms and conditions. Conxion Confidential DSv1.0 Page 6 Proposal No. DSv1.0 Date 05/03/99 DEDICATED SERVER AGREEMENT [Logo of CONXION CORPORATION]
Company : Object Products Billing Contact: Laurel Brown ----------------- ---------------------------- Billing Address: 330 Townsend Department: ----------------- ---------------------------- Suite #206 Phone Number: 415-495-4741 x106 ----------------- ---------------------------- City: SF Fax Number: 415-495-4748 ----------------- ---------------------------- State: CA Email Address: Laurelb@objectproducts.com ----------------- ---------------------------- Zip: 94107 Tax ID Number: 68-0347739 ----------------- ---------------------------- D&B Number: ---------------------------- Project Mgr: Michael Barry Phone Number: 415-495-4741 x104 ----------------- ---------------------------- Email Address: Mikeb@objectproducts.com ----------------------------
Estimated Charges as Per Proposal
Qty Item Monthly Initial Qtr. Contract Term - ------------------------------------------------------------------------------------------------------------------------------- Hosting Solution: Compaq 5550R Quad Xeon - ------------------------------------------------------------------------------------------------------------------------------- 1 Server Fee: Compaq 5550R Quad Xeon [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------------- 1 2GB of Ram [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------------- 1 Server Colocation Fee [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------------- 1 24x7 Server Maintenance [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------------- Server Sub Total [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------------- 1 Usage:/2/ Usage 10GB/ Month [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------------- 1 Set Up Fee/3/ ($1500) - - - - ------------------------------------------------------------------------------------------------------------------------------- 1 Expedite Fee/4/ ($2000) $2,000 $2,000 $2,000 - ------------------------------------------------------------------------------------------------------------------------------- Total Cost [*] [*] [*] - -------------------------------------------------------------------------------------------------------------------------------
CONTRACT TERM: 12 Months 1. Payment is quarterly in advance. PO for full contract term required with order. 2. Minimum usage is [*]/10GB of usage per month per server. Usage pricing is based off of Conxion's Dedicated Server Metered Usage Schedule. Customers whose throughput estimations surpass actual activity will be credited for future service. If an underestimation of throughput is made, the difference will be billed the following quarter. 3. Set Up Fee applies for contract terms less than one year. $1500/server 4. Expedite Fee applies for service setup in less than two weeks from date accepted by Conxion Finance. $2000/server Object Products , hereafter referred to as "Customer", hereby orders - -------------------------- from Conxion Corporation, the Products and Services for the term specified in this Order Form and Agreement. This Order Form and Agreement is valid when accepted by an authorized representative of Conxion. The term begins on the day of installation of equipment by Conxion. CUSTOMER HAS READ AND AGREES TO BE BOUND BY THE "CONXION TERMS AND CONDITIONS" FOR THE SERVICES SPECIFIED IN THIS AGREEMENT. CUSTOMER AND CONXION AGREE THAT THE TERMS AND CONDITIONS OF THIS AGREEMENT REPLACE PROVISIONS OF ANY CUSTOMER DRAFTED PURCHASE ORDER AND SUPERSEDE ALL PROPOSALS, WRITTEN OR ORAL, AS WELL AS OTHER COMMUNICATIONS BETWEEN CUSTOMER AND CONXION RELATING TO THIS ORDER. Customer confirms that non-standard support services will be billed to customer account at the rate of $150/HR during business hours and $350/HR during non- business hours (subject to engineer availability). Such services will only be extended to parties designated as technical and administrative contacts. [ ] DNS Form Attached [ ] Custom Configuration/Consulting Form Attached [X] Technical Support Contact Sheet Attached
ACCEPTED BY CUSTOMER: ACCEPTED BY CONXION SALES: ACCEPTED BY CONXION FINANCE: Signature: /s/ Signature Signature: ----------------------------- --------------------------- ---------------------------- Name: Michael Barry Name: --------------------------------- --------------------------- Title: C.I.O. Title: Name: --------------------------------- --------------------------- ---------------------------- Date: PO# Date: Order# Date: Customer # ------------ ----------------- ------------ ----------- ----------- -----------
* Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential 05/03/99 Page 7 Proposal No. DSv1.0 Date 05/03/99 [Logo of CONXION CORPORATION] Support Services Information Form Please select one of the following billing options: [ ] Please add billable consulting services to my monthly invoice as they are accrued. [ ] Billable consulting services require a pre-approved Purchase Order. Please find Purchase Order # ___________________ attached as an open Purchase Order for consulting services. Authorized Contacts: Please identify the "Super User" and up to two other contacts for your company. The Super User is the primary point of contact and the only one authorized to call Conxion with updates to your company's list of "Authorized Contacts." Please identify the other two contacts as either "Technical Contacts" or "Reports-Only Contacts." Technical contacts have access to the full range of technical services. Reports-Only contacts can only access your website's online reports. Note that requests from un-authorized contacts from your company will not be provided service. Contact 1: Super User and designated primary point of contact. First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Department: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax No.: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 2: [ ]Technical contact [ ] Reports-Only contact First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Department: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax No.: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 3: [ ]Technical contact [ ] Reports-Only contact First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Deparatment: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Conxion Confidential 05/03/99 Page 8 EX-10.18 16 TI SERVICE AGREEMENT DATED 05/23/99 EXHIBIT 10.18 Proposal No. T3V1.0- Dated 5/23/99 [Logo of CONXION CORPORATION] Thursday, May 20, 1999 Michael Barry Object Products 330 Townsend Suite #206 SF, CA 94107 (415) 495-4741 x106 I. Conxion Corporation - ----------------------- Conxion Corporation was founded in 1994 with a single mission: to provide the highest quality Internet delivery and transaction outsourcing services. That requires exceptional dependability not only in technology, but also in the company behind it. Today, Conxion is the only provider of internetwork delivery services, which is entirely independent and solely focused on Internet services. Privately held with no venture capital, no legacy technology, and no legacy cost structure, Conxion has been cash flow positive from the start. Conxion is debt- free and financially secure. II. The Conxion Internetwork: - ------------------------------ Conxion is able to offer the highest performance and most reliable service because of our unique fault-tolerant architecture: . Each data center uses dual OC-3 circuits (over 300 Mbps) connected to diverse Network Access Points, over true SONET rings. . OC-3c/OC-12c Packet over SONET backbone. . All nodes utilize OC-48 SONET equipment, and are scalable to OC-576. . All Web servers reside on 100Mbps LANs, moving to Gigabit Ethernet. . Customers experience maximum exposure to the Internet as a result of our Tier 1 provider status and over 140 public and private peering agreements. . Conxion's robust data center architecture is interconnected by a fully meshed ATM OC-3 backbone. . Customers receive "single-hop/no pop" connectivity to the Internet exchange points. . Conxion's present throughput capability is in excess of 10 Terabytes per day. . Conxion's nation-wide network includes PBNAP, MAE-WEST, ADDS-Chicago, and MAE- EAST. . Expansion plans call for eight domestic data centers, and 1-3 international locations by the middle of 1999. Conxion Corporation . 