<PAGE>
As filed with the Securities and Exchange Commission on June 17, 1999
Registration No. 333-77269
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 2
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
RAVISENT TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7372 23-2763854
(State or other
jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>
One Great Valley Parkway, Malvern, Pennsylvania 19355, (800) 700-0362
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
---------------
Mr. Francis E.J. Wilde III
Chief Executive Officer and President
RAVISENT Technologies Inc.
One Great Valley Parkway, Malvern, Pennsylvania 19355, (800) 700-0362
(Name address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Warren T. Lazarow, Esq.
David A. Makarechian, Esq.
Jonathan G. Shapiro, Esq. Gregory C. Smith, Esq.
Alan K. Tse, Esq. Michael J. Cordero, Esq.
Brian E. Covotta, Esq. Spencer G. Park, Esq.
BROBECK, PHLEGER & HARRISON LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
Two Embarcadero Place 525 University Ave.
2200 Geng Road Suite 220
Palo Alto, California 94303 Palo Alto, California 94301
(650) 424-0160 (650) 470-4500
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
---------------
If 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 (the "Securities Act"), 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. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 17, 1999
PRELIMINARY PROSPECTUS
5,000,000 Shares
[RAVISENT TECHNOLOGIES INC. LOGO]
Common Stock
-----------
We are offering 5,000,000 shares of our common stock. This is our initial
public offering.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "RVST." We estimate that the initial public offering price will be
between $11.00 and $13.00 per share.
See "Risk Factors" beginning on page 9 to read about risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
------ ------
<S> <C> <C>
Public offering price............................................ $ $
Underwriting discounts and commissions........................... $ $
Proceeds, before expenses, to us................................. $ $
</TABLE>
-----------
The underwriters may purchase up to an additional 750,000 shares of common
stock from us at the initial public offering price less the underwriting
discount, solely to cover over-allotments.
The underwriters expect to deliver the shares in New York, New York on or about
July , 1999.
-----------
Bear, Stearns & Co. Inc.
SG Cowen
Volpe Brown Whelan & Company
The date of this prospectus is June , 1999.
<PAGE>
(Inside Front Cover)
An enlarged copy of the RAVISENT logo centered on the page, which consists
of the word "RAVISEnT(TM)" in capital letters except for the letter "n," with a
wave running through the lower half of each of the letters and below and
towards the right of which appears the word "TECHNOLOGIES" in capital letters.
Underneath the logo are the words "What the digital world watches." On the
bottom of the page is the address and telephone number of RAVISENT's
headquarters.
<PAGE>
(Gatefold)
A two page graphic across both pages of the gatefold. Across the top is the
statement "RAVISENT(TM) Brings It All Home." Underneath is a picture of a two
story house with shuttered windows surrounded by trees and a lawn. On the left
side of the house are the words "What do we do? We develop the digital audio
and video technologies inside the products you use every day. Whether it's
playing a new DVD, watching HDTV, recording your favorite TV program, or
sending a video of Sally's dance recital over the Internet. Our customers are
the manufacturers of your favorite name-brand personal computer and consumer
electronics products." On the right side of the picture are the words "Compaq,
Dell, Fountain, Fujitsu, Gateway, Hewlett-Packard, Micron, Packard-Bell NEC,
Tottori-Sanyo, Yamaha and others rely on us to make sure you can just sit back
and enjoy. Who are we? We're the people who bring the digital world home."
Centered below this text is the word "RAVISENT.(TM)" Lines are drawn from five
of the windows and the roof to pictures appearing below the house and blocks of
text appearing below these pictures.
The first window shows a line to a television set, below which appears the
text "Turning the average PC into a state-of-the-art digital VCR can become a
reality with our emerging digital video and audio encoding software
technologies." The second window shows a line to a camcorder, below which
appears the text "With our CineMaster(TM) RT Encoder software, camcorder video
can be digitized, viewed, stored and copied on a PC; and sent over the Internet
to family and friends." The third window shows a line to a personal computer,
below which appears the text "Award-winning CineMaster(TM) products bring the
theater-quality experience of DVD technology to millions of homes on personal
computers from the world's leading manufacturers." The fourth window shows a
line to a DVD player, below which appears the text "Our state-of-the-art
digital audio and video software powers brand name DVD players and other
consumer electronics appliances driving the digital home theater revolution."
The fifth window shows a line to a projection television set, below which
appears the text "Already demonstrating High Definition Television on personal
computers, we are developing the technologies that will make HDTV a cost-
effective reality in 1999." A line also runs from the roof to a satellite dish,
below which appears the text "We are demonstrating live satellite TV on a
personal computer, and we are adding full DBS viewing and recording
capabilities to our CineMaster(TM) family of software solutions."
<PAGE>
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our consolidated financial
statements and the notes thereto before making an investment decision.
RAVISENT Technologies Inc.
We design, develop, license and market innovative modular software solutions
that enable digital video and audio stream management in personal computer
systems and consumer electronics devices. We also license supporting hardware
designs to selected customers and provide customization services and customer
support. "Stream management" includes recording, playback and other
manipulation of a video or audio input or "stream." Our solutions enable
decoding (playback) and encoding (recording) of multimedia formats such as
digital versatile disk, or DVD; direct broadcast satellite, or DBS, or its
European counterpart, digital video broadcasting or DVB; and high definition
television, or HDTV, on existing personal computer and consumer electronics
platforms. Our digital solutions incorporate industry standards such as MPEG-1
MPEG-2 and Dolby Digital, for video and audio compression, the process of
storing video or audio content in digital form, while using the same powerful,
easily customizable and modular software architecture and remaining independent
of operating systems and silicon components. As digital technology continues to
evolve and standards change, we can add new modules to our software to provide
additional functionality without needing to alter existing core components of
our digital solution. Moreover, our modular approach provides our customers
with enhanced flexibility and adaptability that enables the rapid introduction
of new products to market. We intend to leverage the flexibility of our
products to capitalize on the shift from analog to digital content across the
media and entertainment industries.
Our products focus on two important markets, the personal computer market
and the consumer electronics market. Our products incorporate a common or
"core" high-performance software code across multiple applications in each
market. This allows personal computer and consumer electronics manufacturers to
achieve faster time-to-market, to cross-market their product offerings, to
develop a customizable, consistent look and feel across product lines and to
reduce technical support costs. Personal computer and peripherals manufacturers
currently shipping products that incorporate our technology include ATI
Technologies Inc., Compaq Computer Corporation, Dell Computer Corporation,
Fountain Technologies, Inc., Fujitsu Microelectronics, Inc., Gateway
2000, Inc., Hewlett-Packard Company, Micron Electronics, Inc. and Packard Bell
NEC Europe. Consumer electronics manufacturers that have agreed to incorporate
our technology include Tottori-Sanyo Electric Co., Ltd. (a subsidiary of Sanyo
Electronics Corporation, Inc.) and Yamaha Corporation of America. We also have
strategic relationships with ATI Technologies, Dolby Laboratories, Inc., Intel
Corporation and STMicroelectronics (formerly SGS-Thomson Microelectronics).
Consumers are increasingly demanding capabilities that analog technology
cannot provide. Meanwhile, digital formats have emerged that provide higher
image resolution and quality, the opportunity to deliver a wide range of new
services and content, more efficient use of limited transmission spectrum and
the ability to deliver customized and interactive services. As a result, a
growing number of consumer electronics manufacturers are using digital
technologies in their video and audio devices. Government regulation and the
expanding digital content market have accelerated this trend. As a result, all
existing television sets, video cassette recorders, stereos, set-top boxes and
personal computers are now candidates for upgrade to digital
technologies. In order to capitalize on upgrade cycles for existing products
and enter new markets, personal computer and consumer electronics manufacturers
are seeking digital product solutions that permit rapid time-to-market and
incorporate the latest features and functionality.
3
<PAGE>
Our strategy is to be the leading global provider of digital video and audio
solutions to personal computer and consumer electronics manufacturers. We
believe that the most effective way to achieve our strategy is to license our
technology to manufacturers that will in turn use our solutions to penetrate
very large personal computer and consumer electronics markets. The key elements
of our strategy include growing our licensing business model among top tier
personal computer and consumer electronics manufacturers, extending our
technological leadership, leveraging our technology and expertise into new
markets and focusing on our strategic relationships.
We currently offer two complete solutions for DVD playback on personal
computers. These solutions are incorporated into the products of seven of the
top ten personal computer manufacturers, based on total unit sales. These
include Software CineMaster 98, a software-only solution, and Hardware
CineMaster 98, a software solution with a supporting hardware platform design.
We also offer CineMaster CE, a software solution with multiple supporting
hardware platform designs that enables DVD playback across a variety of
consumer electronics products. CineMaster CE was introduced in late 1998 and we
have already signed agreements with Sanyo Electronics and Yamaha to license
this solution. In addition, we are developing a software-only DVD encoding
solution that enables the recording of video and audio streams in the DVD
format, a software solution that enables digital television viewing on a
consumer electronics device and a software solution that enables the viewing of
digital cable television streams using a personal computer or digital cable
set-top device. We receive a per unit license fee from personal computer and
consumer electronics devices manufacturers that incorporate our technology in
addition to any license fees we may receive from manufacturers of
semiconductors used in these devices.
----------------
We were incorporated in Pennsylvania in April 1994 as Quadrant Sales
International, Inc. and changed our name to Quadrant International, Inc. in May
1994, to Divicore Inc. in May 1999 and to RAVISENT Technologies Inc. in June
1999. We are planning to reincorporate in Delaware prior to the consummation of
the offering.
----------------
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered............................... 5,000,000 shares
Common stock to be outstanding after the offering.. 15,488,322 shares
Use of proceeds.................................... For general corporate
purposes, including
working capital, product
development, capital
expenditures and possible
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol............. RVST
</TABLE>
The common stock outstanding after this offering is based on the number of
shares outstanding at March 31, 1999 and includes:
. 920,006 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $0.66 per share to be
exercised upon consummation of the offering;
. 1,659,251 shares of common stock issuable upon the exercise of warrants
at a weighted average exercise price of $0.36 per share which will
remain outstanding following this offering; and
. 675,152 shares of common stock issuable upon conversion of preferred
stock issued subsequent to March 31, 1999.
The common stock outstanding after this offering excludes:
. 2,252,528 shares of common stock issuable upon exercise of stock options
outstanding on March 31, 1999 at a weighted average exercise price of
$1.86 per share;
. 481,555 shares of common stock issuable upon exercise of stock options
granted subsequent to March 31, 1999 at an exercise price of $10.20 per
share;
. 2,725,000 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan which incorporates our 1995 Stock Option Plan; and
. 500,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.
See "Capitalization," "Management--Benefit Plans," "Description of Capital
Stock" and Notes 12 and 19 of the notes to our consolidated financial
statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the year ended December
31, 1998 include the operations of Viona Development Hard & Software
Engineering GmbH from April 1998, the date of acquisition by RAVISENT.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License and services
..................... $ 825 $ 1,445 $ 3,447 $ 10 $ 2,290
Hardware ............. 3,370 5,376 26,841 3,133 8,522
--------- --------- --------- --------- ---------
Total revenues.......... 4,195 6,821 30,288 3,143 10,812
Cost of revenues:
License and services.. 472 331 354 15 135
Hardware.............. 2,664 8,072 24,192 3,062 7,264
--------- --------- --------- --------- ---------
Total cost of revenues.. 3,136 8,403 24,546 3,077 7,399
--------- --------- --------- --------- ---------
Gross profit............ 1,059 (1,582) 5,742 66 3,413
Operating loss.......... (1,950) (7,772) (12,961) (1,417) (265)
--------- --------- --------- --------- ---------
Net loss.............. $ (2,055) $ (7,253) $ (13,683) $ (1,544) $ (310)
========= ========= ========= ========= =========
Basic and diluted net
loss per common
share................ $ (1.19) $ (3.52) $ (4.94) $ (0.73) $ (0.18)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in per
common share
calculation............ 1,720,922 2,060,668 2,920,677 2,103,654 3,320,851
Pro forma basic and
diluted net loss per
common share........... $ (1.19) $ (3.52) $ (2.60) $ (0.73) $ (0.08)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in
pro forma per common
share calculation...... 1,720,922 2,060,668 5,547,260 2,103,654 7,233,923
</TABLE>
The weighted average shares outstanding used in the pro forma per common
share calculation reflects the conversion of all outstanding preferred stock
into common stock as though it occurred on the date of issuance and excludes:
. 920,006 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $0.66 per share to be
exercised upon consummation of the offering;
. 1,659,251 shares of common stock issuable upon the exercise of warrants
at a weighted average exercise price of $0.36 per share which will
remain outstanding following this offering; and
. 675,152 shares of common stock issuable upon conversion of preferred
stock issued subsequent to March 31, 1999.
6
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 2,175 $ 5,898 $60,198
Working capital (deficit)..................... (489) 3,234 57,534
Total assets.................................. 14,511 19,950 74,250
Debt and capital lease obligations, less
current portion.............................. 977 352 352
Mandatory redeemable convertible preferred
stock........................................ 14,871 -- --
Total stockholders' equity (deficit).......... (12,779) 8,156 62,456
</TABLE>
The balance sheet data set forth above is shown:
. on an actual basis;
. on a pro forma basis to give effect to:
. the conversion of all outstanding shares of preferred stock into
common stock;
. the exercise of outstanding warrants to purchase 920,006 shares of
common stock at an exercise price of $0.66 per share upon the
consummation of this offering;
. the exercise of outstanding warrants to purchase 1,659,251 shares of
common stock at a weighted average exercise price of $0.36 per share;
and
. the issuance of 675,152 shares of preferred stock subsequent to March
31, 1999 and the conversion of such shares into common stock; and
. on a pro forma, as adjusted basis to give effect to the sale of the
shares of common stock by us at an assumed initial public offering price
of $12.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses.
----------------
Except as set forth in the consolidated financial statements or as otherwise
specified in this prospectus, all information in this prospectus assumes:
.a one-for-six reverse split of the outstanding shares of common stock;
.the conversion of all of our outstanding preferred stock into common
stock;
.the exercise of all of our outstanding warrants to purchase common stock
and preferred stock;
.our reincorporation in Delaware; and
.no exercise of the underwriters' over-allotment option.
7
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:
. implementing our business strategy;
. obtaining and expanding market acceptance of the products we offer;
. meeting our requirements with our customers;
. forecasts of digital video penetration in the personal computer and
consumer electronics industries;
. competition in the digital video and audio stream management market;
and
. the existence and timing of any consumer shift from analog-based to
digital-based products and the corresponding development of the
digital media market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations
and assumptions and are subject to a number of risks and uncertainties. Actual
results and events may vary significantly from those discussed in the forward-
looking statements. A description of certain risks that could cause our results
to vary appears under the caption "Risk Factors" and elsewhere in this
prospectus. These forward-looking statements are made as of the date of this
prospectus, and we assume no obligation to update them or to explain the
reasons why actual results may differ. In light of these assumptions, risks and
uncertainties, the forward-looking events discussed in this prospectus might
not occur.
8
<PAGE>
RISK FACTORS
An investment in our shares is extremely risky. You should consider
carefully the following risks, in addition to the other information presented
in this prospectus, in evaluating us and our business.
Risks Related to RAVISENT
We are in the process of changing our business model from selling hardware to
licensing software and supporting hardware designs, and our revenues are
expected to decline as a result
RAVISENT was founded in April 1994 as a provider of hardware-based digital
video solutions. In November 1997 we changed our strategic focus from selling
hardware-based digital solutions to licensing software-based digital solutions,
and in early 1999 we began to discontinue direct sales of hardware-based
solutions altogether to focus exclusively on licensing software-based solutions
and supporting hardware platform designs. This change required us to adjust our
business processes and make additions to our engineering and marketing teams.
In addition, we expect to recognize lower revenues in 1999 than in 1998 in part
because we will no longer be selling hardware solutions. Before investing, you
should consider the risks and challenges we may face as a result of our change
in business model, which include, among others:
. increasing demand for our products and services;
. maintaining and increasing our base of personal computer and
consumer electronics manufacturers;
. competing effectively with existing and potential competitors; and
. developing further our new and unproven business model.
We cannot be certain that our change in business strategy will be successful
or that we will successfully address these risks. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Our transition to a software and hardware design licensing model depends on our
ability to enter into new contractual arrangements with our customers, which we
have not concluded
We may not be able to enter into agreements with our customers that are
necessary in order to transition to a business model based on licensing
software and hardware designs from our traditional product sales model. We have
agreements with several of our customers that require us to supply them with
hardware. Under our old business model, we would contract with third party
manufacturers which would produce hardware for us, which we in turn would ship
to customers. Under our new business model, we will license the hardware design
to our customers, and we will not contract with third party manufacturers.
