<PAGE>
As filed with the Securities and Exchange Commission on March 29, 2000
Registration No. 333-96077
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
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>
Title of Each Class of Amount of
Securities to be Amount to be Proposed Maximum Proposed Maximum Registration
Registered Registered Offering Price Per Share Aggregate Offering Price (1) Fee (2)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 6,634,613 $14.00 $92,884,582 $24,522
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</TABLE>
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(1) Includes 865,384 shares as to which Registrant has granted the Underwiters
an option to cover over-allotments.
(2) $15,180 was previously paid on February 3, 2000.
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 March 29, 2000
5,769,229 Shares
APPLIED SCIENCE FICTION, INC.
[LOGO]
COMMON STOCK
-----------
Applied Science Fiction, Inc. is offering 5,769,229 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 $12 and $14 per share.
-----------
We have filed an application 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 865,384 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>
The outside front gate contains text which reads, "Analog to Digital"
across the top with the name and logo of the Company immediately under this
text. Under the Company's name and logo, a digitized photograph appears
alongside a picture of a compact disc with the text, "Digital Acceleration"
written on the compact disc.
The inside front cover contains a gatefold with the name and the logo of
the Company written across the top of the gatefold. Underneath the name and
logo of the Company is a picture of a model standing beside a digital minilab
("DML") which, when equipped with the Company's Digital Film Processing, or
DFP technology, can convert standard 35mm and Advanced Photosystem film into
digital images. Projecting to the right from the DML are six lines and one
arrow. The six lines end at circles containing pictures of various medium
which can be used to store or transmit photographs which were developed with
the Company's technologies and which are labeled, "print," "DVD/CD," "Disk,"
"Flash Memory," "Satellite Dish," and "Personal Digital Assistant."
respectively. The arrow ends at text which runs vertically along the near
right side of the gatefold and reads, "Internet Ready." The far right side of
the gatefold depicts the home pages, vertically arranged, of several internet
photo-imaging websites which can store images developed by the Company's
technologies, including; family-buzz.com, photo-geneology.com, family
archival.com, photobox.org, imageline.net, fotoho.sting.com, my-heraldy.com
and photoclan.com, respectively. Projecting to the left from the DML is an
arrow that runs through text which reads, "Film in...Bits out!" Underneath
this text is additional text which is capitalized and reads, "PROCESSES AND
DIGITIZES 35MM FILM IN ONE STEP; WITHOUT EFFLUENTS, PLUMBING OR ODOR (DRY
PROCESS)." Underneath this capitalized text is additional text which reads,
"Conceptual design pictured above to be made available through original
equipment manufacturers (OEMs) worldwide. OEM implementation specifications
may vary." Across the bottom of the gatefold are before and after versions of
pictures that have been restored using the Company's patented Digital ICE,
Digital ROC and Digital GEM technologies. Underneath these pictures is text
which reads, "Over 650 Billion Images Exist in Shoeboxes, News Rooms, Archives
and Photo Albums Worldwide." To the left of these before and after pictures,
also along the bottom of the gatefold are pictures of a flatbed scanner, a
conventional wet-process film developer and a Nikon LS-2000 printer. Above
these photos is text which reads, "Conventional Wet Film Process and Digital
Scan." Finally, in the upper left hand corner of the gatefold is text which
reads, "Over 85 Billion New Images Captured on 35MM Film in 1998."
The inside back cover has the logo and the name of the Company in the upper
left hand corner and descending diagonally from the upper right hand corner is
a list of the Company's patented technologies, Digital GEM, Digital ROC,
Digital ICE, and Digital ICE3. In the middle of the inside back cover is a
picture of a strip of conventional film with the words, "Digital Film Process"
printed on the film. Descending diagonally from the middle of the inside back
cover to the lower right hand corner are the names of the Company's OEMs,
including Nikon, Hewlett-Packard, Noritsu, Kodak, Konica, Minolta and Gretag.
The outside back cover has the name and logo of the Company centered in the
middle.
<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............................ 29
Management.......................... 43
Related Party Transactions.......... 53
Principal Stockholders.............. 54
Description of Capital Stock........ 56
Shares Eligible for Future Sale..... 59
Underwriters........................ 61
Legal Matters....................... 63
Experts............................. 63
Where You Can Find Additional
Information About Applied Science
Fiction............................ 63
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.
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 and license 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 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 anticipate will be
incorporated within DFP systems which we expect will be introduced by our
original equipment manufacturer, or OEM, customers. When commercially
introduced, DFP systems will process exposed but undeveloped standard 35mm and
Advanced Photosystem 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 enable our customers to compete
more effectively in the market for image output, including Internet storage,
archiving, transmission and printing of digital images and 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;
. no use or discharge of hazardous liquid 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 Advanced Photosystem 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 first half of 2002. 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 $25.0 million, including net losses of approximately
$16.3 million in 1999, and we expect to continue to incur significant losses
for at least the next 24 months. 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 a 1.309-for-1
stock split of our common stock effected pursuant to a stock dividend that will
be declared and paid prior to the closing of this 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.
----------------
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered......................... 5,769,229 shares
Common stock to be outstanding after this
offering.................................... 34,470,666 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) 354,002 shares of common stock issuable upon exercise of
options outstanding as of December 31, 1999 with a weighted average exercise
price of $.64 per share, (2) 634,426 additional shares of common stock reserved
under our option plan as of December 31, 1999, (3) 1,647,146 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 $.52 per share, and
(4) 769,230 shares of common stock issued to IBM at a price valued at the mid-
point of the pricing range to be set forth in the circulated preliminary
prospectus used to market this offering subject to adjustment if the initial
public offering price is lower than that price.
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) (16,642)
Net loss........................................... (990) (7,510) (16,256)
Basic and diluted net loss per share............... $ (.14) $ (.77) $ (1.33)
Shares used in computing basic and diluted net loss
per share......................................... 7,017 9,719 12,244
Pro forma basic and diluted net loss per share..... $ (.69)
Shares used in computing pro forma basic and
diluted net
loss per share.................................... 23,718
</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
11,474,705 shares of common stock; and
. on a pro forma as adjusted basis at December 31, 1999 to reflect our
sale of 5,769,229 shares of common stock in this offering at an assumed
initial public offering price of $13.00 per share and the application of
the net proceeds received from this offering.
<TABLE>
<CAPTION>
As of 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 $86,985
Working capital....................................... 7,434 7,434 75,684
Total assets.......................................... 23,656 23,656 91,906
Notes payable to bank, less current portion........... 6,436 6,436 6,436
Total stockholders' equity............................ 11,730 11,730 79,980
</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 if our technologies do
not prove to be commercially viable, we will not be able to generate revenues
from the licensing of these technologies.
We are at an early stage in the development of our business and
technologies and our success depends largely on the efforts of original
equipment manufacturers, or 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
52% of our revenues during 1999 were derived from our Digital Image Correction
and Enhancement, or Digital ICE, technology. We do not expect to earn royalty
revenues from our Digital Reconstruction of Color, or Digital ROC, and Digital
Grain Equalization and Management, or Digital GEM, technologies prior to the
fourth quarter of 2000. Our Digital Film Processing, or 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 first half of
2002. However, we may not generate any revenues from the sales or licensing of
DFP products or technologies by 2002, or at all. If we are unable to complete
the development of all of our technologies and license them to OEMs, we will
not generate revenues from our operations, which in turn, would adversely
affect our financial condition.
We do not have, and do not anticipate having, agreements which bind OEMs to
commercialize our DFP technology and if our customers fail or cease their
efforts to commercialize our DFP technology, we may not be able to generate
revenues from the licensing of our DFP technology or from the sales of
products that incorporate DFP technology.
Our business model depends on the successful commercialization of our DFP
technology and products that use DFP technology. With respect to our DFP
subsystems, we are in the design phase with three OEM customers. However, we
have not entered into, and do not anticipate entering into, agreements that
would affimatively obligate these or any other OEMs to develop and/or
commercialize our DFP technology. Our current arrangements with OEMs for our
DFP technology:
. 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.
8
<PAGE>
We cannot assure you that our OEM customers will complete the development and
commercialization of our DFP technology. In addition, we expect that any
agreements with our OEM customers, if entered into, would not create any
affirmative obligation requiring the 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. Any inability to
successfully develop DFP subsystems and to sell these subsystems to our
customers would likely cause a significant shortfall in our anticipated future
revenues and could consequently impair our financial condition.
Based on our limited operating history, the small amount of revenues that we
have recognized to date and the significant net losses that we have incurred
since our inception, we lack a foundation for establishing profitable
operations, and if we fail to achieve profitability, we will require
additional funding.
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 $16.3 million in 1999. As of December 31, 1999, we had an
accumulated deficit of $25.0 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 at least the next 24
months. 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. If we fail to achieve profitability,
we will require additional funding, which may not be available on acceptable
terms or at all. A continuing inability to raise required funding could result
in our insolvency.
We will need to raise additional capital after this offering and if we are
unable to raise this additional capital on acceptable terms or on a timely
basis, we may not be able to continue our business operations.
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 at
least the next 12 months. However, we anticipate that we will continue to
experience negative cash flows for at least the next 24 months following this
offering. Thus, within the next 12 to 18 months, we will need to raise
additional funds. We do not know whether we can obtain this required
additional financing on favorable terms, if at all. If we cannot raise
additional financing on acceptable terms or on a timely basis, we may not be
able to:
. develop new technologies and products or enhance our technologies and
products;
. hire, train and retain employees; and
. respond to competitive pressures or unanticipated requirements.
A limited number of OEM customers account for the vast majority of our
revenues and because of this small customer base, the loss of, or a
significant reduction in, contract fees or royalties from any one OEM
customer would 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 collectively 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.
9
<PAGE>
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, demand for our technologies would substantially decrease and
result in lower revenues, which could impair our financial condition.
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 adversely affect
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. Should this occur, our revenues likely would decrease,
which would adversely affect our operating results. In addition, revenues from
the licensing of our ICE/3/ technologies would be adversely affected by a
significant slowdown in the demand for image scanners or other image capture
hardware.
We are dependent on our customers' efforts to generate interest in our
technologies and if they fail to create end-user demand for the commercial
application of our technologies, we may not be able to generate revenues from
the sales of products that incorporate 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, would adversely affect our operating results and impair our financial
condition.
Many large companies offer products that compete with our technologies and if
these products sustain or achieve widespread commercial acceptance, we may
experience a decrease in demand for our technologies which would reduce our
market share and adversely affect our revenues.
The markets for digital image editing software and photofinishing equipment
and services are intensely competitive. Moreover, 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 continuing technological advances,
may soon be capable of producing images of a quality approaching that
attained with 35mm or Advanced Photosystem film;
. digital minilabs which, by combining a traditional photoprocessing
system with an onboard film scanner, 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 technology 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.
10
<PAGE>
Many of our potential competitors, including our current and prospective
customers, have longer operating histories and significantly greater
financial, technical, and 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 current or future 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, which could cause us to
lose market share and adversely affect our operating results. See "Business--
Competition."
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, we may not be
able to provide DFP subsystems to our customers.
We intend to 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, harm our business reputation and impair our relationships with
our customers.
We recently have experienced rapid growth and our failure to effectively
manage this growth could impede our future expansion by placing significant
demands on the time and limited resources of our management.
Our revenues increased 691% to $4.0 million in 1999 from $502,000 in 1998,
and the total number of our employees increased to 136 at December 31, 1999
from 52 at December 31, 1998. We anticipate hiring a significant number of new
employees in 2000 and 2001. Our growth has resulted, and will continue to
result, in new and increased responsibilities for our management and stress to
our management information systems. 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, we may not be able to
adequately address competition in our markets, upgrade our technology when
necessary or effectively pursue market opportunities. As a result, our
business could be adversely affected.
Our quarterly and annual revenues and operating results may fluctuate
significantly, which may result in volatility in our stock price and the
potential loss of a significant portion of your investment if you sell your
shares.
Although our expenses are largely fixed, many of our revenue components
fluctuate on a quarterly and annual basis and are difficult to predict.
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 development fees and
other components of 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;
11
<PAGE>
. 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, which may increase the volatility in our stock price and cause you to
lose a significant portion of your investment if you sell your shares.
Our success is dependent upon our president and chief executive officer's
ability to manage our business effectively and upon our chief scientist's
ability to further develop our technologies and, if we are unable to retain
these key 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, who is ultimately responsible for our business strategy,
and Dr. Albert Edgar, our chief scientist, who is responsible for developing
substantially all of our proprietary technologies. We do not have employment
contracts with either Mr. Urdahl or Dr. Edgar and the loss of either of these
individuals would adversely affect our relationships with key customers and
our ability to develop new technologies. 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
knowledge and experience. The loss of any existing key personnel or our
inability to attract, motivate and retain additional qualified personnel could
hinder our ability to grow our business or effectively address existing market
opportunities on a timely basis.
If unauthorized parties misappropriate our technologies or if we are unable
to protect our intellectual property or enforce our patents, our ability to
compete would be adversely affected, particularly if our intellectual
property is used to develop competing technologies.
We are dependent upon the proprietary information that pertains to our
technologies and on our development of those technologies. 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 their use of, access to and distribution of our
proprietary information. However, these precautions may not adequately prevent
the 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. In addition,
under the terms of our recent purchase from IBM of patents that relate to our
technologies, we have granted IBM a license to our general purpose patent
portfolio which will restrict us from bringing any patent infringement action
against IBM. Therefore, unauthorized third parties could copy aspects of our
technologies, reverse engineer the products which may be derived from our
technologies or otherwise obtain and use information or technologies that we
regard as proprietary. If third parties misappropriate our intellectual
property, they may be able to produce technologies which compete with ours, or
offer less expensive alternatives to our customers and prospective customers.
As a consequence, our ability to compete effectively in our markets may be
compromised and our operating results may be adversely affected.
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.
12
<PAGE>
It is possible that claims may be brought against us which allege that our
technologies infringe the intellectual property rights of others, which would
require us to incur costs in defending both ourselves and our customers
against such allegations.
There is a substantial risk of litigation regarding intellectual property
rights in the imaging industry, particularly due to the convergence of the
traditional photoimaging industry with the expanding capabilities of the
computer industry. 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 claim, 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 the allegedly infringing technology;
. require us to enter into royalty or licensing agreements which may not
be available on acceptable terms;
. require us to pay damages to or indemnify our customers under our
contracts with them; or
. cause our customers to terminate their licensing agreements with us.
Any of these consequences could impair our financial condition and adversely
affect our ability to conduct our business.
Our technologies are complex and may contain undetected software or hardware
errors which could result in an increase in our costs if we have to correct
these errors or a reduction in our revenues if our customers are dissatisfied
and elect to terminate their licensing agreements with us.
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;
. 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 retain our existing customers and
attract new customers; and
. diversion of time and resources of our management and development team.
A significant portion of our revenues are generated from a customer located
in Japan who remits payments to us in Japanese yen; transacting business with
foreign customers subjects us to exchange rate, political and increased
regulatory risks which would not be present if we licensed our technologies
solely to domestic customers.
During 1999, royalty revenues from a licensing agreement with Nikon, which
has its principal office in Japan, constituted approximately 19% of our
revenues. 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
13
<PAGE>
have not used derivative instruments to hedge against foreign currency
exchange rate risk. We plan on marketing our technologies to prospective
customers in Asia and Europe and, therefore, expect that revenues derived from
international customers will continue to represent a significant portion of
our revenues in the future. Transacting business with international customers
subjects us 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 which may make it difficult for us to
fulfill demand for our technologies from foreign customers;
. trade barriers;
. changes in regulatory requirements which could be expensive for us to
comply with;
. longer payment cycles and difficulties in collecting accounts
receivables which could impair our financial condition and require us to
seek additional financing;
. export license requirements;
. political and economic instability;
. fluctuations in foreign currency exchange rates;
. lower protection of our intellectual property rights which could allow
competitors in other countries to offer similar products; and
. changes in diplomatic and trade relationships which may prevent us from
exporting our products to some countries.
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, or keep
pace with emerging technologies, our technologies could become obsolete and
demand for our technologies will diminish.
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 attain broad market
acceptance; and
. respond effectively to technological changes, emerging industry
standards and product announcements by our competitors.
Our failure to address any of these factors could make our products less
competitive and reduce our customers' demand for our technologies, which, in
turn, would adversely affect our revenues and decrease our market share.
Our principal stockholders will continue to have significant influence on
matters submitted to a stockholder vote after this offering, and if their
interests diverge from yours, or if you otherwise disagree with their
decisions, you will lack the ability to alter the outcome of such matters.
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
14
<PAGE>
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. Therefore, investors in this
offering will lack the ability to approve or influence the outcome of matters
which they may believe are in their best interests.
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, which could result in a loss of a
significant portion of your investment in our shares.
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 those
described elsewhere in these risk factors and the following:
. 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; and
. fluctuations in stock market prices and the volume of traded shares
generally, and particularly fluctuations in the stock prices of
technology companies.
As a technology company, the market price of our shares may experience
extreme price and volume fluctuations which would increase the likelihood of
us becoming subject to securities litigation.
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 damages and divert management's attention and
resources, and, therefore, could adversely affect our operating results and
impair our financial condition.
Provisions in our charter documents and Delaware law could prevent, delay or
impede a change in our control and may reduce the 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. These provisions of
Delaware law and of our charter and bylaws 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 our stockholders to change our 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
15
<PAGE>
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."
A substantial number of our shares will be freely tradable in the public
market after this offering and the sale of such shares, or the perception
that such sales may occur, could adversely affect our stock price.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. All of the
5,769,229 shares sold in this offering will be freely tradable, with the
remaining 28,701,437 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 for 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 depress our stock price. In addition, the
sale of these shares could impair our ability to raise capital through the
sale of additional stock.
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," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" 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 $13.00 per share, we will
receive approximately $68,249,979 million from the sale of 5,769,229 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 $10,462,493
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 at least $30.0 million of the net proceeds of this
offering for engineering costs, composed of research and development and cost
of contract revenues, a significant portion for sales and marketing activities
as well as for the purchase of capital equipment and leasehold improvements,
and the remainder for 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 cash 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 11,474,705
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 5,769,229 shares of common stock in this offering at an
assumed initial public offering price of $13.00 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, 17,226,732, 28,701,437 and 34,470,666
shares issued and outstanding actual, pro-forma
and pro forma as adjusted........................ 17 29 34
Additional paid-in capital.......................... 50,348 50,342 118,587
Deferred stock-based compensation................... (7,957) (7,957) (7,957)
Notes receivable from stockholders.................. (5,675) (5,675) (5,675)
Accumulated other comprehensive loss................ (42) (42) (42)
Accumulated deficit................................. (24,967) (24,967) (24,967)
------- ------- -------
Total stockholders' equity...................... 11,730 11,730 79,980
------- ------- -------
Total capitalization.......................... $18,166 $18,166 $86,416
======= ======= =======
</TABLE>
- --------
The share information set forth above is based on shares outstanding as of
December 31, 1999 and excludes:
. 769,230 shares of common stock issued to IBM at a price valued at the
mid-point of the pricing range to be set forth in the circulated
preliminary prospectus used to market this offering subject to
adjustment if the initial public offering price is lower than that
price.
. 1,647,146 shares of common stock, on an as-converted basis, that are
subject to outstanding warrants with a weighted average exercise price
of $.52 per share;
. 354,002 shares of common stock that are subject to outstanding options
under our stock option/stock issuance plan with a weighted average
exercise price of $.64 per share; and
. 634,426 additional shares of common stock that are reserved for issuance
under our stock option plan.
18
<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 $.41 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 5,769,229 shares of common stock in this offering at an assumed
initial public offering price of $13.00 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 $80.0 million, or $2.32 per share. This amount represents an immediate
increase in pro forma net tangible book value to our existing stockholders of
$1.91 per share and an immediate and substantial dilution to new investors of
$10.68 per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Pro forma net tangible book value per share at December 31,
1999........................................................... $ .41
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 1.91
-----
Pro forma net tangible book value per share after this offering... 2.32
------
Dilution per share to new investors............................... $10.68
======
</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 $90.4 million, or $2.56 per share, representing an immediate increase in
pro forma net tangible book value to our existing stockholders of $2.15 per
share and an immediate dilution to new investors of $10.44 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 $13.00 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........... 28,701,437 83.3% $ 43,087,000 36.5% $ 1.50
New investors................... 5,769,229 16.7 74,999,977 63.5 13.00
---------- ----- ------------ -----
Total......................... 34,470,666 100.0% $118,086,977 100.0%
========== ===== ============ =====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options and warrants. At December 31,
1999, there were options outstanding to purchase a total of 354,002 shares of
our common stock with a weighted average exercise price of $.64 per share and
warrants outstanding to purchase a total of 1,647,146 shares of common stock,
on an as-converted basis, with a weighted average exercise price of $.52 per
share. If all of these options and warrants were exercised, then after giving
effect to the completion of this offering, our adjusted pro forma net tangible
book value at December 31, 1999 would have been $81.1 million, or $2.22 per
share, representing an immediate increase in pro forma net tangible book value
to our existing stockholders of $1.81 per share and an immediate dilution to
new investors of $10.78 per share.
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,
including $475 for
amortization of stock-
based compensation in
1999..................... -- 19 43 250 2,622
Research and development,
including $690 for
amortization of stock-
based compensation in
1999..................... -- 139 717 4,218 9,740
Selling, general and
administrative, including
$624 for amortization of
stock-based compensation
in 1999.................. 9 209 998 3,572 8,253
------ ------ ------- -------- --------
Total operating
expenses............... 9 367 1,758 8,040 20,615
------ ------ ------- -------- --------
Loss from operations........ $ (9) $ (207) $(1,130) $ (7,538) $(16,642)
Interest and other income,
net........................ -- 4 202 28 457
------ ------ ------- -------- --------
Net loss before foreign
withholding taxes.......... $ (9) $ (203) $ (928) $ (7,510) $(16,185)
Foreign withholding taxes... -- -- 62 -- 71
------ ------ ------- -------- --------
Net loss.................... $ (9) $ (203) $ (990) $ (7,510) $(16,256)
====== ====== ======= ======== ========
Basic and diluted net loss
per share.................. $ (.00) $ (.05) $ (.14) $ (.77) $ (1.33)
Shares used in computing
basic and diluted net loss
per share.................. 1,831 3,888 7,017 9,719 12,244
Pro forma basic and diluted
net loss per share......... $ (.69)
Shares used in computing pro
forma basic and diluted net
loss per share............. 23,718
<CAPTION>
As of 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 and licenses 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 Image Correction and Enhancement,
or Digital ICE, Digital Reconstruction of Color, or Digital ROC, and Digital
Grain Equalization and Management, or Digital GEM, technologies. DFP
technology permits the direct digitization of exposed but undeveloped 35mm and
Advanced Photosystem film. ICE/3/ technologies 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 were
incorporated in June 1995 as a Delaware corporation 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 original equipment manufacturers, or 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 the design
phase of a specified "class" of DFP subsystems and related developing agent
consumable with Hewlett-Packard and two other OEMs. 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
at least 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 design agreements that we have entered into and 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 have and 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 first half of 2002.
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 and Kodak have licensed Digital ICE for use in digital minilabs.
Digital minilabs are traditional wet-chemical photofinishing systems that
incorporate an on-board film scanner to digitize the developed photographic
images immediately following the film development process. Under our
agreements with Noritsu and Kodak, 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
technologies 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 $25.0 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 at least the next 24 months. 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 52
employees at December 31, 1998. This rapid growth places a significant demand
on our management and operational resources. In order to
22
<PAGE>
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 revenues do 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, our business, financial
condition and operating results would be adversely affected.
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 decreased 20% from $628,000 in 1997 to $502,000 in 1998, and
increased by 691% to $4.0 million in 1999. The increase in total revenues from
1998 to 1999 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 decreased by 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. 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.
Royalty revenues. We did not recognize any royalty revenues during 1997. 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.
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 949% to $2.6 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 as well as $475,000 of amortization of deferred stock-based
compensation in 1999. We expect cost of contract revenues to increase in the
future due to the anticipated expansion of our obligations under 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 131% to $9.7 million in 1999. These increases were primarily due to
increases in internal
23
<PAGE>
engineering personnel from 10 to 34 to 90 at December 31, 1997, 1998 and 1999,
respectively, as well as $690,000 of amortization of deferred stock-based
compensation in 1999. 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 131% to $8.3 million in 1999. These increases were
primarily due to a significant increase in personnel costs from $475,000 to
$1.4 million to $4.2 million in 1997, 1998 and 1999, respectively, reflecting
an increase in personnel from nine to 18 to 46 at December 31, 1997, 1998 and
1999, respectively, as well as $624,000 of amortization of deferred stock-
based compensation in 1999, and an increase in legal expenses incurred to
protect our intellectual property from $133,000 to $665,000 to $1.3 million in
1997, 1998 and 1999, respectively. We believe these expenses will continue to
increase in 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.
Interest and other income, net. Interest and other income, net consists
primarily of interest income and expense. 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 as compared to 1997. Additionally,
other income in 1997 included a $90,000 cancellation payment from a former OEM
customer. 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.
Foreign Withholding Taxes. Foreign withholding taxes paid in 1997 and 1999
relate to withholdings on royalties from a customer located in a foreign
country.
24
<PAGE>
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 71 531 899 1,121
Research and
development........... 947 1,059 1,072 1,140 1,662 2,250 2,841 2,987
Selling, general and
administrative........ 534 804 1,104 1,130 1,055 1,822 2,239 3,137
------- ------- ------- ------- ------- ------- ------- -------
1,535 1,924 2,242 2,339 2,788 4,603 5,979 7,245
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,535) (1,904) (2,049) (2,050) (1,992) (3,966) (5,003) (5,681)
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) (2,012) (3,788) (4,834) (5,551)
Foreign withholding
taxes.................. -- -- -- -- -- 35 15 21
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,487) $(1,866) $(2,039) $(2,118) $(2,012) $(3,823) $(4,849) $(5,572)
======= ======= ======= ======= ======= ======= ======= =======
</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 were $3.0 million, of which approximately
$700,000 has been repaid. As of December 31, 1999, borrowings under these
facilities bore interest at a weighted average annual rate of 8.90% and were
collateralized by all of our assets except those resulting from the 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 borrowings
then outstanding under this facility will bear a fixed interest rate equal to
the 18 month U.S. treasury bill rate at March 31, 2000 plus 325 basis points.