4201 Burton Drive . Santa Clara, CA 95054-1512 www.conxion.com . phone 408.566.8500 . fax 408.980.8240 --------------- Proposal No. T3V1.0- Dated 5/23/99 [Logo of CONXION CORPORATION] III. Conxion Solutions: - ----------------------- T3 Service . Conxion's T3 customers are drawn point-to-point into Conxion's edge routers, one hop from the Internet Exchange Points. Monitoring - ---------- . All servers and other network devices on Conxion's Internetwork are monitored every minute. If a server or device fails to respond for 5 minutes an email notification is sent. If a server or device fails to respond for 10 minutes a page notification is sent. Customers may opt to be included on the email notification for their server monitoring. Once the server has been restored a follow up email notification will be sent. . Custom monitoring is available up on request. Depending on customer requirements, custom monitoring may require billable consulting time. Service and Performance Guarantee - --------------------------------- Service guarantee: (Excluding local loop outages and maintenance windows.) Conxion considers an "outage" to be any service degradation on Conxion's network that is greater than 50%, and lasts for more than 12 minutes. You will receive a free day of service for each day that you experience an outage. Five outages over a thirty-day rolling period and you will receive a free month of service. Two consecutive months of free service and you can cancel your contract without penalty. Performance guarantee: Conxion guarantees your circuit will be always be connected to a facility that has at least three times the capacity of your circuit. Conxion guarantees the capacity of the facility to which you are connected will not exceed an average utilization of 70%. At an average utilization of 70% bandwidth, we increase our capacity. Customer Responsibilities: - -------------------------- . Providing on-site technical contact for circuit installation by Telco. . Configuration of hardware not provided by Conxion. . Coordinating in-house wiring with Telco. Conxion will notify Telco of need for in-house wiring at the time the circuit order is placed. Circuit Move: A circuit can be moved to another location within the company. Provisioning costs to move the circuit will be billed to the customer. Cancellation of Service: Agreements are only cancelable without penalty due to a breach of Conxion's Service Guarantee as described above. Conxion Confidential 05/23/99 Page 2 Proposal No. T3V1.0- Dated 5/23/99 [Logo of CONXION CORPORATION] V. Technical Support - --------------------- It is Conxion's mission, and history, to provide our customers with the highest performance, and most reliable Internet solutions. Conxion understands that our customers, like us, take their Internet business seriously. Therefore every Conxion account is supported with exemplary technical support. Conxion works diligently to proactively monitor network activity and behavior, to deal with issues before they become problems. However, should a problem arise with your service Conxion's qualified, professional staff, will assist you in a prompt and efficient manner, 24 hours a day, 7 days a week. Conxion incorporates an escalation procedure that includes senior level management intervention, when necessary. VI. Consulting Services - --------------------------- Conxion's expert technical staff is available to answer any of your questions, or help you solve any problem you may have with your server. Consulting services are billed at a rate of $150/hr during business hours (8 A.M to 6 P.M., M-F PST) and $350/hr during off-hours (6 P.M. to 8 A.M. M-F and all day Saturday Sunday PST). Any problems that you experience which are shown to have been caused by Conxion, will not be billed. If your business needs to pre-approve consulting service expenditures, we recommend that you include a line item in your initial Purchase Order covering an initial block of 10 hours of service. The service will be charged as a line item in your invoice as you accrue billable hours. Please be sure to include the names of employees at your company authorized to incur billable consulting services. VII. Ordering and Billing - ---------------------------- All prices quoted within this proposal are valid for 30 (thirty) days from above date. To Order: . All orders are subject to the "TERMS AND CONDITIONS" as indicated below. . Ordering for all services requires a P.O. with "Net Due" terms, which must include an acknowledgment of the recurring nature of the ongoing Internet service for the duration of the contract. A physical purchase order is preferable; a faxed purchase order is acceptable. . Payment must be received prior to service activation. Please include a check for the first term of service with your purchase order if immediate service activation is required. Otherwise, Conxion will await payment on the first invoice before activating the service. . Please return the attached agreement and technical contact sheet with you order. . If your company requires pre-approval before accruing consulting expenses, please include a line item for consulting services, and the names of employees at your company authorized to accrue billable consulting services. Lead Time: The Telco requires four to six weeks for installation of the circuit. Conxion can bring your connection live within 48 hours after the circuit has been installed and tested. Conxion Confidential 05/23/99 Page 3 Proposal No. T3V1.0- Dated 5/23/99 [Logo of CONXION CORPORATION] CONXION TERMS AND CONDITIONS 1. Conxion services may only be used for lawful purposes. Transmission of any material in violation of any US federal law is prohibited. This includes but is not limited to; copyrighted material, material legally judged to be threatening or obscene or material protected by trade secret. The customer agrees to indemnify and hold harmless Conxion from any claims resulting from the customer use of these services, which damages the customer or another party. 2. Access to any other networks connected to Conxion implies that the customer must comply with the rules appropriate for that other network. Conxion services may be used for any lawful purpose, including any lawful commercial purpose. Connectivity is provided for the customer organization only. 3. Conxion makes no warranties or conditions, either express or implied, including without limitation, warranties of title, non-infringement and the implied warranties of merchantability and fitness for a particular purpose, concerning the services provided or any information accessed using these services. 