Instead, our customers will be directly responsible for the manufacture of the
design licensed from us and will either manufacture the design internally or
contract directly with a third-party manufacturer. However, we have not yet
concluded a contract implementing this arrangement with Dell Computer to which
we license our hardware. For the year ended December 31, 1998 and for the three
months ended March 31, 1999, 88.7% and 78.8% of our total revenues,
respectively, resulted from hardware sales rather than licenses of our hardware
design. We may not be successful in concluding this contract. Accordingly, we
will remain responsible for securing hardware for Dell until a contractual
arrangement is reached. This may be for a potentially indefinite period of
time. The completion of our transformation from a sales revenue model to a
licensing revenue model will be delayed until we reach an agreement with Dell.
9
<PAGE>
We have a limited history operating under our current business model, and our
historical financial information is of limited value in projecting our future
operating results or evaluating our operating history
As a result of our relatively brief operating history as a licensor of
digital software solutions and supporting hardware designs, our historical
financial information is of limited value in projecting future operating
results. We believe that comparing different periods of our operating results
is not meaningful and you should not rely on the results for any period as an
indication of our future performance. In addition at some point in the future,
these fluctuations may cause us to perform below the expectations of public
market analysts and investors. If our results were to fall below market
expectations, the price of our common stock may fall significantly. Our limited
operating results have varied widely in the past, and we expect that they will
continue to vary significantly from quarter-to-quarter as we attempt to
establish our products in the market.
You should expect our quarterly operating results to fluctuate in future
periods and they may fail to meet the expectations of securities analysts or
investors, which could cause our stock price to decline
Our revenues and operating results will vary significantly from quarter-to-
quarter due to a number of factors, including:
. variations in demand for our products and services, which are
relatively few in number;
. the timing of sales of our products and services and the timing of
new releases of personal computer systems, consumer electronics
devices and semiconductors that incorporate our products;
. delays in introducing our products and services;
. changes in our pricing policies or the pricing policies of our
competitors;
. the timing and accuracy of royalty reports received from our
customers, which we have to date not audited;
. the timing of large contracts that materially affect our operating
results in a given quarter;
. changes in the usage of digital media;
. our ability to develop and attain market acceptance of enhancements
to our CineMaster products;
. new product introductions by competitors;
. the mix of license, service and hardware revenues;
. the mix of domestic and international sales;
. costs related to acquisitions of technologies or businesses;
. our ability to attract, integrate, train, retain and motivate a
substantial number of sales and marketing, research and development,
administrative and product management personnel;
. our ability to expand our operations; and
. global economic conditions as well as those specific to personal
computer, consumer electronics, peripherals and semiconductor
manufacturers and other providers of digital video and audio stream
management solutions.
We plan to significantly increase our operating expenses to expand our sales
and marketing operations, including opening new sales offices and adding
additional sales professionals, broaden our product management and customer
support capabilities and fund greater levels of research and development,
particularly in the consumer electronics markets. We determine our operating
expenses largely on the basis of anticipated revenue trends and a high
percentage of our expenses are fixed in the short term and are significant. As
a result, any
10
<PAGE>
delay in generating or recognizing revenue could cause significant variations
in our operating results from quarter-to-quarter and could result in
substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
In future quarters, our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock may fall significantly. See "--Since our license revenue is based upon
customer sales reports and we have never audited our customers, we may be
required to restate our recognized revenues or adjust our revenues for
subsequent periods, which could cause our stock price to drop" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We have a history of losses and we may not be able to achieve profitability in
the future
We incurred net losses of approximately $0.3 million for the three months
ended March 31, 1999, $13.7 million for the year ended December 31, 1998, $7.3
million for the year ended December 31, 1997 and $2.1 million for the year
ended December 31, 1996. As of March 31, 1999, we had an accumulated deficit of
approximately $24.2 million. To date, we have not achieved profitability on a
quarterly or annual basis, and revenues from our software solutions and
supporting hardware designs may not result in sufficient revenues to generate
profitability in any future period. If we do achieve profitability, we cannot
be certain that we can sustain or increase profitability on a quarterly or
annual basis, particularly to the extent that we face price competition. In
addition, we expect to significantly increase our sales and marketing, product
development, engineering and administrative expenses to grow. As a result, we
will need to generate significant revenues to achieve and maintain
profitability.
Increasing competition may cause our prices to decline, which would harm our
operating results
We expect our prices for our CineMaster products to decline over the next
few years. Most of our current revenues are derived from license fees
originating from sales of personal computer systems which use our Software
CineMaster product as their DVD solution. We expect to face increased
competition in this market, which will make it more difficult to maintain our
revenues and profit margins even if our sales volumes increase. If anticipated
increases in sales volume did not keep pace with anticipated pricing pressures,
our revenues would decline and our business could be harmed. Despite our
efforts to introduce enhancements to our products, we may not be successful in
maintaining our pricing. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our business currently depends upon our CineMaster products, and it is
uncertain whether the market will continue to accept these products
During 1997 and 1998, we derived virtually all of our license revenues from
the sale of personal computers and peripherals incorporating our CineMaster
products. We expect that license revenues from our CineMaster products will
continue to account for a significant portion of our revenues for the
foreseeable future. In particular, our business will be harmed if our existing
manufacturing customers do not continue to incorporate our CineMaster products
or if we are unable to obtain new customers for our CineMaster products. In
seeking market acceptance, it may be difficult for our digital solutions to
displace incumbent solutions employed by manufacturers not currently licensing
our CineMaster products. Manufacturers that are using other solutions would
need to invest in additional training and development tools and convert
software for existing hardware solutions in order to change to a new digital
solution. Accordingly, potential customers may not accept our digital
solutions, which could limit our growth opportunities and harm our prospects.
See "Business--Products and Services."
The loss of a single customer could significantly harm our business because a
majority of our revenues is derived from a small number of customers
A substantial portion of our license revenues come from three customers,
Dell Computer Corporation, ATI Technologies Inc. and Gateway 2000, Inc. During
1998, Dell Computer accounted for 81% of our total
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revenues and 38% of our gross profit, while ATI Technologies accounted for 6%
of total revenues and 33% of gross profit. In the quarter ending March 31,
1999, Dell Computer, ATI Technologies and Gateway accounted for 74%, 6% and 11%
of our total revenues and 34%, 18% and 29% of our gross profit, respectively.
We expect a relatively small number of customers to account for a majority of
our revenues and gross profit, if any, for the foreseeable future. The loss of
any of these or other primary customers, or a material decrease in revenue from
these customers, would immediately harm our business.
Since most of our revenue is derived from a small number of customers, problems
those customers experience will directly impact our business
As a result of our concentrated customer base, problems that our customers
experience could materially harm our business. These risks are beyond our
control. For example, because we do not control the business practices of our
customers, we do not influence the degree to which they promote our technology
or set the prices at which the products incorporating our technology are sold
to end users. Risks that may influence the success or failure of the personal
computer or consumer electronics manufacturers that are our customers include:
. the competition the manufacturer faces and the market acceptance of
its products;
. the engineering, marketing and management capabilities of the
manufacturer and the technical challenges unrelated to our
technology that it faces in developing its products;
. the financial and other resources of the manufacturer;
. new governmental regulations or changes in taxes or tariffs
applicable to the manufacturer; and
. the failure of third parties to develop and introduce content for
DVD and other digital media applications in a timely fashion.
The inability of us or our customers to successfully address any of these risks
could harm our business. See "Business--Customers."
Since our customers have not executed long term contracts with us, our revenues
could decline significantly with little or no notice
We have received purchase orders and do not have a licensing agreement with
one customer, Gateway, that accounted for 11.0% of our revenues in the quarter
ending March 31, 1999. In addition, our agreements with our customers are
typically of limited duration and do not contain minimum purchase commitments
or are terminable with little or no notice. Rather than long term contracts, we
typically enter into licensing agreements with one-year terms that
automatically renew each subsequent year unless a written cancellation is
received by either party. As a result, these customers could elect not to renew
these agreements and we could have little warning of this election. Also, since
our agreements with our customers do not include minimum purchase requirements,
the demand for our products is unpredictable. As a result of competition or
fluctuations in demand, we could be required to reach an accommodation with our
customers with respect to contractual provisions such as price or delivery time
in order to obtain additional business and maintain our customer relationships.
Any termination, decrease in orders or election not to renew a contract by our
principal customers would harm our business.
We depend upon technology licensed from third parties, and if we do not
maintain these license arrangements, we will not be able to ship our DVD
product and our business will be seriously harmed
We license technology that is used in our CineMaster products from third
parties under agreements with a limited duration and we may not be able to
maintain these license arrangements. If we fail to maintain these license
arrangements, we would not be able to ship our products for the DVD market, and
our business would be seriously harmed. In 1998 all of our revenue was derived
from DVD-related products. We have a
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license agreement with Dolby Laboratories for the audio format that is used in
all of our DVD-related products. Without this technology, we could not ship
product for DVD markets. In addition, we license encryption and decryption
software technology from Matsushita Electric, which must also be included in
any DVD products we ship. The license for the Dolby Digital technology is for a
term expiring at the expiration of the patent covered thereby with the furthest
expiration date from the date of the license. The license for the encryption
and decryption technology may be terminated by Matsushita at any time after the
giving of notice. We may not be able to renew either license. If we failed to
renew either of these licenses, we would not be able to ship products for the
DVD market, and we would accordingly lose a substantial amount of our revenue.
The loss of any of our strategic relationships would make it more difficult to
keep pace with evolving industry standards and to design products that appeal
to the marketplace
We rely on strategic relationships, such as those with Intel Corporation,
STMicroelectronics, Inc., Dolby Laboratories Licensing Corporation and ATI
Technologies to provide us with state of the art technology, assist us in
integrating our products with leading industry applications and help us make
use of economies of scale in manufacturing and distribution. Through our
interaction with our strategic partners, we gain valuable insights on evolving
industry standards and trends. For example, we may be able to learn about
future product lines in advance so that we can more efficiently design products
that our customers find valuable. However, we do not have written agreements
with any of our strategic partners that can ensure these relationships will
continue for a significant period of time. All of our agreements with these
partners are informal, and may be terminated by them at any time. The loss of
any one of these relationships could harm our business. See "Business--Sales
and Marketing."
Delays in providing our products to our customers may affect how much business
we receive
Our product development efforts may not be successful and we may encounter
significant delays in bringing our products to market. Since the product life
cycle in the personal computer and consumer electronics industries can be as
short as six to twelve months or less, if our product development efforts are
not successful or are significantly delayed, our business will be harmed. In
the past, we have failed to deliver new products, upgrades or customizations on
time, including customization projects for DVD products that are requested from
time to time by our customers. In the future, our efforts to remedy this
situation may not be successful and we may lose customers as a result. Delays
in bringing to market new products, enhancements to old products or interfaces
between existing products and new models of personal computers or consumer
electronics devices could be exploited by our competitors. If we were to lose
market share as a result of lapses in our product management, our business
would be harmed.
Our business model depends upon licensing our intellectual property, and if we
fail to protect our proprietary rights, our business could be harmed
Our ability to compete depends substantially upon our internally developed
technology. We have a comprehensive program for securing and protecting rights
in patentable inventions, trademarks, trade secrets and copyrightable
materials. If we are not successful in protecting our intellectual property,
our business could be substantially harmed.
Our pending patents may never be issued, and even if issued, may provide us
with little protection.
We regard the protection of patentable inventions as important to our future
opportunities. We currently have four U.S. patent applications pending relating
to our digital video and audio stream management technology. However, none of
our technology is patented outside of the United States nor do we currently
have any international patent applications pending. It is possible that:
. our pending patent applications may not result in the issuance of
patents;
. our patents may not be broad enough to protect our proprietary
rights;
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. any issued patent could be successfully challenged by one or more
third parties, which could result in our loss of the right to
prevent others from exploiting the inventions claimed in those
patents;
. current and future competitors may independently develop similar
technology, duplicate our products or design around any of our
patents; and
. effective patent protection may not be available in every country in
which we do business.
We rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which are only of limited value.
We rely on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. We currently
have a pending trademark application for the mark "RAVISENT" and a second
pending trademark application for the mark "CineMaster" which has been approved
for publication by the PTO. However, none of our trademarks are registered
outside of the United States, nor do we have any trademark applications pending
outside of the United States. Moreover, despite any precautions which we have
taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. other companies may claim common law trademark rights based upon
state or foreign law which precede our federal registration of such
marks;
. current federal laws that prohibit software copying provide only
limited protection from software "pirates," and effective trademark,
copyright and trade secret protection may be unavailable or limited
in certain foreign countries;
. policing unauthorized use of our products and trademarks is
difficult, expensive and time-consuming and we are unable to
determine the extent to which piracy of our products and trademarks
may occur, particularly overseas;
. we have provided our source code for Software CineMaster to one of
our customers, ATI Technologies, as part of our licensing
arrangements with it and the procedures and practices implemented
under the terms of this license may not be sufficient to prevent it
from exploiting the source code; and
. the tamper-resistant copy protection codes in our software have been
broken in the past and may not be successful in preventing
unauthorized use of our software in the future.
See "Business--Intellectual Property and Proprietary Rights."
We may become involved in costly and time consuming litigation over proprietary
rights
Intellectual property litigation is typical in our industry.
Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software and hardware in our industry may be
increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry
segments overlaps. Third parties may currently have, or may eventually be
issued, patents that would be infringed by our products or technology. We
cannot be certain that any of these third parties will not make a claim of
infringement against us with respect to our products and technology.
Any litigation, brought by us or others, could result in the expenditure of
significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement may
cause product shipment delays, require us to develop non-infringing technology
or require us
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to enter into royalty or license agreements even before the issue of
infringement has been decided on the merits. If any litigation were not to be
resolved in our favor, we could become subject to substantial damage claims and
be enjoined from the continued use of the technology at issue without a royalty
or license agreement. These royalty or license agreements, if required, might
not be available on acceptable terms, or at all, and could harm our business.
If a successful claim of infringement were made against us and we could not
develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could be
significantly harmed.
We have received notices of claims that may result in litigation.
From time to time, we have received, and we expect to continue to receive,
notice of claims of infringement of other parties' proprietary rights. For
example:
. Our digital video stream management solutions comply with industry
DVD specifications, which incorporates technology known as MPEG-2
that governs the process of storing a video input in digital form.
We have recently received notice from two of our largest customers
which are personal computer manufacturers, that a third party with a
history of litigating its proprietary rights and which has
substantial financial resources has alleged that aspects of MPEG-2
technology infringe upon patents held by the third party. These
customers may in the future seek compensation or indemnification
from us arising out of the third-party claims and may be required to
agree to indemnify them to secure future business or otherwise. We
do not have written agreements with these customers that limit our
liability to these customers should litigation ensue. Moreover, we
may be required to pay license fees in connection with the use of
the third party's technology in the future.
. A group of companies mostly comprised of consumer electronics
manufacturers has formed a consortium known as MPEG-LA to enforce
the proprietary rights of other holders of patents covering
essential aspects of MPEG-2 technology that are incorporated into
our products. MPEG-LA has notified a number of personal computer
manufacturers, including our customers, that patents owned by
members of the consortium are infringed by the personal computer
manufacturers in their distribution of products that incorporate the
MPEG-2 technology. MPEG-LA has requested that these personal
computer manufacturers pay license fees for use of the technology
covered by MPEG-LA patents. These personal computer manufacturers
may in the future seek compensation or indemnification from us
arising out of the MPEG-LA claims, and we may be required to pay
license fees in connection with the use of MPEG-2 technology in the
future.
. A third party has asserted that the parental control features of our
CineMaster products infringe patents held by the third party. A
court could determine that we did infringe these patents and we
would be liable for resulting damages.
Any of these notices could result in litigation, which would include all of the
risks discussed above. See "Business--Intellectual Property and Proprietary
Rights."
We may not be able to profit from growth in our business if we are unable to
effectively manage the growth
Our ability to successfully offer our CineMaster products and other products
and services in a rapidly evolving digital video and audio stream management
market requires an effective planning and management process. We have limited
experience in managing rapid growth. In the last several months, we have added
engineering, sales, marketing, administrative and other management personnel.