No further borrowings are available under our first line of credit. Borrowings
under any new equipment lines of credit are expected to be on substantially
similar terms as those under our existing facilities. 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 second equipment line of credit.
25
<PAGE>
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 royalty receipts under two 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 may be decreased further if a fourth licensed product begins
shipping. Payments made under the specified Digital ICE manufacturing license
agreement are and, in certain circumstances, under the Digital ICE development
and license agreement will be, first applied against the interest obligation,
with any remaining amounts then applied against outstanding principal and
other obligations.
In the event the specified Digital ICE license agreement expires or
terminates on or before October 2008 or January 2009 with respect to the $2.5
million and $3.5 million notes, respectively, Silicon Valley Bank may demand,
at its option, that interest and principal amounts then outstanding be paid in
equal quarterly installments in an amount that would fully amortize the
outstanding principal from the date of the demand through the earlier of
October 2008 or January 2009, as the case may be, and the four year
anniversary of the expiration or termination of such agreement. 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 a
warrant 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 a specified
Digital ICE license agreement expired or was 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.
In addition, in March 2000 we entered into a patent assignment and cross
license agreement with IBM whereby we executed a patent cross license
agreement and purchased from IBM patents relevant to our ICE/3/ and DFP
technologies for consideration consisting of cash and shares of our common
stock. We are obligated under the terms of the agreement to keep the amount of
the total consideration confidential.
Also in March 2000, we entered into an agreement with a commercial real
estate developer to lease build-to-suit office and lab space, which lease is
expected to commence in the first quarter of 2001. The agreement includes an
obligation to deposit up to a $1.2 million letter of credit with the landlord
by June 2000 and up to an additional $1.2 million letter of credit upon the
take down of additional space, which is expected to occur no later than the
first quarter of 2003. The amounts of the letters of credit will decrease upon
the attainment of specified financial milestones.
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 at least the next 12
months. However, we may be required to seek additional debt or equity 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
26
<PAGE>
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 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. Due to the short-term nature of our
cash equivalents and investments, we have concluded that there is no material
market risk exposure to changes in interest rates.
Our interest rate risk exposure results from our debt portfolio which is
influenced by short-term rates and U.S. Treasury rates. The following table
provides information as of December 31, 1999, about our long-term debt that is
subject to interest rate risk. The table presents principal cash flows and
weighted average interest rates by expected maturity dates.
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
------ ----- ----- ----- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt, including
current portion
Royalty backed annuity
notes.................. $ -- $ -- $ -- $ -- $ -- $5,544 $5,544
Interest rate (1)...... 9.25% 9.25% 9.25% 9.25% 9.25% 9.25%
Borrowings under
equipment lines of
credit................. $1,402 $ 892 $ -- $ -- $ -- $ -- $2,294
Fixed rate............. 8.90% 8.90%
</TABLE>
27
<PAGE>
- --------
(1) The interest rate will be adjusted from the prime rate plus 100 basis
points on the date that our fourth licensee customer begins shipping
products incorporating our Digital ICE technology to 100 basis points over
the average yield paid by the first four licensees on public, U.S. dollar
debt obligations of like duration or, if this cannot be ascertained, to 50
basis points over the prime rate. However, the interest rate may be
increased in certain circumstances to an annual rate equal to the then
issuable four-year U.S. treasury notes rate plus 650 basis points. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
We do not hedge against our interest rate exposure, and we do not use
derivative financial instruments for trading or speculative trading purposes.
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.
However, if our exposure to changes in foreign exchange rates becomes more
pronounced in the future, we may enter into U.S. dollar-denominated contracts.
28
<PAGE>
BUSINESS
We innovate, develop and license 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. Digital Film Processing, or DFP, and
ICE/3/ are our two principal technologies. DFP directly digitizes exposed but
undeveloped 35mm and Advanced Photosystem film, supplementing or eliminating
the traditional wet chemical development process. Our ICE/3/ technologies
consist of our Digital Image Correction and Enhancement, or Digital ICE,
Digital Reconstruction of Color, or Digital ROC, and Digital Grain
Equalization and Management, or Digital GEM, technologies. ICE/3/ technologies
are embedded in scanners and help to eliminate surface defects, restore faded
color and enhance the granular clarity of scanned color photographic images.
The implementation of our technologies for use by our original equipment
manufacturer, or OEM, customers generally occurs in three distinct phases:
design, development and production. In the design phase, we coordinate with
the OEM customer to design the product specifications. In the development
phase, we develop or assist in the development of a product prototype. In the
production phase, either the OEM customer or a third-party manufacturer
produces the resultant products.
We have developed a product prototype of our DFP subsystem that includes a
highly specialized digital image capture engine. We anticipate that our OEM
customers will incorporate our digital image capture engine within their DFP
systems. When commercially introduced, we believe that DFP systems will enable
our customers to compete more effectively in the market for image output,
including Internet storage, archiving, transmission and printing of digital
images, and 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;
. no use or discharge of hazardous liquid 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.
We are in the design phase with three OEM customers for DFP subsystems. 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.
ICE/3/ technologies improve and enhance the digitized quality of existing
color photographs, slides and negatives:
. Digital ICE eliminates scratches, dust, fingerprints and other surface
defects in scanned color photographic images;
29
<PAGE>
. Digital ROC corrects color fading in aging photographic images and
restores the color values in a digitized image to their original
condition; and
. Digital GEM 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 one or more of our ICE/3/ technologies to Kodak, Konica, 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, an information, market research and consulting services
company that covers the global imaging industry, 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 research report published by Photofinishing News and Lyra
Research, an information service provider to the photo-imaging industry,
estimated that 85 billion images, or 92%, of images captured in 1999, 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 the Photo Marketing Association Industry Trends Report,
a market research report, the central labs' share of total film-roll volume in
the United States declined to approximately 62% 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 Advanced Photosystem film
cameras 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.
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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 39.5 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
an ink-jet printer attached to a personal computer 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 ememories.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 and license 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. 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 Advanced
Photosystem 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 color 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 Advanced Photosystem 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 original
equipment manufacturers, or OEM, customers' 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 then be
archived, accessed and transmitted over the Internet.
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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 optimal development settings for each discernable component, or
pixel, of the photographic image. 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 Advanced Photosystem 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. For example, we recently
entered into a patent license and purchase agreement with IBM to acquire
certain IBM patents relevant to our ICE/3/ and DFP technologies in order to
ensure continued and unfettered access to this technology. Our research and
development efforts resulted in the filing of 83 patent applications as of
December 31, 1999. We
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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 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 allow or 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 our 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 Computer and 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 computer server and storage
products and companies in other industries that are being affected by the
demand for digital images, including storage solution providers, business-to-
business and business-to-consumer electronic commerce companies, online photo-
server companies and personal computer OEMs and value added resellers and
distributors. 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 Advanced Photosystem 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. We expect that this highly specialized DFP image
capture engine will be integrated with a computer system and our proprietary
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 personal computers
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 first
half of 2002. When commercially
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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 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 Advanced
Photosystem 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 in
the 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 viewing monitor, 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
prior to the fourth quarter of 2000. We believe that scanners which are
enabled with our ICE/3/ technologies can reduce a majority 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 personal computer where the defects are
accurately identified and automatically removed from the resultant digitized
image.
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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 one of our
proprietary design specifications 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 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 will provide 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
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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 personal computer interface to the Internet or a help-line
telephone that will enable the end user to receive 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 Advanced Photosystem 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 personal computers, will leverage the enormous investment
in technology and market development that is occurring in the personal
computer 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 although we currently do
not have development or licensing agreements with any OEMs. We do not expect
Digital GEM to be incorporated into flatbed scanners in the foreseeable
future.
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Licensing and Implementation of Our Technologies
The implementation of our technologies for use by our original equipment
manufacturer, or 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 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 our patents related to the applicable technologies; (3) a
copyright license for our customized 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 the first
half of 2002, 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 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
Elite; and in design phase for an
additional Minolta product
Digital ROC/Digital GEM Development
Konica Digital GEM Design
Gretag DFP Design
Hewlett-Packard DFP Design
</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 if our customers fail or cease their efforts to commercialize
our DFP technology, we may not be able to generate revenues from the licensing
of our DFP technology or from the sale of products that incorporate 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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<PAGE>
Through our participation in industry trade shows and conferences, such as
PhotoKina in Europe and, COMDEX, Internet World and the Photo Marketing
Association trade show in the United States, 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. In addition, as part of our
agreement with IBM to purchase certain of their patents which are relevant to
our ICE/3/ and DFP technologies, we have obtained a license to all IBM general
purpose patents issued and all future patents filed or issued before March 24,
2005 and have granted to IBM a license to our general purpose patents. The
cross license does not cover design patents such as those covering the
industrial design elements of IBM products or our patents covering the design
of the consummables associated with DFP systems. This patent cross-license
precludes us from bringing any patent infringement action against IBM should
IBM decide to develop competing technologies. IBM would not, however, have the
ability to produce compatible consummable cartridges if such cartridge
production infringed on our cartridge design patent. 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.
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<PAGE>
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 it is possible that they may 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 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 that may be installed in kiosks and
at other retail sites will compete with digital minilabs, copy machines,
personal computer equipment and software, mid-range film and photo scanners,
and other types of office or digital imaging equipment. In the personal
computer 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 two issued patents we have received and one
patent application that has 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 applications. The Patent Cooperation Treaty applications give us the
opportunity to file for patent protection in 69 countries around the world.
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<PAGE>
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 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 two issued patents and allowance of one
other patent application from the U.S. Patent and Trademark Office with
respect to these applications. We expect the allowed application to issue as a
patent in the next six months.
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 technology originally
developed by IBM. On March 23, 2000, we entered into a patent assignment and
cross license agreement with IBM whereby we executed a patent cross license
and purchased from IBM patents relevant to our ICE/3/ and DFP technologies.
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 1,000
square feet are subleased to a third party. In March 2000, we entered into an
agreement with a commercial real estate developer to lease approximately
100,000 square feet of build-to-suit office and lab space in Austin, Texas,
with a lease term expected to commence in the first quarter of 2001. This
agreement further includes an obligation to lease a minimum of an additional
60,000 square feet of build-to-suit space on the same site with a lease term
expected to commence no later than the first quarter of 2003. In addition, we
have an option to lease an additional approximately 275,000 square feet of
build-to-suit space as the need arises commencing in the first quarter of
2005, subject to the terms and conditions of the agreement. We also lease
approximately 1,000 square feet in Tokyo, Japan to support sales and marketing
in Asia and approximately 1,300 square feet in Burlingame, California to
support a portion of our research and development efforts. 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.
42
<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........ 52 Chief Scientist and Director
Robert E. Sleet, Jr..... 54 Executive Vice President and Chief Financial Officer,
Secretary and Treasurer
Jerome W. Johnson....... 51 Executive Vice President, Sales, Marketing and
Licensing Operations
Daniel J. Sullivan...... 53 Executive Vice President, Intellectual Property,
Strategy and Administration
S. Dana Seccombe........ 51 Executive Vice President, Research and Development
John Asa(2)............. 63 Director
Harvey B. Cash.......... 61 Director
Carmelo M. Gordian(2)... 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 January 1996, Dr. Edgar was employed by IBM as a senior engineer
and scientist where he engaged in various scientific and engineering projects.
Dr. Edgar holds a B.S. degree in Electrical Engineering and Physics from
Northwestern University and a Ph.D 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 August 1995 to June
1998, 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.
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<PAGE>
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 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 August 1972 to December 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 Owner and General Manager of Japan Camera, Inc. since June 1959.
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 1986. 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 March 1999. Mr. Kimball
is a General Partner of Technology Crossover Ventures, which he co-founded in
December 1994. Mr. Kimball is on the board of directors of Copper Mountain
Networks, Inc. and of several private companies. 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. 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 2001;
. Class II, whose term will expire at the annual meeting of stockholders
to be held in 2002; and
. Class III, whose term will expire at the annual meeting of stockholders
to be held in 2003.
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.
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<PAGE>
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, Gordian 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
71,995 shares of common stock at a price of $2.67 per share.
On January 24, 2000, we granted to each of John Asa and Carmelo M. Gordian
options to purchase 19,635 shares of common stock at a price of $5.91 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 enter 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
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<PAGE>
in 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
remaining 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
46
<PAGE>
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.
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 other executive officers 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 $ -- 46,448
President and Chief Executive
Officer
Albert Edgar .................... 190,000 67,203 -- 21,112
Chief Scientist
Jerome W. Johnson................ 127,885 50,000 30,700 (1) 283,398
Executive Vice President, Sales,
Marketing and Licensing
Operations
</TABLE>
- --------
(1) Consists of relocation expenses paid by us.
47
<PAGE>
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 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 exercise price on the
date of grant 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 2,812,609 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 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............. 46,448 1.7% $1.18 08/11/09 $ 34,469 $ 87,351
Albert Edgar............ 21,112 0.8 1.18 08/11/09 15,667 39,704
Jerome W. Johnson....... 283,398 10.1 1.18 06/16/09 210,309 532,963
</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 acquired pursuant to options exercised by
our executive officers in 1999 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............. 46,448 $ 549,015 -- -- -- --
Albert Edgar............ 21,112 249,544 -- -- -- --
Jerome W. Johnson....... 283,398 3,349,764 -- -- -- --
</TABLE>
48
<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 6,545,000 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 5,556,572 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 1,963,500 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 654,500 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 eligible 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.
49
<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 $5,000 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 19,635 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
50
<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 16
equal successive quarterly 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 654,500 shares of our common stock
will initially be reserved 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 327,250 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 quarterly
entry date (generally February 1, May 1, August 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 quarterly entry date within that
period.
51
<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 1,309 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.
52
<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 warrants exercisable into 10,233 shares 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 1,603,360 shares of
common stock for $.47 per share.
Our officers, directors and 5% stockholders participated in the foregoing
transactions as follows:
<TABLE>
<CAPTION>
Number of Aggregate Number of Shares of
Number of Warrants to Number of Common Stock Issuable Upon
Shares Purchase Shares Shares Exercise of Warrants and
Name of Purchaser of Series C* of Common of Series D** Conversion of Preferred Stock
- ----------------- ------------ --------------- ------------- -----------------------------
<S> <C> <C> <C> <C>
Mark R. Urdahl.......... -- -- -- 3,204
Dr. Albert Edgar........ -- -- -- 19,112
Harvey B. Cash.......... 13,513 14,722 -- 67,787
CenterPoint Venture
Partners............... 594,595 647,884 258,398 3,321,100
InterWest Funds......... 405,406 441,739 258,398 2,372,010
Sevin Rosen Funds....... 374,325 407,869 516,796 2,554,326
Entities associated with
Technology
Crossover Ventures...... -- -- 1,453,489 1,902,615
</TABLE>
- --------
* Each share of Series C preferred stock is convertible into 3.927 shares of
common stock.
** Each share of Series D preferred stock is convertible into 1.309 shares of
common stock.
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.
53
<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 47 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 28,701,437 shares of
common stock outstanding at December 31, 1999, consisting of 17,226,732 shares
of common stock outstanding, and 11,474,705 shares of common stock 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>
Named Officers and Directors:
Mark R. Urdahl.................................. 3,330,003 11.6% 9.7%
Dr. Albert Edgar................................ 3,320,575 11.6 9.7
Jerome W. Johnson............................... 262,454 * *
John Asa........................................ 19,635 * *
Harvey B. Cash.................................. 67,787 * *
Carmelo Gordian................................. 19,635 * *
Richard H. Kimball.............................. 1,902,615 6.6 5.5
Peter M. Palermo................................ 71,995 * *
All directors and executive officers as a group
(11 persons)................................... 9,829,055 34.2 28.6
Other 5% Stockholders:
CenterPoint Venture Partners.................... 3,321,100 11.6 9.6
Sevin Rosen Funds............................... 2,554,326 8.9 7.4
InterWest Funds................................. 2,372,010 8.3 6.9
Sada Cumber..................................... 2,115,345 7.4 6.1
Entities associated with Technology Crossover
Ventures ...................................... 1,902,615 6.6 5.5
</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 3,204 shares issuable upon exercise of a
currently exercisable warrant and 46,448 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 1,602 shares issuable upon exercise of a
currently exercisable warrant and 21,112 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.
Jerome W. Johnson. Includes 262,454 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 14,722 shares issuable upon exercise of a
currently exercisable warrant.
Peter M. Palermo. Includes 71,995 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.
54
<PAGE>
Richard H. Kimball. Includes 1,902,615 shares held by entities
associated with Technology Crossover Ventures over which Mr. Kimball, along
with Jay C. Hoag, has sole investment control.
Carmelo M. Gordian. Includes a currently exercisable option for 19,635
shares that was issued on January 24, 2000.
John Asa. Includes a currently exercisable option for 19,635 shares that
was issued on January 24, 2000.
All directors and officers as a group. Includes 255,255, 242,165 and
336,936 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. Includes 647,884 shares underlying a
warrant that is exercisable upon completion of this offering. Paluck
Associates, LP has sole voting and investment control over the shares owned
by CenterPoint Venture Partners, L.P. Robert J. Paluck is the general
partner of Paluck Associates, LP. CenterPoint Venture Partners, L.P.'s
address is Two Galleria Tower, 13455 Noel Road, Suite 1670, Dallas, Texas
75240.
Funds affiliated with Sevin Rosen. Includes (a) 1,383,593 shares and
338,900 shares underlying a warrant that is exercisable upon completion of
this offering held by Sevin Rosen Fund V, L.P.; (b) 59,150 shares and
14,490 shares underlying a warrant that is exercisable upon completion of
this offering held by Sevin Rosen V Affiliates Fund L.P.; (c) 196,350
shares and 54,479 shares underlying a warrant that is exercisable upon
completion of this offering held by Sevin Rosen Management Company; (d)
415,847 shares held by Sevin Rosen Fund VI, L.P.; and (e) 37,038 shares
held by Sevin Rosen VI Affiliates Fund, L.P. (collectively, the "Sevin
Rosen Funds"). SRB Associates V L.P. is the general partner of the Sevin
Rosen Funds and exercises investment and voting power over the shares held
by these entities. 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 InterWest Ventures. Includes (a) 1,872,869 shares
and 428,667 shares underlying a warrant that is exercisable upon completion
of this offering held by InterWest Partners VI, L.P. and (b) 57,402 shares
and 13,072 shares underlying a warrant that is exercisable upon completion
of this offering held by InterWest Investors VI, L.P. InterWest Management
Partners VI, LLC has sole voting and investment control over the shares
owned by InterWest Partners VI, L.P. and InterWest Investors VI, L.P.
Harvey B. Cash, Alan W. Crites, Philip T. Gianos, W. Scott Hedrick, W.
Stephen Holmes, Robert R. Mornsen and Gilbert H. Kilman have shared voting
and investment control over InterWest Management Partners VI, LLC. Each of
these individuals disclaims beneficial ownership of the shares owned by
InterWest Partners VI, L.P. and InterWest Investors VI, L.P., except to the
extent of their pro rata partnership interests therein. The address of the
investment funds associated with InterWest Ventures is 3000 Sand Hill Road,
Building 3, Suite 255, Menlo Park, California 94025.
Sada Cumber. Includes 122,719 shares of common stock which are currently
unvested and subject to our right to repurchase them if Mr. Cumber's
services are terminated prior to vesting.
Funds affiliated with Technology Crossover Ventures. Includes 13,815
shares held by TCV III (GP), 65,622 shares held by TCV III, L.P., 1,744,192
shares held by TCV III (Q), L.P., and 78,986 shares held by TCV III
Strategic Partners, L.P. (collectively, the "TCV Funds"). Technology
Crossover Management III, L.L.C. has sole investment control over the TCV
Funds. Richard H. Kimball and Jay C. Hoag have sole investment control over
Technology Crossover Management III, L.L.C. Mr. Kimball and Mr. Hoag
disclaim beneficial ownership of such shares except to the extent of their
pecuniary interests therein. The address for each of Mr. Kimball and the
TCV Funds is c/o Technology Crossover Ventures, 575 High Street, Suite 400,
Palo Alto, California 94301.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon completion of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $.001 par value, and 25,000,000 shares
of undesignated preferred stock, $.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, each as amended, 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 28,701,437 shares of our 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 our company without
further action by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding. At 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, in the aggregate, for 43,786 shares of common stock. In addition,
there were warrants outstanding to purchase 1,603,360 shares of common stock
which upon completion of this offering will become exercisable. 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."
56
<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 11,105,880 shares of common stock and warrants to purchase
1,616,754 shares of common stock, may exercise a demand registration right to
require us to file one registration statement under the Securities Act of
1933, as amended, with respect to the resale of their shares. However, if the
shares registered under the requested registration statement are less than
two-thirds of the then outstanding shares subject to the demand registration
right, then these stockholders may request that another registration statement
be filed. To demand such registration, investors holding an aggregate of at
least 3,180,658 shares, or a lower amount of shares that would raise at least
$7.5 million in proceeds to the investors, must request that the registration
statement be filed. We are not required to effect more than one demand
registration in any 12 month period except as noted above.
We granted to IBM the same registration rights as set forth in the
investors rights agreement noted above for the 769,230 shares held by IBM. For
IBM to require us to file a registration statement pursuant to its demand
right, at least one-half of the shares held by it must be included in such
registration statement, or a lower amount of shares that would raise at least
$7.5 million in proceeds to it.
Additionally, the holders of 23,319,953 shares of common stock and warrants
to purchase 1,656,906 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 up to
four 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:
. our acquisition by means of a tender offer;
. our acquisition 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 our company 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 our company outweigh the
disadvantages of discouraging such proposals as negotiation of such proposals
could result in an improvement of their terms.
57
<PAGE>
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 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 our company 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 our company. These and other provisions may have the effect
of deterring hostile takeovers or delaying changes in our officers and
directors.
Supermajority Vote Provisions. The General Corporation Law of the State of
Delaware 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. Our company is authorized to 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 our common stock is ChaseMellon
Shareholder Services LLC.
58
<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
34,470,666 shares of our common stock, based upon the number of shares
outstanding at December 31, 1999, and assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants. Of these shares, all shares sold in this offering will be freely
tradable 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>
28,701,437 After the date of this prospectus, freely
tradable shares sold in this offering and
shares saleable under Rule 144(k) that are
not subject to the 180-day lock-up.
27,247,547 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.
1,453,890 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.
</TABLE>
The remaining 28,701,437 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 have 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 344,706 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 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
59
<PAGE>
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
23,319,953 shares of our common stock and warrants to acquire up to 1,656,906
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 will 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 7,199,500 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 354,002 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.
60
<PAGE>
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 we have 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........................................................ 5,769,229
=========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us 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.
Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan Stanley &
Co. Incorporated, is acting as an underwriter in connection with the offering
and will distribute shares of common stock over the Internet to its eligible
account holders.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
AdvisorSM, a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors.
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 a 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.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 865,384
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 us would be $ .
The underwriters have informed us 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 have filed an application to qualify our common stock for quotation on
the NASDAQ National Market under the symbol "ASFX."
61
<PAGE>
We have agreed, and, 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, we and
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 or exercisable or exchangeable for common stock; or
. 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 us of options under our stock option and employee stock
compensation plans or 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 us.
We have agreed, and the underwriters have agreed, to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
At our request, the underwriters have reserved for sale, at the initial
offering price, up to 576,922 shares offered hereby for the directors,
officers, employees, business associates, stockholders and related persons of
our company. Of this amount, up to 288,461 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 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 our common
stock. The initial public offering price will be determined by negotiations
between us and the underwriters. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
our company and our industry in general, sales, earnings and certain other
financial operating information of our company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating
62
<PAGE>
information of companies engaged in activities similar to those of our
company. 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.
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 and in
connection with such appointment, was granted an option to purchase 19,635
shares of our common stock.
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, we 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.
63
<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.
Ernst & Young LLP
Austin, Texas
January 21, 2000, except as to the 4th paragraph of Note 9 as to which the
date is .
The foregoing report is in the form that will be signed upon the completion
of the 1.309 for one forward split for all common shares in the form of a
stock dividend payable upon the effectiveness of the Company's Initial Public
Offering as described in Note 9 to the consolidated financial statements.