4. Conxion will not be liable for any direct or indirect damages, including without limitation, lost profits, lost savings, or any incidental, special, or indirect damages or other economic consequential damages, even if Conxion has been advised of the possibility of such damages, which may result from the use of these services by its customers or any related or unrelated third parties. This includes loss of data resulting from delays, non-deliveries, mis-deliveries or service interruptions caused by Conxion negligence or the customer's errors or omissions. 5. Conxion specifically denies any responsibility for the accuracy or quality of information obtained through its services. Use of any information obtained via Conxion services is at the customer's own risk. 6. Services are invoiced and payment is required in advance of the first day that services are available. The invoice amount shall be appropriate to the selected term (monthly, quarterly, or annually) in accordance with Conxion's price list. Ongoing services billed under a monthly or quarterly plan will be invoiced in advance on the first day of the month succeeding the month in which the term expired. 7. Conxion Dedicated/Web customers have root access to their servers, if desired. However, customers may not move, modify, or otherwise inhibit Conxion's access to the web server log files. 8. Terms of payment are 10 days from date of invoice. Accounts are in default if payment is not received by due date. Accounts unpaid 30 days from date of invoice may have their service interrupted. Such interruption does not relieve the customer from the obligation to pay amounts due. Accounts in default are subject to a service charge of 1.5% per month on the outstanding balance. If in payment default, the customer agrees to reimburse Conxion its reasonable expenses, including attorney and other fees, incurred in collecting amounts due. 9. These terms and conditions supersede all previous representations, understandings or agreements and shall prevail notwithstanding any variance with terms and conditions of any other submitted. Use of Conxion's services constitutes acceptance of these terms and conditions. Conxion Confidential 05/23/99 Page 4 Proposal No. T3V1.0- Dated 5/23/99 [Logo of CONXION CORPORATION] T1 SERVICE AGREEMENT Company : Object Products Billing Contact: Laurel Brown ----------------- ---------------------------- Billing Address: 330 Townsend Department: ----------------- ---------------------------- Suite #206 Phone Number: 415-495-4741 x106 ----------------- ---------------------------- City: SF Fax Number: 415-495-4748 ----------------- ---------------------------- State: CA Email Address: Laurelb@objectproducts.com ----------------- ---------------------------- Zip: 94107 Tax ID Number: 68-0347739 ----------------- ---------------------------- D&B Number: ---------------------------- Project Mgr: Michael Barry Phone Number: 415-495-4741 x104 ----------------- ---------------------------- Email Address: Mikeb@objectproducts.com ----------------------------
Estimated Charges as Per Proposal
Qty Item Install Charges Monthly Quarterly Contract Term - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Hosting Solution: 128K CIR/T1 Port - ----------------------------------------------------------------------------------------- 1 Conxion Charges - [*] [*] [*] - ----------------------------------------------------------------------------------------- PacBell Charges - ----------------------------------------------------------------------------------------- 1 Install [*] - - ----------------------------------------------------------------------------------------- 1 Monthly [*] [*] [*] - ----------------------------------------------------------------------------------------- - - - - - ----------------------------------------------------------------------------------------- Total Cost [*] [*] [*] [*] - -----------------------------------------------------------------------------------------
Object Products, hereafter referred to as "Customer", hereby orders from Conxion Corporation, the Products and Services for the term specified in this Order Form and Agreement. This Order Form and Agreement is valid when accepted by an authorized representative of Conxion. The term begins on the day of installation of equipment by Conxion. CUSTOMER HAS READ AND AGREES TO BE BOUND BY THE "CONXION TERMS AND CONDITIONS" FOR THE SERVICES SPECIFIED IN THIS AGREEMENT. CUSTOMER AND CONXION AGREE THAT THE TERMS AND CONDITIONS OF THIS AGREEMENT REPLACE PROVISIONS OF ANY CUSTOMER DRAFTED PURCHASE ORDER AND SUPERSEDE ALL PROPOSALS, WRITTEN OR ORAL, AS WELL AS OTHER COMMUNICATIONS BETWEEN CUSTOMER AND CONXION RELATING TO THIS ORDER. Customer confirms that non-standard support services will be billed to customer account at the rate of $150/HR during business hours and $350/HR during non- business hours (subject to engineer availability). Such services will only be extended to parties designated above as technical and administrative contacts. [ ] DNS Form Attached [ ] Custom Configuration/Consulting Form Attached [ ] Technical Support Contact Sheet Attached - ------------------------------------------------------------------------------- ACCEPTED BY CUSTOMER: ACCEPTED BY CONXION: Signature: /s/ Signature: -------------------------- ---------------------------- Name: Michael Barry Name: -------------------------- ---------------------------- Title: C.I.O Title: -------------------------- ---------------------------- Date: 5/28/99 PO# Date: -------------- --------- ---------------------------- - ------------------------------------------------------------------------------- * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential 05/23/99 Page 5 Proposal No. T3V1.0- Dated 5/23/99 [Logo of CONXION CORPORATION] Support Services Information Form Please select one of the following billing options: [ ] Please add billable consulting services to my monthly invoice as they are accrued. [ ] Billable consulting services require a pre-approved Purchase Order. Please find Purchase Order # ___________________ attached as an open Purchase Order for consulting services. Authorized Contacts: Please identify the "Super User" and up to two other contacts for your company. The Super User is the primary point of contact and the only one authorized to call Conxion with updates to your company's list of "Authorized Contacts." Please identify the other two contacts as either "Technical Contacts" or "Reports-Only Contacts." Technical contacts have access to the full range of technical services. Reports-Only contacts can only access your website's online reports. Note that requests from un-authorized contacts from your company will not be provided service. Contact 1: Super User and designated primary point of contact. First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Department: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax No.: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 2: [ ]Technical contact [ ] Reports-Only contact First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Department: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax No.: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 3: [ ]Technical contact [ ] Reports-Only contact First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Deparatment: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Conxion Confidential 05/23/99 Page 6 EX-10.19 17 DEDICATED SERVER AGREEMENT DATED 06/01/99 EXHIBIT 10.19 Proposal No. DSv1.0 Date 06/01/99 [Logo of CONXION CORPORATION] Tuesday, June 01, 1999 Michael Barry Object Products Mikeb@objectproducts.com - ------------------------ I. The Conxion Internetwork: - --------------------------- Conxion is able to offer the highest performance and most reliable service because of our unique fault-tolerant architecture: . Each data center uses dual OC-48 circuits (over 300 Mbps) connected to diverse Network Access Points, over true SONET rings. . OC-3c/OC-12c Packet over SONET backbone. . All nodes utilize OC-48 SONET equipment, and are scalable to OC-768. . All Web servers reside on 100Mbps LANs, uplinked to Gigabit Ethernet. . Customers experience maximum exposure to the Internet as a result of our Tier 1 provider status and over 140 public and private peering agreements. . Conxion's robust data center architecture is interconnected by a fully meshed ATM OC-3/ OC12 backbone. . Customers receive "single-hop/no pop" connectivity to the Internet exchange points. . Conxion's present throughput capability is in excess of 10 Terabytes per day. . Conxion's nation-wide network includes PBNAP, MAE-WEST, ADDS-Chicago, and MAE-EAST. . Expansion plans call for eight domestic data centers, and 1-3 international locations by the middle of 1999. II. Conxion Web Hosting Service - -------------------------------- Labor, Services, and Maintenance provided by Conxion for Dedicated Server hosting: Data Center - ----------- . Class "A" data centers with industrial strength hosting environment, controlled access, raised floors, HVAC, fire detection and suppression systems. . Racks are mounted to the concrete floor in a locked facility in a secure building. . Up to 8 separate power devices per rack with a total draw not exceeding 20 AMPS/rack. . Fully conditioned electrical power. . UPS back-up power, with multiple separate UPS units. . Diesel generator back-up power (72 hour capacity; hot refillable from the street). Conxion Corporation . 4201 Burton Drive . Santa Clara, CA 95054-1512 www.conxion.com . phone 408.566.8500 . fax 408.980.8240 --------------- Proposal No. DSv1.0 Date 06/01/99 [Logo of CONXION CORPORATION] Internet Connectivity - --------------------- . Full-time connectivity between the server complex and a backbone/edge router of no less than 100 Megabits/sec. . Full-time connectivity between backbone/edge router and the Internet of no less than OC-3. (155 Megabits/second). Maintenance & Support - --------------------- . Includes up to two hours of installation and standard configuration consulting for each server. . 7 x 24 maintenance of the server hardware. . Maintenance of the operating system and web server software, including as a minimum, revision levels and software patches. . Access to 7 x 24 consulting services (detailed description below) . File backup (daily incremental backup, weekly full backup). All backups are stored off-site in fireproof safes. . Access to the server(s), with the assistance of Conxion personnel. . Full root/administrative access to servers. Customers are only prevented from altering anything that will affect the log files. Conxion must have access to log files at all times. . Detailed log usage reports, custom per request. The usage reports are in WUSAGE format. An example may be viewed on the Boutell.Com, Inc. Web Site at the following URL: http://www.boutell.com/wusage/example/. -------------------------------------- Monitoring - ---------- . All servers and other network devices on Conxion's Internetwork are monitored every minute. If a server or device fails to respond for 5 minutes an email notification is sent. If a server or device fails to respond for 10 minutes a page notification is sent. Customers may opt to be included on the email notification for their server monitoring. Once the server has been restored a follow up email notification will be sent. . Standard monitoring includes A) Hardware B) Operating System C) HTTP & FTP requests. . Custom monitoring is available up on request. Depending on customer requirements, custom monitoring may require billable consulting time. Service and Performance Guarantee - --------------------------------- Service guarantee: (Excluding maintenance windows.) Conxion considers an "outage" to be any service degradation on Conxion's network that is greater than 50%, and lasts for more than 12 minutes. You will receive a free day of service for each day that you experience an outage. Five outages over a thirty-day rolling period and you will receive a free month of service. Two consecutive months of free service and you can cancel your contract without penalty. Performance guarantee: Conxion guarantees the facility you are connected to will always be at least three times bigger than the 100Mbit LAN, and will never exceed an average of 70% utilization. Conxion will increase bandwidth when the average utilization of Conxion's circuit is 70%. Customer Responsibilities - ------------------------- . Experience with the UNIX or NT platform being provided by Conxion. . Internet Access to remotely maintain and administer your site. (If needed, Conxion can provide Conxion Confidential DSv1.0 Page 2 Proposal No. DSv1.0 Date 06/01/99 [Logo of CONXION CORPORATION] Internet Access in the San Francisco Bay Area, Chicago, and Washington DC) . Maintenance of system security as you deem necessary. . Third party software licenses and installation, unless otherwise indicated. . Content installation and updates. . Conxion shares administrative access and retains rights to all server log files. Customer cannot alter the log files without Conxion approval. NOTE: **Any changes made to the log files without Conxion's approval will be corrected at your expense, billing will be based on Conxion's consulting services described herein. ** III. Conxion Proposed Solution(s): - ----- ----------------------------- Download Services: Conxion currently provides http:// download service for some of the biggest names in the industry including Microsoft, Intel and Oracle. Turnaround time for setting up a download site can be as fast as 24 hours under Conxion's Shared Server program. This service is offered on Conxion's shared servers and the customer pays only for throughput as calculated in the standard metered usage chart. The service can also be implemented on a dedicated machine under Conxion's Dedicated Server program, for which the quarterly server fee must be paid in addition to usage charges. Dedicated Server Offering: The Dedicated Server Offering from Conxion is for customers who wish to take advantage of Conxion's unmatched Web Hosting service and require dedicated servers for security, capacity, or manageability. Conxion Dedicated Server customers have the choice of using a high performance UNIX or NT machine, both on Conxion's standard 100Mbps Web Farm LAN. Dedicated Server customers pay a quarterly fee for the dedicated machine and throughput charges derived from the standard metered usage chart (below). NT Server: Compaq 1850R - Processor: Dual Pentium II, Twin 450 MHz - Memory: 320 MB RAM - Storage: 3 x 9 GB FAST WIDE SCSI HDDS, RAID 5 striped, hot pluggable/hot swappable - Network: 100 BaseT Ethernet / Full Duplex Mode - Conxion server service - Web Server: IIS/Netscape Enterprise server software - OS: Microsoft NT Server 4.0 - Standard Setup: PCAnywhere, FrontPage '98 Extensions, ASP, CGI, FTP, SMTP Conxion Confidential DSv1.0 Page 3 Proposal No. DSv1.0 Date 06/01/99 [Logo of CONXION CORPORATION] IV. Pricing Summary - ---- --------------- Conxion bills based upon actual usage. Please refer to the Dedicated Metered Usage Schedule provided below. If you anticipate your first quarter usage at lower or higher than that estimated below, please adjust the amount based upon your most recent projections.
