<PAGE>
As filed with the Securities and Exchange Commission on February 3, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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APPLIED SCIENCE FICTION, INC.
(Exact name of registrant as specified in its charter)
Delaware 3861 74-2765186
(State or other
jurisdiction of
incorporation or
organization)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer
Identification Number)
Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, Texas 78759
Telephone: (512) 651-6200
Facsimile: (512) 651-6205
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
---------------
Mark R. Urdahl
Chairman of the Board, President and Chief Executive Officer
Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, Texas 78759
(512) 651-6200
Facsimile: (512) 651-6205
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Carmelo M. Gordian, P.C. Julia Cowles
S. Michael Dunn, P.C. Davis Polk & Wardwell
Terry Fokas 450 Lexington Avenue
Brobeck, Phleger & Harrison LLP New York, New York 10017
301 Congress Avenue, Suite 1200 (212) 450-4000
Austin, Texas 78701 Facsimile (212) 450-4800
(512) 477-5495
Facsimile (512) 477-5813
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price (1) Registration Fee
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<S> <C> <C>
Common Stock, $0.001 par value...... $57,500,000 $15,180
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</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued February 3, 2000
Shares
APPLIED SCIENCE FICTION, INC.
[LOGO]
COMMON STOCK
-----------
Applied Science Fiction, Inc. is offering shares of its common stock. This
is our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$ and $ per share.
-----------
An application will be made to qualify our common stock for quotation on the
Nasdaq National Market under the symbol "ASFX."
-----------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 8.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Price Underwriting Proceeds to
to Discounts and Applied
Public Commissions Science Fiction
------ ------------- ---------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Applied Science Fiction has granted the underwriters the right to purchase up
to an additional shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
PRUDENTIAL VOLPE TECHNOLOGY
a unit of Prudential Securities
, 2000
<PAGE>
[To be filed by amendment]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 8
Special Note Regarding Forward-
Looking Statements................. 16
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Consolidated Financial
Data............................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................ 28
Management.......................... 42
Related Party Transactions.......... 52
Principal Stockholders.............. 53
Description of Capital Stock........ 55
Shares Eligible for Future Sale..... 58
Underwriters........................ 60
Legal Matters....................... 62
Experts............................. 62
Where You Can Find Additional
Information About Applied Science
Fiction............................ 62
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock, only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock. In this
prospectus, the terms "ASF," "we," "us" and "our" refer to Applied Science
Fiction, Inc. and our consolidated subsidiaries.
Until , 2000, all dealers that buy, sell or trade shares, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, especially the risks of investing in our common stock discussed under
the caption "Risk Factors" and our consolidated financial statements and
related notes appearing elsewhere in this prospectus.
APPLIED SCIENCE FICTION
We innovate, develop, license and sell proprietary imaging technologies that
optimize, enhance and enable the digitization of photographic images for
traditional photo processing applications as well as for desktop, professional
and Internet publishing applications. Our two principal technologies are:
. Digital Film Processing, or DFP, which permits the direct digitization
of exposed but undeveloped 35mm and Advanced Photosystem, or APS, film;
and
. ICE/3/ (pronounced "ICE cubed") technologies, which are embedded in
scanners and have the power to eliminate surface defects, restore faded
color values and enhance the granular clarity of scanned color
photographic images.
We have developed a product prototype of our DFP subsystem, which includes a
highly specialized digital image capture engine that we expect will be
incorporated within DFP systems which we expect will be introduced by our
original equipment manufacturer customers. When commercially introduced, DFP
systems will process exposed but undeveloped standard 35mm and APS film
directly into a digital form without a wet chemical development process, and
will thus serve as a substitute means for processing such film. We believe that
DFP systems will offer a number of advantages over traditional film processing
systems, including:
. end-user convenience and flexibility in processing traditional film into
digital form;
. fewer over- and under-exposures in processed images;
. enabling our customers to compete more effectively in the market for
image output, including Internet storage, archiving, transmission and
printing of digital images;
. no use or discharge of hazardous chemicals in the film-development
process;
. no need for plumbing or specialized handling of hazardous chemicals,
enabling DFP systems to be deployed at diverse locations; and
. scalability of use, including the possible introduction of multiple DFP
engine central processing units and PC-compatible versions for small
office/home office use.
ICE/3/ consists of the following three technologies that improve and enhance
the digitized quality of existing color photographs, slides and negatives,
which we refer to simply as "photographic images":
. Digital Image Correction and Enhancement, or Digital ICE, which
eliminates scratches, dust, fingerprints and other surface defects in
scanned color photographic images;
. Digital Reconstruction of Color, or Digital ROC, which corrects color
fading in aging photographic images and restores the color values in a
digitized image to their original condition; and
. Digital Grain Equalization and Management, or Digital GEM, which
minimizes the distracting visual pattern seen in photographic images
caused by excess silver grains in the original developed image.
Our objectives are to establish DFP subsystems as a premier means for
processing exposed but undeveloped 35mm and APS film and to establish ICE/3/
technologies as premier technologies for enhancing the digitization of existing
color images. To achieve these objectives, we plan to:
. leverage our current relationships with global market leaders, such as
Gretag, Hewlett-Packard, Kodak, Konica, Minolta, Nikon and Noritsu, and
expand our customer base;
4
<PAGE>
. continue to enhance our technology position through research and
development and the patenting of our core technologies;
. expand end-user awareness of our company and its technologies through
brand identity;
. diversify sources of recurring revenue, including ICE/3/ royalties and
sales of the developing agent consumable that will be used in DFP
subsystems; and
. pursue strategic alliances in the evolving imaging industry.
We expect that a significant portion of our future growth will depend on the
success of our DFP technology and products. We are in the process of further
developing our DFP technology for commercial application. We have, to date,
recognized contract revenues relating to the development of our DFP technology,
but we do not expect to derive revenue from sales of DFP subsystems and related
products prior to the second half of 2001. We have generated most of our
revenue to date from our Digital ICE technology. As of December 31, 1999, we
had an accumulated deficit of $24.6 million, including net losses of
approximately $15.9 million in 1999, and we expect to continue to incur
significant losses for the foreseeable future. Our ability to reduce these
losses will depend in large part on our ability to generate significant
additional revenues. Our technologies are largely unproven and we may not
achieve profitability.
----------------
Unless otherwise indicated, all information in this prospectus gives effect
to the conversion of all outstanding shares of our preferred stock into shares
of common stock effective upon the closing of the offering and assumes no
exercise of the underwriters' over-allotment option. Our principal executive
offices are located at 8920 Business Park Drive, Austin, Texas 78759. Our
telephone number is (512) 651-6200.
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5
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THE OFFERING
<TABLE>
<C> <S>
Common stock offered......................... shares
Common stock to be outstanding after this
offering.................................... shares
Use of proceeds.............................. We intend to use the net proceeds for
research and development, sales and marketing
activities, purchases of capital equipment
and leasehold improvements and general
corporate purposes.
Proposed Nasdaq National Market symbol....... ASFX
</TABLE>
The above information is based on shares outstanding as of December 31, 1999.
It excludes (1) 270,439 shares of common stock issuable upon exercise of
options outstanding as of December 31, 1999 with a weighted average exercise
price of $.83 per share, (2) 484,607 additional shares of common stock reserved
under our option plan as of December 31, 1999 and (3) 1,258,332 shares of
common stock, on an as-converted basis, that are subject to outstanding
warrants as of December 31, 1999 with a weighted average exercise price of $.68
per share.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes our financial data. For a more detailed
explanation of our financial condition and operating results, you should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes to
those statements included in this prospectus. Unaudited pro forma basic and
diluted net loss per share have been calculated assuming the conversion of all
outstanding shares of our preferred stock into common stock as if the shares
had converted immediately upon their issuance.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands,
except per share data)
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues........................................... $ 628 $ 502 $ 3,973
Loss from operations............................... (1,130) (7,538) (16,284)
Net loss........................................... (990) (7,510) (15,898)
Basic and diluted net loss per share............... $ (.18) $ (1.01) $ (1.70)
Shares used in computing basic and diluted net loss
per share......................................... 5,361 7,424 9,353
Pro forma basic and diluted net loss per share..... $ (.88)
Shares used in computing pro forma basic and
diluted net
loss per share.................................... 18,119
</TABLE>
The following table contains a summary of our balance sheet:
. on an actual basis at December 31, 1999;
. on a pro forma basis at December 31, 1999 to reflect the conversion of
all outstanding shares of our preferred stock into an aggregate of
8,766,033 shares of common stock; and
. on a pro forma as adjusted basis at December 31, 1999 to reflect our
sale of shares of common stock in this offering at an assumed
initial public offering price of $ per share and the
application of the net proceeds received from this offering.
<TABLE>
<CAPTION>
At December 31, 1999
------------------------
Pro As
Actual Forma Adjusted
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short- and long-term
investments.......................................... $18,735 $18,735 $
Working capital....................................... 7,434 7,434
Total assets.......................................... 23,656 23,656
Notes payable to bank, less current portion........... 6,436 6,436 6,436
Total stockholders' equity (deficit).................. $11,730 $11,730 $
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. You should also refer to the other information in this
prospectus, including our consolidated financial statements and the related
notes thereto. The risks and uncertainties described below are those that we
currently believe may materially affect our company. Our business, financial
condition or results of operations could be materially adversely affected by
any of these risks. Additional risks and uncertainties that we are unaware of
or that we currently deem immaterial also may become important factors that
affect our company. The trading price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including the risks faced by us described below and elsewhere in this
prospectus.
Risks Related to Our Business
Our business is at an early stage of development and our technologies may not
prove to be commercially viable
We are at an early stage of development and our success depends largely on
the efforts of OEMs to effectively implement our technologies and achieve
significant sales of products which incorporate our technologies. We cannot be
certain that our technologies will be incorporated into products that achieve
broad commercial acceptance. All of our revenues during 1998 and approximately
half of our revenues during 1999 were derived from our Digital ICE technology.
We do not expect to earn royalty revenues from our Digital ROC and Digital GEM
technologies prior to the fourth quarter of 2000. Our DFP technology is still
in the commercialization phase and we do not expect to earn any revenues from
sales of DFP subsystems and related products prior to the second half of 2001.
However, we may not generate any revenues from the sales or licensing of DFP
products or technologies by these dates, or at all.
We do not have, and do not anticipate having, agreements which bind OEMs to
commercialize our DFP technology and it is possible that our customers may
fail or cease their efforts to commercialize our DFP technology
Our business model depends on the successful commercialization of our DFP
technology and products that use DFP technology. We have completed the design
phase and have begun the development phase with one OEM customer and are in
the design phase with two other OEM customers. However, we have not entered
into, and do not anticipate entering into, agreements that would affimatively
obligate the OEMs to develop and/or commercialize our DFP technology. Our
current arrangements with the OEMs:
. do not require the OEMs to develop and commercialize our DFP technology;
. do not require the OEMs to license our DFP technology or to purchase the
DFP consumable;
. do not specify launch schedules for products incorporating our DFP
technology;
. do not require the OEMs to create interest in or establish a market for
products incorporating our DFP technology;
. do not set a minimum price at which products incorporating our DFP
technology will be sold; and
. may be terminated by the OEMs without significant penalty.
We cannot assure you that our OEM customers will complete the development and
commercialization of our DFP technology. We expect that any such agreements,
if entered into, would not create any affirmative obligation requiring OEMs to
complete the development and/or commercialization of DFP. If OEMs do not
commercialize DFP, we may not earn contract revenues from DFP implementations
or achieve sales of DFP products in accordance with our expected timetable, or
at all.
8
<PAGE>
We have recognized limited revenues, have incurred significant net losses and
may never achieve profitability
We have a limited operating history upon which you may evaluate our company
and prospects. We have recognized limited revenues, have incurred significant
net losses and may never achieve profitability. We incurred net losses of $7.5
million in 1998 and $15.9 million in 1999. As of December 31, 1999, we had an
accumulated deficit of $24.6 million. We expect to incur significant operating
expenses over the next several years in connection with the continued
development and expansion of our business. As a result, we expect to continue
to incur significant losses and negative cash flow for the foreseeable future.
With increased expenses, we will need to generate significant revenues in
order to achieve profitability. We may never achieve profitability, and even
if we do, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future.
We depend on a limited number of OEM customers for the vast majority of our
revenues, and the loss of, or a significant reduction in, contract fees or
royalties from any OEM customer could significantly reduce our revenues
A significant percentage of our revenues are derived from contract fees and
royalties that are received from a small number of OEM customers. For example,
in 1999, Hewlett-Packard and Nikon accounted for 68% of our total revenues,
including 89% of our DFP contract fees and 91% of our Digital ICE royalties,
respectively. During 1998, Nikon accounted for 74% of our total revenues,
including 100% of our Digital ICE royalties. Furthermore, the particular
customers which account for significant portions of our revenues have varied
from period to period, and a major customer in one period may not produce
significant additional revenue in a subsequent period. The loss of one or more
of our largest customers, unfavorable renegotiation of existing agreements
with our customers or our inability to successfully develop relationships with
additional key customers could cause our revenues to decline significantly.
We are dependent upon the film-based photography market, and if this method
of capturing images is replaced by digital camera photography or by another
technology, our business will suffer
Our technologies are designed to digitize, enhance and develop images
captured on traditional photographic film. Our business success is dependent
upon the continued dominance of film-based photography as a means of capturing
images. Broad use of digital cameras as a means of capturing images, or the
development of other technologies which replace film, would have a material
adverse affect on the demand for our technologies or for products that
incorporate our technologies. Although the dominant method of capturing images
today is film-based photography, digital cameras are gaining increasing
acceptance. It is possible that digital camera photography could replace film-
based photography as the primary means of capturing images, particularly if
digital camera technology improves. In addition, our business would be
materially and adversely affected in the event of a significant slowdown in
the markets for image scanners or other image capture hardware, or for
proprietary imaging technology used to digitize or enhance and develop film-
based images.
We are dependent on our OEM customers' efforts to generate sufficient
interest in our technologies and to create end-user demand for the commercial
application of our technologies
Our current and future revenues depend upon the achievement of meaningful
sales of products utilizing our licensed technologies. In particular, we will
be dependent on our OEM customers' efforts to establish a market for DFP
systems. Our OEM customers will have significant influence on the
commercialization of our DFP technology, including control over feature
definition, launch schedules, marketing, sales and pricing of DFP systems.
Although we actively participate in the implementation of our licensed
technologies, we cannot assure you that our OEM customers will be able to
effectively implement our technologies or that our OEM customers will be able
to achieve significant sales of products incorporating our technologies. The
failure of our OEM customers to achieve significant sales of products which
incorporate our technologies would significantly reduce our revenues, which,
in turn, could adversely affect our business.
9
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We depend on a non-exclusive license from IBM which, if terminated or renewed
on less favorable terms, could cause us to incur substantial expenses in
developing new technologies
We are dependent on technology that we license from International Business
Machines Corporation. IBM has granted us a non-exclusive license which expires
in October 2000 to use several of its patents for the development of our
proprietary DFP and ICE/3/ technologies. In addition, our ICE/3/ customers
must also enter into third-party license agreements directly with IBM in order
to incorporate our technologies into their products or be cross-licensed with
IBM for those patents. IBM retains the right to license these patents to other
companies, including larger and better capitalized companies which may compete
with us in the development of similar imaging technologies. If IBM elects to
terminate or fails to renew our license on similar terms, or fails to grant
the necessary licenses to our customers, we will be required to develop
alternative technologies which could require payment of substantial fees to
third parties for development costs and prove to be time-consuming and
expensive. The features or functionality offered by our technologies may also
be compromised, which could limit the ability of our customers to sell
products that incorporate our technologies.
Competition within our markets may reduce demand for our technologies and
reduce our market share
The markets for digital image editing software and photofinishing equipment
and services are intensely competitive. Certain sectors within these markets
are characterized by rapid technological change and increasing competition in
both domestic and foreign markets, as well as by constant demand for, and the
introduction of, new products and product enhancements. Our technologies
compete directly or indirectly with:
. products and technologies offered by many large companies, including
many of our customers, such as Nikon, Noritsu and Kodak, and other
companies, such as Canon, Polaroid and Xerox;
. products and technologies which may be offered in the future, including
technologies under evaluation by our current and prospective customers;
. digital cameras, which as a result of technological advances, may
produce images of a quality approaching that attained with 35mm or APS
film;
. digital minilabs and other services which develop and scan traditional
film and provide end users with the ability to receive prints, negatives
and digitized images at the same time; and
. traditional wet chemistry film processing equipment and commercially-
available scanners.
In the future, if products incorporating our DFP technologies are widely
adopted, use of such products may reduce or eliminate the need to scan
photographs into a digital format, which would result in reduced demand for
our ICE/3/ technologies.
Many of our potential competitors, including our current and prospective
customers, have longer operating histories and significantly greater
financial, technical, sales and marketing resources, as well as greater name
recognition, larger customer bases and more established product distribution
channels, than we do. As a result, these competitors may be able to respond
more effectively to new or emerging technologies and changes in customer
requirements, withstand significant price decreases or devote greater
resources to the development, promotion, sale and support of their products
and technologies than we can. In addition, our present or future competitors,
including our OEM customers, may be able to develop products or technologies
comparable or superior to those offered by us. We may be unable to continue to
compete effectively in our markets, and future competition may materially and
adversely affect our business. See "Business--Competition."
10
<PAGE>
We will be dependent upon third-party manufacturers to build our DFP
subsystems and if we or our contract manufacturers do not manage the
procurement, supply and order fulfillment process effectively, our business
will suffer
We will contract with third-party manufacturers to build our DFP
subsystems. We have never entered into arrangements with contract
manufacturers to assemble DFP subsystems and, therefore, we have no experience
in this area. If our contract manufacturers cannot secure the materials and
components necessary for the manufacture of our DFP subsystems or if we cannot
effectively manage this process, we could suffer delays in providing, or we
may not be able to provide, DFP subsystems to our customers. Any material
disruption in the procurement, supply and order fulfillment process would
materially and adversely affect our ability to supply our customers with DFP
subsystems on a timely basis, or at all, which in turn, would adversely affect
our revenues and harm our business reputation.
We recently have experienced rapid growth and our failure to effectively
manage this expansion could impede our future growth
Our revenues increased 691% to $4.0 million in 1999 from $502,000 in 1998,
and our total number of employees increased to 136 at December 31, 1999 from
54 at December 31, 1998. We anticipate hiring new employees in 2000 and
beyond. Our growth has resulted, and will continue to result, in new and
increased responsibilities for our management. We cannot assure you that our
existing or future management controls, internal systems or procedures will be
adequate to support our future operations. Our ability to manage any future
growth of our business will require us to improve our financial and management
controls, reporting systems and procedures on a timely basis, to implement new
systems as necessary and to expand, train and manage our workforce
effectively. If we are unable to effectively manage our future growth, our
business will be harmed.
Our quarterly and annual revenues and operating results may fluctuate
significantly, which may result in volatility in our stock price
Many of our revenue components fluctuate on a quarterly and annual basis
and are difficult to predict although our expenses are largely fixed.
Therefore, it is difficult for us to accurately forecast our future revenues
or operating losses on a quarterly or annual basis. Contract fee revenues,
which are comprised primarily of development fees, represented 79% of our
revenues in 1999 and will continue to represent a significant portion of our
revenues through at least 2001. The amount of development fees that we will
earn in a particular period are difficult to predict. Our revenues vary from
period to period depending on:
. the timing of our achievement of milestones as specified under our
agreements;
. our customers' licensed product development and launch schedules;
. our customers' sales volumes of products incorporating our licensed
technologies and the royalty rates applicable to those sales; and
. restructurings, reorganizations or mergers and consolidations involving
our customers.
Because contract and licensing revenues are difficult to accurately
predict, it will be difficult for us to forecast our revenues and operating
results.
We depend on our key personnel to manage our business effectively and if we
are unable to retain our current personnel or hire additional personnel, our
business could be harmed
Our future success will depend on the continued employment of our key
senior management, technical and sales and marketing personnel, many of whom
would be difficult to replace. In particular, we believe that our future
success is highly dependent on Mark Urdahl, our Chairman, President and Chief
Executive Officer, and Albert Edgar, our Chief Scientist. Our success is also
dependent upon our ability to attract, motivate and retain other highly
qualified personnel, particularly personnel with imaging industry or
intellectual property
11
<PAGE>
knowledge and experience. The loss of any existing key personnel or our
inability to attract, motivate and retain additional qualified personnel could
have a material adverse effect on our business.
We may not be able to protect our intellectual property, which would
adversely affect our ability to compete
We are dependent upon our proprietary information and technology. We rely
primarily on a combination of patent, copyright, trademark and trade secret
laws and license agreements to establish and protect our intellectual
property. We require our employees, third-party consultants and contractors to
enter into agreements which limit the use of, access to and distribution of
our proprietary information. We cannot assure you that our precautions will be
adequate to prevent misappropriation or infringement of our intellectual
property. The laws of some foreign countries may not protect our proprietary
information and technology rights as fully as the laws of the United States.
Despite the steps taken by us to protect our proprietary rights, it may be
possible for unauthorized third parties to copy aspects of our technologies,
reverse engineer the products which may be derived from our technologies or
otherwise obtain and use information or technology that we regard as
proprietary. Several of our license agreements allow our licensees to access
the source code versions of our software upon the occurrence of specified
events, such as the insolvency or bankruptcy of our company. Although our
license agreements with these customers attempt to prevent misuse of the
source code, the possession of our source code by third parties increases the
ease and likelihood of potential misappropriation of our intellectual
property. We may need to engage in litigation in order to enforce our
intellectual property rights in the future, which could result in substantial
costs and diversion of management and other resources. Failure to protect our
intellectual property rights in a meaningful manner could have a material and
adverse effect on our business.
Claims may be brought against us that our technologies infringe the
intellectual property rights of others, which may require us to incur costs
in defending ourselves and our customers against such allegations
Although we do not believe that our technologies infringe the proprietary
rights of others, it is possible that infringement or invalidity claims could
be asserted or prosecuted against us in the future. Any such assertions or
prosecutions could have a material adverse effect on our business. There is a
substantial risk of litigation regarding intellectual property rights in our
industry. Any claims, with or without merit, could:
. be time-consuming, costly to defend and harm our reputation;
. divert management's attention and resources;
. cause delays in the delivery of products that incorporate our
technologies;
. require the payment of monetary damages, which may be tripled if the
infringement is found to be willful;
. result in an injunction, which would prohibit us from offering licenses
to a particular technology;
. require us to enter into royalty or licensing agreements which may not
be available on acceptable terms; or
. require us to pay damages to or indemnify our customers under our
contracts with them.
Our technologies are complex and may contain undetected software or hardware
errors which could lead to an increase in our costs or a reduction in our
revenues
All of our technologies and products in development include a significant
software component. Complex software such as ours frequently contains errors
or defects, especially when first introduced or when new versions or
enhancements are released. If our software contains undetected defects or
errors, we could experience:
. delayed or lost revenues;
12
<PAGE>
. termination or renegotiation of license agreements and difficulties in
obtaining new agreements;
. expenses associated with warranty service costs or unexpected
reprogramming costs;
. claims for substantial damages;
. negative publicity regarding us and our technologies, which could
adversely affect our ability to attract new customers; and
. diversion of time and resources of our management and development team.
A significant portion of our revenues are generated from international
customers, which subjects us to additional business risks
During 1999, revenues from customers with principal offices in foreign
countries constituted approximately 48% of our revenues. We expect that
revenues derived from international customers will continue to represent a
significant portion of our revenues in the future. All of our revenues from our
licensing agreement with Nikon are denominated in Japanese yen and, as a
result, are subject to exchange rate fluctuations. To date, we have not used
derivative instruments to hedge against foreign currency exchange rate risks.
International operations and demand from our international customers are
subject to a variety of risks, including:
. increases in tariffs, duties, price controls or similar restrictions;
. restrictions on the import or export of our technologies or on products
incorporating our technologies;
. trade barriers;
. changes in regulatory requirements;
. longer payment cycles and difficulties in collecting accounts
receivables;
. export license requirements;
. foreign government regulation;
. political and economic instability;
. fluctuations in foreign currency exchange rates;
. lower protection for intellectual property rights; and
. changes in diplomatic and trade relationships.
In addition, the laws of certain countries require significant withholding
taxes on payments for intellectual property. We may not be able to offset these
withholding taxes fully against our United States tax obligations. We are
subject to the further risk that tax authorities in those countries may
recharacterize engineering fee revenues as license fees, which could result in
increased tax liabilities and penalties.
Industry standards affecting our business evolve rapidly, and if we cannot
develop products that are compatible with these evolving standards, our
business will suffer
The markets for our technologies and products are characterized by rapidly
changing technology, evolving industry standards and short product life cycles.
Our success will depend to a substantial degree upon our ability to develop and
market new technologies, products and enhancements to our existing technologies
that meet evolving customer requirements and emerging industry standards. The
development of new imaging technologies is a complex and uncertain process
requiring high levels of innovation, as well as the accurate anticipation of
technological and market trends. In order to succeed we will need to:
. identify, develop, market and support new technologies and products
successfully;
. develop new technologies and products that gain market acceptance; and
. respond effectively to technological changes, emerging industry
standards and product announcements by our competitors.
13
<PAGE>
Our failure to address these factors could have a material adverse effect on
our business.
Our principal stockholders will continue to have significant influence over
our company after this offering on matters submitted to a stockholder vote
Upon completion of this offering, our officers and directors and their
affiliates will continue to own a significant percentage of our common stock.
Consequently, these stockholders, acting together, will be able to exert
significant influence over the outcome of all matters submitted for
stockholder vote, including the election of our board of directors and the
approval of significant corporate transactions.
Risks Related to This Offering
Our stock price may be volatile because our shares have not been publicly
traded before this offering, and you may not be able to resell your shares at
or above our initial public offering price
Prior to this offering, you could not buy or sell our common stock
publicly. The initial public offering price for our common stock will be
determined through negotiations between the underwriters and us. The initial
public offering price may vary from the market price of our common stock after
the offering. If you purchase shares of our common stock, you may not be able
to resell your shares at or above the initial public offering price. The
market price of our common stock may fluctuate significantly in response to
numerous factors, some of which are beyond our control, including the
following:
. actual or anticipated fluctuations in our quarterly or annual operating
results;
. changes in financial estimates or investment recommendations by
securities analysts or our failure to perform in line with analysts'
estimates;
. changes in consumer use of film-based photography products;
. announcements by us or our competitors of significant contracts,
technical innovations, acquisitions, strategic partnerships, joint
ventures or capital commitments;
. the loss of one or more key OEM customers or the reduction in sales of
products incorporating our technologies;
. additions or departures of key personnel;
. the potential for future sales of our common stock; and
. fluctuations in stock market prices and the volume of traded shares
generally, and particularly fluctuations in the stock prices of
technology companies.
We are at risk of securities class action litigation due to our expected
stock price volatility
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. Due to the potential volatility of our stock price, we may be the
target of similar litigation in the future. Securities litigation could result
in substantial costs and divert management's attention and resources, and,
therefore, could adversely affect our operating results and financial
condition.
We will need to raise additional capital that may not be available
We expect that the net proceeds from this offering, together with our
existing cash balances and availability under our credit facilities, will be
sufficient to meet our working capital and capital expenditure needs for the
next 12 months. After that, we may need to raise additional funds and we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. If we need additional capital and cannot raise it
on acceptable terms, we may not be able to:
. develop new technologies and products or enhancements to our
technologies and products;
14
<PAGE>
. hire, train and retain employees; and
. respond to competitive pressures or unanticipated requirements.
Provisions in our charter documents, Delaware law and customer agreements
could prevent, delay or impede a change in our control and may reduce the
market price of our common stock
Provisions in our certificate of incorporation and bylaws could have the
effect of discouraging, delaying or preventing a merger or acquisition that
stockholders may consider favorable. We also are subject to the anti-takeover
laws under the Delaware General Corporation Law which may discourage, delay or
prevent a third party from acquiring or merging with us. In addition, certain
of our customer agreements permit our customers to terminate their obligations
to us in the event we are acquired by a competitor of such customer. These
provisions of Delaware law and of our charter, bylaws and customer agreements
may depress the market price of our common stock as they may make it more
difficult for a third party to acquire control of our company or for
stockholders to change management.
Our management may apply the proceeds of this offering to uses that our
stockholders may not agree with and in ways that do not increase our profits
or market value
Our management will have considerable discretion in the application of the
net proceeds received by us from this offering, and you will not have the
opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. Our net proceeds may be used for
purposes that do not increase our profitability or our market value. Pending
their application, proceeds of this offering may be placed in investments that
do not produce income or that lose value. For a more complete description of
how we plan to use the proceeds of this offering, please see "Use of
Proceeds."
There may be sales of a substantial amount of our common stock after this
offering that could cause our stock price to fall
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. All of the
shares sold in this offering will be freely tradable, with the
remaining 21,926,324 shares outstanding (based on the number of shares
outstanding as of December 31, 1999) being "restricted securities" as defined
in Rule 144 of the Securities Act of 1933. All of these restricted shares will
be freely tradable, subject in some cases to volume and other limitations
imposed upon restricted securities that have been held less than two years,
under Rule 144, beginning 180 days after the effective date of this offering
upon the termination of lock-up agreements with the underwriters. The
underwriters may waive or terminate these agreements at their discretion,
which could enable these shares to be available for sale prior to the
expiration of such 180-day period. Sales of a substantial number of shares of
our common stock after this offering, or the perception that a substantial
amount of shares will be sold, could cause our stock price to fall. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional stock.
You will experience immediate and substantial dilution in the book value of
your shares
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock immediately
after this offering. Accordingly, if you purchase our common stock in this
offering, you will incur immediate and substantial dilution of approximately
$ in the book value per share of our common stock from the price you
pay for our common stock based on an assumed initial public offering price of
$ per share. For information regarding the dilution that you will
experience, please see "Dilution."
15
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "may," "will," "should," "expect," "intend," "plan,"
"anticipate," "believe," "estimate," "continue," "potential" and "future." You
should read statements that contain these words carefully because they discuss
our future expectations, make projections of our future results of operations
or financial condition or state other "forward-looking" information. We believe
that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or control. The factors listed in the sections captioned "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as any cautionary language in
this prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of the events described in the "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" sections and elsewhere in this prospectus could have a
material adverse effect on our business and may result in the loss of a portion
or all of your investment in our common stock. We are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform them to actual results.
16
<PAGE>
USE OF PROCEEDS
Assuming an initial public offering price of $ per share, we will
receive approximately $ million from the sale of shares of our
common stock, net of estimated offering expenses and underwriting discounts and
commissions payable by us. If the underwriters exercise their over-allotment
option in full, we will receive an additional $ million in net proceeds.
The principal purposes of this offering are to increase our equity capital,
create a public market for our common stock, facilitate future access by us to
the public equity markets and provide us with increased visibility in our
markets. We intend to use the net proceeds of this offering for research and
development, sales and marketing activities, the purchase of capital equipment
and leasehold improvements, and general corporate purposes. In addition, we may
use a portion of the net proceeds to acquire businesses, products or
technologies that are complementary to our current or future business and
technologies. We have no current plans, agreements or commitments and are not
currently engaged in any negotiations with respect to any acquisition
transaction, although we have from time to time engaged in acquisition
discussions with other parties. Our management will have significant
flexibility in applying the net proceeds of this offering. Pending such uses,
we will invest the net proceeds of this offering in high quality, investment
grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock, and we do
not anticipate paying any cash dividends on our common stock in the foreseeable
future. We currently expect to retain future earnings, if any, to fund the
operation and expansion of our business. In addition, our existing indebtedness
restricts, and indebtedness we may incur in the future may prohibit or
effectively restrict, the payment of cash dividends.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect the conversion of all outstanding shares
of our outstanding preferred stock into an aggregate of 8,766,033 shares
of our common stock upon completion of this offering; and
. on a pro forma as adjusted basis to reflect the estimated net proceeds
from the sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and offering
expenses payable by us, and the application of the net proceeds as
described under "Use of Proceeds."
You should read the following table in conjunction with our financial
statements and the notes to those statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------
Pro
Pro Forma As
Actual Forma Adjusted
------- ------- --------
(in thousands, except
share data)
<S> <C> <C> <C>
Current portion of notes payable to bank............ $ 1,402 $ 1,402 $ 1,402
------- ------- -------
Notes payable to bank, less current portion......... $ 6,436 $ 6,436 $ 6,436
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value,
25,000,000 shares authorized, 5,653,162 shares
designated, 5,635,189 shares issued and
outstanding, actual; no shares authorized, issued
or outstanding, pro forma and pro forma as
adjusted......................................... 6 --
Common stock, $.001 par value, 100,000,000 shares
authorized, 13,160,291 shares issued and
outstanding, actual; shares authorized,
21,926,324 issued and outstanding, pro forma;
shares authorized, shares
issued and outstanding, pro forma as adjusted.... 13 22
Additional paid-in capital.......................... 48,750 48,747
Deferred stock-based compensation................... (6,713) (6,713) (6,713)
Notes receivable from stockholders.................. (5,675) (5,675) (5,675)
Accumulated other comprehensive loss................ (42) (42) (42)
Accumulated deficit................................. (24,609) (24,609) (24,609)
------- ------- -------
Total stockholders' equity...................... 11,730 11,730
------- ------- -------
Total capitalization.......................... $18,166 $18,166 $
======= ======= =======
</TABLE>
- --------
The share information set forth above at December 31, 1999 excludes:
. 1,258,332 shares of common stock, on an as-converted basis, that are
subject to outstanding warrants with a weighted average exercise price
of $.68 per share;
. 270,439 shares of common stock that are subject to outstanding options
under our stock option/stock issuance plan with a weighted average
exercise price of $.83 per share; and
. 484,607 additional shares of common stock that are reserved for issuance
under our stock option plan.
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<PAGE>
DILUTION
Our pro forma net tangible book value at December 31, 1999, after giving
effect to the conversion of all outstanding shares of our convertible preferred
stock into shares of common stock upon completion of this offering, was
approximately $11.7 million, or $.53 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets reduced by the amount of our total liabilities, divided by the pro forma
number of shares of common stock outstanding at December 31, 1999.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers in this offering and
the pro forma net tangible book value per share of common stock immediately
after the completion of this offering. After giving effect to our sale of
shares of common stock in this offering at an assumed initial public
offering price of $ per share, and after deducting estimated
underwriting discounts and commissions and offering expenses payable by us, our
pro forma net tangible book value at December 31, 1999 would have been
$ million, or $ per share. This amount represents an immediate
increase in pro forma net tangible book value to our existing stockholders of
$ per share and an immediate and substantial dilution to new investors
of $ per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma net tangible book value per share at December 31, 1999.. $.53
Increase in pro forma net tangible book value per share
attributable to new investors....................................
----
Pro forma net tangible book value per share after this offering.....
-----
Dilution per share to new investors.................................
=====
</TABLE>
If the underwriters exercise their over-allotment option in full, our
adjusted pro forma net tangible book value at December 31, 1999 would have been
$ million, or $ per share, representing an immediate increase in pro
forma net tangible book value to our existing stockholders of $ per share
and an immediate dilution to new investors of $ per share.
The following table summarizes, at December 31, 1999, on a pro forma basis
to reflect the conversion of all of our outstanding convertible preferred stock
into common stock, the differences between the number of shares of common stock
purchased from us, the aggregate cash consideration paid to us and the average
price per share paid by our existing stockholders and by new investors
purchasing shares of common stock in this offering. The calculation below is
based on an assumed initial public offering price of $ per share, before
deducting underwriting discounts and commissions and offering expenses payable
by us:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ ------------------- per
Number Percent Amount Percent Share
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 21,926,324 % $43,087,000 % $1.97
New investors....................
---------- ----- ----------- -----
Total.......................... 100.0% 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the underwriter's over-allotment
option or shares underlying outstanding options and warrants. At December 31,
1999, there were options outstanding to purchase a total of 270,439 shares of
our common stock with a weighted average exercise price of $.83 per share and
warrants outstanding to purchase a total of 1,258,332 shares of common stock,
on an as-converted basis, with a weighted average exercise price of $.68 per
share. To the extent that any of these options or warrants are exercised, there
will be further dilution to new investors. See "Capitalization."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
period from June 15, 1995 (inception) to December 31, 1995, and each of the
years in the four-year period ended December 31, 1999, have been derived from
our consolidated financial statements. The information set forth below is not
necessarily indicative of the results of future operations and should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements and
the related notes thereto included at the end of this prospectus and the other
financial information included elsewhere in this prospectus. The selected
statements of operations data for the period from June 15, 1995 (inception) to
December 31, 1995 and for the year ended December 31, 1996 and the balance
sheet data as of December 31, 1995 and 1996 have been derived from unaudited
financial statements not included herein. The balance sheet data at December
31, 1997 have been derived from audited financial statements not included in
this prospectus. The consolidated statements of operations data for the years
ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data
at December 31, 1998 and 1999 have been derived from our audited consolidated
financial statements included elsewhere in this prospectus.
See Note 2 of the notes to our consolidated financial statements for a
detailed explanation of the determination of shares used in computing basic and
diluted, and pro forma basic and diluted, net loss per share.
<TABLE>
<CAPTION>
Period from
June 15,
1995
(Inception)
to Year Ended December 31,
December 31, ----------------------------------
1995 1996 1997 1998 1999
------------ ----- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues:
Contract revenues........... $ -- $ 160 $ 628 $ 214 $ 3,152
Royalty revenues............ -- -- -- 288 821
------ ----- ------- -------- --------
Total revenues............ -- 160 628 502 3,973
Costs and expenses:
Cost of contract revenues... -- 19 43 250 2,147
Research and development.... -- 139 717 4,218 9,050
Selling, general and
administrative............. 9 209 998 3,572 7,629
Amortization of stock-based
compensation............... -- -- -- -- 1,431
------ ----- ------- -------- --------
Total operating expenses.. 9 367 1,758 8,040 20,257
------ ----- ------- -------- --------
Loss from operations.......... $ (9) $(207) $(1,130) $ (7,538) $(16,284)
Interest and other income,
net.......................... -- 4 202 28 457
------ ----- ------- -------- --------
Net loss before foreign
withholding taxes............ $ (9) $(203) $ (928) $ (7,510) $(15,827)
Foreign withholding taxes..... -- -- 62 -- 71
------ ----- ------- -------- --------
Net loss...................... $ (9) $(203) $ (990) $ (7,510) $(15,898)
====== ===== ======= ======== ========
Basic and diluted net loss per
share........................ $ (.01) $(.07) $ (.18) $ (1.01) $ (1.70)
Shares used in computing basic
and diluted net loss per
share........................ 1,349 2,970 5,361 7,424 9,353
Pro forma basic and diluted
net loss per share........... $ (.88)
Shares used in computing pro
forma basic and diluted net
loss per share............... 18,119
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------------ ----- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash, cash equivalents, short
and long-term investments.... $89 $ 76 $5,199 $ 633 $18,735
Working capital (deficit)..... 82 81 4,349 (957) 7,434
Total assets.................. 89 205 5,532 2,228 23,656
Notes payable to bank, less
current portion.............. -- -- -- 3,028 6,436
Total stockholders' equity
(deficit).................... $(8) $(10) $4,552 $(2,958) $11,730
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes thereto included at the end of this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
Overview
Applied Science Fiction innovates, develops, licenses and sells proprietary
imaging technologies that optimize, enhance and enable the digitization of
photographic images for traditional photo processing applications, as well as
for desktop, professional and Internet publishing applications. Our two
principal technologies are digital film processing, or DFP, and ICE/3/
technologies, which consist of our Digital ICE, Digital ROC and Digital GEM
technologies. DFP technology permits the direct digitization of exposed but
undeveloped 35 mm and advanced photo system, or APS, film. ICE/3/ technologies
are embedded in scanners and eliminate surface defects, restore faded color
values and enhance the granular clarity of scanned photographic images. We were
incorporated in June 1995 and have devoted our efforts principally to raising
capital, conducting research and development activities and establishing
markets for our technologies.
Revenues
Currently, our revenues are comprised of contract and royalty revenues.
Contract revenues are generally earned by us when we meet specified milestones
set forth in our agreements with OEMs to develop, adapt and customize our
technologies for use in OEM products. Royalty revenues generally relate to
licensing fees paid to us by OEMs for use of our ICE/3/ technologies in their
products. We recognize royalty fees as revenues under ICE/3/ license agreements
upon our receipt of a report from our licensees that they have shipped products
that incorporate our technology. We do not receive these reports from the
licensee until the quarter after the licensee has shipped the product that
incorporates our technology, resulting in a one quarter delay between shipment
and recognition of revenues from those sales.
The amount of contract revenues that we earn typically varies from period to
period depending on factors such as the timing of our achievement of contract-
specific development milestones and our customers' licensed product development
and launch schedules. Royalty revenues also may vary from period to period
based on our customers' sales volumes of products incorporating our licensed
technologies. Because many of our revenue components fluctuate due to factors
beyond our control and our expenses are largely fixed, our revenues and
operating results may vary significantly from period to period.
We record cash receipts from customers and billed amounts due from customers
in excess of recognized revenue as deferred revenues. The timing and amount of
cash receipts from customers can vary significantly depending on specific
contractual terms and can therefore have a significant impact on the amount of
deferred revenue we record in any given period.
DFP Technology
We are currently developing our first generation DFP subsystem. During 1999,
we developed a functional product prototype of a DFP subsystem under a design
review agreement with Hewlett-Packard. We are currently in negotiations with
three OEMs to design, develop and manufacture through third party contract
manufacturers, a specified "class" of DFP subsystem and related developing
agent consumable. Each "class" of DFP subsystem is defined primarily by film-
processing speed. We expect the design and development effort for the first
specified class of DFP subsystems to take approximately 18 to 24 months.
21
<PAGE>
In 1999, we derived 48% of our revenues from DFP contract fees. We believe
that a substantial portion of our revenues through at least 2001 will be from
contract fees under DFP development agreements that we expect to enter into
with our OEM customers.
We anticipate generating revenues from the design, development and sales of
our DFP subsystems and associated licenses, and from sales of the proprietary
developing agent consumable that we are developing for use in DFP subsystems.
Pursuant to agreements that we expect to enter into with our OEM customers, we
expect to (1) manufacture, through a contract manufacturer, and distribute DFP
subsystems and a developing agent consumable to our OEM customers and (2)
invoice the sales price for DFP subsystems and developing agent consumable upon
shipment to OEM customers. We do not expect to recognize revenues related to
sales of our DFP subsystems and the developing agent consumable until the
second half of 2001.
ICE/3/ Technologies
We derive contract fees under ICE/3/ development agreements from the
adaptation and customization of our technologies for use with OEM scanner
products. ICE/3/ adaptation and customization efforts for an OEM customer
generally take from three to 12 months to complete, with the period varying
depending on the technology and services provided and the particular
requirements of the customer. Through December 31, 1999, substantially all of
our ICE/3/ contract fees have been generated under Digital ICE development
agreements. We believe that a substantial portion of our revenues through at
least 2000 will be from contract fees related to ICE/3/ development agreements.
We have derived all of our royalty fees through December 31, 1999 from the
licensing of our Digital ICE technology to Kodak and Nikon. Presently, Nikon
and Minolta are shipping film scanners and Kodak is shipping a kiosk with an
embedded film scanner that incorporates our Digital ICE technology. With
respect to film scanners, royalty rates for the licensing of our Digital ICE
technology range from 2% to 7% of the manufacturers' price for the scanner.
Noritsu has licensed Digital ICE for use in digital minilabs. Under our
agreement with Noritsu, we will receive a set dollar amount per unit for each
digital minilab sold. Digital ICE royalty rates applicable to future products
that may incorporate this technology may vary considerably from our current
range.
We do not expect that we will recognize royalty revenues related to our
Digital ROC and Digital GEM technologies prior to the fourth quarter of 2000.
We expect to establish royalty rates pertaining to the licensing of Digital ROC
and Digital GEM technologies in a manner similar to those established for our
Digital ICE technology.
Costs and Expenses
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our engineering,
sales and marketing and professional services departments, and to establish an
administrative organization. As a result, we have incurred net losses in each
fiscal quarter since inception and, as of December 31, 1999, had an accumulated
deficit of $24.6 million. We anticipate that our operating expenses will
increase substantially in future quarters as we increase sales and marketing
operations, fund greater levels of research and development, improve
operational and financial systems and increase expenses associated with
protecting our intellectual property. Accordingly, we expect to incur
additional losses for the foreseeable future. In addition, our limited
operating history makes it difficult for us to predict future operating results
and, accordingly, there can be no assurance that we will achieve or sustain
revenue growth or profitability.
We had 136 full-time employees at December 31, 1999, compared to 54
employees at December 31, 1998. This rapid growth places a significant demand
on our management and operational resources. In order to manage growth
effectively, we must implement and improve our operational systems, procedures
and controls on a timely basis. In addition, we expect that future expansion
will continue to challenge our management's ability to hire, train, motivate,
and manage our employees. Competition is intense for highly qualified
technical, sales and marketing and management personnel. If our total revenue
does not increase relative to our operating expenses, if our management systems
do not expand to meet increasing demands, if we fail to attract, assimilate and
retain qualified personnel, or if our management otherwise fails to manage our
expansion effectively, there would be a material adverse effect on our
business, financial condition and operating results would be adversely
affected.
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Results of Operations
The following discussion should be read in connection with the audited
financial statements and the related notes included elsewhere in this
prospectus.
Years Ended December 31, 1997, 1998 and 1999
Revenues
Total revenues increased 691% from $502,000 in 1998 to $4.0 million in 1999.
This increase was attributable to an increase in our customer base for both DFP
and ICE/3/ technologies. Nikon accounted for approximately 64%, 74% and 25% of
our revenues in 1997, 1998 and 1999, respectively; Kodak accounted for
approximately 35% and 16% of our revenues in 1997 and 1998, respectively; and
Hewlett-Packard accounted for approximately 43% of our revenues in 1999.
Contract revenues. Contract revenues increased from $214,000 in 1998 to $3.2
million in 1999 primarily due to fees earned and recognized under our first DFP
design review agreement and an increase in the fees earned and recognized under
ICE/3/ agreements. Contract revenues decreased 66% from $628,000 in 1997 to
$214,000 in 1998, due to the amount and timing of revenue recognized upon our
achievement of contract specific development milestones.
Royalty revenues. We began recognizing royalty revenue under a license
agreement for our Digital ICE technology in the third quarter of 1998 and, as a
result, royalty revenues increased by 185% from $288,000 in 1998 to $821,000 in
1999. We did not recognize any royalty revenues during 1997.
Costs and Expenses
Cost of contract revenues and research and development. Cost of contract
revenues consists of costs incurred to fulfill our obligations under design
review or development agreements with our OEM customers. Research and
development expense combined with cost of contract revenues comprise our total
engineering costs. In a given period, the allocation of engineering costs
between cost of contract revenues and research and development expense is a
function of the timing and extent of the adaptation, customization and
development of our technologies to licensees' products and specifications and
does not necessarily correspond to the recognition of revenues under the
related contracts.
Cost of contract revenues increased by 481% from $43,000 in 1997 to $250,000
in 1998, and by 759% to $2.1 million in 1999. These increases were due to
increases in personnel and other costs associated with greater obligations
under design review and development arrangements with our OEM customers. We
expect cost of contract revenues to increase in the future due to the expansion
of our obligations under future design review and development arrangements that
we expect to enter into with our OEM customers.
Research and development expense consists primarily of personnel costs to
support the general development of our technologies. Research and development
expense increased by 488% from $717,000 in 1997 to $4.2 million in 1998, and by
115% to $9.1 million in 1999. These increases were primarily due to increases
in internal engineering personnel. We believe that continued investment in
research and development is critical to attaining our strategic objectives and,
as a result, we expect research and development expense to increase
significantly in future periods. To date, all software development costs have
been expensed in the period incurred.
Selling, general and administrative. Selling, general and administrative
expenses consist primarily of salaries and other related costs for sales and
marketing personnel and salaries and related costs of our executive,
accounting, finance, legal and administrative personnel. Selling, general and
administrative expenses increased by 258% from $1.0 million in 1997 to $3.6
million in 1998, and by 114% to $7.6 million in 1999. These increases were
primarily due to a significant increase in personnel and an increase in legal
expense related to the protection of our intellectual property. We believe
these expenses will continue to increase in
23
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future periods as we expect to continue to expand our sales and marketing
efforts, add personnel to our general and administrative departments to support
our expanding operations, incur additional costs related to the growth of our
business and assume the responsibilities of a public company.
Amortization of deferred stock compensation. In 1999, we recorded total
deferred stock-based compensation of $8.1 million in connection with stock
options granted during 1999. We are amortizing this amount primarily over the
vesting periods, generally four years, of the applicable options, resulting in
amortization expense of $1.4 million in 1999. These amounts primarily represent
the difference between the exercise price of certain stock option grants made
in 1999 and the deemed fair value of our common stock at the time of such
grants.
Interest and other income, net. Interest and other income, net consists
primarily of interest income and expense. Interest and other income, net
increased from $28,000 in 1998 to $457,000 in 1999. This increase was primarily
due to interest income earned on higher average cash and investment balances,
partially offset by interest expense on a higher average debt balance. Interest
and other income, net decreased by 86% from $202,000 in 1997 to $28,000 in
1998, primarily due to interest expense on a higher average debt balance and
interest income earned on a lower average cash balance in 1998 when compared to
1997. Additionally, other income in 1997 included a $90,000 cancellation
payment from a former OEM customer.
Foreign Withholding Taxes. Foreign withholding taxes paid in 1997 and 1999
relate to withholdings on royalties from a customer located in a foreign
country.
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Selected Quarterly Financial Results
The following table presents selected unaudited quarterly operating results
for each of the eight quarters in the period ended December 31, 1999. This data
has been derived from unaudited consolidated financial statements that have
been prepared on the same basis as the annual audited consolidated financial
statements and, in our opinion, include all recurring adjustments necessary for
a fair presentation of such information. We believe this unaudited consolidated
financial information accurately reflects our operating results during these
periods and should be read in conjunction with the audited consolidated
financial statements and the notes thereto appearing elsewhere in the
prospectus. The operating results in any quarter are not necessarily indicative
of the results that may be expected for any future period. The amount of
contract revenues that we earn vary from period to period depending on factors
such as the timing of our achievement of contract-specific development
milestones and our customers' licensed product development and launch
schedules. Royalty revenues also may vary from period to period based on our
customers' sales volumes of products incorporating our licensed technologies.
Because many of our revenue components fluctuate due to factors beyond our
control and our expenses are largely fixed, our revenues and operating results
have varied significantly from period to period and we expect that they will
continue to do so in future periods.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Contract revenues...... $ -- $ 20 $ 84 $ 110 $ 598 $ 409 $ 773 $ 1,372
Royalty revenues....... -- -- 109 179 198 228 203 192
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.......... -- 20 193 289 796 637 976 1,564
Costs and Expenses:
Cost of contract
revenues.............. 54 61 66 69 71 472 786 818
Research and
development........... 947 1,059 1,072 1,140 1,609 2,142 2,682 2,617
Selling, general and
administrative........ 534 804 1,104 1,130 1,033 1,763 2,120 2,713
Amortization of stock-
based
compensation.......... -- -- -- -- 45 159 323 904
------- ------- ------- ------- ------- ------- ------- -------
1,535 1,924 2,242 2,339 2,758 4,536 5,911 7,052
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,535) (1,904) (2,049) (2,050) (1,962) (3,899) (4,935) (5,488)
Interest and other
income (expense), net.. 48 38 10 (68) (20) 178 169 130
------- ------- ------- ------- ------- ------- ------- -------
Net loss before
withholding taxes...... (1,487) (1,866) (2,039) (2,118) (1,982) (3,721) (4,766) (5,358)
Foreign withholding
taxes.................. -- -- -- -- -- 35 15 21
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,487) $(1,866) $(2,039) $(2,118) $(1,982) $(3,756) $(4,781) $(5,379)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Liquidity and Capital Resources
We have accessed two separate equipment lines of credit with Silicon Valley
Bank to finance purchases of capital equipment. At December 31, 1999,
borrowings under these facilities bore interest at a weighted average annual
rate of 8.90%. Borrowings under these facilities are collateralized by all of
our tangible assets except those resulting from specified Digital ICE license
agreements discussed below. We are obligated to make monthly payments of
principal and interest through March and December 2001 under these respective
lines of credit. Under the second line of credit, any prepayment of principal
or interest is subject to a prepayment penalty. At December 31, 1999, we were
in compliance with the only financial covenant under the second line of credit
and $939,000 was available for future borrowings. This second facility expires
on March 31, 2000 and any future borrowings will bear a fixed interest rate
equal to the then 18 month U.S. treasury bill rate plus 325 basis points. No
further borrowings are available under our first line of credit. Our principal
sources of liquidity at December 31, 1999 consisted of $18.7 million of cash
and cash equivalents, highly liquid short- and long-term investments and
availability under the foregoing equipment line of credit.
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We have issued to Silicon Valley Bank a $2.5 million and a $3.5 million
royalty-backed annuity note pursuant to a note purchase agreement. The two
notes are secured by future royalty receipts under specified Digital ICE
license agreements. At December 31, 1999, these notes bore interest at an
annual rate of 9.25%. According to the terms of the notes, the interest rate
was decreased during 1999 when two additional products incorporating our
technologies began shipping and will be decreased further when a fourth
licensed product begins shipping. Payments we receive under a specified Digital
ICE license agreement are first applied against the interest obligation, with
any remaining amounts then applied against the outstanding principal. Any
principal amount still outstanding beginning in October 2004 will be payable in
equal quarterly installments over the succeeding four years. We may prepay the
notes at any time without penalty.
In the event the specified Digital ICE license agreements are terminated on
or before October 2008, Silicon Valley Bank may demand, at its option, that
principal amounts then outstanding be paid in equal quarterly installments over
the four years following such termination. In such case, the remaining
principal amount of the notes would bear interest at an annual rate equal to
the then issuable four-year U.S. treasury notes rate plus 650 basis points. In
addition, Silicon Valley Bank would be entitled to exercise warrants to
purchase shares of our common stock with a value of $300,000 subject to upward
incremental adjustments to a maximum of $1.2 million if the outstanding amount
is not repaid within 36 months from the date the specified license agreements
were terminated.
For the year ended December 31, 1999, cash used in operating activities was
$12.3 million compared to $6.8 million in 1998 and $18,000 in 1997. The
increases in net cash used in operating activities were primarily due to
increased losses from operations.
For the year ended December 31, 1999, cash provided by financing activities
was $33.6 million compared to $3.5 million in 1998 and $5.3 million in 1997. We
have funded our operations to date primarily through sales of preferred stock,
resulting in aggregate net proceeds to us of $34.5 million, and to a lesser
extent, bank debt and contract fees and royalties.
For the year ended December 31, 1999, cash used in investing activities was
$15.8 million compared to $1.2 million in 1998 and $172,000 in 1997. The
increases in cash used in investing activities were primarily due to net
purchases of short- and long-term investments in 1999 and increases in
purchases of computer equipment, software development tools and leasehold
improvements, all of which were required to support our business expansion. We
anticipate capital expenditures through 2000 of approximately $9.0 million
primarily for purchases of additional computer equipment, software development
tools and leasehold improvements.
We believe the net proceeds we receive from this offering, together with our
existing cash balances and the availability under our credit facilities, will
be sufficient to meet our capital requirements over the next 12 months.
However, we could be required, or could elect, to seek additional funding prior
to that time. Our future capital requirements will depend on many factors,
including our rate of revenue growth, the timing and extent of spending to
support technology and product development efforts and expansion of our sales
and marketing activities. Although we are currently not a party to any
agreement or letter of intent with respect to a potential acquisition, we may
enter into acquisitions in the future which also could require us to seek
equity or debt financing. We cannot assure you that additional equity or debt
financing, if required, will be available to us on acceptable terms, or at all.