/s/ Ernst & Young LLP
Austin, Texas
March 24, 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>
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 14,641,701,
17,226,732 and 28,701,437 shares issued and
outstanding at December 31, 1998, 1999, and
pro forma, respectively.................... 15 17 29
Additional paid-in capital.................. 5,968 50,348 50,342
Deferred stock-based compensation........... -- (7,957) (7,957)
Notes receivable from stockholders.......... (232) (5,675) (5,675)
Accumulated other comprehensive loss........ -- (42) (42)
Accumulated deficit......................... (8,711) (24,967) (24,967)
------- -------- --------
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, including $475 for
amortization of stock-based compensation in 1999. 43 250 2,622
Research and development, including $690 for
amortization of stock-based compensation in 1999. 717 4,218 9,740
Selling, general and administrative, including
$624 for amortization of stock-based compensation
in 1999.......................................... 998 3,572 8,253
------ ------- --------
1,758 8,040 20,615
------ ------- --------
Loss from operations................................ (1,130) (7,538) (16,642)
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) (16,185)
Foreign withholding taxes........................... 62 -- 71
------ ------- --------
Net loss............................................ $ (990) $(7,510) $(16,256)
====== ======= ========
Basic and diluted net loss per share................ $(0.14) $ (0.77) $ (1.33)
====== ======= ========
Shares used in computing basic and diluted net loss
per share.......................................... 7,017 9,719 12,244
====== ======= ========
Pro forma basic and diluted net loss per share...... $ (0.69)
========
Shares used in computing pro forma basic and diluted
net loss per share................................. 23,718
========
</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 11,417,743 $11 $ 345 $ -- $ (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........ -- -- 911,062 1 85 -- -- -- --
Issuance of
Common Stock
under Stock
Option/Stock
Issuance Plan,
net of
cancellations... -- -- 575,407 1 55 -- (56) -- --
Net loss........ (990)
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
--------- --- ---------- --- ------- ------- ------- ---- --------
Balance at
December 31,
1997............. 1,564,606 2 12,904,212 13 5,797 -- (59) -- (1,201)
Issuance of
Common Stock
under Stock
Option/Stock
Issuance Plan,
net of
cancellations... -- -- 1,737,489 2 171 -- (173) -- --
Net loss........ (7,510)
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
--------- --- ---------- --- ------- ------- ------- ---- --------
Balance at
December 31,
1998............. 1,564,606 2 14,641,701 15 5,968 -- (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... -- -- 2,585,031 2 5,442 -- (5,443) -- --
Issuance of
warrants to
purchase
preferred stock. -- -- -- -- 25 -- -- -- --
Stock-based
compensation.... -- -- -- -- 9,746 (9,746) -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 1,789 -- -- --
Net loss........ -- (16,256)
Foreign currency
adjustment...... 3 --
Unrealized loss
on available-
for-sale
securities...... -- -- -- -- -- -- -- (45) --
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
--------- --- ---------- --- ------- ------- ------- ---- --------
Balance at
December 31,
1999............. 5,635,189 $ 6 17,226,732 $17 $50,348 $(7,957) $(5,675) $(42) $(24,967)
========= === ========== === ======= ======= ======= ==== ========
<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.... 1,789
Net loss........ (16,256)
Foreign currency
adjustment...... 3
Unrealized loss
on available-
for-sale
securities...... (45)
-------------
Comprehensive
loss............ (16,298)
-------------
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) $(16,256)
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.......... -- -- 1,789
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)
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. The estimated fair value of
the Company's investment securities and debt instruments have been determined
by the Company using appropriate market information and valuation
methodologies.
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's contract fees
are generally fixed and such fees are generally recognized as revenues based
upon the achievement of certain milestones in accordance with the terms of the
related arrangements. Cost of contract revenues include the portion of
engineering costs that the Company has incurred to fulfill its obligations
under the related arrangements determined based on actual engineering hours
incurred. Any losses on contracts are recognized when it is probable that the
costs estimated to achieve a defined milestone exceed the revenue to be
recognized upon achievement of that milestone. 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 any royalties received in advance of shipment 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. The deferred stock-
based compensation is amortized using a graded vesting which results in higher
amortization amounts in the first year of the vesting period and declining
amortization amounts in each year thereafter. 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
F-9
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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) $(16,256)
====== ======= ========
Weighted-average shares of common stock outstanding. 11,836 14,014 15,266
Less: Weighted-average shares that may be
repurchased........................................ (4,819) (4,295) (3,022)
------ ------- --------
Weighted-average shares of common stock outstanding
used in computing basic and diluted net loss per
share.............................................. 7,017 9,719 12,244
====== ======= ========
Basic and diluted net loss per share................ $(0.14) $ (0.77) $ (1.33)
====== ======= ========
Pro forma:
Net loss.......................................... $(16,256)
========
Weighted-average shares used in computing basic
and diluted net loss per share (from above)...... 12,244
Adjustment to reflect the effect of the assumed
conversion of preferred stock from the date of
issuance......................................... 11,474
--------
Weighted-average shares used in computing pro
forma basic and diluted net loss per share....... 23,718
========
Pro forma basic and diluted net loss per share.... $ (0.69)
========
</TABLE>
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately
4,819,000, 4,295,000 and 3,022,000 weighted average shares subject to
repurchase, and approximately 617,000, 860,000 and 910,000 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.
Foreign Currency Translation
For the Company's foreign subsidiary, the functional currency has been
determined to be the local currency, and therefore, assets and liabilities are
translated at year end exchange rates, and income statement items are
translated at average exchange rates prevailing during the year. Such
translation adjustments are recorded in aggregate as a component of
stockholders' equity. Gains and losses from foreign currency denominated
transactions are included in other income (expense) and were not material in
1998 and 1999. There were no gains or losses from foreign currency denominated
transactions during 1997.
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
F-10
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 respectively, the Company 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 two 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 may be decreased further if a fourth licensed product
begins shipping. Payments made under the specified Digital ICE manufacturing
license
F-11
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreement are and, in certain circumstances, under the Digital ICE development
and license agreement will be first applied against the interest obligation,
with any remaining amounts then applied against the outstanding principal and
other obligations. 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 agreement expires or
terminates on or before October 2008 or January 2009, with respect to the $2.5
million and $3.5 million notes, respectively, Silicon Valley Bank may, at its
option, demand that interest and principal amounts then outstanding be paid in
equal quarterly installments in an amount that would fully amortize the
outstanding principal from the date of the demand through the earlier of
October 2008 or January 2009, as the case may be, and the four year
anniversary of the expiration or termination of such agreement. 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 Silicon
Valley 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 a date the specified Digital ICE license agreement was terminated
or expired.
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 were 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. Under both lines of
credit, the Company is restricted from paying dividends without the written
consent of the Bank.
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>
F-12
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Long-term accrued rent represents the cumulative
difference between escalating rent payments made under the Company's
facilities lease and rent expense recognized on a straight-line basis over the
lease 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>
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>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ -- $ -- $ --
State........................................... -- -- --
Foreign......................................... 62,000 -- 71,000
------- ------- -------
Total current................................... 62,000 -- 71,000
------- ------- -------
Deferred:
Federal......................................... -- -- --
State........................................... -- -- --
Foreign......................................... -- -- --
------- ------- -------
Total deferred.................................. -- -- --
------- ------- -------
$62,000 $ -- $71,000
======= ======= =======
</TABLE>
F-13
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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>
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Computed at statutory rate.......... $(316,000) $(2,553,000) $(5,503,000)
State taxes, net of federal benefit. (27,000) (225,000) (427,000)
Permanent items..................... 2,000 9,000 58,000
Stock-based compensation............ -- -- 609,000
Effect of foreign operations........ 62,000 -- 71,000
Tax credits......................... (114,000) (115,000) (465,000)
Other............................... -- -- 36,000
Change in valuation allowance....... 455,000 2,884,000 5,692,000
--------- ----------- -----------
$ 62,000 $ -- $ 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.
F-14
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
3.927 shares of Common Stock for each share of Series B and C Preferred Stock
and 1.309 shares 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.
F-15
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 627,011 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 warrants
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 30,392 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
1,603,360 shares of Common Stock at $.47 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 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 13,394 shares of Common Stock,
subject to adjustment, and upon certain events as defined above. The fair
value of the warrants was estimated using the Black-Scholes pricing model with
the following assumptions: expected volatility of 50%; expected life of 2
years; expected dividends yield of 0%; and the risk-free interest rate of 6%.
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 17,226,732 shares of common stock outstanding as of
December 31, 1999. Of these shares, 3,851,813 shares were unvested and are
subject to rights of repurchase that lapse according to a time-based vesting
schedule.
F-16
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common stock reserved at December 31, 1999 consists of the following:
<TABLE>
<S> <C>
For conversion of convertible preferred stock................. 11,474,705
For exercise of warrants to purchase common stock............. 1,647,146
For issuance under the Company's 1995 Stock Option/Stock
Issuance Plan................................................ 988,428
----------
Total....................................................... 14,110,279
==========
</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 14,162,512 after an increase of 614,452 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 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
F-17
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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........................ 1,533,097 0.09 0.09
Options exercised...................... (604,862) 0.09 0.09
Options forfeited...................... (78,540) 0.09 0.09
---------- ---------- -----
Outstanding, December 31, 1997........... 849,695 0.09 0.09
Options granted........................ 1,290,209 0.09-0.19 0.11
Options exercised...................... (1,839,595) 0.09-0.19 0.10
Options forfeited...................... (11,781) 0.09 0.09
---------- ---------- -----
Outstanding, December 31, 1998........... 288,528 0.09-0.19 0.11
Options granted........................ 2,812,609 0.19-2.67 2.02
Options exercised...................... (2,713,756) 0.19-2.67 2.01
Options forfeited...................... (33,379) 0.09-1.18 0.83
---------- ---------- -----
Outstanding, December 31, 1999........... 354,002 $0.09-2.67 $0.64
========== ========== =====
</TABLE>
At December 31, 1999, 988,428 shares of Common Stock were reserved for
future issuance of which 634,426 options were available for future grants.
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>
$ 0.09 225,696 8.01 $0.09 117,137 $0.09
$ 0.19 39,270 8.88 $0.19 11,453 $0.19
$ 1.18 23,012 9.30 $1.18 -- $ --
$ 1.64 6,675 9.63 $1.64 -- $ --
$ 2.67 59,349 9.91 $2.67 15,708 $2.67
------- ----- ------- -----
Total 354,002 $0.64 144,298 $0.38
======= ===== ======= =====
</TABLE>
The Company recorded deferred stock-based compensation of $9,558,000 in
connection with stock options granted to employees for 2,762,504 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 $1,774,000 for the year ended December 31, 1999.
F-18
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also recorded deferred stock-based compensation of $188,000 in
connection with stock options granted to nonemployee consultants for 26,180
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 for the years ended December 31, 1997,
1998 and 1999:
<TABLE>
<S> <C>
Risk-free interest rate.......................................... 6.0%
Dividend yield................................................... 0%
Expected life of the options..................................... 2 years
</TABLE>
The weighted-average fair value of options granted during fiscal 1997,
1998, and 1999 was $0.02, $0.02, and $0.42, 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) $(16,359)
Pro forma basic and diluted loss per share.... $(0.14) $ (0.77) $ (1.34)
</TABLE>
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, results of operations or
future cash flows of the Company.
F-19
<PAGE>
APPLIED SCIENCE FICTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Subsequent Events
2000 Employee Stock Purchase Plan (Unaudited)
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 654,500 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, but no such annual increase will exceed 327,500 shares.
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 (Unaudited)
In January 2000, the Board of Directors approved the Company's 2000 Stock
Incentive Plan (the 2000 Plan). A total of 6,545,000 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 1,963,500. 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.
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.
Stock Split
In January 2000, the Company's Board of Directors authorized a 1.309 to one
forward split for all common shares in the form of a stock dividend payable
upon the effectiveness of the Company's Initial Public Offering. All common
stock information has been adjusted to reflect the stock split as if such
stock split had taken place at the inception of the Company.
Facility Lease (Unaudited)
In March 2000, the Company entered into an agreement with a commercial real
estate developer to initially lease approximately 100,000 square feet of
build-to-suit office and lab space in Austin, Texas, with a ten-year lease
term expected to commence in the first quarter of 2001. This agreement also
includes an obligation to lease a minimum of an additional 60,000 square feet
of build-to-suit space on the same site with a ten-year lease term
F-20
<PAGE>
APPLIED SCIENCE FICTION, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(Continued)
expected to commence no later than the first quarter of 2003. The lease term
on the initial 100,000 square feet will then be adjusted to be coterminous
with the term on the additional 60,000 square feet. The monthly rent payments
increase at certain dates over the lease term. Future minimum lease payments
under this non-cancelable lease are as follows, assuming the foregoing
commencement dates (in thousands):
<TABLE>
<S> <C>
2000............................................................... $ --
2001............................................................... 1,239
2002............................................................... 1,487
2003............................................................... 2,323
2004............................................................... 2,532
Thereafter......................................................... 21,369
-------
Total............................................................ $28,950
=======
</TABLE>
The agreement also includes an obligation to deposit up to a $1.2 million
letter of credit with the landlord by June 2000 and up to an additional $1.2
million letter of credit upon take down of the additional 60,000 square feet
of space. The amounts of the letters of credit will decrease upon the
attainment of certain financial milestones as specified in the agreement.
Patent Purchase (Unaudited)
In March 2000, the Company entered into a patent assignment and cross
license agreement with IBM whereby the Company executed into a patent cross
license and purchased IBM patents relevant to the Company's ICE/3/ and DFP
technologies for consideration consisting of cash and shares of the Company's
common stock. The Company is obligated under the terms of the agreement to
keep the amount of the total consideration confidential.
F-21
<PAGE>
The inside back cover has the logo and the name of the Company in the upper
left hand corner and descending diagonally from the upper right hand corner is
a list of the company's patented technologies, Digital GEM, Digital ROC,
Digital ICE, and Digital ICE3. In the middle of the inside back cover is a
photo of a strip of conventional film with the words, "Digital Film Process"
printed on the film. Descending diagonally from the middle of the inside back
cover to the lower right hand corner are the names of the Company's OEMs,
including Nikon, Hewlett-Packard, Noritsu, Kodak, Konica, Minolta and Gretag.
The outside back cover has the name and logo of the Company centered in the
middle.
<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.......................................... $ 24,522
NASD filing fee............................................... 9,125
Nasdaq National Market listing fee............................ 95,000
Printing and engraving expenses............................... 375,000
Legal fees and expenses....................................... 425,000
Accounting fees and expenses.................................. 300,000
Blue sky fees and expenses.................................... 2,500
Transfer agent fees........................................... 10,000
Miscellaneous................................................. 258,853
----------
Total....................................................... $1,500,000
==========
</TABLE>
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 1,603,360 shares of common stock
at an exercise price of $0.47 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 $31,499,997. 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. In March 2000, Registrant issued to IBM 769,230 shares of common
stock at a price valued at the mid-point of the pricing range to be set
forth in the circulated preliminary prospectus used to market this
offering, subject to adjustment if the initial public offering price is
lower than that price. These securities were issued pursuant to Regulation
D of the Securities Act.
5. Through December 31, 1999, Registrant had issued and sold 13,434,362
shares of its common stock to directors, employees and consultants upon the
exercise of options granted at a weighted average exercise price of $.43.
These shares were issued pursuant to Rule 701 promulgated under the
Securities Act.
6. Through December 31, 1999, Registrant had issued options to purchase
13,912,064 shares of common stock, of which 13,434,362 have been exercised,
354,002 remain outstanding and 123,700 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.
10.7 Employment Agreement Robert Sleet
10.8 Employment Agreement Dan Sullivan
10.9 Employment Agreement Dana Seccombe
10.10 Employment Agreement Jerome Johnson
23.1 Consent of Ernst & Young LLP, Independent Auditors
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>
- --------
*Previously filed
**To be filed by amendment
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 28th day of March, 2000.
Applied Science Fiction, Inc.
/s/ Mark R. Urdahl
By:__________________________________
Mark R. Urdahl
President, Chief Executive Officer
and Chairman of the Board
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 March 28, 2000
____________________________________ Officer and Chariman of the
Mark R. Urdahl Board (principal executive
officer)
/s/ Robert E. Sleet, Jr. Executive Vice President and March 28, 2000
____________________________________ Chief Financial Officer
Robert E. Sleet, Jr. (principal accounting
officer)
/s/ Dr. Albert Edgar* Director March 28, 2000
____________________________________
Dr. Albert Edgar
Director March 28, 2000
____________________________________
John Asa
Director March 28, 2000
____________________________________
Harvey B. Cash
/s/ Richard H. Kimball* Director March 28, 2000
____________________________________
Richard H. Kimball
Director March 28, 2000
____________________________________
Peter M. Palermo
/s/ Carmelo M. Gordian* Director March 28, 2000
____________________________________
Carmelo M. Gordian
</TABLE>
/s/ Mark R. Urdahl
*By:______________________
Mark R. Urdahl
Attorney-in-fact
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.
10.7 Employment Agreement Robert Sleet
10.8 Employment Agreement Dan Sullivan
10.9 Employment Agreement Dana Seccombe
10.10 Employment Agreement Jerome Johnson
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>
- --------
*Previously filed
**To be filed by amendment
<PAGE>
EXHIBIT 1.1
_______________ SHARES
APPLIED SCIENCE FICTION, INC.
COMMON STOCK (PAR VALUE $0.001 PER SHARE)
UNDERWRITING AGREEMENT
_______________, 2000
<PAGE>
_______________, 2000
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Salomon Smith Barney Inc.
Prudential Securities Incorporated
c/o Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Applied Science Fiction, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "UNDERWRITERS") _________ shares of its Common Stock (par value
$0.001 per share) (the "FIRM SHARES"). The Company also proposes to issue and
sell to the several Underwriters not more than an additional ______________
shares of its Common Stock (par value $0.001 per share) (the "ADDITIONAL
SHARES") if and to the extent that you, as Managers of the offering, shall have
determined to exercise, on behalf of the Underwriters, the right to purchase
such shares of common stock granted to the Underwriters in Section 2 hereof. The
Firm Shares and the Additional Shares are hereinafter collectively referred to
as the "SHARES." The shares of Common Stock (par value $0.001 per share) of the
Company to be outstanding after giving effect to the sales contemplated hereby
are hereinafter referred to as the "COMMON STOCK."
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
2
<PAGE>
Morgan Stanley & Co. Incorporated and its affiliates ("MORGAN STANLEY")
has agreed to reserve a portion of the Shares to be purchased by it under this
Agreement for sale to the Company's directors, officers, employees and business
associates and other parties related to the Company (collectively,
"PARTICIPANTS"), as set forth in the Prospectus under the heading "Underwriters"
(the "DIRECTED SHARE PROGRAM"). The Shares to be sold by Morgan Stanley pursuant
to the Directed Share Program are referred to hereinafter as the "DIRECTED
SHARES." Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the business day on which this Agreement is executed
will be offered to the public by the Underwriters as set forth in the
Prospectus.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or, to the
Company's knowledge, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any 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, (ii) the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder and (iii) the
Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph
do not apply to statements or omissions in the Registration Statement or
the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so
3
<PAGE>
qualified or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to
the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole; all of the issued shares of capital stock
of each subsidiary of the Company have been duly and validly authorized
and issued, are fully paid and non-assessable and are owned directly by
the Company, free and clear of all liens, encumbrances, equities or
claims. None of the subsidiaries of the Company is a "significant
subsidiary" as such term is defined in Rule 1-02 of Regulation S-X of the
Securities Act.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid
and non-assessable.
(h) The shares of Common Stock to be issued upon conversion of the
Company's Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock (collectively, the "CONVERTIBLE PREFERRED STOCK") have
been duly authorized and, when issued and delivered pursuant to the terms
of the Company's Fourth Amended and Restated Certificate of Incorporation,
will be validly issued, fully paid and non-assessable.
(i) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(j) The shares of Common Stock being sold pursuant to Regulation D
under the Securities Act concurrently with the Shares as
4
<PAGE>
described in the Prospectus (the "PRIVATE PLACEMENT SHARES") will be
validly issued, fully paid and non-assessable, and the issuance of such
Private Placement Shares will not be subject to any preemptive or similar
rights.
(k) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or
Blue Sky laws of the various states in connection with the offer and sale
of the Shares.
(l) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(m) There are no legal or governmental proceedings pending or, to
the Company's knowledge, after due inquiry, threatened, to which the
Company or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the Prospectus
and are not so described or any statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required.
(n) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder.
(o) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
5
<PAGE>
described in the Prospectus, will not be required to register as an
"investment company" as such term is defined in the Investment Company Act
of 1940, as amended.
(p) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals would not, singly or
in the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(q) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(r) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company or to require the Company to include such securities with the
Shares registered pursuant to the Registration Statement.
(s) It is not necessary in connection with the offer, sale and
delivery of the Private Placement Shares to register the Private Placement
Shares under the Securities Act.
(t) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
(u) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company
and its subsidiaries have not incurred any material liability or
obligation,
6
<PAGE>
direct or contingent, nor entered into any material transaction, in each
case, not in the ordinary course of business; (ii) the Company has not
purchased any of its outstanding capital stock, nor declared, paid or
otherwise made any dividend or distribution of any kind on its capital
stock other than ordinary and customary dividends and the __ for __ stock
dividend effected on ____, 2000; and (iii) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its subsidiaries, except in each case as described in the
Prospectus (exclusive of any amendments or supplements thereto subsequent
to the date of this Agreement).
(v) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by
the Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries, in each
case except as described in the Prospectus.
(w) The Company and its subsidiaries own or hold valid licenses to
all material patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names currently employed by them in
connection with the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(x) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in the Prospectus, or,
to the knowledge of the Company, is imminent; and the Company is not aware
of any existing, threatened or imminent labor disturbance by the employees
of any of its principal suppliers, manufacturers or contractors that could
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
7
<PAGE>
(y) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses
in which they are engaged; neither the Company nor any such subsidiary has
been refused any insurance coverage sought or applied for; and neither the
Company nor any such subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, except as described in the Prospectus.
(z) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses and neither the Company nor any such subsidiary has received
any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the Company and its subsidiaries,
taken as a whole, except as described in the Prospectus.
(aa) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(bb) Except as described in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), the Company has not sold, issued or distributed any shares of
Common Stock during the six-month period preceding the date hereof,
including any sales pursuant to Rule 144A under, or Regulation D or S of,
the Securities Act, other than shares issued pursuant to employee benefit
plans, qualified stock option plans or other employee compensation plans
or pursuant to outstanding options, rights or warrants.
8
<PAGE>
(cc) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations of
the Company or any of its subsidiaries have been or could be affected by
the Year 2000 Problem (that is, any significant risk that computer
hardware or software applications used by the Company and its subsidiaries
will not, in the case of dates or time periods occurring after December
31, 1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000); as a result of such review,
the Company has no reason to believe, and does not believe, that the Year
2000 Problem will have a material adverse effect on the condition,
financial or otherwise, or on the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, or result in any material
loss or interference with the business or operations of the Company and
its subsidiaries, taken as a whole.
(dd) The Registration Statement, the Prospectus and any preliminary
prospectus comply, and any amendments or supplements thereto will comply,
with any applicable laws or regulations of foreign jurisdictions in which
the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share
Program.
(ee) No consent, approval, authorization or order of, or
qualification with, any governmental body or agency, other than those
obtained, is required in connection with the offering of the Directed
Shares in any jurisdiction where the Directed Shares are being offered.
(ff) The Company has not offered, or caused Morgan Stanley or its
affiliates to offer, Shares to any person pursuant to the Directed Share
Program with the intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell to
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
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one-time right to purchase, severally and not jointly, up to _______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) 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 or exercisable or
exchangeable for Common Stock or (ii) 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 such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing, or (C) the issuance by the Company of
options to purchase Common Stock, or the direct issuance by the Company of
Common Stock, that are made pursuant to a stock option or other employee
compensation plan described in the Prospectus, provided that the person
acquiring such options or Common Stock agrees in writing to the restriction set
forth in the foregoing sentence.
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that
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represents a concession not in excess of $______ a share under the Public
Offering Price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of $_____ a share, to any Underwriter or to
certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made to the
Company in Federal or other funds immediately available in New York City against
delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on ____________, 2000, or at
such other time on the same or such other date, not later than _________, 2000,
as shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "CLOSING DATE."
Payment for any Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 a.m., New York City time, on the date specified in the notice described in
Section 2 or at such other time on the same or on such other date, in any event
not later than _______, 2000, as shall be designated in writing by you. The
time and date of such payment are hereinafter referred to as the "OPTION CLOSING
DATE."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [_____] (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
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(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or
of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical
rating organization," as such term is defined for purposes of Rule
436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in Section 5(a)(i) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Brobeck, Phleger & Harrison, LLP, outside counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in the State of Texas, ____ and
____;
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(ii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
(iii) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, and, to such counsel's knowledge, are fully paid and
non-assessable;
(iv) the shares of Common Stock to be issued upon conversion
of the Convertible Preferred Stock have been duly authorized and,
when issued and delivered pursuant to the terms of the Company's
Fourth Amended and Restated Certificate of Incorporation, will be
validly issued, fully paid and non-assessable;
(v) the Shares have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor in
accordance with the terms of this Agreement, will be validly issued,
fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive rights arising under the Company's
Fourth Amended and Restated Certificate of Incorporation or the
Delaware General Corporation Law or, to such counsel's knowledge,
any similar rights that entitle or will entitle any person to
acquire any shares of capital stock of the Company upon the issuance
and sale of the Shares;
(vi) the Private Placement Shares have been duly authorized
and, when issued and delivered in accordance with the terms of the
applicable subscription agreements, will be validly issued, fully
paid and non-assessable, and the issuance of such Private Placement
Shares will not be subject to any preemptive rights arising under
the Company's Fourth Amended and Restated Certificate of
Incorporation or the Delaware General Corporation Law or, to such
counsel's knowledge, any similar rights that entitle or will entitle
any person to acquire any shares of capital stock of the Company
upon the issuance and sale of the Shares;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) it is not necessary in connection with the offer, sale
and delivery of the Private Placement Shares to register such shares
under the Securities Act, it being understood that no opinion is
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expressed as to any subsequent resale of any such Shares (such
counsel being expressly permitted to rely upon the "no action"
letters issued by the Commission to [Black Box, Inc. (dated June 26,
1990) and Squadron, Ellenoff, Pleasant & Lehrer (dated February 28,
1992)]);
(ix) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
(A) will not result in any violation of any existing law, (B) will
not violate the certificate of incorporation or by-laws of the
Company, (C) will not constitute a breach of, or a default under,
any agreement or other instrument binding upon the Company or any of
its subsidiaries that is set forth as an exhibit to the Registration
Statement, and (D) will not violate any judgment, order or decree of
any governmental body, agency or court having jurisdiction over the
Company or any of its subsidiaries known to such counsel and
applicable to the Company or any of its subsidiaries, and no
consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by
the Company of its obligations under this Agreement, except such as
may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares;
(x) the statements (A) in the Prospectus under the captions
"Related Party Transactions," "Description of Capital Stock" and, to
the extent of the description of this Agreement, "Underwriters" and
(B) in the Registration Statement in Items 14 and 15, in each case
insofar as such statements constitute summaries of the legal
matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the matters
referred to therein;
(xi) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to
be described in the Registration Statement or the Prospectus and are
not so described or of any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required;
and
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(xii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be required to
register as an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
In addition, such counsel shall also state in its opinion that
(A) it is of the opinion that the Registration Statement and Prospectus (except
for financial statements and schedules and other financial and statistical data
included therein as to which such counsel need not express any opinion), as of
the effective date of the Registration Statement complied, and of the Closing
Date will comply, as to form in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder, (B) it
has no reason to believe that (except for financial statements and schedules and
other financial and statistical data as to which such counsel need not express
any belief) the Registration Statement and the prospectus included therein at
the time the Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(C) it has no reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which such counsel need
not express any belief) the Prospectus as of its date and as of the date hereof
contained or contains any untrue statement of a material fact or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of o, outside counsel for the Company, dated the Closing Date, to
the effect that:
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(i) the statements in the Prospectus under the captions
["Risk Factors--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," "Risk
Factors--We may be unable to protect our intellectual property,
which would adversely affect our ability to compete," "Risk
Factors--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,"] "Business--Research and Development" and
"Business--Intellectual Property Rights," insofar as such statements
constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein; and
(ii) (A) the patent estate of the Company and its subsidiaries
that such counsel has worked on is made up of the issued patents
listed in Exhibit A to such opinion ("COMPANY PATENTS") and the
patent applications listed in Exhibit B to such opinion ("COMPANY
PATENT APPLICATIONS"), (B) such counsel does not know of any legal
or governmental proceedings pending (other than prosecution of the
Company Patent Applications) or threatened relating to the claimed
inventions of the Company Patents or the Company Patent
Applications, (C) such counsel does not know of any facts which
would preclude the Company or its subsidiaries from having valid
license rights or clear title to the Company Patents or the Company
Patent Applications, (D) to the best of such counsel's knowledge,
after due inquiry, the Company and its subsidiaries have valid
license rights or clear record title to all patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and
trade names currently employed by the Company and its subsidiaries
in connection with the business now operated by them ("COMPANY
INTELLECTUAL PROPERTY") free and clear of any liens or encumbrances,
(E) the Company and its subsidiaries have complied with the Patent
and Trademark Office duty of candor and disclosure for each of the
Company Patents and Company Patent Applications and such counsel
does not have any knowledge, after due inquiry, that the Company or
its subsidiaries lack or will be unable to obtain any rights or
licenses to use all Company Intellectual Property, (F) such
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counsel does not know of any reasonable basis for a finding of
invalidity of any of the Company Patents that could have a material
adverse effect on the Company and its subsidiaries, taken as a
whole, (G) such counsel has no reason to believe that any of the
Company Patent Applications will not issue as a patent, except to
the extent that such failure to issue as a patent would not have a
material adverse effect on the Company and its subsidiaries, taken
as a whole, (H) such counsel does not know of any notices received
by either the Company or any of its subsidiaries of infringement or
conflict with asserted intellectual property rights or claims of
others with respect to any products or proposed products of the
Company or its subsidiaries described in the Prospectus and (I) such
counsel does not know of any patent rights of others which are or
would be infringed by the manufacture, sale or use of the products
or processes referred to in the Prospectus.