Our business will suffer dramatically if we fail to manage our growth. On March
31, 1999, we had a total of 106 employees compared to a total of 30 employees
on March 31, 1998. Our growth so far has placed strains on our managerial,
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financial and personnel resources. We expect these strains to continue in the
future. The pace of our expansion, together with the complexity of the
technology involved in our products, demands an unusual amount of focus upon
the operational needs of our customers for quality, reliability, timely
delivery and post-installation field support. Our existing licenses rely
heavily on our technical expertise in customizing our digital solutions to
their new products. In addition, relationships with new manufacturing customers
generally require significant engineering support. Therefore, any increases in
adoption of our products by existing or new customers will increase the strain
on our resources, especially our engineers. To reach our goals, we will need to
continue hiring on a rapid basis while, at the same time, investing in our
infrastructure. We will also need to increase the scale of our operations. We
expect that we will also have to expand our facilities, and we may face
difficulties identifying and moving into suitable office space. In addition, we
will need to:
. successfully train, motivate and manage new employees;
. expand our sales and support organization;
. integrate new management and employees into our overall operations;
. implement a more effective cash management system;
. adopt and staff an investor relations program; and
. establish improved financial and accounting systems.
We may not succeed in anticipating all of the changing demands that growth
will impose on our systems, procedures and structure. If we fail to effectively
manage our expansion, our results of operations will suffer.
We may not be able to successfully make acquisitions of or investments in other
companies
We have very limited experience in acquiring or making investments in
companies, technologies or services. From time to time we have had discussions
with companies regarding our acquiring, or investing in, their businesses,
products or services. We have no present understanding or agreement relating to
any acquisition or investment. In the future, from time to time, we may make
acquisitions or investments in other companies, products or technologies.
Acquisitions in our industry are particularly difficult to assess because of
the rapidly changing technological standards in our industry. If we make any
acquisitions, we will be required to assimilate the personnel, operations and
products of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. However, the key personnel of the
acquired company may decide not to work for us. Moreover, acquisitions may
cause disruptions in our operations and divert management's attention from day-
to-day operations, which could impair our relationships with our current
employees, customers and strategic partners. We may be unable to maintain
uniform standards, controls, procedures and policies if we fail in our efforts
to assimilate acquired businesses which could make management of our business
very difficult.
We are dependent upon our key management for our future success, and few of our
managers are obligated to stay with us
Our success depends on the efforts and abilities of our senior management
and certain other key personnel, particularly technical personnel in our
engineering subsidiary in Germany. Many of our officers and key employees are
employed at will. In addition, Mr. Wilde and the principal engineers in our
German subsidiary, Messrs. Sigmund, Horak and Ringelberg, are the only
employees upon whom we have obtained key man life insurance and we do not
expect to obtain life insurance on any of our other senior managers. If any of
these or other key employees left or was seriously injured and unable to work
and we were unable to find a qualified replacement, then our business could be
harmed. We have recently hired new managers and intend to continue hiring key
management personnel. We may not be able to successfully assimilate our
recently hired managers or to hire qualified key management personnel to
replace them. See "Management--Employment Contracts, Termination of Employment
Agreements and Change in Control Arrangements."
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We may not be able to hire and retain qualified employees, which would impair
our ability to grow
We intend to hire a significant number of additional sales, support,
marketing, engineering and product management personnel in 1999 and beyond.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. Hiring qualified personnel, particularly sales, marketing, engineering
and product management personnel, is very competitive in our industry due to
the limited number of people available with the necessary technical skills and
understanding of the digital video and audio stream management industry. In
addition, we are headquartered in Malvern, Pennsylvania and we have in the past
and expect in the future to face difficulties locating qualified personnel in
this location. We expect to face greater difficulty attracting these personnel
with equity incentives as a public company than we did as a privately held
company. See "Business--Employees."
We may encounter significant difficulties in integrating our newest subsidiary
which could result in unexpected future expenses and difficulties in financial
reporting
In April 1998, we completed the acquisition of Viona. However, we may not be
able to successfully integrate the two companies. Combining our companies
requires, among other things, integrating our respective technologies,
coordinating our research and development and financial reporting efforts, and
continuously evaluating whether existing systems and procedures meet our growth
requirements, especially our financial and internal control systems and
management structure. Important aspects of the integration, such as improving
financial controls and reporting, are still in process and may not be completed
smoothly or successfully. If we fail to integrate these areas, we may be unable
to maintain uniform standards, procedures, controls and policies. Integrating
operations such as engineering, may require our management to dedicate
resources which may temporarily distract them from our day-to-day business,
including from the development of new products, which could result in delays in
introducing these new products. Coordinating geographically separated
organizations with distinct cultures may increase the difficulty of our
integration. If we fail to successfully complete the integration of Viona's
operations, our business could be harmed.
We may be subject to product returns, product liability claims and reduced
sales because of defects in our products
Products as complex as our CineMaster products frequently contain undetected
errors. The likelihood of errors is higher when a new product is introduced or
when new versions or enhancements are released. Errors may also arise as a
result of defects in the products into which our products are incorporated.
Despite our extensive quality assurance process, we have in the past shipped
product releases with some defects, and have discovered other errors in our
products after their commercial shipment. Despite our quality assurance process
and that of our customers, defects and errors may be found in new products or
in new versions or enhancements of existing products after commercial shipment
has begun. We may be required to devote significant financial resources and
personnel to correct any defects. Known or unknown errors or defects that
affect the operation of our products could result in the following, any of
which could harm our business:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. failure of our products to achieve market acceptance;
. increased service and warranty costs; and
. litigation costs.
Although some of our licenses with customers contain provisions designed to
limit our exposure to potential product liability claims, these contractual
limitations on liability may not be enforceable. In addition,
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our product liability insurance may not be adequate to cover our losses in the
event of a product liability claim resulting from defects in our products and
may not be available to us in the future. See "Business--Products and
Services."
Since our license revenue is based upon customer sales reports and we have
never audited our customers, we may be required to make an adjustment to our
revenues for subsequent periods, which could cause our stock price to drop
We receive a license royalty for each personal computer system, peripheral
or consumer electronics product sold that contains our Software CineMaster
product and a royalty for each silicon device sold by a semiconductor
manufacturer that incorporates our technology. In collecting these fees,
preparing our financial reports, projections and budgets and in directing our
sales efforts and product development, we rely on our customers to accurately
report the number of units sold. We have never undertaken an audit of any of
our customers to verify that its reported sales unit numbers were accurate.
These reports are subject to potential revision by these manufacturers. If any
of our customers revised their product sales reports, we might be required to
adjust our revenues for subsequent periods, which could harm our business and
the price of our common stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
Our business is subject to risks from international operations such as legal
uncertainty, tariffs and trade barriers and political and economic instability
In 1998, we derived approximately 22% of our revenues from shipments to
foreign subsidiaries of U.S. companies, and we expect to derive an increasing
amount of our revenue from sales outside North America. We have limited
experience in marketing and distributing our products internationally. In
addition, there are many risks inherent in doing business on an international
basis, including, among others:
. legal uncertainty regarding liability;
. tariffs, trade barriers and other regulatory barriers;
. problems in collecting accounts receivable;
. political and economic instability;
. changes in diplomatic and trade relationships;
. seasonal reductions in business activity;
. potentially adverse tax consequences;
. the impact of recessions in economies outside the United States; and
. variance and unexpected changes in local laws and regulations.
Our licensees are subject to many of the risks described above with respect
to their manufacturing or end-user customers. Currently, all of our
international sales are denominated in U.S. dollars; therefore, a strengthening
of the dollar could make our products less competitive in foreign markets. We
do not use derivative instruments to hedge foreign exchange risk. In the
future, we may conduct sales in local currencies, in which case, changes in
exchange rates could adversely affect our operating results. In addition, if we
conduct sales in local currencies, we may engage in hedging activities, which
may not be successful and could expose us to additional risks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Qualitative and Quantitative Disclosures About Market Risk."
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It may be difficult to raise needed capital in the future, which could
significantly harm our business
We may require substantial additional capital to finance our future growth
and fund our ongoing research and development activities beyond 1999. Our
capital requirements will depend on many factors, including:
. acceptance of and demand for our products;
. the number and timing of acquisitions;
. the costs of developing new products;
. the costs associated with our expansion; and
. the extent to which we invest in new technology and research and
development projects.
To the extent that the proceeds of this offering, our existing sources of
cash and cash flow from operations, if any, are insufficient to fund our
activities, we may need to raise additional funds. If we issue additional stock
to raise capital, your percentage ownership in RAVISENT would be reduced.
Additional financing may not be available when needed and, if such financing is
available, it may not be available on terms favorable to us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Liquidity and Capital Resources."
We recently changed our name
In May 1999, we changed our name from Quadrant International, Inc. to
Divicore Inc. In June 1999, we changed our name again to RAVISENT Technologies
Inc. It is likely that for a period of time after our name change occurs,
potential customers and the market in general may not recognize our new name.
If potential customers do not realize who we are, we may lose future business
to competitors, which would harm our business.
Because of their significant stock ownership, our officers and directors will
be able to exert significant control over our future direction
Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately 33.3% of our outstanding common stock
following the completion of this offering. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. See "Principal
Stockholders."
Certain provisions of our certificate of incorporation and by-laws make changes
of control difficult even if they would be beneficial to shareholders
After this offering, the board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock. Further, without any further vote or
action on the part of the stockholders, the board of directors will have the
authority to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if it is ever
issued, may have preference over and harm the rights of the holders of common
stock. Although the issuance of this preferred stock will provide us with
flexibility in connection with possible acquisitions and other corporate
purposes, this issuance may make it more difficult for a third party to acquire
a majority of our outstanding voting stock. We currently have no plans to issue
preferred stock.
Our certificate of incorporation and by-laws include provisions that may
have the effect of deterring an unsolicited offer to purchase RAVISENT. These
provisions, coupled with the provisions of the Delaware General Corporation
Law, may delay or impede a merger, tender offer or proxy contest involving
RAVISENT. Furthermore, upon reincorporation, our board of directors will be
divided into three classes, only one of which is elected each year. Directors
will only be capable of being removed by the affirmative vote of 66 2/3% or
greater of all classes of voting stock. These factors may further delay or
prevent a change of control of
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RAVISENT. See "Description of Capital Stock--Antitakeover Effects of Provisions
of the Certificate of Incorporation, By-laws and Delaware Law."
Risks Related to our Industry
Our revenues are dependent upon acceptance of products that incorporate our
digital video technologies in the personal computer and consumer electronics
industries, particularly DVD-related products
We rely on the personal computer and consumer electronics industries, and
these industries have risks and uncertainties that are beyond our control.
The personal computer and consumer electronics industries are presently the
only markets for our digital video and audio solutions. As a result, our
results of operations will depend almost entirely on consumer acceptance of the
products that incorporate our digital video technology. Our dependence on these
industries involves several risks and uncertainties, including:
. whether semiconductor manufacturers developing silicon devices for
personal computer and consumer electronics manufacturers will design
our digital solutions into their devices and successfully introduce
these devices;
. changes in consumer requirements and preferences;
. the small number of product manufacturers in these industries and
the short product life cycles which can be six months or less;
. the difficulty in predicting the level of consumer interest in and
acceptance of many digital product applications, such as handheld
personal computers and set-top boxes, which have only recently been
introduced to the market; and
. the current lack of open industry standards for software and
hardware in the consumer electronics industry.
We currently depend upon demand for DVD-related products, which may not be
sustained.
Our success currently depends upon continued demand for DVD-related products
in the consumer electronics and personal computer markets. All of our revenues
in 1998 resulted from sales of DVD-related products. In addition to the risks
inherent in the personal computer and consumer electronics industries, the
market for DVD-related products also contains risk and uncertainties,
including:
. the developing and marketing of content by third party content
providers for end-user systems such as DVD players and desktop
computers in a format compatible with our digital solutions;
. the sustaining and developing of the demand for DVD players or other
existing applications; and
. the potential for declining demand for DVD solutions in lower price
personal computers.
Factors negatively affecting the consumer electronics or personal computer
industries in general or the DVD market in particular could harm our business.
Moreover, to the extent that the performance, functionality, price and power
characteristics of our digital solutions fail to satisfy customers who have a
critical need for specific digital applications, the use of our digital
solutions could become confined to a limited segment of these industries. See
"Business--Sales and Marketing" and "--Strategy."
Competition in our markets is likely to continue to increase and could harm our
business
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing and which are characterized by short product life cycles
and price erosion. Our principal competitors in the software-based digital
solution market are Mediamatics, Inc. (a subsidiary of National Semiconductor,
Inc.), Zoran
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Corporation and Xing Technology Corporation (which has agreed to be acquired by
RealNetworks, Inc.). Our principal competitor in the hardware-based digital
solution market is Sigma Designs, Inc. and we also compete against several
smaller companies. We also compete with the internal research and development
departments of other software companies as well as those of personal computer,
peripherals, consumer electronics and semiconductor manufacturers who are in
the market for specific digital video or audio software applications. Numerous
other major personal computer manufacturers, software developers and other
companies are focusing significant resources on developing and marketing
products and services that will compete with our CineMaster products. At least
two semiconductor manufacturers, including C-Cube Microsystems and Zoran, are
positioning their products as offering hardware-based digital video and audio
management capabilities and marketing such products as equal or superior to our
CineMaster products. In the future, operating system providers with a larger
established customer base, such as Microsoft, may enter the digital video or
audio stream management markets by building video or audio stream management
applications into their operating systems. For example, Microsoft currently
markets a very basic MPEG-1 compliant digital solution that is bundled into its
operating system, which is used by a substantial number of personal computer
users. If Microsoft were to successfully develop or license a more
sophisticated DVD-compliant digital video solution and incorporate the solution
into its operating system, our revenues could be substantially harmed.
We anticipate continued growth and competition in the digital video industry
and the entrance of new competitors into our markets, and that, accordingly,
the market for our products will remain intensely competitive. We expect that
competition will increase in the near term and that our primary long-term
competitors may not yet have entered the market. Our future competitors may
have significantly more personnel or greater financial, technical, marketing
and other resources than either we or our current competitors do. Furthermore,
our future competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, future
competitors may have greater name recognition and more extensive customer bases
that they can leverage. Increased competition could result in price reductions,
fewer customer orders, reduced gross profit margins and loss of market share,
any of which could harm our business. See "Business--Competition."
If we fail to manage technological change, respond to evolving industry
standards or enhance our products' interoperability with the products of our
customers, demand for our products will drop and our business will suffer
Future versions of software and hardware platforms embodying new
technologies or the emergence of new industry standards could render our
products obsolete or uncompetitive. The market for digital video and audio
stream management hardware and software is characterized by rapid technological
change, and evolving industry standards, such as standards for DVD audio, DVD
random access memory and DTV in Europe. If we fail to respond to evolving
industry standards, our products could rapidly become obsolete, which would
harm our business. If the characteristics of our digital solutions are not
compatible with the requirements of specific system or program applications,
the likelihood that our customers will design our products into their systems
and devices will decrease and our business will be harmed. See "Business--
Research and Development."
21
<PAGE>
We may not be able to respond to rapidly changing consumer preferences
Our results of operations will depend on the extent to which our CineMaster
products are incorporated into the products of leading personal computer,
consumer electronics, peripherals and semiconductor manufacturers. Their
willingness to incorporate our products depends upon whether we succeed in
developing enhancements and new generations of our software and hardware that
satisfy consumer preferences in our markets and introduce these new
technologies to the marketplace in a timely manner. We must constantly modify
or improve our products to keep pace with changing consumer preferences. For
example, DVD drives became widespread on new personal computers in the last two
years. It is particularly difficult to keep pace with changing consumer
preferences in the personal computer and consumer electronics industries as a
result of a number of factors, including:
. the difficulty of anticipating and timely responding to the latest
consumer trends and requirements;
. the introduction by our competitors of new products embodying
popular new technologies or features that appeal to consumers; and
. the significant investment that is often required before commercial
viability is achieved to market a new feature or function.
Any failure by us to adequately address these risks could render our
existing digital solutions obsolete and could harm our business. In addition,
we may not have the financial and other resources necessary to develop any
enhancements or new generations of the technology that generate revenue in
excess of the costs of development.
Year 2000 issues present technological risks to our business and could harm
sales
In order to save valuable memory, many existing computer systems and
software programs were designed to calculate or refer to the year in any
calendar date using the last two digits and presuming that the first two digits
are "19." As a result, these systems and programs may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results known as Year 2000 failures. If
the systems or programs look ahead of the current date for any reason, they may
need to refer to dates occurring after December 31, 1999. As a result, Year
2000 failures may occur at any time, including prior to January 1, 2000.