Year 2000 Computer Functions
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally
and the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems. Computer experts have warned that there may
still be residual consequences of the change in centuries and any such
difficulties could result in a decrease in sales of our products, an increase
in allocation of resources to address
26
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Year 2000 problems of our customers, or an increase in litigation costs
relating to losses suffered by our customers due to such Year 2000 problems.
Effect of Recent Accounting Changes
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137, which is effective for fiscal years beginning after June 15,
2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments. The statement requires that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value, and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. We do
not have any derivative instruments as of December 31, 1999. We believe that
the adoption of SFAS No. 133 will not have a material effect on our
consolidated financial statements.
In March 1999, the Financial Accounting Standards Board issued an exposure
draft entitled "Accounting for Certain Transactions involving Stock
Compensation," which is a proposed interpretation of APB Opinion No. 25.
However, the exposure draft has not been finalized. Once finalized and issued,
the current accounting practices for transactions involving stock compensation
may need to change and such changes could affect our future operating results.
Qualitative and Quantitative Disclosure about Market Risk
Interest Rate Risk
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in cash
equivalents and short-term instruments. In addition, we are exposed to interest
rate risks through our credit facilities, where we borrow at prevailing short-
term variable rates. We do not hedge against our interest rate exposure, and we
do not use derivative financial instruments for trading or speculative trading
purposes. Due to the nature of our cash equivalents and investments, we have
concluded that there is no material market risk exposure to changes in interest
rates.
Foreign Exchange Risk
Royalty revenues under our Digital ICE agreement with Nikon are denominated
in Japanese yen. As a result, 19% of our revenues in 1999 were denominated in
Japanese yen. We believe that our exposure to changes in foreign exchange rates
is minimal, and therefore, we do not hedge against such exposure. We intend to
enter into U.S. dollar-denominated contracts in the future.
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BUSINESS
We innovate, develop, license and sell proprietary imaging technologies that
optimize, enhance and enable the digitization of photographic images for
traditional photo processing applications as well as for desktop, professional
and Internet publishing applications. Our two principal technologies are:
. Digital Film Processing, or DFP, which permits the direct digitization of
exposed but undeveloped 35mm and Advanced Photosystem, or APS, film; and
. ICE/3/ (pronounced "ICE cubed") technologies, which are embedded in
scanners, and have the power to eliminate surface defects, restore faded
color values and enhance the granular clarity of scanned color
photographic images.
We have developed a product prototype of our DFP subsystem that includes a
highly specialized digital image capture engine that will be incorporated
within DFP systems which we expect will be introduced by our OEM customers.
When commercially introduced, DFP systems will provide an alternative to
processing exposed but undeveloped standard 35mm and APS film directly into a
digital form without a wet chemical development process. We believe that DFP
systems will offer a number of advantages over traditional film processing
systems, including:
. end-user convenience and flexibility in processing traditional film into
a digital form;
. fewer over- and under-exposures in processed images;
. enabling our customers to compete more effectively in the market for
image output, including Internet storage, archiving, transmission and
printing of digital images;
. no use or discharge of hazardous chemicals in the film-development
process;
. no need for plumbing or specialized handling of hazardous chemicals,
enabling DFP systems to be deployed at diverse locations; and
. scalability of use, including the possible introduction of multiple DFP
engine central processing units and PC-compatible versions for small
office/home office use.
For these reasons, we believe that DFP has the potential to revolutionize the
imaging industry. Furthermore, unlike digital camera technology, DFP will not
require end users to purchase additional camera equipment, as traditional film-
based cameras can be used to achieve direct-to-digital capabilities.
The implementation of our technologies for use by our customers generally
occurs in three distinct phases: design, development and production. First, in
the design phase, we coordinate with the OEM customer to design the product
specifications; next, in the development phase, we develop or assist in the
development of a product prototype; and third, in the production phase, either
the OEM customer or a third-party manufacturer produces the resultant products.
For DFP subsystems, we have completed the design phase and have begun the
development phase with one OEM customer and are in the design phase with two
other OEM customers. We intend to license and sell these subsystems, together
with our proprietary developing agent consumable that will be used in the DFP
process. We anticipate that our customers will integrate our DFP subsystems
initially with either conventional wet chemistry photoprinting or dry digital
photoprinting capabilities. When introduced into the market, DFP systems may
also be integrated with an e-commerce platform that will allow consumers to
drop off rolls of exposed but unprocessed film at a DFP processing location and
then receive their images in digitized form via an e-mail or posted at a Web
site. We expect that the market for DFP systems and the related developing
agent consumable will include traditional photofinishing equipment and service
providers, as well as new market entrants. We also believe that DFP will
contribute to the emergence of new markets for photofinishing services such as
desktop photofinishing and Internet photo-serving applications.
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ICE/3/ consists of the following three distinct technologies that improve
and enhance the digitized quality of existing color photographs, slides and
negatives:
. Digital Image Correction and Enhancement, or Digital ICE, which
eliminates scratches, dust, fingerprints and other surface defects in
scanned color photographic images;
. Digital Reconstruction of Color, or Digital ROC, which corrects color
fading in aging photographic images and restores the color values in a
digitized image to their original condition; and
. Digital Grain Equalization and Management, or Digital GEM, which
minimizes the distracting visual pattern seen in photographic images
caused by excess silver grains in the original developed image.
ICE/3/ technologies may be licensed individually or in combinations of two or
all three. We first made Digital ROC and Digital GEM available for licensing in
the fourth quarter of 1999. To date, we have entered into agreements to license
our Digital ICE technology to OEMs in the image scanning and photofinishing
equipment industries, including Gretag, Kodak, Minolta, Nikon and Noritsu, all
of whom are in various phases of design, development or production.
Industry Background
Snapshot of the Photographic Imaging Industry
Since the invention of the camera, our personal histories, and that of the
world, have been largely captured on film. Images pervade our daily life, from
recording personal experiences to facilitating commercial transactions.
Photofinishing News estimates that there are at least 650 billion photographic
images currently in storage worldwide. This publication also estimates that
annual sales within the photographic industry, which includes sales of cameras
and film, were approximately $85 billion in 1998. A joint report of
Photofinishing News and Lyra Research estimated that 84 billion images, or 95%,
of images captured in 1998, were taken by conventional film-based cameras, with
other media, including digital cameras, accounting for the balance. According
to the same report, an estimated 89 billion, or 79%, of images captured in 2002
will be taken by conventional film-based cameras. The widespread availability
of single-use cameras, which, according to the same report, is expected to
increase in unit sales from 276 million in 1998 to 378 million in 2002, will
continue to be an important contributor to the annual growth in image creation.
In the past, most rolls of exposed but undeveloped film were dropped off at
a collection point where the film was forwarded to central photofinishing labs
that operate high capacity film-processing equipment. In more recent years, on-
site photofinishing systems, or minilabs, have been installed at consumer-
convenient locations to provide on-site photoprocessing services with a much
faster turnaround time than is possible with centralized off-site facilities.
The greater convenience and more rapid film-processing offered by minilabs have
eroded the dominance of the central lab facilities in film-development
services. According to Photofinishing News, the central labs' share of total
film-roll volume in the United States declined to approximately 55% in 1998.
However, because traditional film-processing services involve a wet chemistry
process that, in turn, requires plumbing, the handling and discharge of
hazardous substances such as emulsions and fixes, and specialized operator
training, photofinishing equipment cannot be readily installed at widespread
locations, which has limited the proliferation of minilabs.
Advent of Image Digitization
In recent years, advances in computer processing capability, improvements in
computer storage systems and the availability of less expensive personal
computers, printers and scanners, combined with the broad adoption of networked
communications and Internet-based entertainment and electronic commerce, have
created strong demand for photographic images to be digitized so that they may
be accessed, stored and transmitted through digital communications. Generally,
there are two methods for digitizing an image: (1) the scanning of a
photograph, slide or negative image previously captured by a conventional
camera or (2) the original capture of the image with a digital camera. Consumer
acceptance of digital cameras has been slow due to relatively poor image
quality, high price points and the lack of an established infrastructure.
Improvements in the pricing and image quality of digital cameras to approach
the capabilities of 35mm and APS film cameras
29
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will require significant advances in technology, including improved storage and
optics technologies. Due to these limitations, we believe scanners will remain
a primary means for image digitization for the foreseeable future. Shipments of
scanners have grown dramatically in recent years, with International Data
Corporation projecting that annual unit shipments will increase from 13.9
million in 1998 to 39.1 million in 2003. This unit growth largely will be
driven by flatbed and handheld scanners that are relatively inexpensive and
easy to use, making them widely accessible for small office, educational and
personal use, as well as more traditional commercial applications. The quality
of scanner technology, as well as the quality of the original photographic
image, significantly affect the quality of the final digitized image. This
creates an enormous opportunity for technology capable of both improving the
quality of digitized images and making access to digitization more efficient
for participants in the industry and more convenient for the end user.
Evolving Competitive Dynamics within the Imaging Industry
Providers of photofinishing services have strongly influenced the
duplication, enhancement and output options for images captured by consumers.
With the advent of digitization, once an image is digitized, the duplication,
enhancement, distribution and storage of that image ceases to be influenced by
the providers of photofinishing services. For example, a digitized image can be
stored on a personal computer, on a CD-rom or at a Web site; it can be
transferred over a network or the Internet; and it can be cropped, modified and
printed at home, at a commercial copy shop or by an online service provider.
Thus, opportunities have emerged to provide post-processing imaging equipment,
software and services in markets that previously were dominated by
photofinishing equipment vendors and service providers. For the consumer, image
digitization offers a greater selection of output products and services.
Instead of receiving only negatives and copies of photographs printed on
photographic paper, image digitization enables consumers to have images
delivered by email, saved on a photodisk, posted on a Web site or printed from
a PC on photo-quality paper. With the changes in output options, new markets
are being created for paper, photo-quality dry printers, inkjet supplies and
related products, as well as Web pages, Internet advertising and photo-archival
services.
As a result, digital imaging has provided opportunities for companies across
diverse industries, including manufacturers of storage devices, toner and
inkjet suppliers and e-commerce businesses. Manufacturers of color copiers,
such as Canon, Ricoh and Xerox, have introduced high-capacity photo-quality
digital printing into retail copy/print locations using networked color
copiers. Traditional photo companies, such as Kodak, Fuji and their respective
retailers, as well as a large number of new imaging companies, such as
Camera.com, e-Memories.com, ImageBank, MyFamily.com, Photopoint.com, Seattle
Filmworks, ShutterFly.com and Zing.com, have introduced Internet-based photo
networks that allow online access and archiving of consumer images. According
to the joint report of Photofinishing News and Lyra Research, revenues from
digital online photofinishing services, such as archiving, printing and
delivery, uploading and scanning, are expected to grow from approximately $10
million in 1998 to approximately $3.3 billion in 2002. The ongoing mass
digitization has begun to drive the convergence of companies within
traditionally distinct industries, such as the computer, printing, scanning,
Internet and photography industries. These companies are beginning to compete
for a share of the rapidly growing markets within an expanding imaging industry
with suppliers increasingly vying to control the sale of associated follow-on
services and consumables and to generate online advertising and e-commerce
revenues.
Current Approaches are Limited in Responding to the Demand for Digitized
Images
The two accepted approaches to digitization, digital cameras and image
scanning, currently do not fully address the growing demand for digitized
images. Most professional and amateur photographers are familiar with the
capabilities of conventional film-based cameras and are knowledgeable about
where to purchase cameras and film and where to have pictures processed,
reproduced and enhanced. A similar infrastructure has not yet developed for
digital camera photography. This lack of infrastructure, combined with the
reluctance of consumers to replace their film-based cameras with digital
cameras, has resulted in the vast majority of end users continuing to rely on
traditional film-based photography as their primary means for capturing images.
In addition, growth in the popularity and availability of inexpensive one-time
use cameras has established a new standard for convenience that has impacted
consumers' buying behavior.
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The advent of digitization has allowed for new entrants in the image output
market and has increased competition within that market. However, the input
market, which essentially consists of traditional film processing, continues to
be strongly influenced by photofinishing equipment manufacturers. The best
opportunity to provide consumers with a convenient means to digitize their
images is at the same time that their traditional film is processed. To address
this opportunity and in order to continue to exert influence over the image
input and output markets, a number of companies within the photofinishing
equipment and services industries, such as Fuji, Gretag, Kodak, Konica and
Noritsu, have modified their minilab products to incorporate an on-board film
scanner that digitizes photographic images immediately following the
traditional wet chemistry development process. These minilabs with on-board
scanners are referred to as "digital minilabs" and are expected to rapidly gain
market acceptance as a primary means for digitizing images. Infotrends
estimates that annual sales of digital minilabs will increase from
approximately 3,000 units in 2000 to over 23,000 units in 2002. Scanning
processes, including the digital minilab scanning process, however, are
susceptible to a number of deficiencies. Most scanners are able to produce an
image that is comparable, but not superior to, the original image. Therefore,
dust, scratches, color fading and grain buildup on the original image are
passed on to the digitized image. In order to attain better quality images, the
original image must be thoroughly cleaned prior to scanning and then touched up
once in digitized form with commercially-available software. This process is
labor intensive. Moreover, because digital minilabs are dependent on the
traditional wet chemistry film development process which requires a plumbing
system, specialized operator training and a relatively large physical space to
operate, digital minilabs generally cannot be installed at businesses that are
unable or unwilling to meet these requirements. These limitations have impeded
the expansion of film processing capabilities to a wider range of markets such
as quick print and color copier service venues, small office/home office
markets and markets within less industrialized nations.
THE APPLIED SCIENCE FICTION SOLUTION
We innovate, develop, license and sell proprietary imaging technologies that
optimize, enhance and accelerate the digitization of photographic images for
traditional photo-processing applications, as well as for desktop, professional
and Internet publishing applications. In order to address the limitations of
both digital cameras and traditional film processing, we have developed DFP
technology which processes exposed but undeveloped 35mm and APS film directly
into digital form. When DFP becomes commercially available, it will enable
direct and rapid digitization of photographic images as a supplement to, or
replacement for, conventional wet chemistry film processing. In addition, we
have introduced to market our ICE/3/ technologies, which eliminate surface
defects, restore faded color values and enhance the granular clarity of scanned
images. Our ICE/3/ technologies empower users to automate the restoration of
original film-based images in digital form with high quality and accuracy.
These technologies are important for users who continue to develop their images
through traditional photofinishing services or who seek to improve or enhance
the digital quality of previously developed images.
Our technologies offer the imaging industry and its consumers the following
benefits:
Convenience and Flexibility. Our technologies are intended to support the
development of products that meet existing imaging market demands, as well as
create new market opportunities. DFP has been designed to be compatible with
35mm and APS film standards. When DFP becomes commercially available,
photographers will be able to use their film-based cameras to capture images
and then process the exposed but undeveloped film on DFP systems, which may be
located at traditional photo labs, DFP retail outlets or kiosks or through
Internet photo-delivery services, depending on our OEMs' marketing strategy.
Furthermore, as DFP systems will not require plumbing systems and should be
smaller and less expensive to operate than traditional film-processing
equipment, these systems will be easier to deploy and operate than traditional
wet chemistry systems. We believe these features will make DFP services an
attractive business for a variety of retailers, including those who do not
offer photoprocessing services today, including malls, convenience stores,
vending locations and hotels. In addition, because of its dry development and
direct-to-digital capabilities, DFP will provide consumers with a more
convenient solution for processing digital images. The digitized images can
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then be archived, accessed and transmitted over the Internet. For existing
photographic images, our ICE/3/ technologies automate the enhancement of these
images during the scanning process, thus making image restoration simple,
convenient and cost-effective.
Enable Broad Capabilities for Film Processing. When commercially available,
DFP systems will create new opportunities for film processing services across a
number of markets. We believe that DFP will be an attractive product extension
for manufacturers of digital minilabs that will enable them to sell equipment
to businesses and consumers that are not within the scope of their current
minilab markets. DFP systems also will enable OEMs to market and sell to
businesses from a wide variety of industries, including photo labs, photocopy
businesses and other retailers, as well as large commercial users of
photographic images, such as advertising agencies, real estate agencies,
insurance companies and catalog and e-commerce retailers. Our OEM customers
could choose to deploy DFP systems to expand their film-processing capabilities
in potential high growth markets, such as in Africa, Asia and Latin America. In
addition, with further technological advances in computer processing and
storage capabilities and in our DFP technology, as well as economies of scale
from volume production, we believe that DFP units eventually may become cost
effective for broad consumer use as a computer peripheral, thereby facilitating
home-based film processing. We believe that our DFP systems will also allow
OEMs or their customers to compete more effectively in the market for image
output, such as Internet storage, archiving, transmission and printing.
Image Quality and Consistency. We believe that DFP has the potential to
process film with a smaller percentage of under- and over-exposures than can be
produced by conventional photoprocessing equipment due to the ability to
establish the development settings on a pixel-by-pixel basis. Furthermore, our
ICE/3/ technologies improve the quality and consistency of images that are
scanned for digital use. In contrast to traditional photoprocessing and photo-
enhancement services, both DFP and ICE/3/ will be able to achieve image quality
without special operator training and expertise.
Cost Effectiveness. Our technologies offer the imaging industry cost-
effective solutions to pursue attractive market opportunities. Because DFP
systems will not require plumbing, will require less space to operate and will
not use or discharge hazardous chemicals, we expect DFP systems to be less
expensive to operate than traditional film-processing equipment. Our ICE/3/
technologies can significantly improve the quality of existing photographic
images in an automated process that occurs during the scanning of the image. As
a result, image restoration and enhancement can be conducted without labor-
intensive cleaning and post-scanning touch-ups.
Strategy
Our objectives are to establish DFP subsystems as a premier means for
processing exposed but undeveloped 35mm and APS film and to establish ICE/3/
technologies as premier technologies for enhancing the digitization of existing
color images. Our strategy is based on the following key elements:
Leverage Our Current Relationships with Global Market Leaders and Expand
Customer Base. We have established important customer relationships with
Gretag, Hewlett-Packard, Kodak, Konica, Minolta, Nikon and Noritsu. We believe
that if our current technologies are successfully adopted by these OEMs, we
will be able to expand these relationships to cover additional technologies
that will allow them to bring innovative products to market before their
competitors. In addition, we expect that successes by our first OEM customers
will generate additional demand for our technologies from other companies that
will seek to remain competitive. We will continue to work closely with OEMs to
identify opportunities where we can enhance their market position through the
development and introduction of innovative technologies.
Continue to Enhance Our Technology Position. We intend to continue to
capitalize on advanced technologies and developments in the digital imaging
industry and introduce new technologies through our OEM customer base. In
addition, we intend to maintain and enhance our position as an industry
innovator in image digitization technologies by continuing to invest
significant resources in research and development. Our research and development
efforts resulted in the filing of 83 patent applications as of December 31,
1999. We intend to continue to patent our core technologies and to license our
technologies under terms that provide us with additional intellectual property
protection, including the ownership of derivative and enhancement
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products and, where appropriate, covenants not to compete. We plan to recruit
and hire additional personnel for our research and development organization, as
well as continue to expand our in-house patent protection and technology
licensing team.
Expand End-User Awareness of Our Company and its Technologies through Brand
Identity. We believe that continuing to establish and enhance the brand
identity of our company and our digitization technologies is highly beneficial
for creating awareness and generating demand from end users for products that
incorporate our technologies. To this end, our licensing arrangements generally
require our customers to place our logo on their products, packaging and
software user interfaces. We also will continue to actively participate in
industry trade shows independently and in conjunction with our customers,
including trade shows which are oriented toward our OEM customers' customers in
order to stimulate end-user demand for products that incorporate our
technologies. We intend to begin establishing a brand name for our DFP
technology prior to the first commercial launch of a DFP system. By expanding
our co-branding efforts with our OEM customers and by generating end-user
awareness of ASF technologies, we believe that our technologies and products
will be perceived by end users as differentiated features and capabilities that
justify price premiums for the OEM products that incorporate them.
Diversify Sources of Recurring Revenue. We intend to continue to implement
and expand OEM licensing arrangements for our ICE/3/ technologies that will
assure us a strong and diversified foundation of recurring royalty revenue.
Furthermore, besides selling and licensing DFP subsystems, we intend to supply
the developing agent consumable used in these subsystems. The licensing and
sale of our proprietary DFP developing agent consumable will generate recurring
revenues that will increase as DFP systems are broadly deployed by retailers
and accepted by the public.
Pursue Strategic Opportunities in the Evolving Imaging Industry. We
anticipate that ongoing competitive convergence within the imaging industry,
which we expect will be more pronounced with the introduction of DFP systems,
will continue to present us with numerous opportunities to establish strategic
relationships with current and new market participants. After the commercial
launch of DFP, we will actively explore strategic relationships with
manufacturers of digital minilabs and companies in other industries that are
being affected by the demand for digital images, including storage solution
providers, online photo-server companies and personal computer OEMs. We also
will continue to evaluate and seek to establish strategic alliances with other
developers of imaging technologies as a means to expand the scope of the
technologies that we offer to our customers.
ASF Technologies and Products
Digital Film Processing
DFP is a proprietary technology that processes exposed but undeveloped color
and black-and-white 35mm and APS film directly into a digital format. We have
completed the development of a product prototype DFP image capture engine and
are in negotiations with OEMs to incorporate this engine into their products.
This highly specialized DFP image capture engine will be integrated with a
computer system and our proprietary ASF digital image processing software to
form a DFP subsystem. Other than our DFP technology, the remaining components
of the DFP subsystem will consist largely of commercially available products
and technologies such as PCs and electro-optical and high capacity storage
components. We expect to outsource the manufacture of DFP subsystems and the
related developing agent consumable to one or more third-party contract
manufacturers.
In order to prepare for the commercial launch of the first DFP system, we
are customizing and adapting our technology to meet the specifications of our
OEM customers, increasing the film development speed and improving the quality
of the resulting digital images. Our current development schedule with our OEMs
contemplates the commercial introduction of a DFP system in the second half of
2001. When commercially introduced, DFP technology will enable our OEM
customers to integrate either conventional wet chemistry photoprinting or dry
digital photoprinting, Internet access and other devices with our DFP
subsystems to create a comprehensive DFP system which they can market and sell,
along with the related developing agent consumable, to end users in traditional
retail and wholesale photoprocessing markets, as well as possible new markets
for photoprocessing that will be enabled by DFP, such as Internet and desktop
photoprocessing and
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image serving applications. In addition, we believe the advent of DFP systems
may develop further the adoption of photoprocessing in potential high growth
markets, such as in Africa, Asia and Latin America, where photofinishing
equipment- and services-to-population ratios are low relative to the United
States, Japan and Europe.
In a DFP system, a roll of exposed but undeveloped 35mm or APS film is
placed into a feeder. As the film is fed through the image capture engine, a
proprietary non-toxic developing agent is applied to the film with no resultant
by-product. The DFP system then makes a digital record of the image. Once this
image data is captured, settings are established on a pixel-by-pixel basis in
software for each element of the image, with each element developed to its
optimal exposure level. The data for the final digitized image then can be
routed to one or more destinations, including the Internet, a file server,
inkjet color printers, removable disk media or a digital video disk (DVD) where
the developed image is stored or printed. The developed digital images may be
managed online using commercially available file servers with archival and
retrieval software or with HTML tags on Web server software. Because DFP
processes the film directly to a digital format, film negatives are not
generated as a direct result of the process, although it is possible to produce
traditional negatives by outputting the digital record to a film recorder.
However, we expect most customers will receive selected printed copies of their
images, a CD-rom or an e-mail of their photographs, or have them posted
directly to a password protected Web site.
We believe consumers will prefer to have their pictures developed with a DFP
system for several reasons. For instance, due to the ability to automatically
establish the settings on a pixel-by-pixel basis during the development
process, we believe that pictures can be developed with a lower percentage of
over-and under-exposures. In addition, DFP systems could be configured with a
quick-feed batch print output system, enabling the end user to review
composites of the entire roll of developed film, select the photos and
quantities they want, and have prints and images outputted in digital form much
more rapidly than is possible with traditional photoprocessing systems. When
commercially introduced, DFP will be an environmentally-friendly alternative to
the conventional wet chemistry film processing system, a feature which we
believe consumers will value. DFP does not use any effluent chemicals or
generate hazardous waste, thereby eliminating the need for color stabilizers,
bleach, fix and other environmental contaminants that are used in wet chemistry
film processing. Finally, DFP may facilitate broader and more convenient
distribution of photoprocessing systems, including at kiosks and a variety of
other retail and office locations.
ICE/3/
ICE/3/ consists of three technologies: Digital Image Correction and
Enhancement, or Digital ICE, Digital Reconstruction of Color, or Digital ROC,
and Digital Grain Equalization and Management, or Digital GEM. We offer non-
exclusive, worldwide licenses for ICE/3/ technologies individually, in
combinations of two or as an entire suite of all three. Digital ROC and Digital
GEM became available for licensing in the fourth quarter of 1999; however, we
do not expect any royalty revenues from Digital ROC or Digital GEM until the
second half of 2000. We believe that scanners which are enabled with our ICE/3/
technologies can reduce up to 90% of the most common touch-ups that are
traditionally performed by desktop publishing applications following the
scanning of a photographic image. The resulting improvement in the quality of
the digitized image can be significant.
Digital ICE. When installed in a scanner, Digital ICE eliminates dust,
scratches, fingerprints and many other surface defects from scanned color
photographs, slides and negatives. Digital ICE technology performs this feature
by identifying a "defect channel," in addition to the standard red, green and
blue channels that all scanners capture in order to build color images. A
Digital ICE-enabled scanner sends the defect channel along with the red, green
and blue channels to a host PC where the defects are accurately identified and
automatically removed from the resultant digitized image.
Implementing Digital ICE technology involves modifications to both a
scanner's hardware and software. A scanner manufacturer will first modify its
basic scanner hardware to be Digital ICE-capable by implementing a proprietary
ASF design specification so that the scanner is able to generate and transmit a
high quality defect channel. We customize our Digital ICE software specifically
to each OEM's scanner in order to optimize
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performance and quality. We also coordinate closely with our OEM licensees to
develop easy to use interface software. In addition, a trademarked "Digital
ICE" logo is applied to the OEM's product.
Digital ROC. Digital ROC is a software application that automatically and
consistently rebuilds the lost color values in faded photographic images in
order to produce color corrected digitized images. This application is an
attractive feature for scanners, color copiers, photocopy print stations and
other digital input/output systems where true color correction has value to the
end user. As with Digital ICE, software vendors currently offer products that
enable color enhancement and touch-up, but these applications require
significant manual intervention and often blur or distort the image in the
colorizing process. In contrast, Digital ROC operates by identifying clues from
the original film image to extrapolate the original color for reconstruction in
the digital image. Digital ROC can be implemented as a fully-automated, one-
touch feature that performs relatively basic image color reconstruction or can
be adjusted to allow for the control of all aspects of image correction, with
definable profiles for different input devices, output devices and customer
preferences.
Digital GEM. Digital GEM is designed to correct the "graininess" in
processed film images and thereby enhance the visual impact of photographic
images in their digitized form. Film grain refers to the distracting visual
pattern often seen in photographs that is caused by the uneven distribution of
silver grains in the original photographic image. These grains are by-products
of the light sensitive emulsion used to develop exposed film. Our Digital GEM
technology analyzes a film's unique grain pattern, extracts the data related to
image quality, color and sharpness and then applies a proprietary algorithm to
remove excess grain from the scanned record of the image.
Target Markets and Customers
Digital Film Processing
We have identified the following three major target markets for our DFP
technologies: manufacturers of photofinishing equipment, manufacturers of photo
kiosks and manufacturers of dry output equipment, such as inkjet printers and
photocopiers. We have identified companies within each of these markets that
may serve as "first movers" in the development and commercial introduction of
complete DFP systems.
Photofinishing Equipment Manufacturers. This market consists of a relatively
small number of companies that manufacture photofinishing equipment for central
labs and minilabs, including digital minilabs. Because digital minilabs
currently serve as a primary means for digitizing newly developed film images
for use in online photo networks and managed archive systems, photofinishing
equipment manufacturers may extend their digitization capabilities and expand
their market share through the introduction of DFP systems. DFP systems will
enable these manufacturers to sell equipment to their existing customer base,
such as central photofinishing labs that may offer high-volume DFP
photoprocessing services with a rapid turnaround time in conjunction with more
convenient film drop off locations. Furthermore, by offering DFP systems,
photofinishing equipment manufacturers will be able to shift more
photofinishing services to on-site locations within their current large
customer base, including discount and mass merchandisers, drug stores and
supermarkets. Additionally, DFP provides them with the opportunity to expand
into previously untapped distribution channels, such as copy centers,
convenience stores and businesses in potential high growth markets, such as in
Africa, Asia and Latin America. Assuming that technological advances continue
to be made in computer processing and storage capabilities and by us in our DFP
development efforts, and assuming that we achieve the economies of scale that
we expect from volume production, we believe that these manufacturers will have
the opportunity to sell DFP systems into a broader class of customers, such as
small offices and eventually home users.
Photo Kiosk Manufacturers. Because of its dry development characteristics,
DFP will offer manufacturers of photo kiosks greater ability to expand their
market share within the photofinishing services industry. We believe that DFP
photo kiosks will be introduced in both self-serve and operator-attended
installations in such locations as malls, convenience stores, vending locations
and hotels. Self-serve kiosks likely would be configured with a PC interface to
the Internet or a help-line telephone that will enable the end user to receive
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trained assistance in the use of the DFP system. Kiosks could also allow a
variety of convenience options such as rapid turnaround photoprocessing or
direct delivery of photos to an email or Web site address, without the need to
return to the kiosk to pick up the images in an output form.
Dry Output Equipment Manufacturers. This target market consists largely of
companies that offer products that benefit from the demand for digital images,
such as manufacturers of scanners, photocopiers, inkjet printers and personal
computers. When introduced, DFP systems will allow businesses and consumers to
store and retrieve photo quality images on their desktop PCs. Photo quality
printers introduced by Canon, Epson and Hewlett-Packard, among others, enable
end users to produce thick, glossy prints which are virtually indistinguishable
from standard 35mm and APS film-based prints available from photo labs today.
Image editing software from Adobe, Live Picture and MGI would further enable
users to produce calendars, postcards, digital photo albums and image-oriented
Web pages with near professional quality. We believe that DFP systems, when
integrated with the Internet and desktop PCs, will leverage the enormous
investment in technology and market development that is occurring in the PC
imaging industry today.
ICE/3/
We have licensed our Digital ICE technology, and expect to license our
Digital ROC and Digital GEM technologies, to scanner and photofinishing
equipment OEMs for incorporation into their products. We use market research
information in order to customize our base technologies for specific segments
of the market and to assist OEM customers in defining their end-user offerings.
In licensing these technologies, we segment the scanner market into two key
markets:
Film scanners. A film scanner is used to scan and digitize images on slides
and negatives, but not photographic prints. Film scanners are incorporated into
digital minilabs and also are widely used by graphic artists, service bureaus
and pre-press professionals for desktop publishing. We believe that any
incremental amount paid by an end user for a film scanner with one or more
ICE/3/ technologies is more than offset by the costs saved in not having to
manually or otherwise touch-up and restore damaged images in their digital
form. A film scanner is typically priced at the retail level between $350 and
$9,000. According to International Data Corporation, film scanner sales were
approximately $160 million in 1998 and are expected to grow to approximately
$200 million by 2003. Minolta and Nikon, manufacturers of film scanners, have
licensed our Digital ICE technology for inclusion in several of their products.
Our Digital ROC and Digital GEM technologies are in the process of being
incorporated into film scanners and digital minilabs with products
incorporating these technologies scheduled for commercial release in the fourth
quarter of 2000.
Flatbed scanners. Flatbed scanners are used to scan and digitize
photographic prints and are growing in popularity as a PC accessory for small
office and home use. Flatbed scanners with Digital ICE and Digital ROC features
will provide an easy and efficient means to digitize and restore damaged
images. Most flatbed scanners are priced at less than $1,000, with many models
in the fastest growing segment priced at less than $100. According to
International Data Corporation, sales of flatbed scanners were approximately
$2.6 billion in 1998 and are expected to grow to approximately $5.4 billion by
2003. As a result of the benefits to the owner of a flatbed scanner that is
enabled with one or more of our ICE/3/ technologies, a significant opportunity
may exist to license these technologies to flatbed scanner manufacturers. Our
Digital ICE and Digital ROC technologies are in the process of being
incorporated into flatbed scanners under development agreements with OEMs, but
to date, OEMs of flatbed scanners have not shipped any resultant licensed
product. We do not expect Digital GEM to be incorporated into flatbed scanners
in the foreseeable future.
Licensing and Implementation of Our Technologies
The implementation of our technologies for use by our OEM customers
generally occurs in three distinct phases: design, development and production.
First, in the design phase, we coordinate with the customer to design the
product specifications; next, in the development phase, we develop or assist in
the development of a product prototype; and third, in the production phase,
either the OEM customer or a third-party manufacturer
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produces the resultant products. During the design and development phases, we
generally adapt and customize our technologies to our OEM customers' products
and specifications, as well as provide the manufacturer with software
customization services to support its product implementation.
As part of our arrangements with our licensees, we offer the following
services: design review, prototype design engineering and product development
assistance. The typical license agreement package consists of: (1) a license to
use our proprietary know-how and design specifications; (2) a patent license
for all ASF patents related to the applicable technologies; (3) a copyright
license for customized ASF software; and (4) a trademark license to use our
trademarks on the OEM's products.
Prior to undertaking a DFP design review, we require the prospective
customer to enter into a nondisclosure agreement that requires the customer to
maintain the confidentiality of our proprietary information. Our nondisclosure
agreements typically include a covenant on the part of the customer not to
compete with us with respect to DFP technology and may include an assignment of
intellectual property rights from the customer. During the design and
development phases, we expect to be paid contract fees as milestones specified
in the contracts are achieved. The amount of contract fees varies according to
the level of services provided and the particular customization and adaptation
required by the OEM customer. During these phases, we expect to develop DFP
subsystems to the customer's specifications and assist the customer with the
integration of our DFP subsystems into its products. During the production
phase, we expect to outsource the manufacture and distribution of DFP
subsystems and the related DFP developing agent consumable. Our current
schedule contemplates the commercial introduction of a DFP system in late 2001,
and we expect to recognize revenues related to license and sales of our DFP
subsystems and developing agent consumable at that time. Although we have
entered into agreements with three OEMs whereby we have produced preliminary
design specifications for DFP subsystems, we do not have any agreements which
bind OEMs to commercialize our DFP technology. We expect that, as a general
practice, agreements we enter into will not create any affirmative obligation
requiring OEMs to complete the development and/or commercialization of DFP.
Implementation and support of our ICE/3/ technologies follow a somewhat
similar process as DFP but are focused on adaptation of our technology with the
OEMs existing or planned scanner products. With respect to ICE/3/ technologies,
the design review phase entails an evaluation of the prospective licensee's
scanner or other imaging product to ensure that it can accommodate the licensed
ICE/3/ technology, and if so, the extent of the adaptation and customization
effort that will be required. We then proceed to the two other phases: the
development phase and the production phase. During the development phase, we
provide instruction and guidance to the customer to modify its product's
hardware to accommodate the licensed ICE/3/ technology. Once the customer is
satisfied with a prototype, the production phase ensues. During the production
phase, we provide additional guidance and instruction to the customer to
produce scanners or other imaging products that incorporate the licensed ICE/3/
technologies. Additional or ongoing technical support may also be obtained for
an additional fee. The customer can terminate the relationship at any time
after the commencement of the development phase.
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Customers, Sales and Marketing
We sell and license our technologies to manufacturers of photofinishing
equipment, scanners, dry printers and other companies within the imaging
industry. Our current customers, the technologies subject to their arrangements
with us, and the respective phases of implementation with respect to those
technologies are depicted in the following table.
<TABLE>
<CAPTION>
OEM Technologies Phase of Implementation
--- ------------ -----------------------
<S> <C> <C>
Eastman-Kodak Digital ICE Production phase for Kodak's PictureMaker
kiosk; and in the development phase for
Kodak's digital minilab system
Noritsu Digital ICE Development
DFP Design
Nikon Digital ICE Production phase for Nikon's LS-2000
scanner; and in the development phase for
an additional Nikon product
Digital ROC Development
Minolta Digital ICE Production phase for Minolta's Dimage Scan
Speed; and in design phase for an
additional Minolta product
Digital ROC/Digital GEM Development
Konica Digital GEM Design
Gretag DFP Design
Hewlett-Packard DFP Development
</TABLE>
We cannot assure you that any of these OEMs will deliver products incorporating
these technologies to market. Moreover, it is possible that these OEMs will
withdraw their products from the market after they have begun delivery of such
products. Please see "Risk Factors--We do not have, and do not anticipate
having, agreements which bind OEMs to commercialize our DFP technology and it
is possible that our customers may fail or cease their efforts to commercialize
our DFP technology."
Customers that accounted for 10% or more of our total revenues in 1999 were
Hewlett-Packard and Nikon, and in 1998 were Nikon and Kodak. A significant
portion of our revenues through December 31, 1999 were derived from development
and license agreements for our Digital ICE technology. However, we expect that,
as our customers undertake additional DFP development projects and we sell
licenses for our Digital ROC and Digital GEM technologies, we will become less
dependent on Digital ICE for generating revenues.
To date, we have sold licenses to our technologies through direct sales
conducted from our corporate headquarters and our Japanese subsidiary. At
December 31, 1999, our direct sales force consisted of nine personnel. Our
sales force contacts prospective customers in order to build awareness of our
technologies and their capabilities. Once a lead is established, senior
personnel, including our executive officers, will often engage in discussions
with their counterparts at the prospective customer. The sales cycle for the
licensing of our ICE/3/ technologies has ranged from six to 14 months, but is
expected to be significantly longer for our DFP technology due to the relative
size and complexity of DFP development and licensing projects.
We believe the technology awareness that we create with our customers
through our initial licensing engagement will enable us to license additional
technologies to them on a successive basis. Our Digital ICE licensees, for
example, also may become licensees of Digital ROC, Digital GEM and DFP.
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Through our participation in industry trade shows and conferences, such as
PhotoKina in Europe and the Photo Marketing Association trade show in the U.S.,
our Web site and an advertising campaign that we commenced in the first quarter
of 2000, we intend to build broad awareness of our company and our
technologies. Industry trade shows and conferences provide us with the
opportunity to educate prospective customers of the potential value of our DFP
and ICE/3/ technologies, thereby stimulating demand for them. Our marketing
efforts are focused not only on leading companies within the imaging industry,
but the customers of those companies as well. By marketing to our customer's
customers, we intend to cultivate end-user demand for our technologies that
will translate into increased demand from the OEMs that sell to those end
users.
Competition
The markets for image editing software and film-development products are
intensely competitive and are characterized by rapid technological change,
increasing foreign and domestic competition and constant demand for new
products and product enhancements. Our technologies and the products that
incorporate our technologies compete directly or indirectly with products
offered by many large companies. Our technologies and the products that
incorporate our technologies may also compete in the future with products
offering similar functionality that may be introduced by our current customers,
including Hewlett-Packard, Kodak and Nikon as well as by other companies such
as Canon, Polaroid and Xerox. All of our customers, and most of our other
potential competitors, have longer operating histories and significantly
greater financial, technical, sales, marketing and other resources than us. In
addition, many of our potential competitors also have greater name recognition
and larger customer bases. As a result, our competitors may be able to respond
more effectively to new or emerging technologies and changes in customer
requirements or preferences, withstand significant price decreases or devote
greater resources to the development, promotion, sale and support of their
products than us. Our future competitors may also be able to develop products
or technologies comparable or superior to those we offer and may be able to
adapt more quickly than us to new technologies or evolving customer
requirements.
We believe that the principal competitive factors in our market include the
following:
. ease of integration of software and other technology with OEM hardware
and software systems;
. technology and product performance and reliability;
. price;
. service;
. convenience and ease of use by end users;
. timeliness of new product introductions and enhancements of current
products;
. the extent to which an infrastructure exists for competing products and
technologies;
. customer service and support capabilities; and
. effective strategic alliances and partnering arrangements.
Although we believe that we are competitive with respect to most of these
factors, there can be no assurance that we will compete successfully in our
markets in the future.
Digital Film Processing
DFP subsystems, when incorporated into commercial DFP systems, will compete
with conventional digital imaging input technologies, such as digital cameras,
and conventional wet chemistry photo imaging processes with scanners, including
digital minilabs. Digital camera technologies are rapidly advancing and there
can be no assurance that they will not replace film-based photography in the
future as the prevailing means for capturing images. New services, such as
those offered by Seattle Filmworks and Kodak/America Online, have
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also been introduced that offer traditional film processing and scanning, and
then provide end users with the ability to receive prints and negatives of the
digitized images, as well as storage and Internet delivery of the images. In
the retail processing market, DFP systems installed in kiosks and at other
retail sites will compete with digital minilabs, copy machines, PC equipment
and software, mid-range film and photo scanners, and other types of office or
digital imaging equipment. In the PC photography market, future desktop DFP
systems will compete with digital cameras, conventional film and photo
scanners, as well as service businesses such as one-hour photo labs, all of
which offer alternative methods of either digitizing photo images or delivering
photographs to consumers.
ICE/3/
Our ICE/3/ technologies compete, or are expected to compete, with certain
features of image editing software such as Adobe's Photoshop, as well as image
reconstruction software specifically designed to correct defects in an image.
While defects in digitized images can be corrected with image editing software,
the process typically is slow, often inaccurate and limited to those defects
that are readily discernible to the human eye. Although there are software
solutions available in the market to assist in the removal of defects in an
image, we believe that these software-only solutions are inferior to our ICE/3/
technologies because of the relative complexity involved in their use and their
relative expense (both in time and dollars) as compared to our technologies.
However, to the extent that DFP systems are successfully introduced to market,
we anticipate that we will experience a decline in revenues from ICE/3/
licenses to manufacturers of digital minilabs, as DFP systems will compete
directly with digital minilabs.
Research and Development
Our long-term growth and success depends, in significant part, on our
ability to develop high quality technologies on a timely basis that have
commercial appeal for OEMs and end-users in the imaging industry. We intend to
focus our research and development activities on enhancing our existing
technologies and developing new technologies and products that incorporate
innovative ideas, designs and features to expand or improve the performance of
our customers' products. Our objective with respect to research and development
activities is to aggressively expand the scope of our patents and to create new
markets where we may develop additional patents that define a market that we
have established. To this end, we had filed 83 patent applications as of
December 31, 1999, including 68 patent applications in 1999 alone. We cannot
assure you that any patents will be issued from these applications, other than
the single issued patent we have received and the two patent applications that
have been allowed. At December 31, 1999, our research and development
organization consisted of 90 employees, and 10 independent consultants who were
retained on a full-time or part-time basis to assist in specific research and
development projects.
Intellectual Property Rights
We rely on domestic, foreign, and international laws and treaties to
establish and protect our proprietary rights in our technologies and products.
In particular, we rely on a combination of patent, trademark, copyright, trade
secret and contract law, as well as other technical measures to protect our
proprietary technologies and products.
Our principal intellectual property strategy is to patent the ideas and
inventions that embody our technologies. One aspect of our intellectual
property strategy is to maximize the time our technologies are protected by
patents. To that end, we have filed provisional patent applications with the
United States Patent and Trademark Office which effectively protects our
technologies for 21 years from the filing date. Another aspect of our
intellectual property strategy is to protect our technologies internationally.
The majority of our patent applications are also filed as Patent Cooperation
Treaty, or PCT, applications. The PCT applications give us the opportunity to
file for patent protection in 69 countries around the world.
We have filed a number of patent applications on inventions that pertain to
our ICE/3/ and DFP technologies. In addition, we have filed patent applications
on inventions which go beyond the scope of our
40
<PAGE>
current licensed technologies and may represent future market opportunities. At
December 31, 1999, we had filed 83 patent applications with the U.S. Patent and
Trademark Office. To date, we have received one issued patent and allowance of
two other patents applications from the U.S. Patent and Trademark Office with
respect to these applications. We expect the allowed applications to issue as
patents in the near future.
Although we have filed numerous patent applications covering our
technologies and products, no assurance can be given that any pending patent
applications will result in the issuance of patents. We rely to some extent on
trade secret protection to protect our technologies, and we regularly enter
into confidentiality agreements with our customers. However, there can be no
assurance that third parties will not independently develop the same or similar
technology, obtain unauthorized access to our proprietary technologies, or
misuse technologies that we have granted access to our customers. In addition,
we cannot guarantee that our technologies and products will not infringe the
patents or rights of any third party.
We also rely on trademarks to establish consumer recognition and loyalty. We
have filed a total of 111 trademark applications on 14 separate marks. The
marks on which we have filed trademark applications include "ASF," "Applied
Science Fiction," "Digital ICE," "Digital ICE/2/," "Digital ICE/3/," "Digital
ROC," "Digital GEM," "Digital Negative" and "Virtual Negative". We have
received notices of allowance on five of the marks for which we have submitted
trademark applications, and we expect an additional 16 applications to be
approved in the near future. No assurance can be given, however, that any
pending trademark application will result in the registration of the trademark.
In addition, we cannot guarantee that a third party does not already own rights
in or to our pending trademarks, which may prevent us from obtaining trademark
protection.
Our ICE/3/ and DFP technologies utilize patented inventions that we
presently license from IBM. Our intellectual property strategy with respect to
the licensed IBM patents is to augment these patents with our own patents. In
exchange for the use of the IBM patents, our customers are generally required
to enter into a separate license agreement with IBM. Royalties from this
agreement are payable directly to IBM by our customers. This payment is in
addition to the royalties paid to us by our customers for the use of our
technologies and products. Our license agreement with IBM expires on October
31, 2000. We believe that this license agreement will be renewed on
substantially the same terms in accordance with IBM's open-licensing policy
pursuant to which licenses of IBM intellectual property generally are renewed
as a matter of course, unless there is a material breach of our agreement with
IBM.
Employees
As of December 31, 1999, we had 134 full-time employees in our offices in
Austin, Texas and two full-time employees in our offices in Tokyo, Japan. Of
these employees, 90 were engaged in research and development, 26 were employed
in sales and marketing and 20 were employed in finance and administration. None
of our employees is represented by a labor union or is subject to a collective
bargaining agreement. We believe that our relationship with our employees is
good.
Facilities
Our executive offices and principal operations are currently located in a
leased facility in Austin, Texas that provides us with up to approximately
54,000 square feet of office and lab space, of which approximately 1,500 square
feet is subleased to third parties. As these subleases terminate, we will take
down the additional space to support our growth. In November 1999, we entered
into a letter of intent with a commercial real estate developer to lease
100,000 square feet of build-to-suit office and lab space in Austin, Texas,
with a proposed lease term commencing in the first quarter of 2001. This letter
of intent also contemplates an option to lease an additional 335,000 square
feet of build-to-suit space as the need arises, subject to the terms and
conditions of the definitive agreements that will be entered into by the
parties. We also lease approximately 1,000 square feet in Tokyo, Japan to
support sales, marketing and development for customers in Asia. We believe that
our lease arrangements for our facilities are adequate to meet our needs for
the foreseeable future.
Legal Proceedings
We are currently not a party to any material legal proceedings.
41
<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information concerning our directors and
executive officers.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mark R. Urdahl.......... 39 President, Chief Executive Officer and Chairman of
the Board
Dr. Albert Edgar........ 50 Chief Scientist and Director
Robert E. Sleet, Jr..... 53 Executive Vice President and Chief Financial Officer,
Secretary and Treasurer
Jerome W. Johnson....... 50 Executive Vice President Sales, Marketing and
Licensing Operations
Daniel J. Sullivan...... 52 Executive Vice President, Intellectual Property,
Strategy and Administration
S. Dana Seccombe........ 51 Executive Vice President, Research and Development
John Asa(2)............. 62 Director
Harvey B. Cash.......... 61 Director
Carmelo M. Gordian...... 41 Director
Richard H. Kimball(1)... 43 Director
Peter M. Palermo(1)(2).. 58 Director
</TABLE>
- --------
(1) Member of our Compensation Committee
(2) Member of our Audit Committee
Executive Officers and Directors
Mark R. Urdahl is a founder of our company and has served as our President
and Chief Executive Officer since June 1995. Mr. Urdahl also serves as our
Chairman of the Board. Prior to joining our company, Mr. Urdahl was Program
Manager of Open Ventures at IBM, where he focused on software investments and
alliances, including the Fibre Channel System Initiative, a joint effort of
IBM, Sun Microsytems and Hewlett-Packard. From August 1983 through June 1995,
Mr. Urdahl held management and marketing positions at IBM where he focused on
advanced software, imaging and network communications technologies as well as
Internet strategies. Mr. Urdahl holds a B.S. in Economics from the University
of California at Santa Barbara.
Dr. Albert Edgar is a founder of our company and has served as our Chief
Scientist since June 1995. Dr. Edgar also serves as one of our directors. From
June 1978 to June 1995, Dr. Edgar was employed by IBM where he engaged in
various scientific and engineering projects. Dr. Edgar holds B.S. degrees in
Electrical Engineering and Physics from Northwestern University and Ph.D.s in
Electrical Engineering and Computer Science from the University of Oklahoma.
Robert E. Sleet, Jr. is our Secretary and Treasurer and has served as our
Executive Vice President and Chief Financial Officer since October 1999. From
January 1999 to June 1999, Mr. Sleet was Chief Financial Officer at Real Time
Data, Inc., a vending services holding company. Mr. Sleet served as Vice
President and Treasurer at Sprint PCS, a global telecommunications services
company, from April 1996 to November 1998. From April 1985 to April 1996, Mr.
Sleet served as Vice President and Treasurer at Global Marine Inc., an offshore
drilling contractor and services company. Mr. Sleet holds a B.A. in Economics
and Finance from the University of North Carolina at Charlotte.
Jerome W. Johnson has served as our Executive Vice President Sales,
Marketing and Licensing Operations since June 1999. From 1993 to May 1999, Mr.
Johnson was Vice President and General Manager of the U.S. and Canadian
Consumer Imaging Division of Kodak. Mr. Johnson holds a B.S. in Business from
the University of North Dakota and an M.B.A. from Syracuse University.
Daniel J. Sullivan has served as our Executive Vice President, Intellectual
Property, Strategy and Administration since December 1999. From August 1974 to
November 1999, Mr. Sullivan was employed by
42
<PAGE>
IBM where he served in various positions, including, most recently, as its Vice
President, Asia Pacific Technical Operations. Mr. Sullivan holds a B.A. in
Liberal Arts from Hanover College and an M.S. in Systems Management from the
University of Southern California.
S. Dana Seccombe has served as our Executive Vice President, Research and
Development since December 1999. From April 1968 to November 1999, Mr. Seccombe
was Vice President and General Manager of Hewlett-Packard's Inkjet Supplies
Business Unit. From August 1972 through March 1988, Mr. Seccombe held various
other positions at Hewlett-Packard, including Group Research and Development
Manager, General Manager--Information Hardware Operation and Research and
Development Manager. Mr. Seccombe holds a B.S. and an M.S. in Electrical
Engineering from the Massachusetts Institute of Technology.
John Asa has served as a director since January 2000. Mr. Asa has served as
the Executive Vice President and General Manager of Japan Camera, Inc. since
November 1990. Mr. Asa was the Executive Vice President and General Manager of
ASA Corporation, Ltd., a wholesale distributor of photographic products, from
March 1963 to October 1990.
Harvey B. Cash has served as a director since January 1999. Mr. Cash has
served as a partner of various venture capital organizations affiliated with
InterWest Partners, a venture capital firm, since 1985. Mr. Cash serves on the
board of directors of the following public companies: AMX Corporation, a
manufacturer of remote control systems; Aurora Electronics, Inc., a distributor
of recycled integrated circuit boards and computer components; Ciena
Corporation, a manufacturer of systems for long distance fiberoptic networks;
i2 Technologies, Inc., a software company; Liberte Investors, Inc., an
investment company; and ProNet, Inc., a manufacturer of paging devices. In
addition, Mr. Cash is a director of several privately held companies. Mr. Cash
holds a B.S. in Electrical Engineering from Texas A&M University and an M.B.A.
from Western Michigan University.
Carmelo M. Gordian has served as a director since January 2000. Since
October 1994, Mr. Gordian has served as a partner of Brobeck, Phleger &
Harrison LLP, a law firm, either directly or through Carmelo M. Gordian, P.C.,
a professional corporation of which Mr. Gordian is the sole director and
shareholder. Mr. Gordian also serves as Chairman of that firm's Business and
Technology Group. Mr. Gordian holds a B.A. in Economics from Harvard College
and a J.D. from Harvard Law School.
Richard H. Kimball has served as a director since April 1999. Mr. Kimball is
a General Partner of Technology Crossover Ventures, which he co-founded in June
1995. From September 1984 to December 1994, Mr. Kimball was a Managing Director
at Montgomery Securities. Mr. Kimball is on the Board of Directors at Copper
Mountain, Inc. and several private companies and is an outside advisor to Intel
and its Intel 64 Fund. Mr. Kimball holds an A.B. from Dartmouth College and an
M.B.A. from the University of Chicago.
Peter Palermo has served as a director since November 1999. Mr. Palermo has
been President and Chief Executive Officer of The Strategic Triangle, Inc., an
international management consulting firm, since 1994. From July 1963 to
December 1993, Mr. Palermo has served in a variety of positions at Kodak,
including, most recently, as its Corporate Vice President, Director of
Marketing and Senior Vice President of Imaging. Mr. Palermo holds a B.A. in
Psychology and English from Bowling Green State University and an M.B.A. from
the University of Rochester.
Classified Board of Directors
We currently have authorized seven directors. At the first annual meeting of
stockholders following the closing of this offering, our board of directors
will be divided into three classes, as nearly equal in size as is practicable,
to serve staggered three-year terms as follows:
. Class I, whose terms will expire at the annual meeting of stockholders
to be held in 2000;
. Class II, whose term will expire at the annual meeting of stockholders
to be held in 2001; and
. Class III, whose term will expire at the annual meeting of stockholders
to be held in 2002.
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<PAGE>
The directors for each class will be elected for three-year terms at the
annual meeting of stockholders in the year in which their term expires. Each
director's term is subject to the election and qualification of his successor,
or his earlier death, resignation or removal.
Committees of the Board of Directors
Our board of directors established an audit committee in May 1998. The
members of the audit committee are Messrs. Asa and Palermo. The audit committee
reports to the board of directors with regard to the selection of our
independent auditors, the scope and records of our annual audits, fees to be
paid to the auditors, the performance of our independent auditors, compliance
with our accounting and financial policies and management's procedures and
policies relative to the adequacy of our internal accounting controls.
Our board of directors established a compensation committee in April 1999.
The members of the compensation committee are Messrs. Kimball and Palermo. The
compensation committee reviews and makes recommendations to the board of
directors regarding our compensation policies and all forms of compensation to
be provided to our directors, executive officers and certain other employees.
In addition, the compensation committee reviews bonus and stock compensation
arrangements for all of our other employees. The compensation committee also
administers our stock option and stock purchase plans.
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, our board of directors as
a whole performed the functions delegated to the compensation committee. No
member of our board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of
directors or compensation committee. 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 have any such
interlocking relationships existed in the past.
Director Compensation
We typically do not pay our directors for their services as directors other
than to grant them stock options to purchase our common stock. However, we may,
by resolution of our board of directors, reimburse directors for expenses
incurred in connection with their attendance at board and committee meetings.
On November 12, 1999, we granted Peter M. Palermo an option to purchase
55,000 shares of common stock at a price of $3.50 per share.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of our directors to
our company or our stockholders for breaches of the directors' fiduciary duties
to the fullest extent permitted by Delaware law. In addition, our certificate
of incorporation and bylaws provide for mandatory indemnification of directors
and officers to the fullest extent permitted by Delaware law. Prior to
consummation of this offering, we also intend to obtain directors' and
officers' liability insurance and will have entered into indemnification
agreements with all of our directors and executive officers.
Employment Contracts
The officers generally serve at the discretion of our board of directors.
However, we have entered into employment contracts with Jerome W. Johnson,
Daniel J. Sullivan, S. Dana Seccombe and Robert E. Sleet, Jr.