(e) The Underwriters shall have received on the Closing Date an
opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in Sections 5(c)(v),
5(c)(vii) and 5(c)(x) (but only as to the statements in the Prospectus
under "Description of Capital Stock" and "Underwriters") and in the final
paragraph of Section 5(c) above.
With respect to the final paragraph of Section 5(c) above,
Brobeck, Phleger & Harrison, LLP and Davis Polk & Wardwell may
state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent
check or verification, except as specified.
The opinion of Brobeck, Phleger & Harrison, LLP described in
Section 5(c) above shall be rendered to the Underwriters at the
request of the Company and shall so state therein.
(f) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the Closing
Date, as the case may be, in form and substance satisfactory to the
Underwriters, from Ernst & Young LLP, independent public accountants,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration
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Statement and the Prospectus; PROVIDED that the letter delivered on the
Closing Date shall use a "cut-off date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other securities, delivered to you on
or before the date hereof, shall be in full force and effect on the
Closing Date.
(h) The Nasdaq National Market shall have approved the Common Stock
for listing, subject only to official notice of issuance.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to you on
the Option Closing Date of such documents as you may reasonably
request with respect to the good standing of the Company, the due
authorization and issuance of the Additional Shares and other
matters related to the issuance of the Additional Shares.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with
each Underwriter as follows:
(a) To furnish to you, without charge, five signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by
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an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will
furnish to the Company) to which Shares may have been sold by you on
behalf of the Underwriters and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request; PROVIDED, however, that the Company will not be required to
qualify in any jurisdiction where it would be required to (i) give a
general consent to the service of process or submit to general personal
jurisdiction or (ii) assume any ongoing reporting obligation to the
authorities in such jurisdiction.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending June 30, 2001 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations under
this Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of
the Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or
other taxes payable thereon, (iii) the cost of printing or producing any
Blue Sky
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or Legal Investment memorandum in connection with the offer and sale of
the Shares under state securities laws and all expenses in connection with
the qualification of the Shares for offer and sale under state securities
laws as provided in Section 6(d) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky or
Legal Investment memorandum, (iv) all filing fees and the reasonable fees
and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering of the Shares by the
NASD Regulation, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating
to the Common Stock and all costs and expenses incident to listing the
Shares on the Nasdaq National Market, (vi) the cost of printing
certificates representing the Shares, (vii) the costs and charges of any
transfer agent, registrar or depositary, (viii) the costs and expenses of
the Company relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Shares,
including, without limitation, expenses associated with the production of
road show slides and graphics, fees and expenses of any consultants
engaged in connection with the road show presentations with the prior
approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and
the cost of any aircraft chartered in connection with the road show, (ix)
all fees and disbursements of counsel incurred by the Underwriters in
connection with the Directed Share Program and stamp duties, similar taxes
or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program, and (x) all other costs and
expenses incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section. It is
understood, however, that except as provided in this Section, Section 7
entitled "Indemnity and Contribution", and the last paragraph of Section
10 below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes
payable on resale of any of the Shares by them and any advertising
expenses connected with any offers they may make.
(g) To place stop transfer orders on any Directed Shares that have
been sold to Participants subject to the three month restriction on sale,
transfer, assignment, pledge or hypothecation imposed by NASD Regulation,
Inc. under its Interpretative Material 2110-1 on free-riding and
withholding to the extent necessary to ensure compliance with the three
month restrictions.
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(h) To comply with all applicable securities and other applicable
laws, rules and regulations in each jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
7. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by 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, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein PROVIDED, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
from and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
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alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only with
reference to information relating to such Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendments or
supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a), 7(b) or 7(c), such person (the "INDEMNIFIED
PARTY") shall promptly notify the person against whom such indemnity may be
sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably satisfactory
to the indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (i) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act or (ii) the fees and expenses
of more than one separate firm (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement and
each person, if any, who controls the Company within the meaning of either such
Section. In the case of any such separate firm for the Underwriters and such
control persons of any Underwriters, such firm shall be designated in writing by
Morgan Stanley. In the case of any such separate firm for the Company, and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent, but
if settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an
22
<PAGE>
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(d) To the extent the indemnification provided for in Section 7(a), 7(b)
or 7(c) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party or parties on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause 7(d)(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 7(d)(i) above but also the relative
fault of the indemnifying party or parties on the one hand and of the
indemnified party or parties on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other hand
in connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The relative fault of the Company on the one hand
and the Underwriters on the other hand 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 by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
23
<PAGE>
(e) The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 7 were determined by PRO RATA
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(d). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this Section 7
and the representations, warranties and other statements of the Company
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation made
by or on behalf of any Underwriter or any person controlling any Underwriter or
by or on behalf of the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Shares.
8. DIRECTED SHARE PROGRAM INDEMNIFICATION. The Company agrees to indemnify
and hold harmless Morgan Stanley and each person, if any, who controls Morgan
Stanley within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act ("MORGAN STANLEY ENTITIES"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant has agreed to purchase; or (iii) related to, arising out
of, or in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or
24
<PAGE>
expenses relating thereto) that are finally judicially determined to have
resulted from the bad faith or gross negligence of the Morgan Stanley Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Morgan Stanley Entity in respect of which
indemnity may be sought pursuant to Section 8(a), the Morgan Stanley Entity
seeking indemnity shall promptly notify the Company in writing and the Company,
upon request of the Morgan Stanley Entity, shall retain counsel reasonably
satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity
and any other indemnified party the Company may designate in such proceeding and
shall pay the reasonable fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any Morgan Stanley Entity shall have the
right to retain its own counsel, but the reasonable fees and expenses of such
counsel shall be at the expense of such Morgan Stanley Entity unless (i) the
Company shall have agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include both
the Company and the Morgan Stanley Entity and representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. The Company shall not, in respect of the legal expenses
of the Morgan Stanley Entities in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the fees and expenses of
more than one separate firm (in addition to any local counsel) for all Morgan
Stanley Entities. Any such separate firm for the Morgan Stanley Entities shall
be designated in writing by Morgan Stanley. The Company shall not be liable for
any settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
Company agrees to indemnify the Morgan Stanley Entities from and against any
loss or liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time a Morgan Stanley Entity shall have requested
the Company to reimburse it for fees and expenses of counsel as contemplated by
the second and third sentences of this paragraph, the Company agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by the Company of the aforesaid request and (ii) the Company shall not
have reimbursed the Morgan Stanley Entity in accordance with such request prior
to the date of such settlement. The Company shall not, without the prior written
consent of Morgan Stanley, effect any settlement of any pending or threatened
proceeding in respect of which any Morgan Stanley Entity is or could have been a
party and indemnity could have been sought hereunder by such Morgan Stanley
Entity, unless such settlement includes an unconditional release of the Morgan
Stanley Entities from all liability on claims that are the subject matter of
such proceeding.
(c) To the extent the indemnification provided for in Section 8(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any losses,
25
<PAGE>
claims, damages or liabilities referred to therein, then the Company, in lieu of
indemnifying the Morgan Stanley Entity thereunder, shall contribute to the
amount paid or payable by the Morgan Stanley Entity as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Morgan Stanley Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(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 8(c)(i) above but also the
relative fault of the Company on the one hand and of the Morgan Stanley Entities
on the other hand in connection with any statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and of the Morgan Stanley Entities on the other hand in connection with
the offering of the Directed Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Directed Shares (before
deducting expenses) and the total underwriting discounts and commissions
received by the Morgan Stanley Entities for the Directed Shares, bear to the
aggregate Public Offering Price of the Directed Shares. If the loss, claim,
damage or liability is caused by an untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact, the
relative fault of the Company on the one hand and the Morgan Stanley Entities on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement or the omission or alleged omission
relates to information supplied by the Company or by the Morgan Stanley Entities
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would not be
just or equitable if contribution pursuant to this Section 8 were determined by
PRO RATA allocation (even if the Morgan Stanley Entities were treated as one
entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 8(c). The amount
paid or payable by the Morgan Stanley Entities as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by the Morgan Stanley
Entities in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Morgan Stanley Entity shall
be required to contribute any amount in excess of the amount by which the total
price at which the Directed Shares distributed to the public were offered to the
public exceeds the amount of any damages that such Morgan Stanley Entity has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. The remedies provided for in this
Section 8 are not exclusive
26
<PAGE>
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(e) The indemnity and contribution provisions contained in this Section 8
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Morgan Stanley Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
9. TERMINATION. This Agreement shall be subject to termination by notice
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 9(a)(i) through 9(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; PROVIDED that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 10 by an amount in excess of one-ninth of
such number of Shares without
27
<PAGE>
the written consent of such Underwriter. If, on the Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the
aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
13. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
28
<PAGE>
APPLIED SCIENCE FICTION, INC.
By: __________________________________
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Salomon Smith Barney Inc.
Prudential Securities Incorporated
Acting severally on behalf of themselves and
the several Underwriters named in
Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By: _____________________________________________________________
Name:
Title:
29
<PAGE>
SCHEDULE I
UNDERWRITER NUMBER OF FIRM SHARES
TO BE PURCHASED
Morgan Stanley & Co. Incorporated.........
Credit Suisse First Boston Corporation ...
Salomon Smith Barney Inc..................
Prudential Securities Incorporated........
Total:..............................
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP LETTER]
_________, 2000
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Salomon Smith Barney Inc.
Prudential Securities Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with Applied Science Fiction, Inc., a Delaware
corporation (the "COMPANY"), providing for the public offering (the "PUBLIC
OFFERING") by the several underwriters, including Morgan Stanley (the
"UNDERWRITERS"), of shares (the "SHARES") of the Common Stock (par value $0.001
per share) of the Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final prospectus relating
to the Public Offering (the "PROSPECTUS"), (1) 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 or exercisable or exchangeable for Common Stock
or (2) 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 such transaction described in clause (1) or (2) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (a) transactions relating
to shares of Common Stock or other securities acquired in open market
transactions after the completion of the
<PAGE>
Public Offering and (b) if the undersigned is an individual, transfers of shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (i) by will or intestacy, or as a bona fide gift
or gifts, to members of the undersigned's immediate family or (ii) to members of
the undersigned's immediate family; provided that in the case of any transfer or
distribution pursuant to clause (b), (A) each donee or distribute shall execute
and deliver to Morgan Stanley a duplicate form of this Lock-up Letter and (B) no
filing by any party (donor, donee, transferor or transferee) under Section 16(a)
of the Securities Exchange Act of 1934, as amended, shall be required or shall
be made voluntarily in connection with such transfer or distribution (other than
a filing on a Form 5 made after the expiration of the 180-day period referred to
above). "IMMEDIATE FAMILY" shall mean the undersigned's children, stepchildren,
grandchildren, parents, stepparents, grandparents, spouse, former spouses,
siblings, nieces, nephews, mother-in-law, father-in-law, sons-in-law,
daughters-in- laws, brothers-in-law, or sisters-in-law, including adoptive
relationships, any person sharing the undersigned's household (other than a
tenant or employee), a trust in which these persons have more than fifty percent
of the beneficial interest, a foundation in which these persons (or the
undersigned) control the management of assets, and any other entity in which
these persons (or the undersigned) own more than fifty percent of the voting
interests. In addition, the undersigned agrees that, without the prior written
consent of Morgan Stanley on behalf of the Underwriters, it will not, during the
period commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
____________________________________
(Name)
____________________________________
(Address)
2
<PAGE>
EXHIBIT 10.2
APPLIED SCIENCE FICTION, INC.
2000 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 2000 Stock Incentive Plan is intended to promote the interests of
Applied Science Fiction, Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock,
(ii) the 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) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued shares
of Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent
or Subsidiary),
(iv) the Automatic Option Grant Program under which
eligible non-employee Board members shall automatically receive options at
periodic intervals to purchase shares of Common Stock; and
(v) the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of their
annual retainer fee otherwise payable in cash applied to a special option
grant.
B. The provisions of Articles One and Seven shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board
unless otherwise determined by the Board. Beginning with the Section 12
Registration Date, the following provisions shall govern the administration of
the Plan:
(i) The Board shall have the authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders but may delegate such authority in whole or in part to
the Primary Committee.
(ii) Administration of the Discretionary Option Grant and
Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in
the Primary Committee or a Secondary Committee, or the Board may retain the
power to administer those programs with respect to all such persons.
(iii) Administration of the Automatic Option Grant Program
shall be self-executing in accordance with the terms of that program.
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
subject to the provisions of the Plan:
(i) to establish such rules as it may deem appropriate for
proper administration of the Plan, to make all factual determinations, to
construe and interpret the provisions of the Plan and the awards thereunder
and to resolve any and all ambiguities thereunder;
(ii) to determine, with respect to awards made under the
Discretionary Option Grant and Stock Issuance Programs, which eligible
persons are to receive such awards, the time or times when such awards are
to be made, the number of shares to be covered by each such award, the
vesting schedule (if any) applicable to the award, the status of a granted
option as either an Incentive Option or a Non-Statutory Option and the
maximum term for which the option is to remain outstanding;
(iii) to amend, modify or cancel any outstanding award with
the consent of the holder or accelerate the vesting of such award; and
(iv) to take such other discretionary actions as permitted
pursuant to the terms of the applicable program.
Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
2
<PAGE>
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any options or stock issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Only non-employee Board members shall be eligible to participate
in the Automatic Option Grant and Director Fee Option Grant Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed Five
Million (5,000,000) shares. Such authorized share reserve consists of (i) the
number of shares which remain available for issuance, as of the Section 12
Registration Date, under the Predecessor Plan, including the shares subject to
the outstanding options to be incorporated into the Plan and the additional
shares which would otherwise be available for future grant, plus (ii) an
increase of Four Million Two Hundred Forty-Four Thousand Nine Hundred Fifty-Four
(4,244,954) shares authorized by the Board subject to stockholder approval prior
to the Section 12 Registration Date.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of each calendar
year during the term of the Plan, beginning with the 2001 calendar year, by an
amount equal to three percent (3%) of the shares of Common Stock outstanding on
the last trading day of the immediately preceding calendar year, but in no event
shall such annual increase exceed One Million Five Hundred Thousand (1,500,000)
shares.
3
<PAGE>
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than One Million Five Hundred Thousand (1,500,000) shares of Common Stock
in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent those options
expire, terminate or are cancelled for any reason prior to exercise in full.
Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the original exercise or issue price paid per share, pursuant to
the Corporation's repurchase rights under the Plan shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent options
or direct stock issuances under the Plan. However, should the exercise price of
an option under the Plan be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance under the Plan, then the number
of shares of Common Stock available for issuance under the Plan shall be reduced
by the gross number of shares for which the option is exercised or which vest
under the stock issuance, and not by the net number of shares of Common Stock
issued to the holder of such option or stock issuance. Shares of Common Stock
underlying one or more stock appreciation rights exercised under the Plan shall
not be available for subsequent issuance.
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities by which the share reserve is
to increase each calendar year pursuant to the automatic share increase
provisions of the Plan, (iii) the number and/or class of securities for which
any one person may be granted options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year, (iv) the
number and/or class of securities for which grants are subsequently to be made
under the Automatic Option Grant Program to new and continuing non-employee
Board members, (v) the number and/or class of securities and the exercise price
per share in effect under each outstanding option under the Plan and (vi) the
number and/or class of securities and price per share in effect under each
outstanding option incorporated into this Plan from the Predecessor Plan. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
4
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator at the time of the option grant and may be less than, equal to or
greater than the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section II of
Article Seven and the documents evidencing the option, be payable in one or more
of the following forms:
(i) in cash or check made payable to the Corporation;
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-approved brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable
----------------------------
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
5
<PAGE>
C. Cessation of Service.
--------------------
1. The following provisions shall govern the exercise of any
options outstanding at the time of the Optionee's cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or her
Beneficiary.
(iii) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct or should the Optionee engage in Misconduct while his or her
options are outstanding, then all such options shall terminate immediately
and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding:
(i) to extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service to such
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) to permit the option to be exercised, during the
applicable post-Service exercise period, for one or more additional
installments in which the Optionee would have vested had the Optionee
continued in Service.
D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to
6
<PAGE>
repurchase, at the exercise price paid per share, any or all of those unvested
shares. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than to a beneficiary following the
Optionee's death. Non-Statutory Options shall be subject to the same
restrictions, except that a Non-Statutory Option may, to the extent permitted by
the Plan Administrator, be assigned in whole or in part during the Optionee's
lifetime (i) as a gift to one or more members of the Optionee's immediate
family, to a trust in which Optionee and/or one or more such family members hold
more than fifty percent (50%) of the beneficial interest or to an entity in
which more than fifty percent (50%) of the voting interests are owned by one or
more such family members or (ii) pursuant to a domestic relations order. The
terms applicable to the assigned portion shall be the same as those in effect
for the option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Plan Administrator may deem
appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
7
<PAGE>
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of a Change in Control but
not otherwise fully-vested shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Change in
Control, assumed or otherwise continued in full force and effect by the
successor corporation (or parent thereof) pursuant to the terms of the Change in
Control, (ii) such option is replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Change in Control on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant. Each option outstanding
at the time of the Change in Control shall terminate as provided in Section
III.C. of this Article Two.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control, except to
the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) or otherwise continue in full force and effect
pursuant to the terms of the Change in Control or (ii) such accelerated vesting
is precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.
C. Immediately following the consummation of the Change in Control,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) or otherwise
expressly continued in full force and effect pursuant to the terms of the Change
in Control.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted, immediately after such Change in
Control, to apply to the number and class of securities which would have been
issuable to the Optionee in consummation of such Change in Control had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments to reflect such Change in Control shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
--------
aggregate exercise price payable for such securities shall remain the same, (ii)
the maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.
E. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Change in Control,
whether or not those options are assumed or otherwise continued in full force
and effect pursuant to the terms of the Change in Control. Any such option shall
accordingly become exercisable, immediately prior to the effective date of such
Change in Control, for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of
8
<PAGE>
Common Stock. In addition, the Plan Administrator may at any time provide that
one or more of the Corporation's repurchase rights shall not be assignable in
connection with such Change in Control and shall terminate upon the consummation
of such Change in Control.
F. The Plan Administrator may at any time provide that one or more
options will automatically accelerate upon an Involuntary Termination of the
Optionee's Service within a designated period (not to exceed eighteen (18)
months) following the effective date of any Change in Control in which those
options do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
-------
the option term or (ii) the expiration of the one (1) year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may at any time provide that one or more of the Corporation's
repurchase rights shall immediately terminate upon such Involuntary Termination.
G. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Hostile Take-Over.
Any such option shall become exercisable, immediately prior to the effective
date of such Hostile Take-Over, for all of the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. In addition, the Plan Administrator may
at any time provide that one or more of the Corporation's repurchase rights
shall terminate automatically upon the consummation of such Hostile Take-Over.
Alternatively, the Plan Administrator may condition such automatic acceleration
and termination upon an Involuntary Termination of the Optionee's Service within
a designated period (not to exceed eighteen (18) months) following the effective
date of such Hostile Take-Over. Each option so accelerated shall remain
exercisable for fully-vested shares until the expiration or sooner termination
of the option term.
H. The portion of any Incentive Option accelerated in connection
with a Change in Control or Hostile Take Over shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a Non-
Statutory Option under the Federal tax laws.
IV. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it may
determine, grant to selected Optionees stock appreciation rights which will
allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a) the Option Surrender Value of the number of shares for which the
option is surrendered over (b) the aggregate exercise price payable for such
shares. The distribution may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
9
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee may implement the Salary Investment Option Grant
Program for one or more calendar years beginning after the Underwriting Date and
select the Section 16 Insiders and other highly compensated Employees eligible
to participate in the Salary Investment Option Grant Program for each such
calendar year. Each selected individual who elects to participate in the Salary
Investment Option Grant Program must, prior to the start of each calendar year
of participation, file with the Plan Administrator (or its designate) an
irrevocable authorization directing the Corporation to reduce his or her base
salary for that calendar year by an amount not less than Five Thousand Dollars
($5,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary
Committee shall have complete discretion to determine whether to approve the
filed authorization in whole or in part. To the extent the Primary Committee
approves the authorization, the individual who filed that authorization shall be
granted an option under the Salary Investment Grant Program on the first trading
day in January for the calendar year for which the salary reduction is to be in
effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the approved reduction in the
Optionee's base salary for the calendar year, and
10
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become
----------------------------
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. Cessation of Service. Each option outstanding at the time of the
--------------------
Optionee's cessation of Service shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the option term or (ii) the
-------
expiration of the three (3)-year period following the Optionee's cessation of
Service. To the extent the option is held by the Optionee at the time of his or
her death, the option may be exercised by his or her Beneficiary. However, the
option shall, immediately upon the Optionee's cessation of Service, terminate
and cease to remain outstanding with respect to any and all shares of Common
Stock for which the option is not otherwise at that time exercisable.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while
the Optionee remains in Service, each outstanding option shall automatically
accelerate so that each such option shall, immediately prior to the effective
date of the Change in Control or Hostile Take-Over, become fully exercisable
with respect to the total number of shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as fully-
vested shares of Common Stock. Each such option accelerated in connection with a
Change in Control shall terminate upon the Change in Control, except to the
extent assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the exercise
price payable per share under each outstanding option, provided the aggregate
--------
exercise price payable for such securities shall remain the same.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Option Surrender Value of the shares of Common Stock at the time subject to
each surrendered option (whether or not the Optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation.
11
<PAGE>
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
12
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening options. Shares
of Common Stock may also be issued under the Stock Issuance Program pursuant to
share right awards which entitle the recipients to receive those shares upon the
attainment of designated performance goals or Service requirements. Each such
award shall be evidenced by one or more documents which comply with the terms
specified below.
A. Purchase Price.
--------------
1. The purchase price per share of Common Stock subject to
direct issuance shall be fixed by the Plan Administrator and may be less than,
equal to or greater than the Fair Market Value per share of Common Stock on the
issue date.
2. Subject to the provisions of Section II of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting/Issuance Provisions.
---------------------------
1. The Plan Administrator may issue shares of Common Stock
which are fully and immediately vested upon issuance or which are to vest in one
or more installments over the Participant's period of Service or upon attainment
of specified performance objectives. Alternatively, the Plan Administrator may
issue share right awards which shall entitle the recipient to receive a
specified number of vested shares of Common Stock upon the attainment of one or
more performance goals or Service requirements established by the Plan
Administrator.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
13
<PAGE>
3. The Participant shall have full stockholder rights with
respect to the issued shares of Common Stock, whether or not the Participant's
interest in those shares is vested. Accordingly, the Participant shall have the
right to vote such shares and to receive any regular cash dividends paid on such
shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock, or should the performance
objectives not be attained with respect to one or more such unvested shares of
Common Stock, then those shares shall be immediately surrendered to the
Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money indebtedness),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to the
surrendered shares.