Neither our Hardware CineMaster nor our Software CineMaster products make
use of calendar clocks in any way. However, our products are incorporated into
software and hardware of personal computer, consumer electronics, computer
peripheral and semiconductor manufacturers, some of which may make use of
calendar clocks and may therefore experience Year 2000 failures. We have
recently initiated a comprehensive assessment of the possibility of Year 2000
failures affecting us and we have replaced our internal computer systems and
application software as a precaution. However, we cannot assure you that third-
party software and hardware that is incorporated into our information systems
will not need to be revised or replaced as well. If we were required to replace
these third-party products, our business could be harmed. In addition, we have
performed operational tests on our products as incorporated into those of our
customers and these tests have not resulted in Year 2000 failures. Nonetheless,
these tests may not be completely accurate and Year 2000 failures may occur. If
our customers' hardware or software were to suffer Year 2000 failures, such
failures might cause our CineMaster products to fail as well. Changes required
to respond to Year 2000 failures caused by interoperability issues could be
expensive and time consuming and lead to lost revenues, breach of contract
claims, higher operating costs, loss of customers and other business
interruptions, any of which could harm our business.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control may
suffer Year 2000 failures. If these entities were to suffer Year 2000 failures,
a systemic failure might occur which is beyond our control, such as a prolonged
Internet, telecommunications or electrical failure. A systemic failure could
prevent us from delivering our
22
<PAGE>
services to our customers or cause other business disruptions, such as
preventing our customers or potential customers from accessing our Internet web
site. Any significant disruption in the infrastructure on which we rely could
harm our business. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Year 2000 Compliance."
We face risks from the uncertainties of any future governmental regulation
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally.
However, due to the increasing popularity and use of the digital delivery
mediums, it is possible that future laws and regulations may be adopted that
regulate DSS/DBS or other markets in which our products are sold. Future
regulatory measures may include, among other things:
. pricing;
. content;
. copyrights;
. export controls (particularly regarding data encryption);
. distribution; and
. characteristics and quality of products and services.
The growth and development of the digital media market may prompt calls for
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business in this segment. The adoption of any
additional laws or regulations may decrease the expansion of this market and
harm our business. Our business could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing
laws and regulations to the digital media market.
Risks Related to this Offering
Our management has broad discretion as to how to use the proceeds from this
offering and the proceeds may not be appropriately used
We expect to use the net proceeds of this offering primarily for working
capital and other general corporate purposes. In particular, we intend to
increase our spending on marketing, research and development and product
management. We may also use some of the proceeds to acquire other businesses,
products or technology which would complement our existing products, expand our
market coverage or enhance our technological capabilities. We have no specific
plan as to how we will spend the proceeds of this offering. As a result, our
management will have discretion over how to use all of the funds provided by
this offering. If our management uses poor judgment in spending the proceeds,
our business will be adversely affected. We cannot assure you that investment
of the proceeds will yield a favorable return or any return. See "Use of
Proceeds."
The price of our common stock may be volatile
The trading price of the shares being sold in this offering may fluctuate
widely as a result of a number of factors, most of which are outside our
control. Some of these factors include:
. quarter-to-quarter variations in our operating results;
. our announcements about the performance of our products and our
competitors' announcements about performance of their products;
. changes in earnings estimates by, or failure to meet the
expectations of, analysts;
. government regulatory action;
. increased price competition;
23
<PAGE>
. developments or disputes concerning intellectual property rights;
and
. general conditions in the computer industry.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology and computer software companies and which have often been unrelated
to the operating performance of these companies.
We are negotiating the initial offering price of the common stock with the
underwriters. However, the initial offering price may not be indicative of the
prices that will prevail in the public market after the offering, and the
market price of the common stock could fall below the initial public offering
price. See "Underwriting."
There has been no prior public market for our common stock, and a public market
may not develop
Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop in the future. If an active trading
market does develop, it may not last. The lack of an active trading market may
impair your ability to dispose of your shares at the time you wish to sell them
or at a price which you consider reasonable. Moreover, the lack of an active
market may reduce the fair market value of our shares. An inactive market may
also impair our ability to raise capital by selling shares and may impair our
ability to acquire other companies or technology by using our shares as
consideration.
As our currently outstanding stock becomes eligible for sale, the introduction
of this stock into the market may cause our stock price to decline
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, including shares issued upon the
exercise of outstanding options and warrants, the trading price of our common
stock could fall. Such sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. Upon completion of this offering, we will have outstanding
15,488,332 shares of common stock (based upon shares outstanding as of March
31, 1999), assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options after March 31, 1999. Of these shares, the
5,000,000 shares sold in this offering will be freely tradable. Another
9,726,785 shares will be eligible for sale in the public market 180 days from
the date of this prospectus, substantially all of which are subject to lock up
agreements. Bear, Stearns & Co. Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. The remaining 761,547 shares will be restricted securities
that have been held for less than one year and are not yet saleable under Rule
144. See "Shares Eligible for Future Sale."
After this offering, if certain conditions are met, the holders of
approximately 5,716,192 shares of common stock and the holders of warrants to
purchase up to approximately 2,551,325 shares of common stock will be entitled
to require us to register their shares under the Securities Act. These
shareholders also have the right to participate in any registration of our
shares which we undertake on our own. If these shareholders exercise their
registration rights, a large number of our shares may be registered and sold in
the public market. This could adversely affect the trading price for our
shares. If we attempted to raise money through a registration and sale of our
stock and these shareholders forced us to allow them to participate in the
registration, our ability to raise the amount of money we need to execute our
business plan could be adversely affected. See "Description of Capital Stock--
Registration Rights."
You will experience substantial dilution in the value of your shares
immediately following this offering
The price of the shares is substantially higher than the net tangible book
value per share. If you buy any shares in the offering, you will incur
immediate and substantial dilution in the pro forma net tangible book value of
each share. If others exercise options to purchase our common stock, you will
suffer further dilution. See "Dilution."
24
<PAGE>
USE OF PROCEEDS
The net proceeds to RAVISENT from the sale and issuance of the 5,000,000
shares of common stock offered hereby are estimated to be $54.3 million
(approximately $62.7 million if the underwriters' over-allotment option is
exercised in full), at the assumed initial public offering price of $12.00 per
share after deducting the underwriting discount and estimated offering
expenses. RAVISENT is conducting this offering primarily to increase its equity
capital, create a public market for its common stock and to facilitate future
access by RAVISENT to public equity markets. RAVISENT intends to use a portion
of the net proceeds for general corporate purposes, including working capital,
marketing, research and development, product management and capital
expenditures. In addition, RAVISENT may use a portion of the net proceeds to
acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. RAVISENT has no commitments with
respect to any acquisition or investment, and it is not involved in any
negotiations with respect to any similar transaction. In addition, RAVISENT has
not performed any studies or made any decisions with its financial advisors or
otherwise regarding the use of proceeds from this offering. Pending these uses,
the net proceeds of this offering will be invested in short-term, interest-
bearing, investment grade securities. See "Risk Factors--We have substantial
discretion as to how to use proceeds from this offering" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
DIVIDEND POLICY
RAVISENT has never declared or paid dividends on its capital stock and does
not anticipate declaring or paying cash dividends in the foreseeable future.
RAVISENT anticipates that it will retain all future earnings, if any, for use
in its operations and the expansion of its business. Payments of future
dividends, if any, will be at the discretion of RAVISENT's board of directors
after taking into account various factors, including its financial condition,
operating results, current and anticipated cash needs and plans for expansion.
Moreover, pursuant to agreements with its lender, RAVISENT is prohibited from
declaring or paying dividends without the prior written consent of the lender.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CORPORATE INFORMATION
RAVISENT Technologies Inc. was incorporated in Pennsylvania in April 1994 as
Quadrant Sales International, Inc. and changed its name to Quadrant
International, Inc. in May 1994, to Divicore Inc. in May 1999 and will change
its name again to RAVISENT Technologies Inc. effective in June 1999. RAVISENT
Technologies Inc. plans to reincorporate in Delaware prior to the consummation
of the offering. RAVISENT's assets are held by two Delaware corporations,
Liuco, Inc., a finance subsidiary, and Divico, Inc., an operating subsidiary,
each of which is a wholly-owned subsidiary of RAVISENT Technologies Inc., and a
Nevada corporation, DVA, Inc., an intellectual property subsidiary, which is a
wholly-owned subsidiary of Liuco, Inc. RAVISENT's assets in Germany are held by
two German corporations, Erste Cinco Vermogensverwaltungs GmbH and Viona
Vervatungs GmbH, each of which is a wholly-owned subsidiary of DVA, Inc., and a
German limited partnership, Viona Development Hard and Software Engineering
GmbH, which is a wholly-owned subsidiary of the two German corporations.
References in this prospectus to "RAVISENT," "we," "our," and "us" collectively
refer to RAVISENT Technologies Inc., a Delaware corporation, and all of its
U.S. and German subsidiaries, and not to the underwriters. RAVISENT's principal
executive offices are located at One Great Valley Parkway, Malvern,
Pennsylvania, 19355 and its telephone number is (800) 700-0362.
RAVISENT, the RAVISENT logo and CineMaster are trademarks of RAVISENT
Technologies Inc. Each trademark, trade name or service mark of any other
company appearing in this prospectus belongs to its holder.
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of RAVISENT as of March
31, 1999:
. on an actual basis;
. on a pro forma basis to give effect to:
. the conversion of all outstanding shares of preferred stock into
common stock;
. the exercise of outstanding warrants to purchase 920,006 shares
of common stock at an exercise price of $0.66 per share upon the
consummation of this offering;
. the exercise of outstanding warrants to purchase 1,659,251 shares
of common stock at a weighted average exercise price of $0.36 per
share; and
. the issuance of 675,152 shares of preferred stock subsequent to
March 31, 1999 and the conversion of such shares into common
stock;
. on a pro forma, as adjusted basis to give effect to the sale of the
shares of common stock by us at an assumed initial public offering
price of $12.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses.
This table should be read in conjunction with the consolidated financial
statements and notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
----------------------------
Pro As
Actual Forma Adjusted
-------- -------- --------
(In thousands, except
share data)
<S> <C> <C> <C>
Current portion of long-term obligations......... $ 2,073 $ 2,073 $ 2,073
======== ======== ========
Long-term obligations, excluding current
portion......................................... 977 352 352
-------- -------- --------
Mandatory redeemable convertible preferred stock:
31,523,684 shares, $.06 par value per share,
authorized, actual and pro forma; 5,000,000
shares, $.001 par value per share, authorized,
as adjusted; 3,913,072 shares $.06 par value per
share, issued and outstanding, actual net of
subscription receivable of $625,000 for 125,502
shares; no shares issued and outstanding,
pro forma; no shares, $.001 par value per share,
issued and outstanding, as adjusted............. 14,871 -- --
Stockholders' equity:
Common stock: 80,000,000 shares, $.06 par value
per share, authorized, actual and pro forma;
50,000,000 shares, $.001 par value per share,
authorized, as adjusted; 3,520,851 shares, $.06
par value per share, issued, actual; 10,488,332
shares, $.06 par value per share, issued,
pro forma; 15,488,322 shares, $.001 par value
per share, issued and outstanding, as adjusted.. 211 641 15
Additional paid-in capital....................... 13,110 34,115 89,041
Deferred stock compensation...................... (1,182) (1,182) (1,182)
Stockholders' equity (accumulated deficit)....... (24,152) (24,152) (24,152)
Cumulative foreign currency translation
adjustment...................................... (46) (46) (46)
Subscription note receivable..................... -- (500) (500)
Treasury stock, at cost, 200,000 shares.......... (720) (720) (720)
-------- -------- --------
Total stockholders' equity (deficit)........... (12,779) 8,156 62,456
-------- -------- --------
Total capitalization........................... $ 3,069 $ 8,508 $ 62,808
======== ======== ========
</TABLE>
26
<PAGE>
The common stock outstanding after this offering excludes:
. 2,252,528 shares of common stock issuable upon exercise of stock
options outstanding on March 31, 1999 at a weighted average exercise
price of $1.86 per share;
. 481,555 shares of common stock issuable upon exercise of stock
options granted subsequent to March 31, 1999 at an exercise price of
$10.20 per share.
. 2,725,000 shares of common stock reserved for issuance under the
1999 Stock Incentive Plan which incorporates our 1995 Stock Option
Plan; and
. 500,000 shares of common stock reserved for issuance under
RAVISENT's 1999 Employee Stock Purchase Plan.
See "Management--Benefit Plans," "Description of Capital Stock" and Notes 12
and 19 the of notes to the consolidated financial statements.
27
<PAGE>
DILUTION
Dilution is the amount by which the initial public offering price paid by
the purchasers of shares of common stock in the offering exceeds the net
tangible book value per share of common stock after the offering. The pro forma
net tangible book value per share of common stock is determined by subtracting
RAVISENT's total liabilities from the total book value of its tangible assets
and dividing the difference by the number of shares of common stock deemed to
be outstanding on the date as of which such book value is determined.
The pro forma net tangible book value of RAVISENT at March 31, 1999, was
approximately $3,781,000, or $0.36 per share. After giving effect to the sale
of the shares of common stock offered by RAVISENT at the assumed initial public
offering price of $12.00 per share, and after deducting underwriting discounts
and estimated offering expenses, RAVISENT's pro forma net tangible book value
at March 31, 1999, would have been $58,081,000, or $3.75 per share. This
represents an immediate increase in net tangible book value of $3.39 per share
to existing stockholders and an immediate dilution of $8.25 per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Pro forma net tangible book value per share as of March 31,
1999........................................................... $0.36
Pro forma increase attributable to new investors................ $3.39
-----
Pro forma net tangible book value per share after the offering.... 3.75
------
Pro forma dilution per share to new investors..................... $ 8.25
======
</TABLE>
The following table summarizes, as of March 31, 1999, on a pro forma basis,
the total number of shares and consideration paid to RAVISENT and the average
price per share paid by existing stockholders and by new investors purchasing
shares of common stock in this offering at an assumed initial public offering
price of $12.00 per share (before deducting the underwriting discount and
estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per-Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 10,488,332 67.7% $34,757,000 36.7% $ 3.31
New investors.............. 5,000,000 32.3% $60,000,000 63.3% $12.00
---------- ----- ----------- ------ ------
Totals................... 15,488,322 100.0% $94,757,000 $100.0%
========== ===== =========== ======
</TABLE>
The foregoing computations are based on the number of shares of common stock
outstanding as of March 31, 1999 and includes:
. 920,006 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $0.66 per share to
be exercised upon consummation of the offering;
. 1,659,251 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $0.36
per share which will remain outstanding following the offering; and
. 675,152 shares of common stock issuable upon conversion of preferred
stock issued subsequent to March 31, 1999.
The common stock outstanding after the offering excludes:
. 2,252,528 shares of common stock issuable upon exercise of stock
options outstanding on March 31, 1999 at a weighted average exercise
price of $1.86 per share;
. 481,555 shares of common stock issuable upon exercise of stock
options granted subsequent to March 31, 1999 at an exercise price of
$10.20 per share;
28
<PAGE>
. 2,725,000 shares of common stock reserved for issuance under the
1999 Stock Incentive Plan which incorporates our 1995 Stock Option
Plan; and
. 500,000 shares of common stock reserved for issuance under the 1999
Employee Stock Purchase Plan.
To the extent that any of these options or warrants are exercised, there
could be further dilution to new investors. See "Capitalization," "Management--
Benefit Plans," "Description of Capital Stock" and Notes 12 and 19 of the notes
to the consolidated financial statements.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for each of the years in the
three-year period ended December 31, 1998, and the consolidated balance sheet
data at December 31, 1997 and 1998, are derived from the consolidated financial
statements of RAVISENT which have been audited by KPMG LLP, independent
accountants, and are included elsewhere in this prospectus. The consolidated
statement of operations data for the year ended December 31, 1995, and the
consolidated balance sheets at December 31, 1995 and 1996, are derived from the
audited consolidated financial statements of RAVISENT not included in this
prospectus. The consolidated statement of operations data for the period from
April 1994 (inception) to December 31, 1994 and the consolidated balance sheet
data at December 31, 1994, are derived from the unaudited consolidated
financial statements of RAVISENT not included in this prospectus. The
consolidated statement of operations data for the year ended December 31, 1998
include the operations of Viona Development Hard & Software Engineering GmbH
from April 1998, the date of acquisition by RAVISENT. The 1998 pro forma
consolidated statement of operations data is presented as if the acquisition
occurred on January 1, 1998. The consolidated statement of operations data for
each of the three-month periods ended March 31, 1998 and 1999, and the
consolidated balance sheet data at March 31, 1999, are derived from unaudited
interim consolidated financial statements of RAVISENT included elsewhere in
this prospectus. The unaudited interim consolidated financial statements have
been prepared on substantially the same basis as the audited consolidated
financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods. The historical
results are not necessarily indicative of results to be expected for any future
period. The selected consolidated financial data set forth below should be read
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements of
RAVISENT and the notes thereto and the unaudited pro forma financial statements
included elsewhere in this prospectus. See "Management's Discussion and
Analysis of Financial Condition and Result of Operations."