Mr. Johnson
If, prior to our entering into a written agreement resulting in a "change in
our control," we terminate Mr. Johnson's employment without "cause," or he
terminates his employment for "good reason," all as defined in
44
<PAGE>
his employment agreement, then he shall receive from us: (1) 50% of his annual
base salary paid in one lump-sum immediately following his termination; (2)
100% of his annual base salary and target bonus which will be paid out in
installments over the 12 month period following his termination; (3) six months
of continued health benefits, including coverage for his dependents; (4) six
months of accelerated vesting of unvested shares immediately following his
termination; and (5) an additional 12 months of continued vesting of his
unvested shares over the 12 months following his termination.
In addition, if, within 18 months of our entering into a written agreement
resulting in a "change in our control," we terminate Mr. Johnson's employment
without "cause," or he terminates his employment for "good reason," all as
defined in his employment agreement, then he shall receive from us: (1) 200% of
his annual base salary and target bonus paid in one lump-sum immediately
following his termination; (2) six months of continued health benefits,
including coverage for his dependents; and (3) 100% accelerated vesting of his
unvested shares immediately following his termination. In addition, if Mr.
Johnson terminates his employment for any reason during a 30-day period
commencing 12 months after a written agreement resulting in a "change in our
control," as defined in his employment agreement, then he shall receive 50%
accelerated vesting of his then unvested shares immediately following such
termination.
If any of the foregoing benefits provided to Mr. Johnson constitute
"parachute payments," as defined under Section 280G of the Internal Revenue
Code, then we will pay any resultant excise and income taxes up to a maximum of
$100,000.
If Mr. Johnson dies or becomes permanently and totally disabled while
employed by us, then he or his estate will receive from us immediately upon his
death or disability: (1) 100% of his annual base salary and target bonus paid
in one lump-sum; (2) 12 months of continued health benefits for him or his
dependents, as the case may be; and (3) 12 months of accelerated vesting of his
unvested shares.
Mr. Seccombe
If, prior to our entering into a written agreement resulting in a "change in
our control," we terminate Mr. Seccombe's employment without "cause," as
defined in his employment agreement, then he shall receive from us: (1) 50% of
his annual base salary plus 50% of his target bonus paid in one lump-sum
immediately following his termination; (2) 100% of his annual base salary and a
dollar amount equal to 1/12 of his target bonus paid over the 18 months
following his termination; (3) six months of continued health benefits,
including coverage for his dependents; (4) continued vesting of unvested shares
as if his employment was not terminated until all those options shares are
fully vested; and (5) an extension of the exercisability of his options
following such termination for a period of 48 months.
If, within 18 months of our entering into a written agreement resulting in a
"change in our control," we terminate Mr. Seccombe's employment without
"cause," as defined in his employment agreement, then he shall receive from us:
(1) 200% of his annual base salary and target bonus paid in one lump-sum
immediately following his termination; (2) six months of continued health
benefits, including coverage for his dependents; (3) continued vesting of
unvested shares as if his employment had not been terminated until all shares
are fully vested; and (4) an extension of the exercisability of his options
following such termination for a period of 48 months. Upon the expiration of
the 18 month period, Mr. Seccombe's rights upon termination shall be governed
by the same provisions that apply to termination prior to our entering into a
written agreement resulting in a "change in our control" as set forth above. In
addition, if Mr. Seccombe terminates his employment for any and all reasons
during a 30-day period commencing 12 months after a written agreement resulting
in a "change in our control," as defined as defined in his employment
agreement, then for purposes of vesting he shall receive from us an additional
24 months of service (and the shares reflecting the additional 24 months of
service shall immediately vest).
If Mr. Seccombe dies or becomes permanently and totally disabled while
employed by us, then he or his estate shall receive from us immediately upon
his death or disability: (1) 100% of his annual base salary and target bonus
paid in one lump-sum; (2) 24 months of continued health benefits for him or his
dependents, as the case may be; and (3) 24 months accelerated vesting of his
unvested shares.
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<PAGE>
Mr. Sleet
If, prior to our entering into a written agreement resulting in a "change in
our control," we terminate Mr. Sleet's employment without "cause," as defined
in his employment agreement, then he shall receive from us immediately
following his termination: (1) 100% of his annual base salary paid in one lump-
sum; and (2) accelerated vesting of his unvested shares as if he were employed
through his next employment anniversary date.
If within 18 months of our entering into a written agreement resulting in a
"change in our control," we "involuntarily terminate" Mr. Sleet's employment,
as defined in his employment agreement, then he shall receive from us
immediately following his termination: (1) 100% of his annual base salary paid
in one lump-sum; and (2) 100% accelerated vesting of his unvested shares.
Mr. Sullivan
If, prior to our entering into a written agreement resulting in a "change in
our control," we terminate Mr. Sullivan's employment without "cause," as
defined in his employment agreement, then he shall receive from us immediately
following his termination: (1) 100% of his base salary paid in one lump-sum;
and (2) accelerated vesting of his unvested shares as if he were employed
through his next anniversary.
If, within 18 months of our entering into a written agreement resulting in a
"change in our control," we "involuntarily terminate" Mr. Sullivan's
employment, as defined in his employment agreement, then he shall receive from
us immediately following his termination: (1) 100% of his annual base salary
paid in one lump-sum; and (2) 100% accelerated vesting of his unvested shares.
Executive Compensation
The following table provides the total compensation paid to our Chief
Executive Officer and the only other executive officer of our company whose
compensation (salary and bonus) was in excess of $100,000 for services rendered
in all capacities to us for the year ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Securities
Salary Bonus All Other Underlying
Name and Principal Position ($) ($) Compensations($) Options
- -------------------------------- -------- ------- ---------------- ------------
<S> <C> <C> <C> <C>
Mark Urdahl..................... $205,000 $70,539 $ -- 35,484
President and Chief Executive
Officer
Albert Edgar ................... 190,000 67,203 -- 16,129
Chief Scientist
Jerome W. Johnson............... 127,885 50,000 30,700 (1) 216,500
Executive Vice President Sales,
Marketing and Licensing
Operations
</TABLE>
- --------
(1) Consists of relocation expenses paid by us.
Option Grants in Last Fiscal Year
The following table provides information concerning individual grants of
stock options made during the year ended December 31, 1999 to each of our
executive officers. We have never granted any stock appreciation rights.
The exercise prices represent our board of director's estimate of the fair
market value of our common stock on the grant date. In establishing these
prices, our board considered many factors, including our financial condition
and operating results, development milestones, recent transactions and the
market for comparable stocks.
The amounts shown as potential realizable value represent hypothetical gains
that could be achieved for the respective options if exercised at the end of
the option term. These amounts represent certain assumed rates
46
<PAGE>
of appreciation in the value of our common stock. The 5% and 10% assumed annual
rates of compounded stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of the future price of our common stock. The potential realizable
value is calculated based on the ten year term of the option at its time of
grant. It is calculated based on the assumption that the assumed initial public
offering price of $ per share appreciates at the indicated annual rate
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock price.
Actual gains, if any on stock option exercises depend on the future performance
of our common stock. There can be no assurance that the amounts reflected in
the table will be achieved.
We granted these options under our 1995 Stock Option/Stock Issuance Plan.
Each option has a maximum term of ten years, subject to earlier termination if
the optionee's services are terminated. These options are immediately
exercisable, but we have the right to repurchase, at the exercise price, any
shares that have not vested at the time the optionee terminates employment with
us. The percentage of total options granted to our employees in the last fiscal
year is based on options to purchase an aggregate of 2,148,721 shares of stock
granted during 1999.
<TABLE>
<CAPTION>
Potential Realizable
Value
of Assumed Annual
Rates
of Stock Price
Option Grants During Year Ended Appreciation
December 31, 1999 Individual Grants for Option Term
------------------------------------------------------ ---------------------
Percent of
Number of Total Exercise
Securities Options Granted Price
Underlying Options to Employees per Expiration
Name Granted (1)(#) in Fiscal 1999 Share($) Date 5% 10%
- ---- ------------------ --------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mark Urdahl............. 35,484 1.7% $1.55 08/11/09 $ $
Albert Edgar............ 16,129 0.8 1.55 08/11/09
Jerome W. Johnson....... 216,500 10.0 1.55 06/16/09
</TABLE>
- --------
(1) All options were granted at fair market value, as determined by our board
of directors on the date of grant. All options granted to our executive
officers in 1999 were exercised shortly after the date of grant. As of
December 31, 1999, all shares exercised by our executive officers were
subject to repurchase.
Fiscal Year-End Option Values
The following table sets forth information concerning option exercises and
option holdings for the year ended December 31, 1999 with respect to each of
our executive officers named in the Summary Compensation table. We have never
granted any stock appreciation rights.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
-----------------------------------------------------------------------------
Value Number of Securities
Realized Underlying Unexercised Value of Unexercised
Number (Market Price Options at In-the-Money Options at
of Shares at Exercise December 31, 1999 December 31, 1999
Acquired on less Exercise ------------------------- -------------------------
Name Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark Urdahl............. 35,484 -- -- -- --
Albert Edgar............ 16,129 -- -- -- --
Jerome W. Johnson....... 216,500 -- -- -- --
</TABLE>
47
<PAGE>
Benefit Plans
2000 Stock Incentive Plan
The 2000 Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1995 Stock Option/Stock Issuance. The 2000 Stock
Incentive Plan became effective upon its adoption by the board of directors on
January 24, 2000; and it will be approved by the stockholders prior to the date
of this offering.
We have reserved 5,000,000 shares of our common stock for issuance under the
2000 Stock Incentive Plan. This share reserve consists of the shares available
for issuance under the predecessor plan on the effective date of this offering
plus an additional increase of 4,244,954 shares. The share reserve will
automatically be increased on the first trading day of January each calendar
year, beginning in January 2001, by a number of shares equal to 3% of the total
number of shares of common stock outstanding on the last trading day of the
immediately preceding calendar year, but no such annual increase will exceed
1,500,000 shares. However, in no event may any one participant in the 2000
Stock Incentive Plan receive option grants or direct stock issuances for more
than 500,000 shares in the aggregate per calendar year.
Outstanding options under the predecessor plan will be incorporated into the
2000 Stock Incentive Plan on the date of this offering, and no further option
grants will be made under that plan. The incorporated options will continue to
be governed by their existing terms, unless our compensation committee extends
one or more features of the 2000 Stock Incentive Plan to those options.
However, except as otherwise noted below, the outstanding options under the
predecessor plan contain substantially the same terms and conditions summarized
below for the discretionary option grant program under the 2000 Stock Incentive
Plan.
The 2000 Stock Incentive Plan has five separate programs:
. the discretionary option grant program under which eligible individuals
in our employ or service (including officers, non-employee board members
and consultants) may be granted options to purchase shares of our common
stock,
. the stock issuance program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares or
as a bonus tied to the performance of services,
. the salary investment option grant program under which executive
officers and other highly compensated employees may elect to apply a
portion of their base salary to the acquisition of special below-market
stock option grants,
. the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members and
. the director fee option grant program under which non-employee members
of our board of directors may elect to apply a portion of their retainer
fee to the acquisition of special below-market stock option grants.
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the exercise or purchase
price for each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The committee will also select the executive officers and other
highly compensated employees who may participate in the salary investment
option grant program in the event that program is activated for one or more
calendar years. Neither the compensation committee nor the board will exercise
any administrative discretion with respect to option grants made under the
salary investment option grant program or under the automatic option grant or
director fee option grant program for the non-employee board members.
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<PAGE>
The exercise price for the options will be determined by the compensation
committee and may be paid in cash or in shares of our common stock valued at
fair market value on the exercise date. The option may also be exercised
through a same-day sale program without any cash outlay by the optionee. In
addition, the compensation committee may allow a participant to pay the option
exercise price or direct issue price (and any associated withholding taxes
incurred in connection with the acquisition of shares) with a full-recourse,
interest-bearing promissory note.
In the event that the company is acquired, whether by merger, asset sale or
board-approved sale by the stockholders of more than 50% of our voting stock,
each outstanding option under the discretionary option grant program which is
not assumed by the successor corporation or otherwise continued will
automatically accelerate in full, and all unvested shares under the
discretionary option grant and stock issuance programs will immediately vest,
except to the extent the company's repurchase rights with respect to those
shares are to be assigned to the successor corporation or otherwise continued
in effect. The compensation committee may grant options and issue shares under
those programs which will accelerate (1) in the acquisition even if the options
are assumed or if the optionee's service is subsequently terminated or (2) in
connection with a hostile change in control (effected through a successful
tender offer for more than 50% of our outstanding voting stock or by proxy
contest for the election of board members) or upon a subsequent termination of
the individual's service.
In the event of an acquisition (by merger or asset sale), options currently
outstanding under the 1995 Stock Option/Stock Issuance Plan will accelerate
unless assumed by the successor corporation; all assumed options will
accelerate upon the optionee's involuntary termination (including a forced
resignation) within 18 months following the acquisition. Such options are not
by their terms subject to acceleration upon any other change in control or
hostile takeover.
Stock appreciation rights may be issued under the discretionary option grant
program which will provide the holders with the election to surrender their
outstanding options for an appreciation distribution from our company equal to
the fair market value of the vested shares subject to the surrendered option
less the aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of our common stock. There are
currently no outstanding stock appreciation rights under the predecessor plan.
The compensation committee has the authority to cancel outstanding options
under the discretionary option grant program (including options incorporated
from predecessor plans) in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the common stock on the new grant date.
In the event the compensation committee elects to activate the salary
investment option grant program for one or more calendar years, each of our
executive officers and other highly compensated employees selected for
participation may elect to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $10,000 nor more than $50,000. In
return, the individual will automatically be granted, on the first trading day
in the calendar year for which the salary reduction is to be in effect, a non-
statutory option to purchase that number of shares of common stock determined
by dividing the salary reduction amount by two-thirds of the fair market value
per share of our common stock on the grant date. The option exercise price will
be equal to one-third of the fair market value of the option shares on the
grant date. As a result, the fair market value of the option shares on the
grant date less the exercise price payable for those shares will be equal to
the salary reduction amount. The option will become exercisable in a series of
12 equal monthly installments over the calendar year for which the salary
reduction is to be in effect and will be subject to full and immediate vesting
in the event of an acquisition or change in control of the company.
Under the automatic option grant program, each individual who first joins
the board after the effective date of this offering as a non-employee board
member will automatically be granted an option to purchase 15,000 shares of our
common stock at the time of his or her commencement of board service. Each
automatic grant will have an exercise price equal to the fair market value per
share of our common stock on the grant date and will have a maximum term of 10
years, subject to earlier termination following the optionee's cessation of
49
<PAGE>
board service. Each option will be immediately exercisable, subject to the
company's right to repurchase any unvested shares, at the original exercise
price, at the time of the board member's cessation of service. The options will
vest, and the company's repurchase right will lapse, in a series of four equal
successive annual installments upon the optionee's completion of each year of
service over the four-year period measured from the grant date. However, each
outstanding option will immediately vest upon an acquisition or change in
control or the death or disability of the optionee while serving as a member of
the board of directors.
If the director fee option grant program is put into effect in the future,
then each non-employee board member may elect to apply all or a portion of any
cash retainer fee for the year to the acquisition of a below-market option
grant. The option grant will automatically be made on the first trading day in
January in the year for which the non-employee board member would otherwise be
paid the cash retainer fee in the absence of his or her election. The option
will have an exercise price per share equal to one-third of the fair market
value of the option shares on the grant date, and the number of shares subject
to the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of our
common stock on the grant date. As a result, the fair market value of the
option shares on the grant date less the exercise price payable for those
shares will be equal to the portion of the retainer fee applied to that option.
The option will become exercisable in a series of twelve equal monthly
installments over the calendar year for which the election is in effect.
However, the option will become immediately exercisable for all the option
shares upon the death or disability of the optionee while serving as a board
member.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant, director fee option grant and
salary investment option grant programs and may be granted to one or more
officers as part of their option grants under the discretionary option grant
program. Options with such a limited stock appreciation right may be
surrendered to the company upon the successful completion of a hostile tender
offer for more than 50% of our outstanding voting stock. In return for the
surrendered option, the optionee will be entitled to a cash distribution from
the company in an amount per surrendered option share equal to the highest
price per share of common stock paid in connection with the tender offer less
the exercise price payable for such share.
The board may amend or modify the 2000 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 2000 Stock Incentive Plan
will terminate no later than January 23, 2010.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan was adopted by the board on January 24,
2000 and will be approved by the stockholders prior to the date of this
offering. The plan will become effective immediately upon the execution of the
underwriting agreement for this offering. The plan is designed to allow
eligible employees of our company and its participating subsidiaries to
purchase shares of common stock, at semi-annual intervals, through their
periodic payroll deductions. A total of 500,000 shares of our common stock will
initially be issued under the plan. The share reserve will increase on the
first trading day of each calendar year beginning with the 2001 calendar year
by 1% of the total number of shares of common stock outstanding on the last day
of the immediately preceding year, but no such annual increase will exceed
250,000 shares.
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. However, the initial offering period will begin
on the day the underwriting agreement is executed in connection with this
offering and will end on the last business day in April 2002. The next offering
period will begin on the first business day in May 2002, and subsequent
offering periods will be set by our compensation committee.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date (generally May 1 or November 1 each year). Individuals who become
eligible employees after the start date of the offering period may join the
plan on any subsequent semi-annual entry date within that period.
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<PAGE>
A participant may contribute up to 15% of his or her cash earnings through
payroll deductions and the accumulated payroll deductions will be applied to
the purchase of shares on the participant's behalf on each semi-annual purchase
date (the last business day in April and October each year). The purchase price
per share will be 85% of the lower of the fair market value of our common stock
on the participant's entry date into the offering period or the fair market
value on the semi-annual purchase date. The first purchase date will occur on
the last business day in October 2000. In no event, however, may any
participant purchase more than 1,000 shares. Should the fair market value of
our common stock on any semi-annual purchase date be less than the fair market
value on the first day of the offering period, then the current offering period
will automatically end and a new offering period will begin, based on the lower
fair market value.
The board may at any time amend or modify the plan. The plan will terminate
no later than the last business day in April 2010.
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<PAGE>
RELATED PARTY TRANSACTIONS
The following is a description of transactions during the last three years
to which we have been a party, in which the amount involved in the transaction
exceeded $60,000 and in which any director, executive officer or holder of more
than 5% of our capital stock had or will have a direct or indirect material
interest other than compensation arrangements that are otherwise required to be
described under "Management."
Private Placement Of Equity
During the past three years, we have issued shares of our convertible
preferred stock as follows:
. In August 1999, we issued 10,233 warrants exercisable into share of
Series D preferred stock to Silicon Valley Bank for $7.74 share.
. In March 1999, we sold 4,069,767 shares of Series D preferred stock in a
private placement at a purchase price of $7.74 per share;
. In July and September 1997, we sold an aggregate of 1,471,500 shares of
Series C preferred stock in a private placement at a purchase price of
$3.70 per share and issued warrants to purchase 1,224,879 shares of
common stock for $.62 per share.
Our officers, directors and 5% stockholders participated in the foregoing
transactions as follows:
<TABLE>
<CAPTION>
Number of Number of Aggregate Number of Shares of
Number of Warrants to Shares Common Stock Issuable Upon
Shares Purchase Shares of Series Exercise of Warrants and
Name of Purchaser of Series C of Common D Conversion of Preferred Stock
- ----------------- ----------- --------------- --------- -----------------------------
<S> <C> <C> <C> <C>
Mark R. Urdahl.......... -- -- -- 2,448
Dr. Albert Edgar........ -- -- -- 14,601
Harvey B. Cash.......... 13,513 11,247 -- 51,786
CenterPoint Venture
Partners............... 594,595 494,946 258,398 2,537,129
InterWest Funds......... 405,406 337,464 258,398 1,812,080
Sevin Rosen Funds....... 374,325 311,589 516,796 1,951,360
Technology Crossover
Venture Funds.......... -- -- 1,453,489 1,453,489
</TABLE>
Registration Rights. We granted registration rights to the investors in our
preferred stock which require us to register or include their shares in a
registered offering of our securities. Please see "Description of Capital
Stock--Registration Rights" for a description of these rights.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock at December 31, 1999 and as adjusted to reflect
the sale of shares offered hereby, by (1) each person who is known by us to own
beneficially more than 5% of our common stock, (2) each of our directors, (3)
each of our executive officers named in the Summary Compensation table on page
46 and (4) all executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to the securities. 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 used to
calculate the percentage ownership of each listed person includes the shares of
common stock underlying options or warrants held by such persons that are
exercisable within 60 days of this offering. The percentage of beneficial
ownership before the offering is based on 21,926,324 shares of common stock
outstanding at December 31, 1999, consisting of 13,160,291 shares of common
stock outstanding, and 8,766,033 shares issuable upon the conversion of the
preferred stock.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Beneficially
Owned
Shares -----------------
Beneficially Before After
Beneficial Owners Owned Offering Offering
- -------------------------------------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Executive Officers and Directors
Mark R. Urdahl.............................. 2,553,930 11.6%
Dr. Albert Edgar............................ 2,546,728 11.6
Jerome W. Johnson........................... 216,500 *
John Asa....................................
Harvey B. Cash.............................. 51,786 *
Carmelo Gordian.............................
Richard H. Kimball.......................... -- --
Peter M. Palermo............................ 55,000 *
All directors and executive officers as a
group (11 persons)......................... 6,061,344 27.6
CenterPoint Venture Partners................ 2,537,129 11.6
InterWest Funds............................. 1,812,080 8.3
Sevin Rosen Funds........................... 1,951,360 8.9
Technology Crossover Venture Funds.......... 1,453,489 6.6
</TABLE>
- --------
*Less than 1%.
Named Officers and Directors. Additional information regarding beneficial
ownership of shares held by our executive officers and directors is contained
below. Except as indicated below, the address for each executive officer and
director is c/o Applied Science Fiction, Inc., 8920 Business Park Drive,
Austin, Texas 78759.
Mark R. Urdahl. Includes 2,488 shares issuable upon exercise of a
currently exercisable warrant and 35,484 shares of common stock which are
currently unvested and subject to our right to repurchase them if Mr.
Urdahl's services are terminated prior to vesting.
Dr. Albert Edgar. Includes 1,224 shares issuable upon exercise of a
currently exercisable warrant and 16,129 shares of common stock which are
currently unvested and subject to our right to repurchase them if Mr.
Edgar's services are terminated prior to vesting.
53
<PAGE>
Jerome W. Johnson. Includes 216,500 shares of common stock which are
currently unvested and subject to our right to repurchase them if Mr.
Johnson's services are terminated prior to vesting.
Harvey B. Cash. Includes 11,247 shares issuable upon exercise of a
currently exercisable warrant.
Peter M. Palermo. Includes 55,000 shares of common stock which are
currently unvested and subject to our right to repurchase them if Mr.
Palermo's services are terminated prior to vesting.
All directors and officers as a group. Includes 195,000, 185,000 and
257,400 shares of common stock owned by Messrs. Sleet, Sullivan and
Seccombe. These shares are currently unvested and subject to our right to
repurchase them if the respective individual's service is terminated prior
to vesting.
Other 5% Stockholders. Additional information regarding the beneficial
owners of 5% or more of our stock is as follows:
CenterPoint Venture Partners. CenterPoint Venture Partners, L.P.'s
address is Two Galleria Tower, 13455 Noel Road, Suite 1670, Dallas, Texas
75240.
Funds affiliated with InterWest Ventures. Includes (a) 1,758,241 common
stock equivalent shares held by InterWest Partners VI, L.P. and (b) 53,839
shares held by InterWest Investors VI, L.P. The address of the investment
funds associated with InterWest Ventures is 3000 Sand Hill Road, Building
3, Suite 255, Menlo Park, California 94025.
Funds affiliated with Sevin Rosen. Includes (a) 1,315,886 shares held by
Sevin Rosen Fund V, L.P.; (b) 56,258 shares held by Sevin Rosen V
Affiliates Fund L.P.; (c) 191,619 shares held by Sevin Rosen Management
Company; (d) 359,302 shares held by Sevin Rosen Fund VI, L.P.; and (e)
28,295 shares Sevin Rosen VI Affiliates Fund, L.P. The address of the
investment funds associated with Sevin Rosen is Two Galleria Tower, 13455
Noel Road, Suite 1670, Dallas, Texas 75240.
Funds affiliated with Technology Crossover Ventures. Includes (a) 10,544
shares held by TCV III (GP); (b) 50,132 shares held by TCV III, L.P.; (c)
1,332,462 shares held by TCV III (Q) L.P.; and (d) 60,341 shares held by
TCV III Strategic Partners, L.P. The address of the investment funds
associated with Technology Crossover Ventures is 56 Main Street, Milburn,
New Jersey 07041.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon completion of this offering, our authorized capital stock will consist
of shares of common stock, $0.001 par value, and
shares of undesignated preferred stock, $0.001 par value. The following
description of our capital stock is subject to and qualified in its entirety by
our certificate of incorporation and bylaws, which are included as exhibits to
the registration statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
Common Stock
At December 31, 1999, there were 21,926,324 shares of common stock
outstanding after giving pro forma effect to the conversion of all outstanding
shares of preferred stock into common stock upon the closing of this offering.
These shares were held of record by approximately 200 stockholders.
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by our board of directors out of funds legally available for that
purpose.
In the event of a liquidation, dissolution or winding up, the holders of our
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The holders of our common stock do not have
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock.
Preferred Stock
Our board of directors has the authority, without action by our
stockholders, to designate and issue preferred stock in one or more series with
certain rights, preferences and privileges which may be greater than the rights
of the common stock. It is not possible to accurately describe the actual
effect of the issuance of any shares of preferred stock upon the rights of
holders of common stock until our board of directors determines the specific
rights of the holders of such preferred stock. However, the effects might
include, among other things:
. restricting dividends on our common stock;
. diluting the voting power of our common stock;
. impairing the liquidation rights of our common stock; or
. delaying or preventing a change in control of Applied Science Fiction
without further action by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding. At the present, we have no plans to issue any shares of preferred
stock.
Warrants
At December 31, 1999 there were warrants outstanding to purchase 7,740
shares of Series B preferred stock and 10,233 shares of Series D preferred
stock. Upon completion of this offering, these warrants will become exercisable
for 33,453 shares of common stock. In addition, there were warrants outstanding
to purchase 1,224,879 shares of common stock. Also, under the terms of a
warrant issued to Silicon Valley Bank, Silicon Valley Bank may become entitled
to purchase up to $1.2 million of our common stock in certain circumstances.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
55
<PAGE>
Registration Rights
According to the terms of an investors' rights agreement, beginning 180 days
after the closing of this offering, some of our stockholders, who hold in the
aggregate shares of common stock, may require us to file a
registration statement under the Securities Act of 1933, as amended, with
respect to the resale of their shares. To demand such registration, investors
holding an aggregate of at least shares must request that the
registration statement register at least shares. We are not required to
effect more than two demand registrations in any 12 month period.
Additionally, the holders of shares of common stock will have
piggyback registration rights with respect to the registration of shares of
common stock under the Securities Act. If we propose to register any shares of
common stock under the Securities Act, the holders of shares having piggyback
registration rights are entitled to receive notice of that registration and are
entitled to include their shares in the registration.
At any time after we become eligible to file a registration statement on
Form S-3, holders of demand registration rights may require us to file
registration statements on Form S-3 under the Securities Act with respect to
their shares of common stock. We are not required to effect more than two such
registrations on Form S-3 in any 12 month period.
These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear all of the expenses of all registrations under the investors'
rights agreement, except underwriting discounts and selling commissions. The
investors' rights agreement also contains our commitment to indemnify the
holders of registration rights and certain other people for certain losses they
may incur in connection with registrations under the agreement. Registration of
any of the shares of common stock held by security holders with registration
rights would result in those shares becoming freely tradeable without
restriction under the Securities Act.
Anti-Takeover Provisions
Certain provisions of Delaware law, our certificate of incorporation and our
bylaws could make the following transactions more difficult:
. the acquisition of Applied Science Fiction by means of a tender offer;
. the acquisition of Applied Science Fiction by means of a proxy contest
or otherwise; or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are intended to discourage certain types
of coercive takeover practices and inadequate takeover bids. They are designed
to encourage persons seeking to acquire control of Applied Science Fiction to
first negotiate with our board of directors. We believe that the benefits of
our increased ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Applied Science Fiction outweigh
the disadvantages of discouraging such proposals as negotiation of such
proposals could result in an improvement of their terms.
Delaware Anti-Takeover Law. We are subject to Section 203 of the General
Corporation Law of the State of Delaware, an anti-takeover law. In general,
Section 203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years following the date the person became an interested stockholder, unless
the "business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with
56
<PAGE>
respect to transactions not approved in advance by our board of directors,
including, but not limited to, discouraging attempts that might result in a
premium over the market price of shares of common stock held by our
stockholders.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term
upon being elected by our stockholders. See "Management--Executive Officers and
Directors." This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of Applied Science Fiction because it generally makes it more
difficult for stockholders to replace a majority of the directors.
Stockholders Meetings. Under our bylaws, only our board of directors,
Chairman of the Board and President may call special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and stockholder nominations of candidates for election as
directors.
Elimination of Stockholder Action by Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent.
Elimination of Cumulative Voting. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of our directors.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock allows our board of directors to issue preferred stock with voting and
other rights or preferences that could impede the success of any attempt to
change control of Applied Science Fiction. These and other provisions may have
the effect of deterring hostile takeovers or delaying changes in our officers
and directors.
Supermajority Vote Provisions. The Delaware General Corporate Law provides
generally that the affirmative vote of a majority of the shares entitled to
vote on any matter is required to amend a corporation's certificate of
incorporation or bylaws, unless a corporation's certificate of incorporation or
bylaws, as the case may be, requires a greater percentage. Our certificate of
incorporation imposes supermajority vote requirements in connection with the
amendment of certain provisions of our certificate of incorporation, including
the provisions relating to the classified board of directors and action by
written consent of stockholders.
Indemnification. We indemnify our directors and officers to the fullest
extent permitted by Delaware law. We have entered into indemnity agreements
with all of our directors and officers and have purchased directors' and
officers' liability insurance. In addition, our charter limits the personal
liability of our board members for breaches by the directors of their fiduciary
duties where permitted under Delaware law.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is
.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the prevailing market price of our
common stock could decline. Furthermore, because we do not expect any shares
will be available for sale for 180 days after this offering as a result of
certain contractual and legal restrictions on resale described below, sales of
substantial amounts of our common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon the closing of this offering, we will have outstanding an aggregate of
shares of our common stock, based upon the number of shares
outstanding at , 2000, and assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all shares sold in this offering will be freely tradeable without restriction
or further registration under the Securities Act unless they are purchased by
our "affiliates," as that term is defined in Rule 144 under the Securities Act.
The remaining shares will be eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<C> <S>
After the date of this prospectus, freely
tradeable shares sold in this offering and
shares saleable under Rule 144(k) that are
not subject to the 180-day lock-up.
After 180 days from the date of this
prospectus, the 180-day lock-up is released
and these shares are saleable under Rule
144 (subject, in some cases, to volume
limitations), Rule 144(k) or Rule 701.
After 180 days from the date of this
prospectus, restricted securities that are
held for less than one year and are not yet
saleable under Rule 144. However,
of these shares will become
eligible for sale on the public markets
within 10 days after the expiration of the
lock-up.
</TABLE>
The remaining shares of common stock held by existing
stockholders are "restricted securities" as defined in Rule 144. Our existing
stockholders may sell restricted securities in the public market only if the
shares are registered or if the shares qualify for an exemption from
registration under Rule 144 or 701 under the Securities Act, which are
summarized below.
Lock-up Agreements. All of our directors and officers and substantially all
of our stockholders and option holders are expected to sign lock-up agreements
under which they agreed not to transfer or dispose of, directly or indirectly,
any shares of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock for 180 days after
the date of this prospectus. Transfers or dispositions can be made sooner with
the prior written consent of Morgan Stanley & Co. Incorporated.
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year, including the holding period
of certain prior owners other than affiliates, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (a)
1% of the number of shares of our common stock then outstanding, which will
equal approximately shares immediately after the offering, or (b) the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding the filing of a notice on Form 144
with respect to that sale. Sales under Rule 144 are also
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<PAGE>
subject to certain manner-of-sale provisions, notice requirements and the
availability of current public information about us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the three months preceding a sale and who
has beneficially owned shares for at least two years, including the holding
period of certain prior owners other than affiliates, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon the closing of this
offering.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, each of our directors, officers, employees, consultants or advisors who
purchased shares from us before the date of this prospectus in connection with
a compensatory stock plan or other written compensatory agreement is eligible
to resell such shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
Registration Rights. After this offering, the holders of at least
shares of our common stock will be entitled to certain rights with respect to
the registration of those shares under the Securities Act. See "Description of
Capital Stock Registration Rights." After such registration, these shares of
our common stock become freely tradeable without restriction under the
Securities Act. These sales could cause the market price of our common stock to
decline.
Stock Plans. After this offering, we intend to file a Form S-8 registration
statement under the Securities Act covering 5,500,000 shares of common stock
issued or reserved for issuance under our 2000 Stock Incentive Plan and our
2000 Employee Stock Purchase Plan. We expect this registration statement to
become effective as soon as practicable after the effective date of this
offering.
As of December 31, 1999, options to purchase 270,439 shares of our common
stock were issued and outstanding. All of these shares will be eligible for
sale in the public market from time to time, subject to vesting provisions,
Rule 144 volume limitations applicable to our affiliates and the expiration of
lock-up agreements.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below have
severally agreed to purchase, and Applied Science Fiction has agreed to sell to
them, severally, the number of shares indicated below:
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated..............................
Credit Suisse First Boston Corporation.........................
Salomon Smith Barney, Inc......................................
Prudential Securities Incorporated.............................
----------
Total........................................................
==========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from Applied Science Fiction and subject to prior
sale. The underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered by this prospectus are subject to the approval of certain legal matters
by their counsel and to certain other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock offered by this
prospectus if any such shares are taken. However, the underwriters are not
required to take or pay for the shares covered by the underwriters' over-
allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at as price that represents
a concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives of the
underwriters.
Applied Science Fiction has granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to an
aggregate of additional shares of common stock at the public offering price
listed on the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose
of covering overallotments, if any, made in connection with the offering of the
shares of common stock offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase about the same percentage of the additional shares of
common stock as the number listed next to the underwriter's name in the
preceding table bears to the total number of shares of common stock listed next
to the names of all underwriters in the preceding table. If the underwriters'
option is exercised in full, the total price to the public would be $ , the
total underwriters' discounts and commissions would be $ and total proceeds
to Applied Science Fiction would be $ .
The underwriters have informed Applied Science Fiction that they do not
intend sales to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.
We expect to file an application to qualify our common stock for quotation
on the NASDAQ National Market under the symbol "ASFX."
Each of Applied Science Fiction, each of our directors and officers and
substantially all of our stockholders have agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, they will not, during the period ending 180 days after the date
of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into to exercisable or exchangeable for common stock; or
60
<PAGE>
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock.
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions in this paragraph do not apply to:
. the sale of shares to the underwriters; or
. the issuance by Applied Science Fiction of shares of common stock upon
the exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters
have been advised in writing.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares
of common stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
From time to time, Morgan Stanley & Co. Incorporated has provided, and
continues to provide, investment banking services to Applied Science Fiction.
Applied Science Fiction and the underwriters have agreed to indemnify each
other against certain liabilities, including liability under the Securities
Act.
At our request, the underwriters have reserved for sale, at the initial
offering price, up to shares offered hereby for the directors,
officers, employees, business associates, stockholders and related persons of
Applied Science Fiction. Of this amount, up to shares, representing up to
five percent of the shares of our common stock sold by us in the offering, will
be offered to the holders of our Series C and Series D preferred stock pursuant
to an agreement made with them prior to the filing of this registration
statement. The shares of common stock available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered hereby.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between Applied Science Fiction and the underwriters. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of Applied Science Fiction and its industry in general, sales,
earnings and certain other financial operating information of Applied Science
Fiction in recent periods, and the price-earnings ratios, price-sales ratios,
market prices of securities and certain financial and operating information of
companies engaged in activities similar to those of Applied Science Fiction.
The anticipated initial public offering price range set forth on the cover page
of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
61
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Austin, Texas and for the underwriters by
Davis Polk & Wardwell, New York, New York. Mr. Gordian, a partner at Brobeck,
Phleger & Harrison LLP, was recently appointed as one of our directors.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999, and for each of the three
years in the period ending December 31, 1999, as set forth in their report. We
have included our consolidated financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL
INFORMATION ABOUT APPLIED SCIENCE FICTION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information about us and
the common stock offered in this offering, we refer you to the registration
statement and to the attached exhibits and schedules. Complete exhibits have
been filed with our registration statements on Form S-1.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information about the public reference rooms. You may obtain copies of
all or any part of our registration statement from the Securities and Exchange
Commission upon payment of prescribed fees. Our filings with the Securities and
Exchange Commission, including the registration statement, are also available
without charge at the Securities and Exchange Commission's Web site
http://www.sec.gov.
Upon completion of this offering, Applied Science Fiction will become
subject to the information and periodic reporting requirements of the
Securities Exchange Act of 1934 and, accordingly, will file periodic reports,
proxy statements and other information with the Securities and Exchange
Commission. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the Securities and Exchange
Commission's public reference rooms, and the Web site of the Securities and
Exchange Commission referred to above.
62
<PAGE>
APPLIED SCIENCE FICTION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999...................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997, 1998 and 1999................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Applied Science Fiction, Inc.
We have audited the accompanying consolidated balance sheets of Applied
Science Fiction, Inc. as of December 31, 1998 and 1999 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Applied
Science Fiction, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Austin, Texas
January 21, 2000
F-2
<PAGE>
APPLIED SCIENCE FICTION, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
----------------- December 31,
1998 1999 1999
------- -------- -------------
(Unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 633 $ 6,092
Short-term investments...................... -- 4,906
Accounts receivable, net of allowance of $0
in 1998 and $20 in 1999.................... 170 1,372
Prepaid expenses and other current assets... 60 268
------- --------
Total current assets...................... 863 12,638
Property and equipment:
Computer equipment and software............. 770 2,815
Lab equipment............................... 441 1,263
Furniture and fixtures...................... 248 476
------- --------
1,459 4,554
Accumulated depreciation.................... (407) (1,675)
------- --------
Net property and equipment.................... 1,052 2,879
Long-term investments......................... -- 7,737
Other long-term assets........................ 313 402
------- --------
Total assets.............................. $ 2,228 $ 23,656
======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities.... $ 696 $ 1,735
Accrued compensation........................ 524 1,917
Deferred revenues........................... 177 150
Current portion of notes payable to bank.... 423 1,402
------- --------
Total current liabilities................. 1,820 5,204
Accrued rent.................................. 338 286
Notes payable to bank, less current portion... 3,028 6,436
Stockholders' equity (deficit):
Convertible Preferred Stock; $.001 par
value; 25,000,000 shares authorized;
1,573,917 and 5,653,162 shares designated;
1,564,606 and 5,635,189 shares issued and
outstanding; liquidation preference of
$5,616 and $37,118 at December 31, 1998 and
1999, respectively; and none issued and
outstanding pro forma...................... 2 6 $ --
Common Stock: $.001 par value; 100,000,000
shares authorized; and 11,185,431,
13,160,291 and 21,926,324 shares issued and
outstanding at December 31, 1998, 1999, and
pro forma, respectively.................... 11 13 22
Additional paid-in capital.................. 5,972 48,750 48,747
Deferred stock-based compensation........... -- (6,713) (6,713)
Notes receivable from stockholders.......... (232) (5,675) (5,675)
Accumulated other comprehensive loss........ -- (42) (42)
Accumulated deficit......................... (8,711) (24,609) (24,609)
------- -------- --------
Total stockholders' equity (deficit)...... (2,958) 11,730 $ 11,730
------- -------- ========
Total liabilities and stockholders' equity
(deficit)................................ $ 2,228 $ 23,656
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
APPLIED SCIENCE FICTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues:
Contract revenues................................ $ 628 $ 214 $ 3,152
Royalty revenues................................. -- 288 821
------- ------- --------
Total revenues................................. 628 502 3,973
Costs and expenses:
Cost of contract revenues........................ 43 250 2,147
Research and development......................... 717 4,218 9,050
Selling, general and administrative.............. 998 3,572 7,629
Amortization of stock-based compensation......... -- -- 1,431
------- ------- --------
1,758 8,040 20,257
------- ------- --------
Loss from operations............................... (1,130) (7,538) (16,284)
Interest income.................................... 116 167 1,092
Interest expense................................... (4) (122) (627)
Other income (expense), net........................ 90 (17) (8)
------- ------- --------
Net loss before foreign withholding taxes.......... (928) (7,510) (15,827)
Foreign withholding taxes.......................... 62 -- 71
------- ------- --------
Net loss........................................... $ (990) $(7,510) $(15,898)
======= ======= ========
Basic and diluted net loss per share............... $ (0.18) $ (1.01) $ (1.70)
======= ======= ========
Shares used in computing basic and diluted net loss
per share......................................... 5,361 7,424 9,353
======= ======= ========
Pro forma basic and diluted net loss per share..... $ (0.88)
========
Shares used in computing pro forma basic and
diluted net loss per share........................ 18,119
========
</TABLE>
See accompanying notes.
F-4
<PAGE>
APPLIED SCIENCE FICTION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Notes Accumulated
----------------- ----------------- Additional Deferred Receivable Other
$ $ Paid-In Stock-Based from Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation Stockholders Income (Loss) Deficit
--------- ------ ---------- ------ ---------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............. 201,906 $ 1 8,722,500 $ 9 $ 347 $ -- $ (3) $-- $ (211)
Cancellation of
Series A
Preferred Stock. (108,800) -- -- -- -- -- -- -- --
Issuance of
Series C
Preferred Stock,
net of offering
costs of $131... 1,471,500 1 -- -- 5,312 -- -- -- --
Issuance of
Common Stock to
certain founders
for services
rendered........ -- -- 696,000 1 85 -- -- -- --
Issuance of
Common Stock
under Stock
Option/Stock
Issuance Plan,
net of
cancellations... -- -- 439,581 -- 56 -- (56) -- --
Net loss........ (990)
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
--------- --- ---------- --- ------- ------- ------- ---- --------
Balance at
December 31,
1997............. 1,564,606 2 9,858,081 10 5,800 -- (59) -- (1,201)
Issuance of
Common Stock
under Stock
Option/Stock
Issuance Plan,
net of
cancellations... -- -- 1,327,350 1 172 -- (173) -- --
Net loss........ (7,510)
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
--------- --- ---------- --- ------- ------- ------- ---- --------
Balance at
December 31,
1998............. 1,564,606 2 11,185,431 11 5,972 -- (232) -- (8,711)
Issuance of
Series B
Preferred Stock
upon exercise of
warrants........ 816 -- -- -- 2 -- -- -- --
Issuance of
Series D
Preferred Stock,
net of offering
costs of $2,331. 4,069,767 4 -- -- 29,165 -- -- -- --
Issuance of
Common Stock
under Stock
Option/Stock
Issuance Plan,
net of
cancellations... -- -- 1,974,860 2 5,442 -- (5,443) -- --
Issuance of
warrants to
purchase
preferred stock. -- -- -- -- 25 -- -- -- --
Stock-based
compensation.... -- -- -- -- 8,144 (8,144) -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 1,431 -- -- --
Net loss........ -- (15,898)
Foreign currency
adjustment...... 3 --
Unrealized loss
on available-
for-sale
securities...... -- -- -- -- -- -- -- (45) --
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
--------- --- ---------- --- ------- ------- ------- ---- --------
Balance at
December 31,
1999............. 5,635,189 $ 6 13,160,291 $13 $48,750 $(6,713) $(5,675) $(42) $(24,609)
========= === ========== === ======= ======= ======= ==== ========
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balance at
December 31,
1996............. $ 143
Cancellation of
Series A
Preferred Stock. --
Issuance of
Series C
Preferred Stock,
net of offering
costs of $131... 5,313
Issuance of
Common Stock to
certain founders
for services
rendered........ 86
Issuance of
Common Stock
under Stock
Option/Stock
Issuance Plan,
net of
cancellations... --
Net loss........ (990)
-------------
Comprehensive
loss............ (990)
-------------
Balance at
December 31,
1997............. 4,552
Issuance of
Common Stock
under Stock
Option/Stock
Issuance Plan,
net of
cancellations... --
Net loss........ (7,510)
-------------
Comprehensive
loss............ (7,510)
-------------
Balance at
December 31,
1998............. (2,958)
Issuance of
Series B
Preferred Stock
upon exercise of
warrants........ 2
Issuance of
Series D
Preferred Stock,
net of offering
costs of $2,331. 29,169
Issuance of
Common Stock
under Stock
Option/Stock
Issuance Plan,
net of
cancellations... 1
Issuance of
warrants to
purchase
preferred stock. 25
Stock-based
compensation.... --
Amortization of
deferred stock-
based
compensation.... 1,431
Net loss........ (15,898)
Foreign currency
adjustment...... 3
Unrealized loss
on available-
for-sale
securities...... (45)
-------------
Comprehensive
loss............ (15,940)
-------------
Balance at
December 31,
1999............. $ 11,730
=============
</TABLE>
See accompanying notes.
F-5
<PAGE>
APPLIED SCIENCE FICTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Operating activities
Net loss............................................ $ (990) $(7,510) $(15,898)
Non-cash adjustments to net loss:
Depreciation expense.............................. 31 383 1,268
Compensation expense related to issuance of common
stock............................................ 86 -- --
Amortization of warrant........................... -- -- 5
Amortization of stock-based compensation.......... -- -- 1,431
Changes in assets and liabilities:
Accounts receivable............................. (33) (70) (1,202)
Prepaids and other assets....................... (30) (342) (277)
Accounts payable and accrued liabilities........ 50 921 987
Accrued compensation............................ 199 326 1,393
Deferred revenues............................... 669 (493) (27)
------ ------- --------
Cash used in operating activities................... (18) (6,785) (12,320)
Investing activities
Purchases of short- and long-term investments....... -- -- (18,188)
Sales and maturities of short- and long-term
investments........................................ -- -- 5,500
Purchases of property and equipment, net of
retirements........................................ (172) (1,232) (3,095)
------ ------- --------
Cash used in investing activities................... (172) (1,232) (15,783)
Financing activities
Proceeds from issuance of notes payable to bank..... -- 3,451 5,530
Payments on notes payable to bank................... -- -- (1,143)
Proceeds from issuance of preferred stock, net of
offering costs..................................... 5,313 -- 29,169
Proceeds from exercise of preferred stock warrants.. -- -- 2
Proceeds from notes receivable from stockholders.... -- -- 1
------ ------- --------
Cash provided by financing activities............... 5,313 3,451 33,559
Effect of exchange rate changes on cash and cash
equivalents........................................ -- -- 3
------ ------- --------
Net increase (decrease) in cash..................... 5,123 (4,566) 5,459
Cash and cash equivalents at beginning of year...... 76 5,199 633
------ ------- --------
Cash and cash equivalents at end of year............ $5,199 $ 633 $ 6,092
====== ======= ========
Supplemental disclosure of cash flow information
Foreign taxes paid.................................. $ 62 $ -- $ 71
====== ======= ========
Interest paid....................................... $ 4 $ 122 $ 627
====== ======= ========
Non-cash transaction
Issuance of Common Stock under Stock Option/Stock
Issuance plan and paid through the issuance of
full-recourse notes by stockholders, net of
cancellations...................................... $ 56 $ 173 $ 5,444
====== ======= ========
Issuance of warrants to purchase preferred stock.... $ -- $ -- $ 25
====== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Applied Science Fiction, Inc. (the Company, or ASF) is a leading innovator,
developer and licensor of proprietary imaging technologies that optimize,
enhance and enable the digitization of photographic images for traditional
photoprocessing applications, as well as desktop, professional and Internet
publishing applications. The Company, a Delaware corporation, was incorporated
on June 15, 1995.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Applied Science Fiction Japan Co.,
Ltd. All intercompany transactions and balances have been eliminated in
consolidation.
Unaudited Pro Forma Information
Upon the closing of the initial public offering, each of the outstanding
shares of Series D convertible preferred stock will convert into one share of
common stock and each of the outstanding shares of Series C and Series B
convertible preferred stock will convert into three shares of common stock. The
pro forma stockholders' equity presents the Company's stockholders' equity as
if this had occurred at December 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of highly liquid cash equivalents, short-
and long-term investments and trade receivables. The Company's cash
equivalents, short- and long-term investments are placed with high credit
quality financial institutions and issuers. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. The Company provides for an allowance for doubtful accounts
receivable based upon the expected collectibility of such receivables.
The following table summarizes the changes in the allowance for doubtful
accounts receivable (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1998........................................ $ --
Additions charged to costs and expenses............................. 20
Write-off of uncollectible accounts................................. --
----
Balance at December 31, 1999........................................ $ 20
====
</TABLE>
There was no activity in the allowance for doubtful accounts receivable, nor
any related balance, in 1997 or 1998.
F-7
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a detail of customers that accounted for greater than 10%
of gross revenue in the respective fiscal years:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A................................................ 64% 74% 25%
Customer B................................................ 35% 16% --
Customer C................................................ -- -- 43%
</TABLE>
Cash, Cash Equivalents and Long- and Short-Term Investments
The Company's cash equivalents, short- and long-term investments consist of
highly liquid debt instruments--all of which are high-grade corporate
securities--and are held by three U.S. banks. The Company considers all debt
instruments with an original maturity at date of purchase of (i) three months
or less to be cash equivalents; (ii) between three and twelve months to be
short-term investments; and (iii) twelve months or more to be long-term
investments.
The Company's debt instruments have been classified as available-for-sale
and are stated at market value with unrealized gains and losses reported as a
component of "accumulated other comprehensive loss" within stockholders'
equity. Realized gains and losses and declines in value judged to be other than
temporary are included in "interest income" and have not been material to date.
The amortized cost and estimated fair value of debt securities at December
31, 1999, by contractual maturity, is shown below (in thousands). Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less.......... $ 4,701 $ 1 $-- $ 4,702
Due after one year through five
years........................... 7,987 -- (46) 7,941
------- --- ---- -------
$12,688 $ 1 $(46) $12,643
======= === ==== =======
</TABLE>
Fair values were determined using quoted market prices.
Fair Value of Financial Instruments
The Company's financial instruments consist principally of cash and cash
equivalents, short-and long-term investments, receivables, accounts payable,
and borrowings. The Company believes all of the financial instruments' recorded
values approximate current market values.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful life of the assets (generally two to five
years).
Computer Software to be Sold, Leased or Otherwise Marketed
The Company capitalizes eligible computer software costs upon achievement of
technological feasibility subject to net realizable value considerations. The
Company has defined technological feasibility as the completion of a working
model. The Company has not capitalized any software development costs as such
costs have been insignificant.
F-8
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Since inception and through December 31, 1999, the Company's revenues have
been derived from contract fees associated with its DFP (Digital Film
Processing), Digital ICE (Image Correction and Enhancement), and Digital ROC
(Reconstruction of Colors) technologies and royalties associated with its
Digital ICE technology. Contract fees generally refer to fees paid by original
equipment manufacturers (OEMs) for developing, adapting and customizing the
Company's technologies for use in OEM products. The Company generally
recognizes contract fees as revenues based upon the achievement of certain
milestones in accordance with the terms of the related arrangements. Cost of
contract revenues have been determined based on the portion of engineering
costs that the Company has incurred to fulfill its obligations under the
related arrangements. Royalties under Digital ICE license agreements are
recognized as revenues when shipments by the licensee of products that
incorporate the Digital ICE technology are reported to the Company. Such
reports are generally received by the Company in the quarter following shipment
by the licensee of such products resulting in a one quarter delay between
shipment and recognition of revenues from those sales.
The amount of prepaid royalties and contract fees received by the Company in
excess of recognized revenues are recorded as deferred revenues, as
appropriate, until earned.
Advertising
Advertising costs are expensed as incurred. Advertising expenses in the
years ended December 31, 1997, 1998, and 1999 were not material.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
This statement prescribes the use of the liability method whereby deferred tax
asset and liability account balances are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair value of
the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock, amortized over the vesting period. Any stock options
granted to non-employee consultants are valued at the fair market value of the
equity investment in accordance with EITF 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. The resultant deferred stock-based
compensation is amortized over the vesting period, or the expected life, of the
applicable options, as appropriate. Information regarding the Company's pro
forma disclosure of stock-based compensation pursuant to SFAS No. 123,
Accounting for Stock-Based Compensation, may be found under the heading
"Stockholders' Equity" in these Notes to Consolidated Financial Statements (see
Note 7).
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period (excluding shares
subject to repurchase). Diluted net loss per common share was the same as basic
net loss per common share for all periods presented since the effect of any
potentially dilutive securities is excluded as they are anti-dilutive because
of the Company's net losses.
F-9
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma basic and diluted net loss per share is computed by dividing net
loss by the sum of the weighted average number of common shares outstanding for
the period (excluding shares subject to repurchase) and the weighted average
number of common shares resulting from the assumed conversion of outstanding
shares of convertible preferred stock.
The calculation of historical and pro forma basic and diluted net loss per
share is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Historical:
Net loss.......................................... $ (990) $(7,510) $(15,898)
====== ======= ========
Weighted-average shares of common stock outstanding. 9,042 10,706 11,663
Less: Weighted-average shares that may be
repurchased........................................ (3,681) (3,282) (2,310)
------ ------- --------
Weighted-average shares of common stock outstanding
used in computing basic and diluted net loss per
share.............................................. 5,361 7,424 9,353
====== ======= ========
Basic and diluted net loss per share................ $(0.18) $ (1.01) $ (1.70)
====== ======= ========
Pro forma:
Net loss.......................................... $(15,898)
========
Weighted-average shares used in computing basic
and diluted net loss per share (from above)...... 9,353
Adjustment to reflect the effect of the assumed
conversion of preferred stock from the date of
issuance......................................... 8,766
--------
Weighted-average shares used in computing pro
forma basic and diluted net loss per share....... 18,119
========
Pro forma basic and diluted net loss per share.... $ (0.88)
========
</TABLE>
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately
3,681,000, 3,282,000 and 2,310,000 weighted average shares subject to
repurchase, and approximately 472,000, 657,000 and 697,000 common equivalent
shares related to outstanding stock options and warrants not included above
(determined using the treasury stock method), for the years ended December 31,
1997, 1998 and 1999, respectively.
Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income, which requires that an enterprise
report, by major components and as a single total, the change in its net assets
during the period from nonowner sources. The Company adopted this statement in
1998 and has presented its total comprehensive loss in the statements of
stockholders' equity (deficit). There was no accumulated other comprehensive
gain or loss during 1997 and 1998. Accumulated other comprehensive loss is
comprised of unrealized losses on available-for-sale securities and foreign
currency adjustments during 1999.
Segment Information
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. The adoption of SFAS
No. 131 did not have a significant effect on the disclosure of segment
information as the Company continues to consider its business activities as a
single
F-10
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
segment. Revenues from customers with principal offices in Japan were
approximately $401,000, $402,000 and $1,901,000 for the years ending December
31, 1997, 1998, and 1999. Substantially all of the long-lived assets as of
December 31, 1998 and 1999 are located in the United States.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137, which is
effective for fiscal years beginning after June 15, 2000. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will
be effective for the Company's year ending December 31, 2001. Management
believes that this statement will not have a material impact on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB No. 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The application of SAB No. 101
did not have a material impact on the financial statements of the Company.
In March 1999, the FASB issued an exposure draft entitled "Accounting for
Certain Transactions involving Stock Compensation," which is a proposed
interpretation of APB Opinion No. 25. However, the exposure draft has not been
finalized. Once finalized and issued, the current accounting practices for
transactions involving stock compensation may need to change and such changes
could affect the Company's future operating results.