5. The Plan Administrator may waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting of
the Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
6. Outstanding share right awards shall automatically
terminate, and no shares of Common Stock shall actually be issued in
satisfaction of those awards, if the performance goals or Service requirements
established for such awards are not attained. The Plan Administrator, however,
shall have the authority to issue shares of Common Stock in satisfaction of one
or more outstanding share right awards as to which the designated performance
goals or Service requirements are not attained.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights shall
terminate automatically, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Change in
Control, except to the extent (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) or otherwise continue in full force
and effect pursuant to the terms of the Change in Control or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
B. The Plan Administrator may at any time provide for the automatic
termination of one or more of those outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those terminated
rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary
Termination of the Participant's Service within a designated period (not to
exceed eighteen (18) months) following the effective date of any
14
<PAGE>
Change in Control or Hostile Take-Over in which those repurchase rights are
assigned to the successor corporation (or parent thereof) or otherwise continue
in full force and effect.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
15
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. Options shall be made on the dates specified below:
-----------
1. Each individual who is first elected or appointed as a non-
employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase Fifteen Thousand (15,000) shares of Common
Stock, provided that individual has not previously been in the employ of the
Corporation (or any Parent or Subsidiary).
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years measured
-----------
from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each option shall vest, and the Corporation's
repurchase right shall lapse, in a series of four (4) successive equal annual
installments over the Optionee's period of continued service as a Board member,
with the first such installment to vest upon the Optionee's completion of one
(1) year of Board service measured from the option grant date.
E. Cessation of Board Service. The following provisions shall govern the
--------------------------
exercise of any options outstanding at the time of the Optionee's cessation of
Board service:
(i) Any option outstanding at the time of the Optionee's
cessation of Board service for any reason shall remain exercisable for a
twelve (12)-month period following the date of such cessation of Board
service, but in no event shall such option be exercisable after the
expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by his or her
Beneficiary.
16
<PAGE>
(iii) Following the Optionee's cessation of Board service, the
option may not be exercised in the aggregate for more than the number of
shares for which the option was exercisable on the date of such cessation
of Board service. Upon the expiration of the applicable exercise period or
(if earlier) upon the expiration of the option term, the option shall
terminate and cease to be outstanding for any vested shares for which the
option has not been exercised. However, the option shall, immediately upon
the Optionee's cessation of Board service, terminate and cease to be
outstanding for any and all shares for which the option is not otherwise at
that time exercisable.
(iv) However, should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at the
time subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over, the
shares of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option may,
immediately prior to the effective date of such Change in Control or Hostile
Take-Over, became fully exercisable for all of the shares of Common Stock at the
time subject to such option and maybe exercised for all or any of those shares
as fully-vested shares of Common Stock. Each such option accelerated in
connection with a Change in Control shall terminate upon the Change in Control,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. All outstanding repurchase rights shall automatically terminate
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Change in Control or Hostile Take-
Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Option Surrender Value of the shares of Common Stock at the time subject to
each surrendered option (whether or not the option is otherwise at the time
exercisable for those shares) over (ii) the aggregate exercise price payable for
such shares. Such cash distribution shall be paid within five (5) days following
the surrender of the option to the Corporation.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be
17
<PAGE>
made to the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for options made under
the Discretionary Option Grant Program.
18
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Board may implement the Director Fee Option Grant Program as of
the first day of any calendar year beginning after the Underwriting Date. Upon
such implementation of the Program, each non-employee Board member may elect to
apply all or any portion of the annual retainer fee otherwise payable in cash
for his or her service on the Board to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the election is to be in effect. Each non-employee Board member
who files such a timely election with respect to the annul retainer fee shall
automatically be granted an option under this Director Fee Option Grant Program
on the first trading day in January in the calendar year for which that fee
would otherwise be payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
19
<PAGE>
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each month of Board service during the calendar year in
which the option is granted. Each option shall have a maximum term of ten (10)
years measured from the option grant date.
D. Cessation of Board Service. Should the Optionee cease Board
--------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options, then each such option shall remain exercisable, for any or
all of the shares for which the option is exercisable at the time of such
cessation of Board service, until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service. However, each option
held by the Optionee at the time of such cessation of Board service shall
immediately terminate and cease to remain outstanding with respect to any and
all shares of Common Stock for which the option is not otherwise at that time
exercisable.
E. Death or Permanent Disability. Should the Optionee's service as a
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee shall immediately become exercisable for all the shares of
Common Stock at the time subject to that option, and the option may be exercised
for any or all of those shares as fully-vested shares until the earlier of (i)
-------
the expiration of the ten (10)-year option term or (ii) the expiration of the
three (3)-year period measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options, then each such option may be exercised, for any or
all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Board service (less any shares subsequently purchased by
Optionee prior to death), by the Optionee's Beneficiary. Such right of exercise
shall lapse, and the option shall terminate, upon the earlier of (i) the
-------
expiration of the ten (10)-year option term or (ii) the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while
the Optionee remains in Board service, each outstanding option held by such
Optionee shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Change in Control or Hostile
Take-Over, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such option
accelerated in connection with a Change in Control shall terminate upon the
Change in Control, except to the extent assumed by the successor corporation (or
parent thereof) or otherwise expressly continued in full force and effect
pursuant to the terms of the Change in Control. Each such option accelerated in
connection with a Hostile Take-Over shall remain exercisable until the
expiration or sooner termination of the option term.
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an
20
<PAGE>
amount equal to the excess of (i) the Option Surrender Value of the shares of
Common Stock at the time subject to each surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
21
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. NO IMPAIRMENT OF AUTHORITY
Outstanding awards shall in no way affect the right of the Corporation
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
II. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Withholding Taxes incurred by such holders in connection with the
exercise of their options or the vesting of their shares. Such right may be
provided to any such holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Option or the vesting of such shares, a portion of those shares with
an aggregate Fair Market Value equal to the percentage of the Withholding Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
22
<PAGE>
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. However, the Salary Investment Option Grant and Director Fee
Option Grant Programs shall not be implemented until such time as the Primary
Committee or the Board may deem appropriate. Options may be granted under the
Discretionary Option Grant Program at any time on or after the Plan Effective
Date. However, no options granted under the Plan may be exercised, and no shares
shall be issued under the Plan, until the Plan is approved by the Corporation's
stockholders. If such stockholder approval is not obtained within twelve (12)
months after the Plan Effective Date, then all options previously granted under
this Plan shall terminate and cease to be outstanding, and no further options
shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and
no further options or direct stock issuances shall be made under the Predecessor
Plan after the Section 12 Registration Date. All options outstanding under the
Predecessor Plan on the Section 12 Registration Date shall be incorporated into
the Plan at that time and shall be treated as outstanding options under the
Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the terms of the documents evidencing such option, and no
provision of the Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Changes in
Control, may, in the Plan Administrator's discretion, be extended to one or more
options incorporated from the Predecessor Plan which do not otherwise contain
such provisions.
D. The Plan shall terminate upon the earliest of (i) January 23,
--------
2010, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Change in Control. Upon such plan
termination, all outstanding options and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in
23
<PAGE>
excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under those programs shall be held in
escrow until there is obtained stockholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under the
Plan. If such stockholder approval is not obtained within twelve (12) months
after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were held
in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
24
<PAGE>
APPENDIX
---------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under the Plan.
B. Beneficiary shall mean, in the event the Plan Administrator
-----------
implements a beneficiary designation procedure, the person designated by an
Optionee or Participant, pursuant to such procedure, to succeed to such person's
rights under any outstanding awards held by him or her at the time of death. In
the absence of such designation or procedure, the Beneficiary shall be the
personal representative of the estate of the Optionee or Participant or the
person or persons to whom the award is transferred by will or the laws of
descent and distribution.
C. Board shall mean the Corporation's Board of Directors.
-----
D. Change in Control shall mean a change in ownership or control of
-----------------
the Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization approved by
the Corporation's stockholders, unless securities representing more than
------
fifty percent (50%) of the total combined voting power of the voting
securities of the successor corporation are immediately thereafter
beneficially owned, directly or indirectly and in substantially the same
proportion, by the persons who beneficially owned the Corporation's
outstanding voting securities immediately prior to such transaction,
(ii) any stockholder-approved transfer or other disposition
of all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board recommends such
stockholders accept.
E. Code shall mean the Internal Revenue Code of 1986, as amended.
----
F. Common Stock shall mean the Corporation's common stock.
------------
G. Corporation shall mean Applied Science Fiction, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Applied Science Fiction, Inc. which shall by
appropriate action adopt the Plan.
H. Director Fee Option Grant Program shall mean the director fee
---------------------------------
option grant program in effect under the Plan.
A-1
<PAGE>
I. Discretionary Option Grant Program shall mean the
----------------------------------
discretionary option grant program in effect under the Plan.
J. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. Exercise Date shall mean the date on which the Corporation
-------------
shall have received written notice of the option exercise.
L. Fair Market Value per share of Common Stock on any relevant
-----------------
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported on the Nasdaq National Market or any successor system. If
there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price on
the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market for
the Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is to be sold in the initial
public offering pursuant to the Underwriting Agreement.
(iv) For purposes of any options made prior to the
Underwriting Date, the Fair Market Value shall be determined by the Plan
Administrator, after taking into account such factors as it deems
appropriate.
M. Hostile Take-Over shall mean:
-----------------
(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board does not recommend such
stockholders to accept, or
A-2
<PAGE>
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a majority
of the Board members ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or (B)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (A)
who were still in office at the time the Board approved such election or
nomination.
N. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
O. Involuntary Termination shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation or Parent or
Subsidiary employing the individual which materially reduces his or her
duties and responsibilities or the level of management to which he or she
reports, (B) a reduction in his or her level of compensation (including
base salary, fringe benefits and target bonus under any performance based
bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is
effected by the Corporation without the individual's consent.
P. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any intentional wrongdoing by such
person, whether by omission or commission, which adversely affects the business
or affairs of the Corporation (or any Parent or Subsidiary) in a material
manner. This shall not limit the grounds for the dismissal or discharge of any
person in the Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
R. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
S. Option Surrender Value shall mean the Fair Market Value per share
----------------------
of Common Stock on the date the option is surrendered to the Corporation or, in
the event of a Hostile Take-Over, effected through a tender offer, the highest
reported price per share of Common Stock paid by the tender offeror in effecting
such Hostile Take-Over, if greater. However, if the surrendered option is an
Incentive Option, the Option Surrender Value shall not exceed the Fair Market
Value per share.
A-3
<PAGE>
T. Optionee shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
U. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 2000 Stock Incentive Plan, as
----
set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant, Salary Investment Option Grant and
Stock Issuance Programs with respect to one or more classes of eligible persons,
to the extent such entity is carrying out its administrative functions under
those programs with respect to the persons under its jurisdiction. However, the
Primary Committee shall have the plenary authority to make all factual
determinations and to construe and interpret any and all ambiguities under the
Plan to the extent such authority is not otherwise expressly delegated to any
other Plan Administrator.
Z. Plan Effective Date shall mean January 24, 2000, the date on which
-------------------
the Plan was adopted by the Board.
AA. Predecessor Plan shall mean the Corporation's pre-existing 1995
----------------
Stock Option/Stock Issuance Plan in effect immediately prior to the Plan
Effective Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more
-----------------
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program with
respect to all eligible individuals.
CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment grant program in effect under the Plan.
A-4
<PAGE>
DD. Secondary Committee shall mean a committee of one (1) or more
-------------------
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
EE. Section 12 Registration Date shall mean the date on which the
----------------------------
Common Stock is first registered under Section 12(g) of the 1934 Act.
FF. Section 16 Insider shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
GG. Service shall mean the performance of services for the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
HH. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under the Plan.
JJ. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
KK. 10% Stockholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
LL. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
MM. Underwriting Date shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
NN. Withholding Taxes shall mean the Federal, state and local income
-----------------
and employment withholding tax liabilities to which the holder of Non-Statutory
Options or unvested shares of Common Stock may become subject in connection with
the exercise of those options or the vesting of those shares.
A-5
<PAGE>
Exhibit 10.3
APPLIED SCIENCE FICTION, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This 2000 Employee Stock Purchase Plan is intended to promote the
interests of Applied Science Fiction, Inc., a Delaware corporation, by providing
eligible employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Section 423 of the Code. Decisions of the Plan Administrator
shall be final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued in the aggregate under the Plan shall not exceed Five
Hundred Thousand (500,000) shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2001, by
an amount equal to one percent (1%) of the total number of shares of Common
Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
Two Hundred Fifty Thousand (250,000) shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to the maximum number and class of securities issuable in the
aggregate under the Plan, (ii) the maximum number and class of securities by
which the share reserve may increase annually, (iii) the maximum number and
class of securities purchasable per Participant and in the aggregate on any one
Purchase Date and (iv) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.
<PAGE>
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in April
2002. Subsequent offering periods shall commence as designated by the Plan
Administrator.
C. Each offering period shall be comprised of a series of one or
more successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May each year to the last business day in October of the same
year and from the first business day in November each year to the last business
day in April of the following year. However, the first Purchase Interval in
effect under the initial offering period shall commence at the Effective Time
and terminate on the last business day in October 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
an offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
2
<PAGE>
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering
period, reduce his or her rate of payroll deduction to become effective as
soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1)
such reduction per Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent (15%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be required
to be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a
-----------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
3
<PAGE>
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.
C. Purchase Price. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
-----
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common
----------------------------
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed One Thousand (1,000) shares, subject to periodic adjustments in the event
of certain changes in the Corporation's capitalization.
E. Excess Payroll Deductions. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next
4
<PAGE>
Purchase Date. If no such election is made at the time such purchase right
is terminated, then the payroll deductions collected with respect to the
terminated right shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the offering
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before his or her scheduled Entry Date into that
offering period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions collected to date on
his or her behalf for that Purchase Interval or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll deductions
be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service (i) within ninety (90) days
following the commencement of such leave or, (ii) prior to the expiration
of any longer period for which such Participant's right to reemployment
with the Corporation is guaranteed by either statute or contract, his or
her payroll deductions under the Plan shall automatically resume at the
rate in effect at the time the leave began. However, should the
Participant's leave of absence exceed ninety (90) days and his or her re-
employment rights not be guaranteed by either statute or contract, then the
Participant's status as an Eligible Employee will be deemed to terminate on
the ninety-first (91st) day of that leave, and such Participant's purchase
right for the offering period in which that leave began shall thereupon
terminate. An individual who returns to active employment following such a
leave shall be treated as a new Employee for purposes of the Plan and must,
in order to resume participation in the Plan, re-enroll in the Plan (by
making a timely filing of the prescribed enrollment forms) on or before his
or her scheduled Entry Date into the offering period.
G. Change of Control. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change of Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change of Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
-----
Stock on the Participant's Entry Date into the offering period in which such
Change of Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change of Control. However, the
applicable limitation on the number of shares of
5
<PAGE>
Common Stock purchasable by all Participants in the aggregate shall not apply to
any such purchase.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change of Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change of Control.
H. Proration of Purchase Rights. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis
of the Fair Market Value per
6
<PAGE>
share on the date or dates of grant) for each calendar year such rights
were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on January 24, 2000 and shall
become effective at the Effective Time, provided no purchase rights granted
--------
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in April 2010, (ii) the date on
--------
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT/TERMINATION OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the
7
<PAGE>
number of shares of Common Stock issuable under the Plan, except for permissible
adjustments in the event of certain changes in the Corporation's capitalization,
(ii) alter the purchase price formula so as to reduce the purchase price payable
for the shares of Common Stock purchasable under the Plan or (iii) modify
eligibility requirements for participation in the Plan.
XI. GENERAL PROVISIONS
A. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
B. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
C. The provisions of the Plan shall be governed by the laws of the
State of Texas without regard to that State's conflict-of-laws rules.
8
<PAGE>
Schedule A
----------
Corporations Participating in
2000 Employee Stock Purchase Plan
As of the Effective Time
------------------------
Applied Science Fiction, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Cash Earnings shall mean the (i) base salary payable to a
-------------
Participant by one or more Participating Corporations during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, current profit-sharing
distributions and other incentive-type payments. Such Cash Earnings shall be
calculated before deduction of (A) any income or employment tax withholdings or
(B) any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. However,
Cash Earnings shall not include any contributions (other than Code Section
401(k) or Code Section 125 contributions) made on the Participant's behalf by
the Corporation or any Corporate Affiliate to any employee benefit or welfare
plan now or hereafter established.
C. Change of Control shall mean a change of ownership of the
-----------------
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
----
E. Common Stock shall mean the Corporation's common stock.
------------
F. Corporate Affiliate shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
A-1
<PAGE>
G. Corporation shall mean Applied Science Fiction, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Applied Science Fiction, Inc. which shall by
appropriate action adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed. Any Corporate Affiliate which becomes a Participating
Corporation after such Effective Time shall designate a subsequent Effective
Time with respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. Entry Date shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
A-2
<PAGE>
N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. Plan shall mean the Corporation's 2000 Employee Stock Purchase
----
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be October 31, 2000.
R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in May
----------------------
and November each year on which an Eligible Employee may first enter an offering
period.
T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the Corporation's
initial public offering of its Common Stock.
A-3
<PAGE>
EXHIBIT 10.7
APPLIED SCIENCE FICTION, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made by and between Applied
Science Fiction, Inc. (the "Company"), and Robert E. Sleet, Jr. ("Executive") as
of October 4, 1999.
1. Duties and Scope of Employment.
------------------------------
(a) Positions, Employment Commencement Date, Duties. Executive's
-----------------------------------------------
employment with the Company pursuant to this Agreement shall commence on October
4, 1999 (the "Employment Commencement Date"). As of the Employment Commencement
Date, the Company shall employ Executive as the Chief Financial Officer of the
Company. The period of Executive's employment with the Company is referred to
herein as the "Employment Term." During the Employment Term, Executive shall
render such business and professional services in the performance of his duties,
consistent with Executive's position within the Company, as shall reasonably be
assigned to him by the Chief Executive Officer.
(b) Employment Term. The Employment Term is originally for a
---------------
period of one year from the Employment Commencement Date. The Employment Term
will automatically be extended an additional year at October 4, 2000 and all
subsequent employment commencement anniversary dates unless Executive is
notified in writing by the Company of its intent not to extend the Employment
Term and such notification occurs thirty (30) days prior to the end of the
Employment Term and any extensions thereto provided that the Executive is an
employee of the Company at that time. Notwithstanding the foregoing, the
Employment Term and/or the employment relationship between Executive and the
Company may be terminated at any time by either party in accordance with
provisions of Paragraph 3.
(c) Obligations. During the Employment Term and any extensions
-----------
thereto, Executive shall devote all of his full business efforts and time to the
Company. Executive agrees, during the Employment Term, not to actively engage in
any other employment, occupation or consulting activity (a) in any field related
to the Company's line of business, or (b) in a position that requires
significant time commitment, without first informing the Company of such
potential employment or activity and receiving the Company's approval.
Notwithstanding the above, Executive shall be free to participate in community
and charitable activities to the extent such activities do not interfere with
Executive's duties and responsibilities to the Company. Lack of objection by the
Company regarding any particular outside activities does not in any way reduce
the Executive's obligations under this Agreement.
2. Employee Benefits.
-----------------
(a) General. During the Employment Term, Executive shall be
-------
eligible to participate in the employee benefit plans maintained by the Company
that are applicable to other senior management to the full extent provided for
under those plans. The terms of the employee benefit plans may, from time to
time, change without advance notice or without cause.
<PAGE>
(b) Relocation Expense Reimbursement. If Executive chooses to
--------------------------------
relocate his principal residence closer to the Company's offices, the Company
will reimburse Executive for the following reasonable costs:
(i) Transaction costs associated with buying
Executive's new residence (closing costs, inspections, title insurance,
brokerage and related fees, etc.).
(ii) Transaction costs associated with selling
Executive's old residence (closing costs, inspections, title insurance,
brokerage and related fees, etc.).
(iii) Moving household furnishings and personal
effects.
Executive will be fully grossed-up by the Company for any imputed income
required to be recognized with respect to this reimbursement so that the
economic effect to Executive, after taking into account any tax deductions
available to Executive, is the same as if this reimbursement was provided to
Executive on a non-taxable basis
(c) Executive will accrue 160 hours of vacation per annum on a ratable
basis. Executive may accumulate a maximum of 200 vacation hours at any time.
Vacation will not accrue after the 200-hour vacation limit has been reached.
Upon termination of Executive's employment with the Company for any reason,
Executive shall not be entitled to pay for any accrued and unused vacation
hours.
3. At-Will Employment. Executive and the Company understand and
------------------
acknowledge and agree that Executive's employment with the Company constitutes
"at-will" employment. Subject to the Company providing severance benefits as
specified herein this Agreement, Executive and the Company understand,
acknowledge and agree that the employment relationship between Executive and the
Company may be terminated at any time, upon written notice to the other party,
with or without cause, at the option either of the Company or Executive.
4. Compensation.
------------
(a) Base Salary. While employed by the Company, the Company
-----------
shall pay the Executive as compensation for his services a base salary at the
annualized rate of $225,000.00 (the "Base Salary"). The Compensation Committee
of the Company's Board shall review the Base Salary at least annually, and after
such review may increase, but not decrease, the Base Salary. The Base Salary
shall be paid periodically in accordance with normal Company payroll practices
and subject to the usual, applicable withholdings.
(b) Bonuses. Executive shall not be eligible for bonuses
-------
unless otherwise granted by the Compensation Committee of the Board of
Directors.
(c) Equity Compensation.
-------------------
(i) Employment-Based Vesting Stock Option. Executive
-------------------------------------
shall receive a stock option to purchase a total of 195,000 shares of Company
common stock with a per share exercise price equal to the fair value per common
share as determined by the Company's Board of
-2-
<PAGE>
Directors on the date of grant (the "Employment-Based Stock Option"). The
Employment-Based Stock Option shall be for a term of ten years (or shorter upon
termination of employment with the Company) and shall be vested with respect to
25% of the total grant as of the first anniversary of the Employment
Commencement Date and shall thereafter vest at the rate of 1/48/th/ of the total
grant per month at each of the following 36 monthly anniversary dates so as to
be 100% vested on the fourth year anniversary thereof, conditioned upon
Executive's continued employment with the Company as of each vesting date. This
option grant is in all respects subject to the terms, definitions and provisions
of the Company's 1995 Stock Option/Stock Issuance Plan (the "Stock Plan") and
the standard form of stock option agreement thereunder to be entered into by and
between Executive and the Company (the "Employment-Based Option Agreement"). The
Stock Plan and Employment-Based Option Agreement are incorporated by reference
for all purposes as if fully set forth at length herein.
(d) Severance. If the Executive is involuntarily terminated by
---------
the Company at any time without "Cause" as defined below, then promptly
following such termination, the Company shall pay or provide to Executive
liquidated damages as follows: (i) Executive shall receive a lump sum payment
equal to the Executive's Base Salary, less applicable withholding, and (ii) the
unvested portion of Executive's Employment-Based Stock Option that would be
vested on next succeeding October 4 after the date of such termination shall be
vested. Executive acknowledges and agrees that the payments set forth in this
Paragraph, are a reasonable estimate of damages to Executive and that this
amount is not a penalty. For the purposes of this Agreement, "Cause" means fraud
or intentional misconduct, which is materially harmful to the Company.
(ii) Subsequent Awards. During the Employment Term,
-----------------
Executive shall be eligible to receive stock and stock option grants, as
determined by and at the sole discretion of the Compensation Committee of the
Board of Directors.
5. Confidential and/or Proprietary Information.
-------------------------------------------
(a) At the beginning and throughout Executive's employment with
the Company, he will receive certain sensitive, proprietary,
trade secret and/or confidential information about the
Company. Executive agrees that his employment creates a
relationship of confidence and trust with the Company with
respect to such proprietary, trade secret and/or
confidential information of the Company. Executive further
agrees to enter into the Company's Proprietary Information
Agreement ("Proprietary Information Agreement") at the
commencement of his employment. Executive further agrees
that during his employment and at all times after
termination of his employment, Executive will keep in
confidence and trust all proprietary, trade secret and/or
confidential information of the Company without the written
consent of the Company, except as may be necessary in the
ordinary course of performing Executive's duties to the
Company.
(b) In consideration of the covenants of the Company in this
Agreement, the receipt by Executive of proprietary, trade
secret and/or confidential information of the company, and
other good and valuable consideration,
-3-
<PAGE>
Executive acknowledges and agrees as follows: At any time within
one year after separation of Executive's employment with the
Company for any reason, Executive, without the Company's written
consent, directly or indirectly, alone or as a partner, joint
venture, officer, director, employee, consultant, agent or
stockholder (other than a less than 5% stockholder of a publicly
traded Company) will not (i) knowingly engage in any activity
which is in competition with the business and/or the specific
products, technologies and/or services of the Company, as existed
at the Company at the date of termination; (ii) knowingly solicit
any of the Company'' employees or customers, (iii) knowingly hire
any of the Company's employees or consultants in an unlawful
manner or solicit for hire or actively encourage employees or
consultants to leave the Company; and/or (iv) otherwise knowingly
breach Executive's confidential information obligations as set
forth in his Proprietary Information Agreement with the Company.
Should Executive engage in any conduct listed above, then: (1)
Executive's stock options, to the extent, unexercised, and
notwithstanding any provision in this employment Agreement to the
contrary, shall immediately terminate, cease to be exercisable
and expire effective the date on which the Executive enters into
such activity, unless this stock option is terminated sooner for
any other reason. (2) with respect to any portion of Executive's
stock options or related shares exercised or sold during the
period beginning one year prior to the Executive's termination
and ending two years after Executive's termination, any gain
represented by the Fair Market Value on the date of exercise if
the shares are still held, or on the date of sale, over the
exercise price multiplied by the number of shares Executive sold
or exercised, without regard to any subsequent market price
increase or decrease, shall be paid by Executive to the Company.
By accepting and executing this Agreement, Executive agrees and
acknowledges that the provisions of this section are reasonably
necessary to protect the Company's proprietary, trade secret and/or
confidential information, legitimate business interests and goodwill.