<TABLE>
<CAPTION>
Period from
April 1994 Three Months Ended
(inception) Year Ended December 31, March 31,
to ------------------------------------------------------- --------------------
December 31, 1998
1994 1995 1996 1997 1998 Pro Forma 1998 1999
------------ --------- --------- --------- --------- ----------- --------- ---------
(unaudited) (unaudited) (unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License and services... $ -- $ 229 $ 825 $ 1,445 $ 3,447 $ 3,447 $ 10 $ 2,290
Hardware............... 127 972 3,370 5,376 26,841 26,841 3,133 8,522
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.......... 127 1,201 4,195 6,821 30,288 30,288 3,143 10,812
Cost of revenues:
License and services... -- 115 472 331 354 354 15 135
Hardware............... 62 661 2,664 8,072 24,192 24,192 3,062 7,264
--------- --------- --------- --------- --------- --------- --------- ---------
Total cost of revenues.. 62 776 3,136 8,403 24,546 24,546 3,077 7,399
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............ 65 425 1,059 (1,582) 5,742 5,742 66 3,413
Research and
development............ 78 319 1,034 1,828 3,121 3,037 498 1,465
Sales and marketing..... 63 305 731 1,158 1,964 1,995 465 1,062
General and
administrative......... 35 497 1,198 1,710 4,673 4,692 505 837
Depreciation and
amortization........... 3 23 46 86 906 1,146 15 314
Compensation related to
stock options.......... -- -- -- 1,408 139 139 -- --
Acquired in-process
research and
development............ -- -- -- -- 7,900 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Operating loss.......... (114) (719) (1,950) (7,772) (12,961) (5,267) (1,417) (265)
Interest expense, net... 3 36 105 197 722 711 127 45
Other income............ -- -- -- 716 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss............... $ (117) $ (755) $ (2,055) $ (7,253) $ (13,683) $ (5,978) $ (1,544) $ (310)
========= ========= ========= ========= ========= ========= ========= =========
Basic and diluted net
loss per common
share(1)............... $ (0.08) $ (0.49) $ (1.19) $ (3.52) $ (4.94) $ (2.03) $ (0.73) $ (0.18)
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares
outstanding used in
computing per common
share calculation(1)... 1,491,069 1,545,856 1,720,922 2,060,668 2,920,677 3,316,782 2,103,654 3,320,851
Pro forma basic and
diluted net loss per
common share(1)........ $ (0.08) $ (0.49) $ (1.19) $ (3.52) $ (2.60) $ (1.01) $ (0.73) $ (0.08)
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares
outstanding used in
pro forma per common
share calculation(1)... 1,491,069 1,545,856 1,720,922 2,060,668 5,547,260 5,943,365 2,103,654 7,233,923
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
March 31,
1994 1995 1996 1997 1998 1999
----------- ---- ------ ------ -------- -----------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $61 $ 17 $ 53 $ 607 $ 1,024 $ 2,175
Total assets............ 25 707 1,900 2,569 17,374 14,511
Debt and capital lease
obligations, less
current portion........ 130 557 725 732 1,418 977
Mandatory redeemable
convertible preferred
stock.................. -- -- -- -- 14,589 14,871
Total stockholders'
equity (deficit)....... (66) (774) (922) (6,084) (12,236) (12,779)
</TABLE>
See Note 1 of the notes to the consolidated financial statements for a
detailed explanation of the determination of the shares used to compute basic
and diluted net loss per share.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of RAVISENT should be read in conjunction with the consolidated
financial statements and notes thereto and the unaudited pro forma financial
statements included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. RAVISENT's
actual results could differ from those anticipated in these forward-looking
statements as a result of various factors including but not limited to, those
discussed in "Risk Factors," "Business" and elsewhere in this prospectus.
Overview
RAVISENT designs, develops, licenses and markets innovative modular software
solutions that enable digital video and audio stream management in personal
computer systems and consumer electronics devices. RAVISENT also licenses
supporting hardware designs to selected customers and provides customization
services and customer support. RAVISENT's solutions enable decoding and
encoding multimedia formats such as DVD, DBS/DVB and HDTV on existing personal
computer and consumer electronics platforms. RAVISENT's digital solutions
incorporate industry standards for video and audio compression and are
independent of operating systems and silicon components.
RAVISENT's customers consist primarily of personal computer and consumer
electronics manufacturers. In addition, RAVISENT supplies its software
solutions and hardware designs to selected peripherals providers and
semiconductor manufacturers. In 1998 and the quarter ended March 31, 1999,
RAVISENT generated substantially all of its total revenues, respectively, from
personal computer and peripherals manufacturers. However, RAVISENT anticipates
that an increasing percentage of revenues, beginning in the second half of
1999, will be derived from consumer electronics and semiconductor
manufacturers.
Prior to 1998, RAVISENT generated revenue primarily from direct sales of its
hardware solutions to retail distributors and end users. In 1998, substantially
all of RAVISENT's revenues were derived from Software CineMaster 98 and
Hardware CineMaster 98. RAVISENT introduced the first in its line of digital
video products in March 1997 with the launch of CineMaster, a hardware and
software solution sold to personal computer manufacturers, which enabled DVD
playback on a personal computer. In December 1997, RAVISENT introduced its
second generation hardware and software solution called Hardware CineMaster 98.
The first released version of this product, release 1.2, accounted for 100% of
hardware sales or $26.8 million in the year ended December 31, 1998. In the
quarter ended March 31, 1999, RAVISENT phased release 1.2 out of production in
favor of a new release, version 3.0. For the quarter ended March 31, 1999
revenues from sales of release 1.2 were $4.6 million or approximately 54.5% of
hardware revenues, and revenues from release 3.0 were $3.9 million or
approximately 45.5% of hardware revenues. In August 1998, RAVISENT launched its
software-only solution, Software CineMaster 98, and began to transition its
business model from a direct product sales approach to a license approach.
License revenues from Software CineMaster 98 are currently RAVISENT's sole
source of license revenue. RAVISENT currently expects to release the successor
product to Software CineMaster 98 during the summer of 1999. As part of its
license approach, in February 1999, RAVISENT began entering into manufacturing
and license agreements with third parties under which RAVISENT will no longer
manufacture Hardware CineMaster 98. Instead, RAVISENT will receive a per unit
license fee on all future sales of Hardware CineMaster 98. RAVISENT is
currently in the process of completing its transition to a license model and,
in the future, RAVISENT expects that most of its revenues will be derived from
licenses of its software and its hardware designs. As a result of this change,
RAVISENT will recognize lower revenues in 1999 than in 1998, which RAVISENT
expects to be accompanied by a decrease in its cost of revenues.
RAVISENT's revenues are comprised of hardware revenues, license revenues and
services revenues. Hardware revenues, consisting of direct sales of hardware
subsystems to personal computer and peripherals manufacturers, have represented
most of RAVISENT's total revenues in the past but are expected to be nominal in
the future. License revenues consist of fees paid on a per unit basis, or
sometimes with new
32
<PAGE>
customers in advance, each time a manufacturer ships a product that
incorporates RAVISENT's software solutions or software with supporting hardware
designs. Service revenues consist of engineering fees from consumer
electronics, personal computer, peripherals and semiconductor manufacturers for
custom engineering services. Services are generally billed on either a time and
material basis or on a project or contract basis.
License revenues are recognized when earned, which is generally based on
receiving notification from a licensee detailing the shipments of products
incorporating RAVISENT technology. In a number of cases, this occurs in the
quarter following the sale of the licensee's product to its customers.
RAVISENT's license agreements generally have a term of one year or less, and
typically require payment within 45 or 60 days after the end of the calendar
quarter in which the product is shipped. Some of RAVISENT's contracts may also
require payment of an up-front license fee. License fees paid in advance, with
no further future commitment, are recognized in the period that the license
agreement is signed, the technology is delivered and collectibility is
probable. The amount and timing of prepaid fees could cause RAVISENT's
operating results to vary significantly from period to period. Services
revenues are recognized upon delivery of the service in the case of time and
material contracts or on a percentage completion basis in the case of project-
based contracts. Hardware product sales are recognized upon shipment of the
product to the manufacturer or end user.
RAVISENT's revenues are concentrated among a few customers. In 1998, Dell
Computer accounted for approximately 81% of total revenues and 38% of gross
profit. ATI Technologies accounted for approximately 6% of total revenues and
33% of gross profit. Revenues from ATI Technologies made a relatively larger
contribution to gross profit because revenues from ATI Technologies consisted
entirely of license fees. In the quarter ended March 31, 1999, Dell Computer,
ATI Technologies and Gateway accounted for 74%, 6% and 11% of RAVISENT's
revenues and 34%, 18% and 29% of its gross profit, respectively. While RAVISENT
believes that the number of customers incorporating its technology into their
products will grow, RAVISENT expects that a significant portion of revenue will
continue to be concentrated among a relatively small number of customers for
the foreseeable future. The revenues from particular customers may vary widely
from period to period depending on the addition of new contracts and the
volumes and prices at which licensees sell RAVISENT-enabled products to end
users in any given period.
RAVISENT sells its products directly to personal computer and consumer
electronics manufacturers in the United States and Europe and through a sales
representative in Japan. To date, companies based in the Pacific Rim and Europe
have accounted for a small portion of RAVISENT's revenues. Sales outside of the
United States have been primarily through U.S. manufacturers that distribute
their products to end users overseas.
In April 1998, RAVISENT acquired Viona, a German engineering services
company. Prior to the acquisition, RAVISENT had contracted Viona to co-develop
its products and a significant portion of its software and systems
architecture. The purchase price was approximately $11.4 million, and the
acquisition was recorded under the purchase method of accounting. The results
of operations of Viona have been included in RAVISENT's operating results since
the date of acquisition. In connection with the acquisition, RAVISENT expensed
$7.9 million of the purchase price as acquired in-process research and
development. The remaining portion of the purchase price was attributable to
acquired assets, which were primarily fixed assets and accounts receivable,
recorded at fair market value, in the amount of $0.5 million, and intangible
assets totaling $3.5 million less, liabilities acquired of $0.6 million. The
intangible assets consisted of goodwill valued at $3.5 million and workforce in
place valued at $0.04 million. RAVISENT plans to amortize the remaining
goodwill and other intangibles associated with the acquisition over the next
four years. See "--Acquired In-Process Research and Development" and Note 4 of
the notes to consolidated financial statements.
In April 1999, RAVISENT completed a financing in which it issued convertible
securities to an affiliate of Intel of $4.7 million and entered into a license
agreement covering certain Intel technology.
RAVISENT's future net income and cash flow will also be affected by its
ability to apply its net operating losses, which totaled approximately $14.1
million for federal tax reporting purposes as of December 31, 1998, against
taxable income in future periods. Due to the uncertainty of RAVISENT's ability
to realize the benefit of
33
<PAGE>
the deferred tax assets, the deferred tax assets are fully offset by a
valuation allowance. Under the Tax Reform Act of 1986, the use of net operating
losses may be impaired or limited in certain circumstances, including a
cumulative ownership change of greater than 50% over a three-year period. The
consummation of this offering, together with previous equity transactions, will
most likely result in a cumulative ownership change of greater than 50%.
Accordingly, RAVISENT's net operating losses incurred prior to this offering
that can be used to reduce future taxable income for federal tax purposes will
most likely be limited. Future changes of ownership, including this offering,
could further limit RAVISENT's use of net operating losses and could have an
adverse effect on its net income and cash flow. Changes in tax laws in the
United States or in our status may limit RAVISENT's ability to use its net
operating losses. Any limitation on RAVISENT's ability to use its net operating
losses could harm its business. See Note 15 of the notes to consolidated
financial statements.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items reflected in RAVISENT's
consolidated statements of operations:
<TABLE>
<CAPTION>
Three
Months
Year Ended Ended
December 31, March 31,
---------------------- -------------
1996 1997 1998 1998 1999
----- ------ ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License and services............... 19.7% 21.2% 11.3% 0.3% 21.2%
Hardware........................... 80.3 78.8 88.7 99.7 78.8
----- ------ ----- ----- -----
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
License and services............... 11.2 4.9 1.2 .5 1.2
Hardware........................... 63.6 118.3 79.8 97.4 67.2
----- ------ ----- ----- -----
Total cost of revenues............... 74.8 123.2 81.0 97.9 68.4
----- ------ ----- ----- -----
Gross profit......................... 25.2 (23.2) 19.0 2.1 31.6
Research and development............. 24.6 26.8 10.3 15.8 13.6
Sales and marketing.................. 17.4 17.0 6.5 14.8 9.8
General and administrative........... 28.6 25.0 15.4 16.1 7.7
Depreciation and amortization........ 1.1 1.3 3.0 0.5 2.9
Compensation related to stock
options............................. -- 20.6 0.5 -- --
Acquired in-process research and
development......................... -- -- 26.1 -- --
----- ------ ----- ----- -----
Operating loss....................... (46.5) (113.9) (42.8) (45.1) (2.4)
Interest expense, net................ 2.5 2.9 2.4 4.0 0.4
Other income......................... -- 10.5 -- -- --
----- ------ ----- ----- -----
Net loss......................... (49.0)% (106.3)% (45.2)% (49.1)% (2.8)%
===== ====== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1998 and 1999
Revenues. Total revenues increased 244% from $3.1 million for the quarter
ended March 31, 1998 to $10.8 million for the quarter ended March 31, 1999.
License and services revenue increased to $2.3 million for the quarter ended
March 31, 1999, due primarily to growth in license fees associated with
RAVISENT's Software CineMaster 98 product and increased customization services
related to RAVISENT's consumer electronics business. Software CineMaster 98 was
introduced during the quarter ended June 30, 1998. Hardware revenues increased
172% from $3.1 million for the quarter ended March 31, 1998 to $8.5 million for
the quarter ended March 31, 1999, due primarily to increased market acceptance
of RAVISENT's Hardware Cinemaster 98 product. In the quarter ended March 31,
1999, CineMaster release 1.2 was phased out of production, in favor of a new
release, CineMaster release 3.0. For the quarter ended March 31, 1999 revenues
34
<PAGE>
from sales of release 1.2 were $4.6 million or approximately 54.5% of hardware
revenues, and revenues from release 3.0 were $3.9 million or approximately
45.5% of hardware revenues.
Cost of Revenues. Cost of revenues consist primarily of manufacturing costs
associated with Hardware CineMaster 98, costs associated with shipment of
Software CineMaster 98 and license fees paid to third parties for technologies
incorporated into RAVISENT's products, including Dolby Digital technology. Cost
of revenues increased 140% from $3.1 million for the quarter ended March 31,
1998 to $7.4 million for the quarter ended March 31, 1999. The increase in cost
of revenues was primarily due to increased product costs associated with the
manufacturing of RAVISENT's Hardware CineMaster 98 product.
Gross Profit. Gross profit increased from $0.07 million for the quarter
ended March 31, 1998 to $3.4 million for the quarter ended March 31, 1999,
primarily due to increased revenues. As a percentage of total revenues, gross
profit increased from 2% for the quarter ended March 31, 1998 to 32% for the
quarter ended March 31, 1999, primarily as a result of a higher proportion of
license revenues associated with RAVISENT's transition during this quarter to a
business model based on licensing its technology rather than direct sales of
hardware products. For the quarter ended March 31, 1998, hardware revenue
represented 99.7% of total revenues compared to 78.8% of total revenues for the
quarter ended March 31, 1999.