3. Notes Payable to Bank
Royalty Backed Annuity Notes
In October 1998 and January 1999, the Company issued to a bank (the Bank) a
$2.5 million and a $3.5 million royalty backed annuity note, respectively,
pursuant to a note purchase agreement. The two annuity notes are secured by
future royalty receipts under specified Digital ICE license agreements. At
December 31, 1999, these notes bore interest at an annual rate of 9.25%.
According to the terms of the notes, the interest rate was decreased during
1999 when two additional products incorporating the Company's technologies
began shipping and will be decreased further when a fourth licensed product
begins shipping. Payments received by the Company under a specified Digital ICE
license agreement are first applied against the interest obligation, with any
remaining amounts then applied against the outstanding principal. Any principal
amount still outstanding beginning in October 2004 will be payable in equal
quarterly installments over the succeeding four years. The Company may repay
the annuity notes at any time without penalty.
In the event the specified Digital ICE license agreements are terminated on
or before October 2008, the Bank may, at its option, demand that principal
amounts then outstanding be paid in equal quarterly installments over the four
years following such termination. In such case, the remaining principal amount
of the annuity notes would bear interest at an annual rate equal to the then
issuable four-year U.S. Treasury Bills plus 650 basis points. In addition, the
Company would be obligated to issue to the Bank warrants to purchase shares of
the Company's common stock with a value of $300,000 subject to upward
incremental adjustments to a maximum of $1.2 million if the outstanding
principal amount is not repaid within 36 months from the date the specified
license agreements were terminated.
F-11
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equipment Lines of Credit
During 1998 and 1999, the Company borrowed under two separate equipment
lines of credit with the Bank to finance most of its purchases of capital
equipment. At December 31, 1999, borrowings under these facilities bore
interest at a weighted average rate of 8.90% and are collateralized by all of
the Company's tangible assets except those resulting from specified Digital
ICE license agreements discussed above. The Company is obligated to make equal
monthly payments of principal plus interest through March and December 2001
under these respective lines of credit. Under the second line of credit, any
prepayment of principal or interest is subject to a prepayment penalty.
At December 31, 1999, $939,000 was available for future borrowings under
the second line of credit. This second facility expires on March 31, 2000 and
any future borrowings will bear a fixed interest rate equal to the then
eighteen month U.S. treasury bill rate plus 325 basis points. No further
borrowings are available under the first line of credit.
Notes payable to bank consisted of the following at December 31, 1999 (in
thousands):
<TABLE>
<S> <C>
Royalty backed annuity notes...................................... $5,544
Borrowings under equipment lines of credit........................ 2,294
------
Total notes payable to bank..................................... 7,838
Less: current portion............................................. (1,402)
------
$6,436
======
</TABLE>
The expected future principal payments on notes payable to bank as of
December 31, 1999 are presented below. The expected future principal payments
related to the royalty backed annuity notes are determined based upon the most
current forecast of royalty receipts under the specified Digital ICE license
agreement in excess of the expected interest obligation at an interest rate of
9.25% (in thousands):
<TABLE>
<S> <C>
2000............................................................... $1,402
2001............................................................... 892
2002 .............................................................. --
2003 .............................................................. --
Thereafter......................................................... 5,544
------
Total principal.................................................... $7,838
======
</TABLE>
4. Leases
The Company leases certain office space and equipment under various
noncancelable operating leases.
Rent expense under all operating leases was $55,393, $606,156, and $707,351
for the years ended December 31, 1997, 1998 and 1999, respectively. Rent
expense for the years ended December 31, 1998 and 1999 was offset by $230,259
and $334,946, respectively, in payments received by the Company pursuant to
sublease agreements with several companies to rent office space not then
occupied by the Company. Future minimum payments under these sublease
agreements are not material. Under the terms of the Company's lease agreement
for its corporate headquarters, the monthly payments increase at certain dates
during the five-year term. At December 31, 1999, future minimum lease payments
under noncancelable leases are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................... $ 759
2001............................................................... 777
2002............................................................... 839
2003............................................................... 292
------
Total.............................................................. $2,667
======
</TABLE>
F-12
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Income Taxes
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $20,431,000, a research and development credit
carryforward of approximately $573,000 and a foreign tax credit carryforward of
approximately $133,000. The net operating loss carryforward and research and
development credit carryforward will begin to expire in 2012 if not utilized.
The foreign tax credit carryforward will begin to expire in 2003 if not
utilized.
The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. The Company's utilization of the net
operating losses may be subject to a substantial annual limitation due to an
"ownership change" resulting from the sales of private equity securities. The
annual limitation may result in the expiration of net operating losses and tax
credits before utilization.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Current:
Federal................................................. $ -- $ --
State................................................... -- --
Foreign................................................. -- 71,000
------- -------
Total current........................................... -- 71,000
------- -------
Deferred:
Federal................................................. -- --
State................................................... -- --
Foreign................................................. -- --
------- -------
Total deferred.......................................... -- --
------- -------
$ -- $71,000
======= =======
</TABLE>
The foreign taxes relate to withholdings on royalties from a customer located
in a foreign country.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred taxes as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Deferred tax liabilities
Prepaid expenses............................... $ -- $ (14,000)
---------- ----------
-- (14,000)
Deferred tax assets:
Depreciable assets............................. 106,000 210,000
Accrued liabilities............................ 209,000 662,000
Net operating loss and tax credit
carryforwards................................. 3,112,000 8,265,000
Deferred revenue............................... 30,000 18,000
Bad debt....................................... -- 7,000
---------- ----------
3,457,000 9,162,000
---------- ----------
Net deferred tax asset........................... 3,457,000 9,148,000
Valuation allowance for net deferred tax assets.. (3,457,000) (9,148,000)
---------- ----------
Net deferred taxes............................... $ -- $ --
========== ==========
</TABLE>
F-13
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has established a valuation allowance equal to the net deferred
tax asset due to uncertainties regarding the realization of deferred tax assets
based on the Company's lack of earnings history. The valuation allowance
increased by approximately $5,692,000 during the year ended December 31, 1999.
The Company's recorded provision for income taxes differs from the expected
tax expense amount computed by applying the statutory federal income tax rate
of 34% to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Computed at statutory rate..................... $(2,553,000) $(5,381,000)
State taxes, net of federal benefit............ (225,000) (427,000)
Permanent items................................ 9,000 545,000
Effect of foreign operations................... -- 71,000
Tax credits.................................... (115,000) (465,000)
Other.......................................... -- 36,000
Change in valuation allowance.................. 2,884,000 5,692,000
----------- -----------
$ -- $ 71,000
=========== ===========
</TABLE>
6. Employee Benefit Plan
The Company sponsors a defined contribution plan in accordance with Section
401(k) of the Internal Revenue Code. The Plan is available to all full-time
employees of the Company on the first day of the quarter following employment.
The Plan is funded through employee contributions. The Company's only expenses
relating to the Plan are administrative costs, which are not significant.
7. Stockholders' Equity
The following is a summary of convertible preferred stock issued by the
Company at December 31, 1999, except where noted (in thousands, except share
amounts):
<TABLE>
<CAPTION>
Shares Issued and Outstanding
-----------------------------
Number of December 31 Aggregate
Shares ----------------------------- Liquidation
Designated 1997 1998 1999 Preference
---------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Series B............ 101,662 93,106 93,106 93,922 $ 173
Series C............ 1,471,500 1,471,500 1,471,500 1,471,500 5,445
Series D............ 4,080,000 -- -- 4,069,767 31,500
--------- --------- --------- --------- -------
5,653,162 1,564,606 1,564,606 5,635,189 $37,118
========= ========= ========= ========= =======
</TABLE>
Series A Convertible Preferred Stock
In July 1997, all outstanding Series A Preferred Stock and warrants to
purchase Series A Preferred Stock were returned to the Company and immediately
canceled for no consideration. The Series A Preferred stockholder also paid the
Company a $90,000 fee to cancel a development agreement that had been entered
into with the Company. The cancellation fee has been classified as other income
in the accompanying Statement of Operations. Series A Preferred Stock is no
longer authorized for issuance.
Series B, C and D Convertible Preferred Stock
Non-cumulative dividends are paid to the Series B, C and D Preferred
stockholders only if declared by the Board of Directors at the rate of up to
$0.18, $0.37 and $0.77 per share, respectively. Dividends may not be paid to
the common stockholders unless approved by at least two-thirds of the voting
power (as determined on an as-converted basis) of all then outstanding shares
of Series B, C and D Preferred Stock, each voting as a distinct and separate
class.
F-14
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the event of any liquidation, dissolution or winding up of the Company,
the Series B, C and D Preferred stockholders are entitled to receive a
distribution of $1.84, $3.70 and $7.74 per share, respectively, before any
distribution may be made to the Common stockholders. The distribution rate per
share may be adjusted as defined in the related agreement.
The Series B, C and D Preferred Stock may be converted into Common Stock at
the option of each Series B, C and D Preferred stockholder at any time. All of
the Series B Preferred Stock will automatically convert to Common Stock in the
event of any qualified public offering, as defined in the related agreement.
All of the Series C Preferred Stock will automatically convert to Common Stock
(i) in the event of a qualified public offering, as defined in the related
agreement, in which the aggregate proceeds of such an offering exceeds
$20,000,000 (Qualified Offering), or (ii) upon written consent of the holders
of at least two-thirds of the shares of Series C Preferred Stock then
outstanding. All of the Series D Preferred Stock will automatically convert to
Common Stock (i) in the event of a Qualified Offering prior to or after March
30, 2000 in which the initial price per share of Common Stock sold to the
public is at least $10.06 or $13.16, respectively, (in each case the minimum
price per share may be adjusted as defined in the related agreement), or (ii)
upon written consent of the holders of at least a majority of the shares of
Series D Preferred Stock then outstanding. The conversion rates are presently
three shares of Common Stock for each share of Series B and C Preferred Stock
and one share of Common Stock for each share of Series D Preferred Stock,
subject to certain anti-dilution adjustments.
The Series B Preferred Stock is non-voting. The Series C and D Preferred
stockholders are entitled to one vote for each share of Common Stock into which
such Preferred Stock could then be converted.
The Series D stockholders are entitled to participate in the Company's
initial public offering. The Company is obligated to require the underwriters
to reserve five percent of the shares offered pursuant to such offering in the
form of a directed share program. The Company is obligated to require the
underwriters to grant the Series D stockholders a priority to purchase that
number of shares equal to the lesser of (i) 100% of the shares reserved in the
directed share program or (ii) the number of shares obtained by dividing
$3,000,000 by the initial price to the public. Such shares will be offered to
the Series D stockholders at the initial price to the public.
In December 1999, the Board of Directors authorized that all holders of
Series D Preferred Stock of record as of December 16, 1999 be granted a
dividend of not more than 469,406 shares of common stock in the event the
Company does not complete an initial public offering prior to December 31, 2000
or at an implied market capitalization greater than $800 million.
Stock Purchase Warrants
In connection with the issuance of the Series B Preferred Stock, the Company
issued warrants to the Series B Preferred stockholders to purchase 8,556 shares
of Series B Preferred Stock at $1.84 per share, of which options to purchase
7,740 shares remained outstanding at December 31, 1999. These warrants are
exercisable by the warrant holders at any time prior to January 2001, and
automatically convert to warrants to purchase 23,220 shares of Common Stock,
subject to adjustment, and upon certain events as defined above. No amount was
allocated to the value of these warrants as such amounts were not significant.
In connection with the issuance of the Series C Preferred Stock, the Company
issued warrants to the Series C Preferred stockholders to purchase 1,224,879
shares of Common Stock at $0.62 per share. The warrants are exercisable by the
warrant holders for a period of fifteen years from the date of an exercise
event. An exercise event is defined in the agreement as a qualified public
offering, a sale of substantially all of the Company's assets, or a merger or
acquisition in which the Company is not the surviving corporation or in
F-15
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which the stockholders of the Company immediately prior to the transaction hold
less than half of the voting stock of the surviving entity. No amount was
allocated to the value of these warrants as such amounts were not significant.
In connection with the second equipment line of credit, the Company issued
warrants to the Bank to purchase 10,233 shares of Series D Preferred Stock at
$7.74 per share. These warrants are exercisable through August 2006 and
automatically convert to warrants to purchase 10,233 shares of Common Stock,
subject to adjustment, and upon certain events as defined above. The warrants
were recorded at their fair market value of approximately $25,000 and are being
amortized over the term of the equipment line of credit.
Common Stock
The Company had 13,160,291 shares of common stock outstanding as of December
31, 1999. Of these shares, 2,943,307 shares were unvested and are subject to
rights of repurchase that lapse according to a time-based vesting schedule.
Common stock reserved at December 31, 1999 consists of the following:
<TABLE>
<S> <C>
For conversion of convertible preferred stock................. 8,766,033
For exercise of warrants to purchase common stock............. 1,258,332
For issuance under the Company's 1995 Stock Option/Stock
Issuance Plan................................................ 755,046
----------
Total....................................................... 10,779,411
==========
</TABLE>
Stock Split
On March 26, 1999, the Company effected a three-for-one stock split. All
references to common stock share and per share amounts including options to
purchase common stock have been retroactively restated to reflect the stock
split as if such split had taken place at the inception of the Company.
Stock Option/Stock Issuance Plan
The Company has established the 1995 Stock Option/Stock Issuance Plan ( the
Plan), providing for two separate equity programs: (i) the option grant program
providing for the granting of both incentive and non-statutory stock options,
as defined by the Internal Revenue Code, and (ii) the stock issuance program
providing for the issuance of common stock directly, either through the
immediate purchase of such shares or for services rendered to the Company.
The Plan provides for a maximum number of common shares to be
optioned/issued of 10,819,337 after an increase of 469,406 approved by the
Company's Board of Directors in December 1999. Accordingly, the Company has
reserved a sufficient number of shares of common stock to permit exercise of
options or issuance of common shares in accordance with the terms of the Plan.
Under the Plan, incentive stock options may be granted only to Company
employees (including officers and directors who are also employees) and shall
be issued at an exercise price not less than 100% of the fair market value of
the Company's common stock at the grant date, as determined by the Company's
Board of Directors or by a committee of the Board of Directors appointed to
administer the Plan, except for incentive stock option grants to a stockholder
that owns greater than 10% of the Company's outstanding stock in which case the
exercise price per share is not less than 110% of the fair market value of the
Company's common stock at date of grant. Non-Statutory stock options may be
granted to Company employees, members of the board, and consultants at the
exercise price determined by the
F-16
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Board of Directors or a committee appointed by the Board of Directors to
administer the Plan. Options granted under the Plan are exercisable no later
than ten years from the date of grant except for incentive stock options
granted to an optionee that owns more than 10% of the voting stock at the date
of grant in which case the option term shall be five years from the date of
grant or shorter based on the terms enumerated in the related option agreement.
At the time of the grant, the Company's Board of Directors or committee
appointed by the board to administer the Plan determines the exercise price and
vesting schedules. Generally, 25% of each option vests one year from the
vesting commencement date, as defined in the option agreement after the grant
and the remaining amount vests ratably over the remaining three years of the
vesting period. The Plan allows for options to be immediately exercisable,
subject to the Company's right of repurchase for unvested shares at the
original exercise price and for vested shares at the then current fair value as
determined by the Board of Directors.
The stock issuance program under the Plan allows eligible persons to
purchase shares of common stock at an amount that may be less than, equal to or
greater than the fair market value of the common shares on the issuance date.
Such shares may be fully vested when issued or may vest over time as the
recipient provides services or as specified performance objectives are attained
as determined by the Board of Directors or a committee appointed by the board
to administer the Plan. The Company retains the right to repurchase unvested
shares issued in conjunction with the stock issuance program upon voluntary or
involuntary termination of service, at an amount equal to the original price
paid by the purchaser and for vested shares at the then current fair value as
determined by the Board of Directors.
A summary of activity of stock options granted to employees, and to certain
non-employees, for the years ended December 31, 1997, 1998, and 1999 is noted
below.
<TABLE>
<CAPTION>
Weighted-
Range of Average
Exercise Exercise
Shares Prices Price
---------- ---------- ---------
<S> <C> <C> <C>
Outstanding, December 31, 1996........... -- $ -- $ --
Options granted........................ 1,171,200 0.12 0.12
Options exercised...................... (462,081) 0.12 0.12
Options forfeited...................... (60,000) 0.12 0.12
---------- ---------- -----
Outstanding, December 31, 1997........... 649,119 0.12 0.12
Options granted........................ 985,650 0.12-0.25 0.14
Options exercised...................... (1,405,350) 0.12-0.25 0.13
Options forfeited...................... (9,000) 0.12 0.12
---------- ---------- -----
Outstanding, December 31, 1998........... 220,419 0.12-0.25 0.14
Options granted........................ 2,148,721 0.25-3.50 2.64
Options exercised...................... (2,073,201) 0.25-3.50 2.63
Options forfeited...................... (25,500) 0.25-1.55 1.09
---------- ---------- -----
Outstanding, December 31, 1999........... 270,439 $0.12-3.50 $0.83
========== ========== =====
</TABLE>
At December 31, 1999, 755,046 shares of Common Stock were reserved for
future issuance and 484,607 options were available for future grants.
F-17
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Exercise Number Contractual Exercise Exercisable Exercise
Prices Outstanding Life Price and Vested Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.12 172,419 8.01 $0.12 89,487 $0.12
$ 0.25 30,000 8.88 $0.25 8,750 $0.25
$ 1.55 17,580 9.30 $1.55 -- $ --
$ 2.15 5,100 9.63 $2.15 -- $ --
$ 3.50 45,340 9.88 $3.50 12,000 $3.50
------- ----- ------- -----
Total 270,439 $0.83 110,237 $0.50
======= ===== ======= =====
</TABLE>
The Company recorded deferred stock-based compensation of $7,956,000 in
connection with stock options granted to employees for 1,890,262 shares of
common stock during 1999. This amount represents the difference between the
deemed fair value of the Company's common stock underlying these options and
their exercise price at the date of grant. The deferred stock-based
compensation is amortized over the vesting periods of the applicable options,
resulting in amortization of $1,416,000 for the year ended December 31, 1999.
The Company also recorded deferred stock-based compensation of $188,000 in
connection with stock options granted to nonemployee consultants for 20,000
shares of common stock during 1999. This amount represents the fair market
value of the stock options at December 31, 1999. The deferred stock-based
compensation is amortized over the expected life of the applicable options,
resulting in amortization of $15,000 for the year ended December 31, 1999.
Pro Forma Disclosures
FAS 123 requires that the Company present pro forma information regarding
net income as if the Company had accounted for the stock options under the fair
value method of that Statement. The fair value of the options was estimated at
the date of grant using a minimum value pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Year-ended
December 31,
1999
------------
<S> <C>
Risk-free interest rate...................................... 6.0%
Dividend yield............................................... 0%
Weighted-average expected life of the options................ 2 years
</TABLE>
The weighted-average fair value of options granted during fiscal 1997, 1998,
and 1999 was $0.03, $0.03, and $0.55, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the options' vesting periods. The Company's pro forma
information for the years ended December 31, 1997, 1998 and 1999 follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Pro forma stock-based compensation expense.... $ (2) $ (12) $ (103)
Pro forma net loss............................ $ (992) $(7,522) $(16,001)
Pro forma basic and diluted loss per share.... $(0.19) $ (1.01) $ (1.71)
</TABLE>
F-18
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option valuation models incorporate highly subjective assumptions. Because
changes in the subjective assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options. Because the
determination of fair value of all employee stock options granted after such
time as the Company becomes a public entity will include an expected volatility
factor and because, for pro forma disclosure purposes, the estimated fair value
of the Company's employee stock options is treated as if amortized to expense
over the options' expected life, the effects of applying SFAS No. 123 for pro
forma disclosures are not necessarily indicative of future amounts.
Notes Receivable from Stockholders
During 1997, 1998, and 1999, the Company made full-recourse loans to
employees of $56,000, $173,000 and $5,444,000, respectively, in connection with
the employees' purchase of shares through exercises of options. These full-
recourse notes are secured by the shares of stock, are generally interest
bearing at a weighted average interest rate of 5.68% at December 31, 1999, have
terms of five years, and must be repaid upon the sale of the underlying shares
of stock.
8. Litigation
The Company is involved in various legal matters which have arisen in the
normal course of business. While the ultimate results of these matters cannot
be predicted with certainty, management does not expect them to have a material
adverse effect on the financial position of the Company.
9. Subsequent Events
2000 Employee Stock Purchase Plan
In January 2000, the Company's Board of Directors approved the adoption of
the Company's 2000 Employee Stock Purchase Plan (the Purchase Plan). A total of
500,000 shares of common stock have been reserved for issuance under the
Purchase Plan. The share reserve will automatically increase each calendar year
beginning in 2001 by an amount equal to 1% of the total number of outstanding
shares of our common stock on the last day of December in the prior calendar
year. The Purchase Plan permits eligible employees to purchase shares of common
stock through payroll deductions at 85% of the fair market value of the common
stock, as defined in the Purchase Plan.
2000 Stock Incentive Plan
In January 2000, the Board of Directors approved the Company's 2000 Stock
Incentive Plan (the 2000 Plan). A total of 5,000,000 shares of common stock
have been reserved for issuance under the 2000 Plan. This share reserve
includes the number of shares carried over from the 1995 Stock Option/Stock
Issuance Plan. The share reserve will automatically increase each calendar year
beginning in 2001 by an amount equal to 3% of the total number of shares of our
common stock outstanding on the last day of December in the prior calendar
year, but in no event will the annual increase exceed 1,500,000. The 2000 Plan
provides for: (i) discretionary option grant program under which eligible
persons may be granted options to purchase shares of common stock; (ii) a
salary investment option grant program under which eligible employees may elect
to have a portion of their base salary invested each year in special options;
(iii) a stock issuance program under which eligible persons may be issued
shares of common stock directly, either through the immediate purchase of such
shares or as a bonus; (iv) an automatic option grant program under which
eligible non-employee board members will automatically receive options at
periodic intervals to purchase shares of common stock; and (v) a director fee
option grant program under which non-employee board members may elect to have
all or part of their annual retainer fee applied to a special option grant.
F-19
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amendment to Certificate of Incorporation (Unaudited)
In January 2000, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its common stock to the public. In
connection with this authorization, the Board of Directors authorized the
amendment of the Company's Certificate of Incorporation and changed the
aggregate number of shares of preferred stock and common stock authorized to be
issued to 25,000,000 and 100,000,000, respectively. All share information
included in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the increase in the number of authorized
shares.
F-20
<PAGE>
[INSIDE BACK COVER ART]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this registration
statement shall have the meaning assigned to them in the prospectus which forms
a part of this registration statement.
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 Applied Science Fiction in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC registration fee............................................. $15,180
NASD filing fee.................................................. 6,250
Nasdaq National Market listing fee............................... *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue sky fees and expenses....................................... *
Transfer agent fees.............................................. *
Miscellaneous.................................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
- --------
*To be provided by amendment.
Item 14. Indemnification of Directors and Officers.
Subsection (a) of Section 145 of the General Corporation Law of the State of
Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgements, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action,
suit or proceeding if the person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonably cause to believe the person's conduct was unlawful.
Subsection (b) of Section 145 of the General Corporation Law of the State of
Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that the person acted in any of the capacities
set forth above, against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or settlement
of such action or suit if the person acted in good faith and in a manner the
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
II-1
<PAGE>
Section 145 further provides: that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of
any such action, suit or proceeding referred to in subsections (a) and (b) of
Section 145, or in the defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith; that
the indemnification provided for by Section 145 shall not be deemed exclusive
of any other rights to which the indemnified party may be entitled; that
indemnification provided by Section 145 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; and that the corporation shall
have the power to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against such person
and incurred by him in any such capacity, or arising out of such person's
status as such, whether or not the corporation would have the power to
indemnify such person against such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders. (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit.
Article VI of our Fifth Amended and Restated Certificate of Incorporation
provides that, to the fullest extent permitted by the General Corporation Law
of the State of Delaware as the same exists, or as it may hereafter be amended,
no director of the registrant shall be personally liable to the registrant or
its stockholders for monetary damages for breach of fiduciary duty as a
director.
Article XI of our Bylaws further provides that the registrant shall, to the
maximum extent and in the manner permitted by Section 145 of the General
Corporation Law of the State of Delaware as that Section may be amended and
supplemented from time to time, indemnify each of its directors and officers
against expenses (including attorneys' fees), judgments, fines, amounts paid in
settlements, and for other matters referred to or covered by that Section by
reason of the fact that such person is or was a director or officer of the
registrant and is or was serving at the request of the registrant as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
The registrant has entered into indemnification agreements with each of its
directors and executive officers that provide for indemnification and expense
advancement to the fullest extent permitted under the General Corporation Law
of the State of Delaware.
The registrant maintains officers' and directors' liability insurance.
Reference is made to Section of the Underwriting Agreement filed as
Exhibit 1.1 hereto, indemnifying officers and directors of the registrant
against certain liabilities.
Item 15. Recent Sales of Unregistered Securities.
Since January 31, 1997, Registrant has issued securities to a limited number
of entities as described below.
1. In July and September 1997, Registrant issued 1,471,500 shares of
Series C preferred stock to accredited investors for $3.70 per share, for
an aggregate purchase price of $5,444,550. Registrant also issued warrants
to accredited investors to purchase up to 1,224,879 shares of common stock
at an exercise price of $0.62 per share. These securities were issued
pursuant to Rule 506 of Regulation D of the Securities Act.
II-2
<PAGE>
2. In March 1999, Registrant issued 4,069,767 shares of Series D
preferred stock to accredited investors for $7.74 per share, for an
aggregate purchase price of $31,499,996.58. These securities were issued
pursuant to Rule 506 of Regulation D of the Securities Act.
3. In August 1999, Registrant issued warrants to Silicon Valley Bank to
purchase up to 10,233 shares of Series D preferred stock at an exercise
price of $7.74 per share. These securities were issued pursuant to Rule 506
of Regulation D of the Securities Act.
4. Through December 31, 1999, Registrant had issued and sold 10,263,132
shares of its common stock to directors, employees and consultants upon the
exercise of options granted at a weighted average exercise price of $.64.
These shares were issued pursuant to Rule 701 promulgated under the
Securities Act.
5. Through December 31, 1999, Registrant had issued options to purchase
10,628,071 shares of common stock, of which 10,263,132 have been exercised,
270,439 remain outstanding and 94,500 have been forfeited and returned to
our option plan for future grant. These options were issued pursuant to
Rule 701 promulgated under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant to be
in effect immediately following the offering made under this Registration
Statement.
3.2 Amended and Restated Bylaws of the Registrant to be in effect immediately
following the closing of the offering made under this Registration
Statement.
4.1* Specimen Common Stock Certificate (standard form, not filed).
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Form of Indemnification Agreement between the Registrant and each of its
directors and officers.
10.2* 2000 Stock Incentive Plan and form of agreements thereunder.
10.3* 2000 Employee Stock Purchase Plan and form of agreements thereunder.
10.4 Amended and Restated Investors' Rights Agreement dated September 26, 1997,
by and among the Registrant and the investors named therein.
10.5 Registrant Office Lease dated March 19, 1998 by and between RGK Rentals,
Ltd. and Applied Science Fiction, Inc.
10.6+ IBM License Agreements.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (see Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment
+Filed herewith under a confidential treatment request, redacted portions
have been provided to the Commission.
II-3
<PAGE>
(b) Financial Statement Schedules.
Not included because the information required to be set forth therein is not
applicable or is shown in registrant's Consolidated Financial Statements or the
related Notes.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the General Corporation Law of the State of Delaware,
the Certificate of Incorporation or the Bylaws of the registrant, the
Underwriting Agreement, 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 matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of 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 that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 Austin,
State of Texas, on this 2nd day of February, 2000.
Applied Science Fiction, Inc.
/s/ Mark R. Urdahl
By:__________________________________
Mark R. Urdahl
President, Chief Executive Officer
and Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Mark R. Urdahl and Robert E. Sleet, Jr.
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to sign any registration
statement for the same offering covered by this registration statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto and all documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mark R. Urdahl President, Chief Executive February 2, 2000
____________________________________ Officer and Chariman of the
Mark R. Urdahl Board (principal executive
officer)
/s/ Robert E. Sleet, Jr. Executive Vice President and February 2, 2000
____________________________________ Chief Financial Officer
Robert E. Sleet, Jr. (principal accounting
officer)
/s/ Dr. Albert Edgar Director February 2, 2000
____________________________________
Dr. Albert Edgar
Director February 2, 2000
____________________________________
John Asa
Director February 2, 2000
____________________________________
Harvey B. Cash
/s/ Richard H. Kimball Director February 2, 2000
____________________________________
Richard H. Kimball
Director February 2, 2000
____________________________________
Peter M. Palermo
/s/ Carmelo M. Gordian Director February 2, 2000
____________________________________
Carmelo M. Gordian
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant to be
in effect immediately following the offering made under this Registration
Statement.
3.2 Amended and Restated Bylaws of the Registrant to be in effect immediately
following the closing of the offering made under this Registration
Statement.
4.1* Specimen Common Stock Certificate (standard form, not filed).
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Form of Indemnification Agreement between the Registrant and each of its
directors and officers.
10.2* 2000 Stock Incentive Plan and form of agreements thereunder.
10.3* 2000 Employee Stock Purchase Plan and form of agreements thereunder.
10.4 Amended and Restated Investors' Rights Agreement dated September 26, 1997,
by and among the Registrant and the investors named therein.
10.5 Registrant Office Lease dated March 19, 1998 by and between RGK Rentals,
Ltd. and Applied Science Fiction, Inc.
10.6+ IBM License Agreements.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (see Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment
+Filed herewith under a confidential treatment request, redacted portions
have been provided to the Commission.
<PAGE>
Exhibit 3.1
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
APPLIED SCIENCE FICTION, INC.
ARTICLE I
The name of this Corporation is Applied Science Fiction, Inc. (the
"Corporation").
-----------
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is The Corporation Trust Center, 1209 Orange Street, City of
Wilmington, County of New Castle, Delaware, and the name of the registered agent
of the corporation in the State of Delaware at such address is The Corporation
Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV
4.1 Prior to a Qualified IPO (as defined in Section 4(b) of Article V
below), the Corporation's capital stock shall be comprised as set forth in this
Section 4.1 and Article V as follows:
A. Classes of Stock. The Corporation is authorized to issue two classes
----------------
of capital stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares of capital stock authorized to be issued is
Fifty Million (50,000,000) shares. Thirty-Five Million (35,000,000) shares shall
be Common Stock, par value $0.001 per share, and Fifteen Million (15,000,000)
shares shall be Preferred Stock, par value $0.001 per share. Concurrently with
the filing of this Fourth Restated Certificate of Incorporation of the
Corporation with the Secretary of State of the State of Delaware, each share of
Common Stock of the Corporation issued and outstanding on the date of such
filing shall be divided into three (3) shares of Common Stock of the Corporation
authorized hereunder, without any further action on the part of the Corporation
or the holder thereof.
B. Rights, Preferences and Restrictions of Preferred Stock. The
-------------------------------------------------------
Preferred Stock authorized under this Fourth Restated Certificate of
Incorporation of the Corporation (this "Restated Certificate") may be issued
from time to time in one or more series. The first series shall consist of
101,662 shares and is designated "Series B Preferred Stock." The second series
shall consist of 1,471,500 shares and is designated "Series C Preferred Stock."
The third series
<PAGE>
shall consist of 4,080,000 shares and is designated "Series D Preferred Stock."
Shares of the Corporation's authorized but undesignated Preferred Stock may be
issued from time to time in one or more series. The Board of Directors of the
Corporation is hereby authorized, subject to the provisions of Section 5 of
Article V hereof, by filing a certificate pursuant to the Delaware General
Corporation Law, to fix or alter from time to time the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations and restrictions thereof, including without limitation, the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), redemption price or prices, and
the liquidation preferences of any wholly unissued series of Preferred Stock,
and to establish from time to time the number of shares constituting any such
series and the designation thereof, or any of them (a "Preferred Stock
Designation"); and to increase or decrease the number of shares of any series
(including without limitation the series designated in Article V hereof to the
extent provided by Article V hereof) subsequent to the issuance of shares of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be decreased in accordance with
the foregoing sentence or be converted pursuant to the Preferred Stock
Designation or Section 4 of Article V hereunder, the shares constituting such
decrease or so converted shall resume the status of authorized but unissued and
undesignated Preferred Stock. If at any time subsequent to the issuance of
shares of a particular series, there are no shares of such series remaining
outstanding, such series thereupon shall constitute a wholly unissued series and
may be altered (including without limitation the elimination of such series) to
the full extent as hereinabove provided, except as otherwise provided herein.
The foregoing authority of the Corporation's Board of Directors expressly
includes the authority to designate, in accordance with Section 5 of Article V
hereof, series of Preferred Stock with designations, powers, preferences,
rights, qualifications, limitations and restrictions senior to, junior to, or on
parity with, the designations, powers, preferences, rights, qualifications,
limitations and restrictions of the Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock defined and designated below.
C. Common Stock.
------------
1. Dividend Rights. Subject to the provisions of Section 1 of Article
---------------
V, the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors of the Corporation, out of any funds of the
Corporation legally available therefor, such dividends as may be declared from
time to time by the Board of Directors of the Corporation.
2. Liquidation Rights. Upon the liquidation, dissolution or winding
------------------
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Article V hereof.
3. Redemption. The Common Stock is not redeemable.
----------
4. Voting Rights. The holder of each share of Common Stock shall have
-------------
the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
2
<PAGE>
4.2 Effective immediately (as defined in Section 4(b) of Article V below),
the Corporation's capital stock shall be comprised as follows:
A. Authorized Shares. The aggregate number of shares that the Corporation
-----------------
shall have authority to issue is 125,000,000, (a) 100,000,000 shares of which
shall be Common Stock, par value $0.001 per share, and (b) 25,000,000 of which
shall be Preferred Stock, par value $0.001 per share.
B. Common Stock. Each share of Common Stock shall have one vote on each
------------
matter submitted to a vote of the stockholders of the Corporation. Subject to
the provisions of applicable law and the rights of the holders of the
outstanding shares of Preferred Stock, if any, the holders of the Common Stock
shall be entitled to receive, when and as declared by the Board of Directors of
the Corporation, out of the assets of the Corporation legally available
therefor, dividends or other distributions, whether payable in cash, property or
securities of the Corporation. The holders of shares of Common Stock shall be
entitled to receive, in proportion to the number of shares of Common Stock held,
the net assets of the Corporation upon dissolution after any preferential
amounts required to be paid or distributed to holders of outstanding shares of
Preferred Stock, if any, are so paid or distributed.
C. Preferred Stock.
---------------
1. Series. The Preferred Stock may be issued from time to time by the
------
Board of Directors as shares of one or more series. The description of shares of
each additional series of Preferred Stock, including any designations,
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption shall be as set forth in resolutions adopted by the Board of
Directors.
2. Rights and Preferences. The Board of Directors is expressly
----------------------
authorized, at any time, by adopting resolutions providing for the issuance of,
or providing for a change in the number of any particular series of Preferred
Stock and, if and to the extent from time to time required by law, by filing
certificates of amendment or designation which are effective without stockholder
action, to increase or decrease the number of shares included in each series of
Preferred Stock, but not below the number of shares then issued, and to set in
any one or more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption relating to the shares of
each such series. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to, setting or
changing the following:
(a) the dividend rate, if any, on shares of such series, the times of
payment and the date from which dividends shall be accumulated, if dividends are
to be cumulative;
(b) whether the shares of such series shall be redeemable and, if so,
the redemption price and the terms and conditions of such redemption;
(c) the obligation, if any, of the Corporation to redeem shares of
such series pursuant to a sinking fund;
3
<PAGE>
(d) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class of classes and, if so, the
terms and conditions of such conversion or exchange, including the price or
prices or the rate or rates of conversion or exchange and the terms of
adjustment, if any;
(e) whether the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the extent of such
voting rights;
(f) the rights of the shares of such series in the event of voluntary
or involuntary liquidation, dissolution or winding-up of the Corporation; and
(g) any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such series.
ARTICLE V
The respective rights, preferences, privileges and restrictions granted to
and imposed on the Series B Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock of the Corporation are as set forth below in this Article V.
1. Dividend Provisions.
-------------------
(a) The holders of shares of Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall be entitled to receive
dividends, out of any assets legally available therefor, prior and in preference
to any declaration or payment of any dividend (payable other than in Common
Stock or other securities and rights convertible into or entitling the holder
thereof to receive, directly or indirectly, additional shares of Common Stock of
the Corporation) on the Common Stock of the Corporation, in such amounts and at
such times as the Board of Directors of the Corporation deems advisable with
respect to the Series B Preferred Stock (provided, however, in no event shall
such amount exceed $0.18 per share) and at the rate of $0.37 and $0.774 per
share (as adjusted for any stock dividends, combinations or splits with respect
to such shares) per annum, with respect to the Series C Preferred Stock and the
Series D Preferred Stock, respectively, payable quarterly when, as and if
declared by the Board of Directors. Declared dividends with respect to each
share of Series B Preferred Stock, each share of Series C Preferred Stock and
each share of Series D Preferred Stock which are payable shall, upon conversion
of such share to Common Stock, be paid in shares of Common Stock (valued at the
fair market value on the date of payment as determined in the manner provided in
subsection 2(b)(ii) of this Article V). Dividends on the Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock shall not be
cumulative.
(b) So long as any shares of Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock are issued and outstanding, the
Corporation shall not declare and distribute any cash dividends among the
holders of Common Stock, nor shall the Corporation purchase, redeem or acquire
any shares of Common Stock or pay funds into or set aside or make available a
sinking fund for the purchase, redemption or acquisition of shares of Common
Stock, unless, in each case, such declaration, distribution, purchase,
redemption or acquisition is approved by the holders of at least two thirds
(2/3rds) of the voting power (as determined on an as-converted basis) of all
then outstanding shares of Series B Preferred Stock,
4
<PAGE>
Series C Preferred Stock and Series D Preferred Stock, each voting as a distinct
and separate class; provided, however, that the foregoing restriction shall not
-------- -------
apply to the repurchase of shares of Common Stock held by employees, officers,
directors, consultants or other persons performing services for the Corporation
or any wholly-owned subsidiary of the Corporation (including, but not by way of
limitation, distributors and sales representatives) pursuant to restrictive
stock purchase agreements under which the Corporation has the option to
repurchase such shares at cost (or other fixed price intended to be
representative of the cost of such shares of Common Stock) upon the occurrence
of certain events such as the termination of employment.
(c) Any dividend or distribution which is declared by the Corporation
and payable with assets of the Corporation other than cash shall be valued in
accordance with the provisions of subsection 2(b)(ii) of this Article V.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock shall be entitled
to receive, prior and in preference to any distribution of any of the assets of
the Corporation to the holders of Common Stock by reason of their ownership
thereof, an amount per share equal to the sum of (i) $1.8382353 for each
outstanding share of Series B Preferred Stock (the "Original Series B Issue
Price"), $3.70 for each outstanding share of Series C Preferred Stock (the
"Original Series C Issue Price") and $7.74 for each outstanding share of Series
D Preferred Stock (the "Original Series D Issue Price") (in each case, as
adjusted for any stock dividends, combinations or splits with respect to such
shares) held by such holder and (ii) an amount equal to all declared but unpaid,
dividends on such shares of Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock, as the case may be, held by such holder. The
Original Series B Issue Price, Original Series C Issue Price and Original Series
D Issue Price are sometimes referred to herein collectively as the "Original
Issue Price". If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amounts, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock in proportion to the
preferential amount each such holder is otherwise entitled to receive pursuant
to this subsection (a).
(b) After the distribution described in subsection (a) above has been
paid and in addition to any amounts so paid, the remaining assets of the
Corporation available for distribution to stockholders shall be distributed
among the holders of Common Stock pro rata based on the number of shares of
Common Stock held by each of them.
(i) For purposes of this Section 2, a liquidation, dissolution or
winding up of the Corporation shall be deemed to be occasioned by, or to
include, (A) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that results in the
transfer of 50% or more of the outstanding voting power of the Corporation or
(B) a sale of all or substantially all of the assets of the Corporation; unless,
------
in either event, such sale or
5
<PAGE>
other transaction or related transactions is determined not to be a liquidation,
dissolution or winding up of the Corporation by (x) the holders of a majority of
the Series B Preferred Stock and Series C Preferred Stock, voting together as a
single class and on an as-converted basis, and (y) the holders of a majority of
the Series D Preferred Stock, voting as a single and separate class.
(ii) In any of such events, if the consideration received by the
Corporation is other than cash, its value will be deemed its fair market value.
Any securities to be delivered to the holders of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Common Stock, as the case
may be, shall be valued as follows:
(A) If traded on a securities exchange or through the Nasdaq
National Market, the value shall be deemed to be the average of the closing
prices of the securities on such exchange over the thirty (30) day period ending
three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days prior to the
closing; and
(C) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined by the Corporation and the
holders of at least two thirds (2/3rds) of the voting power (as determined on an
as-converted basis) of all then outstanding shares of Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock.
(iii) In the event the requirements of this Section 2 are not
complied with, the Corporation shall forthwith either:
(A) cause such closing to be postponed until such time as
the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the respective
rights, preferences and privileges of the holders of the Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock shall revert to and
be the same as such rights, preferences and privileges existing immediately
prior to the date of the first notice referred to in subsection 2(b)(iv) hereof.
(iv) The Corporation shall give each holder of record of Series B
Preferred Stock, each holder of record of Series C Preferred Stock and each
holder of record of Series D Preferred Stock written notice of such impending
transaction not later than twenty (20) days prior to the stockholders' meeting
called to approve such transaction, or twenty (20) days prior to the closing of
such transaction, whichever is earlier, and shall also notify such holders in
writing of the final approval of such transaction. The first of such notices
shall describe the material terms and conditions of the impending transaction
and the provisions of this Section 2, and the Corporation shall thereafter give
such holders prompt notice of any material changes. The transaction shall in no
event take place sooner than twenty (20) days after the Corporation has given
the first notice provided for herein or sooner than ten (10) days after the
Corporation
6
<PAGE>
has given notice of any material changes provided for herein; provided, however,
-------- -------
that such periods may be shortened upon the Corporation's receipt of written
consent of the holders of at least two thirds (2/3rds) of the outstanding shares
of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock, each voting separately and not as a single class, entitled to such notice
rights or similar notice rights.
3. Redemption. None of the Series B Preferred Stock, Series C Preferred
----------
Stock or Series D Preferred Stock is redeemable.
4. Conversion. The holders of the Series B Preferred Stock, Series C
----------
Preferred Stock and Series D Preferred Stock shall have the following respective
conversion rights (the "Conversion Rights"):
(a) Right to Convert. Each share of Series B Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined, with respect to each share of Series B Preferred
Stock, by dividing the Original Series B Issue Price plus all declared but
unpaid dividends on the Series B Preferred Stock by the Series B Conversion
Price, determined as hereinafter provided, in effect on the date the certificate
is surrendered for conversion (the result of such division is hereinafter
referred to as the "Series B Conversion Rate"). The initial Series B Conversion
Price per share for the Series B Preferred Stock shall be $1.8382353; provided,
--------
however, that such Series B Conversion Price shall be subject to adjustment as
- -------
set forth in subsections 4(d), 4(e) and 4(f). Each share of Series C Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share, at the office of the Corporation or
any transfer agent for such stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined, with respect to each
share of Series C Preferred Stock, by dividing the Original Series C Issue Price
plus all declared but unpaid dividends on the Series C Preferred Stock by the
Series C Conversion Price, determined as hereinafter provided, in effect on the
date the certificate is surrendered for conversion (the result of such division
is hereinafter referred to as the "Series C Conversion Rate"). The initial
Series C Conversion Price per share for the Series C Preferred Stock shall be
$3.70; provided, however, that such Series C Conversion price shall be subject
-------- -------
to adjustment as set forth in subsections 4(d), 4(e), 4(f) and 4(g). Each share
of Series D Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share, at the office of
the Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined, with respect to
each share of Series D Preferred Stock, by dividing the Original Series D Issue
Price plus all declared but unpaid dividends on the Series D Preferred Stock, by
the Series D Conversion Price in effect on the date the certificate is
surrendered for conversion (the result of such division is hereinafter referred
to as the "Series D Conversion Rate"). The initial Series D Conversion Price per
share for the Series D Preferred Stock shall be $7.74; provided, however, that
-------- -------
such Series D Conversion Price shall be subject to adjustment as set forth in
subsections 4(d), 4(e), 4(f) and 4(g).
(b) Mandatory Conversion. Each share of Series B Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Series B
7
<PAGE>
Conversion Rate immediately upon the closing with an underwriter or underwriters
of the sale of Common Stock pursuant to an underwritten offer of securities
under the Securities Act of 1933, as amended (the "Securities Act"). Each share
of Series C Preferred Stock shall automatically be converted into shares of
Common Stock at the then effective Series C Conversion Rate immediately upon the
earlier of (i) the date specified by vote or written consent of the holders of
at least two-thirds (2/3) of the shares of Series C Preferred Stock then
outstanding or (ii) the closing of the Corporation's sale of its Common Stock in
a firm commitment underwritten public offering pursuant to a registration
statement under the Securities Act in which the aggregate proceeds to the
Corporation and any selling stockholders participating therein is at least $20
million (a "Qualified IPO"). Each share of Series D Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Series D Conversion Rate immediately upon the earlier of (i) the date specified
by vote or written consent of the holders of at least a majority of the shares
of Series D Preferred Stock then outstanding or (ii) the closing of a Qualified
IPO wherein the initial price at which shares of Common Stock are sold to the
public is at least (x) $10.06 if the Qualified IPO occurs within twelve (12)
months of the first issuance of shares of Series D Preferred Stock or (y) $13.16
if the Qualified IPO occurs more than twelve (12) months following the first
issuance of shares of the Series D Preferred Stock (in each case as such minimum
per share price is adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like after the date of the filing of this
Restated Certificate with the Secretary of State of the State of Delaware).
(c) Mechanics of Conversion. Prior to the conversion of any shares of
-----------------------
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock,
as the case may be, into shares of Common Stock (other than pursuant to a
mandatory conversion under subsection 4(b)), such holder shall surrender the
certificate or certificates thereof, duly endorsed, at the office of the
Corporation or of any transfer agent for such stock, and shall give written
notice by mail, postage prepaid, to the Corporation at such office that such
holder elects to convert the same and shall state therein the name or names in
which the holder wishes the certificate or certificates for shares of Common
Stock to be issued. The Corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such holder of Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock, or to the nominee or
nominees of such holder, as the case may be, a certificate or certificates for
the number of shares of Common Stock to which the holder shall be entitled as
aforesaid and a check payable to the holder in the amount of any cash amounts
payable as the result of a conversion into fractional shares of Common Stock
pursuant to subsection 4(m) hereunder and any declared but unpaid dividends on
such fractional shares of the converted Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock to which the holder may be entitled.
Except for a conversion in connection with an underwritten offering of
securities under the Securities Act pursuant to subsection 4(b) hereof, such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of surrender of the shares of Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. In the case of a conversion
pursuant to subsection 4(b) hereof in connection with an underwritten offering
of securities under the Securities Act, the conversion shall be conditioned upon
the closing with the underwriter or underwriters of the sale of securities
pursuant to such offering, and such conversion shall then be deemed to occur
immediately prior to the closing of such sale
8
<PAGE>
of securities. In the event of a conversion pursuant to subsection 4(b) hereof,
the outstanding shares of Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock shall be converted automatically without any further
action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or its transfer
agent; and provided further that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such automatic
conversion unless and until the certificates evidencing such shares of Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, as the
case may be, are either delivered to the Corporation or its transfer agent as
provided above, or the holder notifies the Corporation or its transfer agent
that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificates.
(d) Adjustment for Subdivisions. Combinations or Consolidations of
--------------------------- ---------------------------------
Common Stock and Stock Dividend. In the event that, after the date that the
- -------------------------------
Series C Preferred Stock was first issued and prior to the date on which shares
of Series D Preferred Stock were first issued, the outstanding shares of Common
Stock shall be subdivided (by stock split or otherwise) into a greater number of
shares of Common Stock, or a dividend or distribution of Common Stock payable to
all holders of Common Stock shall be made (or a record date for such dividend
declared), each of the Series B Conversion Price and Series C Conversion Price
then in effect shall, concurrently with the effectiveness (or record date) of
such subdivision or dividend, be proportionately decreased. In the event that,
after the date on which the Series D Preferred Stock was first issued, the
outstanding shares of Common Stock shall be subdivided (by stock split or
otherwise) into a greater number of shares of Common Stock, or a dividend or
distribution of Common Stock payable to all holders of Common Stock shall be
made (or a record date for such dividend declared), each of the Series B
Conversion Price, Series C Conversion Price and Series D Conversion Price then
in effect shall, concurrently with the effectiveness (or record date) of such
subdivision or dividend, be proportionately decreased. In the event that, after
the date on which shares of the Series D Preferred Stock were first issued, the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
each of the Series B Conversion Price, Series C Conversion Price and Series D
Conversion Price then in effect shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased. In each case,
the proportionate decrease or increase, respectively, of the Series B Conversion
Price, Series C Conversion Price and/or Series D Conversion Price shall be equal
to the number of shares of Common Stock outstanding immediately prior to the
event giving rise to the adjustment divided by the number of shares of Common
Stock outstanding immediately after such event.
(e) Adjustments for Other Distributions. In the event the Corporation at
-----------------------------------
any time or from time to time after the date on which shares of Series D
Preferred Stock were first issued makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, any distribution
payable in securities of the Corporation other than Common Stock or otherwise,
then in each such event, provision shall be made so that the holders of Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall
receive upon conversion thereof, in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the Corporation or
portion of any other distribution which they would have received had their
Series B Preferred Stock, Series C Preferred Stock and Series D
9
<PAGE>
Preferred Stock, as the case may be, been converted into Common Stock on the
date of such event and had they thereafter, during the period from the date of
such event to and including the date of conversion, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 4 of Article V with
respect to the rights of the holders of the Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock.
(f) Adjustments for Reorganization, Reclassification, Exchange and
--------------------------------------------------------------
Substitution. If the Common Stock issuable upon conversion of the Series B
- ------------
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock or other securities or property, whether by reorganization
(unless such reorganization is deemed a liquidation under subsection 2(b)(i) of
this Article V), reclassification or otherwise (other than a subdivision or
combination of shares provided for above), each of the Series B Conversion
Price, Series C Conversion Price and Series D Conversion Price then in effect
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series B Preferred
Stock, Series C Preferred Stock and Series D Convertible Stock, respectively,
shall be convertible into, in lieu of the number of shares of Common Stock which
the holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock or other securities or property equivalent
to the number of shares of Common Stock that would have been subject to receipt
by the holders upon conversion of the Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, as the case may be, immediately
before such event; and, in any such case, appropriate adjustment (as determined
by the Board of Directors of the Corporation) shall be made in the application
of the provisions herein set forth with respect to the rights and interest
thereafter of the holders of the Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock, to the end that the provisions set forth
herein (including provisions with respect to changes in and other adjustments of
the Series B Conversion Price, Series C Conversion Price and Series D Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock, as the case may be.
(g) Adjustments to Series C Conversion Price and Series D Conversion
----------------------------------------------------------------
Price for Certain Diluting Issues.
- ---------------------------------
(i) Special Definitions. For purposes of this subsection 4(g), the
-------------------
following definitions apply:
(A) "Options" shall mean rights, options, or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities (defined below).
(B) "Original Issue Date" shall mean the date on which a share
of Series D Preferred Stock was first issued by the Corporation.
(C) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than Common Stock, Series B Preferred Stock, Series
C Preferred
10
<PAGE>
Stock and Series D Preferred Stock) or other securities convertible into or
exchangeable for Common Stock.
(D) "Additional Shares of Common Stock" shall mean, all shares
of Common Stock issued (or, pursuant to subsection 4(g)(iii), deemed to be
issued) by the Corporation after the Original Issue Date, other than shares of
Common Stock issued or issuable:
(w) to employees or directors of, or consultants to, the
Corporation under stock option, stock bonus or stock purchase plans or
agreements or similar plans or agreements approved by the Board of Directors or
an authorized committee thereof; provided, however, that this subsection
-------- -----
4(g)(i)(D)(w) shall only apply to 3,000,000 shares (notwithstanding anything
herein to the contrary, including without limitation in Section 4(g)(ii), such
amount including both Options outstanding on the Original Issue Date and Options
reserved for issuance under the Company's stock option plan on the Original
Issue Date) (as adjusted for any stock dividends, combinations or splits and net
of any repurchases of shares or cancellations or expirations of options) issued
(or deemed to be issued) to such employees, directors or consultants;
(x) as a dividend or distribution on Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock;
(y) for which adjustment of the Series B Conversion Price,
Series C Conversion Price and Series D Conversion Price is made pursuant to
subsections 4(d), 4(e) or 4(f); or
(z) upon issuance of warrants or options to subscribe
for, purchase or otherwise acquire Common Stock or convertible
Securities issued to financial institutions or other lenders, lessors or
guarantors in connection with current or potential borrowings, indebtedness or
leases of real or personal property by the Corporation, so long as the
principal purpose of such issuance is not equity financing and so long as such
issuance is approved by the Board of Directors of the Corporation.
(ii) No Adjustment of Conversion Price. Any provision herein to
---------------------------------
the contrary notwithstanding, no adjustment in the Series C Conversion Price
shall be made in respect of the issuance of Additional Shares of Common Stock
unless the consideration per share (determined pursuant to subsection 4(g)(v)
hereof) for an Additional Share of Common Stock issued or deemed to be issued by
the Corporation is less than the Series C Conversion Price in effect on the date
of, and immediately prior to, such issue. Any provision herein to the contrary
notwithstanding, no adjustment in the Series D Conversion Price shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share (determined pursuant to subsection 4(g)(v) hereof) for
an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Series D Conversion Price in effect on the date of,
and immediately prior to, such issue.