Qty Item Monthly Initial Qtr. Contract Term - ---------------------------------------------------------------------------------------------------------------------------- Hosting Solution: Compaq 1850R - ---------------------------------------------------------------------------------------------------------------------------- 1 Server Fee: Compaq 1850R [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------- 1 Server Colocation Fee [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------- 1 24x7 Server Maintenance [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------- Server Sub Total [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------- 1 Usage:/2/ Usage 10GB/ Month [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------- 1 Set Up Fee/3/ ($1500) - - - - ---------------------------------------------------------------------------------------------------------------------------- 1 Expedite Fee/4/ ($2000) - - - - ---------------------------------------------------------------------------------------------------------------------------- Total Cost [*] [*] [*] - ----------------------------------------------------------------------------------------------------------------------------
CONTRACT TERM: 12 Months 1. Payment is quarterly in advance. PO for full contract term required with order. 2. Minimum usage is [*]/10GB of usage per month per server. Usage pricing is based off of Conxion's Dedicated Server Metered Usage Schedule. Customers whose throughput estimations surpass actual activity will be credited for future service. If an underestimation of throughput is made, the difference will be billed the following quarter. 3. Set Up Fee applies for contract terms less than one year. $1500/server 4. Expedite Fee applies for service setup in less than two weeks from date accepted by Conxion Finance. $2000/server V. Technical Support - --------------------- Conxion understands that your Internet strategy is mission critical. That is why we put so much emphasis on our reliability, high performance and customized technical support. The $300 per month server support fee provides 24 x 7 monitoring of your server's performance and its network connectivity. Conxion proactively monitors network activity and behavior in order to be able to deal with issues before they become problems. Any problems with your server, it's operating system, or its Internet connectivity will be dealt with by our professional staff in a prompt and efficient manner, 24 hours a day, 7 days a week, at no charge to the customer. Any support requirements created by customer modification of the standard configuration will be considered a consulting service. * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential DSv1.0 Page 4 Proposal No. DSv1.0 Date 06/01/99 [Logo of CONXION CORPORATION] VI. Consulting Services - --------------------------- Conxion's expert technical staff is available to answer any of your questions, or help you solve any problem you may have with your server. Consulting services are billed at a rate of $150/hr during business hours (8 A.M to 6 P.M., M-F PST) and $350/hr during off-hours (6 P.M. to 8 A.M. M-F and all day Saturday Sunday PST). Any problems that you experience which are shown to have been caused by Conxion, will not be billed. If your business needs to pre-approve consulting service expenditures, we recommend that you include a line item in your initial Purchase Order covering an initial block of 10 hours of service. The service will be charged as a line item in your invoice as you accrue billable hours. Please be sure to include the names of employees at your company authorized to incur billable consulting services. VII. Ordering and Billing - -------------------------- All prices quoted within this proposal are valid for 30 (thirty) days from above date. Billing for all Conxion services is quarterly in advance. Dedicated Server customers pay throughput/month charges in addition to quarterly server fees. An estimate of the future quarter's throughput is necessary to determine the advance billing charge. Customers whose throughput estimations surpass actual activity will be credited for future service. If an underestimation of throughput is made, the difference will be billed the following quarter. To Order: . All orders are subject to the "TERMS AND CONDITIONS" as indicated below. . Ordering for all services requires a P.O. with "Net Due" terms, which must include an acknowledgment of the recurring nature of the ongoing Internet service for the duration of the contract. A physical purchase order is preferable; a faxed purchase order is acceptable. . Payment must be received prior to service activation. Please include a check for the first term of service with your purchase order if immediate service activation is required. Otherwise, Conxion will await payment on the first invoice before activating the service. . Please return the attached agreement and technical contact sheet with you order. . If your company requires pre-approval before accruing consulting expenses, please include a line item for consulting services, and the names of employees at your company authorized to accrue billable consulting services. Lead-Time: Lead-time for Conxion Dedicated Server service implementation is two weeks from receipt of payment. Payment for the first quarterly invoice must be received prior to service commencement. Dedicated server implementation can be expedited to less than 2 (two) weeks at a cost of $2,000 per dedicated server. Conxion Confidential DSv1.0 Page 5 Proposal No. DSv1.0 Date 06/01/99 [Logo of CONXION CORPORATION] Dedicated Server Metered Usage Schedule: All Dedicated Server prices are based on throughput/month as calculated in this chart.
Throughput/Month Monthly Rates Quarterly Rates - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- 10.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 11.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 12.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 13.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 15.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 17.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 20.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 22.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 24.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 26.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 28.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 30.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 33.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 36.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 39.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 42.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 45.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 48.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 51.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 52.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 55.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 58.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 61.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 64.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 67.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 70.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 73.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 76.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 79.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 82.0 [*] [*] - -------------------------------------------------------------------------------------------------------------- 85.0 $[*]/MB - --------------------------------------------------------------------------------------------------------------
* Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential DSv1.0 Page 6 Proposal No. DSv1.0 Date 06/01/99 [Logo of CONXION CORPORATION] CONXION TERMS AND CONDITIONS 1. Conxion services may only be used for lawful purposes. Transmission of any material in violation of any US federal law is prohibited. This includes but is not limited to; copyrighted material, material legally judged to be threatening or obscene or material protected by trade secret. The customer agrees to indemnify and hold harmless Conxion from any claims resulting from the customer use of these services, which damages the customer or another party. 2. Access to any other networks connected to Conxion implies that the customer must comply with the rules appropriate for that other network. Conxion services may be used for any lawful purpose, including any lawful commercial purpose. Connectivity is provided for the customer organization only. 3. Conxion makes no warranties or conditions, either express or implied, including without limitation, warranties of title, non-infringement and the implied warranties of merchantability and fitness for a particular purpose, concerning the services provided or any information accessed using these services. 4. Conxion will not be liable for any direct or indirect damages, including without limitation, lost profits, lost savings, or any incidental, special, or indirect damages or other economic consequential damages, even if Conxion has been advised of the possibility of such damages, which may result from the use of these services by its customers or any related or unrelated third parties. This includes loss of data resulting from delays, non-deliveries, mis-deliveries or service interruptions caused by Conxion negligence or the customer's errors or omissions. 5. Conxion specifically denies any responsibility for the accuracy or quality of information obtained through its services. Use of any information obtained via Conxion services is at the customer's own risk. 6. Services are invoiced and payment is required in advance of the first day that services are available. The invoice amount shall be appropriate to the selected term (monthly, quarterly, or annually) in accordance with Conxion's price list. Ongoing services billed under a monthly or quarterly plan will be invoiced in advance on the first day of the month succeeding the month in which the term expired. Cancellation of service must be in writing with 60 days notice. Conxion reserves the right to change the service rates upon 60 days notice in advance of the effective date. 7. Conxion Dedicated/Web customers have root access to their servers, if desired. However, customers may not move, modify, or otherwise inhibit Conxion's access to the web server log files. 8. Terms of payment are 10 days from date of invoice. Accounts are in default if payment is not received by due date. Accounts unpaid 30 days from date of invoice may have their service interrupted. Such interruption does not relieve the customer from the obligation to pay amounts due. Accounts in default are subject to a service charge of 1.5% per month on the outstanding balance. If in payment default, the customer agrees to reimburse Conxion its reasonable expenses, including attorney and other fees, incurred in collecting amounts due. 9. These terms and conditions supersede all previous representations, understandings or agreements and shall prevail notwithstanding any variance with terms and conditions of any other submitted. Use of Conxion's services constitutes acceptance of these terms and conditions. Conxion Confidential DSv1.0 Page 7 Proposal No. DSv1.0 Date 06/01/99 DEDICATED SERVER AGREEMENT [Logo of CONXION CORPORATION]
Company : Object Products Billing Contact: Laurel Brown ----------------- ---------------------------- Billing Address: 330 Townsend Department: ------------- ---------------------------- Suite 206 Phone Number: 415-495-4741 x106 ----------------- ---------------------------- City: SF Fax Number: 415-495-4748 ----------------- ---------------------------- State: CA Email Address: Laurelb@objectproducts.com ----------------- ---------------------------- Zip: 94107 Tax ID Number: 68-0347739 ----------------- ---------------------------- D&B Number: ---------------------------- Project Mgr: Phone Number: 415-495-4741 x104 ----------------- ---------------------------- Email Address: Mikeb@objectproducts.com ----------------------------
Estimated Charges as Per Proposal
Qty Item Monthly Initial Qtr. Contract Term - ------------------------------------------------------------------------------------------------------------------------- Hosting Solution: Compaq 1850R - ------------------------------------------------------------------------------------------------------------------------- 1 Server Fee: Compaq 1850R [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- 1 Server Colocation Fee [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- 1 24x7 Server Maintenance [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- Server Sub Total [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- 1 Usage:/2/ Usage 10GB/ Month [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------- 1 Set Up Fee/3/ ($1500) - - - - ------------------------------------------------------------------------------------------------------------------------- 1 Expedite Fee/4/ ($2000) - - - - ------------------------------------------------------------------------------------------------------------------------- Total Cost [*] [*] [*] - -------------------------------------------------------------------------------------------------------------------------
CONTRACT TERM: 12 Months 1. Payment is quarterly in advance. PO for full contract term required with order. 2. Minimum usage is [*]/10GB of usage per month per server. Usage pricing is based off of Conxion's Dedicated Server Metered Usage Schedule. Customers whose throughput estimations surpass actual activity will be credited for future service. If an underestimation of throughput is made, the difference will be billed the following quarter. 3. Set Up Fee applies for contract terms less than one year. $1500/server 4. Expedite Fee applies for service setup in less than two weeks from date accepted by Conxion Finance. $2000/server Object Products , hereafter referred to as "Customer", hereby orders - ------------------------ from Conxion Corporation, the Products and Services for the term specified in this Order Form and Agreement. This Order Form and Agreement is valid when accepted by an authorized representative of Conxion. The term begins on the day of installation of equipment by Conxion. CUSTOMER HAS READ AND AGREES TO BE BOUND BY THE "CONXION TERMS AND CONDITIONS" FOR THE SERVICES SPECIFIED IN THIS AGREEMENT. CUSTOMER AND CONXION AGREE THAT THE TERMS AND CONDITIONS OF THIS AGREEMENT REPLACE PROVISIONS OF ANY CUSTOMER DRAFTED PURCHASE ORDER AND SUPERSEDE ALL PROPOSALS, WRITTEN OR ORAL, AS WELL AS OTHER COMMUNICATIONS BETWEEN CUSTOMER AND CONXION RELATING TO THIS ORDER. Customer confirms that non-standard support services will be billed to customer account at the rate of $150/HR during business hours and $350/HR during non- business hours (subject to engineer availability). Such services will only be extended to parties designated as technical and administrative contacts. [ ] DNS Form Attached [ ] Custom Configuration/Consulting Form Attached [ ] Technical Support Contact Sheet Attached
ACCEPTED BY CUSTOMER: ACCEPTED BY CONXION SALES: ACCEPTED BY CONXION FINANCE: Signature: /s/ Signature Signature: ----------------------------- --------------------------- ---------------------------- Name: Michael Barry Name: Name: --------------------------------- --------------------------- ---------------------------- Title: C.I.O. Title: --------------------------------- --------------------------- Date: 6/1/99 PO# 9904001 Date: Order# Date: Customer # ------------ ----------------- ------------ ----------- ----------- -----------
* Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential 06/01/99 Page 8 Proposal No. DSv1.0 Date 06/01/99 [Logo of CONXION CORPORATION] Support Services Information Form Please select one of the following billing options: [ ] Please add billable consulting services to my monthly invoice as they are accrued. [ ] Billable consulting services require a pre-approved Purchase Order. Please find Purchase Order # ___________________ attached as an open Purchase Order for consulting services. Authorized Contacts: Please identify the "Super User" and up to two other contacts for your company. The Super User is the primary point of contact and the only one authorized to call Conxion with updates to your company's list of "Authorized Contacts." Please identify the other two contacts as either "Technical Contacts" or "Reports-Only Contacts." Technical contacts have access to the full range of technical services. Reports-Only contacts can only access your website's online reports. Note that requests from un-authorized contacts from your company will not be provided service. Contact 1: Super User and designated primary point of contact. First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Department: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax No.: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 2: [ ]Technical contact [ ] Reports-Only contact First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Department: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax No.: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 3: [ ]Technical contact [ ] Reports-Only contact First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Deparatment: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Conxion Confidential 06/01/99 Page 9 EX-10.20 18 TI SERVICE AGREEMENT DATED 09/01/99 EXHIBIT 10.20 Proposal No. T1V1.0- Dated 9/1/99 [Logo of CONXION CORPORATION] Monday, August 30th, 1999 Michael Barry OrganicNet, Inc. I. Conxion Corporation - ----------------------- Conxion Corporation was founded in 1994 with a single mission: to provide the highest quality Internet delivery and transaction outsourcing services. That requires exceptional dependability not only in technology, but also in the company behind it. Today, Conxion is the only provider of internetwork delivery services, which is entirely independent and solely focused on Internet services. Privately held with no venture capital, no legacy technology, and no legacy cost structure, Conxion has been cash flow positive from the start. Conxion is debt- free and financially secure. II. The Conxion Internetwork: - ------------------------------ Conxion is able to offer the highest performance and most reliable service because of our unique fault-tolerant architecture: . Each data center uses dual OC-3 circuits (over 300 Mbps) connected to diverse Network Access Points, over true SONET rings. . OC-3c/OC-12c Packet over SONET backbone. . All nodes utilize OC-48 SONET equipment, and are scalable to OC-576. . All Web servers reside on 100Mbps LANs, moving to Gigabit Ethernet. . Customers experience maximum exposure to the Internet as a result of our Tier 1 provider status and over 140 public and private peering agreements. . Conxion's robust data center architecture is interconnected by a fully meshed ATM OC-3 backbone. . Customers receive "single-hop/no pop" connectivity to the Internet exchange points. . Conxion's present throughput capability is in excess of 20 Terabytes per day. . Conxion's nation-wide network includes PBNAP, MAE-WEST, ADDS-Chicago, and MAE- EAST. . Expansion plans call for eight domestic data centers, and 1-3 international locations by the middle of 1999. Conxion Corporation . 