Executive further agrees that the restrictions as to duration,
geographic area, and scope of activity in this section are reasonably
necessary for the protection of the Company's proprietary, trade
secret and/or confidential information, legitimate business interest
and goodwill and are not oppressive or injurious to the public
interest. Executive further agrees that if the scope of any of the
restrictions is too broad to permit enforcement to its full extent,
then such restriction shall be enforced to the maximum extent
permitted by law, and the Executive hereby agrees that such scope may
be judicially modified accordingly in any proceeding to enforce such
restriction. The Company shall be entitled to injunctive relief
against Executive's activities in the event of a breach or threatened
breach of any of the provisions in this section to the extent allowed
by law.
6. Severability. In the event that any provision or covenant hereof becomes
------------
or is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall
-4-
<PAGE>
continue in full force and effect without said provision and the existence of
such unenforceable provision shall not constitute a defense to the enforcement
of the remainder of this Agreement.
7. Entire Agreement. This Agreement, the Stock Plan, the Employment-
----------------
Based Option Agreement and the Proprietary Information Agreement constitute the
entire agreement and understanding between the Company and Executive concerning
Executive's employment relationship with the Company, and supersede and replace
any and all prior or contemporaneous verbal or written agreements and
understandings concerning Executive's employment relationship with the Company.
This Agreement may only be modified by writing signed by all parties to this
Agreement.
8. Arbitration and Equitable Relief.
--------------------------------
(a) Except as provided in Section 8(d) below, Executive agrees that
any dispute or controversy arising out of, relating to, or in connection with
this Agreement, the interpretation, validity, construction, performance, breach,
or termination of this Agreement, and/or the employment relationship between the
Company and Executive, shall be settled by arbitration to be held in Travis
County, Texas, pursuant to the Federal Arbitration Act and in accordance with
the National Rules for the Resolution of Employment Disputes then in effect of
the American Arbitration Association (the "Rules"). The arbitrator may grant
injunctions or other relief in such dispute or controversy. The decision of the
arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator's decision in any court
having jurisdiction.
(b) The arbitrator shall apply Texas law to the merits of any dispute
or claim, without reference to rules of conflict of law. The arbitration
proceedings shall be governed by the Federal Arbitration Act, federal
arbitration law and the Rules, without reference to state arbitration law.
Executive hereby expressly consents to the personal jurisdiction of the state
and federal courts located in Travis County, Texas for any action or proceeding
arising from or relating to this Agreement and/or relating to any arbitration in
which the parties are participants.
(c) The Company shall pay the costs and expenses of such arbitration.
(d) Executive understands that nothing in Section 8 modifies
Executive's at-will status. The employment relationship between Executive and
the Company may be terminated at any time, upon written notice to the other
party, with or without cause, at the option either of the Company or the
Executive.
(e) EXECUTIVE HAS READ AND UNDERSTANDS SECTION 8, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION
WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,
BREACH, OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION
CLAUSE CONSTITUTES AN EXPRESS WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND
RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL
-5-
<PAGE>
ASPECTS OF THE EMPLOYMENT RELATIONSHIP BETWEEN THE COMPANY AND EXECUTIVE,
INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT
OF GOOD FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR
INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL
MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT
OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE
CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE
DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH
DISABILITIES ACT OF 1990, THE FAIR LABOR STANDARDS ACT, THE TEXAS
COMMISSION ON HUMAN RIGHTS ACT, AND [TEXAS LABOR CODE SECTION 21, et
seq;]
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
9. No Oral Modification, Cancellation or Discharge. This Agreement may
------------------------------------------------
only be modified, amended, canceled or discharged in writing signed by Executive
and the Company.
10. Withholding. The Company shall be entitled to withhold, or cause to
-----------
be withheld; any amount of applicable withholding with respect to payments
and/or compensation to Executive in connection with this Agreement and
Executive's employment with the Company.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
12. Effective Date. This Agreement is effective October 4, 1999.
--------------
13. Acknowledgment. Executive agrees that he is not presently affected
--------------
by a disability, which would prevent Executive from freely, knowingly and
voluntarily executing this Agreement. Executive acknowledges that he has had the
opportunity to review and revise this Agreement, has had sufficient time to, and
has carefully read and fully understands all the provisions of this Agreement,
and is knowingly and voluntarily entering into this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below:
-6-
<PAGE>
APPLIED SCIENCE FICTION, INC.
By: /s/ [ILLEGIBLE]
------------------------------------
Its: President
------------------------------------
ROBERT E. SLEET, JR.
/s/ Robert E. Sleet, Jr
- -----------------------------------------
-7-
<PAGE>
Exhibit 10.8
APPLIED SCIENCE FICTION, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made by and between Applied
Science Fiction, Inc. (the "Company"), and Dan Sullivan ("Executive") as of
November 15, 1999.
1. Duties and Scope of Employment.
------------------------------
(a) Positions, Employment Commencement Date, Duties. Executive's
-----------------------------------------------
employment with the COmpany pursuant to this Agreement shall commence on
November 15, 1999 (the "Employment Commencement Date"). As of the Employment
Commencement Date, the Company shall employ Executive as the Executive Vice
President, Intellectual Property Strategy and Administration of the Company. The
period of Executive's employment with the Company is referred to herein as the
"Employment Term." During the Employment Term, Executive shall render such
business and professional services in the performance of his duties, consistent
with Executive's position within the Company, as shall reasonably be assigned to
him by the Chief Executive Officer.
(b) Employment Term. The Employment Term is originally for a
---------------
period of one year from the Employment Commencement Date. The Employment Term
will automatically be extended an additional year at November 15, 2000 and all
subsequent employment commencement anniversary dates unless Executive is
notified in writing by the Company of its intent not to extend the Employment
Term and such notification occurs thirty (30) days prior to the end of the
Employment Term and any extensions thereto provided that the Executive is an
employee of the Company at that time. Notwithstanding the foregoing, the
Employment Term and/or the employment relationship between Executive and the
Company may be terminated at any time by either party in accordance with
provisions of Paragraph 3.
(c) Obligations. During the Employment Term and any extensions
-----------
thereto, Executive shall devote all of his full business efforts and time to the
Company. Executive agrees, during the Employment Term, not to actively engage in
any other employment, occupation or consulting activity (a) in any field related
to the Company's line of business, or (b) in a position that requires
significant time commitment, without first informing the Company of such
potential employment or activity and receiving the Company's approval.
Notwithstanding the above, Executive shall be free to participate in community
and charitable activities to the extent such activities do not interfere with
Executive's duties and responsibilities to the Company. Lack of objection by the
Company regarding any particular outside activities does not in any way reduce
the Executive's obligations under this Agreement.
2. Employee Benefits.
-----------------
(a) General. During the Employment Term, Executive shall be
-------
eligible to participate in the employee benefit plans maintained by the Company
that are applicable to other senior
<PAGE>
management to the full extent provided for under those plans. The terms of the
employee benefit plans may, from time to time, change without advance notice or
without cause.
If Executive does not elect coverage under the Company's medical
benefits plan, the Company shall reimburse Executive for the reasonable
costs of medical insurance premiums paid for by Executive for he and his
spouse in excess of the amount Executive would be required to pay had he
elected coverage for he and his spouse under the Company's medical benefits
plan. The alternate medical plan will be selected by the Executive and
approved by the Company within 90 days of date of employment. The medical
benefit provision shall remain in force until cancelled by Executive. In
the event that the current provider of the medical insurance plan ceases
operation or discontinues operations in the area where the Executive
currently resides, the Executive will select an equivalent plan with
approval of the Company. The Company will not withhold reasonable approval
of such a plan change.
Upon termination of employment, the Company may, at its sole
discretion, estimate the future value of continuing the current medical
benefits plan and compensate Executive for the net present value of the
future medical benefits plan in the form of a lump sum or annuity payment
on behalf of the Executive.
(b) Relocation Expense Reimbursement. If Executive chooses to
--------------------------------
relocate his principal residence closer to the Company's offices prior to
November 15, 2001 the Company will reimburse Executive for the following
reasonable costs:
(i) Transaction costs associated with buying Executive's new
residence (closing costs, inspections, title insurance,
brokerage and related fees, etc.)
(ii) Transaction costs associated with selling Executive's old
residence (closing costs, inspections, title insurance,
brokerage and related fees, etc.)
(iii) Moving household furnishings and personal effects.
(c) Expenses. Executive's principal office will be in Austin, Texas.
--------
For the period November 15, 1999 through November 15, 2001, the Company will pay
the following expenses in connection with Executive's work in the principal
office:
(i) Executive's reasonable living expenses in Austin, Texas
not to exceed $2,000.00 per month.
(ii) Executive's reasonable travel expenses between Austin,
and Connecticut.
(iii) Executive's spouse's travel expenses between Austin,
Texas and Connecticut.
-2-
<PAGE>
Executive will be fully grossed-up by the Company for any imputed income
required to be recognized with respect to this reimbursement so that the
economic effect to Executive, after taking into account any tax deductions
available to Executive, is the same as if this reimbursement was provided to
Executive on a non-taxable basis.
(d) Executive will accrue 160 hours of vacation per annum on a
ratable basis. Executive may accumulate a maximum of 200 vacation hours at any
time. Vacation will not accrue after the 200-hour vacation limit has been
reached. Upon termination of Executive's employment with the Company for any
reason, Executive shall not be entitled to pay for any accrued and unused
vacation hours.
3. At-Will Employment. Executive and the Company understand and
------------------
acknowledge and agree that Executive's employment with the Company constitutes
"at-will" employment. Subject to the Company providing severance benefits as
specified herein this Agreement, Executive and the Company understand,
acknowledge and agree that the employment relationship between Executive and the
Company may be terminated at any time, upon written notice to the other party,
with or without cause, at the option either of the Company's Board of Directors
or Compensation Committee of the Board of Directors or Executive.
4. Compensation.
------------
(a) Base Salary. While employed by the Company, the Company
-----------
shall pay the Executive as compensation for his services a base salary at the
annualized rate of $200,000.00 (the "Base Salary"). The Compensation Committee
of the Company's Board shall review the Base Salary at least annually, and after
such review may increase, but not decrease, the Base Salary. The Base Salary
shall be paid periodically in accordance with normal Company payroll practices
and subject to the usual, applicable withholdings.
(b) Bonuses. Beginning for the year ended December 31, 2000, and
-------
for all subsequent fiscal years, Executive shall be eligible for a target bonus
equal to 40% of Base Salary for the fiscal year (the "Target Bonus") (with a
greater payment based on achievement in excess of the target milestones) based
upon performance criteria established at the discretion of and approved by the
Compensation Committee of the Board of Directors or the Chief Executive Officer;
provided, however, that the payment of any such annual bonus shall be subject to
Executive's employment with the Company on May 31 of the fiscal year to which
that bonus relates, and such payment will be prorated based on the number of
days of such fiscal year the Executive was employed with the Company at the date
Executive's employment with the Company is terminated for any reason except for
"Cause" as defined in 4(d) below. If Executive's employment with the Company is
terminated with "Cause" (as defined in Paragraph 4(d) below), then Executive is
not eligible for payment of any bonuses and/or Target Bonuses.
(c) Equity Compensation. Employment-Based Vesting Stock Option.
-------------------
Executive shall receive a stock option to purchase a total of 185,000 shares of
Company common stock with a per share exercise price of $3.50 per share (the
"Employment-Based Stock Option"). The Employment-Based Stock Option shall be for
a term of ten years (or shorter upon termination of
-3-
<PAGE>
employment with the Company) and shall be vested with respect to 25% of the
total grant as of the first anniversary of the Employment Commencement Date and
shall thereafter vest at the rate of 1/48/th/ of the total grant per month at
each of the following 36 monthly anniversary dates so as to be 100% vested on
the fourth year anniversary thereof, conditioned upon Executive's continued
employment with the Company as of each vesting date. This option grant is in all
respects subject to the terms, definitions and provisions of the Company's 1995
Stock Option/Stock Issuance Plan (the "Stock Plan") and the standard form of
stock option agreement thereunder to be entered into by and between Executive
and the Company (the "Employment-Based Option Agreement"). The Stock Plan and
Employment-Based Option Agreement are incorporated by reference for all purposes
as if fully set forth at length herein.
Severance. If the Executive is involuntarily terminated by the
---------
Company at any time without "Cause" as defined below, then promptly following
such termination, the Company shall pay or provide to Executive liquidated
damages as follows: (i) Executive shall receive a lump sum payment equal to the
Executive's Base Salary, less applicable withholding, and (ii) the unvested
portion of Executive's Employment-Based Stock Option that would be vested on
next succeeding November 15 after the date of such termination shall be vested.
Executive acknowledges and agrees that the payments set forth in this Paragraph,
are a reasonable estimate of damages to Executive and that this amount is not a
penalty. For purposes of this Agreement, "Cause" means fraud or intentional
misconduct, which is materially harmful to the Company.
(e) Subsequent Awards. During the Employment Term, Executive
-----------------
shall be eligible to receive stock and stock option grants, as determined by and
at the sole discretion of the Compensation Committee of the Board of Directors.
4. Confidential and/or Proprietary Information.
-------------------------------------------
(a) At the beginning and throughout Executive's employment with
the Company, he will receive certain sensitive, proprietary,
trade secret and/or confidential information about the
Company. Executive agrees that his employment creates a
relationship of confidence and trust with the Company with
respect to such proprietary, trade secret and/or
confidential information of the Company. Executive further
agrees to enter into the Company's Proprietary Information
Agreement ("Proprietary Information Agreement") at the
commencement of his employment. Executive further agrees
that during his employment and at all times after
termination of his employment, Executive will keep in
confidence and trust all proprietary, trade secret and/or
confidential information of the Company without the written
consent of the Company, except as may be necessary in the
ordinary course of performing Executive's duties to the
Company.
(b) In consideration of the covenants of the Company in this
Agreement, the receipt by Executive of proprietary, trade
secret and/or confidential information of the company, and
other good and valuable consideration, Executive
acknowledges and agrees as follows: At any time within one
year
-4-
<PAGE>
after separation of Executive's employment with the Company for
any reason, Executive, without the Company's written consent,
directly or indirectly, alone or as a partner, joint venture,
officer, director, employee, consultant, agent or stockholder
(other than a less than 5% stockholder of a publicly traded
Company) will not (except as explicitly allowed through a written
consent from the Company's Board of Directors) (i) knowingly
engage in any activity which is in competition with the business
and/or the specific products, technologies and/or services of the
Company, as existed at the Company at the date of termination;
(ii) knowingly solicit any of the Company's employees or
customers, (iii) knowingly hire any of the Company's employees or
consultants in an unlawful manner or solicit for hire or actively
encourage employees or consultants to leave the Company; and/or
(iv) otherwise knowingly breach Executive's confidential
information obligations as set forth in his Proprietary
Information Agreement with the Company. Should Executive engage
in any conduct listed above, then: (1) Executive's stock options,
to the extent, unexercised, and notwithstanding any provision in
this employment Agreement to the contrary, shall immediately
terminate, cease to be exercisable and expire effective the date
on which the Executive enters into such activity, unless this
stock option is terminated sooner for any other reason. (2) With
respect to any portion of Executive's stock options or related
shares exercised or sold during the period beginning one year
prior to the Executive's termination and ending two years after
Executive's termination, any gain represented by the Fair Market
Value on the date of exercise price multiplied by the number of
shares Executive sold or exercised, without regard to any
subsequent market price increase or decrease, shall be paid by
Executive to the Company.
By accepting and executing this Agreement, Executive agrees and
acknowledges that the provisions of this section are reasonably
necessary to protect the Company's proprietary, trade secret and/or
confidential information, legitimate business interests and goodwill.
Executive further agrees that the restrictions as to duration,
geographic area, and scope of activity in this section are
reasonably necessary for the protection of the Company's proprietary,
trade secret and/or confidential information, legitimate business
interest and goodwill and are not oppressive or injurious to the
public interest. Executive further agrees that if the scope of any of
the restrictions is too broad to permit enforcement to its full
extent, then such restriction shall be enforced to the maximum extent
permitted by law, and the Executive hereby agrees that such scope may
be judicially modified accordingly in any proceeding to enforce such
restriction. The Company shall be entitled to injunctive relief
against Executive's activities in the event of a breach or threatened
breach of any of the provisions in this section to the extent allowed
by law.
5. Severability. In the event that any provision or covenant hereof becomes
------------
or is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall
-5-
<PAGE>
continue in full force and effect without said provision and the existence of
such unenforceable provision shall not constitute a defense to the enforcement
of the remainder of this Agreement.
6. Entire Agreement. This Agreement, the Stock Plan, the Employment-Based
----------------
Option Agreement and the Proprietary Information Agreement constitute the entire
agreement and understanding between the Company and Executive concerning
Executive's employment relationship with the Company, and supersede and replace
any and all prior or contemporaneous verbal or written agreements and
understandings concerning Executive's employment relationship with the Company.
This Agreement may only be modified by writing signed by all parties to this
Agreement.
7. Arbitration and Equitable Relief.
--------------------------------
(a) Except as provided in Section 8(d) below, Executive agrees that
any dispute or controversy arising out of, relating to, or in connection with
this Agreement, the interpretation, validity, construction, performance, breach,
or termination of this Agreement, and/or the employment relationship between the
Company and Executive, shall be settled by arbitration to be held in Travis
County, Texas, pursuant to the Federal Arbitration Act and in accordance
with the National Rules for the Resolution of Employment Disputes then in effect
of the American Arbitration Association (the "Rules"). The arbitrator may grant
injunctions or other relief in such dispute or controversy. The decision of the
arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgement may be entered on the arbitrator's decision in any court
having jurisdiction.
(b) The arbitrator shall apply Texas law to the merits of any dispute
or claim, without reference to rules of conflict of law. The arbitration
proceedings shall be governed by the Federal Arbitration Act, federal
arbitration law and the Rules, without reference to state arbitration law.
Executive hereby expressly consents to the personal jurisdiction of the state
and federal courts located in Travis County, Texas for any action or proceedings
arising from or relating to this Agreement and/or relating to any arbitration
in which the parties are participants.
(c) The Company shall pay the costs and expenses of such arbitration.
(d) Executive understands that nothing in Section 8 modifies
Executive's at-will status. The employment relationship between Executive and
the Company may be terminated at any time, upon written notice to the other
party, with or without cause, at the option either of the Company or the
Executive.
(e) EXECUTIVE HAS READ AND UNDERSTANDS SECTION 8, WHICH DISCUSSES
ARBITRATION, EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN
CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION,
PERFORMANCE, BREACH, OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT
THIS ARBITRATION CLAUSE CONSTITUTES AN EXPRESS WAIVER OF EXECUTIVE'S RIGHT TO A
JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL
-6-
<PAGE>
ASPECTS OF THE EMPLOYMENT RELATIONSHIP BETWEEN THE COMPANY AND EXECUTIVE,
INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF
GOOD FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR
INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL
MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR
PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL
RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE
FAIR LABOR STANDARDS ACT, THE TEXAS COMMISSION ON HUMAN RIGHTS ACT, AND
[TEXAS LABOR CODE SECTION 21, et seq;]
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
8. No Oral Modification, Cancellation or Discharge. This Agreement may
-----------------------------------------------
only be modified, amended, canceled or discharged in writing signed by Executive
and the Company.
9. Withholding. The Company shall be entitled to withhold, or cause to be
-----------
withheld; any amount of applicable withholding with respect to payments and/or
compensation to Executive in connection with this Agreement and Executive's
employment with the Company.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
11. Effective Date. This Agreement is effective November 15, 1999.
--------------
12. Acknowledgment. Executive agrees that he is not presently affected by
--------------
a disability, which would prevent Executive from freely, knowingly and
voluntarily executing this Agreement. Executive acknowledges that he has had the
opportunity to review and revise this Agreement, has had sufficient time to, and
has carefully read and fully understands all the provisions of this Agreement,
and is knowingly and voluntarily entering into this Agreement.
-7-
<PAGE>
13. Expiration Date. This offer of Agreement expires Friday, November 19,
---------------
1999.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below:
APPLIED SCIENCE FICTION, INC.
By: /s/ [ILLEGIBLE]
-----------------------
Its: PRESIDENT
-----------------------
Daniel Sullivan
/s/ Daniel J. Sullivan
----------------------
November 15, 1999
-8-
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made by and between Applied
Science Fiction, Inc. (the "Company"), and S. Dana Seccombe ("Executive") as of
December 10, 1999.
1. Duties and Scope of Employment.
-------------------------------
(a) Position, Employment Commencement Date, Duties. Executive's employment
----------------------------------------------
with the Company pursuant to this Agreement shall commence on December 10, 1999
(the "Employment Commencement Date"). As of the Employment Commencement Date,
the Company shall employ Executive as the Executive Vice President of Research
and Development of the Company. The period of Executive's employment with the
Company is referred to herein as the "Employment Term." During the Employment
Term, Executive shall manage the research and development of the Company,
including, but not limited to, the areas listed on attached Exhibit B.
(b) Employment Term. Executive and the Company understand, acknowledge and
---------------
agree that Executive's employment with the Company constitutes "at-will"
employment. Subject to the Company's providing severance benefits as specified
herein, Executive and the Company understand, acknowledge and agree that the
employment relationship between Executive and the Company may be terminated at
any time, upon written notice to the other party, with or without cause, at the
option of either the Company or Executive. The at-will nature of the employment
relationship does not modify the four year vesting requirements, nor the
accelerated vesting requirements referenced in other sections of this Agreement.
(c) Obligations. During the Employment Term, Executive shall devote his
-----------
full business efforts and time to the business of the Company. Notwithstanding
the above, Executive may serve as a director or trustee of other organizations,
or engage in charitable, civic, and/or governmental activities provided that
such service and activities do not prevent Executive from performing his duties
under this Agreement and further provided that Executive obtains written consent
for all such activities from the Company, which consent will not be unreasonably
withheld. Executive may engage in personal activities, including, without
limitation, personal investments (subject to the limitations specified elsewhere
in this Agreement), provided that such activities do not interfere with his
performance of duties hereunder. Executive may, from time to time, work at
home, so long as it does not interrupt communication or materially interfere
with the performance of his duties and job functions.
2. Employee Benefits.
------------------
(a) During the Employment Term, Executive shall be eligible to participate
in the employee benefit plans maintained by the Company that are applicable to
other senior management to the fullest extent provided for under those plans.
The terms of the employee benefit plans may, from time to time, change without
advance notice or without cause.
(b) Executive's principal office will be in Austin, Texas. Executive shall
be provided supplemental office space near where he chooses to reside, initially
in California, but Executive shall be expected to work in Austin, Texas, to the
extent necessary to perform his duties.
<PAGE>
Executive shall not be required to relocate his residence. The company will pay
the following expenses in connection with Executive's work in the principal
office:
(i) Executive's reasonable living expenses in Austin, Texas
(including without limitation, rent for an apartment or house),
not to exceed $2,000.00 per month;
(ii) Executive's reasonable travel expenses for business purposes
only; and
(iii) Executive's reasonable automobile expenses in Austin, Texas not
to exceed $400.00 per month.
Executive will be fully grossed-up by the Company for any
imputed income required to be recognized with respect to reimbursement for
expenses so that the economic effect to Executive, after taking into account any
tax deductions available to Executive, is the same as if this reimbursement was
provided to Executive on a non-taxable basis.
(c) Executive will accrue four (4) weeks of vacation per annum, provided,
however, that Executive may not accumulate any more than five (5) weeks of
vacation at any time. Vacation will accrue on a pro rata basis, at the rate of
one and two-thirds (1 2/3) days per month. Vacation will not accrue after the 5
week vacation limit has been reached. Upon termination of Executive's employment
with the Company for any reason, Executive shall be paid by the Company for all
accrued and unused vacation.
Special One-Time Vacation Grant: The Company agrees to grant Executive an
-------------------------------
additional one and one-half weeks of vacation in December 1999.
3. Compensation.
-------------
(a) Base Salary. While Executive is employed by the Company, the Company
-----------
shall pay Executive as compensation for his services a base salary at the
annualized rate of $250,000.00 (the "Base Salary"). However, the reference to an
annual salary is not intended to communicate a term of employment of one year;
rather, Executive's employment is "at-will" under this Agreement. The
Compensation Committee of the Company's Board shall review the Base Salary from
time to time, and after such review may increase, but not decrease, the Base
Salary. The Base Salary shall be paid periodically in accordance with normal
Company payroll practices and subject to the usual, applicable withholdings.
(b) Bonuses. The Company's fiscal year is identical to the calendar year.
-------
Beginning for the year ended December 31, 2000, and for all subsequent fiscal
years, Executive shall be eligible for a target bonus equal to 40% of Base
Salary for the fiscal year (the "Target Bonus") (with a greater payment based on
achievement in excess of the target milestones) based upon performance criteria
established at the discretion of and approved by the Compensation Committee of
the Board of Directors or the Chief Executive Officer to be established after
negotiation with Executive and provided to Executive in writing by the end of
April 2000 and the end of the first quarter of each year thereafter; provided,
however, that the payment of any such
Page 2 of 18
ASF-Seccombe Employment Agreement
<PAGE>
annual bonus shall be subject to Executive's employment with the Company on May
31 of the fiscal year to which that bonus relates, and such payment will be pro-
rated based on the number of days of such fiscal year the Executive was employed
with the Company at the date Executive's employment with the Company is
terminated. If Executive's employment with the Company is terminated with
"Cause" (as defined in Paragraph 3(f) below), then Executive is not eligible for
payment of any bonuses and/or Target Bonuses.
Transition Allowance: The Company also agrees to provide Executive
--------------------
with a transition allowance in the amount of Ten Thousand dollars ($10,000),
less statutory deductions and withholdings, upon Executive's execution of this
Agreement.
(c) Equity Compensation.