11
<PAGE>
(iii) Deemed Issue of Additional Shares of Common Stock. In the
-------------------------------------------------
event the Corporation at any time or from time to time after the Original Issue
Date shall issue any Options or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities then entitled
to receive any such Options or Convertible Securities, then the maximum number
of shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution) of Common
Stock issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the exercise and conversion or exchange of such
Options for Convertible Securities and the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
(unless excluded from the definition thereof pursuant to subsection 4(g)(i)(D))
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that in
any such case in which Additional Shares of Common Stock are deemed to be
issued:
(A) no further adjustments in the Series C Conversion Price or
the Series D Conversion Price, as the case may be, shall be made upon the
subsequent issue of Convertible Securities or shares of Common Stock upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(B) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Corporation, or decrease or increase in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Series C Conversion Price and the Series D Conversion
Price, as the case may be, computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the Series
-------- -------
C Conversion Price or Series D Conversion Price shall affect Common Stock
previously issued upon conversion of the Series C Preferred Stock or the Series
D Preferred Stock, as the case may be);
(C) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the Series C Conversion Price and the Series D Conversion Price,
as the case may be, computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if:
(x) in the case of Convertible Securities or Options for
Common Stock, the only Additional Shares of Common Stock issued were the shares
of Common Stock, if any, actually issued upon the exercise of such Options or
the conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
such Convertible Securities which
12
<PAGE>
were actually converted or exchanged, plus the additional consideration, if any,
actually received by the Corporation upon such conversion or exchange, and
(y) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued upon the exercise thereof
were issued at the time of issue of such Options, and the consideration received
by the Corporation for the Additional Shares of Common Stock deemed to have been
then issued was the consideration actually received by the Corporation for the
issue of all such Options, whether or not exercised, plus the consideration
deemed to have been received by the Corporation (determined pursuant to
subsection 4(g)(v) hereof) upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(D) no readjustment pursuant to subsection 4(g)(iii)(B) or (C)
above shall have the effect of increasing the Series C Conversion Price or the
Series D Conversion Price to an amount which exceeds the lower of (x) the Series
C Conversion Price or the Series D Conversion Price, as the case may be, on the
original adjustment date, or (b) the Series C Conversion Price or the Series D
Conversion Price, as the case may be, that would have resulted from any issuance
or issuances of Additional Shares of Common Stock between the original
adjustment date and such readjustment date;
(E) in the case of any Options or Convertible Securities which
expire by their terms not more than 30 days after the date of issue thereof, no
adjustment of the Series C Conversion Price or Series D Conversion Price shall
be made until the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the same manner provided in subsection 4(g)(iii)(C)
above; and
(F) in the case of any Options or Convertible Securities with
respect to which the maximum number of shares of Common Stock issuable upon
exercise or conversion or exchange thereof is not determinable, no adjustment to
the Series C Conversion Price or the Series D Conversion Price shall be made
until such number becomes determinable.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock. In the event the Corporation, at any time after the
- ----------------------
Original Issue Date, shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to subsection
4(g)(iii)) without consideration or for a consideration per share less than the
Series C Conversion Price or the Series D Conversion Price, as the case may be,
in effect on the date of, and immediately prior to, such issue, then and in such
event, the Series C Conversion Price or the Series D Conversion Price, as the
case may be, shall be reduced, concurrently with such issue, to a price
(calculated in accordance with subsection 4(g)(vi)(b)) determined by multiplying
the Series C Conversion Price or the Series D Conversion Price, as the case may
be, by a fraction, (x) the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of
shares of Common Stock which the aggregate consideration received by the
Corporation for the total number of Additional Shares of Common Stock so issued
would purchase at the Series C Conversion Price or the Series D Conversion
Price, as the case may be, in effect immediately prior to such issuance, and (y)
the denominator of which shall be the number of shares of
13
<PAGE>
Common Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued. For the purpose of the above
calculation, the number of shares of Common Stock outstanding immediately prior
to such issue shall be calculated on a fully-diluted basis, as if all shares of
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
all Convertible Securities had been fully converted into shares of Common Stock
immediately prior to such issuance and any outstanding warrants, options or
other rights for the purchase of shares of stock or convertible securities had
been fully exercised immediately prior to such issuance (and the resulting
securities fully converted into shares of Common Stock, if so convertible) as of
such date, but not including in such calculation any additional shares of Common
Stock issuable with respect to shares of Series C Preferred Stock, Series D
Preferred Stock and Convertible Securities, or outstanding options, warrants or
other rights for the purchase of shares of stock or convertible securities,
solely as a result of the adjustment of the Series C Conversion Price or Series
D Conversion Price (or other conversion ratios) resulting from the issuance of
Additional Shares of Common Stock causing such adjustment.
(v) Determination of Consideration. For purposes of this subsection
------------------------------
4(g), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property. Such consideration shall:
-----------------
(x) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(y) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such issue, as determined in
good faith by the Board of Directors; and
(z) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (x) and (y) above, as
determined in good faith by the Board of Directors.
(B) Options and Convertible Securities. The consideration per
----------------------------------
share received by the Corporation for Additional Shares of Common Stock deemed
to have been issued pursuant to subsection 4(g) relating to Options and
Convertible Securities shall be equal to the quotient determined by dividing:
(x) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the
14
<PAGE>
case of Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities, by
(y) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against the dilution) issuable upon the
exercise of such Options or conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the conversion or exchange of
such Convertible Securities.
(vi) Miscellaneous.
-------------
(A) All calculations under this subsection 4(g) shall be made to
the nearest cent or to the nearest one hundredth (1/100) of a share, as the case
may be.
(B) No adjustment in the Series C Conversion Price or the Series
D Conversion Price need be made if such adjustment would result in a change in
such Series C Conversion Price or Series D Conversion Price, as the case may be,
of less than $0.01. Any adjustment of less than $0.01 which is not made shall be
carried forward and shall be made at the time of and together with any
subsequent adjustment made prior to three (3) years from the date of the event
giving rise to the adjustment being carried forward which, on a cumulative
basis, amounts to an adjustment of $0.01 or more in such Series C Conversion
Price or Series D Conversion Price, as the case may be, or shall be made at the
end of three (3) years from the date of the event giving rise to the adjustment
being carried forward.
(h) No Impairment. The Corporation will not, by amendment of this
-------------
Restated Certificate or through any reorganization, recapitalization, transfer
of assets, consolidation, merger, dissolution, issuance or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Corporation,
but will at all times in good faith assist in the carrying out of all the
provisions of this Section 4 of this Article V and in the taking of all such
action as may be necessary or appropriate in order to protect the respective
conversion rights of the holders of the Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock against impairment.
(i) Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Series B Conversion Price, Series C Conversion
Price or Series D Conversion Price pursuant to this Section 4, the Corporation,
at its expense, shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth (i)
such applicable adjustments and readjustments, (ii) the applicable Series B
Conversion Price, Series C Conversion Price and Series D Conversion Price at the
time in effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other
15
<PAGE>
property which at the time would be received upon the conversion of Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. Any
certificate sent to the holders of Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock pursuant to this subsection 4(i) shall be
certified by the President or Chief Financial Officer of the Corporation.
(j) Notices of Record Date. In the event that this Corporation shall
----------------------
propose at any time:
(i) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series or
other rights; or
(iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; then, in
connection with each such event, the Corporation shall send to the holders
of the Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock:
(A) at least twenty (20) days prior written notice of the date
on which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which holders of Common Stock shall be
entitled thereto and the approximate amount and character of such dividend,
distribution or right) or for determining rights to vote in respect of the
matters referred to in (i) and (ii) above; and
(B) in the case of the matters referred to in (iii) above, at
least twenty (20) days prior written notice of the date when the same shall take
place (and specifying the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event and the approximate amount and
character of such dividend, distribution or right).
(k) Issue Taxes. The Corporation shall pay any and all issue and
-----------
other taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of shares of Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock pursuant hereto; provided, however,
-------- -------
that the Corporation shall not be obligated to pay any transfer taxes or income
taxes payable by the stockholder and resulting from any transfer requested by
any holder in connection with any such conversion.
(l) Reservation of Stock Issuable Upon Conversion. There is hereby
---------------------------------------------
reserved out of the presently authorized but unissued shares of Common Stock
304,986, 4,414,500 shares and 4,080,000 shares for the sole purpose of issuance
pursuant to conversions of the Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock, respectively, as provided herein. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock, such number of its shares of Common Stock as
shall from time to time be
16
<PAGE>
sufficient to effect the conversion of all outstanding shares of the Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock; and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of the
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock,
in addition to such other remedies as shall be available to the holders of such
Preferred Stock, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(m) Fractional Shares. No fractional share shall be issued upon the
-----------------
conversion of any share or shares of Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock. Whether or not fractional shares
are issuable upon such conversion shall be determined on the basis of the total
number of shares of Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock that the holder is at the time converting into Common
Stock and the number of shares of Common Stock issuable upon such aggregate
conversion. If the conversion would result in the issuance of a fraction of a
share of Common Stock, the Corporation shall, in lieu of issuing any fractional
share, pay the holder otherwise entitled to such fraction a sum in cash equal to
the fair market value of such fraction on the date of conversion (as determined
in good faith by the Board of Directors of the Corporation).
(n) Notices. Any notice required by the provisions of this Section 4
-------
to be given to the holders of shares of Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock shall be deemed given if delivered
personally or three days after being deposited in the United States mail, first
class postage prepaid, and addressed to each holder of record at his address
appearing on the books of the Corporation.
5. Restrictions and Limitations.
-----------------------------
(a) Actions Requiring Approval of Holders of Series B Preferred
-----------------------------------------------------------
Stock. In addition to any other rights provided by law, so long as any Series B
- -----
Preferred Stock shall be outstanding, the Corporation shall not, without the
vote or written consent by the holders of at least a majority of the then
outstanding shares of the Series B Preferred Stock:
(i) Purchase, redeem or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose), any of the Common Stock or any other
series of preferred stock of the Corporation (other than by conversion);
provided, however, that this restriction shall not apply to the repurchase of
- -------- -------
shares of Common Stock from employees, officers, directors, consultants or other
persons performing services for the Corporation or any subsidiary of the
Corporation, in accordance with written plans or agreements; or
(ii) Increase or decrease (other than by conversion) the total
number of authorized shares of Series B Preferred Stock of the Corporation; or
(iii) Authorize or issue, or obligate itself to issue, any other
equity security senior to the Series B Preferred Stock as to liquidation
preferences without contemporaneously amending the liquidation preference of the
Series B Preferred Stock such that it is pari passu to such equity security, or
create any obligation or security convertible into or
17
<PAGE>
exchangeable for, or having any option rights to purchase, any such equity
security which is senior to the Series B Preferred Stock with respect to
liquidation preferences without contemporaneously amending the liquidation
preference of the Series B Preferred Stock such that it is pari passu to such
equity security.
(b) Actions Requiring Approval of Holders of Each of the Series C
-------------------------------------------------------------
Preferred Stock and Series D Preferred Stock. In addition to any other rights
- --------------------------------------------
provided by law, so long as any Series C Preferred Stock or Series D Preferred
Stock shall be outstanding, the Corporation shall not, without the vote or
written consent by the holders of at least a majority of the then outstanding
shares of the Series C Preferred Stock and Series D Preferred Stock,
respectively, each voting or acting, as the case may be, as a single and
separate class:
(i) Amend this Restated Certificate or the Corporation's
Bylaws, or waive any provision thereof, if such amendment or waiver would
adversely affect the powers, privileges, preferences or rights of the
outstanding shares of such series of the Preferred Stock provided for herein; or
(ii) Authorize or issue, or obligate itself to issue, any other
equity security senior to such series of the Preferred Stock as to liquidation
preferences, voting rights, redemption, conversion or dividends, or create any
obligation or security convertible into, or exercisable or exchangeable for, any
such equity security which is senior to such series of the Preferred Stock with
respect to liquidation preferences, voting rights, redemption, conversion or
dividends; or
(iii) Effect any sale, lease, assignment, transfer or other
conveyance of all or substantially all of the assets of the Corporation, or any
acquisition of the Corporation by another entity by means of any transaction or
series of related transactions (including, without limitation, any
reorganization, merger or consolidation) that results in the transfer of 50% or
more of the outstanding voting power of the Corporation, other than any such
sale, lease, assignment, transfer, conveyance, acquisition, reorganization,
merger or consolidation in which holders of such series of the Preferred Stock
receive consideration, as a result of their ownership thereof, with a fair
market value (as determined in accordance with Section 2(b)(ii)) at least equal
to two (2) times the Original Issue Price of such series of the Preferred Stock
(as such Original Issue Price may be adjusted for any stock splits, reverse
stock splits or stock dividends, and the like); or
(iv) Purchase, redeem or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose), any of the Common Stock or any other
series of Preferred Stock of the Corporation (other than by conversion);
provided, however, that this restriction shall not apply to the repurchase of
- -------- -------
shares of Common Stock at cost from employees, officers, directors, consultants
or other persons performing services for the Corporation or any subsidiary of
the Corporation, in accordance with written plans or agreements, except for any
such repurchase as would adversely affect the rights of a holder of Series C
Preferred Stock or Series D Preferred Stock under Section 1202 of the Internal
Revenue Code of 1986, as amended; or
18
<PAGE>
(v) Increase or decrease (other than by conversion) the total
number of authorized shares of such series of the Preferred Stock of the
Corporation; or
(vi) Amend this Section 5(b).
(c) Actions Requiring Approval of Holders of Two-Thirds of the
----------------------------------------------------------
Series C Preferred Stock and Series D Preferred Stock. In addition to any other
- -----------------------------------------------------
rights provided by law, so long as any Series C Preferred Stock or Series D
Preferred Stock shall be outstanding, the Corporation shall not, without the
vote or written consent by the holders of at least two-thirds (2/3) of the then
outstanding shares of the Series C Preferred Stock and Series D Preferred Stock
(as determined on an as-converted basis), voting or acting, as the case may be,
together as a single, and not as a separate, class:
(i) Authorize or issue, or obligate itself to issue, any other
equity security senior to such series of the Preferred Stock as to liquidation
preferences, voting rights, redemption, conversion or dividends, or create any
obligation or security convertible into, or exercisable or exchangeable for, any
such equity security which is senior to such series of the Preferred Stock with
respect to liquidation preferences, voting rights, redemption, conversion or
dividends; or
(ii) Increase or decrease (other than by conversion) the total
number of authorized shares of the Series C Preferred Stock or Series D
Preferred Stock; or
(iii) Declare or pay dividends on any shares of Common Stock
(other than dividends payable solely in shares of Common Stock); or
(iv) Purchase, redeem or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose), any of the Common Stock or any other
series of Preferred Stock of the Corporation (other than by conversion);
provided, however, that this restriction shall not apply to the repurchase of
- -------- -------
shares of Common Stock at cost from employees, officers, directors, consultants
or other persons performing services for the Corporation or any subsidiary of
the Corporation, in accordance with written plans or agreements, except for any
such repurchase as would adversely affect the rights of a holder of Series C
Preferred Stock or Series D Preferred Stock under Section 1202 of the Internal
Revenue Code of 1986, as amended; or
(v) Own, or permit any subsidiary company to own, any stock
or other securities of any subsidiary company or other corporation, partnership
or entity unless it is wholly-owned by the Corporation; or
(vi) Increase or decrease the number of authorized members of
the Board of Directors from the authorized number of nine (9) directors; or
(vii) Increase the total number of shares reserved for issuance
under the Corporation's employee stock option, stock incentive or other
compensation plans or arrangements to more than 3,000,000 shares of Common
Stock; or
(viii) Amend this Section 5(c).
19
<PAGE>
6. Voting Rights.
-------------
(a) Each holder of shares of the Series C Preferred Stock or Series D
Preferred Stock shall be entitled to the number of votes equal to the whole
number of shares of Common Stock into which such holder's shares of Series C
Preferred Stock and/or Series D Preferred Stock could be converted immediately
prior to the close of business on the record date fixed for such meeting or, if
no record date is established, at the date such vote is taken, or on the date
any such written consent is executed by such holder, and shall have voting
rights and powers equal to the voting rights and powers of the Common Stock
(except as otherwise expressly provided herein or as required by law, voting
together with the Common Stock as a single class) and shall be entitled to
notice of any stockholders' meeting in accordance with the Bylaws of the
Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Series C Preferred Stock and Series D Preferred
Stock held by each holder could be converted) shall be rounded to the nearest
whole number (with one-half being rounded upward).
(b) Until the closing of the Corporation's initial sale of securities
pursuant to an underwritten public offering registered under the Securities Act,
other than a registration relating solely to a transaction under Rule 145 under
the Securities Act (or any successor thereto) or to an employee benefit plan of
the Corporation, (i) the holders of Series C Preferred Stock, voting together as
a single class, shall be entitled to elect three (3) members of the Board of
Directors, (ii) the holders of Series D Preferred Stock, voting together as a
single class, shall be entitled to elect one (1) member of the Board of
Directors and (iii) the holders of the Common Stock, voting together as a single
class, shall be entitled to elect the remaining members of the Board of
Directors; provided, however, that one such director to be elected by the
-------- -------
holders of the Common Stock shall be nominated upon the advice and consent of
the Board of Directors. Promptly following the closing of the Corporation's
initial public offering of securities, the Board of Directors shall promptly
call a special meeting of the stockholders at which all directors will be
elected by the holders of Common Stock, and the terms of office of all persons
who are then directors of the Corporation shall terminate immediately upon, the
election of their successors.
(c) In the case of any vacancy in the office of a director occurring
among the directors elected by the holders of the Series C Preferred Stock,
Series D Preferred Stock or Common Stock pursuant to subsection 6(b) of this
Article V, the remaining director or directors so elected by the holders of the
Series C Preferred Stock or Common Stock (as the case may be) may, by
affirmative vote of a majority of such remaining directors (or the remaining
director so elected if there is but one, or if there is no such director
remaining (as would be the case in the event of a vacancy in the director seat
to be filled by the Series D Preferred Stock), by the affirmative vote of the
holders of a majority of the shares of that class) elect a successor or
successors to hold the office for the unexpired term of the director or
directors whose place or places shall be vacant. Any director who shall have
been elected by the holders of the Series C Preferred Stock, Series D Preferred
Stock or Common Stock or any director so elected as provided in the preceding
sentence hereof, may be removed during the aforesaid term of office, whether
with or without cause, only in accordance with the provisions of the Delaware
General Corporation Law and by the affirmative vote of the holders of a majority
of the Series C Preferred Stock, Series D Preferred Stock or Common Stock, as
the case may be.
20
<PAGE>
(d) Except as specified in subsection 5(a) hereof, prior to conversion
of the Series B Preferred Stock, the holders of Series B Preferred Stock shall
not be entitled to vote on any matters pertaining to the governance or
management of the Corporation and shall not be entitled to notice of any
stockholders' meeting.
7. Status of Converted or Redeemed Stock. In the event any shares of
-------------------------------------
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
shall be converted pursuant to Section 4 above, or in the event any shares of
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
shall be redeemed pursuant to Section 3 above, the shares so converted or
redeemed shall be cancelled and shall not be issuable by the Corporation. The
Restated Certificate shall be amended at such time or times as the Corporation
deems it reasonably practicable to effect the corresponding reduction in the
Corporation's authorized capital stock.
ARTICLE VI
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article VI to authorize corporate action
further eliminating or limiting the personal liability of directors then the
liability of a Director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
ARTICLE VII
The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The numbers of directors
which shall constitute the whole Board of Directors of the Corporation shall be
fixed by, or in the manner provided in, the Bylaws of the Corporation.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX
Election of directors at an annual or special meeting of stockholders need
not be by written ballot unless the Bylaws of the Corporation shall so provide.
21
<PAGE>
ARTICLE X
A. At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, and until their successors have been duly elected and qualified. At
the first annual meeting of stockholders following the closing of the initial
public offering (the "First Public Company Annual Meeting") of the Corporation's
-----------------------------------
capital stock pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended (the "Initial Public Offering"), the
-----------------------
directors of the Corporation shall be divided into three classes as nearly equal
in size as is practicable, hereby designated as Class I, Class II and Class III.
The term of office of the initial Class I directors shall expire at the next
succeeding annual meeting of stockholders, the term of office of the initial
Class II directors shall expire at the second succeeding annual meeting of
stockholders and the term of office of the initial Class III directors shall
expire at the third succeeding annual meeting of stockholders. For the purposes
hereof, the initial Class I, Class II and Class III directors shall be those
directors designated and elected at the First Public Company Annual Meeting. At
each annual meeting after the First Public Company Annual Meeting, directors to
replace those of a Class whose terms expire at such annual meeting shall be
elected to hold office until the third succeeding annual meeting and until their
respective successors shall have been duly elected and qualified. If the number
of directors is hereafter changed, any newly created directorships or decrease
in directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as is practicable.
B. Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
although less than a quorum, at a meeting of the Board of Directors. A person so
elected by the Board of Directors to fill a vacancy shall hold office until the
next succeeding annual meeting of stockholders of the Corporation and until his
or her successor shall have been duly elected and qualified.
ARTICLE XI
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
ARTICLE XII
Effective upon the closing of the Initial Public Offering, stockholders of
the Corporation may not take action be written consent in lieu of a meeting but
must take any actions at a duly called annual or special meeting.
ARTICLE XIII
Notwithstanding any other provision of this Certificate of Incorporation
or any provision of law which might otherwise permit a lesser vote or no vote,
but in addition to any affirmative vote of the holders of the capital stock
required by law of this Certificate of Incorporation, the affirmative vote of
the holders of at least two-thirds (2/3) of the combined
22
<PAGE>
voting power of all of the then-outstanding shares of the Corporation entitled
to vote shall be required to alter, amend or repeal Articles X, XII or XIII, or
any provisions thereof.
ARTICLE XIV
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred on stockholders herein
are granted subject to this reservation.
23
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
APPLIED SCIENCE FICTION, INC.,
a Delaware corporation
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
ARTICLE I. Offices...................................................................1
Section 1.1 Registered Office..................................................1
Section 1.2 Other Offices......................................................1
ARTICLE II. Corporate Seal...........................................................1
ARTICLE III. Stockholders' Meetings..................................................1
Section 3.1 Place of Meetings.................................................1
Section 3.2 Annual Meeting....................................................2
Section 3.3 Special Meetings..................................................4
Section 3.4 Notice of Meetings................................................4
Section 3.5 Quorum............................................................4
Section 3.6 Adjournment and Notice of Adjourned Meetings......................5
Section 3.7 Voting Rights.....................................................5
Section 3.8 Joint Owners of Stock.............................................5
Section 3.9 List of Stockholders..............................................5
Section 3.10 No Action Without Meeting.........................................6
Section 3.11 Organization......................................................6
ARTICLE IV. Directors................................................................7
Section 4.1 Number and Term of Office; Classification.........................7
Section 4.2 Powers............................................................7
Section 4.3 Vacancies.........................................................7
Section 4.4 Resignation.......................................................8
Section 4.5 Removal...........................................................8
Section 4.6 Meetings..........................................................8
Section 4.7 Quorum and Voting.................................................9
Section 4.8 Action Without Meeting............................................9
Section 4.9 Fees and Compensation.............................................9
Section 4.10 Committees.......................................................10
ARTICLE V. Officers.................................................................11
Section 5.1 Officers Designated..............................................11
Section 5.2 Tenure and Duties of Officers....................................11
Section 5.3 Delegation of Authority..........................................14
Section 5.4 Resignations.....................................................14
Section 5.5 Removal..........................................................14
ARTICLE VI. Execution of Corporate Instruments and Voting of Securities Owned by
the Corporation.....................................................................14
Section 6.1 Execution of Corporate Instruments...............................14
Section 6.2 Voting of Securities Owned by the Corporation....................15
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE VII. Shares of Stock........................................................15
Section 7.1 Form and Execution of Certificates...............................15
Section 7.2 Lost Certificates................................................16
Section 7.3 Transfers........................................................16
Section 7.4 Fixing Record Dates..............................................16
Section 7.5 Registered Stockholders..........................................17
ARTICLE VIII. Other Securities of the Corporation...................................17
Section 8.1 Execution of Other Securities....................................17
ARTICLE IX. Dividends...............................................................18
Section 9.1 Declaration of Dividends.........................................18
Section 9.2 Dividend Reserve.................................................18
ARTICLE X. Fiscal Year..............................................................18
ARTICLE XI. Indemnification of Directors, Officers, Employees and Other Agents......18
Section 11.1 Directors and Executive Officers.................................18
Section 11.2 Other Officers, Employees and Other Agents.......................19
Section 11.3 Good Faith.......................................................19
Section 11.5 Enforcement......................................................20
Section 11.6 Non-Exclusivity of Rights........................................20
Section 11.7 Survival of Rights...............................................20
Section 11.8 Insurance........................................................20
Section 11.9 Amendments.......................................................21
Section 11.10 Savings Clause...................................................21
Section 11.11 Certain Definitions..............................................21
ARTICLE XII. Notices................................................................22
Section 12.1 Notice to Stockholders...........................................22
Section 12.2 Notice to Directors..............................................22
Section 12.3 Address Unknown..................................................22
Section 12.4 Affidavit of Mailing.............................................22
Section 12.5 Time Notices Deemed Given........................................22
Section 12.6 Failure to Receive Notice........................................22
Section 12.7 Notice to Person with Whom Communication Is Unlawful.............22
Section 12.8 Notice to Person with Undeliverable Address......................23
ARTICLE XIII. Amendments............................................................23
Section 13.1 Amendments.......................................................23
Section 13.2 Application of Bylaws............................................23
ARTICLE XIV. Loans to Officers......................................................24
</TABLE>
iii
<PAGE>
BYLAWS
OF
APPLIED SCIENCE FICTION, INC.,
a Delaware corporation
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ARTICLE I.
OFFICES
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Section 1.1 Registered Office. The registered office of the corporation
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shall be the registered office named in the certificate of incorporation of the
corporation, or such other office as may be designated from time to time by the
Board of Directors in the manner provided by law.
Section 1.2 Other Offices. The corporation may have offices at such other
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places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.
The books of the corporation may be kept (subject to any provision contained in
the Delaware General Corporation Law) outside the State of Delaware at such
place or places as may be designated from time to time by the Board of Directors
or in these Bylaws.
ARTICLE II.
CORPORATE SEAL
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The corporate seal shall consist of a die bearing the name of the
corporation. Said seal may be used by causing it, or a facsimile thereof, to be
impressed, affixed or reproduced.
ARTICLE III.
STOCKHOLDERS' MEETINGS
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Section 3.1 Place of Meetings. Meetings of the stockholders of the
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corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal executive offices of the
corporation.
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Section 3.2 Annual Meeting.
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(a) The annual meeting of the stockholders of the corporation, for the
purpose of election of Directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business shall
be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors; (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors; or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received by the
Secretary of the corporation not later than the close of business on the one
hundred twentieth (120th) day prior to the first anniversary of the date of the
proxy statement delivered to stockholders in connection with the preceding
year's annual meeting; provided, however, that if either (i) the date of the
annual meeting is advanced more than thirty (30) days or delayed (other than as
a result of adjournment) more than sixty (60) days from such an anniversary date
or (ii) no proxy statement was delivered to stockholders in connection with the
preceding year's annual meeting, notice by the stockholder to be timely must be
so delivered not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or the close of
business on the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made by the corporation. To be in proper
form, a stockholder's notice to the Secretary shall set forth as to each matter
the stockholder proposes to bring before the annual meeting:
(i) a brief description of the business desired to
be brought before the annual meeting and the reasons for
conducting such business at the annual meeting;
(ii) a representation that the stockholder is a
holder of record of stock of the corporation entitled to vote at
such meeting and, if applicable, intends to appear in person or
by proxy at the meeting to nominate the person or persons
specified in the notice or introduce the business specified in
the notice;
(iii) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business;
(iv) the class and number of shares of the
corporation which are beneficially owned by the stockholder;
(v) any material interest of the stockholder in
such business; and
(vi) any other information that is required to be
provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of
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1934, as amended (the "Exchange Act"), in such stockholder's
capacity as a proponent of a stockholder proposal.
The chairman of the meeting shall determine whether any business
proposed to be transacted by the stockholders has been properly brought before
the meeting and, if any proposed business has not been properly brought before
the meeting, the chairman shall declare that such proposed business shall not be
presented for stockholder action at the meeting. For purposes of this Section
3.2, "public announcement" shall mean disclosure in a press release reported by
the Dow Jones News Service, Associated Press or comparable national news service
or in a document publicly filed by the corporation with the Securities and
Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
Notwithstanding any provision in this Section 3.2 to the contrary, requests for
inclusion of proposals in the corporation's proxy statement made pursuant to
Rule 14a-8 under the Exchange Act shall be deemed to have been delivered in a
timely manner if delivered in accordance with such Rule. Notwithstanding
compliance with the requirements of this Section 3.2, the chairman presiding at
any meeting of the stockholders may, in his sole discretion, refuse to allow a
stockholder or stockholder representative to present any proposal which the
corporation would not be required to include in a proxy statement under any rule
promulgated by the Securities and Exchange Commission.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of Directors at the meeting who complies with the notice
procedures set forth in this paragraph. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 3.2. Such stockholder's notice
shall set forth (i) as to each person, if any, whom the stockholder proposes to
nominate for election or re-election as a Director: (A) the name, age, business
address and residence address of such person; (B) the principal occupation or
employment of such person; (C) the class and number of shares of the corporation
which are beneficially owned by such person; (D) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nominations are to be made by the stockholder; and (E) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of Directors, or is otherwise required in each case
pursuant to Regulation 14A under the 1934 Act (including without limitation such
person's written consent to being named in the proxy statement, if any, as a
nominee and to serving as a Director if elected); and (ii) as to such
stockholder giving notice, the information required to be provided pursuant to
paragraph (b) of this Section 3.2. At the request of the Board of Directors, any
person nominated by a stockholder for election as a Director shall furnish to
the Secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a Director of the corporation unless nominated
in accordance with the procedures set forth in this paragraph. The chairman of
the meeting shall, if the facts warrant, determine and declare at the meeting
that a nomination was not made in accordance with the procedures prescribed by
these Bylaws, and if the chairman should so determine, the chairman shall so
declare at the meeting, and the defective nomination shall be disregarded.
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Section 3.3 Special Meetings.
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(a) Special meetings of the stockholders of the corporation may only
be called, for any purpose or purposes, by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized Directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board of Directors for
adoption).
(b) No business may be transacted at such special meeting otherwise
than specified in the resolution calling for the meeting. The Board of Directors
shall determine the time and place of such special meeting, which shall be held
not less than thirty-five (35) nor more than one hundred twenty (120) days after
the date of the receipt of the request other than any actions effected prior to
an Initial Public Offering (as defined below). Upon determination of the time
and place of the meeting, notice shall be given to the stockholders entitled to
vote, in accordance with the provisions of Section 3.4 of these Bylaws. If the
notice is not given within sixty (60) days after the receipt of the request, the
person or persons requesting the meeting may set the time and place of the
meeting and give the notice. Nothing contained in this paragraph (b) shall be
construed as limiting, fixing or affecting the time when a meeting of
stockholders may be held.
Section 3.4 Notice of Meetings. Except as otherwise provided by law or the
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certificate of incorporation of the corporation, as the same may be amended or
restated from time to time and including any certificates of designation
thereunder (hereinafter, the "Certificate of Incorporation"), and for actions
effected prior to an Initial Public Offering (for which no notice need be given)
written notice of each meeting of stockholders shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting, such notice to specify the place,
date, time and purpose or purposes of the meeting. Notice of any meeting of
stockholders may be waived in writing, signed by the person entitled to notice
thereof, either before or after such meeting, and will be waived by any
stockholder by his attendance thereat in person or by proxy, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Any stockholder so waiving notice of such
meeting shall be bound by the proceedings of any such meeting in all respects as
if due notice thereof had been given.
Section 3.5 Quorum. At all meetings of stockholders, except where otherwise
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provided by statute or by the Certificate of Incorporation, or by these Bylaws,
the presence, in person or by duly authorized proxy, of the holders of a
majority of the outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a quorum, any meeting
of stockholders may be adjourned, from time to time, either by the chairman of
the meeting or by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
actions taken by the holders of a majority of the votes cast, excluding
abstentions, at any meeting at which a quorum is present shall be valid and
binding upon the corporation; provided,
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however, that Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of Directors. Where a separate vote by a class or classes
is required, a majority of the outstanding shares of such class or classes,
present in person or represented by proxy, shall constitute a quorum entitled to
take action with respect to that vote on that matter and the affirmative vote of
the majority (plurality, in the case of the election of Directors) of shares of
such class or classes present in person or represented by proxy at the meeting
shall be the act of such class.
Section 3.6 Adjournment and Notice of Adjourned Meetings. Any meeting of
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stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 3.7 Voting Rights. For the purpose of determining those
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stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 7.5 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a written proxy executed by
such person or his duly authorized agent, which proxy shall be filed with the
Secretary at or before the meeting at which it is to be used. An agent so
appointed need not be a stockholder. No proxy shall be voted after three (3)
years from its date of creation unless the proxy provides for a longer period.
Elections of Directors need not be by written ballot, unless otherwise provided
in the Certificate of Incorporation.
Section 3.8 Joint Owners of Stock. If shares or other securities having
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voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; or (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the Delaware General Corporation Law, Section 217(b). If
the instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of clause (c) shall
be a majority or even-split in interest.
Section 3.9 List of Stockholders. The Secretary shall prepare and make, at
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least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to
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vote at said meeting, arranged in alphabetical order, showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not specified, at the place where the meeting is
to be held. The list shall be produced and kept at the time and place of meeting
during the whole time thereof and may be inspected by any stockholder who is
present.
Section 3.10 No Action Without Meeting. Effective upon the closing of the
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corporation's initial public offering of its capital stock pursuant to an
effective registration statement filed under the Securities Act of 1933, as
amended (the "Initial Public Offering"), the stockholders of the corporation may
not take action by written consent without a meeting and must take any actions
at a duly called annual or special meeting.
Section 3.11 Organization.
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(a) At every meeting of stockholders, unless another officer of the
corporation has been appointed by the Board of Directors, the Chairman of the
Board of Directors, or, if a Chairman has not been appointed, is absent, or
designates the next senior officer present to so act, the President, or, if the
President is absent, the most senior Vice President present, or, in the absence
of any such officer, a chairman of the meeting chosen by a majority in interest
of the stockholders entitled to vote, present in person or by proxy, shall act
as chairman. The Secretary, or, in his absence, an Assistant Secretary directed
to do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
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ARTICLE IV.
DIRECTORS
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Section 4.1 Number and Term of Office; Classification.
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(a) The number of directors which shall constitute the whole Board of
Directors shall be determined from time to time by the Board of Directors
(provided that no decrease in the number of directors which would have the
effect of shortening the term of an incumbent director may be made by the Board
of Directors), provided that the number of directors shall be not less than one
(1). At each annual meeting of stockholders, Directors of the corporation shall
be elected to hold office until the expiration of the term for which they are
elected, and until their successors have been duly elected and qualified or
until such Director's earlier death, resignation or due removal; except that if
any such election shall not be so held, such election shall take place at a
stockholders' meeting called and held in accordance with the Delaware General
Corporation Law. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If, for any reason, the Directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
(b) At the first annual meeting of stockholders following the closing
of the Initial Public Offering (the "First Public Company Annual Meeting"), the
Directors of the corporation shall be divided into three classes as nearly equal
in size as is practicable, hereby designated Class I, Class II and Class III.
The initial Class I, Class II and Class III directors shall be those directors
designated and elected at the First Public Company Annual Meeting. The term of
office of the initial Class I directors shall expire at the next succeeding
annual meeting of stockholders, the term of office of the initial Class II
directors shall expire at the second succeeding annual meeting of stockholders,
and the term of office of the initial Class III directors shall expire at the
third succeeding annual meeting of stockholders. At each annual meeting of
stockholders following the First Public Company Annual Meeting, Directors to
replace those of the Class whose terms expire at such annual meeting shall be
elected to hold office until the third succeeding annual meeting and until their
respective successors shall have been duly elected and qualified. If the number
of directors is hereafter changed, any newly created directorships or decrease
in directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as is practicable.
Section 4.2 Powers. The powers of the corporation shall be exercised, its
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business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
Section 4.3 Vacancies. Vacancies occurring on the Board of Directors may be
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filled by vote of a majority of the remaining members of the Board of Directors,
although less than a quorum. Each Director so elected shall hold office for the
unexpired portion of the term of the Director or newly created directorship
whose place shall be vacant and until his or her successor shall have been duly
elected and qualified or until such Director's earlier death, resignation or due
removal. A vacancy in the Board of Directors shall be deemed to exist under this
Section 4.3 in the case of (i) the death, removal or resignation of any
Director; (ii) an
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increase in the authorized number of Directors pursuant to Section 4.1(a) above;
or (iii) if the stockholders fail at any meeting of stockholders at which
Directors are to be elected (including any meeting referred to in Section 4.6
below) to elect the number of Directors then constituting the whole Board of
Directors.
Section 4.4 Resignation. Any Director may resign at any time by delivering
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his or her written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When one
or more Directors shall resign from the Board of Directors, effective at a
future date, a majority of the Directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
Section 4.5 Removal. At a special meeting of stockholders called for such
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purpose and in the manner provided herein, subject to any limitations imposed by
law or the Certificate of Incorporation, the Board of Directors, or any
individual Director, may only be removed from office for cause, and a new
Director or Directors shall be elected by a vote of stockholders holding a
majority of the outstanding shares entitled to vote at an election of Directors.
Section 4.6 Meetings.
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(a) Annual Meetings. Unless the Board shall determine otherwise, the
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annual meeting of the Board of Directors shall be held immediately before or
after the annual meeting of stockholders and at the place where such meeting is
held. No notice of an annual meeting of the Board of Directors shall be
necessary and such meeting shall be held for the purpose of electing officers
and transacting such other business as may lawfully come before it.
(b) Regular Meetings. Except as hereinafter otherwise provided,
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regular meetings of the Board of Directors shall be held in the principal
executive offices of the corporation. Unless otherwise restricted by the
Certificate of Incorporation, regular meetings of the Board of Directors may
also be held at any place within or without the State of Delaware which has been
designated by resolution of the Board of Directors or the written consent of all
directors.
(c) Special Meetings. Unless otherwise restricted by the Certificate
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of Incorporation, and subject to the notice requirements contained herein,
special meetings of the Board of Directors may be held at any time and place
within or without the State of Delaware whenever called by the Chairman of the
Board, the President or any two of the Directors.
(d) Telephone Meetings. Any member of the Board of Directors, or of
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any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear
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each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
(e) Notice of Meetings. Written notice of the time and place of all
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special meetings of the Board of Directors shall be given at least one (1) day
before the date of the meeting. Such notice need not state the purpose or
purposes of such meeting, except as may otherwise be required by law or provided
for in the Certificate of Incorporation or these Bylaws. Notice of any meeting
may be waived in writing at any time before or after the meeting and will be
deemed waived by any Director by attendance thereat, except when the Director
attends the meeting solely for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
(f) Waiver of Notice. The transaction of all business at any meeting
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of the Board of Directors, or any committee thereof, however called or noticed,
or wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
meeting, each of the Directors not present shall sign a written waiver of
notice, or a consent to holding such meeting, or an approval of the minutes
thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Section 4.7 Quorum and Voting.
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(a) Unless the Certificate of Incorporation requires a greater number
and except with respect to indemnification questions arising under Article XI
hereof, for which a quorum shall be one-third of the exact number of Directors
fixed from time to time in accordance with Section 4.1 hereof, but not less than
one (1), a quorum of the Board of Directors shall consist of a majority of the
exact number of directors fixed from time to time in accordance with Section 4.1
of these Bylaws, but not less than one (1); provided, however, at any meeting
whether a quorum be present or otherwise, a majority of the Directors present
may adjourn from time to time until the time fixed for the next regular meeting
of the Board of Directors, without notice other than by announcement at the
meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by a vote of the
majority of the Directors present, unless a different vote is required by law,
the Certificate of Incorporation or these Bylaws.
Section 4.8 Action Without Meeting. Unless otherwise restricted by the
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Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 4.9 Fees and Compensation. Directors shall be entitled to such
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compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any
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meeting of a committee of the Board of Directors. Nothing herein contained shall
be construed to preclude any Director from serving the corporation in any other
capacity as an officer, agent, employee, or otherwise and receiving compensation
therefor.
Section 4.10 Committees.
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(a) Executive Committee. The Board of Directors may by resolution
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passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and specifically granted by
the Board of Directors, shall have, and may exercise when the Board of Directors
is not in session, all powers of the Board of Directors in the management of the
business and affairs of the corporation except such committee shall not have the
power or authority to amend the Certificate of Incorporation, to adopt an
agreement of merger or consolidation, to recommend to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, to recommend to the stockholders of the corporation a dissolution of the
corporation or a revocation of a dissolution, or to amend these Bylaws.
(b) Other Committees. The Board of Directors may, by resolution passed
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by a majority of the whole Board of Directors, from time to time appoint such
other committees as may be permitted by law. Such other committees appointed by
the Board of Directors shall consist of one (1) or more members of the Board of
Directors and shall have such powers and perform such duties as may be
prescribed by the resolution or resolutions creating such committees, but in no
event shall such committee have the powers denied to the Executive Committee in
these Bylaws.
(c) Term. Each member of a committee of the Board of Directors shall
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serve a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to the provisions of paragraphs (a)
and (b) of this Section 4.10 may at any time increase or decrease the number of
members of a committee or terminate the existence of a committee. The membership
of a committee member shall terminate on the date of his or her death or
voluntary resignation from the committee or from the Board of Directors. The
Board of Directors may at any time for any reason remove any individual
committee member and the Board of Directors may fill any committee vacancy
created by death, resignation, removal or increase in the number of members of
the committee. The Board of Directors may designate one or more Directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee, and, in addition, in the absence or
disqualification of any member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
(d) Meetings. Unless the Board of Directors shall otherwise provide,
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regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 4.10 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings
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of any such committee may be held at any place which has been determined from
time to time by such committee, and may be called by any Director who is a
member of such committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the time
and place of special meetings of the Board of Directors. Notice of any special
meeting of any committee may be waived in writing at any time before or after
the meeting and will be waived by any Director by attendance thereat, except
when the Director attends such special meeting solely for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. A majority of the
authorized number of members of any such committee shall constitute a quorum for
the transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee.
(e) Organization. The Chairman of the Board shall preside at every
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meeting of the Board of Directors, if present. In the case of any meeting, if
there is no Chairman of the Board or if the Chairman is not present, the Vice
Chairman (if there be one) shall preside, or if there be no Vice Chairman or if
the Vice Chairman is not present, a chairman chosen by a majority of the
Directors present shall act as chairman of such meeting. The Secretary of the
corporation or, in the absence of the Secretary, any person appointed by the
Chairman shall act as secretary of the meeting.
ARTICLE V.
OFFICERS
--------
Section 5.1 Officers Designated. The officers of the corporation shall
-------------------
include a President and a Secretary, and, if and when designated by the Board of
Directors, Chairman of the Board of Directors, one or more executive and
non-executive Vice Presidents (any one or more of which executive Vice
Presidents may be designated as Executive Vice President or Senior Vice
President or a similar title), and a Treasurer. The Board of Directors also may,
at its discretion, create additional officers and assign such duties to those
offices as it may deem appropriate from time to time, which offices may include
a Vice Chairman of the Board of Directors, a Chief Executive Officer, a Chief
Operating Officer, a Chief Financial Officer, one or more Assistant Secretaries
and Assistant Treasurers, and one or more other officers which may be created at
the discretion of the Board of Directors. Any one person may hold any number of
offices of the corporation at any one time unless specifically prohibited
therefrom by law. The salaries and other compensation of the officers of the
corporation shall be fixed by or in the manner designated by the Board of
Directors.
Section 5.2 Tenure and Duties of Officers.
-----------------------------
(a) General. All officers shall hold office at the pleasure of the
-------
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the
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vacancy may be filled by the Board of Directors. Except for the Chairman of the
Board and the Vice Chairman of the Board, no officer need be a director.
(b) Duties of Chairman of the Board of Directors. The Chairman of the
--------------------------------------------
Board of Directors, when present, shall preside at all meetings of the Board of
Directors and, unless the Chairman has designated the next senior officer to so
preside, at all meetings of the stockholders. The Chairman of the Board of
Directors shall perform other duties commonly incident to such office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.
(c) Powers and Duties of the Vice Chairman of the Board. The Board of
----------------------------------------------------
Directors may but is not required to assign areas of responsibility to a Vice
Chairman of the Board, and, in such event, and subject to the overall direction
of the Chairman of the Board and the Board of Directors, the Vice Chairman of
the Board shall be responsible for supervising the management of the affairs of
the corporation and its subsidiaries within the area or areas assigned and shall
monitor and review on behalf of the Board of Directors all functions within such
corresponding area or areas of the corporation and each such subsidiary of the
corporation. In the absence of the President, or in the event of the President's
inability or refusal to act, the Vice Chairman of the Board shall perform the
duties of the President, and when so acting shall have all the powers of and be
subject to all the restrictions upon the President. Further, the Vice Chairman
of the Board shall have such other powers and duties as designated in accordance
with these Bylaws and as from time to time may be assigned to the Vice Chairman
of the Board by the Board of Directors or the Chairman of the Board.
(d) Duties of President. Unless the Board of Directors otherwise
-------------------
determines (including by election of Chief Executive Officer) and subject to the
provisions of paragraph (e) below, the President shall be the chief executive
and chief operating officer of the corporation. Unless the Board of Directors
otherwise determines, he shall, in the absence of the Chairman of the Board or
Vice Chairman of the Board or if there be no Chairman of the Board or Vice
Chairman of the Board, preside at all meetings of the stockholders and (should
he be a director) of the Board of Directors. The President shall have such other
powers and duties as designated in accordance with these Bylaws and as from time
to time may be assigned to him by the Board of Directors.
(e) Duties of the Chief Executive and Chief Operating Officers.
----------------------------------------------------------
Subject to the control of the Board of Directors, the chief executive officer
shall have general executive charge, management and control, of the properties,
business and operations of the corporation with all such powers as may be
reasonably incident to such responsibilities; and subject to the control of the
chief executive officer, the chief operating officer shall have general
operating charge, management and control, of the properties, business and
operations of the corporation with all such powers as may be reasonably incident
to such responsibilities.
(f) Duties of Vice Presidents. Vice Presidents, by virtue of their
-------------------------
appointment as such, shall not necessarily be deemed to be executive officers of
the corporation, such status as an executive officer only being conferred if and
to the extent such Vice President is placed in charge of a principal business
unit, division or function (e.g., sales, administration or finance) or performs
a policy-making function for the corporation (within the meaning of Section 16
of the
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1934 Act and the rules and regulations promulgated thereunder). Each executive
Vice President shall at all times possess, and upon the authority of the
President or the chief executive officer any non-executive Vice President shall
from time to time possess, power to sign all certificates, contracts and other
instruments of the corporation, except as otherwise limited pursuant to Article
VI hereof or by the Chairman of the Board, the President, chief executive
officer or the Vice Chairman of the Board. The Vice Presidents shall perform
other duties commonly incident to their office and shall also perform such other
duties and have such other powers as the Board of Directors or the President
shall designate from time to time.
(g) Duties of Secretary. The Secretary shall keep the minutes of all
-------------------
meetings of the Board of Directors, committees of the Board of Directors and the
stockholders, in books provided for that purpose; shall attend to the giving and
serving of all notices; may in the name of the corporation affix the seal of the
corporation to all contracts and attest the affixation of the seal of the
corporation thereto; may sign with the other appointed officers all certificates
for shares of capital stock of the corporation; and shall have charge of the
certificate books, transfer books and stock ledgers, and such other books and
papers as the Board of Directors may direct, all of which shall at all
reasonable times be open to inspection of any director upon application at the
office of the corporation during business hours. The Secretary shall perform all
other duties given in these Bylaws and other duties commonly incident to such
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time. The chief executive
officer may direct any Assistant Secretary to assume and perform the duties of
the Secretary in the absence or disability of the Secretary, and each Assistant
Secretary shall perform other duties commonly incident to such office and shall
also perform such other duties and have such other powers as the Board of
Directors or the chief executive officer, shall designate from time to time.
(h) Assistant Secretaries. Each Assistant Secretary shall have the
---------------------
usual powers and duties pertaining to such offices, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to an Assistant Secretary by the Board of Directors, the Chairman of
the Board, the President, the Vice Chairman of the Board, or the Secretary. The
Assistant Secretaries shall exercise the powers of the Secretary during that
officer's absence or inability or refusal to act.
(i) Duties of Treasurer.
-------------------
(i) The Treasurer shall keep or cause to be kept the books of
account of the corporation in a thorough and proper manner and shall render
statements of the financial affairs of the corporation in such form and as often
as required by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, chief executive officer, if one be designated, the Chief
Financial Officer. The Treasurer, subject to the order of the Board of
Directors, shall have the custody of all funds and securities of the
corporation. The Treasurer shall perform other duties commonly incident to such
office and shall also perform such other duties and have such other powers as
the Board of Directors, the Chairman of the Board, the Vice Chairman of the
Board or the President shall designate from time to time.
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<PAGE>
(ii) In absence of a designated Chief Financial Officer, unless
otherwise determined by the Board of Directors or chief executive officer, the
Treasurer shall serve as the chief financial officer subject to control of the
chief executive officer.
(iii) The Chief Financial Officer, if any be designated, may, but
need not serve as the Treasurer.
(j) Assistant Treasurers. Each Assistant Treasurer shall have the
--------------------
usual powers and duties pertaining to such office, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to each Assistant Treasurer by the Board of Directors, the Chairman of
the Board, the President, the Vice Chairman of the Board, or the Treasurer. The
Assistant Treasurers shall exercise the powers of the Treasurer during that
officer's absence or inability or refusal to act.
Section 5.3 Delegation of Authority. For any reason that the Board of
-----------------------
Directors may deem sufficient, the Board of Directors may, except where
otherwise provided by statute, delegate the powers or duties of any officer to
any other person, and may authorize any officer to delegate specified duties of
such office to any other person. Any such delegation or authorization by the
Board shall be effected from time to time by resolution of the Board of
Directors.
Section 5.4 Resignations. Any officer may resign at any time by giving
------------
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
Section 5.5 Removal. Any officer may be removed from office at any time,
-------
either with or without cause, by the vote or written consent of a majority of
the Directors in office at the time, or by any committee or superior officers
upon whom such power of removal may have been conferred by the Board of
Directors.
ARTICLE VI.
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
---------------------------------------------
OF SECURITIES OWNED BY THE CORPORATION
--------------------------------------
Section 6.1 Execution of Corporate Instruments. The Board of Directors may,
----------------------------------
in its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
14
<PAGE>
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, the President, Chief Executive Officer or any
executive Vice President and if any be designated, Chief Financial Officer,
Treasurer, Assistant Secretary or Assistant Treasurer, and upon the authority
conferred by the Board of Directors, President or Chief Executive Officer, any
non-executive Vice President, and by the Secretary. All other instruments and
documents requiring the corporate signature, but not requiring the corporate
seal, may be executed as aforesaid or in such other manner as may be directed by
the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
Section 6.2 Voting of Securities Owned by the Corporation. All stock and
---------------------------------------------
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman or Vice Chairman of the Board of Directors, Chief Executive
Officer, the President, or any executive Vice President.
ARTICLE VII.
SHARES OF STOCK
---------------
Section 7.1 Form and Execution of Certificates. Certificates for the shares
----------------------------------
of stock of the corporation shall be in such form as is consistent with the
Certificate of Incorporation and applicable law. Every holder of stock in the
corporation shall be entitled to have a certificate signed by or in the name of
the corporation by the Chairman or Vice Chairman of the Board of Directors, the
Chief Executive Officer, the President or any executive Vice President and by
the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, certifying the number of shares and the class or series owned by him
in the corporation. Where such certificate is countersigned by a transfer agent
other than the corporation or its employee, or by a registrar other than the
corporation or its employee, any other signature on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may
15
<PAGE>
be issued with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Section 7.2 Lost Certificates. A new certificate or certificates shall be
-----------------
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 7.3 Transfers.
---------
(a) Transfers of record of shares of stock of the corporation shall be
made only on its books by the holders thereof, in person or by attorney duly
authorized and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares. Upon surrender to the corporation or a
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. The Board of Directors shall have the power and
authority to make all such other rules and regulations as they may deem
expedient concerning the issue, transfer and registration or the replacement of
certificates for shares of capital stock of the corporation.
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the Delaware General Corporation Law.
Section 7.4 FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
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(b) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed by the Board of Directors,
the record date for determining stockholders for any such purpose shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
Section 7.5 Registered Stockholders. The corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII.
OTHER SECURITIES OF THE CORPORATION
-----------------------------------
Section 8.1 Execution of Other Securities. All bonds, debentures and other
-----------------------------
corporate ecurities of the corporation, other than stock certificates (covered
in Section 7.1), may be signed by the Chairman or Vice Chairman of the Board of
Directors, the Chief Executive Officer, the President or any executive Vice
President, or such other person as may be authorized by the Board of Directors,
and the corporate seal impressed thereon or a facsimile of such seal imprinted
thereon and attested by the signature of the Secretary or an Assistant
Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that
where any such bond, debenture or other corporate security shall be
authenticated by the manual signature of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before any bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
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ARTICLE IX.
DIVIDENDS
---------
Section 9.1 Declaration of Dividends. Dividends upon the capital stock of
------------------------
the corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors pursuant to law at any regular
or special meeting. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 9.2 Dividend Reserve. Before payment of any dividend, there may be
----------------
set aside out of any funds of the corporation available for dividends such sum
or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X.
FISCAL YEAR
-----------
The fiscal year of the corporation shall end as of December 31st, unless
otherwise fixed by resolution of the Board of Directors.
ARTICLE XI.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER
-----------------------------------------------------------
AGENTS
------
Section 11.1 Directors and Executive Officers. The corporation shall
--------------------------------
indemnify its Directors and executive officers to the fullest extent not
prohibited by the Delaware General Corporation Law; provided, however, that the
-------- -------
corporation may limit the extent of such indemnification by individual contracts
with its Directors and executive officers; and, provided, further, that the
-------- -------
corporation shall not be required to indemnify any Director or executive officer
in connection with any proceeding (or part thereof) initiated by such person or
any proceeding by such person against the corporation or its Directors,
officers, employees or other agents unless (i) such indemnification is expressly
required to be made by law, (ii) the proceeding was authorized by the Board of
Directors of the corporation, or (iii) such indemnification is provided by the
corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law.
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Section 11.2 Other Officers, Employees and Other Agents. The corporation
------------------------------------------
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
Section 11.3 Good Faith.
----------
(a) For purposes of any determination under this Article XI, a
Director or executive officer shall be deemed to have acted in good faith and in
a manner such officer reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that such officer's
conduct was unlawful, if such officer's action is based on information,
opinions, reports and statements, including financial statements and other
financial data, in each case prepared or presented by:
(i) one or more officers or employees of the corporation whom the
Director or executive officer believed to be reliable and
competent in the matters presented;
(ii) counsel, independent accountants or other persons as to matters
which the Director or executive officer believed to be within
such person's professional competence; and
(iii) with respect to a Director, a committee of the Board upon which
such Director does not serve, as to matters within such
committee's designated authority, which committee the Director
believes to merit confidence; so long as, in each case, the
Director or executive officer acts without knowledge that would
cause such reliance to be unwarranted.
(b) The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding, that
such person had reasonable cause to believe that his conduct was unlawful.
(c) The provisions of this Section 11.3 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the Delaware
General Corporation Law.
Section 11.4 Expenses. The corporation shall advance, prior to the final
--------
disposition of any proceeding, promptly following request therefor, all expenses
incurred by any Director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Article XI or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
Section 11.5 of this Article XI, no advance shall be made by the corporation if
a determination is reasonably and
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promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation.
Section 11.5 Enforcement. Without the necessity of entering into an express
-----------
contract, all rights to indemnification and advances to Directors and executive
officers under this Article XI shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the Director or executive officer. Any right to indemnification
or advances granted by this Article XI to a Director or executive officer shall
be enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, also shall be entitled to be paid the expense
of prosecuting his claim. The corporation shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under the Delaware General Corporation Law for
the corporation to indemnify the claimant for the amount claimed. Neither the
failure of the corporation (including its Board of Directors, independent legal
counsel or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because such person has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual determination
by the corporation (including its Board of Directors, independent legal counsel
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
Section 11.6 Non-Exclusivity of Rights. The rights conferred on any person
-------------------------
by this Article XI shall not be exclusive of any other right which such person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
Directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its Directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law.
Section 11.7 Survival of Rights. The rights conferred on any person by this
------------------
Article XI shall continue as to a person who has ceased to be a Director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 11.8 Insurance. To the fullest extent permitted by the Delaware
---------
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Article XI.
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Section 11.9 Amendments. Any repeal or modification of this Article XI
----------
shall only be prospective and shall not affect the rights under this Article XI
in effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
Section 11.10 Savings Clause. If this Article XI or any portion hereof
--------------
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each Director and executive officer
to the full extent not prohibited by any applicable portion of this Article XI
that shall not have been invalidated, or by any other applicable law.
Section 11.11 Certain Definitions. For the purposes of this Article XI, the
-------------------
following definitions shall apply:
(a) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(b) The term "expenses" shall be broadly construed and shall include,
without limitation, court costs, attorneys' fees, witness fees, fines, amounts
paid in settlement or judgment and any other costs and expenses of any nature or
kind incurred in connection with any proceeding.
(c) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article XI with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(d) References to a "director," "officer," "employee," or "agent" of
the corporation shall include without limitation, situations where such person
is serving at the request of the corporation as a director, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(e) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan; and references to "serving at the
request of the corporation" shall include any service as a director, officer,
employee or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee, or agent with respect to an
employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an
21
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employee benefit plan shall be deemed to have acted in a manner "not opposed to
the best interests of the corporation" as referred to in this Article XI.
ARTICLE XII.