4201 Burton Drive . Santa Clara, CA 95054-1512 www.conxion.com . phone 408.566.8500 . fax 408.980.8240 --------------- Proposal No. T1V1.0- Dated 9/1/99 [Logo of CONXION CORPORATION] III. Conxion Solutions: - ----------------------- T1 Service . Conxion's T1 customers are drawn point-to-point into Conxion's edge routers, one hop from the Internet Exchange Points. Monitoring - ---------- . All servers and other network devices on Conxion's Internetwork are monitored every minute. If a server or device fails to respond for 5 minutes an email notification is sent. If a server or device fails to respond for 10 minutes a page notification is sent. Customers may opt to be included on the email notification for their server monitoring. Once the server has been restored a follow up email notification will be sent. . Custom monitoring is available up on request. Depending on customer requirements, custom monitoring may require billable consulting time. Service and Performance Guarantee - --------------------------------- Service guarantee: (Excluding local loop outages and maintenance windows.) Conxion considers an "outage" to be any service degradation on Conxion's network that is greater than 50%, and lasts for more than 12 minutes. You will receive a free day of service for each day that you experience an outage. Five outages over a thirty-day rolling period and you will receive a free month of service. Two consecutive months of free service and you can cancel your contract without penalty. Performance guarantee: Conxion guarantees your circuit will be always be connected to a facility that has at least three times the capacity of your circuit. Conxion guarantees the capacity of the facility to which you are connected will not exceed an average utilization of 70%. At an average utilization of 70% bandwidth, we increase our capacity. Customer Responsibilities: - -------------------------- . Providing on-site technical contact for circuit installation by Telco. . Configuration of hardware not provided by Conxion. . Coordinating in-house wiring with Telco. Conxion will notify Telco of need for in-house wiring at the time the circuit order is placed. Conxion Confidential 09/01/99 Page 2 Proposal No. T1V1.0- Dated 9/1/99 [Logo of CONXION CORPORATION] IV. Technical Support - ---------------------- It is Conxion's mission, and history, to provide our customers with the highest performance, and most reliable Internet solutions. Conxion understands that our customers, like us, take their Internet business seriously. Therefore every Conxion account is supported with exemplary technical support. Conxion works diligently to proactively monitor network activity and behavior, to deal with issues before they become problems. However, should a problem arise with your service Conxion's qualified, professional staff, will assist you in a prompt and efficient manner, 24 hours a day, 7 days a week. Conxion incorporates an escalation procedure that includes senior level management intervention, when necessary. V. Consulting Services - -------------------------- Conxion's expert technical staff is available to answer any of your questions, or help you solve any problem you may have with your server. Consulting services are billed at a rate of $150/hr during business hours (8 A.M to 6 P.M., M-F PST) and $350/hr during off-hours (6 P.M. to 8 A.M. M-F and all day Saturday Sunday PST). Any problems that you experience which are shown to have been caused by Conxion, will not be billed. If your business needs to pre-approve consulting service expenditures, we recommend that you include a line item in your initial Purchase Order covering an initial block of 10 hours of service. The service will be charged as a line item in your invoice as you accrue billable hours. Please be sure to include the names of employees at your company authorized to incur billable consulting services. VI. Ordering and Billing - --------------------------- All prices quoted within this proposal are valid for 30 (thirty) days from above date. To Order: . All orders are subject to the "TERMS AND CONDITIONS" as indicated below. . Ordering for all services requires a P.O. with "Net Due" terms, which must include an acknowledgment of the recurring nature of the ongoing Internet service for the duration of the contract. A physical purchase order is preferable; a faxed purchase order is acceptable. . Payment must be received prior to service activation. Please include a check for the first term of service with your purchase order if immediate service activation is required. Otherwise, Conxion will await payment on the first invoice before activating the service. . Please return the attached agreement and technical contact sheet with you order. . If your company requires pre-approval before accruing consulting expenses, please include a line item for consulting services, and the names of employees at your company authorized to accrue billable consulting services. Lead Time: The Telco requires four to six weeks for installation of the circuit. Conxion can bring your connection live within 48 hours after the circuit has been installed and tested. Conxion Confidential 09/01/99 Page 3 Proposal No. T1V1.0- Dated 9/1/99 [Logo of CONXION CORPORATION] CONXION TERMS AND CONDITIONS 1. Conxion services may only be used for lawful purposes. Transmission of any material in violation of any US federal law is prohibited. This includes but is not limited to; copyrighted material, material legally judged to be threatening or obscene or material protected by trade secret. The customer agrees to indemnify and hold harmless Conxion from any claims resulting from the customer use of these services, which damages the customer or another party. 2. Access to any other networks connected to Conxion implies that the customer must comply with the rules appropriate for that other network. Conxion services may be used for any lawful purpose, including any lawful commercial purpose. Connectivity is provided for the customer organization only. 3. Conxion makes no warranties or conditions, either express or implied, including without limitation, warranties of title, non-infringement and the implied warranties of merchantability and fitness for a particular purpose, concerning the services provided or any information accessed using these services. 4. Conxion will not be liable for any direct or indirect damages, including without limitation, lost profits, lost savings, or any incidental, special, or indirect damages or other economic consequential damages, even if Conxion has been advised of the possibility of such damages, which may result from the use of these services by its customers or any related or unrelated third parties. This includes loss of data resulting from delays, non-deliveries, mis-deliveries or service interruptions caused by Conxion negligence or the customer's errors or omissions. 5. Conxion specifically denies any responsibility for the accuracy or quality of information obtained through its services. Use of any information obtained via Conxion services is at the customer's own risk. 6. Services are invoiced and payment is required in advance of the first day that services are available. The invoice amount shall be appropriate to the selected term (monthly, quarterly, or annually) in accordance with Conxion's price list. Ongoing services billed under a monthly or quarterly plan will be invoiced in advance on the first day of the month succeeding the month in which the term expired. 7. Conxion Dedicated/Web customers have root access to their servers, if desired. However, customers may not move, modify, or otherwise inhibit Conxion's access to the web server log files. 8. Terms of payment are 10 days from date of invoice. Accounts are in default if payment is not received by due date. Accounts unpaid 30 days from date of invoice may have their service interrupted. Such interruption does not relieve the customer from the obligation to pay amounts due. Accounts in default are subject to a service charge of 1.5% per month on the outstanding balance. If in payment default, the customer agrees to reimburse Conxion its reasonable expenses, including attorney and other fees, incurred in collecting amounts due. 9. These terms and conditions supersede all previous representations, understandings or agreements and shall prevail notwithstanding any variance with terms and conditions of any other submitted. Use of Conxion's services constitutes acceptance of these terms and conditions. Conxion Confidential 09/01/99 Page 4 Proposal No. T1V1.0- Dated 9/1/99 T1 SERVICE AGREEMENT [Logo of CONXION CORPORATION]