-------------------
(i) Employment-Based Vesting Stock Option. Executive shall receive
-------------------------------------
a stock option under the Company's Stock Option/Stock Issuance Plan to
purchase a total of 234,000 shares of the Company's common stock which, as
of December 9, 1999, represents 1% of the fully diluted capital stock of
the Company (fully diluted capital stock includes, without limitation, all
of the Company's outstanding equity securities, including, without
limitation, all of the Company's common stock, preferred stock, warrants,
options to purchase capital stock, and convertible debt instruments, all on
an as-if-converted basis, plus shares reserved for issuance under stock
grants or direct stock issuance in the future under the Company's Stock
Option/Stock Issuance Plan) with a per share exercise price equal to the
fair market value per common share as determined by the Company's Board of
Directors on the date of grant (the "Employment-Based Stock Option"). For
each dollar the fair market value per common share is greater than $1.55 on
the date of grant the Company will grant an option under the Company's
Stock Option/Stock Issuance Plan to purchase an additional 13,172 shares
(the "Additional Employment-Based Stock Option"). The Employment-Based
Stock Option and the Additional Employment-Based Stock Option shall be for
a term of ten years (or shorter upon termination of employment with the
Company) and, subject to accelerated vesting as set forth elsewhere this
Agreement, shall be vested with respect to 25% of the total grant as of the
first anniversary of the Employment Commencement Date and shall thereafter
vest at the rate of 1/48th of the total grant per month at each of the
following 36 monthly anniversary dates so as to be 100% vested on the
fourth year anniversary thereof, conditioned upon Executive's continued
employment with the Company as of each vesting date (unless otherwise
provided in this Agreement). Except as specified otherwise herein, this
option grant is in all respects subject to the terms, definitions and
provisions of the Company's 1995 Stock Option/Stock Issuance Plan (the
"Stock Plan") and the standard form of stock option agreement thereunder to
be entered into by and between Executive and the Company (the "Employment-
Based Option Agreement"). The Stock Plan and Employment-Based Option
Agreement are incorporated by reference for all purposes as if fully set
forth at length herein including the right to exercise the option for
unvested shares within thirty days of the Date of Grant.
The foregoing stock option grant does not preclude any future stock
option grants by the Company to Executive.
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ASF-Seccombe Employment Agreement
<PAGE>
All stock options granted Executive may be exercised in whole or in
part within 30 days of the Grant Date, subject to the Company's right to
repurchase unvested exercised shares. The Company will accept a full-
recourse promissory note (the "Promissory Note") to finance the exercise of
all stock options granted Executive, and the purchased option shares shall
be pledged with the Company as additional collateral of the Promissory
Note. The Promissory Note shall have a maximum term of five years, subject
to acceleration as indicated below upon Executive's termination of
employment, shall bear interest at the minimum rate required under the
Internal Revenue Code to avoid the imputation of compensation income to the
Executive, and shall be subject to the Company's other standard terms and
conditions unless otherwise specifically noted herein.
Interest on any Promissory Note executed by Executive to the Company
as payment for shares exercised under the Employment-Based Stock Option and
the Additional Employment-Based Stock Option will be 50% forgiven by the
Company at Executive's three year employment anniversary date and 100%
forgiven by the Company at Executive's four year anniversary date.
Provided, however, that if, and only if, Executive's employment with the
Company is terminated for Cause or if Executive voluntary terminates his
employment other than for "Good Reason" prior to Executive's three year or
four year anniversary dates, then Executive must pay the full amount of
accrued and unforgiven interest on the Promissory Note. Such payment must
be made within 180 days after such termination, if such termination occurs
after the Company's initial public offering ("IPO"); or within 2 years if
such termination occurs before an IPO. The outstanding principal balance of
the Promissory Note shall become due and payable in one lump sum 180 days
after the termination of Executive's employment for any reason if such
termination occurs after an IPO, or within 2 years if such termination
occurs before an IPO. In the event severance payments are owed by the
Company to the Executive as provided herein, such payments, net of
applicable withholding taxes, will be first offset against any Promissory
Note amount then owed by the Executive to the Company, and the balance of
such Promissory Note (if any) shall be paid within 180 days after
Executive's termination of employment if such termination occurs after an
IPO, or within 2 years if such termination occurs before an IPO. Should
Executive not have to pay interest on any Promissory Note as provided
herein, Executive shall remain obligated to make other payments pursuant to
the terms of the Promissory Note executed by Executive to the Company.
(ii) Subsequent Awards. During the Employment Term, Executive shall
-----------------
be eligible to receive additional stock and stock option grants, as
determined by and at the sole discretion of the Board's Compensation
Committee.
(d) Severance.
----------
(i) Prior to the Company entering into a Written Agreement resulting
----------------------------------------------------------------
in a Change of Control. If, in any period prior to the Company entering
----------------------
into a written agreement resulting in a "Change of Control" (as defined in
Paragraph 3(f) below),
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ASF-Seccombe Employment Agreement
<PAGE>
Executive's employment with the Company is terminated by the Company
without "Cause" (as defined in Paragraph 3(f) below), then the Company
shall pay or provide to Executive the following severance: (1) Executive's
then unvested option shares shall continue to vest in installments as if
Executive continued in the Company's employ until all those option shares
are fully vested; (2) Executive's stock options shall have their post-
termination exercisability provisions automatically extended by forty-eight
months but not beyond the expiration date of the ten-year term; (3)
Executive shall receive a lump-sum payment equal to 50% of his annual Base
Salary, plus 50% of his annual Target Bonus, less applicable withholdings,
promptly following such termination of Executive's employment, and shall
receive a monthly amount equal to (i) 100% of his monthly rate of Base
Salary plus (ii) a dollar amount equal to one-twelfth of his annual Target
Bonus, less applicable withholdings, for eighteen months following such
termination of Executive's employment as if Executive had remained employed
by the Company for those eighteen months; and (4) Executive and his covered
dependents shall receive paid coverage under the Company's health insurance
benefit plans for a period of six months, with such health insurance
coverage to constitute the first six months of COBRA coverage, or, if and
to the extent ineligible under the terms of such plans, Executive shall
receive an amount equal to the Company's costs of providing such benefits;
provided, however, that Executive will be fully grossed-up by the Company
for any imputed income required to be recognized with respect to the
payments made in lieu of insurance benefit plan coverage so that the
economic effect to Executive is the same as if these payments were provided
to Executive on a non-taxable basis.
(ii) Following a Written Agreement Resulting in a Change of Control.
--------------------------------------------------------------
If, after the execution of any written agreement resulting in a "Change of
Control" (as defined in Paragraph 3(f) below), Executive's employment with
the Company is terminated by the Company without "Cause" (as defined in
Paragraph 3(f) below) or is terminated by Executive for "Good Reason" (as
defined in Paragraph 3(f) below), then the Company shall pay or provide to
Executive the following severance: (1) Executive's then unvested option
shares shall continue to vest in installments as if Executive continued in
the Company's employ until all those option shares shall have fully vested;
(2) Executive's stock options shall have their post-termination
exercisability provisions automatically extended by forty-eight months, but
not beyond the expiration date of the ten-year term; (3) Executive shall
receive, promptly following such termination of employment, a lump-sum
payment equal to 200% of his Base Salary plus Target Bonus less applicable
withholdings; and (4) Executive and his covered dependents shall receive
coverage under the Company's health insurance benefits plans for a period
of six months, with such health insurance coverage to constitute the first
six months of COBRA coverage, or, if and to the extent ineligible under the
terms of such plans, Executive shall receive an amount equal to the
Company's costs of providing such benefits; provided however, that
Executive will be fully grossed-up by the Company for any imputed income
required to be recognized with respect to the payments made in lieu of
insurance benefit plan coverage so that the economic effect to Executive is
the same as if these payments were provided to Executive on a non-taxable
basis. Upon expiration of the 18 month period, Executive's rights upon
termination shall be governed by
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ASF-Seccombe Employment Agreement
<PAGE>
the same provisions that apply to terminations "Prior to the Company
entering into a Written Agreement resulting in a Change of Control" set
forth above.
(iii) Executive shall have a thirty-day period commencing twelve
months after the execution of a written agreement resulting in a "Change of
Control" (as defined in Paragraph 3(f) below) whereby Executive may
terminate Executive's employment with the Company for any reason. If
Executive's employment with the Company is terminated by Executive during
this thirty day period, then for purposes of vesting in the Executive's
then unvested option shares, Executive shall be immediately credited with
an additional twenty-four (24) months of service (and the shares reflecting
the additional twenty-four months of service shall immediately vest), and
no other severance benefits shall be payable to Executive under this
Agreement.
(iv) Except as otherwise provided herein, should Executive
voluntarily terminate his employment with the Company other than for Good
Reason or should the Company terminate Executive's employment for Cause,
whether any such termination by the Executive or the Company occurs before
or after a Change in Control, no severance benefits shall be payable to
Executive under this Agreement. Executive shall be entitled to exercise his
stock options only to the extent those options are, in accordance with the
normal installment vesting schedule, vested at time of such termination of
employment.
(v) Executive and Company acknowledge and agree that the payments
set forth herein this Paragraph are a reasonable estimate of damages to
Executive and that this amount is not a penalty.
(e) Release. Executive acknowledges that the payments and/or benefits
-------
under Paragraph 3(d) are subject to the execution of a mutually agreeable
release agreement entered into between the Parties in the form attached hereto
as Exhibit C.
(f) Definitions. As used in this Agreement, "Cause" means (i) the
-----------
Executive's material breach of this Agreement after receiving written
notification from the Company and following a reasonable cure period of not less
than 15 days, (ii) the Executive's conviction or plea of "guilty" or "no
contest" to (x) any crime constituting a felony in the jurisdiction in which
committed, (y) any crime involving moral turpitude (whether or not a felony), or
(z) any other violation of criminal law involving dishonesty or willful
misconduct that materially injures the Company (whether or not a felony), (iii)
substance abuse by the Executive that in any manner materially interferes with
the performance of his duties under this Agreement, (iv) the failure or refusal
of the Executive to follow the lawful and proper directives of the Company that
are within the scope of the Executive's duties set forth in Section 1(a) above
and that is not corrected within 15 days after written notice from the Board to
the Executive identifying such failure or refusal, (v) willful malfeasance or
gross misconduct by the Executive that discredits or damages the Company which
is not corrected within 15 days after written notice from the Board to the
Executive identifying such failure or refusal, (vi) indictment of the Executive
for a felony violation of the federal securities laws (except that in the event
such an indictment is resolved by means that would not constitute Cause for
termination under Section (f)(ii) above, Executive shall be entitled to
severance and the other benefits described in Section 3(d), as if he were
terminated without Cause, (vii) the Executive's chronic absence from work for
reasons other
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ASF-Seccombe Employment Agreement
<PAGE>
than illness, and that is not corrected within 15 days after written notice from
the CEO. Any dispute by the Executive as to whether his termination was for
Cause will be resolved by arbitration.
For the purposes of this Agreement, a termination of employment by
Executive for "Good Reason" means the termination is based upon: (i) a reduction
in Executive's Base Salary, Target Bonus or benefits; (ii) a material reduction
in Executive's title, authority, or a material change in Executive's duties or
responsibilities; (iii) the failure of the Company to provide Executive with
office accommodations comparable to those provided at the time to the Company's
other executive officers (full service office space of Class A designation or
Class B+ designation in a Class A location with traditional high-wall office
environment, 1500 square feet or greater including conference/demo center and
administrative support, maintained by Company or services provider), initially
near Foster City, CA, but subject to change upon the mutual agreement of
Executive and the Company or (iv) any requirement that Executive permanently
relocate his employment and/or residence more than thirty (30) miles from his
place of residence at the time of the Effective Date of this Agreement or
anytime thereafter if Executive chooses to relocate. In no event, however,
shall any reduction up to 20% in salary or bonus levels applied by the Company
to officers across the board as part of a cost/expense reduction program
constitute grounds for a "Good Reason" termination by Executive under clause (i)
above. Any dispute between Executive and the Company regarding whether
Executive has "Good Reason" to terminate his employment with the Company will be
resolved by binding arbitration, and Executive is not required to resign his
employment with the Company prior to initiating arbitration to determine whether
"Good Reason" to resign exists.
For the purposes of this Agreement, "Change of Control" is defined as:
(1) When any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becomes
the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing
fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities; or
(2) Any merger, consolidation or transfer of securities of the
Company with or into another corporation, other than a merger,
consolidation or transfer of securities in which the holders of
more than 50% of the shares of capital stock of the Company
outstanding immediately prior to such transaction continue to
hold (either by the voting securities remaining outstanding or by
their being converted into voting securities of the surviving
entity) more than 50% of the total voting power represented by
the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction; or
(3) The sale, transfer, or disposal by other means of all or
substantially all of the Company's assets (or consummation of any
transaction having similar effect); or
Page 7 of 18
ASF-Seccombe Employment Agreement
<PAGE>
(4) The dissolution or liquidation of the Company.
4. Confidential and/or Proprietary Information.
--------------------------------------------
(a) At the beginning and throughout Executive's employment with the
Company, he will receive certain sensitive, proprietary, trade secret and/or
confidential information about the Company. Executive agrees that his employment
creates a relationship of confidence and trust with the Company with respect to
such proprietary, trade secret and/or confidential information of the Company.
Executive further agrees to enter into the Company's Proprietary Information
Agreement ("Proprietary Information Agreement") attached as Exhibit A to this
Agreement. Executive further agrees that during his employment and at all times
after termination of his employment, Executive will keep in confidence and trust
all proprietary, trade secret and/or confidential information of the Company and
will not disclose such information without the written consent of the Company,
except as may be necessary in the ordinary course of performing Executive's
duties to the Company. Confidential information that later becomes available in
the public domain would be excluded from this provision. Executive further
agrees that, upon the termination of his employment with the Company, for any
reason, Executive will return to the Company all of the Company's property,
confidential information, and proprietary information provided to him during his
employment.
(b) In consideration of the covenants of the Company in this Agreement,
the receipt by Executive of proprietary, trade secret and/or confidential
information of the Company, and other good and valuable consideration, Executive
acknowledges and agrees as follows: At any time within one year after separation
of Executive's employment with the Company for any reason, Executive, without
the Company's written consent, will not himself personally, directly or
indirectly, alone or in the role of a partner, joint venturer, officer,
director, employee, consultant, agent or stockholder (other than a less than 5%
stockholder of a publicly traded Company) (i) knowingly engage in activity which
is in material, direct competition with the Company's business with the use of
the specific products, trade secrets, proprietary information, and/or services
of the Company, as existed at the Company at the date of termination; (ii)
knowingly solicit any of the Company's employees or customers (unless the
customers are generally known as customers in the market/business at issue),
(iii) solicit for hire or actively encourage employees or consultants to leave
the Company; and/or (iv) otherwise knowingly breach Executive's confidential
information obligations as set forth in his Proprietary Information Agreement
with the Company, which is attached as Exhibit A. Should Executive personally
engage in any conduct listed above, then: (1) Executive's stock options, to the
extent unexercised at that time, and notwithstanding any provision in this
Employment Agreement to the contrary, shall immediately terminate, cease to be
exercisable and expire effective with the date on which the Executive enters
into such activity, unless this stock option is terminated sooner for any other
reason, and all unvested shares held by Executive at that time by reason of
prior exercise of his stock options shall be subject to repurchase by the
Company at the option exercise price paid for those shares; (2) with respect to
any portion of Executive's stock options or related shares exercised or sold
during the period beginning one year prior to Executive's termination and ending
two years after Executive's termination, any gain represented by the Fair Market
Value on the date of exercise if the shares are still held, or on the date of
sale, over the exercise price multiplied by the number of shares Executive sold
or exercised, without regard to any subsequent market price increase or
decrease, shall be paid by Executive to the Company;
Page 8 of 18
ASF-Seccombe Employment Agreement
<PAGE>
(3) the Company will be relieved of any obligations to pay Executive his Base
Salary or Target Bonus or provide Executive and his covered dependents coverage
under the Company's insurance benefits plans effective the date Executive enters
into such activity. In the event that the Company believes that Executive is
engaged in conduct prohibited by this Paragraph 4(b), the Company agrees to
provide Executive notice of such belief, in writing, and provide Executive
thirty (30) days to respond. If Executive responds in writing within that thirty
(30) day period, the Company agrees to provide a written reply indicating the
course of action the Company intends to take in regard to Executive's alleged
conduct. The written reply by the Company shall be provided within thirty (30)
days from the date the Company receives Executive's written response. In the
event the Company and Executive are unable to reach an agreement on the course
of conduct between them, then such dispute shall be submitted to arbitration as
provided herein.
By accepting and executing this Agreement, Executive agrees and
acknowledges that the provisions of this section are reasonably necessary to
protect the Company's proprietary, trade secret and/or confidential information,
legitimate business interests and goodwill. Executive further agrees that the
restrictions as to duration, geographic area, and scope of activity in this
section are reasonably necessary for the protection of the Company's
proprietary, trade secret and/or confidential information, legitimate business
interests and goodwill and are not oppressive or injurious to the public
interest. Executive further agrees that if the scope of any of the restrictions
is too broad to permit enforcement to its full extent, then such restriction
shall be enforced to the maximum extent permitted by law, and the Executive
hereby agrees that such scope may be judicially modified accordingly in any
proceeding to enforce such restriction. The Company shall be entitled to
injunctive relief against Executive's activities in the event of a breach or
threatened breach of any of the provisions in this section to the extent allowed
by law.
5. Director and Officer Insurance.
------------------------------
Executive shall be entitled to the same rights of indemnification as
provided to all other executives, officers, and directors of the Company. To
that extent, the Company and Executive agree to enter into a written
indemnification agreement in the same form as all other senior executives of the
Company. If the Company files an initial public offering at any time during
Executive's employment with the Company, Director and Officer insurance will be
provided to Executive at that time.
6. Total Disability of Executive.
-----------------------------
Should Executive become permanently and totally disabled (as defined
in accordance with Internal Revenue Code Section 22(d)(3) or its successor
provision), then (i) Executive's stock options shall have their vesting
accelerated to the same extent as such options would have vested (based on
service-based vesting provisions solely and not on change of control vesting)
had Executive remained employed by the Company for an additional twenty-four
months, (ii) Executive shall receive a lump-sum payment equal to 100% of the sum
of his Base Salary plus Target Bonus, less applicable withholding, and (iii)
Executive and his covered dependents shall receive coverage under the Company's
health insurance benefit plans for a period of twenty-four months, with such
coverage to constitute the first twelve months of COBRA coverage, or, if and to
the extent ineligible under the terms of such plans, Executive
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ASF-Seccombe Employment Agreement
<PAGE>
shall receive an amount equal to the Company's costs of providing such benefits;
provided, however, Executive will be fully grossed-up by the Company for any
imputed income required to be recognized with respect to the payments made in
lieu of health insurance benefit plan coverage so that the economic effect to
Executive is the same as if these payments were provided to Executive on a non-
taxable basis.
7. Death of Executive.
------------------
If Executive dies while employed by the Company, then (i) Executive's
stock options shall have their vesting accelerated to the same extent as such
options would have vested (based on service-based vesting provisions solely and
not on change of control vesting) had Executive remained employed by the Company
for an additional twenty-four months, (ii) Executive's estate or designated
beneficiary shall receive a lump-sum payment equal to 100% of the sum of
Executive's Base Salary plus Target Bonus, less applicable withholding, and
(iii) Executive's covered dependents shall receive coverage under the Company's
health insurance benefit plans for a period of twelve months, with such coverage
to constitute the first twelve months of COBRA coverage, or, if and to the
extent ineligible under the terms of such plans, Executive's covered dependents
shall receive an amount equal to the Company's costs of providing such benefits;
provided, however, that Executive's covered dependents will be fully grossed-up
by the Company for any imputed income required to be recognized with respect to
the payments made in lieu of health insurance benefit plan coverage so that the
economic effect to them is the same as if these payments were provided to them
on a non-taxable basis.
8. Assignment.
----------
This Agreement shall be binding upon and inure to the benefit of (a)
the heirs, executors and legal representatives of Executive upon Executive's
death, and (b) any successor of the Company. Any such successor of the Company
shall be deemed substituted for the Company under the terms of this Agreement
for all purposes. As used herein, "successor" shall include any person, firm,
corporation or other business entity which at any time, whether by purchase,
merger or otherwise, directly or indirectly acquires all or substantially all of
the assets or business of the Company. None of the rights of Executive to
receive any form of compensation payable pursuant to this Agreement shall be
assignable or transferable except through a testamentary disposition or by the
laws of descent and distribution following termination without "Cause" or for
"Good Reason" (as defined in Paragraph 3(f) herein). Any attempted assignment,
transfer, conveyance or other disposition other than as aforesaid of any
interest in the rights of Executive to receive any form of compensation
hereunder shall be null and void.
9. Notices.
-------
All notices, requests, demands and other communications provided for
and/or required under this Agreement shall be in writing and shall be deemed
received (i) on the day of delivery if delivered personally, (ii) one day after
being sent by Federal Express or a similar commercial overnight service, or
(iii) three days after being mailed by registered or certified mail, return
receipt requested, prepaid and addressed to the Parties or their successors in
interest
Page 10 of 18
ASF-Seccombe Employment Agreement
<PAGE>
at the following addresses, or at such other addresses as the parties may
designate by written notice in the manner aforesaid:
If to the Company: Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, Texas 78759
Austin, Texas
Attention: VP Finance
If to Executive: To the address where the Company's central
records are maintained, as such address may
change from time to time, unless Executive
notifies the Company, in writing, of a different
address.
10. Severability.
------------
In the event that any provision or covenant hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision and the existence of such unenforceable provision shall not constitute
a defense to the enforcement of the remainder of this Agreement.
11. Indemnity.
---------
The Company will, to the extent and on the conditions stated in this
paragraph, indemnify Executive for damages in connection with a lawsuit brought
against Executive by a party other than the Company for theft or disclosure of
trade secrets or breach of a non-compete agreement or any other related claims,
such as unfair competition, to the extent that such claims relate to Executive's
acceptance of employment with, and employment thereafter by, the Company. The
Company will, in addition to such indemnity, undertake the defense of the
Executive against all alleged claims and be responsible for the legal fees
incurred in such defense. The Parties agree that the Company has not in any way
or manner requested, encouraged or induced Executive to breach any non-compete
agreements and/or confidentiality agreements or obligations that Executive has
with any other party and/or entity, or to use or disclose any trade secret,
confidential and/or proprietary information he received from any other party
and/or entity. In the event any such lawsuit is initiated, Executive shall
cooperate fully with the Company in the defense of the alleged claims against
Executive. If Executive is as a result of such lawsuit not permitted to work
with the Company, (either because the Company was unsuccessful in its defense,
chooses not to defend because of expense or any other reason), Executive is
entitled to recover severance (including payments and stock vesting) from the
Company as though he had been terminated without Cause and shall accordingly be
entitled to the severance, benefits, and vesting provided pursuant to Paragraph
3(d)(i) of this Agreement.
12. Other Agreements.
----------------
The Parties acknowledge and agree that the Company did not tortiously
interfere with any contract to which Executive was a party and that the Company
has not induced Executive to breach any contract. The Parties further
acknowledge and agree that throughout
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ASF-Seccombe Employment Agreement
<PAGE>
Executive's employment with the Company he will not disclose or use trade
secret, confidential and/or proprietary information acquired by Executive from
any other party and/or entity, and that the Company will not ask him or permit
him to disclose or use any trade secret, confidential and/or proprietary
information acquired by Executive from any other party and/or entity.
13. Entire Agreement.
----------------
This Agreement, the Stock Plan, the Employment-Based Stock Option
Agreements, the Promissory Note, the Pledge Agreement, the Proprietary
Information Agreement, constitute the entire agreement and understanding between
the Company and Executive concerning Executive's employment relationship with
the Company, and supersede and replace any and all prior or contemporaneous
verbal or written agreements and understandings concerning Executive's
employment relationship with the Company. This Agreement may only be modified by
a writing signed by all Parties to this Agreement.
14. Arbitration and Equitable Relief.
---------------------------------
(a) Except as provided otherwise herein, Executive agrees that any dispute
or controversy arising out of, relating to or in connection with this Agreement,
the interpretation, validity, construction, performance, breach or termination
of this Agreement, and/or the employment relationship between the Company and
Executive, shall be settled by arbitration to be held in Travis County, Texas,
pursuant to the Federal Arbitration Act and in accordance with the National
Rules for the Resolution of Employment Disputes then in effect of the American
Arbitration Association (the "Rules"). The Company agrees to reimburse the
reasonable and necessary travel and accommodation expenses incurred by Executive
in connection with any arbitration taking place under this Agreement. The
arbitrator may grant injunctions or other relief in such dispute or controversy.
The decision of the arbitrator shall be final, conclusive and binding on the
parties to the arbitration. Judgment may be entered on the arbitrator's decision
in any court having jurisdiction.
(b) The arbitrator shall apply Texas law to the merits of any dispute or
claim, without reference to rules of conflict of law. The arbitration
proceedings shall be governed by the Federal Arbitration Act, federal
arbitration law, and the Rules, without reference to state arbitration law.
Executive hereby expressly consents to the personal jurisdiction of the state
and federal courts located in Travis County, Texas for any action or proceeding
arising from or relating to this Agreement and/or relating to any arbitration in
which the parties are participants.
(c) The Company will pay the administrative costs of arbitration for both
Parties. The prevailing party in any arbitration pursuant to this agreement
shall be entitled to recover its costs and reasonable attorneys fees incurred in
the arbitration to the extent permitted by law. In the case of arbitration(s)
initiated by the Company only, the arbitrator must make an affirmative finding
that the Executive has engaged in an actual material breach of this Agreement in
order for the Company to be deemed the prevailing party for purposes of
recovering its reasonable attorneys' fees.
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<PAGE>
(d) In the event of any breach by the Company of this Agreement, Executive
shall not be required to mitigate his damages.
(e) Executive understands that nothing in this Agreement modifies
Executive's "at will" employment status. The employment relationship between
Executive and the Company may be terminated at any time, with or without cause,
at the option of either the Company or Executive pursuant to the terms of this
Agreement.
(f) The Parties agree neither party will intentionally delay the
arbitration procedures. Both parties will be ready to present their case to the
arbitrator within 6 months of the receipt of a written demand for arbitration.