NOTICES
-------
Section 12.1 Notice to Stockholders. Unless the Certificate of
----------------------
Incorporation requires otherwise, whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to such stockholder's last known post office address as shown by
the stock record of the corporation or its transfer agent.
Section 12.2 Notice to Directors. Any notice required to be given to any
-------------------
Director may be given by the method stated in Section 12.1, or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such Director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such Director. It shall not be necessary that the same
method of giving notice be employed in respect of all Directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
Section 12.3 Address Unknown. If no address of a stockholder or Director be
---------------
known, notice may be sent to the principal executive officer of
the corporation.
Section 12.4 Affidavit of Mailing. An affidavit of mailing, executed by a
--------------------
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
Director or Directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall be conclusive evidence of the
statements therein contained.
Section 12.5 Time Notices Deemed Given. All notices given by mail, as above
-------------------------
provided, shall be deemed to have been given as at the time of mailing, and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at the time of transmission.
Section 12.6 Failure to Receive Notice. The period or limitation of time
-------------------------
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any Director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
such person in the manner above provided, shall not be affected or extended in
any manner by the failure of such stockholder or such Director to receive such
notice.
Section 12.7 Notice to Person with Whom Communication Is Unlawful. Whenever
----------------------------------------------------
notice is required to be given, under any provision of law or of the Certificate
of
22
<PAGE>
Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action or
meeting which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the corporation is
such as to require the filing of a certificate under any provision of the
Delaware General Corporation Law, the certificate shall state, if such is the
fact and if notice is required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is unlawful.
Section 12.8 Notice to Person with Undeliverable Address. Whenever notice
-------------------------------------------
is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings to such
person during the period between such two consecutive annual meetings, or (ii)
all, and at least two, payments (if sent by first class mail) of dividends or
interest on securities during a twelve-month period, have been mailed addressed
to such person at such person's address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall be taken or
held without notice to such person shall have the same force and effect as if
such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth such person's then current address,
the requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.
ARTICLE XIII.
AMENDMENTS
----------
Section 13.1 Amendments. Except as otherwise provided in the Certificate of
----------
Incorporation, these Bylaws may be altered, amended or repealed, or new Bylaws
may be adopted, by the holders of a majority of the outstanding voting shares or
by the Board of Directors, when such power is conferred upon the Board of
Directors by the Certificate of Incorporation, at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon
the Board of Directors by the Certificate of Incorporation, it shall not divest
or limit the power of the stockholders to adopt, amend or repeal Bylaws.
Section 13.2 Application of Bylaws. In the event that any provisions of
---------------------
these Bylaws is or may be in conflict with any law of the United States, of the
state of incorporation of the corporation or of any other governmental body or
power having jurisdiction over this corporation, or over the subject matter to
which such provision of these Bylaws applies, or may apply, such provision of
these Bylaws shall be inoperative to the extent only that the operation
23
<PAGE>
thereof unavoidably conflicts with such law, and shall in all other respects be
in full force and effect.
ARTICLE XIV.
LOANS TO OFFICERS
-----------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiaries, including any officer or employee who is a Director of the
corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this Bylaw shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the corporation at common law
or under statute.
24
<PAGE>
EXHIBIT 10.1
INDEMNITY AGREEMENT
This Indemnity Agreement (this "Agreement") is made and entered
---------
into this _____ day of January 2000, between Applied Science Fiction, Inc., a
Delaware corporation (the "Company"), and ________________________
-------
("Indemnitee").
----------
INTRODUCTION:
A. Indemnitee, as a member of the Company's Board of Directors
and/or an officer of the Company, performs valuable services for the Company.
B. The Company and Indemnitee recognize the continued difficulty
in obtaining liability insurance for corporate directors, officers, employees,
controlling persons, agents and fiduciaries, the significant increases in the
cost of such insurance and the general reductions in the coverage of such
insurance.
C. The Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, controlling persons, agents and fiduciaries to expensive litigation
risks at the same time as the availability and coverage of liability insurance
has been severely limited.
D. The stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors, agents
and employees of the Company to the maximum extent authorized by Section 145 of
the Delaware General Corporation Law, as amended ("DGCL").
----
E. Indemnitee does not regard the current protection available
for the Company's directors, officers, employees, controlling persons, agents
and fiduciaries as adequate under the present circumstances, and Indemnitee and
other directors, officers, employees, controlling persons, agents and
fiduciaries of the Company may not be willing to serve or continue to serve in
such capacities without additional protection.
F. The Bylaws and the DGCL, by their non-exclusive nature,
permit contracts between the Company and its directors, officers, employees,
controlling persons, agents or fiduciaries with respect to indemnification of
such directors.
G. The Company (a) desires to attract and retain the involvement
of highly qualified individuals, such as Indemnitee, to serve the Company and,
in part, in order to induce Indemnitee to be involved with the Company and (b)
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
H. In view of the considerations set forth above, the Company
desires that Indemnitee be indemnified by the Company as set forth herein.
AGREEMENT:
<PAGE>
Now, Therefore, in consideration of Indemnitee's service to the
Company, the parties hereto agree as follows:
1. Indemnity of Indemnitee. The Company hereby agrees to
-----------------------
indemnify Indemnitee to the fullest extent permitted by law, even if such
indemnification is not specifically authorized by the other provisions of this
Agreement, the Company's Certificate of Incorporation (the "Certificate"), the
-----------
Company's Bylaws or by statute. In the event of any change after the date of
this Agreement in any applicable law, statute or rule which expands the right of
a Delaware corporation to indemnify a member of its Board of Directors or an
officer, employee, controlling person, agent or fiduciary, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits afforded by such change. In the event of any change in any applicable
law, statute or rule which narrows the right of a Delaware corporation to
indemnify a member of its Board of Directors or an officer, employee, agent or
fiduciary, such change, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement, shall have no effect on this
Agreement or the parties' rights and obligations hereunder except as set forth
in Section 9(a) hereof.
2. Additional Indemnity. The Company hereby agrees to hold
--------------------
harmless and indemnify the Indemnitee:
against any and all expenses incurred by Indemnitee, as set
forth in Section 3(a) below; and
otherwise to the fullest extent not prohibited by the
Certificate, the Bylaws or the DGCL.
3. Indemnification Rights.
----------------------
Indemnification of Expenses. The Company shall indemnify and
---------------------------
hold harmless Indemnitee, together with Indemnitee's partners, affiliates,
employees, agents and spouse and each person who controls any of them or who may
be liable within the meaning of Section 15 of the Securities Act of 1933, as
amended (the "Securities Act"), or Section 20 of the Securities Exchange Act of
--------------
1934, as amended (the "Exchange Act"), to the fullest extent permitted by law if
------------
Indemnitee was or is or becomes a party to or witness or other participant in,
or is threatened to be made a party to or witness or other participant in, any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
and the Company believe might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") against (i) any
-----
and all expenses (including attorneys' fees) and all other costs, expenses and
obligations incurred in connection with investigating, defending, being a
witness in or participating in (including on appeal), or preparing to defend, be
a witness in or participate in, a Claim, (ii) judgments, fines, penalties and
amounts paid in settlement (if such settlement is approved in advance by the
Company, which approval shall not be unreasonably withheld) of a Claim and (iii)
any federal, state, local or foreign taxes imposed on Indemnitee as a result of
the actual or deemed receipt of any payments under this
2
<PAGE>
Agreement (collectively, hereinafter "Expenses"), including all interest,
--------
assessments and other charges paid or payable in connection with or in respect
of such Expenses, incurred by Indemnitee by reason of (or arising in part out
of) any event or occurrence related to the fact that Indemnitee is or was a
director, officer, employee, controlling person, agent or fiduciary of the
Company or any subsidiary of the Company, or is or was serving at the request of
the Company as a director, officer, employee, controlling person, agent or
fiduciary of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action or inaction on the part of Indemnitee
while serving in such capacity including, without limitation, any and all
losses, claims, damages, expenses and liabilities, joint or several (including
any investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit, proceeding or any claim
asserted) under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise, which relate directly
or indirectly to the registration, purchase, sale or ownership of any securities
of the Company or to any fiduciary obligation owed with respect thereto
(hereinafter an "Indemnification Event"). The Company shall make such payment of
---------------------
Expenses as soon as practicable but in any event no later than 25 days after
written demand by Indemnitee therefor is presented to the Company.
Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligations of the Company under Section 2 shall be subject to the condition
that the Reviewing Party (as described in Section 11(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel as defined in Section 11(d) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law and (ii) and Indemnitee
acknowledges and agrees that the obligation of the Company to make an advance
payment of Expenses to Indemnitee pursuant to Section 4(a) (an "Expense
-------
Advance") shall be subject to the condition that, if, when and to the extent
- -------
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced or thereafter commences legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, any determination made by the Reviewing Party that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any Expense Advance until a final judicial determination is made with respect
thereto (as to which all rights of appeal therefrom have been exhausted or
lapsed). Indemnitee's obligation to reimburse the Company for any Expense
Advance shall be unsecured and no interest shall be charged thereon. If there
has not been a Change in Control (as defined in Section 11(c) hereof), the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section 3(e) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall
3
<PAGE>
have the right to commence litigation seeking an initial determination by the
court or challenging any such determination by the Reviewing Party or any aspect
thereof, including the legal or factual bases therefor, and the Company hereby
consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
Contribution. If the indemnification provided for in Section
------------
3(a) above for any reason is held by a court of competent jurisdiction to be
unavailable to an Indemnitee in respect of any losses, claims, damages, expenses
or liabilities referred to therein, then the Company, in lieu of indemnifying
Indemnitee thereunder, shall contribute to the amount paid or payable by
Indemnitee as a result of such losses, claims, damages, expenses or liabilities
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and Indemnitee or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and Indemnitee in connection
with the action or inaction which resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable considerations.
In connection with the registration of the Company's securities, the relative
benefits received by the Company and Indemnitee shall be deemed to be in the
same respective proportions that the net proceeds from the offering (before
deducting expenses) received by the Company and the Indemnitee, in each case as
set forth in the table on the cover page of the applicable prospectus, bear to
the aggregate public offering price of the securities so offered. The relative
fault of the Company and Indemnitee shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or Indemnitee and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and Indemnitee agree that it would not be just and
equitable if contribution pursuant to this Section 3(c) were determined by pro
rata or per capita allocation or by any other method of allocation which does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. In connection with the registration of the Company's
securities, in no event shall an Indemnitee be required to contribute any amount
under this Section 3(c) in excess of the lesser of (i) that proportion of the
total of such losses, claims, damages or liabilities indemnified against equal
to the proportion of the total securities sold under such registration statement
which is being sold by Indemnitee or (ii) the proceeds received by Indemnitee
from its sale of securities under such registration statement. No person found
guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of
the Securities Act) shall be entitled to contribution from any person who was
not found guilty of such fraudulent misrepresentation.
Survival Regardless of Investigation. The indemnification and
------------------------------------
contribution provided for herein will remain in full force and effect regardless
of any investigation made by or on behalf of Indemnitee or any officer,
director, employee, agent or controlling person of Indemnitee.
4
<PAGE>
Change in Control. After the date hereof, the Company agrees
-----------------
that if there is a Change in Control of the Company (other than a Change in
Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control) then,
with respect to all matters thereafter arising concerning the rights of
Indemnitee to payments of Expenses under this Agreement or any other agreement
or under the Company's Certificate or Bylaws as now or hereafter in effect,
Independent Legal Counsel (as defined in Section 11(d) hereof) shall be selected
by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law. The
Company agrees to abide by such opinion and to pay the reasonable fees of the
Independent Legal Counsel referred to above and to fully indemnify such counsel
against any and all reasonable expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this Agreement or its
engagement pursuant hereto.
Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement, to the extent that Indemnitee has been successful
on the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in the defense of any action, suit, proceeding,
inquiry or investigation referred to in Section 3(a) hereof or in the defense of
any claim, issue or matter therein, Indemnitee shall be indemnified against all
Expenses incurred by Indemnitee in connection herewith.
4. Expenses; Indemnification Procedure.
-----------------------------------
Advancement of Expenses. The Company shall advance all Expenses
-----------------------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than ten
(10) business days after written demand by Indemnitee therefor to the Company.
Notice/Cooperation by Indemnitee. Indemnitee shall give the
--------------------------------
Company notice in writing in accordance with Section 15 of this Agreement as
soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement.
No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular
5
<PAGE>
standard of conduct or did not have any particular belief. In connection with
any determination by the Reviewing Party or otherwise as to whether Indemnitee
is entitled to be indemnified hereunder, the burden of proof shall be on the
Company to establish that Indemnitee is not so entitled.
Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in each of the Company's policies. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.
(a) Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to pay the Expenses of any Claim, the Company shall be
entitled to assume the defense of such Claim, with counsel approved by the
Indemnitee (which approval shall not be unreasonably withheld) upon the delivery
to Indemnitee of written notice of its election to do so. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same Claim; provided that (i) Indemnitee shall have the right to
employ Indemnitee's counsel in any such Claim at Indemnitee's expense and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there is a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not continue to retain such counsel to
defend such Claim, then the fees and expenses of Indemnitee's counsel shall be
at the expense of the Company.
5. Nonexclusivity. The indemnification provided by this
--------------
Agreement shall be in addition to any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested directors, the DGCL, or otherwise. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action Indemnitee took or did not take while serving in an indemnified
capacity even though Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable
--------------------------
under this Agreement to make any payment in connection with any Claim made
against any Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, Certificate of Incorporation, Bylaw or
otherwise) of the amounts otherwise indemnifiable hereunder.
7. Partial Indemnification. If any Indemnitee is entitled under
-----------------------
any provision of this Agreement to indemnification by the Company for any
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6
<PAGE>
8. Mutual Acknowledgement. The Company and Indemnitee
----------------------
acknowledge that in certain instances, Federal law or applicable public policy
may prohibit the Company from indemnifying its directors, officers, employees,
controlling persons, agents or fiduciaries under this Agreement or otherwise.
Each Indemnitee understands and acknowledges that the Company has undertaken or
may be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's rights under public policy to
indemnify Indemnitee.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to any Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings to establish or enforce a right to indemnify under this Agreement or
any other agreement or insurance policy or under the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Indemnifiable Events, (ii) in specific cases if the Board of Directors has
approved the initiation or bringing of such Claim or (iii) as otherwise required
under Section 145 of the DGCL, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advance expense payment or
insurance recovery, as the case may be;
Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Exchange Act or any similar
successor statute; or
Claims Excluded Under Section 145 of the Delaware General
---------------------------------------------------------
Corporation Law. To indemnify Indemnitee if (i) Indemnitee did not act in good
- ---------------
faith or in a manner reasonably believed by such Indemnitee to be in or not
opposed to the best interests of the Company, (ii) with respect to any criminal
action or proceeding, Indemnitee had reasonable cause to believe Indemnitee's
conduct was unlawful or (iii) Indemnitee shall have been adjudged to be liable
to the Company unless and only to the extent the court in which such action was
brought shall permit indemnification as provided in Section 145(b) of the DGCL.
10. Period of Limitations. No legal action shall be brought and
---------------------
no cause of action shall be asserted by or in the right of the Company against
any Indemnitee, any Indemnitee's estate, spouse, heirs, executors or personal or
legal representatives after the expiration of five years from the date of
accrual of such cause of action, and any claim or cause of action of the Company
shall be extinguished and deemed released unless asserted by the timely filing
of a legal action within such five-year period; provided, however, that if any
shorter period of limitations is otherwise applicable to any such cause of
action, such shorter period shall govern.
7
<PAGE>
11. Construction of Certain Phrases.
-------------------------------
For purposes of this Agreement, references to the "Company"
-------
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
agents or fiduciaries, so that if Indemnitee is or was a director, officer,
employee, agent, control person or fiduciary of such constituent corporation, or
is or was serving at the request of such constituent corporation as a director,
officer, employee, control person, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on any Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee, agent or fiduciary of the
Company which imposes duties on, or involves services by, such director,
officer, employee, agent or fiduciary with respect to an employee benefit plan,
its participants or its beneficiaries; and if any Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in the interests of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
For purposes of this Agreement a "Change in Control" shall be
-----------------
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
(A) who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases his or her
beneficial ownership of such securities by 5% or more over the percentage so
owned by such person or (B) becomes the "beneficial owner" (as defined in Rule
----------------
13d-3 under said Exchange Act), directly or indirectly, of securities of the
Company representing more than 20% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation other than a
merger or
8
<PAGE>
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
transactions) all or substantially all of the Company's assets.
For purposes of this Agreement, "Independent Legal Counsel"
-------------------------
shall mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 3(d) hereof, who shall not have otherwise performed
services for the Company or any Indemnitee within the last three years (other
than with respect to matters concerning the right of any Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).
For purposes of this Agreement, a "Reviewing Party" shall mean
---------------
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee are
seeking indemnification, or Independent Legal Counsel.
For purposes of this Agreement, "Voting Securities" shall mean
-----------------
any securities of the Company that vote generally in the election of directors.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
13. Binding Effect; Successors and Assigns. This Agreement shall
--------------------------------------
be binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect with respect to Claims relating to Indemnifiable Events
regardless of whether any Indemnitee continues to serve as a director, officer,
employee, agent, controlling person or fiduciary of the Company or of any other
enterprise, including subsidiaries of the Company, at the Company's request.
14. Attorneys' Fees. In the event that any action is instituted
---------------
by an Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, any Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action if Indemnitee
9
<PAGE>
is ultimately successful in such action, and shall be entitled to the
advancement of Expenses with respect to such action, unless, as a part of such
action, a court of competent jurisdiction over such action determines that the
material assertions made by Indemnitee as a basis for such action were not made
in good faith or were frivolous. In the event of an action instituted by or in
the name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses
incurred by Indemnitee in defense of such action (including costs and expenses
incurred with respect to Indemnitee counterclaims and cross-claims made in such
action), and shall be entitled to the advancement of Expenses with respect to
such action, unless, as a part of such action, a court having jurisdiction over
such action determines that the Indemnitee's material defenses to such action
were made in bad faith or were frivolous.
15. Notice. All notices and other communications required or
------
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given (a) five (5) calendar days after
deposit with the U.S. Postal Service or other applicable postal service, if
delivered by first class mail, postage prepaid, (b) upon delivery, if delivered
by hand, (c) one (1) business day after the business day of deposit with Federal
Express or similar overnight courier, freight prepaid, or (d) one day after the
business day of delivery by facsimile transmission, if deliverable by facsimile
transmission, with copy by first class mail, postage prepaid, and shall be
addressed if to Indemnitee, at Indemnitee's address as set forth beneath
Indemnitee's signature to this Agreement and if to the Company at the address of
its principal corporate offices (attention: Chief Executive Officer) or at such
other address as such party may designate by ten calendar days' advance written
notice to the other party hereto.
16. Consent to Jurisdiction. The Company and Indemnitee each
-----------------------
hereby irrevocably consent to the jurisdiction of the courts of the State of
Texas for all purposes in connection with any action or proceeding which arises
out of or relates to this Agreement and agree that any action instituted under
this Agreement shall be commenced, prosecuted and continued only in the state or
federal courts of the State of Texas, which shall be the exclusive and only
proper forum for adjudicating such a claim.
17. Severability. The provisions of this Agreement shall be
------------
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable, and the
remaining provisions shall remain enforceable to the fullest extent permitted by
law. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitations, each portion of this Agreement
containing any provision held to be invalid, void or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
18. Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the laws of the State of
Texas, as applied to contracts between Texas residents, entered into and to be
performed entirely within the State of Texas, without regard to the conflict of
laws principles thereof.
10
<PAGE>
19. Subrogation. In the event of payment under this Agreement,
-----------
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable the
Company effectively to bring suit to enforce such rights.
20. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless it is in
writing signed by all parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
21. Integration and Entire Agreement. This Agreement sets forth
--------------------------------
the entire understanding between the parties hereto and supersedes and merges
all previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
22. No Construction as Employment Agreement. Nothing contained
---------------------------------------
in this Agreement shall be construed as giving the Indemnitee any right to be
retained in the employ of the Company or any of its subsidiaries.
23. Corporate Authority. The Board of Directors of the Company
-------------------
has approved the terms of this Agreement.
[Signature Page Follows]
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
COMPANY:
-------
APPLIED SCIENCE FICTION, INC.
---------------------------------
Mark R. Urdahl
President
INDEMNITEE:
----------
---------------------------------
Printed Name:
Address:
--------------------------
--------------------------
--------------------------
<PAGE>
EXHIBIT 10.4
APPLIED SCIENCE FICTION, INC.
-----------------------------
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the "Agreement") is
made as of the 29th day of March, 1999, by and among Applied Science Fiction,
Inc., a Delaware corporation (the "Company"), the holders of the Company's
Series C Preferred Stock and Series D Preferred Stock listed on Exhibit A hereto
---------
(each an "Investor") and the stockholders of the Company identified on Exhibit B
---------
hereto (each a "Key Employee Stockholder").
R E C I T A L S:
---------------
WHEREAS, certain of the Investors hold shares of the Company's Series C
Preferred Stock (the "Series C Preferred Stock"), and possess registration
rights, information rights and other rights pursuant to an Investors' Rights
Agreement dated as of July 29, 1997, among the Company, such Investors and the
Key Employee Stockholders (the "Original Agreement");
WHEREAS, the Company, Investors holding in excess of sixty percent (60%) of
the outstanding shares of Series C Preferred Stock and the undersigned Key
Employee Stockholders who hold in excess of a majority of the Key Employee
Shares (as hereinafter defined) desire to amend and restate the Original
Agreement pursuant to Section 3.3 thereof and to accept the rights created
pursuant hereto in lieu of the rights granted to them under the Original
Agreement;
WHEREAS, the Company and certain of the Investors have entered into the
Series D Purchase Agreement (as defined below) of even date herewith pursuant to
which the Company has agreed to sell, and such Investors have agreed to
purchase, shares of the Series D Preferred Stock of the Company (the "Series D
Preferred Stock");
WHEREAS, the respective obligations of the parties to consummate the
transactions contemplated by the Series D Purchase Agreement are conditioned
upon the execution and delivery of this Agreement; and
WHEREAS, in order to induce the Company to enter into the Series D Purchase
Agreement and to induce those Investors that have entered into the Series D
Purchase Agreement to invest funds in the Company pursuant to their purchase of
Series D Preferred Stock, each of the Investors, the Key Employee Stockholders
and the Company hereby agree that this Agreement shall govern the rights of the
Investors to cause the Company to register shares of Common Stock issuable to
the Investors and certain other matters as set forth herein.
NOW THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the Investors who are parties to the Original Agreement hereby
amend and restate the Original Agreement in its entirety and the parties hereto
agree as follows:
<PAGE>
SECTION 1
---------
Restrictions on Transferability of Securities; Registration Rights
------------------------------------------------------------------
1.1 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the meanings set forth below:
(a) "Closing" shall mean the date of the initial sale of shares of the
Series D Preferred Stock under the Series D Purchase Agreement.
(b) "Commission" shall mean the United States Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(c) "Common Stock" shall mean the Company's Common Stock, par value $0.001
per share.
(d) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(e) "Holder" shall mean any Investor who holds Registrable Securities and
any holder of Registrable Securities to whom the registration rights conferred
by this Agreement have been transferred in compliance with Section 1.11 hereof.
(f) "Initiating Holders" shall mean any Holder or Holders who, in the
aggregate, hold not less than twenty five percent (25%) of the outstanding
Registrable Securities.
(g) "Investors" shall mean persons who purchased Shares pursuant to the
Series C Purchase Agreement or the Series D Purchase Agreement, and their
respective affiliates, constituent members and partners.
(h) "Investor Warrants" shall mean those warrants to purchase up to
1,224,879 shares of Common Stock issued to certain of the Investors pursuant to
the Series C Purchase Agreement.
(i) "Key Employee Shares" shall mean (i) 8,796,000 shares of Common Stock
or options to acquire Common Stock (as presently constituted and subject to
adjustment for subsequent stock splits, reverse splits and the like) held by the
Key Employee Stockholders on the date hereof, (ii) shares of Common Stock issued
or issuable pursuant to the conversion of 19,143 shares of Series B Preferred
Stock, including shares of Series B Preferred Stock issuable upon the exercise
of warrants to purchase Series B Preferred Stock, held by the Key Employee
Stockholders on the date hereof and (iii) any Common Stock issued as a dividend
or other distribution with respect to or in exchange for or in replacement of
the shares referenced in (i) or (ii) above, provided, however, that Key Employee
-------- -------
Shares shall not include any securities which have previously been registered or
which have been sold to the public pursuant to a registration statement or Rule
144 or which have otherwise been sold or transferred by the Key Employee
Stockholders.
2
<PAGE>
(j) "Other Stockholders" shall mean persons other than Holders and Key
Employee Stockholders who, by virtue of agreements with the Company, are
entitled to include their securities in certain registrations hereunder.
(k) "Preferred Stock" shall mean the Series B Preferred Stock, the Series C
Preferred Stock and the Series D Preferred Stock.
(l) "Qualified IPO" shall mean the first underwritten public offering of
equity securities by the Company registered under the Securities Act.
(m) The terms "register," "registered" and registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
(n) "Registrable Securities" shall mean (1) shares of Common Stock issued
or issuable pursuant to the conversion of the Shares and Investor Warrants and
(2) any Common Stock issued as (or issuable upon the conversion or exercise of
any warrant, right or other security that is issued as) a dividend or other
distribution with respect to or in exchange for or in replacement of the shares
referenced in (1) above; provided, however, that Registrable Securities shall
-------- -------
not include any shares of Common Stock which have previously been registered or
which have been sold to the public either pursuant to a registration statement
or Rule 144 or which have been sold or transferred in a private transaction in
which the transferees rights under this Agreement are not assigned.
(o) "Registration Expenses" shall mean all expenses incurred by the Company
in effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, fees and disbursements of a single counsel for the Holders and/or
Key Employee Stockholders and expenses of any regular or special audits incident
to or required by any such registration, but shall not include Selling Expenses
(but excluding the compensation of regular employees of the Company, which shall
be paid in any event by the Company).
(p) "Rule 144" shall mean Rule 144 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(q) "Rule 145" shall mean Rule 145 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(r) "Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar successor federal statute and the rules and regulations thereunder,
all as the same shall be in effect from time to time.
(s) "Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities.
3
<PAGE>
(t) "Series B Preferred Stock" shall mean the Company's Series B Preferred
Stock, par value $.001 per share.
(u) "Series B Warrants" shall mean those certain warrants to purchase up to
8,556 shares of Series B Preferred Stock which the Company has issued to holders
of Series B Preferred Stock.
(v) "Series C Purchase Agreement" shall mean the Stock Purchase Agreement
dated as of July 29, 1997, between the Company and the purchasers of the Series
C Preferred Stock named therein.
(w) "Series D Purchase Agreement" shall mean the Stock Purchase Agreement
dated as of March 29, 1999, between the Company and the purchasers of the Series
D Preferred Stock named therein.
(x) "Shares" shall mean the Company's Series C Preferred Stock, par value
$.001 per share, and Series D Preferred Stock, par value $.001 per share.
1.2 Requested Registration.
----------------------
(a) Request for Registration. If the Company shall receive from the
------------------------
Initiating Holders at any time not earlier than one hundred eighty (180) days
after the closing of the Company's Qualified IPO, a written request that the
Company effect a registration with respect to at least twenty five percent (25%)
of the Registrable Securities (or a lesser percentage if the aggregate public
offering price of the Registrable Securities subject to such request will exceed
$7,500,000), then the Company will:
(i) promptly give written notice of the proposed registration to all
other Holders; and
(ii) promptly use its best efforts to effect such registration
(including, without limitation, filing post-effective amendments,
appropriate qualifications under applicable blue sky or other state
securities laws and appropriate compliance with the Securities Act) and to
take all such actions as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the
Registrable Securities of any Holder or Holders joining in such request as
are specified in a written request received by the Company within twenty
(20) days after such written notice from the Company is mailed or
delivered.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 1.2:
(A) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting
such registration, qualification, or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be
required by the Securities Act;
4
<PAGE>
(B) After the Company has initiated one such registration pursuant
to this Section 1.2(a) (counting for these purposes only registrations
which have been declared or ordered effective and pursuant to which
securities have been sold and registrations which have been withdrawn by
the Holders as to which the Holders have not elected to bear the
Registration Expenses pursuant to Section 1.4 hereof and would, absent such
election, have been required to bear such expenses); provided, that if in
--------
the registration effected pursuant to this Section 1.2(a), less than sixty-
seven percent (67%) of all Registrable Securities outstanding at the time
of the delivery of the Company's notice under Section 1.2(a)(i) were sold
in such registration and at least one hundred eighty (180) days have
elapsed since the effective date of such first registration, then such
first registration shall not be counted against the single registration
which the Initiating Holders may request under this Section 1.2(a);
provided, further, that if at the time the Holders elect to withdraw a
-------- -------
request for registration, the Holders have learned of a material adverse
change in the condition, business or prospects of the Company from that
known to the Holders at the time of their request for registration and have
withdrawn the request with reasonable promptness following disclosure by
the Company of such material adverse change, then the Holders shall retain
their rights to request registration and shall not be required to pay the
costs of the withdrawn registration.
(C) During the period beginning sixty (60) days prior to the date
of the filing of a registration statement by the Company pursuant to a
Company-initiated registration and ending one hundred eighty (180) days
after the effective date of such registration statement; provided, that the
--------
Company is actively employing in good faith all reasonable efforts to cause
such registration statement to become effective; or
(D) If the Initiating Holders propose to dispose of shares of
Registrable Securities which may be immediately registered on Form S-3
pursuant to a request made under Section 1.5 hereof.
(b) Filing of Registration Statement. Subject to the foregoing clauses (A)
--------------------------------
through (D), the Company shall file a registration statement covering the
Registrable Securities so requested to be registered as soon as practicable
after receipt of the request or requests of the Initiating Holders;
provided, however, that if (i) in the good faith judgment of the Board of
- -------- -------
Directors of the Company, such registration would be seriously detrimental to
the Company and the Board of Directors of the Company concludes, as a result,
that it is necessary to defer the filing of such registration statement at such
time, and (ii) the Company shall furnish to such Holders a certificate signed by
the President 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 for such registration statement to be filed in the near future and that
it is, therefore, necessary to defer the filing of such registration statement,
then the Company shall have the right to defer such filing for the period during
which such disclosure would be seriously detrimental, provided that (except as
--------
provided in clause (C) above) the Company may not defer the filing for a period
of more than ninety (90) days after receipt of the request of the Initiating
Holders, and, provided further, that
-------- -------
5
<PAGE>
the Company shall not defer its obligation in this manner more than once in any
twelve (12) month period.
The registration statement filed pursuant to the request of the Initiating
Holders may, subject to the provisions of Sections 1.2(b) and 1.13 hereof,
include other securities of the Company, with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
(c) Underwriting. The right of any Holder to registration pursuant to
------------
Section 1.2 shall be conditioned upon such Holder's participation in any 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
Registrable Securities held by the Holders participating in such registration
and such Holder with respect to such participation and inclusion) to the extent
provided herein. A Holder may elect to include in such underwriting all or a
part of the Registrable Securities he holds.
(d) Procedures. If the Company shall request inclusion in any registration
----------
pursuant to Section 1.2 of securities being sold for its own account, or if
other persons shall request inclusion in any registration pursuant to Section
1.2, the Initiating Holders shall on behalf of all Holders, offer to include
such securities in the underwriting and may condition such offer on their
acceptance of the further applicable provisions of this Section 1 (including
Section 1.12). The Company shall (together with all Holders and other persons
proposing to distribute their securities through such underwriting) enter into
an underwriting agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders, which underwriters are reasonably acceptable
to the Company. Notwithstanding any other provision of this Section 1.2, if the
representative of the underwriters advises the Initiating Holders in writing
that marketing factors require a limitation on the number of shares to be
underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 1.13 hereof. If a person
who has requested inclusion in such registration as provided above does not
agree to the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company, the underwriter or the Initiating
Holders. The securities so excluded shall also be withdrawn from registration.
Any Registrable Securities or other securities excluded shall also be withdrawn
from such registration. If shares are so withdrawn from the registration and if
the number of shares to be included in such registration was previously reduced
as a result of marketing factors pursuant to this Section 1.2(d), then the
Company shall offer to all Holders who have retained rights to include
securities in the registration the right to include additional securities in the
registration in an aggregate amount equal to the number of shares so withdrawn,
with such shares to be allocated among such Holders requesting additional
inclusions in accordance with Section 1.13.
1.3 Company Registration.
--------------------
(a) Piggy-back Rights. If the Company shall determine to register any of
-----------------
its securities either for its own account or the account of a security holder or
holders exercising their respective registration rights (other than pursuant to
Section 1.2 or 1.5 hereof), other than a registration relating solely to
employee benefit plans, or a registration relating solely to a Rule
6
<PAGE>
145 transaction, or a registration on any registration form that does not permit
secondary sales, the Company will:
(i) promptly give to each Holder and Key Employee Stockholder written
notice thereof; and
(ii) use its best efforts to include in such registration (and any
related qualification under blue sky laws or other compliance), except as
set forth in Section 1.3(b) below, and in any underwriting involved
therein, all the Registrable Securities or Key Employee Shares, as the case
may be, specified in a written request or requests made by any Holder or
Key Employee Stockholders, respectively, and received by the Company within
ten (10) business days after the written notice from the Company described
in clause (i) above is mailed or delivered by the Company. Such written
request may specify all or a part of a Holder's Registrable Securities or
all or any part of a Key Employee Stockholder's Key Employee Shares, as the
case may be.
(b) Underwriting. If the registration of which the Company gives notice is
------------
for a registered public offering involving an underwriting, the Company shall so
advise the Holders and Key Employee Stockholders as a part of the written notice
given pursuant to Section 1.3(a)(i). In such event, the right of any Holder and
of any Key Employee Stockholder to registration pursuant to this Section 1.3
shall be conditioned upon such persons participation in such underwriting and
the inclusion of such Holder's Registrable Securities or such Key Employee
Stockholder's Key Employee Shares (as applicable) in the underwriting to the
extent provided herein. All Holders and Key Employee Stockholders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders of securities of the Company with registration
rights to participate therein distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 1.3, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
representative may (subject to the limitations set forth below) exclude all
Registrable Securities and Key Employee Shares from, or limit the number of
Registrable Securities and Key Employee Shares to be included in, the
registration and underwriting. If the registration is the Qualified IPO, the
Company may limit, to the extent so advised by the underwriters, the amount of
securities (including Registrable Securities and Key Employee Shares) to be
included in the registration by the Company's stockholders (including the
Holders and Key Employee Stockholders), or may exclude, to the extent so advised
by the underwriters, such underwritten securities entirely from such
registration. If such registration is the second or any subsequent registered
offering of the Company's securities to the general public initiated by the
Company or at the request of any other holder, the Company may limit, to the
extent so advised by the underwriters, the amount of securities (including
Registrable Securities and Key Employee Shares) to be included in the
registration by the Company's stockholders (including the Holders and Key
Employee Stockholders); provided, however, that the Company shall permit the
-------- -------
Holders to include at least thirty percent (30%) of the total securities to be
offered in such registration. The Company shall so advise all holders of
securities requesting registration and, subject to the proviso in the
immediately preceding
7
<PAGE>
sentence, the number of shares of securities that are entitled to be included in
the registration and underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter as set forth in Section
1.13. If any person does not agree to the terms of any such underwriting, such
person shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities, Key Employee Shares or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
If shares are so withdrawn from the registration and if the number of
shares of Registrable Securities and Key Employee Shares to be included in such
registration was previously reduced as a result of marketing factors, the
Company shall then offer to all persons who have retained the right to include
securities in the registration the right to include additional securities in the
registration in an aggregate amount equal to the number of shares so withdrawn,
with such shares to be allocated among the persons requesting additional
inclusion in accordance with Section 1.13 hereof.
1.4 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Section 1.2 hereof, and the reasonable fees of one counsel for all of the
selling stockholders, shall be borne by the Company; provided, however, that if
-------- -------
the Holders bear the Registration Expenses for any registration proceeding begun
pursuant to Section 1.2 and subsequently withdrawn by the Holders registering
shares therein, such registration proceeding shall not be counted as a requested
registration pursuant to Section 1.2 hereof, except in the event that such
withdrawal is based upon material adverse information relating to the Company
that is different from the information known or available (upon request from the
Company or otherwise) to the Holders requesting registration at the time of
their request for registration under Section 1.2, in which event such
registration shall not be treated as a counted registration for purposes of
Section 1.2 hereof, even though the Holders do not bear the Registration
Expenses for such registration. All Registration Expenses incurred in connection
with any registration, qualification or compliance with respect to Registrable
Securities or Key Employee Shares pursuant to Sections 1.3 or 1.5 hereof, and
the reasonable fees of one counsel for all of the selling stockholders, shall be
paid by the Company. Selling Expenses relating to securities registered under
any section hereof shall be borne by the holders of such securities pro rata on
the basis of the number of shares of securities so registered on their behalf.
1.5 Registration on Form S-3.
------------------------
(a) After its initial public offering, the Company shall use its best
efforts to qualify for registration on Form S-3 or any comparable or successor
form or forms. After the Company has qualified for the use of Form S-3, in
addition to the rights contained in the foregoing provisions of this Section 1,
the Holders shall have the right to request up to an aggregate of four
registrations, but no more than two in any twelve (12) month period, each on
Form S-3 (such requests shall be in writing and shall state the number of shares
of Registrable Securities to be disposed of and the intended methods of
disposition of such shares by such Holder or Holders), provided, however, that
-------- -------
the Company shall not be obligated to effect any such registration (i) 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) on Form S-3 at an aggregate price
to the public of less than $1,000,000, (ii) in the event that
8
<PAGE>
the Company shall furnish the certification described in paragraph 1.2(b)(ii)
(but subject to the limitations set forth therein) or (iii) if it is to be
effected more than five (5) years after the Company's initial public offering.
(b) If a request complying with the requirements of section 1.5(a)
hereof is delivered to the Company, the provisions of Sections 1.2(a)(i) and
(ii) and Section 1.2(b) hereof shall apply to such registration. If the
registration is for an underwritten offering, the provisions of Sections 1.2(c)
and 1.2(d) hereof shall apply to such registration.
1.6 Registration Procedures. In the case of each registration effected by
-----------------------
the Company pursuant to Section 1, the Company will keep each Holder and, if
applicable, Key Employee Stockholder, advised in writing as to the initiation of
each registration and as to the completion thereof. At its expense, the Company
will use its best efforts to:
(a) Keep such registration effective for a period of one hundred
eighty (180) days or until the Holder or Holders (and, if applicable, Key
Employee Stockholder(s)) have completed the distribution described in the
registration statement relating thereto, whichever first occurs; provided,
--------
however, that (i) such one hundred eighty (180) day period shall be extended for
- -------
a period of time equal to the period the Holder or Key Employee Stockholder
refrain from selling any securities included in such registration at the request
of an underwriter of Common Stock (or other securities) of the Company; and (ii)
in the case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such one hundred eighty
(180) day period shall be extended, if necessary, to keep the registration
statement effective until all such Registrable Securities are sold, provided
that Rule 415, or any successor rule under the Securities Act, permits an
offering on a continuous or delayed basis, and provided further that applicable
rules under the Securities Act governing the obligation to file a post-effective
amendment permit, in lieu of filing a post-effective amendment that (A) includes
any prospectus required by section 10(a)(3) of the Securities Act or (B)
reflects facts or events representing a material or fundamental change in the
information set forth in the registration statement, the incorporation by
reference of information required to be included in (A) and (B) above to be
contained in periodic reports filed pursuant to section 13 or 15(d) of the
Exchange Act in the registration statement;
(b) Prepare and file with the Commission 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
Securities Act with respect to the disposition of all securities covered by such
registration statement and permit counsel for the Holders participating in such
registration to review all such amendments and supplements and such prospectus
prior to the filing thereof with the Commission;
(c) Furnish such number of prospectuses in conformity with the requirements
of the Securities Act and other documents incident thereto, including any
amendment of or supplement to the prospectus, as a Holder (and, if applicable,
Key Employee Stockholder) from time to time may reasonably request;
(d) Use its best efforts to register or qualify such Registrable Securities
under the securities or blue sky laws of such jurisdictions as any Holder
participating in such registration
9
<PAGE>
reasonably requests and do any and all other acts and things which may be
reasonably necessary or advisable to enable such Holder to consummate the
disposition in such jurisdictions of Registrable Securities owned by such
Holder; provided, that the Company will not be required to (i) qualify generally
--------
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this paragraph (d), (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction;
(e) Notify each seller of Registrable Securities or Key Employee Shares
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities 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 or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing (and, pending receipt
of such supplemental or amended prospectus or of a written notice from the
Company that the use of the applicable prospectus may be resumed, each seller
shall forthwith discontinue disposition of such Registrable Securities or Key
Employee Shares covered by such registration); provided, however, that the
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period set forth in (a) above shall be extended for a number of days equal to
the number of days that the Holder was unable to sell Registrable Securities
under the registration statement;
(f) Cause all such Registrable Securities (and, if applicable, Key Employee
Shares) registered pursuant hereunder to be listed on each securities exchange
on which similar securities issued by the Company are then listed;
(g) Provide a transfer agent and registrar for all Registrable Securities
(and, if applicable, Key Employee Shares) registered pursuant to such
registration statement and a CUSIP number for all such Registrable Securities
and Key Employee Shares, in each case not later than the effective date of such
registration; and
(h) In connection with any underwritten offering pursuant to a registration
statement filed pursuant to Section 1.2 and 1.5 hereof, the Company will enter
into an underwriting agreement reasonably necessary to effect the offer and sale
of Common Stock, provided such underwriting agreement contains customary
underwriting provisions and provided further that if the underwriter so requests
the underwriting agreement will contain customary contribution provisions.
1.7 Indemnification.
---------------
(a) The Company will indemnify and hold harmless each Holder and Key
Employee Stockholder, each of its officers, directors and partners, legal
counsel, and accountants and each person controlling such Holder or Key Employee
Stockholder within the meaning of Section 15 of the Securities Act, with respect
to which registration, qualification, or compliance has been
10
<PAGE>
effected pursuant to this Section 1, and each underwriter, if any, and each
person who controls within the meaning of Section 15 of the Securities Act any
underwriter, against all expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular, or other document (including any
related registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation or
alleged violation by the Company of the Securities Act, the Exchange Act, any
state securities laws or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities laws applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, qualification, or compliance, and will reimburse each such
Holder and Key Employee Stockholder, each of its officers, directors, partners,
legal counsel, and accountants and each person controlling such Holder or Key
Employee Stockholder, each such underwriter, and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating and defending or settling any such claim, loss,
damage, liability, or action, provided, that the Company will not be liable in
--------
any such case to the extent that any such claim, loss, damage, liability, or
expense arises out of or is based on any untrue statement or omission based upon
written information furnished to the Company by such Holder, Key Employee
Stockholder or underwriter and stated in writing to be specifically for use
therein. It is agreed that the indemnity agreement contained in this Section
1.7(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 has not been unreasonably withheld).
(b) Each Holder and Key Employee Stockholder will, if Registrable
Securities held by it or him are included in the securities as to which such
registration, qualification, or compliance is being effected, indemnify the
Company, each of its directors, officers, partners, legal counsel, and
accountants and each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, each other
such Holder, Key Employee Stockholder and Other Stockholder, and each of their
officers, directors, and partners, and each person controlling such Holder or
Other Stockholder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company and such Holders, Key Employee Stockholders, Other Stockholders,
directors, officers, partners, legal counsel, and accountants, persons,
underwriters, or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, in each case to the extent, but only to the extent
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular,
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder or Key Employee Stockholder and stated
to be specifically for use therein; provided, however, that the obligations of
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such Holder or Key Employee Stockholder hereunder shall not apply to amounts
paid in settlement of any such claims, losses, damages, or liabilities (or
actions
11
<PAGE>
in respect thereof) if such settlement is effected without consent of such
Holder or Key Employee Stockholder, as the case may be (which consent shall not
be unreasonably withheld). Notwithstanding the foregoing, in no event shall any
indemnity under this subsection (b) exceed the net proceeds from the offering
received by such Holder or Key Employee Stockholder, as the case may be.
(c) Each party entitled to indemnification under this Section 1.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
--------
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party (together with all other
Indemnified Parties that may be represented without conflict by one counsel) may
participate in such defense at such party's expense; provided, however, that the
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Indemnifying Party shall pay the fees and expenses of additional counsel if more
than one counsel is required to be retained by other Indemnified Parties due to
actual or potential conflicts for one counsel to represent all of the
Indemnified Parties; and provided, further, that the failure of any Indemnified
-------- -------
Party to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 1 to the extent such failure is not
prejudicial. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with defense of
such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.7 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into, in connection with the underwritten public offering are in conflict with
the foregoing provisions, the provisions in the underwriting agreement shall
control.
12
<PAGE>
1.8 Information by Holder. Each Holder of Registrable Securities and
---------------------
each Key Employee Stockholder shall furnish to the Company such information
regarding such person or entity and the distribution proposed by such person or
entity as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification, or
compliance referred to in this Section 1.
1.9 Limitations on Registration of Issues of Securities. From and after
---------------------------------------------------
the date of this Agreement, the Company shall not, without the prior written
consent of two thirds (2/3rds) in interest of the Holders, enter into any
agreement with any holder or prospective holder of any securities of the Company
giving such holder or prospective holder any rights to initiate a registration
of securities of the Company. Notwithstanding the foregoing, from and after the
date of this Agreement, the Company may enter into any agreement with any holder
or prospective holder of any securities of the Company giving such holder or
prospective holder rights to initiate a registration of securities of the
Company the terms of which are pari passu with the registration rights granted
to the Holders in Section 1.2 hereof only upon the written consent of two thirds
(2/3rds) in interest of the Holders; provided, however, that without the prior
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written consent of a majority in interest of the Holders, in no registration may
the amount of Registrable Securities to be included in such registration by the
Holder be limited due to marketing factors, pursuant to Sections 1.2(d) or
1.3(b) of this Agreement, unless the securities held by such third-party holder
or holders are excluded from such registration altogether.
1.10 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission that may permit the sale of
Registrable Securities that are "restricted securities" within the meaning of
the Securities Act ("Restricted Securities") to the public without registration,
the Company agrees to use its best efforts to:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times from and after ninety (90) days following the effective date of the
first registration statement under the Securities Act filed by the Company for
an offering of its securities to the general public;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements; and
(c) So long as a Holder owns any Restricted Securities, furnish to the
Holder forthwith upon written request a written statement by the Company as to
its compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following 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 Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a written statement that the
Company is eligible to use Form S-3, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
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.
13
<PAGE>
1.11 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the Company to register securities granted to a Holder by the Company under this
Section 1 may be transferred or assigned along with all related obligations
(including, without limitation, those set forth in Section 1.12) by a Holder
only (a) to a transferee or assignee of not less than 300,000 shares
(aggregating all shares of Registrable Securities held by affiliates of such
Holder) of Registrable Securities (as presently constituted and subject to
subsequent adjustments for stock splits, stock dividends, reverse stock splits,
and the like) or, if less, all shares of Registrable Securities held by such
Holder, (b) to an affiliate, constituent partner, limited partner, shareholder
or retired partner of such Holder in connection with a transfer or assignment of
such Holder's Registrable Securities or (c) to a person who is a Holder
immediately prior to such transfer or assignment; provided, in all such cases,
--------
that the Company is given written notice at the time of or within a reasonable
time after such transfer or assignment, stating the name and address of the
transferee or assignee and identifying the securities with respect to which such
registration rights are being transferred or assigned; and provided further,
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that the transferee or assignee of such rights assumes the obligations of such
Holder under this Section 1. The right of Key Employee Stockholders to cause the
Company to register securities granted to such Key Employee Stockholder under
this Section 1 may not be transferred or assigned.
1.12 "Market Stand-Off" Agreement. If requested by the Company or an
---------------------------
underwriter of Common Stock (or other securities) of the Company, no Holder or
Key Employee Stockholder shall sell or otherwise transfer or dispose of any
Registrable Securities or Key Employee Shares and any other shares of capital
stock acquired prior to the date of the Company's Qualified IPO held by such
Holder or Key Employee Stockholder, respectively (other than those included in
the registration) during a period not to exceed one hundred eighty (180) days
following the effective date of the Company's Qualified IPO; provided, that (i)
--------
each officer, director and holder of at least one percent (1%) of the Company's
securities entitled to vote generally in the election of directors (calculated
assuming full conversion of all voting securities which are convertible into
Common Stock), enter into similar agreements and (ii) if the Company or any
representative of the underwriters of the Qualified IPO shall provide, in its
discretion, a waiver or termination of the "market stand-off" restrictions for
the benefit of any of the Company's shareholders (the "Waiver Recipient"), then
the "market stand-off" restriction imposed hereunder shall immediately cease to
be applicable to all Holders and Key Employee Stockholders on a pro rata basis
according to the number of shares subject to the waiver or termination held by
the Waiver Recipient bears to the total number of shares held by all Holders and
Key Employee Stockholders.
The obligations described in this Section 1.12 shall apply only to the
Qualified IPO. The Company may impose stop-transfer instructions with respect
to the shares (or securities) subject to the foregoing restriction until the end
of such one hundred eighty (180) day period.
1.13 Allocation of Registration Opportunities. In any circumstance
----------------------------------------
in which all of the Registrable Securities, Key Employee Shares and shares of
Common Stock of the Company (including shares of Common Stock issued or issuable
upon conversion of shares of any currently unissued series of Preferred Stock of
the Company) with registration rights held by Other Stockholders (the "Other
Shares") requested to be included in a registration on behalf of the Holders,
Key Employee Stockholders or Other Stockholders cannot be so included as a
result of limitations of the aggregate number of shares of Registrable
Securities, Key Employee Shares and Other Shares that may be so included, the
number of shares of Registrable Securities, Key Employee Shares
14
<PAGE>
and Other Shares that may be so included shall be allocated as follows:
(a) if the registration is initiated by Holders, then Holders requesting
inclusion of Registrable Securities shall be entitled to include shares first on
a pro rata basis among them, with any additional shares that may be included
allocated pro rata among the Key Employee Stockholders and Other Stockholders;
(b) if the registration is initiated by the Company, then the shares
available for sale by the Holders, Key Employee Stockholders and Other
Stockholders requesting inclusion of shares in such registration shall be
allocated among the Holders and the Other Stockholders pro rata on the basis of
the number of shares of Registrable Securities, Key Employee Shares and Other
Shares that would be held by such Holders, Key Employee Stockholders and Other
Stockholders, assuming conversion, with any additional shares that may be
included allocated pro rata among the Key Employee Stockholders, subject to
Section 1.3(b) hereof;
(c) if the registration is initiated by Other Stockholders, then the
shares available for sale by the Holders, Key Employee Stockholders and Other
Stockholders requesting inclusion of shares in such registration shall be
allocated first among the Holders and the Other Stockholders pro rata on the
basis of the number of shares of Registrable Securities and Other Shares that
would be held by such Holders and Other Stockholders, assuming conversion, with
any additional shares that may be included allocated pro rata among the Key
Employee Stockholders; or
(d) if the registration is initiated by Key Employee Stockholder (should
they, after the date hereof, receive rights to initiate a registration), then
the shares available for sale by the Holders, Key Employee Stockholders and
Other Stockholders requesting inclusion of shares in such registration shall be
allocated first among the Holders and the Key Employee Stockholders pro rata on
the basis of the number of shares of Registrable Securities and Key Employee
Shares that would be held by such Holders and Key Employee Stockholders,
assuming conversion, with any additional shares that may be included allocated
pro rata among the Other Stockholders;
provided, however, so that any such allocation shall not operate to reduce the
- -------- -------
aggregate number of Registrable Securities, Key Employee Shares and Other Shares
to be included in such registration, if any Holder, Key Employee Stockholder or
Other Stockholder does not request inclusion of the maximum number of shares of
Registrable Securities, Key Employee Shares and Other Shares allocated to it
pursuant to the above-described procedure, the remaining portion of its
allocation shall be reallocated among those requesting Holders, Key Employee
Stockholders and Other Stockholders whose allocations did not satisfy their
requests in accordance with the allocation provisions set forth above, and this
procedure shall be repeated until all of the shares of Registrable Securities,
Key Employee Shares and Other Shares which may be included in the registration
on behalf of the Holders, Key Employee Stockholders and Other Stockholders have
been so allocated. Notwithstanding the foregoing, the Company shall not limit
the number of Registrable Securities or Key Employee Shares to be included in a
registration pursuant to this Agreement in order to include shares held by
stockholders with no registration rights, and with respect to registrations
under Sections 1.2 or 1.5 hereof, shall not limit the number of Registrable
15
<PAGE>
Securities included in such registration in order to include therein any Key
Employee Shares, Other Shares or securities registered for the Company's own
account.
1.14 Delay of Registration. No Holder shall have any right to take any
---------------------
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.15 Termination of Registration Rights. The right to request registration
----------------------------------
or inclusion in any registration pursuant to Section 1.2, 1.3 or 1.5 (and the
right of any Key Employee Stockholder to request inclusion in any registration
pursuant to Section 1.3) shall terminate five (5) years after the closing of a
Qualified IPO in which all shares of Preferred Stock convert into Common Stock
or earlier, with respect to any Holder or Key Employee Stockholder, at such time
as such Holder or Key Employee Stockholder shall be able to sell all of such
Holder's Registrable Securities or such Key Employee Stockholder's Key Employee
Shares, as the case may be, under Rule 144 during any three (3) month period.
SECTION 2
---------
Covenants of the Company
------------------------
The Company hereby covenants and agrees, so long as any Holder owns any
Registrable Securities and subject to the other terms and conditions provided
herein, as follows:
2.1 Financial Information. The Company will furnish the following reports
---------------------
to each Holder owning at least 150,000 shares of Registrable Securities (for
purposes of calculating the ownership of any Holder under this Section 2,
Registrable Securities owned by any entity that is, within the meaning of the
Securities Act, controlling, controlled by or under common control with such
Holder shall be aggregated with Registrable Securities owned by such Holder), as
presently constituted and subject to subsequent adjustment for stock splits,
stock dividends, reverse stock splits and the like (each, a "Significant
Holder"):
(a) As soon as practicable after the end of each fiscal year (beginning
with the fiscal year ending December 31, 1999) of the Company, and in any event
within ninety (90) days thereafter, an audited consolidated balance sheet of the
Company and its subsidiaries, if any, as at the end of such fiscal year, and
audited consolidated statements of income and cash flows of the Company and its
subsidiaries, if any, for such year, prepared in accordance with generally
accepted accounting principles consistently applied, all in reasonable detail
and prepared by accountants of nationally recognized standing;
(b) At least thirty (30) days prior to the end of each fiscal year of the
Company, an annual operating budget and updated business plan of the Company;
and
(c) As soon as practicable after the end of the first, second, and third
quarterly accounting periods in each fiscal year of the Company, and in any
event within forty-five (45) days thereafter, an unaudited consolidated balance
sheet of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and unaudited consolidated statements of income and cash flows
of the Company and its subsidiaries for such period and for the current fiscal
year to date, prepared in accordance with generally accepted accounting
principles
16
<PAGE>
consistently applied, subject to changes resulting from normal year-end audit
adjustments, all in reasonable detail and certified by the principal financial
or accounting officer of the Company, except that such financial statements need
not contain the notes required by generally accepted accounting principles.
2.2 Inspection. The Company shall permit each Investor that holds at
----------
least 150,000 shares of Registrable Securities, at such Investor's expense and
upon forty-eight hours prior notice, to visit and inspect the Company's
properties, to examine its books of account and records and to discuss the
Company's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by the Investor; provided, however, that
the Company shall not be obligated pursuant to this Section 2.2 to provide
access to any information that it reasonably considers to be a trade secret or
similar confidential information.