Company : OrganicNet, Inc. Billing Contact: Laurel Brown ------------------ ------------------------- Billing Address: 330 Townsend Department: -------------- ------------------------- Suite 206 Phone Number: 415-495-4741 ------------------ ------------------------- City: San Francisco Fax Number: 415-495-4748 ------------------ ------------------------- State: CA Email Address: Laurelb@organic-net.com ------------------ ------------------------- Zip: 94107 Tax ID Number: ------------------ ------------------------- D&B Number: ------------------------- Project Mgr: Michael Barry Phone Number: ------------------ ------------------------- Email Address: Mikeb@organic-net.com -------------------------
Estimated Charges as Per Proposal
Qty Item Annual Prepayment Contract Term - ------------------------------------------------------------------------------------------------------------------------- 12 months - ------------------------------------------------------------------------------------------------------------------------- 1 Frame T1-full (Annual prepayment, [*]/mo) [*] [*] (other option includes [*]/mo prepayment quarterly) - ------------------------------------------------------------------------------------------------------------------------- Total Cost [*] [*] - -------------------------------------------------------------------------------------------------------------------------
Circuit Move: A circuit can be moved to another location within the company. Provisioning costs to move the circuit will be billed to the customer. Cancellation of Service: Agreements are only cancelable without penalty due to a breach of Conxion's Service Guarantee as described above. OrganicNet, Inc. , hereafter referred to as "Customer", hereby orders from - -------------------- Conxion Corporation, the Products and Services for the term specified in this Order Form and Agreement. This Order Form and Agreement is valid when accepted by an authorized representative of Conxion. The term begins on the day of installation of equipment by Conxion. CUSTOMER HAS READ AND AGREES TO BE BOUND BY THE "CONXION TERMS AND CONDITIONS" FOR THE SERVICES SPECIFIED IN THIS AGREEMENT. CUSTOMER AND CONXION AGREE THAT THE TERMS AND CONDITIONS OF THIS AGREEMENT REPLACE PROVISIONS OF ANY CUSTOMER DRAFTED PURCHASE ORDER AND SUPERSEDE ALL PROPOSALS, WRITTEN OR ORAL, AS WELL AS OTHER COMMUNICATIONS BETWEEN CUSTOMER AND CONXION RELATING TO THIS ORDER. Customer confirms that non-standard support services will be billed to customer account at the rate of $150/HR during business hours and $350/HR during non- business hours (subject to engineer availability). Such services will only be extended to parties designated above as technical and administrative contacts. [ ] DNS Form Attached [ ] Custom Configuration/Consulting Form Attached [X] Technical Support Contact Sheet Attached
ACCEPTED BY CUSTOMER: ACCEPTED BY CONXION: Signature: /s/ Signature ----------------------------- --------------------------- Name: Michael Barry Name: --------------------------------- --------------------------- Title: C.I.O. Title: --------------------------------- --------------------------- Date: 8/31/99 PO# Date: ------------ ----------------- ----------------------
* Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. Conxion Confidential 09/01/99 Page 5 Proposal No. T1V1.0- Dated 9/1/99 [Logo of CONXION CORPORATION] Support Services Information Form Please select one of the following billing options: [X] Please add billable consulting services to my monthly invoice as they are accrued. [ ] Billable consulting services require a pre-approved Purchase Order. Please find Purchase Order # ___________________ attached as an open Purchase Order for consulting services. Authorized Contacts: Please identify the "Super User" and up to two other contacts for your company. The Super User is the primary point of contact and the only one authorized to call Conxion with updates to your company's list of "Authorized Contacts." Please identify the other two contacts as either "Technical Contacts" or "Reports-Only Contacts." Technical contacts have access to the full range of technical services. Reports-Only contacts can only access your website's online reports. Note that requests from un-authorized contacts from your company will not be provided service. Contact 1: Super User and designated primary point of contact. First Name: Michael Last Name: Barry ------------------------------------------------- Company: OrganicNet, Inc. ------------------------------------------------- Department: ------------------------------------------------- Title: C.I.O. ------------------------------------------------- Email Address: mikeb@organic-net.com ------------------------------------------------- Fax No.: 415-495-4748 ------------------------------------------------- Primary Phone No.: 415-495-4741 x104 ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 2: [ ]Technical contact [X] Reports-Only contact First Name: William Last Name: Shaw ------------------------------------------------- Company: OrganicNet, Inc. ------------------------------------------------- Department: ------------------------------------------------- Title: President ------------------------------------------------- Email Address: skips@organic-net.com ------------------------------------------------- Fax No.: 415-495-4748 ------------------------------------------------- Primary Phone No.: 415-495-4741 x103 ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Contact 3: [ ]Technical contact [ ] Reports-Only contact First Name: Last Name: ------------------------------------------------- Company: ------------------------------------------------- Department: ------------------------------------------------- Title: ------------------------------------------------- Email Address: ------------------------------------------------- Fax: ------------------------------------------------- Primary Phone No.: ------------------------------------------------- Cell Phone No.: ------------------------------------------------- Pager No: ------------------------------------------------- Conxion Confidential 09/01/99 Page 6 EX-21.1 19 SUBSIDIARIES OF REGISTRANT SUBSIDIARIES OF ORGANICNET, INC. EXHIBIT 21.1 HealthCheck Incorporated 3954 Youngfield Street Wheatridge, CO 80033 Liaisons in Negotiating Care, Inc. (L.I.N.C.) 26500 W. Agoura Road Suite 210 Calabasas, CA 91302 Velocity Healthcare Informatics, Inc. 8441 Wayzata Blvd., Suite 105 Minneapolis, MN 55426 Res-Q Healthcare Systems, Inc. 26500 W. Agoura Road Suite 210 Calabasas, CA 91302 PENDING: PSI-Med Corporation 1221 Dyer Road, Suite 260 Santa Ana, CA 92705 1. EX-23.1 20 CONSENT OF KPMG Exhibit 23.1 The Board of Directors OrganicNet, Inc. We consent to the use of our reports on the consolidated balance sheets of OrganicNet, Inc. and subsidiaries as of December 31, 1997 and 1998 and June 30, 1999, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1998, and for the six-month period ended June 30, 1999, and the related consolidated financial statement schedule, included herein and to the reference to our firm under the headings "Experts" and "Selected Consolidated Financial Data" in the Prospectus. /s/ KPMG LLP San Francisco, California September 30, 1999 EX-23.2 21 CONSENT OF KPMG Exhibit 23.2 The Board of Directors PSI-Med Corporation We consent to the use of our report on the balance sheets of PSI-Med Corporation as of May 31, 1998 and 1999, and the related statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended May 31, 1999, included herein and to the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG LLP Orange County, California September 30, 1999 EX-27.1 22 FINANCIAL DATA SCHEDULE
5 6-MOS YEAR DEC-31-1998 DEC-31-1998 JAN-01-1999 JAN-01-1998 JUN-30-1999 DEC-31-1998 1,680,135 41,104 0 0 647,523 732,370 196,945 128,800 0 0 2,433,236 931,660 309,483 348,134 711,580 615,402 3,444,630 2,215,048 6,137,236 7,221,310 0 0 0 0 56,739 36,794 5,500 5,464 (16,060,171) (5,089,262) 3,444,630 2,215,048 369,969 570,694 2,709,220 4,623,651 1,230,311 3,278,715 3,638,379 7,245,039 5,013 8,643 68,145 15,800 76,018 92,955 (2,639,604) (6,001,701) 4,000 4,000 (2,643,604) (6,005,701) 0 0 0 0 0 0 (2,643,604) (6,005,701) (.48) (1.10) (.48) (1.10)
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