Research and Development Expenses. Research and development expenses consist
primarily of engineering and related costs associated with the development of
new products, customization of existing products for customers, quality
assurance and testing. Research and development expenses increased 194%, from
$0.5 million for the quarter ended March 31, 1998 to $1.5 million for the
quarter ended March 31, 1999. As a percentage of total revenues, research and
development expenses decreased from 16% to 14%. The increase in research and
development expenses in absolute dollars was due primarily to supporting an
expanded customer base. The decrease in research and development expenses as a
percentage of total revenues resulted primarily from RAVISENT's increased
revenue base. RAVISENT expects research and development expenses to continue to
increase in absolute dollars in 1999 compared to 1998 as RAVISENT adds
additional engineering staff and capabilities.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries, travel expenses and costs associated with trade shows, advertising
and other marketing efforts, as well as technical support costs. Sales and
marketing expenses increased 128% from $0.5 million for the quarter ended March
31, 1998 to $1.1 million for the quarter ended March 31, 1999. As a percentage
of total revenues, sales and marketing expenses decreased from 15% to 10%. The
increase in absolute dollars was primarily due to the building of the sales and
marketing teams in the United States. The decrease in sales and marketing
expenses as a percentage of total revenues resulted primarily from RAVISENT's
increased revenue base. RAVISENT expects sales and marketing expenses to
increase in absolute dollars in 1999 compared to 1998.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and support costs for RAVISENT's finance, human
resources, information systems and other management departments. General and
administrative expenses increased 66% from $0.5 million for the quarter ended
March 31, 1998 to $0.8 million for the quarter ended March 31, 1999. As a
percentage of total revenues, general and administrative expenses decreased
from 16% to 8%. The increase in absolute dollars was primarily due to
expenditures on administrative infrastructure to support RAVISENT's growing
business operations. General and administrative expenses decreased as a
percentage of total revenues primarily due to RAVISENT's increased revenue
base. RAVISENT expects general and administrative expenses to increase in
absolute dollars in 1999 compared to 1998 as it continues to build the
necessary infrastructure to support its business operations and incurs greater
legal and accounting expenses as a public company.
Deferred Stock Compensation. In September 1998 and February 1999, RAVISENT
recorded $0.8 million and $0.5 million, respectively, of deferred stock
compensation in connection with grants of stock options. RAVISENT will amortize
this amount as compensation expense over the four year vesting period of the
options which will approximate $0.08 million per quarter.
35
<PAGE>
Depreciation and Amortization Expense. RAVISENT recorded depreciation and
amortization expense of $0.3 million for the quarter ended March 31, 1999
primarily related to the goodwill recorded as part of the Viona acquisition.
See "--Acquired In-Process Research and Development Expense."
Years Ended December 31, 1997 and 1998
Revenues. Total revenues increased 344% from $6.8 million in 1997 to $30.3
million in 1998. License and services revenue increased 139% from $1.4 million
in 1997 to $3.4 million in 1998, primarily due to RAVISENT's launch of its
first software solution, Software CineMaster 98. Hardware revenues increased
399% from $5.4 million in 1997 to $26.8 million in 1998, primarily due to sales
to Dell Computer which incorporated RAVISENT's solution into a particular line
of personal computers.
Cost of Revenues. Cost of revenues increased 192%, from $8.4 million in 1997
to $24.5 million in 1998. The increase in cost of revenues was due to increased
product costs associated with the manufacturing of RAVISENT's hardware related
products.
Gross Profit. Gross profit increased from a negative $1.6 million in 1997 to
$5.7 million in 1998. As a percentage of total revenues, gross profit increased
from a negative 23% to 19% in 1998. The increase in gross profit both in
absolute dollars and as a percentage of total revenues in 1998 was primarily
due to growth in RAVISENT's license and services business, which contributed
$3.1 million or 54% of gross profit, and growth in sales of hardware
subsystems, which contributed $2.6 million or 46% of gross profit.
Research and Development Expenses. Research and development expenses
increased 71% from $1.8 million in 1997 to $3.1 million in 1998. As a
percentage of total revenues, research and development expenses decreased from
27% in 1997 to 10% in 1998. The increase in research and development expenses
in absolute dollars was due to increased headcount associated with research and
development. The decrease in research and development expenses as a percentage
of total revenues resulted primarily from RAVISENT's increased revenue base.
Sales and Marketing Expenses. Sales and marketing expenses increased 70%
from $1.2 million in 1997 to $2.0 million in 1998. As a percentage of total
revenues, sales and marketing expenses decreased from 17% to 6%. The increase
in absolute dollars was primarily due to the building of the sales and
marketing teams in the United States with increased emphasis on enhancing
market awareness. The decrease in sales and marketing expenses as a percentage
of total revenues resulted primarily from RAVISENT's shift from a retail-
oriented distribution model, which required greater advertising expenses.
General and Administrative Expenses. General and administrative expenses
increased 173% from $1.7 million in 1997 to $4.7 million in 1998. As a
percentage of total revenues, general and administrative expenses decreased
from 25% to 15%. The increase in absolute dollars was primarily due to
expenditures on administrative infrastructure to support RAVISENT's growing
business operations. The decrease in general and administrative expenses as a
percentage of total revenues was primarily due to RAVISENT's increased revenue
base.
Depreciation and Amortization Expense. RAVISENT recorded depreciation and
amortization expense in 1998 of $0.9 million primarily related to the goodwill
recorded as part of the Viona acquisition. Additionally RAVISENT wrote off $7.9
million of acquired in-process research and development. See "--Acquired In-
Process Research and Development."
Years Ended December 31, 1996 and 1997
Revenues. Total revenues increased 63% from $4.2 million in 1996 to $6.8
million in 1997. License and services revenue increased 75% from $0.8 million
in 1996 to $1.4 million in 1997. The increase in license and services revenue
was primarily due to the addition of a licensing customer, Digital Processing
Systems, Inc.
36
<PAGE>
Hardware revenues increased 60% from $3.4 million in 1996 to $5.4 million in
1997. The increase in hardware revenues was primarily due to increased market
acceptance of RAVISENT's software solutions with supporting hardware platform
designs.
Cost of Revenues. Cost of revenues increased 168% from $3.1 million in 1996
to $8.4 million in 1997. The increase in cost of revenues was primarily due to
increased product costs associated with the manufacturing of RAVISENT's
hardware related products.
Gross Profit. Gross profit decreased from $1.1 million in 1996 to a negative
$1.6 million in 1997. Gross profit decreased both in absolute dollars and as a
percentage of total revenues in 1997. This decrease was primarily due to
expenses associated with obsolete inventory, which reduced gross profit by
approximately $0.7 million, price protection charges, which reduced gross
profit by approximately $0.4 million, a $0.5 million decrease in higher margin
services revenue and a greater portion of 1997 revenue was attributable to
lower margin hardware sales.
Research and Development Expenses. Research and development expenses
increased 77% from $1.0 million in 1996 to $1.8 million in 1997. As a
percentage of total revenues, research and development expenses increased from
25% in 1996 to 27% in 1997. The increase in research and development expenses
in absolute dollars and as a percentage of total revenues was due primarily to
increased headcount associated with new product development.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$0.7 million in 1996 to $1.2 million in 1997. As a percentage of total
revenues, sales and marketing expenses remained constant at 17% in 1996 and
1997.
General and Administrative Expenses. General and administrative expenses
increased 43% from $1.2 million in 1996 to $1.7 million in 1997. As a
percentage of total revenues, general and administrative expenses decreased
from 29% to 25%. The increase in absolute dollars was primarily due to
expenditures on administrative infrastructure to support RAVISENT's growing
business operations. The decrease in general and administrative expenses as a
percentage of total revenues was primarily due to RAVISENT's increased revenue
base.
37
<PAGE>
Quarterly Results of Operations
The following tables present certain unaudited quarterly consolidated
statements of operations data, both in absolute dollars and as a percentage of
revenues, for the eight quarters ended March 31, 1999. In the opinion of
management, this information has been presented on the same basis as the
audited consolidated financial statements appearing elsewhere in this
prospectus, and all necessary adjustments have been included in the amounts
stated below to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements of RAVISENT.
Results of operations for any quarter are not necessarily indicative of the
results to be expected for the entire fiscal year or for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License and services... $ 461 $ 139 $ 6 $ 10 $ 987 $1,717 $ 733 $2,290
Hardware............... 2,834 1,398 612 3,133 3,867 8,091 11,750 8,522
------- ------- ------- ------- -------- ------ ------- ------
Total revenues.......... 3,295 1,537 618 3,143 4,854 9,808 12,483 10,812
Cost of revenues........ 4,347 808 1,811 3,077 3,713 7,413 10,343 7,399
------- ------- ------- ------- -------- ------ ------- ------
Gross profit............ (1,052) 729 (1,193) 66 1,141 2,395 2,140 3,413
Research and
development............ 432 497 513 498 944 697 982 1,465
Sales and marketing..... 289 262 259 465 476 478 545 1,062
General and
administrative......... 384 378 765 505 1,201 1,318 1,649 837
Depreciation and
amortization........... 12 13 13 15 281 297 313 314
Compensation related to
stock options.......... -- 1,408 -- -- -- -- 139 --
Acquired in-process
research and
development............ -- -- -- -- 7,900 -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Operating loss.......... (2,169) (1,829) (2,743) (1,417) (9,661) (395) (1,488) (265)
Interest expense, net... 31 38 101 127 350 95 150 45
Other income............ 716 -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Net loss............. $(1,484) $(1,867) $(2,844) $(1,544) $(10,011) $ (490) $(1,638) $ (310)
======= ======= ======= ======= ======== ====== ======= ======
As a Percentage of Total
Revenues:
Revenues:
License and services... 14.0 % 9.0 % 1.0 % 0.3 % 20.3 % 17.5 % 5.9 % 21.2 %
Hardware .............. 86.0 91.0 99.0 99.7 79.7 82.5 94.1 78.8
------- ------- ------- ------- -------- ------ ------- ------
Total revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........ 131.9 52.6 293.0 97.9 76.5 75.6 82.9 68.4
------- ------- ------- ------- -------- ------ ------- ------
Gross profit............ (31.9) 47.4 (193.0) 2.1 23.5 24.4 17.1 31.6
Research and
development............ 13.1 32.3 83.0 15.8 19.5 7.1 7.9 13.6
Sales and marketing..... 8.8 17.0 41.9 14.8 9.8 4.9 4.4 9.8
General and
administrative......... 11.7 24.6 123.8 16.0 24.8 13.4 13.2 7.7
Depreciation and
amortization........... 0.3 0.8 2.1 0.5 5.8 3.0 2.5 2.9
Compensation related to
stock options.......... -- 91.6 -- -- -- -- 1.1 --
Acquired in-process
research and
development............ -- -- -- -- 162.7 -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Operating loss.......... (65.8) (118.9) (443.8) (45.0) (199.1) (4.0) (12.0) (2.4)
Interest expense, net... 0.9 2.5 16.3 4.1 7.2 1.0 1.2 0.4
Other income............ 21.7 -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Net loss............. (45.0)% (121.4)% (460.1)% (49.1)% (206.3)% (5.0)% (13.2)% (2.8)%
======= ======= ======= ======= ======== ====== ======= ======
</TABLE>
Hardware revenues decreased in the quarters ending September 30, 1997 and
December 31, 1997 from prior periods due to RAVISENT'S transition away from
distributors and retail customers towards top tier personal computer
manufacturer customers. License and services revenue increased $1.6 million in
the quarter ending March 31, 1999 from the immediately preceding quarter due to
the Company's transition towards a licensing model. License and services
revenue increased $0.7 million in the quarter ending September 30, 1998
primarily due to revenues from an up-front license fee. Hardware revenues
decreased $3.2 million in the quarter ending March 31, 1999 from the
immediately preceding quarter primarily due to RAVISENT's transition away from
a hardware sales model towards a licensing model. Cost of revenues increased
$1.0 million in the quarter ending December 31, 1997 from the immediately
preceding quarter due to the write-off of inventory of approximately $0.7
million, with the balance of the increase attributable to price protection
38
<PAGE>
associated with RAVISENT's transition away from the retail distribution
channel. Gross profit decreased by $0.3 million in the quarter ending December
31, 1998 from the immediately preceding quarter. The decline, both in absolute
dollars and as a percentage of revenues, was primarily due to upfront license
fees received in the preceding quarter. In April 1998, RAVISENT expensed $7.9
million of the purchase price as acquired in-process research and development
in connection with the acquisition of Viona. The increase in general and
administrative expense beginning in the quarter ending June 30, 1998 is
primarily the result of increased personnel costs of $0.2 million, and
increased professional fees of approximately $0.2 million to support the growth
of RAVISENT's infrastructure. General and administrative expenses declined by
$0.8 million for the quarter ended March 31, 1999 as compared to the
immediately preceding quarter primarily due to reclassification of overhead
costs in order to more accurately reflect departmental reporting and one-time
fees for professional services, which decreased by $0.1 million. The increase
in depreciation and amortization expense beginning in the quarter ending June
30, 1998 is the result of the amortization of goodwill and other intangible
assets in connection with the acquisition of Viona in April 1998. Compensation
expense related to stock options in the quarters ending September 30, 1997 and
December 31, 1998 relates to stock options granted to certain employees of
RAVISENT at less than the estimated fair market value of RAVISENT's common
stock on the date of grant and other grants to non-employees.
RAVISENT's business is subject to a variety of risks, many of which are
outside of RAVISENT's control, including those discussed elsewhere in this
prospectus. See "Risk Factors--You should expect our quarterly operating
results to fluctuate in future periods and they may fail to meet expectations
of securities analysts or investors, which could cause our stock price to
decline."
Acquired In-Process Research and Development
In April 1998, RAVISENT completed the acquisition of Viona, a company
specializing in the development of digital video technology. RAVISENT paid $6.1
million in cash, of which $2.6 million was paid at closing, $2.1 million will
be paid during 1999, and $1.4 million will be paid in equal installments at the
end of each of the next three fiscal years, issued 1,204,820 shares of
RAVISENT's common stock valued at $4.8 million and incurred transaction costs
of $0.8 million. For accounting purposes, payments due in future periods have
been discounted.
The acquisition of Viona was recorded under the purchase method of
accounting. A portion of the purchase price was allocated to in-process
research and development technology, which resulted in a charge of
approximately $7.9 million to RAVISENT's operations in April 1998. The in-
process research and development technology was valued using a cash flow model,
under which projected income and expenses attributable to the purchased
technology were identified, and potential income streams were discounted using
a 30%-35% discount rate for risks, probabilities and uncertainties, including
the stage of development of the technology, viability of target markets, and
other factors.
As of the acquisition date, Viona was conducting significant ongoing
research and development into five new software and hardware products including
enhancements to the existing digital video and audio system solutions
previously developed by RAVISENT. At the date of acquisition, these projects
had not reached technological feasibility and there was no alternative future
use for them. The five research and development projects included:
. CineMaster LC Hardware DVD Decoder, a single circuit board or card
that can be added to a personal computer to allow the personal
computer to process digital video signals. At the time of the
acquisition, Viona was conducting research and development to
integrate this product into a single chip-based design in an effort
to reduce manufacturing costs and to improve playback performance
quality. This research and development project had completed only
alpha testing and was approximately 80% complete at the date of
acquisition. Viona had incurred approximately $117,000 of research
and development expense and estimated that $35,000 would be required
to complete the development of the project. Development was
completed during 1998.
39
<PAGE>
. CE DVD Set-top Player/Portable Player, a DVD playback set-top
reference design for equipment manufacturers which was expected to
provide full DVD playback capabilities such as fast forward,
rewinding, multi-language and surround sound audio. At the time of
the acquisition, this project had not yet completed alpha testing
and there was significant uncertainty of completion. RAVISENT
estimated that the project was approximately 5% complete. Viona had
incurred approximately $30,000 of research and development expense
and estimated that $500,000 would be required to complete the
development of the project. Development is expected to be completed
within the next twelve months.
. DVD Software Encoder, a software solution to enable the processing
of digital video signals which is designed to eliminate the need for
a DVD encoder chip or circuit board by utilizing software to record
DVD and video streams on a personal computer. At the time of the
acquisition, this project had not yet completed alpha testing and
there was significant uncertainty of completion. RAVISENT estimated
that the project was approximately 40% complete. Viona had incurred
approximately $121,000 of research and development expense and
estimated that $203,000 would be required to complete the
development of the project. Development is expected to be completed
within the next twelve months.
. HDTV Hardware Decoder, a circuit board or card that could enable
personal computers to process HDTV signals. At the time of the
acquisition, this project had not yet completed alpha testing and
there was significant uncertainty of completion. RAVISENT estimated
that the project was approximately 35% complete. Viona had incurred
approximately $63,000 of research and development expense and
estimated that $111,000 would be required to complete the
development of the project. Development is expected to be completed
within the next twelve months.
. HDTV Software Decoder, a software solution designed to allow a
personal computer to process HDTV signals without the need for a
hardware solution. At the time of the acquisition, this project had
not yet completed alpha testing and there was significant
uncertainty of completion. RAVISENT estimated that the project was
approximately 15% complete. Viona had incurred approximately $15,000
of research and development expense and estimated that $150,000
would be required to complete the development of the project.
Development is expected to be completed within the next twelve
months.