2.3 Right of First Offer. The Company hereby grants to each Investor the
--------------------
right of first offer to purchase a pro rata share of New Securities (as defined
in this Section 2.3) which the Company may, from time to time, propose to sell
and issue. An Investor's pro rata share, for purposes of this right of first
offer, is the ratio of (i) the sum of (x) the number of shares of Common Stock
owned by such Investor immediately prior to the issuance of New Securities,
assuming full conversion of the Shares, and (y) the shares issuable upon
exercise of the Investor Warrants owned by such Investor, to (ii) the sum of the
total number of shares of Common Stock outstanding immediately prior to the
issuance of New Securities, assuming full conversion of the Shares and exercise
of all outstanding rights, options and warrants to acquire Common Stock of the
Company, and the 2,211,900 shares currently reserved for issuance under options
that may be granted in the future under the Company's director-approved stock
option/stock issuance plan. Each Investor shall have a right of over-allotment
such that if any Investor, or any other securities holder of the Company with
rights of first offer to purchase New Securities, fails to exercise its right
hereunder or under any other agreement with the Company to purchase its pro rata
share of New Securities, the other Investors may purchase the non-purchasing
Investor's or other securities holder's portion on a pro rata basis within five
(5) days from the date of notice of such failure to exercise provided by the
Company such non-purchasing Investor or other securities holder fails to
exercise its right to purchase its pro rata share of New Securities. This right
of first offer shall be subject to the following provisions:
(a) "New Securities" shall mean any capital stock (including Common Stock
and/or Preferred Stock) of the Company whether now authorized or not, and
rights, options or warrants to purchase such capital stock, and securities of
any type whatsoever that are, or may become, convertible into capital stock;
provided, that the term "New Securities" does not include (i) securities
- --------
purchased under the Series D Purchase Agreement; (ii) securities issued or
issuable upon the conversion or exercise of currently outstanding options,
warrants, rights or other convertible or exercisable securities (including,
without limitation, upon conversion or exercise of the Shares, the Series B
Preferred Stock, the Series B Warrants and the Investor Warrants); (iii)
securities issued pursuant to any acquisition by the Company of another business
entity or business segment of any such entity by merger, purchase of assets or
otherwise, or pursuant to any other business combination, or in connection with
any joint venture or other corporate partnering transaction, in each such case,
so long as such issuance has been approved by the Board of Directors of the
Company; (iv) any warrants issued pursuant to contractual obligations of the
Company existing on the date of this Agreement; (v) any borrowings or guarantees
17
<PAGE>
thereof, direct or indirect, from financial institutions or other persons by the
Company, whether or not presently authorized, including any type of loan or
payment evidenced by any type of debt instrument; (vi) any warrants, options or
similar rights issued to financial institutions, other lenders or guarantors in
connection with borrowings or commitments or agreements therefor, whether or not
involving present borrowings, or to a lessor, guarantor or other person in
connection with obtaining lease financing, provided that such issuance is
approved by the Company's Board of Directors and does not have equity financing
as its principal purpose; (vii) up to 2,211,900 shares of Common Stock issuable
after the date of this Agreement to employees, consultants, officers or
directors of the Company pursuant to any stock option, stock purchase or stock
bonus plan, agreement or arrangement for the primary purpose of soliciting or
retaining such persons' services; (viii) securities issued to vendors or
customers or to other persons in similar commercial situations with the Company
if such issuance is approved by the Board of Directors and is for other than
primarily equity financing purposes; (ix) Common Stock issued in a Qualified IPO
in which all Preferred Stock converts into Common Stock; and (x) securities
issued in connection with any stock split, stock dividend or recapitalization of
the Company.
(b) In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Investor written notice of its intention,
describing the type of New Securities, and their price and the general terms
upon which the Company proposes to issue the same. Each Investor shall have
twenty (20) days after any such notice is mailed or delivered to agree to
purchase such Investor's pro rata share of such New Securities for the price and
upon the terms specified in the notice by giving written notice to the Company
and stating therein the quantity of New Securities to be purchased.
(c) In the event the Investors fail to exercise fully the right of first
offer within such twenty (20) day period and after the expiration of the five
(5) day period for the exercise of the over-allotment provisions of this Section
2.2, the Company shall have ninety (90) days thereafter to sell or enter into an
agreement (pursuant to which the sale of New Securities covered thereby shall be
closed, if at all, within ninety (90) days from the date of such agreement) to
sell the New Securities respecting which the Investors' right of first offer
option set forth in this Section 2.2 was not exercised, at a price and upon
terms no more favorable to the purchasers thereof than specified in the
Company's notice to the Investors pursuant to Section 2.2(b). In the event the
Company has not sold within such ninety (90) day period or entered into an
agreement to sell the New Securities in accordance with the foregoing within
ninety (90) days from the date of such agreement, the Company shall not
thereafter issue or sell any New Securities, without first again offering such
securities to the Investors in the manner provided in Section 2.2(b) above.
(d) The right of first offer granted under this Agreement shall expire
upon, and shall not be applicable to, the first sale of Common Stock of the
Company to the public effected pursuant to a registration statement filed with,
and declared effective by, the Commission under the Securities Act in which all
classes of Preferred Stock are converted into shares of the Company's Common
Stock.
(e) The right of first offer set forth in this Section 2.2 may not be
assigned or transferred, except that such right shall be assignable by each
Investor to any affiliate of such Investor (within the meaning of the Securities
Act) or to any constituent partner, limited partner, shareholder or retired
partners of such Investor; provided, however, that no such assignment or
-------- -------
18
<PAGE>
transfer shall be permitted except in connection with the sale or transfer of at
least 150,000 Shares (as presently constituted and subject to subsequent
adjustments for stock splits, stock dividends, reverse stock splits, and the
like) (or, if less, all of the Shares held by such Investor), to the proposed
assignee or transferee of such right, provided that the Company is given written
notice at the time of or within a reasonable time after such transfer or
assignment, stating the name and address of the transferee or assignee and
identifying the Shares with respect to which such right of first offer is being
transferred or assigned and provided, further, that the proposed assignee or
transferee is an "accredited investor" (as defined in Regulation D under the
Securities Act) and provides the Company, upon request, with written
certification of its qualifications as a permitted assignee under this Section
2.2(e).
(f) In the event that Investors holding, in the aggregate, at least two
thirds (2/3rds) of the Shares shall waive their rights under this Section 2.2,
such waiver shall be binding upon all Investors; provided, however, that if
-------- -------
an Investor is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, such waiver shall only be effective as to such
Investor if executed by it.
2.4 Board of Directors. Until the time of effectiveness of a Qualified
------------------
IPO in which all shares of Preferred Stock convert into Common Stock, the
parties agree to take all appropriate actions such that the Company shall fix
and maintain a Board of Directors of no more than nine persons. The makeup of
the Board of Directors immediately following the Closing under the Series D
Purchase Agreement shall be Mark Urdahl, Sada Cumber, Albert Edgar, Laura
Kilcrease (such person being referred to as the "Interim Director"), Terrence
Rock, Charles Phipps, Harvey B. Cash, Richard Kimball (as the designee of the
holders of the Series D Preferred Stock) and Mike Wilkes. All holders of Series
D Preferred Stock hereby agree that entities affiliated with Technology
Crossover Ventures ("TCV") shall be entitled to designate one person to serve as
a member of the Board of Directors and agree to vote their Shares in favor of
the election of such person (and for any successor or replacement) so long as
TCV and its affiliates continue to own at least seventy five percent (75%) of
the shares of Series D Preferred Stock purchased by TCV and its affiliates under
the Series D Purchase Agreement. All holders of Series C Preferred Stock hereby
agree that CenterPoint Venture Partners ("CenterPoint") shall be entitled to
designate two persons, and InterWest Partners ("InterWest") shall be entitled to
designate one person, to serve as members of the Board of Directors and agree to
vote their Shares in favor of the election of such persons (and for any
successors or replacements) so long as CenterPoint or InterWest, respectively,
and their respective affiliates continue to own at least a majority of the
shares of Series C Preferred Stock purchased by CenterPoint and InterWest and
their respective affiliates under the Series C Purchase Agreement. The parties
agree to work cooperatively to identify a replacement director of recognized
standing in the Company's industry as soon as practicable after the date hereto
and the Key Employee Stockholders agree to use their respective best efforts to
cause such replacement director to be elected to the Board of Directors in
replacement of the Interim Director, as soon as practicable thereafter. Such
replacement director shall serve on the Board of Directors in accordance with
the Fourth Restated Certificate of Incorporation and Bylaws. Each Director shall
be entitled to reimbursement of reasonable expenses incurred by him or her in
connection with attending meetings of the Board of Directors.
19
<PAGE>
2.5 Qualified Small Business Stock. In the event that the Company
------------------------------
proposes to act or engage in a transaction that would be reasonably expected to
result in the termination or impairment of the Company's capital stock status as
"qualified small business stock" as set forth in Section 1202(c) of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company shall notify the
Investors and consult in good faith to devise a mutually agreeable and
reasonable alternative transaction structure that would preserve such status. In
addition, the Company shall submit to the Investors and to the Internal Revenue
Service any reports that may re required under Section 1202(d)(1)(c) of the Code
and any related Treasury Regulations. In addition, within twenty (20) days after
any Investor has delivered to the Company a written request therefor, the
Company shall deliver to such Investor a written statement informing the
Investor whether such Investor's interest in the Company constitutes "qualified
small business stock" as defined in Section 1202 (c) of the Code; provided,
---------
however, that an Investor shall only be entitled to make one such request in any
- -------
twelve (12) month period at the expense of the Company and any expenses directly
related to fulfilling any additional request within such twelve (12) month
period shall be borne by the Investor making such request with the estimated
amount of such expenses (based on such expenses incurred to fulfill prior
requests) being payable in advance to the Company by the Investor. The Company's
obligation to furnish a written statement pursuant to this Section 2.5 shall
continue notwithstanding the fact that a class of the Company's stock may be
traded on an established securities market.
2.6 Termination of Covenants. The covenants set forth in this Section 2
------------------------
(except for Section 2.5) shall terminate and be of no further force and effect
after the time of effectiveness of the registration statement for the Company's
Qualified IPO in which all shares of Preferred Stock will convert into Common
Stock upon the consummation thereof.
SECTION 3
---------
Miscellaneous
-------------
3.1 Governing law. This Agreement shall be governed in all respects by
-------------
the laws of the State of Delaware, as if entered into by and between Delaware
residents exclusively for performance entirely within Delaware.
3.2 Successors and Assigns. Except as otherwise expressly provided herein,
----------------------
the provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
3.3 Entire Agreement Amendment: Waiver. This Agreement (including the
Exhibits hereto) constitutes the full and entire understanding and agreement
between the parties with regard to the subject matter hereof and supersedes all
prior agreements, including, but not limited to, the Original Agreement which is
hereby terminated and of no further force or effect. Neither this Agreement nor
any term hereof may be amended, waived, discharged or terminated, except by a
written instrument signed by the Company, the holders of at least two thirds
(2/3rds) of the Series C Preferred Stock and the holders of at least two thirds
(2/3rds) of the Series D Preferred Stock (and, in the case of an amendment,
waiver, discharge or termination of the rights of Key Employee Stockholders
adverse in a manner different from the affect on the Holders under Section 1.3
hereof, at least a majority of the Key Employee Shares) and any such amendment,
20
<PAGE>
waiver, discharge or termination shall be binding on all the Holders and Key
Employee Stockholders, but in no event shall the obligation of any Holder or Key
Employee Stockholder hereunder be materially increased, except upon the written
consent of such Holder or Key Employee Stockholder, and in no event shall any
amendment or waiver be effective as to an Investor that is an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
unless consented to in writing by such Investor.
3.4 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be sent by registered United
States mail, postage prepaid, or delivered personally by hand or nationally
recognized courier addressed (a) if to a Holder or Key Employee Stockholder, as
indicated on the list of Holders and Key Employee Stockholders attached hereto
as Exhibits A and B or at such other address as such Holder, Key Employee
Stockholder or permitted assignee shall have furnished to the Company in
writing, or (b) if to the Company, at 8920 Business Park Drive, Austin, Texas
78759, Attention: President, or at such other address as the Company shall have
furnished to each holder in writing. All such notices and other written
communications shall be effective (i) if mailed, five (5) days after mailing and
(ii) if delivered, upon delivery.
3.5 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any Holder or Key Employee Stockholder, upon any
breach or default of the Company under this Agreement shall impair any such
right, power or remedy of such Holder or Key Employee Stockholder nor shall it
be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring, nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default therefore or thereafter occurring. All remedies, either under
this Agreement or by law or otherwise afforded to any Holder or Key Employee
Stockholder, shall be cumulative and not alternative.
3.6 Rights; Separability. Unless otherwise expressly provided herein, a
--------------------
Holder's or Key Employee Stockholder's rights hereunder are several rights, not
rights jointly held with any of the other Holders or Key Employee Stockholders.
In case any provision of the Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
3.7 Information Confidential. Each Holder and Key Employee Stockholder
------------------------
acknowledges that the information received by such holder pursuant hereto may be
confidential and for its use only, and it will not use such confidential
information in violation of the Exchange Act or reproduce, disclose or
disseminate such information to any other person (other than to the general
partners of a Holder, or the affiliates of such general partners, limited
partners, or to the directors, employees or agents of a Holder having a need to
know the contents of such information, and its attorneys, or to the extent
required by any law, or any rule or regulation of a government agency or any
order or mandate of any court or similar judicial body), except in connection
with the exercise of rights under this Agreement, unless the Company has made
such information available to the public generally or such Holder or Key
Employee Stockholder is required to disclose such information by a governmental
body.
21
<PAGE>
3.8 Titles and Subtitles. The titles of the paragraphs and
--------------------
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
3.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an Original, but all of which together
shall constitute one instrument.
3.10 Condition Precedent to Agreement. This Agreement shall not bind or
--------------------------------
grant rights to any Key Employee Stockholder who does not execute this
Agreement. In any such event all references to such person who is not bound
hereby shall be deleted herefrom, and such person shall not be considered a Key
Employee Stockholder for purposes of this Agreement but this Agreement shall
otherwise remain in effect.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Investors Rights Agreement effective as of the day and year first above
written.
Applied Science Fiction, inc.
By:
------------------------------
Mark Urdahl,
President and Chief Executive Officer
23
<PAGE>
HOLDERS:
--------
TCV III (GP)
By: Technology Crossover Management III, L.L.C.,
its General Partner
By:
----------------------------------
Robert C. Bensky,
Chief Financial Officer
TCV III, L.P.
By: Technology Crossover Management III, L.L.C.,
its General Partner
By:
----------------------------------
Robert C. Bensky,
Chief Financial Officer
TCV III (Q), L.P.
By: Technology Crossover Management III, L.L.C.,
its General Partner
By:
----------------------------------
Robert C. Bensky,
Chief Financial Officer
TCV III Strategic Partners, L.P.
By: Technology Crossover Management III, L.L.C.,
its General Partner
By:
----------------------------------
Robert C. Bensky,
Chief Financial Officer
[Signature page to amended and Restated Investors' Rights Agreement]
<PAGE>
AMERINDO INVESTMENT ADVISORS
By:
By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
SELIGMAN COMMUNICATIONS AND
INFORMATION FUND, INC.
By: J. & W. Seligman & Co. Incorporated,
its investment adviser
By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
BEAGLE LIMITED
By:
By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
ASF LLC
By:
----------------------------------
Anthony B. Davis,
General Partner
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
HAMBRECHT & QUIST CALIFORNIA
By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
HAMBRECHT & QUIST EMPLOYEE
VENTURE FUND, L.P. II
By: H & Q Venture Management, L.L.C., its
General Partner
By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
ACCESS TECHNOLOGY PARTNERS, L.P.
By: Access Technology Management, L.L.C., its
General Partner
By: H & Q Venture Management, L.L.C., its
Managing Member
By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
ACCESS TECHNOLOGY PARTNERS
BROKERS FUND, L.P. II
By: H & Q Venture Management, L.L.C., its
General Partner
By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
VF FAMILY PARTNERSHIP
By:
-----------------------------------
Gary D. Vollen,
Partnership Manager
SCULLEY BROTHERS, LLC
By:
----------------------------------
Arthur Sculley,
General Partner
GROSVENOR SELECT LP
By: Grosvenor Select Partners LLC, its General
Partner
By:
-----------------------------------
Doug Dunnan,
[Title]
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
INTERWEST PARTNERS VI, L.P.
By: InterWest Management Partners VI,
L.L.C., its General Partner
By:
------------------------------------
Stephen Holmes,
Managing Director
INTERWEST INVESTORS VI, L.P.
By: InterWest Management Partners VI,
L.L.C., its General Partner
By:
-------------------------------------
Stephen Holmes,
Managing Director
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
SEVIN ROSEN FUND V, L.P.
By: SRB Associates V L.P., its General
Partner
By:
--------------------------------------
John V. Jaggers,
General Partner
SEVIN ROSEN V AFFILIATES FUND L.P.
By: SRB Associates V L.P., its General
Partner
By:
-----------------------------------------
John V. Jaggers,
General Partner
SEVIN ROSEN FUND VI L.P.
By: SRB Associates VI L.P., its General
Partner
By:
-----------------------------------------
John V. Jaggers,
General Partner
SEVIN ROSEN VI AFFILIATES FUND L.P.
By: SRB Associates VI L.P., its General
Partner
By:
-----------------------------------------
John V. Jaggers,
General Partner
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
TIMARK L.P.
By:
-----------------------------------------
Frank J. Marshall
General Partner
KNCL ASSOCIATES LIMITED
By:
-----------------------------------------
Kent Fuka,
General Partner
CROWN GROWTH PARTNERS, LP
By: Crown Partners LLC, its General Partner
By:
-----------------------------------------
David F. Bellet,
General Partner
PARSON FINANCE LIMITED
By: Crown Advisors International Ltd, its
Investment Manager
By:
-----------------------------------------
David F. Bellet,
Chairman
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
INDIVIDUAL HOLDERS:
-----------------------------------------
Thomas Aschenbrenner
-----------------------------------------
Joseph Arsenio
-----------------------------------------
Harvey B. Cash
-----------------------------------------
Neil Cohen
-----------------------------------------
James Davidson
-----------------------------------------
Dietrich R. Erdmann
-----------------------------------------
Ken Hao
-----------------------------------------
Eugene Lowenthal
-----------------------------------------
Regis McKenna
-----------------------------------------
Benjamin Rosen
-----------------------------------------
L.J. Sevin
-----------------------------------------
Steven J. Wallach
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
KEY EMPLOYEE STOCKHOLDERS:
-----------------------------------------
Mark Urdahl
-----------------------------------------
Sada Cumber
-----------------------------------------
Albert Edgar
-----------------------------------------
Mark Bishop
-----------------------------------------
Sheppard Parker
-----------------------------------------
Mike Wilkes
-----------------------------------------
Steven Penn
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
TRITON VENTURE PARTNERS, L.P.
By: Triton Venture Management, LLC, its General
Partner
By:
-----------------------------------------
Laura J. Kilcrease,
Manager
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
GREENOVER GROUP L.P.
By: Greenover Managers, L.L.C., its General
Partner
By:
-----------------------------------------
Kelley Williams, Jr.,
General Partner
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
CENTERPOINT VENTURE PARTNERS L.P.
By: Paluck Associates, L.P., its General Partner
By:
-----------------------------------------
Robert J. Paluck,
General Partner
[Signature page to Amended and Restated Investors' Rights Agreement]
<PAGE>
EXHIBIT A
---------
SCHEDULE OF INVESTORS
---------------------
<TABLE>
<CAPTION>
Shares of Series C Shares of Series D
Name and Address Preferred Stock Preferred Stock
- --------------------------------------------------- ------------------ ------------------
<S> <C> <C>
TCV III (GP) -- 10,554
c/o Technology Crossover Management III, L.L.C.
Attn: Robert C. Bensky
56 Main Street
Milburn, New Jersey 07041
and
CC: Mike Linnert
575 High Street, Suite 400
Palo Alto, California 94301
TCV III, L.P. -- 50,132
c/o Technology Crossover Management III, L.L.C.
Attn: Robert C. Bensky
56 Main Street
Milburn, New Jersey 07041
and
CC: Mike Linnert
575 High Street, Suite 400
Palo Alto, California 94301
TCV III (Q), L.P. -- 1,332,462
c/o Technology Crossover Management III, L.L.C.
Attn: Robert C. Bensky
56 Main Street
Milburn, New Jersey 07041
and
CC: Mike Linnert
575 High Street, Suite 400
Palo Alto, California 94301
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares of Series C Shares of Series D
Name and Address Preferred Stock Preferred Stock
- --------------------------------------------------- ------------------ ------------------
<S> <C> <C>
TCV III Strategic Partners, L.P. -- 60,341
c/o Technology Crossover Management III, L.L.C.
Attn: Robert C. Bensky
56 Main Street
Milburn, New Jersey 07041
and
CC: Mike Linnert
575 High Street, Suite 400
Palo Alto, California 94301
ATGF II -- 205,174
Attn: Marc Weiss
399 Park Avenue
18th Floor
New York, New York 10022
Litton Master Trust -- 179,923
Attn: Marc Weiss
399 Park Avenue
18th Floor
New York, New York 10022
Marc Weiss -- 2,499
399 Park Avenue
18th Floor
New York, New York 10022
J.W. Seligman -- 387,595
Attn: Paul Goucher
100 Park Avenue
New York, New York 10017
Beagle Limited -- 193,798
Attn: Victor Cunningham
1 West 67th Street
Suite 101
New York, New York 10023
Triton Venture Partners, L.P. -- 183,075
Attn: Laura Kilcrease
1301 W. 25th Street
Suite 300
Austin, Texas 78705
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Shares of Series C Shares of Series D
Name and Address Preferred Stock Preferred Stock
- --------------------------------------------------- ------------------ ------------------
<S> <C> <C>
ASF LLC -- 96,899
Attn: Joe Tate
2119 E. 30th Place
Tulsa, Oklahoma 74114
Hambrecht & Quist California -- 6,298
Attn: Michael Beblo
One Bush Street
San Francisco, California 94104
Hambrecht & Quist Employee Venture Fund, L.P. II -- 2,422
Attn: Michael Beblo
One Bush Street
San Francisco, California 94104
Access Technology Partners, L.P. -- 51,034
c/o Hambrecht & Quist
Attn: Michael Beblo
One Bush Street
San Francisco, California 94104
Access Technology Partners Brokers Fund, L.P. -- 565
c/o Hambrecht & Quist
Attn: Michael Beblo
One Bush Street
San Francisco, California 94104
VF Family Partnership -- 689
c/o Hambrecht & Quist
Attn: Michael Beblo
One Bush Street
San Francisco, California 94104
Kenneth Hao -- 689
c/o Hambrecht & Quist
Attn: Michael Beblo
One Bush Street
San Francisco, California 94104
Joseph Arsenio -- 689
c/o Hambrecht & Quist
Attn: Michael Beblo
One Bush Street
San Francisco, California 94104
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Shares of Series C Shares of Series D
Name and Address Preferred Stock Preferred Stock
- --------------------------------------------------- ------------------ ------------------
<S> <C> <C>
James Davidson -- 2,218
c/o Hambrecht & Quist
Attn: Michael Beblo
One Bush Street
San Francisco, California 94104
Sculley Brothers -- 64,599
Attn: Arthur Sculley
90 Park Avenue
32nd Floor
New York, New York 10016
Neil Cohen -- 32,300
10501 Rhode Island Avenue
Beltsville, Maryland 20705
Greenover Group L.P. -- 32,300
Attn: Kelley Williams, Jr.
4418 Hickory Ridge
Jackson, Mississippi 39211
Grosvenor Select Partners LLC -- 32,300
Attn: Bruce Dunnan
1717 Pennsylvania Avenue, N.W.
Suite 225
Washington, D.C. 20006
CenterPoint Venture Partners, L.P. 594,595 258,398
Attn: Robert J. Paluck
Two Galleria Tower
13455 Noel Road, Suite 1670
Dallas, Texas 75240
InterWest Partners VI, L.P. 393,407 250,543
Attn: Stephen Holmes
Building 3, Suite 255
3000 Sand Hill Road
Menlo Park, California 94025
InterWest Investors VI, L.P. 11,999 7,855
Building 3, Suite 255
3000 Sand Hill Road
Menlo Park, California 94025
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
Shares of Series C Shares of Series D
Name and Address Preferred Stock Preferred Stock
- --------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Sevin Rosen Fund V L.P. 311,208 123,902
Attn: John Jaggers
Two Galleria Tower
13455 Noel Road, Suite 1670
Dallas, Texas 75240
Sevin Rosen V Affiliates Fund L.P. 13,297 5,297
Attn: John Jaggers
Two Galleria Tower
13455 Noel Road, Suite 1670
Dallas, Texas 75240
Sevin Rosen Fund VI L.P. -- 359,302
Attn: John Jaggers
Two Galleria Tower
13455 Noel Road, Suite 1670
Dallas, Texas 75240
Sevin Rosen VI Affiliates Fund L.P. -- 28,295
Attn: John Jaggers
Two Galleria Tower
13455 Noel Road, Suite 1670
Dallas, Texas 75240
L.J. Sevin 25,000 32,300
Two Galleria Tower
13455 Noel Road, Suite 1670
Dallas, Texas 75240
Benjamin Rosen 25,000 0
One Central Park West
Apartment 43A
New York, New York 10023
Thomas H. Aschenbrenner 19,065 18,605
6016 Oakcrest
Dallas, Texas 75248
Steven J. Wallach 2,703 3,230
7314 Wester Way
Dallas, Texas 75248
Eugene Lowenthal 5,406 4,522
9600 Crumley Ranch Road
Austin, Texas 78736
</TABLE>
A-5
<PAGE>
<TABLE>
<CAPTION>
Shares of Series C Shares of Series D
Name and Address Preferred Stock Preferred Stock
- ------------------------------------------------ ------------------ ------------------
<S> <C> <C>
David Bellet 13,513 0
The Lincoln Building
Suite # 3405
60 East 42nd Street
New York, NY 10165
Crown Growth Partners, LP -- 11,628
Attn: David Bellet
The Lincoln Building
Suite # 3405
60 East 42nd Street
New York, NY 10165
Parson Finance Limited -- 7,752
Attn: David Bellet
The Lincoln Building
Suite # 3405
60 East 42nd Street
New York, NY 10165
Harvey B. Cash 13,513 0
c/o CenterPoint Venture Partners, L.P.
13455 Noel Road, Suite 1670
Dallas, Texas 75240
Dietrich R. Erdman 13,507 13,175
c/o CenterPoint Venture Partners, L.P.
13455 Noel Road, Suite 1670
Dallas, Texas 75240
KNCL Associates Limited 2,441 0
Kent Fuka, General Partner
10904 Low Bridge Lane
Austin, Texas 78750
Regis McKenna 13,513 13,178
c/o The McKenna Group
1755 Embarcadero Road
Palo Alto, California 94303
TIMARK, L.P. 13,513 3,230
Frank J. Marshall, General Partner
20100 Hill Ave.
Saratoga, California 95070
1,471,500 4,069,767
========= =========
</TABLE>
A-6
<PAGE>
EXHIBIT B
---------
LIST OF KEY EMPLOYEE STOCKHOLDERS
---------------------------------
<TABLE>
<CAPTION>
Shares of and
Shares of and Warrants to
Options to Acquire Purchase Series B
Name and Address Common Stock Preferred Stock
---------------- ------------ ---------------
<S> <C> <C>
Mark Urdahl 2,515,998 9,734
c/o Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, TX 78759-5321
Sada Cumber 1,616,001 --
c/o Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, TX 78759-5321
Dr. Albert Edgar 2,515,998 4,867
c/o Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, TX 78759-5321
Mark Bishop 716,001 4,542
c/o Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, TX 78759-5321
Sheppard Parker 716,001 --
c/o Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, TX 78759-5321
Mike Wilkes 716,001 --
c/o Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, TX 78759-5321
</TABLE>
B-1
<PAGE>
EXHIBIT 10.5
BALCONES NORTH
OFFICE BUILDING
OFFICE LEASE AGREEMENT
LEASE AGREEMENT
BY AND BETWEEN
RGK RENTALS, LTD., AS LESSOR
AND
APPLIED SCIENCE FICTION, INC
AS LESSEE
March 19, 1998
<PAGE>
LEASE AGREEMENT
STATE OF TEXAS )
)
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF TRAVIS )
1. PARTIES. This Lease Agreement (the "Lease") is made and entered into by
and between RGK RENTALS, LTD., a Texas limited partnership (hereinafter
referred to as the "Lessor") and APPLIED SCIENCE FICTION, INC., a Delaware
corporation (hereinafter referred to as "Lessee").
2. LEASED PREMISES. In return for the consideration, covenants and
agreements hereinafter set forth to be paid, observed and/or performed by
Lessee, Lessor hereby demises and lets unto Lessee, and Lessee does hereby lease
from Lessor, that certain real property and improvements including an
approximately 53,984 rentable square foot building (the "Building") together
with the related parking, driveways and landscaped areas, locally known as 8920
Business Park Drive in Austin, Travis County, Texas, legally described as Lot 1,
Block A, North Crossing Subdivision, Section I-B, City of Austin, recorded at
Volume 80, Page 286 of the Plat Records of Travis County, Texas (all of which is
hereinafter collectively referred to as the "Leased Premises") indicated on the
Site Plan attached hereto as Exhibit A.
3. TERM, RENEWAL AND CANCELLATION. The term of this Lease shall commence on
April 1, 1998, ("Commencement Date") and shall end on March 31, 2003 (the
"Term"). Lessee shall have two (2) two-year renewal options at then market
rates. Market rates shall be governed by Exhibit D attached hereto. In the event
Lessee desires to exercise such option to renew this Lease, Lessee shall give
Lessor 180 days prior written notice of such exercise. After the first thirty-
six (36) months of this Lease, Lessee shall have the right to cancel the Lease
by giving Lessor one-hundred and eighty (180) days written notice and by paying
Lessor Two Hundred and Fifty Thousand Dollars ($250,000) plus the then
unamortized portion of the cost of Lessor's Allowance for Improvements (as
defined in paragraph 22 herein) and brokerage fees. Any sublease agreements,
pursuant to paragraph 18 below, shall contain appropriate cancellation
provisions, reflecting Lessee's right to terminate this Lease contained in this
Paragraph 3.
/s/ /s/
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Lessor Lessee
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4. COMMENCEMENT OF LESSEE'S POSSESSION. On March 20, 1998, Lessee has
possession of the Leased Premises subject to all the terms of this Lease, with
the exception of the payment of rent which will commence on April 1, 1998, as
more fully described below.
5. RENTAL PAYMENTS.
(a) Commencing on the Commencement Date and continuing throughout the Term,
Lessee hereby agrees to pay the Base Rental as described in paragraph 6, plus
Forecast Additional Rental and Additional Rental as descfibed in paragraph 7.
The Base Rental and Forecast Additional Rental shall be due and payable in equal
installments on the first day of each calendar month during the Term and any
renewals or extensions thereof, and Lessee hereby agrees to make such payments
monthly in advance to Lessor at Lessor's address as provided herein (or such
other address as may be designated by Lessor from time to time).
(b) If the Term commences or terminates on other than the first day of a
calendar month or terminates on other than the last day of a calendar month,
then the installments of Base Rental and Forecast Additional Rental for such
month or months shall be prorated and the installment or installments so
prorated shall be paid in advance. The payment for such prorated month shall be
calculated by multiplying the monthly installment by a fraction, the numerator
of which shall be the number of days of the Term occurring during said
commencement or termination month, as the case may be, and the denominator of
which shall be the total number of days occurring in said commencement or
termination month. Also, if the Term commences or terminates on other than the
first day of a calendar year, Additional Rent shall be prorated for such
commencement or termination year, as the case may be, by multiplying each by a
fraction, the numerator of which shall be the number of days of the Term during
the commencement or termination year, as the case may be, and the denominator
of which shall be 365.
(c) Lessee shall pay all rent and other sums of money as they shall become
due and payable to Lessor under this Lease at the time and in the manner
provided herein, without demand, set-off or counterclaims. At Lessor's option,
Lessee shall pay (i) five percent (5%) of the monthly rent (including Base
Rental, Forecast Additional Rental and all other sums owed by Lessee to Lessor
under the provisions this Lease), if same are not fully paid within ten (10)
days of the due date as specified herein, or (ii) $25.00 per day from due date
(if not paid within ten (10) days of due date) until all sums due, including
late charges, are paid in full. The parties hereby agree that such charges
represent a fair and reasonable estimate of expenses Lessor
/s/ /s/
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Lessor Lessee
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would incur by reason of Lessee's late payments. Acceptance of such late charge
by Lessor shall neither constitute a waiver of Lessee's default nor, in the
event of Lessee's default, shall it prevent Lessor from exercising any rights or
remedies specified herein or otherwise.
6. BASE RENTAL. (Beginning on April 1, 1998, Lessee shall pay to Lessor a
monthly rental (the "Base Rental") as follows:
April 1, 1998 until September 30, 1998 $20,625.00 per month
October 1, 1998 until December 31, 1998 $35,291.67 per month
January 1, 1999 until March 31, 1999 $49,485.33 per month
April 1, 1999 until March 31, 2000 $58,482.67 per month
April 1, 2000 until March 31, 2002 $62,981.33 per month
April 1, 2002 until March 31, 2003 $71,978.67 per month
7. ADDITIONAL RENTAL.
(a) Beginning on the Commencement Date and continuing thereafter for each
calendar year during the Term, Lessor shall present to Lessee, prior to the
beginning of said period, a statement of Forecast Additional Rental. Lessee
shall pay Forecast Additional Rental in equal monthly installments in advance.
"Forecast Additional Rental" shall mean Lessor's reasonable estimate of
Additional Rental. Lessee shall be liable also for any Additional Rental.
(b) The term "Additional Rental" shall mean Lessor's Actual Operating
Expenses (defined below in paragraph 8) for the Leased Premises incurred during
each calendar year.
(c) By April 1 of each year during the Term, or as soon as possible
thereafter, Lessor shall provide Lessee a statement showing the Actual
Operating Expenses for the twelve-month period then ended, and a statement
prepared by Lessor comparing Forecast Additional Rental with Additional Rental.
In the event that Forecast Additional Rental exceeds Additional Rental for said
calendar year, Lessor shall pay Lessee (in the form of a credit against rentals
next due) an amount equal to such excess. In the event that the Additional
Rental exceeds Forecast Additional Rental for said calendar year, Lessee shall
pay Lessor, within thirty (30) days of receipt of the statement, an amount equal
to such difference. The calculation described in this paragraph 6(c) shall be
made as soon as possible after the termination of the Lease, and all provisions
of this Lease relating to said calculation shall survive the termination of this
Lease.
/s/ /s/
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Lessor Lessee
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8. LESSOR'S ACTUAL OPERATING EXPENSES. Lessor shall pay all of Lessor's
"Actual Operating Expenses," which term shall include solely the following:
(a) Ad valorem taxes for the Leased Premises.
(b) Casualty insurance on the Leased Premises to be carried by Lessor as
described in paragraph 12 below.
9. LESSEE'S OPERATING EXPENSES. Lessee is responsible for paying when due
Lessee's Operating Expenses for the Leased Premises. The term "Lessee's
Operating Expenses" shall mean the aggregate all of operating and maintenance
expenses incurred by Lessor or Lessee in connection with the Leased Premises,
other than Lessor's Actual Operating Expenses, and shall include without
limitation the following:
(a) The cost of all wages, salaries and any ancillary expenses of all
employees actually engaged in operation and maintenance of the Leased Premises,
including taxes, insurance and benefits relating thereto.
(b) The cost of all supplies and material used in operation and
maintenance of the Leased Premises.
(c) The cost of all utilities, including but not limited to electric, gas,
water, heating, lighting, air conditioning and ventilation of the Building.
(d) The cost of all maintenance, service and operating agreements for the
Leased Premises and related equipment, including but not limited to security
service, window cleaning, elevator maintenance and janitorial service.
(e) The gross cost of liability insurance applicable to the Leased Premises
and Lessor's personal property used in connection therewith; excluding however
cost of casualty insurance on the Building included in Lessor's Actual Operating
Expenses.
(f) The cost of all taxes and assessments and governmental charges whether
federal, state, county or municipal, whether they be by taxing district or
authorities presently taxing the Leased Premises or by others, subsequently
created or otherwise, and any other taxes and assessments attributable to the
Leased Premises or its operator and maintenance or its operation,
/s/ /s/
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Lessor Lessee
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excluding only Lessor's federal and state taxes on income, franchise tax and
inheritance tax. Lessee will be responsible for all ad valorem taxes on its
personal property and on the Leased Premises not covered by Lessor's Actual
Operating Expenses as described above. If any such taxes, assessments or charges
are paid by Lessor, Lessee will reimburse Lessor therefor, upon Lessor's demand
accompanied by a supporting statement setting forth Lessor's reasonable
calculation of the amount of such taxes chargeable to the Leased Premises.
(g) The cost of repairs, replacements and maintenance on or of the Leased
Premises (excluding repairs to the structure, foundation and the exterior walls
of the Building or replacement of the roof membrane). Lessee's obligation to
maintain, repair and make replacements to the Leased Premises shall cover, but
not be limited to, pest control (including termites), roof repairs, trash
removal and the maintenance, repair and replacement of all window glass, HVAC,
electrical, plumbing, fire and security and other mechanical systems.
(h) The cost of expenditures, capital or otherwise, made for the specific
purpose of installing equipment, devices or materials intended to reduce
operating expenses of the Building if required by law or regulation of a
governmental authority.
(i) The cost of landscaping and any other costs necessary to maintain the
Leased Premises in a first class condition.
10. SECURITY DEPOSIT. Upon the execution of this Lease, Lessee shall pay
Lessor a security deposit in the amount of Three Hundred Thousand Dollars
($300,000) as security for Lessee's full performance of all the provisions of
this Lease. If Lessee fails to pay rent or otherwise defaults with respect to
any provision of this Lease, Lessor may use, apply or retain all or any portion
of the security deposit for the payment of Base Rent, Additional Rent, or any
other charge in default, or for the payment of any other sum to which Lessor
may become obligated by reason of Lessee's default, or to compensate Lessor for
any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies
all or any portion of the security deposit, Lessee must within five days after
written demand, deposit cash with Lessor in any amount sufficient to restore the
security deposit to the original amount and Lessee's failure to do so is a
material breach of this Lease. The security deposit shall be placed in an
interest bearing account or other instruments chosen by Lessee in Lessor's name
at a bank chosen by Lessee. If Lessee performs all of Lessee's obligations
hereunder, the security deposit, or as much thereof as has not been applied by
Lessor shall be returned to Lessee with accrued interest. At the end of the
/s/ /s/
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Lessor Lessee
5
<PAGE>
twenty-fourth month of this lease, so long as Lessee has paid all Base Rental
and Additional Rental amounts on or before the due date each month, Lessor will
refund $75,000 of Lessee's security deposit. At the end of the thirty-sixth
month of this lease, so long as Lessee has paid all Base Rental and Additional
Rental amounts on before the due date each month, Lessor will refund $50,000 of
Lessee's security deposit plus one-half of the accrued interest on Lessee's
security deposit. At the end of the forty-eighth month of this lease, so long as
Lessee has paid all Base Rental and Additional Rental amounts on or before the
due date each month, Lessor will refund $50,000 of Lessee's security deposit
plus one-half of the accrued interest over the last twelve months. Lessee will
request in writing any refunds of its security deposit. Lessee's security
deposit shall never drop below $150,000.
11. LESSEE'S DUTIES.
(a) Use of Leased Premises. The Leased Premises are to be used and occupied
by the Lessee solely for the purpose of general office, engineering labs and
computer rooms and for no other purpose without the prior written consent of
Lessor, which consent shall not be unreasonably withheld. Lessee agrees not to
commit or suffer to be committed on the Leased Premises any nuisance or other
act or thing against public policy or which violates any law or governmental
regulation or which is disreputable or which may disturb the quiet enjoyment of
any sublease of the Building. Lessee will not use, occupy, or permit the use or
occupancy of the Leased Premises for any unlawful, disreputable, immoral, or
hazardous purpose, or maintain or permit the maintenance of any public or
private nuisance, or keep any substance or carry on or permit any operation
which might emit offensive odors into other portions of the Building or permit
anything to be done which would increase the fire insurance rate of the Building
or contents or which could lead to the cancellation of the fire insurance
coverage.
(b) Condition of the Leased Premises. Lessee shall not damage the Leased
Premises and will maintain the Leased Premises in a clean, attractive condition
and in good repair, ordinary wear and tear excepted. Upon termination of this
Lease, Lessee will surrender and deliver up the Leased Premises in good order
and repair and in the same condition as upon the Commencement Date of this
Lease, ordinary wear and tear excepted.
(c) Compliance with Laws. Lessee will comply with all applicable federal,
state, municipal and other laws, ordinances, rules, and regulations applicable
to the Leased Premises and to the business conducted therein by Lessee,
including without limitation the American's
/s/ /s/
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Lessor Lessee
6
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with Disabilities Act (collectively, "Applicable Laws"). Within fourteen (14)
days of receipt, Lessee shall forward to Lessor copies of any notices received
from any governmental authority regarding noncompliance with any Applicable
Laws. Lessor represents and warrants to Lessee, that to the best of Lessor's
knowledge, that at the commencement of the Lease, the Leased Premises are in
compliance with all applicable laws.
(d) Liens. Lessee shall allow no liens to be filed against the Leased
Premises, or any part thereof, and shall promptly cause the release any liens
that are filed against the Leased Premises, or any part thereof
(e) Alterations, Addition and Improvements. Lessee covenants and agrees not
to permit the Leased Premises to be used for any purpose other than that stated
in paragraph 10(a) hereof, or make or allow to be made any alterations or
physical additions in or to the Leased Premises, or place on the Leased Premises
any signs visible from outside the Leased Premises, or place any safes or vaults
(whether movable or not) upon or in the Leased Premises, without first obtaining
the written consent of Lessor. All plans and drawings pertaining to buildout or
remodeling of the Building exterior, corridors or core, shall first be submitted
to Lessor for review and reasonable determination of Lessor's approval or
disapproval. Remodeling and buildout of the general office and lab areas are
excluded from Lessor review. Within 7 days of any and all remodeling, Lessee
will provide Lessor an electronic file and blue line drawing of changes to the
as-built of the Building. Any and all such alterations, physical additions, or
improvements made to the Leased Premises shall at once become the property of
Lessor and shall be surrendered to Lessor upon the termination of this Lease,
whether by lapse of time or otherwise; however, this clause shall not apply to
movable equipment or furniture owned by Lessee, provided no damage is caused to
the Leased Premises by the removal thereof If not in default at the termination
of this Lease, Lessee may remove all such fixtures, equipment, decoration,
furniture or other such items installed by Lessee. Any damage occasioned and
caused by the installation or removal of such fixtures and equipment shall be
repaired at Lessee's expense. Upon written request by Lessor, Lessee shall
remove all such furniture and equipment and repair the damage caused by the
removal of same. In the event Lessee does not remove such fixtures, equipment
and other installed items, Lessor shall have the right to remove the same and to
repair any damage caused by such removal, and Lessee shall be obligated to pay
the cost of such removal and repair.
/s/ /s/
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Lessor Lessee
7
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(f) Rules and Regulations. Lessee shall comply with the Rules and
Regulations of the Building provided in Exhibit B attached hereto and made a
part hereof. Lessor reserves the right from time to time, after consultation
with Lessee and upon written notice to Lessee, to make such changes, additions
or amendments to the Rules and Regulations as it may deem necessary or
advisable. Lessor shall have no liability to Lessee for any failure of any
sublessees or lessees of the Building to comply with such Rules and Regulations.
(g) Operation. Lessee shall not place, install, or operate on the Leased
Premises or in any part of the Building any engine, refrigerating, heating or
air conditioning apparatus, stove, or machinery, or conduct mechanical
operations, or place or use in or about the Leased Premises any inflammable,
explosive, hazardous, or odorous solvents or materials without the prior written
consent of Lessor. No portion of the Leased Premises shall at any time be used
for cooking, residential quarters; provided, however, that Lessee may place
refrigerators and microwave ovens in the Building.
(h) Repair and Maintenance. Lessee shall, at its own cost, repair/replace
any damage or injury done to the Leased Premises or any part thereof caused by
Lessee or Lessee's agents, contractors, employees, invitees, or visitors. If
Lessee fails promptly to make such repairs/replacements to the Leased Premises,
Lessor may make such repairs/replacement, and Lessee shall repay the cost of
such repairs/replacement plus ten percent (10%) thereof to Lessor on demand.
(i) Telephone System.
(i) As part of this Lease, Lessor hereby leases to Lessee, the
existing telephone system "as is where is", including without limitation all
cabling, telephone switch, telephone instruments, voice mail system, network
cabling in the Building (collectively called the "Telephone System") as more
particularly described on Exhibit C attached hereto for all purposes. Lessee
may, at its own cost, add upgrades to the Telephone System at any time during
the Term. Any such upgrades shall become the property of Lessor and shall
remain with the Telephone System after departure of Lessee from the Leased
Premises.
(ii) Lessee shall maintain and pay for telephone service provided by a
third party approved by Lessor. Any existing unexpired service agreements at the
commencement or
/s/ /s/
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Lessor Lessee
8
<PAGE>
termination of this Lease shall be paid in full by Lessee or shall be paid by
Lessor and reimbursed to Lessor by Lessee.
(iii) Lessee must not sell, mortgage or part with possession or
control, or attempt to sell, mortgage or part with possession or control of the
Telephone System, except as provided in paragraph 18 hereof.
(iv) Lessee may not pledge, encumber, create a security interest in,
or permit any lien to become effective on all or any portion of the Telephone
System. On the occurrence of any of these events, Lessee will be in default.
Lessee must promptly notify Lessor of any such liens, charges, or other
encumbrances of which Lessee has knowledge. Lessee must promptly pay or satisfy
any obligation from which any such lien or encumbrance arises. Lessee must
deliver to Lessor appropriate satisfactions, waivers, or evidence of payment of
any such lien or encumbrance.
(v) On the expiration of the Term, or on any earlier termination of
this Lease, Lessee must return the Telephone System to Lessor in good repair,
condition and working order, normal wear and tear excepted. In addition, Lessee
will provide Lessor a complete and updated inventory of the Telephone System.
(j) Signage. Lessee shall be allowed exterior signage on the Building
subject to Lessor and City of Austin design approval.
(k) Lessor Access. Lessor shall have the right to enter upon and inspect
the Leased Premises following reasonable notice to Lessee in accordance with
paragraph 21(b).
12. QUIET ENJOYMENT. So long as Lessee is not in default under the terms
and provisions of this Lease, Lessee shall peaceably hold and enjoy the Leased
Premises during the said term.
13. INSURANCE; INDEMNITY.
(a) Lessee's Insurance. Lessee shall, at Lessee's expense, obtain and keep
in force during the term of this Lease:
/s/ /s/
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Lessor Lessee
9
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(i) Comprehensive general liability insurance with broad form general
liability endorsement, in an amount of not less than $1,000,000 per occurrence
of bodily injury and property damage combined, or in a greater amount as
reasonably determined by Lessor, and shall insure Lessee with Lessor as an
additional insured against liability arising out of the use, occupancy or
maintenance of the Leased Premises. Compliance with the above requirement
shall not, however, limit the liability of Lessee hereunder.
(ii) Worker's compensation coverage as required by law, together with
employer's liability coverage, with a limit of not less than $500,000.
(iii) Fire and extended coverage insurance, with vandalism and
malicious mischief, in an amount sufficient to cover not less than 100% of the
full replacement cost, as the same may exist from time to time, of all Lessee's
personal property, fixtures, equipment, and tenant improvements.
(b) Insurance Policies. Lessee shall deliver to Lessor copies of liability
insurance policies required under (a) above, or certificates evidencing the
existence and amounts of such insurance, within seven (7) days after the
Commencement Date. No such policy shall be cancelable or subject to reduction of
coverage or other modification except after thirty (30) days prior written
notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals thereof.
(c) No Representation of Adequate Coverage. Lessor makes no representation
that the limits or forms of coverage of insurance specified in this Paragraph 13
are adequate to cover Lessee's property or obligations under this Lease.
(d) Hazard Insurance. During the Lease term, Lessor shall maintain policies
of insurance covering loss of or damage to the Leased Premises in an amount
equal to 100% of the replacement value of the Building. Such policies shall
provide protection against all perils included within the classification of
fire, extended coverage, vandalism, malicious mischief, special extended perils
(all risk), and Inflation Guard endorsement, and any other perils (except flood
and earthquake, unless required by any lender holding a security interest in the
Leased Premises) which Lessor deems necessary.
/s/ /s/
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Lessor Lessee
10
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(e) INDEMNITY. LESSEE SHALL INDEMNIFY AND HOLD HARMLESS LESSOR AND
LESSOR'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, GUESTS, INVITEES, AND LENDERS
FROM AND AGAINST ALL LOSSES, CLAIMS, COSTS, DAMAGE, LIABILITY OR EXPENSES,
INCLUDING BUT NOT LIMITED TO REASONABLE ATTORNEYS' FEES, ARISING OUT OF ANY AND
ALL INJURIES TO OR DEATH OF ANY PERSON OR DAMAGE TO ANY PROPERTY ARISING OUT OF
ANY OCCURRENCE ON OR IN THE PREMISES, INCLUDING THAT CAUSED BY THE NEGLIGENCE OF
LESSOR, BUT NOT TO THE EXTENT CAUSED BY THE INTENTIONAL ACT OR GROSS NEGLIGENCE
OF LESSOR, OR ARISING FROM ANY BREACH OR DEFAULT IN THE PERFORMANCE OF ANY OF
LESSEE'S OBLIGATIONS UNDER THIS LEASE, OR ARISING FROM ANY ACT OR OMISSION OF
LESSEE OR LESSEE'S DIRECTORS, OFFICERS, CONTRACTORS, CUSTOMERS, INVITEES,
EMPLOYEES. IF ANY ACTION OR PROCEEDING IS BROUGHT AGAINST LESSOR BY REASON OF
ANY SUCH MATTER, LESSEE UPON NOTICE FROM LESSOR SHALL DEFEND THE SAME AT
LESSEE'S EXPENSE BY COUNSEL REASONABLY SATISFACTORY TO LESSOR AND LESSOR SHALL
COOPERATE WITH LESSEE IN SUCH DEFENSE. LESSOR NEED NOT HAVE FIRST PAID ANY SUCH
CLAIM IN ORDER TO BE SO INDEMNIFIED. LESSEE, AS A MATERIAL PART OF THE
CONSIDERATION TO LESSOR, HEREBY ASSUMES ALL RISK OF DAMAGE TO PROPERTY OF LESSEE
OR INJURY TO PERSONS, IN, UPON OR ABOUT THE LEASED PREMISES ARISING FROM ANY
CAUSE AND LESSEE HEREBY WAIVES ALL CLAIMS IN RESPECT THEREOF AGAINST LESSOR,
EXCEPT TO THE EXTENT CAUSED BY THE INTENTIONAL ACT OR GROSS NEGLIGENCE OF
LESSOR.
(f) Exemption of Lessor from Liability. Lessee hereby agrees that except to
the extent caused by the intentional act or gross negligence of Lessor, Lessor
shall not be liable to Lessee's business or any loss of income therefrom or for
loss of or damage to the goods, wares, merchandise or other property of Lessee,
Lessee's employees, invitees, customers, or any other person in or about the
Leased Premises, nor shall Lessor be liable for injury to the person of Lessee,
Lessee's employees, agents or contractors, regardless of whether such damage or
injury is caused by or results from theft, fire, steam, electricity, gas, water
or rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air-conditioning or lighting fixtures,
or from any other cause, including the negligence of Lessor, regardless of
whether said damage or injury results from conditions arising upon the Leased
/s/ /s/
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Lessor Lessee
11
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Premises, or of the equipment, fixtures or appurtenances applicable thereto, and
regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible. Lessor shall not be liable for any damages
arising from any act or neglect of any other tenant, occupant or user of the
Leased Premises, nor from the failure of Lessor to enforce the provisions of any
lease of any other sublessee of the Leased Premises.
(g) Waiver of Subrogation. Anything in this Lease to the contrary
notwithstanding, as and to the extent permitted by applicable insurance
policies, Lessor and Lessee each hereby waive any and all rights of recovery,
claim, action, or cause of action, against the other, its agents, officers, or
employees, for any loss or damage that may occur to the Leased Premises, or any
improvements thereto, or the Building, or any improvements thereto, or any
personal property of such party therein, by reason of fire, the elements, or any
other cause to the extent but only to the extent the foregoing are insured
against under the terms of standard fire and extended coverage insurance
policies, regardless of cause or origin, including negligence of the other party
hereto, its agents, officers, or employees, and covenants that no insurer shall
hold any right of subrogation against such other party.
(h) Fire or Other Casualty. The parties hereto mutually agree that if any
time during the Term the Leased Premises or any portion of the Building are
partially (more than 20% of replacement cost) or totally destroyed by fire or
other casualty covered by the fire and extended coverage insurance, the Lessor
may, at its option, upon written notice to Lessee, delivered within sixty (60)
days after such occurrence, elect either (i) to promptly repair and restore the
Leased Premises and the Building, as soon as it is reasonably practicable, to
substantially the same conditions in which the Leased Premises and the Building
were before such damage, or (ii) to terminate the Lease with such termination
to be effective on the date of such fire or other casualty; provided, however in
the event Lessee has occupied and conducted business on the Leased Premises
during the interim between the fire or other casualty and the delivery of the
written notice, the termination will be effective on the date Lessee last
occupied and conducted business on the Leased Premises.
In the event the Leased Premises are completely destroyed or so damaged by
fire or other casualty covered by the fire and extended coverage insurance to be
carried by Lessor under the terms hereof that it cannot reasonably be used by
Lessee for the purposes herein provided and this Lease is not terminated as
above provided, then there shall be a total
/s/ /s/
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Lessor Lessee
12
<PAGE>
abatement of rent until the Leased Premises are made usable. In the event the
Leased Premises are substantially destroyed or damaged by fire or other hazard
so that the Leased Premises can be only partially used by Lessee for the
purposes herein provided, then there shall be a partial abatement in the rent
corresponding to the time and extent to which the Leased Premises cannot be used
by Lessee.
If the Leased Premises shall be damaged by fire or other casualty
resulting from the fault or negligence of Lessee, or the agents employees,
licensees, or invitees of Lessee, then, to the extent not covered by insurance,
such damage shall be repaired by and at the expense of Lessee, under the
direction and supervision of Lessor, and rent shall continue without abatement.
(i) Condemnation and Loss or Damage. If the Leased Premises or any part
thereof shall be taken or condemned for any public purpose to such an extent as
to render the remainder of the Leased Premises, in the opinion of Lessor and
Lessee, not reasonably suitable for Lessee's occupancy, this Lease shall, at the
option of either party, forthwith cease and terminate. All proceeds from any
taking or condemnation of the Leased Premises shall belong to and be paid to
Lessor. In addition, Lessor shall not be liable or responsible to Lessee for any
loss or damage to any property or persons occasioned by theft, fire, act of God,
public enemy, injunction, riot, strike, insurrection, war, court order,
requisition or order of governmental body or authority, force majeure or any
other cause beyond the control of Lessor, or for any damage or inconvenience
which may arise through repair or alteration of any part of the Building, or
failure to make repairs, except to the extent caused by the intentional act or
gross negligence of Lessor.
14. DEFAULT BY LESSEE. The occurrence of any one or more of the following
events shall constitute a default and breach of the Lease by Lessee.
(a) The vacating or abandonment of the Leased Premises by Lessee. Such
vacating or abandonment shall be deemed to have occurred upon the absence of the
Lessee from the Leased Premises for ten (10) consecutive days while Lessee is in
default in the payment of any sum to be paid by Lessee hereunder, during the
term of the Lease or any renewals or extensions thereof.
(b) The failure by Lessee to make any payment of Monthly Rental, Additional
Rental or Forecast Additional Rental or any other payment required to be made by
Lessee hereunder as
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
13
<PAGE>
and when due, provided such failure shall continue for a period of ten (10)
business days after written notice thereof by Lessor to Lessee.