The arbitrator shall schedule an arbitration hearing within 6 months of receipt
of the demand for arbitration and submit a written decision and award within 1
month of the completion of the arbitration hearing, and will determine whether
either party has unnecessarily delayed the procedure. If a party unnecessarily
delays the procedure, that party will accept the claims and or positions of the
other party.
(g) EXECUTIVE HAS READ AND UNDERSTANDS SECTION 15, WHICH DISCUSSES
ARBITRATION, EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION
WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,
BREACH, OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION
CLAUSE CONSTITUTES AN EXPRESS WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND
RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE
EMPLOYMENT RELATIONSHIP BETWEEN THE COMPANY AND EXECUTIVE, INCLUDING BUT NOT
LIMITED TO, THE FOLLOWING CLAIMS:
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH
OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH
AND FAIR DEALING, BOTH EXPRESS AND IMPLIED, NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL
MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR
PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL, STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL
RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE
FAMILY AND MEDICAL LEAVE ACT, THE FAIR LABOR STANDARDS ACT, THE TEXAS
COMMISSION ON HUMAN RIGHTS ACT, AND THE TEXAS LABOR CODE SECTION 21.001, ET
SEQ.)
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS
RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
Page 13 of 18
ASF-Seccombe Employment Agreement
<PAGE>
15. Legal Fee Reimbursement.
-----------------------
The Company agrees to pay Executive's reasonable legal fees associated
with entering into this Agreement upon receiving invoices for such services
within fourteen days of the Employment Commencement Date.
16. Titles Not Controlling.
----------------------
Paragraphs, titles or captions in this Agreement are used for
convenience or reference only and are not intended to and shall not in any way
enlarge, define, limit, extend or describe the rights or obligations of the
Parties or affect the meaning or construction of this Agreement or any provision
hereof.
17. No Oral Modification, Cancellation or Discharge.
-----------------------------------------------
This Agreement may only be modified, amended, canceled or discharged
in writing signed by Executive and the Company.
18. Withholding.
-----------
The Company shall be entitled to withhold, or cause to be withheld any
amount of applicable withholdings with respect to payments and/or compensation
to Executive in connection with this Agreement and Executive's employment with
the Company.
19. GOVERNING LAW.
-------------
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS.
20. Fax Signatures and Counterparts.
--------------------------------
This Agreement may be executed by facsimile signature and may be executed
in counterparts with each counterpart considered an original and all
counterparts taken together considered one complete and enforceable contract.
21. Effective Date.
----------------
This Agreement is effective as of the date set forth above.
22. Acknowledgment.
---------------
Executive agrees that he is not presently affected by a disability
which would prevent Executive from freely, knowingly and voluntarily
executing this Agreement. Executive acknowledges that he has had the
opportunity to review and revise this Agreement, has had sufficient time
to, and has carefully read and fully understands all the provisions of this
Agreement, and is knowingly and voluntarily entering into this Agreement.
Page 14 of 18
ASF-Seccombe Employment Agreement
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement on
the respective dates set forth below:
APPLIED SCIENCE FICTION, INC.
By: Mark Urdahl /s/ Mark Urdahl
-----------------------
Its: President & CEO____________________
/s/ Dana Seccombe
- ----------------------------------------
S. Dana Seccombe
Page 15 of 18
ASF-Seccombe Employment Agreement
<PAGE>
EXHIBIT 10.10
APPLIED SCIENCE FICTION, INC.
EMPLOYMENT AGREEMENT
This Agreement is made by and between Applied Science Fiction, Inc. (the
"Company"), and Jerome W. Johnson ("Executive") as of June 28, 1999.
1. Duties and Scope of Employment.
------------------------------
(a) Positions; Employment Commencement Date; Duties. Executive's
-----------------------------------------------
employment with the Company pursuant to this Agreement shall commence on June
28, 1999 (the "Employment Commencement Date"). As of the Employment Commencement
Date, the Company shall employ the Executive as the Executive Vice President
Worldwide Sales, Marketing, and Licensing, Operations of the Company. The period
of Executive's employment hereunder is referred to herein as the "Employment
Term." During the Employment Term, Executive shall render such business and
professional services in the performance of his duties, consistent with
Executive's position within the Company, as shall reasonably be assigned to him
by the Chief Executive Officer.
(b) The Employment Term is originally for a period of four years
from the Employment Commencement Date. The Employment Term will automatically be
extended an additional year at June 28, 2003 and all subsequent employment
commencement anniversary dates unless the Executive is notified in writing by
the Company of its intent not to extend the Employment Term and such occurs
prior to thirty (30) days from the end of the Employment Term as adjusted and
provided that the Executive is an employee of the Company. Notwithstanding the
foregoing, the Employment Term may be terminated at any time by either party in
accordance with provisions of Paragraph 3 and subject to any severance benefits
payable to Executive under Paragraph 4(d).
(c) Obligations. During the Employment Term, Executive shall devote
-----------
his full business efforts and time to the Company. Executive agrees, during the
Employment Term, not to actively engage in any other employment, occupation or
consulting activity for any direct or indirect remuneration without the prior
approval of the Chief Executive Officer; provided, however, that Executive may
serve in any capacity with any civic, educational or charitable organization, or
as a member of corporate Boards of Directors or committees thereof upon which
Executive currently serves without the approval of the Company.
2. Employee Benefits.
-----------------
(a) General. During the Employment Term, Executive shall be
-------
eligible to participate in the employee benefit plans maintained by the Company
that are applicable to other senior management to the full extent provided for
under those plans.
<PAGE>
(b) Relocation Expense Reimbursement. If Executive chooses to
--------------------------------
relocate his principal residence closer to the Company's offices, the Company
will reimburse Executive for the following reasonable costs:
(i) Transaction costs associated with buying Executive's
new residence (closing costs, inspections, title insurance, brokerage and
related fees, etc.).
(ii) Transaction costs associated with selling Executive's
old residence (closing costs, inspections, title insurance, brokerage and
related fees, etc.).
(iii) Moving household furnishings and personal effects.
(iv) Temporary living expenses.
Executive will be fully grossed-up by the Company for any imputed income
required to be recognized with respect to this reimbursement so that the
economic effect to Executive, after taking into account any tax deductions
available to Executive, is the same as if this reimbursement was provided to
Executive on a non-taxable basis.
(c) Within 10 days of the Employment Commencement Date the Company
will pay the Executive a $50,000 Decision Bonus, less applicable withholding.
(d) Within 10 days of the Employment Commencement date the Company
will loan the Executive $50,000. The loan will be due at the earlier of
Executive's termination of employment with the Company or the end of the
original Employment Term and will be subject to an annual compounded interest
rate of 5.37%. In the event the Executive fails to make payment when due, the
Company will have all the rights of a creditor, including (without limitation)
the rights and remedies provided under the Uniform Commercial Code.
(e) The Executive will accrue 160 hours of vacation per annum. The
Executive may accumulate a maximum of 200 vacation hours. Vacation will not
accrue after the 200-hour vacation limit has been reached.
If the Executive's employment with the company is involuntarily terminated
by the Company for "Cause" (as defined below) or voluntarily terminated by the
Executive for other than "Good Reason" (as defined below) within one year from
the Employment Commencement Date, then the Executive will reimburse the Company
for the Relocation Expenses and Decision Bonus, including any applicable Company
payroll withholding taxes and any employee taxes paid for by the Company related
to the Relocation Expenses and Decision Bonus. In the event the Executive fails
to reimburse the Company when due, the Company will have all the rights of a
creditor, including (without limitation) the rights and remedies under the
Uniform Commercial Code.
-2-
<PAGE>
3. At-Will Employment. Executive and the Company understand and
------------------
acknowledge that Executive's employment with the Company constitutes "at-will"
employment. Subject to the Company providing severance benefits as specified
herein, Executive and the Company acknowledge that this employment relationship
may be terminated at any time, upon written notice to the other party, with or
without good cause or for any or no cause, at the option either of the Company
or Executive.
4. Compensation.
------------
(a) Base Salary. While employed by the Company, the Company
-----------
shall pay the Executive as compensation for his services a base salary at the
annualized rate of $250,000. (the "Base Salary"). The Compensation Committee of
the Board shall review the Base Salary at least annually, and after such review
may increase, but not decrease, the Base Salary. The Base Salary shall be paid
periodically in accordance with normal Company payroll practices and subject to
the usual, required withholding.
(b) Bonuses. Executive shall receive a bonus on account of the
-------
Company's 1999 fiscal year equal to 40% of the Base Salary paid to Executive in
1999 pro-rated based on the number of days the Executive will be employed at the
Company at December 31, 1999. In subsequent fiscal years, Executive shall be
eligible for a target bonus equal to 40% of Base Salary for the fiscal year (the
"Target Bonus") (with a greater payment based on achievement in excess of the
target milestones) based upon performance criteria approved by the Compensation
Committee of the Board of Directors or the Chief Executive Officer; provided,
however, that the payment of any such annual bonus shall be subject to
Executive's employment with the Company at May 31 of the fiscal year to which
that bonus relates, and such payment will be pro-rated based on the number of
days of such fiscal year the Executive was employed at the Company at the date
the Executive's employment with the Company is voluntarily terminated. If the
Executive's employment with the Company is involuntarily terminated with "Cause"
(as defined below), then the Executive is not eligible for payment of any such
bonuses (the employment requirement is further subject to the severance, death
and disability provisions hereof).
(c) Equity Compensation.
-------------------
(i) Employment-Based Vesting Stock Option. Executive
-------------------------------------
shall receive a stock option, which shall be, to the extent possible under the
$100,000 rule of Section 422(d) of the Internal Revenue Code of 1986, as amended
(the "Code") an "incentive stock option" (as defined in Section 422 of the Code)
to purchase a total of 216,500 shares of Company common stock with a per share
exercise price of $1.55 (the "Employment-Based Stock Option"). The Employment-
Based Stock Option shall be for a term of ten years (or shorter upon termination
of employment with the Company) and, subject to accelerated vesting as set forth
elsewhere herein, shall be vested with respect to 54,125 shares as of the first
anniversary of the Employment Commencement Date and shall thereafter vest at the
rate of 4,511 shares per month at each of the following 36 monthly anniversary
dates so as to be 100% vested on the fourth year anniversary thereof,
conditioned upon Executive's continued employment or consulting relationship
with the Company as of each vesting
-3-
<PAGE>
date. Except as specified otherwise herein, this option grant is in all respects
subject to the terms, definitions and provisions of the Company's 1995 Stock
Option/Stock Issuance Plan (the "Stock Plan") and the standard form of stock
option agreement thereunder to be entered into by and between Executive and the
Company (the "Employment-Based Option Agreement"), both of which documents are
incorporated herein by reference. The foregoing stock option grant does not
preclude any future stock option grants by the Company to the Executive.
(ii) Subsequent Awards. During the Employment Term, Executive
-----------------
shall be eligible to receive annual stock and stock option grants, as determined
by the Board's compensation committee.
(d) Severance.
---------
(i) Prior to the Company Entering Into a Written Agreement
------------------------------------------------------
Resulting in a Change of Control. In the period prior to the Company entering
- --------------------------------
into a written agreement resulting in a "Change of Control" (as defined below),
Executive's employment with the Company is involuntarily terminated by the
Company without "Cause" or is voluntarily terminated by Exeuctive for "Good
Reason" (both as defined below), then the Company shall pay or provide to the
Executive as liquidated damages (i) Executive's then unvested stock options
shall have their vesting immediately accelerated to the same extent as such
stock options would have vested (based on service-based vesting provisions
solely and not on change of control vesting) had Executive remained employed by
the Company for an additional six months and Executive's then remaining unvested
stock options shall continue vesting over the twelve months following such
termination to the same extent such options would have vested (based on Service
Based vesting provisions solely and not on change of control vesting) had
Executive remained employed by the Company for those twelve months (ii)
Executive's stock options shall have their post-termination exercisability
provisions automatically extended by eighteen months but not beyond the
expiration date of the ten-year term, (iii) Executive shall receive a lump-sum
payment equal to 50% of the sum of his Base Salary, less applicable withholding,
promptly following such termination of employment, and shall receive 100% of his
Base Salary plus Target Bonus over the twelve months following such termination
as if the Executive had remained employed by the Company, and (iv) Executive and
his covered dependents shall receive coverage under the Company's health and
other welfare benefit plans for a period of six months, with such coverage to
constitute the first six months of COBRA coverage, or, if and to the extent
ineligible under the terms of such plans, Executive shall receive an amount
equal to the Company's costs of providing such benefits; provided, however, that
Executive will be fully grossed-up by the Company for any imputed income
required to be recognized with respect to the payments made in lieu of welfare
benefit plan coverage so that the economic effect to Executive is the same as if
these payments were provided to Executive on a non-taxable basis.
(ii) Following a Written Agreement Resulting in a Change of Control. In
--------------------------------------------------------------
the event that, on or within 18 months after a written agreement resulting in a
Change of Control (as defined below), Executive's employment with the Company is
involuntarily terminated by the Company without "Cause" or is voluntarily
terminated by Executive for "Good Reason" (both as defined below), then the
Company shall pay or provide to the Executive as liquidated damages (i)
Executive's stock
-4-
<PAGE>
options shall have their vesting 100% accelerated, (ii) Executive's stock
options shall have their post-termination exercisability provisions
automatically extended by twenty-four months, but not beyond the expiration date
of the ten-year term, (iii) Executive shall receive a lump-sum payment equal to
200% of the sum of his Base Salary plus Target Bonus, less applicable
withholding, promptly following such termination of employment, and (iv)
Executive and his covered dependents shall receive coverage under the Company's
health and other welfare benefit plans for a period of six months, with such
coverage to constitute the first six months of COBRA coverage, or, if and to the
extent ineligible under the terms of such plans, Executive shall receive an
amount equal to the Company's costs of providing such benefits; provided,
however, that Executive will be fully grossed-up by the Company for any imputed
income required to be recognized with respect to the payments made in lieu of
welfare benefit plan coverage so that the economic effect to Executive is the
same as if these payments were provided to Executive on a non-taxable basis.
(iii) No benefits shall be payable under this Paragraph 4(d) or Paragraph
5 unless Executive first delivers a general release to the Company releasing the
Company from any and all claims or claims of action the Executive may have
against the Company in connection with the Executive's employment or termination
of employment, other than any claims relating to the benefits which may become
payable to him under this Paragraph 4(d) or Paragraph 5.
(iv) If at any time within one year after termination for any reason, the
Executive, without the Company's written consent, directly or indirectly, alone
or as a partner, joint venture, officer, director, employee, consultant, agent
or stockholder (other than a less than 5% stockholder of a publicly traded
company) (i) knowingly engage in any activity which is in competition with the
business, the products or services of the Company, as existed at the Company at
the date of termination (ii) knowingly solicit any of the Company's employees or
customers, (iii) knowingly hire any of the Company's employees or consultants in
an unlawful manner or actively encourage employees or consultants to leave the
Company, or (iv) otherwise knowingly breach the Executive's confidential
information obligations, then (1) this stock option, to the extent unexercised,
and notwithstanding any provision in this Employment Agreement to the contrary,
shall immediately terminate, cease to be exercisable and expire effective the
date on which the Executive enters into such activity, unless this stock option
is terminated sooner for any other reason, and (2) with respect to any portion
of this stock option or related shares exercised or sold during the period
beginning one year prior to the Executive's termination and ending two years
after the Executive's termination, any gain represented by the Fair Market Value
on the date of sale (or on the date of exercise if the shares are still held)
over the exercise price multiplied by the number of shares the Executive sold or
exercised, without regard to any subsequent market price increase or decrease,
shall be paid by the Executive to the Company, and (3) the Company will be
relieved of its obligations to pay the Executive his Base Salary or Target Bonus
or provide the Executive and his covered dependents coverage under the Company's
health and other welfare benefit plans effective the date the Executive enters
into such activity.
By accepting and executing this Employment Agreement the Executive agrees
and acknowledges that the provisions of this section are reasonably necessary to
protect the Company's confidential information, legitimate business interests
and goodwill. The Executive further agrees
-5-
<PAGE>
that the scope of the restrictions as to time, geographic area, and scope of
activity in this section are reasonably necessary for the protection of the
Company's confidential information and legitimate business interest and are not
oppressive or injurious to the public interest. The Company shall be entitled to
injunctive relief against the Executive activities in the event of a breach or
threatened breach of any of the provisions in this section to the extent allowed
by law.
For the purposes of this Agreement, "Cause" means fraud or intentional
misconduct, which is materially harmful to the Company. For the purposes of this
Agreement, "Good Reason" means (i) a reduction in Executive's Base Salary,
Target Bonus or benefits, or (ii) a significant reduction in title, authority,
status, obligations or responsibilities consistent with Executive's experience
and expertise (Executive is expected to be proactive in supporting overall
Company goals), (iii) the requirement that Executive relocate more than thirty
(30) miles from the current Company headquarters, or (iv) if such employment is
deemed to put Executive in violation of his "non-compete" conflict of interest
agreement with Eastman Kodak.
For the purposes of this Agreement, "Change of Control" is defined as:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner"
(as defined in Rule 13d-3 under said Act), directly or indirectly, of securities
of the Company representing fifty percent (50%) or more of the total voting
power represented by the Company's then outstanding voting securities; or
(b) The consummation of a merger or consolidation of the Company with
any other corporation, other than a merger or 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 fifty percent (50%) 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
(c) the consummation of the sale or disposition by the Company of all
or substantially all the Company's assets.
5. The Executive shall have a 30 day period commencing twelve months after
a written agreement resulting in a Change of Control whereby the Executive's
employment with the Company may be voluntarily terminated by the Executive for
any and all reasons. If the Executive's employment with the Company is
voluntarily terminated by the Executive during this 30 day period, the then
unvested portion of the Executive's stock options shall have their vesting 50%
accelerated, and no other severance benefits shall be payable to Executive under
this Agreement.
6. Golden Parachute Excise Tax. In the event that the benefits provided
---------------------------
for in this Agreement or otherwise payable to the Executive constitute
"parachute payments" within the meaning of Section 280G of the Code and will be
subject to the excise tax imposed by Section 4999 of the Code, then the
Executive shall receive (i) a payment from the Company sufficient to pay such
excise tax, and (ii) an additional payment from the Company sufficient to pay
the excise tax and
-6-
<PAGE>
federal and state income taxes arising from the payments made by the Company to
Executive pursuant to this sentence (together, the "Full Gross-Up Amount");
provided, however, that the total amount of the payment to Executive under this
Section 6 shall not exceed $100,000. The determination of Executive's excise tax
liability and the amount, if any, required to be paid under this Section 6 shall
be made in writing by the Company's independent auditors (the "Accountants").
For purposes of making the calculations required by this Section 6, the
Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Sections 280G and 4999 of the Code. The Company
and the Executive shall furnish to the Accountants such information and
documents as the Accountants may reasonably request in order to make a
determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 6.
7. Total Disability of Executive. Upon Executive's becoming
-----------------------------
permanently and totally disabled (as defined in accordance with Internal Revenue
Code Section 22(e)(3) or its successor provision) during the term of this
Agreement, then (i) Executive's stock options shall have their vesting
accelerated to the same extent as such options would have vested (based on
service-based vesting provisions solely and not on change of control vesting)
had Executive remained employed by the Company for an additional twelve (12)
months, (ii) Executive shall receive a lump-sum payment equal to 100% of the sum
of his Base Salary plus Target Bonus, less applicable withholding, and (iii)
Executive and his covered dependents shall receive coverage under the Company's
health and other welfare benefit plans for a period of twelve (12) months, with
such coverage to constitute the first twelve months of COBRA coverage, or, if
and to the extent ineligible under the terms of such plans, Executive shall
receive an amount equal to the Company's costs of providing such benefits;
provided, however, that Executive will be fully grossed-up by the Company for
any imputed income required to be recognized with respect to the payments made
in lieu of welfare benefit plan coverage so that the economic effect to
Executive is the same as if these payments were provided to Executive on a non-
taxable basis.
8. Death of Executive. If Executive dies while employed by the
-------------------
Company pursuant to this Agreement, then (i) Executive's stock options shall
have their vesting accelerated to the same extent as such options would have
vested (based on service-based vesting provisions solely and not on change of
control vesting) had Executive remained employed by the Company for an
additional twelve (12) months, (ii) Executive's estate or designated beneficiary
shall receive a lump-sum payment equal to 100% of the sum of his Base Salary
plus Target Bonus, less applicable withholding, and (iii) Executive's covered
dependents shall receive coverage under the Company's health and other welfare
benefit plans for a period of twelve (12) months, with such coverage to
constitute the first twelve months of COBRA coverage, or, if and to the extent
ineligible under the terms of such plans, Executive's covered dependents shall
receive an amount equal to the Company's costs of providing such benefits;
provided, however, that Executive's covered dependents will be fully grossed-up
by the Company for any imputed income required to be recognized with respect to
-7-
<PAGE>
the payments made in lieu of welfare benefit plan coverage so that the economic
effect to them is the same as if these payments were provided to them on a non-
taxable basis.
9. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of (a) the heirs, executors and legal representatives of Executive upon
Executive's death and (b) any successor of the Company. Any such successor of
the Company shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" shall include any
person, firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires all or
substantially all of the assets or business of the Company. None of the rights
of Executive to receive any form of compensation payable pursuant to this
Agreement shall be assignable or transferable except through a testamentary
disposition or by the laws of descent and distribution upon the death of
Executive following termination without cause. Any attempted assignment,
transfer, conveyance or other disposition (other than as aforesaid) of any
interest in the rights of Executive to receive any form of compensation
hereunder shall be null and void.
10. Notices. All notices, requests, demands and other communications
-------
called for hereunder shall be in writing and shall be deemed given if (i)
delivered personally, (ii) one (1) day after being sent by Federal Express or a
similar commercial overnight service, or (iii) three (3) days after being mailed
by registered or certified mail, return receipt requested, prepaid and addressed
to the parties or their successors in interest at the following addresses, or at
such other addresses as the parties may designate by written notice in the
manner aforesaid:
If to the Company: Applied Science Fiction, Inc.
8920 Business Park Drive
Austin, Texas 78759
Attn: VP Finance
----
If to Executive: ___________________________
at the last residential address known by the
Company.
11. Severability. In the event that any provision hereof becomes or
------------
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
12. Proprietary Information Agreement. Executive agrees to enter into the
---------------------------------
Company's standard Proprietary Information Agreement (the "Proprietary
Information Agreement") upon commencing employment hereunder.
13. Entire Agreement. This Agreement, the Stock Plan, the Employment-Based
----------------
Option Agreement and the Proprietary Information Agreement represent the entire
agreement and understanding between the Company and Executive concerning
Executive's employment relationship with the Company, and supersede and replace
-8-
<PAGE>
any and all prior agreements and understandings concerning Executive's
employment relationship with the Company.
14. Arbitration and Equitable Relief.
--------------------------------
(a) Except as provided in Section 14(d) below, Executive agrees that
any dispute or controversy arising out of, relating to, or in connection with
this Agreement, or the interpretation, validity, construction, performance,
breach, or termination thereof shall be settled by arbitration to be held in
Travis County, Texas, in accordance with the National Rules for the Resolution
of Employment Disputes then in effect of the American Arbitration Association
(the "Rules"). The arbitrator may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court having jurisdiction.
(b) The arbitrator shall apply Texas law to the merits of any dispute
or claim, without reference to rules of conflict of law. The arbitration
proceedings shall be governed by federal arbitration law and by the Rules,
without reference to state arbitration law. Executive hereby expressly consents
to the personal jurisdiction of the state and federal courts located in Texas
for any action or proceeding arising from or relating to this Agreement and/or
relating to any arbitration in which the parties are participants.
(c) The Company and Executive shall each pay one-half of the costs
and expenses of such arbitration, and shall separately pay its counsel fees and
expenses.
(d) Executive understands that nothing in Section 14 modifies
Executive's at-will status. Either the Company or Executive can terminate the
employment relationship at any time, with or without cause.
(e) EXECUTIVE HAS READ AND UNDERSTANDS SECTION 14, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION
WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,
BREACH, OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION
CLAUSE CONSTITUTES A WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO
THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EXECUTIVE
RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD
FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION;
NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC
ADVANTAGE; AND DEFAMATION.
-9-
<PAGE>
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS
ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT
ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR
STANDARDS ACT, THE TEXAS COMMISSION ON HUMAN RIGHTS ACT, AND TEXAS LABOR CODE
SECTION 21, et seq;]
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
15. Financial Consulting Fee Reimbursement. The Company agrees to pay
--------------------------------------
Executive's reasonable financial consulting fees associated with entering into
this Agreement upon receiving invoices for such services.
16. No Oral Modification, Cancellation or Discharge. This Agreement may
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only be amended, canceled or discharged in writing signed by Executive and the
Company.
17. Withholding. The Company shall be entitled to withhold, or cause to
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be withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
18. Governing Law. This Agreement shall be governed by the laws of the
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State of Texas.
19. Effective Date. This Agreement is effective June 28, 1999.
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20. Acknowledgment. Executive acknowledges that he has had the opportunity
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to discuss this matter with and obtain advice from his private attorney, has had
sufficient time to, and has carefully read and fully understands all the
provisions of this Agreement, and is knowingly and voluntarily entering into
this Agreement.
-10-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below:
APPLIED SCIENCE FICTION, INC.
By: [ILLEGIBLE]
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Its: PRESIDENT
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EXECUTIVE
/s/ Jerome W. Johnson
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<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 (except as to the 4th paragraph of Note
9 as to which the date is ______), in Amendment No. 1 to the Registration
Statement (Form S-1) and related Prospectus of Applied Science Fiction, Inc. for
the registration of its common stock.
Ernst & Young LLP
Austin, Texas
The foregoing consent is in the form that will be signed upon the completion of
the 1.309 for one forward split for all common shares in the form of a stock
dividend payable upon the effectiveness of the Company's Initial Public Offering
as described in Note 9 to the consolidated financial statements.
Austin, Texas /s/ Ernst & Young LLP
March 24, 2000