The efforts required to develop the acquired in-process technology into
commercially viable products principally relate to the completion of all
planning, designing and testing activities that are necessary to establish that
the products can meet their design requirements, including function, features
and technical performance requirements.
RAVISENT based its determination of the acquired in-process technology
allocation on recently issued guidance by the Securities and Exchange
Commission and considered such factors as degree of completion, technological
uncertainties, costs incurred and projected costs to complete. Acquired in-
process technology projects continue to progress, in all material respects,
consistent with management's original assumptions used to value the acquired
in-process technology. See Note 4 of Notes to Consolidated Financial
Statements.
Liquidity and Capital Resources
Since inception, RAVISENT has financed its operations primarily through the
issuance and sale of debt and equity securities to investors. As of March 31,
1999 RAVISENT had approximately $2.2 million in cash and cash equivalents.
Net cash provided by operating activities for the three months ended March
31, 1999 was $0.9 million. Net cash used by operating activities for the three
months ended March 31, 1998 and the years ended 1996, 1997 and 1998 was $2.1
million, $2.0 million, $2.5 million and $9.7 million, respectively. Cash used
in
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operating activities in each of these periods was primarily the result of net
losses, adjusted for non-cash items, including in 1997 and 1998 compensation
expense; in 1998, acquired in-process research and development expense; and in
1998 and the three months ending March 31, 1999, depreciation and amortization
expense primarily related to the goodwill recorded with the acquisition of
Viona, offset by increases in accounts receivable and increases in inventory
associated with the increase in hardware sales.
Net cash provided by investing activities for the three months ended March
31, 1999 was $8,000. Net cash used by investing activities for the three months
ended March 31, 1998 and the years ended 1996, 1997 and 1998 was $0.06 million,
$0.1 million, $0.03 million and $4.0 million, respectively. Cash used in
investing activities in each period consisted primarily of net purchases of
furniture and equipment. In 1998, cash used in investing activities also
included the costs associated with the Viona acquisition.
Net cash provided by financing activities for the three months ended March
31, 1998 and 1999 and the years ended 1996, 1997 and 1998 was $4.2 million,
$0.3 million, $2.1 million, $3.0 million and $14.2 million, respectively. Cash
provided by financing activities was primarily attributable to net proceeds
from the issuance of debt and equity securities to investors.
As of March 31, 1999, RAVISENT's principal commitments consisted of
obligations outstanding under equipment leases and notes payable to partially
fund its operations and capital purchases. The equipment leasing arrangements
consist primarily of RAVISENT paying rental fees to third party leasing
providers at interest rates between 15% to 18%, that maintain title to the
leased equipment. In most cases, there are no obligations for RAVISENT to
purchase the equipment at the end of the term. Although RAVISENT has no
material commitments for capital expenditures, it anticipates a substantial
increase in its capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. In addition,
RAVISENT has approximately $2.5 million at March 31, 1999 of payments due over
the next two years to the former owners of Viona.
As of March 31, 1999, RAVISENT had a $5 million line of credit with Silicon
Valley Bank. Under the terms of the line of credit, borrowings are subject to a
percentage of "eligible" accounts receivable and inventory, as defined in the
credit documentation, and bear interest at a rate of prime plus 1% per annum
(8.75% at March 31, 1999). In addition, RAVISENT must:
. maintain a tangible net worth of an amount equal to $1.8 million plus 75%
of RAVISENT's net profits for the previously completed fiscal quarter;
. supply Silicon Valley Bank within ten days after the end of each month,
monthly receivables, payables reconciliations and perpetual inventory
reports; and
. supply Silicon Valley Bank within 30 days after the end of each month,
monthly unaudited financial statements and compliance certificates.
At March 31, 1999 approximately $1.3 million was outstanding and $1.7
million was available under the line of credit. At March 31, 1999, RAVISENT was
not in compliance with the tangible net worth covenant but had received a
waiver from Silicon Valley Bank for this violation. In addition, Silicon Valley
Bank agreed to lower the tangible net worth requirement to $1.0 million. This
line of credit expires in July 2000. Silicon Valley Bank has senior security
interest in substantially all of the assets of RAVISENT.
Although it has not conducted any studies or had discussions with advisors,
RAVISENT presently anticipates that the net proceeds from this offering,
together with existing sources of liquidity and cash anticipated to be provided
by operations, if any, together with borrowings available under its line of
credit, will be adequate to meet its cash needs for at least the next twelve
months.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit
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entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software used by many companies and governmental
agencies may need to be upgraded to comply with such Year 2000 requirements or
risk system failure or miscalculations causing disruptions of normal business
activities.
In February 1999, RAVISENT initiated a Year 2000 compliance program. The
program is directed by RAVISENT's quality assurance manager and includes an
intra-company task force with members from each of RAVISENT's principal
internal divisions, including finance and administration, systems, engineering
and marketing. The task force is charged with identifying areas of potential
risk within each department, and making the appropriate evaluation,
modification, upgrade or replacement, as appropriate.
Scope of Year 2000 Assessment
RAVISENT's Year 2000 compliance program is in the process of investigating
Year 2000 compliance in each of RAVISENT's offices, in Malvern and Lancaster,
Pennsylvania, San Jose California and Karksruhe, Germany. The departments under
investigation include:
. product management;
. program management;
. marketing;
. sales;
. human resources;
. engineering;
. quality assurance;
. development analysis;
. production;
. procurement;
. certification;
. administration;
. finance;
. operations;
. management information systems; and
. internet.
In addition, RAVISENT is examining its operations for Year 2000 impact and
compliance. The operational areas under investigation include:
. products;
. software applications;
. facilities;
. suppliers and vendors; and
. computer systems.
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Budget and Schedule
RAVISENT has allocated a total of approximately $50,000 for completing its
Year 2000 compliance plan. RAVISENT has budgeted approximately $30,000 for cash
outlays for software and hardware replacement. In addition, under the
compliance plan designated RAVISENT employees are required to spend a portion
of their time in support of the compliance program. RAVISENT currently
estimates personnel costs associated with the Year 2000 task force to be
approximately $20,000. RAVISENT estimates that it has expended approximately
20% of its budget for Year 2000 compliance.
Phase 1 of RAVISENT's compliance plan commenced in February 1999. The last
phase of the compliance plan is expected to conclude in October 1999. The major
milestones for each phase, and their expected dates of completion, are as set
forth below:
<TABLE>
<CAPTION>
Task Anticipated Completion Date
---- ---------------------------
<S> <C>
Identify risk areas March 1999
Evaluation of potential risks June through July 1999
Modify, upgrade or replace affected
systems July 1999
Test high risk areas October 1999
Make additional changes as necessary October 1999
Re-testing November 1999
Implement back-up plan October 1999
</TABLE>
RAVISENT is currently in the process of identify its potential risk areas.
This process includes contacting third parties that provide services used in
RAVISENT's operations. The result of this inquiry is discussed below.
Products
RAVISENT's products have no inherent time or date function. RAVISENT
reviewed the engineering specifications for its products, and made the
determination that because there is no inherent time or date function, no
testing of the products was necessary.
Third Party Hardware and Software Systems and Services
RAVISENT is in the process of evaluating all of the third party systems and
software that it uses in its business. RAVISENT has been informed by its
payroll and commercial banker that their systems are Year 2000 compliant.
RAVISENT has not yet received its response to its request for Year 2000
certification from its manufacturing subcontractors, raw materials providers,
office suppliers and benefits providers.
RAVISENT has identified approximately 150 commercial software packages
(including multiple releases of the packages) and an additional approximately
50 hardware and software systems that are used in RAVISENT's business. RAVISENT
has received assurances satisfactory to it from a majority of the providers of
these hardware and software systems that the systems are Year 2000 complaint.
RAVISENT has further determined that Year 2000 "patch kits" are available for a
majority of the commercial software applications it uses in its business for
which it has not received assurances of Year 2000 compliance. RAVISENT has not
yet received assurances as to Year 2000 compliance from those parties from
which it licenses in material technology, including Dolby audio technology and
encryption and decryption software. Should raw materials used in RAVISENT's
Hardware CineMaster product, such as semiconductors, or the software RAVISENT
licenses related to audio technology or encryption and decryption, not be Year
2000 compliant, RAVISENT would not be able to ship its product, it would not be
able to fulfil its contractual obligations and its business would be severely
harmed.
RAVISENT's Year 2000 compliance program has to date revealed that its
telephone system is the only third party system that is not compliant and will
need to be replaced. The cost of replacing the hardware and software associated
with this system is estimated to be approximately $3,000.
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Contingency Plan
As noted above, RAVISENT's Year 2000 compliance plan currently is expected
to be substantially complete by November 1999. This includes re-testing non-
compliant areas and developing a back-up plan by no later than October 1999.
Moreover, RAVISENT may discover Year 2000 compliance problems in its systems
that will require substantial revision. In addition, third-party software,
hardware or services incorporated into RAVISENT's information systems may need
to be revised or replaced, all of which could be time-consuming and expensive
and result in the following, any of which could adversely affect RAVISENT's
business, financial condition and results of operations:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to RAVISENT's reputation;
. increased service and warranty costs; and
. litigation costs.
The failure of RAVISENT to fix or replace its third-party software, hardware
or services on a timely basis could result in lost revenues, increased
operating costs, the loss of customers and other business interruptions.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Positions, or SOP, No. 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires entities to capitalize certain costs related to internal-use software
once certain criteria have been met. The adoption of SOP No. 98-1 did not have
a material effect on RAVISENT's capitalization policy.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. RAVISENT has expensed these costs historically, therefore, the
adoption of SOP No. 98-5 did not have a material impact on RAVISENT's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because RAVISENT does not
currently hold any derivative instruments and does not engage in hedging
activities, RAVISENT expects that the adoption of SFAS No. 133 will not have a
material impact on its financial position or results of operations. RAVISENT
will be required to implement SFAS No. 133 for the year ending December 31,
1999.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. RAVISENT does not expect the adoption of SOP 98-9 to have a material
effect on its results of operations or financial condition.
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Qualitative and Quantitative Disclosures About Market Risk
RAVISENT develops products in the United States and sells such products in
North America, Asia and Europe. As a result, RAVISENT's financial results could
be affected by factors such as changes in foreign currency exchange rates or
weak economic conditions in foreign markets. As all sales are currently made in
U.S. dollars, a strengthening of the dollar could make RAVISENT's products less
competitive in foreign markets. RAVISENT does not use derivative instruments to
hedge its foreign exchange risk. RAVISENT's interest income is sensitive to
changes in the general level of U.S. interest rates, particularly since the
majority of its investments are in short-term instruments. Due to the nature of
RAVISENT's short-term investments, RAVISENT has concluded that there is no
material market risk exposure. Therefore, no quantitative tabular disclosures
are required.
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BUSINESS
RAVISENT designs, develops, licenses and markets innovative modular software
solutions that enable digital video and audio stream management in personal
computer systems and consumer electronics devices. RAVISENT also licenses
supporting hardware designs to selected customers and provides customization
services and customer support. "Stream management" includes recording, playback
and other manipulation of a video or audio input or "stream" in a useful way.
RAVISENT's solutions enable decoding (playback) and encoding (recording) of
multimedia formats such as digital versatile disk, or DVD; direct broadcast
satellite, or DBS, or its European counterpart, digital video broadcasting, or
DVB; and high definition television, or HDTV, on existing personal computer and
consumer electronics platforms. RAVISENT's digital solutions incorporate
industry standards, such as MPEG-1, MPEG-2 and Dolby Digital, for video and
audio compression, the process of storing video or audio content in digital
form, using the same powerful, easily customizable and modular software
architecture and remaining independent of operating systems and silicon
components. As digital technology continues to evolve and standards change,
RAVISENT can add new modules to its software to provide additional
functionality without requiring the altering of existing core components of its
digital solution. Moreover, RAVISENT's modular approach provides its customers
with enhanced flexibility and adaptability that enables the rapid introduction
of new products to market. RAVISENT intends to leverage the flexibility of its
products to capitalize on the shift from analog to digital content across the
media and entertainment industries.
RAVISENT's products focus on two important markets, the personal computer
market and the consumer electronics market. RAVISENT's products incorporate a
common, or "core," high-performance software code across multiple applications
in each market. This allows personal computer and consumer electronics
manufacturers to achieve faster time-to-market, to cross-market their product
offerings, to develop a customizable, consistent look and feel across product
lines and to reduce technical support costs. In the personal computer market,
RAVISENT's current products consist of high-performance digital video and audio
decoding and encoding solutions. In the consumer electronics market, RAVISENT's
current product is a high-performance software solution with multiple
supporting hardware platform designs that provides digital audio and video
stream management. RAVISENT's digital solutions provide personal computer and
consumer electronics manufacturers with a foundation to support future
components, operating systems and functionalities in a rapid and cost effective
manner.
RAVISENT's DVD solutions are incorporated into the products of seven of the
top ten personal computer manufacturers, based on total unit sales. Personal
computer and peripherals manufacturers currently shipping RAVISENT's products
include ATI Technologies Inc., Compaq Computer Corporation, Dell Computer
Corporation, Fountain Technologies, Inc., Fujitsu Microelectronics, Inc.,
Gateway 2000, Inc., Hewlett-Packard Company, Micron Electronics, Inc. and
Packard Bell NEC Europe. Consumer electronics manufacturers that have agreed to
incorporate RAVISENT's technology include Tottori-Sanyo Electric Co., Ltd. (a
subsidiary of Sanyo Electronics Corporation, Inc.) and Yamaha Corporation of
America. RAVISENT also has strategic relationships with ATI Technologies, Dolby
Laboratories, Inc., Intel Corporation and STMicroelectronics.
Industry Background
Historically, the personal computer and consumer electronics industries
addressed video and audio content using different technologies. The personal
computer developed around digital technology using the central processing unit,
or CPU, which was initially expensive and unable to simultaneously run the
operating system and manipulate video and audio inputs at satisfactory
performance levels. As a result, digital video content was managed by a stand-
alone semiconductor device or module. In contrast, the consumer electronics
industry evolved using lower cost analog solutions that were able to provide
acceptable performance, but were typically passive and did not permit the users
to edit or enhance the content. Advances in semiconductor technology have
dramatically lowered the price of high performance microprocessors, allowing
personal computers and consumer electronics devices to employ software
solutions to manage video and audio streams in a digital format without
overburdening their CPUs. Moreover, today, when evaluating a digital personal
computer or consumer electronics device, consumers are increasingly demanding
digital video and audio capabilities such as
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3-D graphics, editing and compression. Analog formatted devices cannot provide
these capabilities. Meanwhile, digital formats have emerged that provide higher
image resolution and quality, the opportunity to deliver a wide range of new
services and content, more efficient use of limited transmission spectrums and
the ability to deliver customized and interactive services. As a result, a
growing number of personal computer and consumer electronics manufacturers are
storing, accessing and playing video and audio streams in a digital format.
A number of trends are accelerating the migration of manufacturers from
analog to digital technology, including advances in technology, the evolution
of standards, government and private initiatives and the increasing
availability of content.
. Advances in Technology. In the past, multiple silicon devices were
needed to process digital video and audio streams. As silicon
technology progressed, in many instances one such device was needed.
Today, as microprocessor computing speeds continue to increase,
software-only solutions are capable of providing video and audio
stream management at a lower cost and at a performance level
indistinguishable from dedicated silicon approaches.
. Evolution of Standards. Historically, a significant barrier to the
growth of digital video and audio technology was the lack of widely
accepted technological standards. Today, industry participants have
adopted a video compression standard known as MPEG-2 that enables
video and audio compression for digital transmission and storage.
MPEG-2 is currently deployed as the DVD solution in personal
computers and DVD players and has been adopted as the standard for
digital television, or DTV, and HDTV. In addition, Dolby Digital,
formerly known as AC-3, designed by Dolby Laboratories, has emerged
as an industry standard for audio compression.
. Government and Private Initiatives. A number of government and
private initiatives have also emerged to fuel the shift from analog
to digital technology. For example, the cable television industry
has adopted the "OpenCable" standard under which digital cable boxes
will be manufactured and sold through retail channels similar to
personal computers and television sets, thereby creating a new
product market. Also, under the Telecommunications Act of 1996, all
broadcasters are required to change their broadcasting formats to
digital and to cease carrying analog broadcasts by 2006. This will
require every owner of an analog television set to purchase either a
new digital television set or a digital converter box in the next
seven years.