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by the
Lessee, other than described in Paragraph 13(a) and (b) above, where such
failure shall continue for a period of thirty (30) days after written notice
thereof by Lessor to Lessee; provided, however, that if the nature of Lessee's
default is such that more than thirty (30) days are reasonably required for its
cure, then Lessee shall not be deemed to be in default if Lessee commences such
cure within said thirty (30) day period and thereafter diligently prosecutes
such cure to completion.
(d) The making by Lessee, or any guarantor of Lessee's obligations under
this Lease, of any general assignment or general arrangement for the benefit of
creditors; or the filing by or against Lessee, or any guarantor of Lessee's
obligations under this Lease, of a petition to have Lessee, or any guarantor of
Lessee's obligations under this Lease, adjudged a bankrupt, or a petition for
reorganization or arrangement under any laws relating to bankruptcy (unless, in
the case of a petition filed against Lessee, or any guarantor of Lessee's
obligations under this Lease, the same is dismissed within thirty (30) days); or
the appointment of a trustee or a receiver to take possession of substantially
all of Lessee's assets located at the Leased Premises or of interests in this
Lease, where possession is not restored to Lessee within thirty (30) days; or
the attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Leased Premises or of Lessee's interest in this
Lease, where such seizure is not discharged in thirty (30) days.
15. REMEDIES IN DEFAULT BY LESSEE. Except as otherwise required herein, in
the event of any such default or breach by Lessee, from time to time, in its
sole discretion, and without notice and without limiting Lessor in the exercise
of any other right or remedy which Lessor may be entitled to exercise at law or
in equity, Lessor may elect to:
(a) Terminate this Lease, after ten (10) business days written notice to
Lessee, and forthwith repossess the Leased Premises and be entitled to recover
as damages a sum of money equal to the total of (1) the cost of recovering the
Leased Premises; (2) all unpaid Base Rental, Additional Rental and Forecast
Additional Rental earned at the time of termination, plus interest thereon at
the maximum lawful rate; (3) an amount equal to the difference between (i) the
total rental (Base Rental, Additional Rental and Forecast Additional Rental
computed as stated in this
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
14
<PAGE>
Lease) for the remaining portion of the Term; and (ii) the then present value
of the fair rental value of the Leased Premises for such period (the parties
hereto agreeing that the fair rental value of the Leased Premises shall be the
sum of all rentals to be paid during such period discounted at the rate of ten
percent (10%) per annum); (4) the cost of repairs or of alteration of the Leased
Premises that are the Lessee's responsibility under this Lease; (5) that portion
of any leasing commission paid by Lessor applicable to the unexpired term of
Lease; and (6) any other sum of money and damages owed by Lessee to Lessor.
(b) Terminate, after five (5) days written notice to Lessee, Lessee's right
of possession (but not the Lease) and repossess the Leased Premises by forcible
entry or otherwise, without demand or notice of any kind to Lessee and without
terminating this Lease, in which event Lessor may, but shall be under no
obligation to do so, re-let the same for the account of Lessee for such rent and
upon such terms as shall be satisfactory to Lessor. For the purpose of such re-
letting, Lessor is authorized to make any repairs, changes, alterations, or
additions in or to Leased Premises that may be desirable, necessary or
convenient, and, if the same are re-let and a sufficient sum shall not be
realized from such re-letting after paying the unpaid Rental, Additional Rental
or Forecast Additional Rental due hereunder earned but unpaid at the time of re-
letting, plus interest thereon at a maximum lawful rate, the cost of recovering
possession, and all of the costs and expenses of such repairs, changes,
alterations, and additions and the expenses of such re-letting and of the
collection of the rent accruing therefrom to satisfy all rent provided for in
this Lease to be paid, the Lessee shall satisfy and pay any such deficiency upon
demand therefor from time to time. If Lessor is unable to re-let the Lease
Premises, then Lessee shall pay to Lessor as damages a sum equal to the amount
of all rentals specified in this Lease for the term thereof. Lessee agrees that
Lessor may file suit to recover any sums falling due under the terms of this
paragraph from time to time, and that no delivery or recovery of any portion due
Lessor hereunder shall be any defense to any subsequent action brought for any
amount not previously reduced to judgment in favor of Lessor, nor shall such re-
letting be construed as an election on the part of the Lessor to terminate this
Lease unless a written notice of such intention be given to Lessee by Lessor.
Notwithstanding any such re-letting without termination, Lessor may at any time
thereafter elect to terminate this lease for any previous breach.
(c) In the event of abandonment as defined in paragraph 14(a) above, of the
Leased Premises by Lessee, Lessor may enter the premises to make inspections, to
show prospective tenants and to remove and store any property of Lessee in the
Leased Premises, without
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
15
<PAGE>
terminating this Lease or limiting any other remedy of Lessor under this Lease.
In addition to any other rights of Lessor, Lessor may dispose of the stored
property if Lessee does not claim such property within sixty (60) days after the
property is stored. Lessor shall deliver by certified mail to Lessee at Lessee's
last known address a notice stating that Lessor may dispose of Lessee's property
if Lessee does not claim the property within sixty (60) days after the date the
property is stored. Lessee's rights in and to such stored property and Lessor's
obligations as herein set forth with regard to such stored property are subject
to and subordinated to the landlord's lien in and to all personal property of
Lessee on the Leased Premises as set forth in paragraph 15(g). Notwithstanding
anything herein to the contrary, upon an abandonment of the Leased Premises by
Lessee, Lessor shall be under no obligation to re-enter the Leased Premises,
store any property or take any other action. In any such event, Lessor may
continue this Lease and recover the full amount of the rent to be paid hereunder
as it comes due.
(d) Pursuit of any remedy by Lessor, whether hereunder or otherwise, shall
never be deemed an election of remedies. Lessee further agrees that failure by
Lessor to use diligence in enforcing its rights against Lessee, or in requiring
performance by Lessee of any of its obligations hereunder or in preserving the
liability of Lessee hereunder, shall not impair, reduce or in any manner affect
Lessor's rights or remedies hereunder, or Lessee's liability or obligations
hereunder.
(e) Exercise by Lessor of any one or more remedies hereunder granted or
otherwise available shall not be deemed to be an acceptance of surrender of the
Leased Premises by Lessee, whether by agreement or by operation of law, it being
understood that such surrender can be effected only by the written agreement of
Lessor and Lessee. No removal or other exercise of dominion by Lessor over the
property of Lessee or others on the Leased Premises shall be deemed unauthorized
or constitute a conversion, Lessee hereby consenting, after any event of
default, to the aforesaid exercise of dominion over Lessee's property within the
Leased Premises. All claims for damages, except to the property of Lessee or
others on the Leased Premises, by reason of such re-entry and/or repossession
are hereby waived, as are all claims for damages by reason of any distress
warrant, forcible entry and detainer proceedings, sequestration proceedings or
other legal process. Lessee agrees that any re-entry by Lessor may be pursuant
to judgment contained in forcible entry and detainer proceedings or other legal
proceedings or without the necessity for any legal proceedings if such re-entry
may be accomplished without force, as Lessor may elect, and Lessor shall not be
liable in trespass or otherwise.
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
16
<PAGE>
(f) If Lessee should fail to make any payment or cure any default hereunder
within the time herein permitted, Lessor, without being under any obligation to
do so and without thereby waiving such default, may make such payment and/or
remedy such other default for the account of Lessee (and enter the Leased
Premises for such purpose), and thereupon Lessee shall be obligated to, and
hereby agrees, to pay Lessor, upon demand, all reasonable costs, expenses and
disbursements (including reasonable attorneys' fees) incurred by Lessor in
taking such remedial action.
(g) In the event that Lessor shall have taken possession of the Leased
Premises pursuant to the authority herein granted, then Lessor shall have the
right to keep in place and use all of the furniture, fixtures, equipment, and
other personal property at the Leased Premises, including that which is owned by
or leased to Lessee, at all times prior to any foreclosure thereon by Lessor or
repossession thereof by any Lessor thereof or third party having a lien thereon.
Lessor shall also have the right to remove from the Leased Premises (without
notice to Lessee and without the necessity of obtaining a distress warrant, writ
of sequestration or other legal process) all or any portion of such furniture,
fixtures, equipment and other property located thereon and place same in storage
at any place within Travis County; and in such event, Lessee shall be liable to
Lessor for costs incurred by Lessor in connection with such removal and storage.
Lessor shall also have the right to relinquish possession of all or any portion
of such furniture, fixtures, equipment and other property to any person
("Claimant") claiming to be entitled to possession thereof who presents to
Lessor a copy of any instrument represented to Lessor by Claimant to have been
executed by Lessee granting Claimant the right under the circumstances to take
possession of such furniture, fixtures, equipment or other property, without the
necessity on the part of Lessor to inquire into the authenticity of said
instrument and without the necessity of Lessor making any investigation or
inquiry as to the validity of the factual or legal basis upon which Claimant
purports to act.
16. HOLDING OVER. In the event of holding over by Lessee after expiration
or termination of this Lease without the written consent of Lessor, Lessee shall
pay monthly as liquidated damages a sum equal to one and one-half (1 1/2) times
the amount of the monthly Base Rental, Forecast Additional Rental and Additional
Rental paid, or to be paid, by Lessee to Lessor for the last month of the Term
for the entire holdover period. No holding over by Lessee after the Term of the
lease shall operate to extend the Lease. In the event of any unauthorized
holding over, Lessee shall indemnify Lessor against all claims for damages by
any other Lessee to whom
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
17
<PAGE>
Lessor may have leased all or any part of the Leased Premises covered hereby
effective upon the termination of this Lease. Any holding over with the consent
of Lessor in writing shall thereafter constitute this Lease a lease from month
to month.
17. NON-WAIVER. Failure of Lessor to declare any default immediately upon
occurrence thereof, or delay in taking any action in connection therewith, shall
not waive such default, but Lessor shall have the right to declare any such
default at any time and take such action as might be lawful or authorized
hereunder, either at law or in equity.
18. DEFAULT BY LESSOR. Except as may otherwise be provided herein, Lessor
shall not be in default unless Lessor fails to perform obligations required of
Lessor within a reasonable time, but in no event later than thirty (30) days
after written notice by Lessee to Lessor and to the holder of any first mortgage
or deed of trust covering the Leased Premises whose name and address shall have
been furnished previously to Lessee in writing, specifying wherein Lessor has
failed to perform such obligations; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are required for
performance, then Lessor shall not be in default if Lessor commences performance
within such thirty (30) day period and thereafter diligently prosecutes the
same to completion. Except as may otherwise be provided herein, Lessee shall
not have the right to terminate this Lease, it being agreed that Lessee's
remedies shall be limited to actual damages, without any award for incidental
or consequential damages.
19. ASSIGNMENT AND SUBLETTING.
(a) Lessee may assign the Leased Premises or any part thereof or sublease,
mortgage, pledge, or hypothecate its leasehold interest only with the prior
express written permission of Lessor. Such permission shall not be unreasonably
withheld or delayed. Any attempt to do any of the foregoing without the prior
express written permission of Lessor, shall be void and of no effect. Lessee
must furnish to Lessor the name and terms of any proposed assignment or sublease
of each proposed assignee or sublessee.
(b) Any assignment or sublease of the leasehold, whether or not consent is
required under the terms of this Lease, and consent to any assignment or
sublease by Lessor, shall not operate to release Lessee of any obligation
hereunder and Lessee shall remain liable for the performance of all of the
covenants, duties, and obligations hereunder including without limitation
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
18
<PAGE>
the obligation to pay all rent and other sums herein provided to be paid, and
Lessor shall be entitled to enforce the provisions of this instrument against
the Lessee and/or against any assignee or sublessee, or either of them, at the
election of Lessor.
(c) Lessee shall give Lessor written notice of the consummation of any
assignment or sublease consented to by Lessor, shall furnish to Lessor copies of
all assignments, transfers, subleases, and other documents executed in
connection with such assignment or sublease, and shall notify Lessor in writing
of the date the assignee or sublessee takes possession of the Leased Premises or
a portion thereof.
(d) Lessee shall require of any sublessee a security deposit equal to at
least one month's rent with Lessor to be held pursuant to the terms of paragraph
9 above.
20. SUBORDINATION. This Lease and Lessee's rights hereunder are and will
remain subordinate to any ground lease, mortgage, deed of trust or any other
hypothecation for security now or hereafter placed upon the Leased Premises, and
to all increases, renewals, modifications, consolidations, replacements, and
extension thereof (collectively referred to as the "Mortgage"). If the holder of
a Mortgage becomes the owner of the Leased Premises by reason of foreclosure or
acceptance of a deed in lieu of foreclosure, at such holder's election Lessee
will be bound to such holder or its successor-in-interest under all terms and
conditions of this Lease, and Lessee will be deemed to have attorned to and
recognized such holder or successor as Lessor's successor-in-interest for the
remainder of the Lease term or any extension thereof. In such event, the holder
of such Mortgage will agree that, so long as Lessee is not then in default
hereunder, such holder will recognize this Lease and will not disturb Lessee in
its possession of the Leased Premises for any reason other than one which would
entitle the Lessor to terminate this Lease under its terms. The foregoing is
self-operative and no further instrument of subordination and/or attornment will
be necessary unless required by Lessor or the holder of a Mortgage, in which
case Lessee will, within ten (10) days after written request, execute and
deliver without charge any documents reasonably required by Lessor or such
holder in order to confirm the subordination and attornment set forth above.
Should the holder of a Mortgage request that this Lease and Lessee's rights
hereunder be made superior, rather than subordinate, to the Mortgage, then
Lessee will, within ten (10) days after written request, execute and deliver
without charge such agreement as may be reasonably required by such holder in
order to effectuate and evidence such superiority of the Lease to the Mortgage.
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
19
<PAGE>
21. MISCELLANEOUS.
(a) Attorney's Fees. In case it should be necessary or proper for Lessor or
Lessee to bring any action under this Lease, then the prevailing party in any
such action shall be entitled to reasonable attorneys' fees, expenses and court
costs from the non-prevailing party.
(b) Lessor's Entry/Inspections. With 4 hours notice, Lessor's agents and
representatives shall have the right to enter the Leased Premises at any
reasonable time during business hours (or at any time in case of emergency) (i)
to inspect the Premises, (ii) to make such repairs as may be required or
permitted pursuant to this Lease, and/or (iii) during the last 180 day period
prior to expiration of this Lease or following notice from Lessee of Lessee's
intent to cancel this Lease pursuant to paragraph 3 above, for showing the
Leased Premises to any prospective tenant. In addition, Lessor shall have the
right to erect a suitable sign on the Leased Premises stating the Leased
Premises are available for lease. Lessee will provide Lessor with all keys
necessary to enter the Leased Premises in case of an emergency.
(c) No Partnership or Agency. Lessor does not in any way or for any purpose
become a partner of Lessee in the conduct of its business or otherwise, or a
joint venturer with Lessee. Lessee shall not be deemed an agent of Lessor for
any purpose.
(d) Accord and Satisfaction. No payment by Lessee or receipt by Lessor of a
lesser amount than the monthly consideration or other payments herein stipulated
shall be deemed to be other than an account of the earliest stipulated monthly
consideration or other payments then due, or shall any check or writing
accompanying any check or payment as monthly consideration or other payment
provided for herein be deemed an accord or satisfaction; and Lessor may accept
such check or payment without prejudice to Lessor's right to recover the
balance of such monthly consideration or other payments or to pursue other
remedies provided in this Lease or by law.
(e) Acceptance of Leased Premises and Building by Lessee. In consideration
of the Allowance granted by Lessor to Lessee under paragraph 22 hereof, the
taking of possession of the Leased Premises by Lessee shall be conclusive
evidence as against Lessee (1) that Lessee accepts the Leased Premises in "AS
IS" condition and as suitable for the purpose for which same is leased; (2) that
it accepts the Building and the land and each and every part and appurtenance
thereof as being in a good and satisfactory condition; and (3) that Lessee
waives any defects in the Leased Premises and its appurtenances. Lessor shall
not be liable, except in the
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
20
<PAGE>
event of negligence if and to the extent such liability is indemnified by
insurance, and in the event of the intentional act or gross negligence
notwithstanding whether such claim is indemnified by insurance, to Lessee or any
of its agents, employees, and servants for any injury or damage to person or
property due to the condition or design of or any defect in the Building or its
mechanical systems and equipment which may exist or occur. Lessor shall be
liable for simple negligence only to the extent Lessor is indemnified by
insurance.
In addition to a visual inspection of the Leased Premises, Lessor warrants
and conveys to Lessee that the Leased Premises are in good working order at
lease commencement including but not limited to: the roof membrane, HVAC,
Telephone System and security system.
(f) Laws Governing. The laws of the State of Texas shall govern the
interpretation and validity of, and other matters pertaining to, this lease.
(g) Notice. Any notice which may or shall be given under the terms of this
Lease shall, unless otherwise provided herein, be in writing and shall be either
delivered by hand or sent by United States Registered or Certified Mail, postage
prepaid, to the address below. Such addresses may be changed from time to time
by either party by giving written notice as provided above. Notice shall be
deemed given when delivered (if delivered by Hand) or when postmarked (if sent
by mail).
LESSOR: RGK RENTALS, LTD.
1301 West 25th Street, Suite 300
Austin, Texas 78705
Attention: David McNeil
LESSEE: APPLIED SCIENCE FICTION, INC.
8920 Business Park Drive
Austin, Texas 78759
Attention: Mark Urdahl
LESSEE: FACILITIES SERVICES, INC.
P.O. Box 830849
Richardson, Texas 75083
Attention: Jimmie Mayhew
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
21
<PAGE>
(h) Severability. If any clause or provision of this Lease is illegal,
invalid, or unenforceable, under present or future laws effective during the
term hereof, then it is the intention of the parties hereto that the remainder
of this lease shall not be affected thereby, and it is also the intention of
both parties that in lieu of each clause or provision that is illegal, invalid,
or unenforceable, there be added as a party of this Lease a clause or provision
as similar to in terms to such illegal, invalid, or unenforceable clause or
provision as is enforceable.
(i) Entire Agreement and Binding Effect. This Lease Agreement, including
exhibits A, B, C and D all of which are hereby incorporated herein by reference,
constitute the entire agreement between Lessor and Lessee; no prior written or
prior contemporaneous oral promises or representations shall be binding.
Paragraph captions herein are for convenience only, and neither limit nor
amplify the provisions of this Lease. The provisions of this Lease shall be
binding upon and insure to the benefit of the heirs, executors, administrator,
successors, and assigns of the parties, but this provision shall in no way alter
the restriction herein in connection with assignment and subletting by Lessee.
(j) Assignment by Lessor. Lessor shall have the right to transfer and
assign, in whole or in part, all of its rights and obligations hereunder and in
the Building and the Leased Premises referred to herein.
(k) Alterations. This Lease may not be altered, changed, or amended, except
by an instrument in writing signed by both parties herein.
(l) Gender. When required for clarity, the masculine gender shall also
include the feminine and neuter.
22. REFURBISHMENT ALLOWANCE. Lessor grants to Lessee a refurbishment
allowance of $269,920.00 (the "Allowance") to be used by Lessee for improvements
to and renovation of the Leased Premises (the "Improvements"). Upon submission
of invoices and releases by Lessee, Lessor shall promptly reimburse Lessee for
actual costs incurred in construction of the Improvements. Lessee is solely
responsible for the cost of any Improvements in excess of the Allowance.
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
22
<PAGE>
23. Brokerage. Lessor agrees to pay to KAM Properties, Inc. and the Don Cox
Company of Austin, Texas, for services performed in procurring and negotiating
this agreement, as set out in the Commission Agreement executed February 20,
1998.
EXECUTED this 20th day of March, 1998
LESSOR: RKG RENTALS, LTD.
By: KMS Ventures, Inc., Partner
By: /s/ Gregory A. Kozmetsky
-------------------------------
Gregory A. Kozmetsky, President
LESSEE: APPLIED SCIENCE FICTION, INC.
By: /s/ Mark Urdahl
------------------------------
Mark Urdahl, President and C.E.O.
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
23
<PAGE>
EXHIBIT A
LEASED PREMISES
BALCONES NORTH
OFFICE BUILDING
[FLOOR PLAN APPEARS HERE]
/s/ /s/
- ------------------ ---------------------
Lessor Lessee
A-1
<PAGE>
EXHIBIT B
RULES AND REGULATIONS
1. No signs of any kind or nature, symbol, or identifying mark shall be put
on the Building, elevators, staircases, entrances, parking areas or upon the
doors or walls, whether plate glass or otherwise of the Leased Premises nor
within the Leased Premises so as to be visible from the public areas or exterior
of the Building, without prior written approval of Lessor. All signs or
lettering shall conform in all respects to the sign and/or lettering criteria
established by Lessor.
2. Lessee shall not make or permit any loud or improper noises in the
building or otherwise interfere in any way with other Lessees.
3. Lessor will not be responsible for any lost or stolen personal property
or equipment from the Leased Premises or public areas, regardless of whether
such loss occurs when the area is locked against entry or not.
4. Lessee, or the employees, agents, servants, visitors, or licensees of
Lessee shall not, at any time or place, leave or discard rubbish, paper,
articles, or objects of any kind whatsoever outside the doors of the Leased
Premises or in the corridors or passageways of the Building. No animals or
vehicles of any description shall be brought into or kept in or about the
building.
5. None of the entries, passages, doors, hallways, or stairways in the
building shall be blocked or obstructed.
6. Lessor shall have the right to determine and prescribe the weight and
proper position of any unusually heavy equipment, including computers, safes,
large files, etc., that are to be placed in the building, and only those which
in the exclusive judgment of the Lessor will not do damage to the floors,
structure, and/or elevators may be moved into the Building. Any damage caused by
installing, moving, or removing such aforementioned articles in the Building
shall be paid by Lessee.
7. All Christmas and other decorations must be constructed of flame
retardant materials.
8. All doors leading from public corridors to the Leased Premises are to be
kept closed when not in use.
9. Canvassing, soliciting, or peddling in the Building is prohibited and
Lessee shall cooperate to prevent the same.
10. Lessee shall give immediate notice to Lessor in case of accidents in
the Leased Premises or in the Building or of defects therein or in any fixtures
or equipment, or of any known emergency in the Building.
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
1
<PAGE>
EXHIBIT C
TELEPHONE SYSTEM
A complete inventory of the Telephone System will be delivered to Lessee at
Lessee's possession of the Leased Premises
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
1
<PAGE>
EXHIBIT D
FAIR MARKET RENTAL RATE
If Lessee elects to renew this Lease, Base Rental and Forecasted Additional
Rental for each renewal term shall be an amount equal to one hundred percent
(100%) of the Fair Market Rental Rate of the Leased Premises in relation to
market conditions at the time of the extension. The Fair Market Rental Rate of
the Leased Premises shall be determined as follows:
After timely receipt by Lessor of Lessee's notice of exercise of option to
renew the Lease, Lessor and Lessee shall have a period of thirty (30) days in
which to agree on the Fair Market Rental Rate as the Base Rental for the Leased
Premises. If Lessor and Lessee agree on the Fair Market Rental Rate for the
Leased Premises, then they shall immediately execute a new lease.
In the event that Lessor and Lessee are unable to agree as to the Fair
Market Rental Rate of the Leased Premises under a renewal of the Lease within
thirty (30) days after such notice of intent to renew was given by Lessee,
Lessor and Lessee shall each promptly appoint an appraiser, and the two
appraisers so appointed shall select a third, or if they cannot agree upon a
third appraiser, either party may petition a court of competent jurisdiction for
the appointment of a third appraiser; provided, however, that each appraiser
must be an "MAI" appraiser with at least five (5) years experience in appraising
real property in Travis County, Texas. Each party shall be responsible for the
compensation, if any, of the third appraiser. Such appraisers shall each make a
separate appraisal of the Fair Market Rental Rate of the Leased Premises under a
renewal of the Lease and shall deliver copies of their appraisals to Lessor and
Lessee, and the average of the three appraisals shall be the figure designated
as the Fair Market Rental Rate for the purposes of this renewal option. Lessor
and Lessee shall, separately and collectively and in good faith, take any
necessary steps to insure that all three appraisals are completed within thirty
(30) days after the appointment of the first appraiser to be appointed. If
Lessee wishes to renew the Lease at the Fair Market Rental Rate determined by
such appraisal, Lessee shall, within ten (10) days after the last appraisal has
been delivered to it, give notice in writing to Lessor of Lessee's agreement to
renew the Lease at a rental rate equal to the average of the three appraisals,
which rental rate shall be specified in such notice. Failure by Lessee to timely
give such notice of agreement shall terminate the right of Lessee to renew the
Lease.
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
1
<PAGE>
11. Lessee shall not use the Leased Premises or permit the Leased Premises
to be used for photographic multilith, or multigraph reproductions, except in
connection with its own business without Lessor consent and Lessor will not
unreasonably withhold consent.
12. Any damages (excepting normal wear and tear) caused to carpet in the
Leased Premises shall be repaired or replaced at the expense of Lessee.
13. Lessee, or the employees, agents, servants, visitors, or licensees of
Lessee, shall abide by the Rules and Regulations established from time to time
for the parking area.
14. Lessee shall not allow to pass into any sewer, drain, or toilet serving
the Leased Premises or located in the Building any oil, grease, or any other
deleterious effluent or substance which may cause an obstruction in or damage to
such sewer, drain, or toilet.
15. All areas within the Building are designated as "no smoking areas".
16. Lessor reserves the right, after consultation with Lessee, to rescind
any of these Rules and Regulations of the Building, and to make such other and
further Rules and Regulations of the Building as in its judgment shall from time
to time be needful for the safety, protection, care and cleanliness of the
Building, the Leased Premises, and the operation thereof, the preservation of
good order therein, and the protection and comfort of the other Lessees in the
Building and their agents, employees, and invitees. Changes in these Rules and
Regulations, when made and written notice thereof is given to Lessee, shall be
binding upon Lessee in like manner as if originally herein prescribed. Provided,
however, such changes shall not operate so as to change the provisions of the
lease agreement between lessor and lessee and as long as changes do not effect
normal operations of business that are in place at the time on a day-to-day
basis.
/s/ /s/
- ---------------------------------- -------------------------------------
Lessor Lessee
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EXHIBIT 10.6
103095 AGREEMENT with an effective date of
October 31, 1995 between
INTERNATIONAL BUSINESS MACHINES
CORPORATION, a New York corporation
(hereinafter called IBM), and
APPLIED SCIENCE FICTION, a Delaware
corporation (hereinafter called
LICENSEE).
IBM has the right to license others under certain patents.
LICENSEE desires to acquire a nonexclusive license under those
patents. In consideration of the premises and mutual covenants
herein contained, IBM and LICENSEE agree as follows:
Section 1. Definitions
1.1 "Information Handling System" shall mean any instrumentality
or aggregate of instrumentalities primarily designed to compute,
classify, process, transmit, receive, retrieve, originate,
switch, store, display, manifest, measure, detect, record,
reproduce, handle or utilize any form of information,
intelligence or data for business, scientific, control or other
purposes.
1.2 "IHS Product" shall mean:
1.2.1 an Information Handling System; or
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1.2.2 any instrumentality or aggregate of instrumentalities (including, without
limitation, any component, subassembly or program) designed for
incorporation into an Information Handling System. An apparatus primarily
designed for use in the fabrication (including testing) of an IHS Product
shall not be considered an IHS Product even if it otherwise meets the
above definition.
1.3 "Type Number" shall mean the combination of numbers, letters or words
utilized by LICENSEE to identify each type or model of Licensed Product.
1.4 "Licensed Patents" shall mean the patents listed in Exhibit 1 to this
Agreement, any patents issuing on the applications listed in Exhibit 1, any
patents of other countries corresponding to the listed patents and applications,
and any reissues, divisions, continuations, or extensions of the foregoing
patents and applications.
1.5 "Licensed Products" shall mean IHS Products which capture, create, process,
handle, transmit, store, or output images.
1.6 "Patented Portion" shall mean that portion of a Licensed Product which
embodies or uses all of the elements or steps recited in one claim of one
Licensed Patent or which is
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manufactured by the use of all of the steps recited in one claim of one Licensed
Patent or which is capable of being used to practice the method recited in one
claim of one Licensed Patent. A Licensed Product which embodies or uses all of
the elements or steps recited in more than one claim of one Licensed Patent or
in the claims of more than one Licensed Patent shall have more than one Patented
Portion.
1.7 "Subsidiary" shall mean a corporation, company or other entity:
1.7.1 more than fifty percent (50%) of whose outstanding shares or securities
(representing the right to vote for the election of directors or other
managing authority) are, now or hereafter, owned or controlled, directly
or indirectly, by a party hereto, but such corporation, company or other
entity shall be deemed to be a Subsidiary only so long as such ownership
or control exists; or
1.7.2 which does not have outstanding shares or securities, as may be the case
in a partnership, joint venture or unincorporated association, but more
than fifty percent (50%) of whose ownership interest representing the
right to make the decisions for such corporation, company or other entity
is now or hereafter, owned or controlled, directly or indirectly, by a
party hereto, but such corporation, company or other entity shall be
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deemed to be a Subsidiary only so long as such ownership or control
exists.
1.8 "LICENSEE's Selling Price" for each Licensed Product sold by LICENSEE to
other than its affiliate shall mean the bona fide selling price, after prompt
payment discounts and quantity discounts actually allowed, at which LICENSEE
sold said Licensed Product. If said selling price includes the following items,
they may be deducted only if separately invoiced to LICENSEE's customer:
packing, transportation and insurance charges; import, export, excise, sales and
value added taxes; and customs duties. "LICENSEE's Selling Price" for each
Licensed Product sold by LICENSEE to one of its affiliates shall be equal to the
average of the LICENSEE's Selling Prices for all Licensed Products identical to
said Licensed Product which were sold to other than LICENSEE's affiliates in the
relevant semiannual accounting period.
Section 2. License
2.1 IBM grants to LICENSEE a nonexclusive license under the Licensed Patents:
2.1.1 to make, use, import, and lease, sell and otherwise transfer Licensed
Products; and
2.1.2 to use any apparatus in the manufacture of Licensed Products and practice
any method or process in the manufacture or use of Licensed Products.
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The license granted in this Section 2.1 for any particular Licensed Product
shall be only under claims of Licensed Patents which claims define a Patented
Portion for said particular Licensed Product and which are claims of Licensed
Patents of the countries of manufacture, use, importation, or lease, sale or
other transfer by LICENSEE.
A particular Licensed Product is licensed under a Licensed Patent when and only
when:
2.1.3 such Licensed Patent defines a Patented Portion of such Licensed Product;
2.1.4 such Licensed Patent was identified in a report, as specified in Section
5.5, as covering such Licensed Product; and
2.1.5 the royalty attributable to such Licensed Product was either timely paid
as required by Section 5.4 or a late payment was made and accepted by IBM
pursuant to Section 5.2.
2.2 No license, immunity or other right is granted by IBM either directly or by
implication, estoppel, or otherwise:
2.2.1 other than under the Licensed Patents;
2.2.2 to have Licensed Products made by a third party for
LICENSEE;
2.2.3 with respect to any Licensed Product which does not fully include a
Patented Portion;
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2.2.4 with respect to any item other than a Licensed Product notwithstanding
that such other item may incorporate one or more Licensed Products; or
2.2.5 to parties acquiring any item from LICENSEE for the combination of such
acquired item with any other item, including other items provided by
LICENSEE, or for the use of any such combination even if such acquired
item has no substantial use other than as part of such combination.
Section 3. Extension of License to Subsidiaries
3.1 The license granted herein by IBM is also granted to LICENSEE's
Subsidiaries, provided that:
3.1.1 each Subsidiary so licensed shall be bound by the terms and conditions of
this Agreement as if it were named herein in the place of LICENSEE; and
3.1.2 LICENSEE shall pay and account to IBM for royalties hereunder in respect
of the exercise by any Subsidiary of any license granted to it hereunder.
Any license granted to a Subsidiary shall terminate on the date such Subsidiary
ceases to be a Subsidiary.
Section 4. Royalty and Other Payment
4.1 LICENSEE shall pay, as hereinafter provided, royalties to IBM in respect of
each Licensed Product having one or more Patented Portions by virtue of one or
more Licensed Patents of
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the countries of manufacture, use, or lease, sale, or other transfer.
4.2 Subject to Sections 4.3, 4.5 and 4.6, for each Licensed Product which
includes one or more Patented Portions and which is manufactured, used, or
leased, sold or otherwise transferred in any country by or for LICENSEE,
LICENSEE shall pay a royalty at a rate computed at the following percentages of
LICENSEE's Selling Price of such Licensed Product:
Number of Licensed Patents Percentage of Licensee's
Defining Patented Portions Selling Price
-------------------------- ------------------------
1 [*]
2 [*]
3 [*]
4 [*]
5 or more [*]
For the purposes of this Section 4.2, a Licensed Patent and its corresponding
patents shall be deemed to be one Licensed Patent.
4.3 In computing royalties on a Licensed Product, LICENSEE may exclude from the
number of Licensed Patents used to compute royalties under Section 4.2, any
Licensed Patent that defines one or more Patented Portions which are fully
included in an item that is part of the Licensed Product and which was purchased
by Licensee directly or indirectly from a third party who was authorized by IBM
to sell such item. If, however, a Licensed
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[*] Indicates that material has been omitted and confidential treatment
requested therefor. All such material has been filed separately with the
Commission pursuant to Rule 406.
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Patent also defines another Patented Portion not fully included in such
purchased item, that particular Licensed Patent must be counted in the number of
Licensed Patents used to compute the percentage of LICENSEE's Selling Price of
the Licensed Product in accordance with Section 4.2.
4.4 If LICENSEE purchases from a third party portions of a Licensed Product and
combines such portions with each other and/or with other portions such that the
combination is itself a Licensed Product which includes a Patented Portion not
fully included in any individual purchased portion, then royalty shall be due
for the combination in accordance with this Section 4, notwithstanding the fact
that said third party is authorized by IBM to sell said purchased portions.
4.5 No royalties shall be paid by LICENSEE for Licensed Products which LICENSEE
manufactures for a third party where:
4.5.1 the third party is licensed by IBM to have such Licensed Product
manufactured for it; and
4.5.2 LICENSEE received prior authorization from such third party under such
party's license from IBM for such manufacture.
4.6 For royalties accruing through December 31, 1995, if a Licensed Product is
covered by more than four (4) Licensed Patents, LICENSEE may, at his election,
pay a royalty of four
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percent (4%) of the LICENSEE's Selling Price of said Licensed Product. On
January 1, 1996, this Section 4.6 and the reference to it contained in Section
4.2 shall be deemed to have been automatically deleted from this Agreement.
4.7 LICENSEE shall bear and pay all taxes (including, without limitation, sales
and value added taxes) imposed by the national government (including any
political subdivision thereof) of any country in which LICENSEE is doing
business, as the result of the existence of this Agreement or the exercise of
rights hereunder.
Section 5. Accruals, Records, Reports and Other Information
5.1 Royalties shall accrue when a Licensed Product, with respect to which
royalty payments are required by this Agreement, is first sold or otherwise
transferred (including, except as otherwise agreed in writing by IBM, sold or
otherwise transferred to IBM or any of its Subsidiaries), or first used or
leased in each country of use or lease, by or for LICENSEE, or when a newly
issued or acquired Licensed Patent covers any portion of a Licensed Product in
use or on lease by or for LICENSEE on which portion the royalties provided for
in Section 4.1 have not previously accrued.
5.2 IBM may accept a late payment provided such payment includes all overdue
royalties or other payment plus an interest penalty. The interest penalty on any
overdue royalty or other payment
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shall be calculated commencing on the date such royalty or other payment became
due, using an annual rate which is the greater of ten percent (10%) or one
percentage point higher than the prime interest rate as quoted by the head
office of Citibank N.A., New York, at the close of banking on such date, or on
the first business day thereafter if such date falls on a non-business day. If
such interest rate exceeds the maximum legal rate in the jurisdiction where a
claim therefor is being asserted, the interest rate shall be reduced to such
maximum legal rate.
5.3 LICENSEE shall pay all royalties and other payments due hereunder in United
States dollars. All royalties for an accounting period computed in other
currencies shall be converted into United States dollars at the exchange rate
for bank transfers from such currency to United States dollars as quoted by the
head office of Citibank N.A., New York, at the close of banking on the last day
of such accounting period (or the first business day thereafter if such last day
shall be a non-business day).
5.4 LICENSEE's accounting period shall be semiannual and shall end on the last
day of each June and December during the term of this Agreement. Within sixty
(60) days after the end of each such period LICENSEE shall furnish to IBM a
written report containing the information specified in Section 5.5 and shall pay
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to IBM all unpaid royalties accrued hereunder to the end of each such period.
5.5 LICENSEE's written report shall be certified by an officer of LICENSEE and
shall contain the following information:
5.5.1 for each Type Number of each Licensed Product upon which royalty has
accrued, the Type Number, a description of said Licensed Product, the
quantity sold or otherwise transferred during the accounting period, and
the total LICENSEE Selling Price for such quantity;
5.5.2 each country in which the Licensed Products identified pursuant to Section
5.5.1 were manufactured or leased, sold or otherwise transferred;
5.5.3 each Licensed Patent covering each such Licensed Product upon which
LICENSEE is paying royalties. However, if LICENSEE pays royalties for the
use of five (5) or more Licensed Patents for a particular Licensed Product
pursuant to Section 4, LICENSEE shall have no obligation to identify the
Licensed Patents for that Licensed Product;
5.5.4 the amount of royalties due for each Licensed Product;
5.5.5 the aggregate amount of all royalties due;
5.5.6 on IBM's request, the name and address of any third party providing items
as described in Section 4.3;
5.5.7 for each Type Number of Licensed Product which LICENSEE has delivered
during such accounting period to a third
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party and which is exempt from royalty under Section 4.5, the quantity
delivered, a description of such Licensed Product, and the name of such
third party; and
5.5.8 in the event that any of Sections 5.5.1 through 5.5.7 do not apply to an
accounting period, LICENSEE shall so state as to each such Section.
In the event no royalties are due, LICENSEE'S report shall so state.
5.6 For the purpose of determining obligations under IBM patents, LICENSEE
shall, within thirty (30) days of a written request by IBM:
5.6.1 provide to or make available for inspection by IBM or its designee a copy
of any materials (including, but not limited to, brochures and service,
use and other technical manuals) relevant to any product identified by
IBM;
5.6.2 sell, license or otherwise transfer and deliver to IBM any product at any
time offered for sale or license or otherwise marketed or transferred by
LICENSEE or, at IBM's option, make such product available to IBM for
inspection on LICENSEE'S premises. Such sale, license or transfer shall
occur under LICENSEE'S generally available terms and conditions, subject
to the time requirement specified in this Section 5.6; and
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5.6.3 provide to IBM or its designee access to those manufacturing processes
used by LICENSEE in the manufacture of LICENSEE's products.
5.7 LICENSEE shall keep records in accordance with generally accepted accounting
principles and in sufficient detail to permit the determination of products
subject to this Agreement, the royalties due IBM, and the accuracy of the
information on LICENSEE's written reports. Such records shall include, but not
be limited to, detailed records supporting the information provided under
Section 5.5.
Such records shall be kept for six (6) years following the due date for the
report relating to the reporting period to which such records pertain.
Upon IBM's written request for an audit, LICENSEE shall permit auditors
designated by IBM, together with such legal and technical support as IBM deems
necessary, to examine, during ordinary business hours, records, materials, and
manufacturing processes of LICENSEE for the purpose of determining royalties due
IBM.
Such audit shall be restricted to an audit of those records, materials, and
manufacturing processes related to Licensed Products or Licensed Patents. Such
records and materials shall
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be deemed to include general financial information to provide a cross-check for
the amount of royalties reported. Such general financial information shall
include, but not be limited to, records on the total revenue for the period
covered by the audit with documentation supporting the fact that the part of
LICENSEE's total revenue which exceeds the reported total of LICENSEE's Selling
Price for Licensed Product was derived from activities other than the sale,
lease or other transfer of Licensed Products.
LICENSEE shall provide its full cooperation in such audit. Such cooperation
shall include, but not be limited to, providing sufficient time for such
examination and convenient access to relevant personnel and records.
Each party shall pay the costs that it incurs in the course of the audit.
However, in the event that the audit establishes underpayment greater than or
equal to the lesser of: five percent (5%) of the royalties which should have
been paid for the accounting periods being audited or the cost of the audit,
then LICENSEE shall reimburse IBM for the costs IBM incurred in conducting such
audit. However, such costs shall not include salaries paid to IBM employees
associated with such audit and such reimbursement shall not exceed the amount of
underpayment.
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5.8 In the event an audit under the provisions of Section 5.7 identifies an
underpayment of royalties by LICENSEE, LICENSEE shall pay an amount equal to the
sum of such underpayment, any interest due under the provisions of Section 5.2,
and any reimbursement to IBM for the costs IBM incurred in conducting such audit
as specified by Section 5.7, within sixty (60) days of IBM's written request.
Such amounts shall be subject to interest under the provisions of Section 5.2.
Section 6. Term of Agreement; Termination
6.1 The term of this Agreement shall be from the effective date of this
Agreement until five (5) years after said date.
6.2 LICENSEE may terminate the license granted herein, in whole or as to any
specified Licensed Patent by giving notice in writing to IBM, provided, however,
that termination of the license as to any specified Licensed Patent shall
include termination of the license as to all Licensed Patents in other countries
which correspond to such specified License Patent. Such termination shall be
effective on the date such notice is mailed unless the notice specifies a later
date. Any such termination shall be irrevocable.
6.3 IBM shall have the right to terminate this Agreement, or LICENSEE's license
granted hereunder, if LICENSEE:
6.3.1 fails, at any time:
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6.3.1.1 to make a report which meets the requirements of Section 5.5;
6.3.1.2 to pay any accrued royalties;
6.3.1.3 to make any other payment required herein;
6.3.1.4 to permit an audit pursuant to Section 5.7; or
6.3.1.5 to comply with the provisions of Section 5.6; and
6.3.2 does not cure such failure (including the payment of any interest due
pursuant to Section 5.2) within sixty (60) days after written notice from
IBM to LICENSEE specifying the nature of such failure.
IBM's termination of this Agreement or of LICENSEE's license shall be given by
written notice to LICENSEE by mail or by facsimile transmission, effective on
the date of mailing or transmission.
6.4 IBM shall notify LICENSEE in the event IBM identifies an underpayment of
accrued royalties. IBM shall provide to LICENSEE the basis on which it has
identified such underpayment. If LICENSEE cannot show that the basis used is
substantially incorrect, IBM may, in its sole discretion, terminate LICENSEE's
license. In such event, IBM shall institute an audit. If such audit shows that
the LICENSEE's payments of royalties are substantially correct for the period
being audited, LICENSEE's license shall be reinstated effective as of the date
of its termination.
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6.5 In the event this Agreement or the license granted hereunder, in whole or as
to any specified patent or claim, shall be terminated pursuant to this Section
6, the corresponding licenses granted to Subsidiaries of LICENSEE pursuant to
Section 3 shall likewise terminate, but no notices need be given by IBM to such
Subsidiaries.
6.6 In the event that more than fifty percent (50%) of LICENSEE's outstanding
shares or securities (representing the right to vote for the election of
directors or other managing authority) are now, or hereafter become, owned or
controlled, directly or indirectly, by a third party, LICENSEE's license shall
terminate unless IBM agrees otherwise in a signed writing.
6.7 No termination pursuant to this Section 6, Section 3.1 or Section 12.9 shall
relieve LICENSEE of any obligation or liability accrued hereunder prior to such
termination, or rescind or give rise to any right to rescind anything done by
LICENSEE or any payments made or other consideration given to IBM hereunder
prior to the time such termination becomes effective. Such termination shall not
affect in any manner any rights of IBM arising under this Agreement prior to
such termination, even though the exercise of such rights occurs after such
termination.
Section 7. Options for Other Licenses
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7.1 LICENSEE grants to IBM the right to obtain, at any time, and from time to
time, during the term of this Agreement, a license upon terms and conditions,
including royalty rates, no less favorable than those granted to LICENSEE herein
or in any amendment hereto. Said right shall be with respect to any IHS Product
and any patent, including utility models and including design patents for type
fonts and registrations for type fonts (but not including any other design
patents or registrations), issued prior to the termination of this Agreement,
which patent covers an invention applicable to IHS Products or any method or
process involved in the manufacture or use of such IHS Product and under which
patent, or the application therefor, LICENSEE or any of its Subsidiaries has the
right, at any time during the term of this Agreement, to grant licenses to third
parties (other than Subsidiaries). Said right of IBM shall be exercisable with
respect to any such patents whether or not issued and whether or not the
applications therefor exist at the time such right is exercised. If IBM
exercises said right, IBM shall pay to LICENSEE the sum of five thousand United
States dollars ($5,000) if such license is for a single patent of one country
and its corresponding patents, or twenty-five thousand United States dollars
($25,000) if such license is for two or more patents, which sum shall be
creditable against royalties payable by IBM under the provisions of said license
agreement. The date of said license agreement shall be the date on which IBM
requests such license.
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Section 8. Warranty
8.1 IBM represents and warrants that it has the full right and power to grant
the license set forth in Section 2, and that there are no outstanding
agreements, assignments, or encumbrances inconsistent with the provisions of
said license or with any other provisions of this Agreement. IBM makes no other
representations or warranties, express or implied, nor does IBM assume any
liability, in respect of any infringement of patents or other rights of third
parties due to LICENSEE's operation under the license herein granted.
8.2 IBM does not warrant nor does it represent that LICENSEE will not require a
license under other patents (owned by IBM or by third parties) to make, use,
import, or lease, sell or otherwise transfer Licensed Products.
Section 9. Means of Payments and Communications
9.1 Payment shall be made by electronic funds transfer. Any notice or other
communication required or permitted to be made or given to either party hereto
pursuant to this Agreement shall be sent to such party by facsimile or by
registered airmail (except that registered or certified mail may be used where
delivery is in the same country as mailing), postage prepaid, addressed to it at
its address set forth below, or to such other address as it shall designate by
written notice given to the other party. Payments shall be deemed to be made on
the date of electronic
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funds transfer. Notices or other communications shall be deemed to have been
given or provided on the date of sending. The addresses are as follows:
9.1.1 For electronic funds transfers of payments:
IBM Director of Licensing
The Bank of New York
48 Wall Street
New York, New York 10286
United States of America
Credit Account No. 890-0209-674
ABA No. 0210-0001-8
9.1.2 For mailing to IBM:
Director of Licensing
International Business Machines Corporation
500 Columbus Avenue
Thornwood, New York 10594
United States of America
9.1.3 For facsimile transmission to IBM:
(914) 742-6737
9.1.4 For mailing to LICENSEE:
Controller
Applied Science Fiction
2700 West Anderson Lane, Suite 901
Austin, TX 78757
9.1.5 For facsimile transmission to ASF:
(512) 450-0397
Section 10. Trade Secrets, Know-How and Copyrights
10.1 No license or other right is granted herein to either party, directly or by
implication, estoppel or otherwise, with respect to any trade secrets or know-
how, and no such license or other
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right shall arise from the consummation of this Agreement or from any acts,
statements or dealings leading to such consummation. Except as specifically
provided herein, neither party is required hereunder to furnish or disclose to
the other any technical or other information.
10.2 No license or other right is granted herein to either party, directly or by
implication, estoppel or otherwise to or under copyrights, or mask work or
similar rights.
Section 11. Assignments
11.1 IBM shall neither assign nor grant any right under any of its Licensed
Patents, and LICENSEE shall neither assign nor grant any right under any of its
patents which are subject to IBM's rights pursuant to Section 7, unless such
assignment or grant is made subject to the terms and conditions of this
Agreement. LICENSEE shall neither sublicense nor assign any of its rights or
privileges hereunder without the prior written consent of IBM. Any attempted
sublicense, assignment, or grant in derogation of the foregoing shall be void.
Section 12. Miscellaneous
12.1 Nothing contained in this Agreement shall be construed as conferring on
either party any license or other right to copy the exterior design of the
products of the other party.
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12.2 Nothing contained in this Agreement shall be construed as conferring any
right to use in advertising, publicity, or other promotional activities any
name, trade name, trademark or other designation of either party hereto
(including any contraction, abbreviation or simulation of any of the foregoing).
Each party hereto agrees not to use or refer to this Agreement or any provision
thereof in any promotional activity associated with products licensed hereunder,
without the express written approval of the other party.
12.3 Nothing contained in this Agreement shall be construed as limiting the
rights which the parties have outside the scope of the license granted
hereunder, or restricting the right of either party or any of its Subsidiaries
to make, have made, use, or lease, sell or otherwise dispose of any particular
product or products not herein licensed.
12.4 Neither party nor any of its Subsidiaries shall be required hereunder to
file any patent application, or to secure any patent or patent rights, or to
maintain any patent in force, or to provide copies of patent applications to the
other party or its Subsidiaries, or to disclose any inventions described or
claimed in such patent applications.
12.5 IBM shall not have any obligation hereunder to institute any action or suit
against third parties for infringement of any
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patent applications or Licensed Patents or to defend any action or suit brought
by a third party which challenges or concerns the validity of any patent
applications or Licensed Patents. In addition, LICENSEE shall not have any right
to institute any action or suit against third parties for infringement of any
patent applications or Licensed Patents.
12.6 In the event IBM prevails in any claim, proceeding or suit against LICENSEE
based upon this Agreement, including, but not limited to, actions for the
recovery of royalties due, LICENSEE shall pay all of IBM's associated costs and
attorneys' fees.
12.7 This Agreement shall not be binding upon the parties nor shall it obligate
either of the parties until it has been signed hereinbelow by or on behalf of
each party, in which event it shall be effective as of the date of this
Agreement first above written. No amendment or modification hereof shall be
valid or binding upon the parties unless made in writing and signed as
aforesaid. This Agreement and its Exhibit I embody the entire understanding of
the parties with respect to the Licensed Patents hereof and merges all prior
discussions between them, and neither of the parties shall be bound by any
conditions, definitions, warranties, understandings or representations with
respect to the subject matter hereof other than as expressly provided herein.
23
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. Sections 200.80(b) (4),
200.83 AND 230.496
12.8 The headings of the several Sections are inserted for convenience of
reference only and are not intended to be a part of or to affect the meaning or
interpretation of this Agreement.
12.9 If any Section of this Agreement is found by competent authority to be
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such Section in every other respect and the
remainder of this Agreement shall continue in effect so long as the Agreement
still expresses the intent of the parties. If the intent of the parties cannot
be preserved, this Agreement shall be either renegotiated or terminated.
12.10 This Agreement shall be construed, and the legal relations between the
parties hereto shall be determined, in accordance with the law of the State of
New York, United States of America.
24
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. Sections 200.80(b) (4),
200.83 AND 230.496
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly signed as of the date first above written.
INTERNATIONAL BUSINESS
MACHINES CORPORATION
Witness: By /s/ M. C. Phelps, Jr.
-----------------------------
/s/ D. J. Sullivan M. C. Phelps, Jr.
- ------------------------- Vice President
APPLIED SCIENCE FICTION
By /s/ Mark Urdahl
-----------------------------
Mark Urdahl
President
Witness:
/s/ ?????????????????
- -------------------------
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. Sections 200.80(b) (4),
200.83 AND 230.496
EXHIBIT I
----------
Licensed Patents
1. Issued US Patents
Patent Number Issue Date
- ------------- ----------
[*] [*]
2. Filed US Patent Applications
Serial Number Date Filed Title
- ------------- ---------- -----
[*] [*] [*]
- -----------
[*] Indicates that material has been omitted and confidential treatment
requested therefor. All such material has been filed separately with the
Commission pursuant to Rule 406.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. Sections 200.80(b) (4),
200.83 AND 230.496
EXHIBIT 1 (CONT'D)
Serial Number Date Filed Title
- ------------- ---------- -----
[*] [*] [*]
- -----------
[*] Indicates that material has been omitted and confidential treatment
requested therefor. All such material has been filed separately with the
Commission pursuant to Rule 406.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. Sections 200.80(b) (4),
200.83 AND 230.496
021997
AMENDMENT No. I dated January 1, 1997
between INTERNATIONAL BUSINESS
MACHINES CORPORATION a New York
corporation (hereinafter "IBM") and
APPLIED SCIENCE FICTION a Delaware
corporation (hereinafter "ASF").
IBM and ASF entered into a patent license agreement "Agreement" effective
October 31, 1995 in which IBM granted ASF certain rights under Licensed Patents
as defined in Agreement.
ASF now desires, and IBM wishes to grant, the right to ASF to have Licensed
Products made by others:
In consideration of the premises and the mutual covenants herein contained, IBM
and LICENSEE agree as follows:
Delete section 2.1 and replace with new section 2.1 as follows:
Section 2. License
2.1 IBM grants to LICENSEE a nonexclusive license under the Licensed Patents:
2.1.1 to make, use, import, and lease, sell and otherwise transfer Licensed
Products; and
2.1.2 to use any apparatus in the manufacture of Licensed Products and practice
and method or process in the manufacture or use of Licensed Products.
2.1.3 to have Licensed Products made by another manufacturer for the use and/or
lease, sale or other transfer by LICENSEE provided:
(a) the specifications for Licensed Products were created by LICENSEE (either
solely or jointly with one or more third parties);
and further provided that the license to have made products granted in this
Section 2.1.3
(b) shall only be under claims of the Licensed Patents, the infringement of
which would be necessitated by compliance with such specifications;
(c) shall not be under claims for a method or process unless such method or
process is based upon technology created by LICENSEE (either solely or
jointly with one or more third parties); and
(d) shall not apply to any products in the form manufactured or marketed by
said other manufacturer prior to LICENSEE's furnishing of said
specifications.
Unless LICENSEE informs IBM to the contrary, LICENSEE shall be deemed to have
authorized said other manufacturer to make Licensed Products under the license
granted to LICENSEE in this section 2.1.3 when the conditions specified herein
2.1.3 are fulfilled. In response to a written request identifying a product and
a manufacturer, LICENSEE shall in a timely manner inform IBM of the quantity of
such product, if any, manufactured by such manufacturer pursuant to the license
granted in this Section 2.1.3.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. Sections 200.80(b) (4),
200.83 AND 230.496
The license granted in this Section 2.1 for any particular Licensed Product
shall be only under claims of Licensed Patents which claims define a Patented
Portion for said particular Licensed Product and which are claims of Licensed
Patents of the countries of manufacture, use, importation, or lease, sale or
other transfer by LICENSEE.
A particular Licensed Product is licensed under a Licensed Patent when and only
when:
2.1.4 such Licensed Patent defines a Patented Portion of such Licensed Product;
2.1.5 such Licensed Patent was identified in a report, as specified in Section
5.5, as covering such Licensed Product; and
2.1.6 the royalty attributable to such Licensed Product was either timely paid
as required by Section 5.4 or a late payment was made and accepted by IBM
pursuant to Section 5.2.
Add new Section 6.8 as follows:
6.8 Each party agrees to promptly enter into good faith negotiations for a new
license on terms and conditions no less favorable then the terms and conditions
of this Agreement, upon written request received no more than six months prior
to the expiration of this Agreement.
Delete Sections 9.1.4 and 9.1.5 and replace with new sections 9.1.4 and 9.1.5,
respectively, as follows:
9.1.4 For mailing to LICENSEE:
Intellectual Property Counsel
Applied Science Fiction
3925 West Braker Lane, Suite 500
Austin, TX 78759
9.1.5 For facsimile transmission to ASF:
(512) 305-0811
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly signed as of the date first above written.
Agreed to: Agreed to:
International Business
Machines Corporation
By: /s/ Mark Urdahl By: /s/ M. C. Phelps, Jr.
-------------------------- -------------------------
Name: Mark Urdahl M. C. Phelps, Jr.
Title: President & CEO Vice President
Witness: Ava C. Ward Witness: Linda Condels
---------------------- --------------------
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 21, 2000, in this Registration Statement (Form
S-1) and related Prospectus of Applied Science Fiction, Inc. for the
registration of its common stock.
/s/ Ernst & Young LLP
Austin, Texas
February 1, 2000
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