. Increasing Availability of Content. The introduction of many forms
of stand-alone content for digital media will lead consumers to shop
for devices, such as DVD players and recorders, digital cable set-
top devices and digital television sets, on which stand-alone
content can be seen, heard, edited and stored. Already, there are
over 2,300 movie titles available in DVD format. The recording
industry has adopted the DVD format to be used in next-generation
audio devices. Cable television providers have adopted content
strategies intended to capitalize on the trend toward digital
technology through increased channel capacity and higher-resolution,
interactive digital programming.
Advances in microprocessor speed and capacity coupled with the shift to
digital technology are leading the personal computer and consumer electronics
markets to converge at an accelerating pace. As the personal computer and
consumer electronics industries converge, two major trends have emerged. First,
the integration of video and audio streams with digital technology is
increasing the complexity of product design. Second, products have shorter life
cycles as a result of rising digital processing capabilities, falling prices of
semiconductors and rapidly improving software. In the past, consumer
electronics products relied on multiple special-purpose silicon devices to
provide the necessary system performance, with each device performing a
particular function such as video or audio decoding. Similarly, the personal
computer industry has historically been driven by the latest in semiconductor
innovation and has timed product introductions around microprocessor advances,
which typically have occurred twice a year. The strategy of relying upon a
special-purpose silicon device carried two major risks: high product
development cost and premature product obsolescence. The risk of high product
development cost came from the time and effort required to adapt a silicon-
based solution to address each new feature or product platform. The risk of
product obsolescence resulted from the fixed-function nature of the special-
purpose silicon device and the inability of manufacturers
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to rapidly change product offerings in light of changes in consumer preferences
for applications or functionality. As the speed of microprocessors increased,
the ability to shift more and more complex tasks from a special-purpose silicon
device to software increased. As a result, personal computer and consumer
electronics manufacturers are now able to use digital solutions with a more-
adaptable and inexpensive software-only format, giving them the flexibility to
innovate without the risk of quick obsolescence.
RAVISENT believes that personal computer and consumer electronics
manufacturers are seeking to leverage their expertise and brand recognition in
order to deliver digital products that provide a new set of choices for
consumers in new markets. For example, all existing television sets, video
cassette recorders, stereos, set-top boxes and personal computers are
candidates for upgrade to digital technologies. To enter into these new markets
and capitalize on upgrade cycles for these products, personal computer and
consumer electronics manufacturers are seeking new digital product solutions
that permit rapid time-to-market with the latest features and functionality.
RAVISENT believes that these product solutions must be extensible and have a
customizable architecture that allows product differentiation and facilitates
migration across product lines and markets. In particular, in order to keep
pace with the rapidly-changing product cycles of personal computer and consumer
electronics manufacturers and be cost effective, these product solutions must
rely on software that is independent of operating system platforms and not on
the design of a special-purpose silicon device and its associated operating
systems.
The RAVISENT Solution
RAVISENT designs, develops, licenses and markets innovative modular software
solutions and supporting hardware designs that enable digital video and audio
stream management in personal computer systems and consumer electronics
devices. RAVISENT's solution is based upon a common, or "core," software code
and contains high-performance digital video and audio decoding and encoding
engines that implement complex algorithms, which optimize the performance of
the solution within a particular system or device. These engines, in turn,
enable decoding and encoding of media formats such as DVD, DBS/DVB and HDTV on
existing personal computer and consumer electronics platforms. RAVISENT's
digital solutions incorporate industry standards for video and audio
compression and are independent of operating systems and silicon components. By
using RAVISENT's solution, its customers can provide various video and audio
processes normally completed by special-purpose silicon devices with software
modules at a fraction of the cost.
RAVISENT believes that its digital solutions provide a number of significant
advantages for personal computer and consumer electronics manufacturers.
RAVISENT's personal computer and consumer electronics products are built using
the same powerful, easily customizable and modular software architecture. This
modular approach provides RAVISENT's customers with enhanced flexibility,
enabling them to rapidly introduce products to market. In addition, using
RAVISENT's software solutions frees these customers from semiconductor design
cycles. As digital technology evolves and standards change, RAVISENT can add
new modules to its software to address the changes without needing to alter
existing components of its digital solution.
Examples of how RAVISENT's digital solutions are being implemented include:
. In the personal computer market, Dell Computer uses RAVISENT's DVD
decoding solutions in all of its DVD-enabled desktop personal
computers. Dell Computer has migrated RAVISENT's solution across
multiple product cycles through RAVISENT's customization and
optimization services, even when the different cycles involve
changing graphics requirements and different microprocessors. The
RAVISENT digital solution allows Dell Computer to use the same user
interface in each of these DVD-enabled product lines while
maintaining high quality video and audio performance and rapid time-
to-market delivery.
. In the consumer electronics market, Sanyo Electronics, by using
RAVISENT's software solution and supporting hardware platform
design, can now offer high quality video and audio performance
together with significant cost savings in its DVD players.
RAVISENT's technology is designed to enable Sanyo Electronics to
migrate this platform to accommodate additional technologies such as
DBS/DVB, DTV and HDTV.
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Strategy
RAVISENT's strategy is to be the leading global provider of digital video
and audio solutions to personal computer and consumer electronics
manufacturers. RAVISENT believes that the most effective way to achieve its
strategy is to become an intellectual property company that licenses its
technology to manufacturers that will, in turn, use RAVISENT's solutions to
penetrate very large personal computer and consumer electronics markets. Key
elements of RAVISENT's strategy include:
Grow License Business Model Among Top Tier Personal Computer and Consumer
Electronics Manufacturers. RAVISENT's strategy is to license its software
solutions and supporting hardware designs to leading personal computer and
consumer electronics manufacturers. RAVISENT believes that the success of its
manufacturing customers in the digital video and audio markets will continue to
validate its technology. RAVISENT intends to leverage its existing customer
relationships into additional product lines and to seek out additional personal
computer and consumer electronics manufacturers as customers. RAVISENT believes
that its license model avoids the pitfalls of manufacturing, storing and
distributing hardware-based digital solutions while simultaneously increases
profitability. RAVISENT also believes that by developing customized solutions
in partnership with its customers, it will avoid commoditization of its
products.
Extend Technological Leadership. RAVISENT has established its line of
CineMaster products as a leading DVD solution for the personal computer market.
RAVISENT's experience in providing digital video and audio technologies has
enabled it to stay at the forefront of the transition to digital technologies.
For example, RAVISENT believes it was the first company to display a working
DVD decode solution on a personal computer, the first company to demonstrate an
HDTV decode solution on a personal computer and the first company to display an
all-software HDTV decode solution. RAVISENT intends to continue to invest in
research and development both internally and in conjunction with its customers
and strategic partners to maintain its technological leadership, improve its
current product offerings and leverage its proprietary technologies.
Leverage Technology and Expertise into New Markets. RAVISENT intends to
leverage its modular software solutions and DVD expertise into multiple
consumer electronics markets, such as the emerging DTV, HDTV, DBS/DVB and
digital cable markets. RAVISENT believes that these markets will undergo
dramatic growth in the next few years and that the extensibility of its
products across multiple digital markets will provide it with an advantage over
competitors focused on a single product, technology or market. In the future,
RAVISENT plans to supplement its distribution channel by establishing an
Internet presence to maximize direct contact with its customers, facilitate
electronic sales of its products and sell associated products directly to end
users. In May 1999, RAVISENT launched the web site Cinemazing.com, through
which it currently provides access to DVD rentals and sales through a "click
through" arrangement with on-line DVD distributors, such as DVDExpress, NetFlix
and Barnesandnoble.com.
Focus on Strategic Relationships. RAVISENT's solutions are incorporated into
the products of seven of the top ten personal computer manufacturers and two
leading consumer electronics manufacturers. In addition, RAVISENT has
established strategic relationships with leading technology companies, such as
ATI Technologies, Dolby Laboratories, Intel and STMicroelectronics. RAVISENT
believes these industry relationships better position it to stay abreast of
industry trends, respond to the needs of its customers, provide input into
industry standards and improve its product planning process. RAVISENT intends
to continue to develop its existing strategic relationships and develop new
strategic relationships in targeted areas.
Technology
RAVISENT has designed its digital video and audio stream management
solutions to be independent of the hardware platform on which they run.
RAVISENT's designs are based on a modular software architecture, whereby each
of the technical standards that are used for various digital media is addressed
through an independent self-contained module of RAVISENT's software. For
example, compliance with MPEG-2 and Dolby Digital has been achieved through
completely discrete components of RAVISENT's software that can be "plugged in"
to each other or to other modules addressing other standards or features of
RAVISENT's
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products. Furthermore, each of these modules can address particular
semiconductors or central processing units (CPUs) as needed. As a result,
RAVISENT's architecture allows personal computer and consumer electronics
manufacturers to choose different combinations of software and hardware
configurations for their products while maintaining a consistent look and feel.
RAVISENT's module-based approach to its digital solutions is designed to
provide flexibility and adaptability as relevant technologies evolve and
standards change. For example, as new digital technology develops, whether
hardware or software-based, RAVISENT can add new modules to address the new
technology without altering other components of its digital solution. In
addition, as the processing speeds and capabilities of personal computers and
graphics cards improve, hardware-based modules can be replaced with software
modules, again without requiring the alteration of other components of
RAVISENT's overall architecture. The same flexibility also applies to the user
interface and storage modules. For example, as new platforms and operating
environments arrive, only the interface modules will need to be altered to
adapt.
RAVISENT identifies emerging technologies necessary for future platforms
which address various media sources such as those shown below. RAVISENT then
applies its high-performance modular software solution to manage these sources
in a digital format, enabling manufacturers to support these technologies in
various devices:
[Graphic appears here]
Description of graphic
The graphic consists of three columns of boxes with blocks of text inside of
them. The first column has four small boxes, the second column has one large
box and the third column has two medium-sized boxes. Arrows point from each box
in the first column to the box in the middle column and from the box in the
middle column to each of the two boxes in the third column.
Over the first column is the word "Sources." The words appearing in the first
box in the first column are "Recorded Media" (in bold) and below the words
"DVD, DVD-ROM, CD, CD-ROM, Video CD." The words appearing in the second box in
the column are "Broadcast Media" (in bold), and below the words "Digital
Satellite, DTV, HDTV, Digital Cable." The words appearing in the third box in
the first column are "Legacy Media" and below the words "TV, Analog Cable, VCR,
Analog Inputs." The words appearing in the fourth box in the first column are
"Network Media" and below the words "Streaming MPEG Video and Digital Audio."
Over the second column are the words "RAVISENT Solution." The words appearing
in the single box in the second column are "Software Algorithms and IP Cores,"
"Software Drivers," "Hardware Designs," "Applications Programming Interfaces"
and "End User Applications." All of these words are in large bold print and
each phrase appears over the next.
Over the third column is the word "Devices." The words appearing in the first
box in the third column are "PC Products," (in bold). Below are the words
"Desktop and Laptop Systems Incorporating:" (in bold) and below this (not in
bold) are the words "DVD, HDTV, Digital Satellite, Digital Cable, Digital VCR."
The words appearing in the second box in the third column are "CE Products" (in
bold) below which are the words "DVD Players, DVD portable players, DVD game
consoles, HDTV decoder boxes, Digital Satellite set-tops, Digital Cable set-
tops, Digital VCRs."
. Software Algorithms and IP Cores
Software algorithms are designed to work with multiple
microprocessors, operating environments or semiconductor devices.
They exist in high level language forms but perform silicon level
functions such as video decoding and encoding.
. Software Drivers
Software drivers control the core software or hardware
implementations. They are designed for specific operating systems
and typically run in Microsoft operating environments; nonetheless,
the core design allows for porting to other environments. Software
drivers are the "middleware" that connects the algorithms of
RAVISENT's solution to the operating environments.
. Hardware Designs
Hardware designs are developed with a modular approach to allow for
flexible silicon device selection and adaptation to industry
standard interfaces. RAVISENT licenses its hardware designs to
enable its software licensees to deliver a complete product.
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. Application Programming Interfaces
Application programming interfaces, or APIs, allow for the use of
RAVISENT software drivers or hardware components by third party
applications as well as independent application development by
RAVISENT teams. These tools are developed around multiple industry
standards and interfaces to allow for full-feature access.
. End User Applications
End user applications are delivered to RAVISENT customers as
complete multi-language installations which provide customizable,
full-featured graphical user interfaces.
The diagram below represents the digital media flow through the RAVISENT
solution:
[Graphic appears here]
Description of graphic
The graphic consists of a flowchart of boxes with arrows pointing from each box
toward one or more boxes below or to the right. There is a column of four boxes
on the left under the word "Sources." These boxes are the same as appear in the
first column of boxes in the graphic on page 46 and the same words appear
inside each of them, respectively. To the right of this column is a group of
boxes encircled by a dotted rectangular line with the words "RAVISENT Solution"
appearing above and outside of this dotted line. All of the boxes are inside
the dotted line except the four boxes in the "sources" column
The four boxes in the "Sources" column on the left each point to a single long
rectangular box inside of which are the words "Source Management." This box
points to another long rectangular box inside of which are the words "Media
Router." Below this box is a small square box inside of which are the words
"Media Caching." An arrow points to and from this box and the "Media Router"
box. Arrows point from the "Media Router" box to each of two small square boxes
inside of which are the words "Media Decode" and "Convergence User Interface"
respectively. Below the "Convergence User Interface" box is a small square box
inside of which are the words "Intelligent Agent." An arrow points to and from
this box and the "Convergence User Interface" box. Arrows also point from each
of the "Media Decode" and "Convergence User Interface" boxes to a small square
box inside of which are the words "User Presentation."
. Source Management
RAVISENT's digital video and audio source management solution starts
by controlling and decoding multiple video and audio streams from
either digital or digitally converted analog sources.
. Media Router/Media Caching
After the streams are received and converted, they are directed via
the "Media Router" module to either store the streams for future
playback using a temporary memory storage module called the "Media
Caching" module, or deliver them to the "Media Decode" module for
immediate presentation.
. Media Decode/Convergence User Interface/Intelligent Agent
Upon delivery, the "Media Decode" module translates the compressed
data into video and audio streams. At this point, RAVISENT's
"Convergence User Interface" module allows users to
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control the final presentation of the stream as well as to provide a
customized look and feel. RAVISENT plans to add intelligent agents
that would enable user habit-based automatic programming and
simultaneous playback and recording capabilities.
. User Presentation
As a final step, RAVISENT's "User Presentation" module converts the
audio and video streams to the proper output format for presentation
on multiple devices including computer monitors, television sets and
speakers.
Products and Services
Products
RAVISENT licenses its high-performance, customizable, modular software
solutions and supporting hardware designs to manufacturers to enable digital
video and audio playback and recording within the personal computer and
consumer electronics industries. Overall, RAVISENT has 22 individual licenses
with its customers for technology incorporated into their products. RAVISENT
currently licenses the following three products:
. Hardware CineMaster 98, a software DVD solution with a supporting
hardware platform design that is incorporated into the systems of
three major personal computer manufacturers to enable DVD playback
in their products. A Dell Computer system incorporating Hardware
CineMaster 98 won the Editors' Choice Award for high-end personal
computers in December 1998 in both PC World and PC Magazine. Both
awards cited the quality of the DVD playback in general and
RAVISENT's solution in particular. Historically, RAVISENT derived
hardware revenue from, and was responsible for, the manufacture and
delivery of this product. In early 1999, RAVISENT began to contract
with third party manufacturers to manufacture and deliver this
product directly to RAVISENT's customers. RAVISENT will receive a
license fee for each unit sold. During the year ended December 31,
1998 and the quarter ended March 31, 1999, RAVISENT sold 0.3 million
units and 0.1 million units, respectively, of Hardware
CineMaster 98.
. Software CineMaster 98, a software-only DVD solution that has been
licensed to seven of the top ten personal computer manufacturers to
enable DVD playback in their products. Software CineMaster 98 is
incorporated into the operating system of personal computers or sold
separately as part of an after-market solution bundled with a
graphics card. Compaq Computer and Gateway systems incorporating
Software CineMaster 98 won the PC Magazine Editors' Choice Award in
March 1999 and December 1998, respectively. These awards cited both
the quality of the DVD playback in these systems and RAVISENT's
Software CineMaster 98 product as responsible for DVD decoding in
these systems. RAVISENT receives a per unit license fee from
manufacturers for each system or device sold by them which
incorporates this product. During the year ended December 31, 1998
and the quarter ended March 31, 1999, RAVISENT received license fees
for 5.1 million units sold and 1.8 million units sold, respectively,
that incorporated Software CineMaster 98.
. CineMaster CE, a software solution with multiple supporting hardware
platform designs that enables DVD playback across a variety of
consumer electronic products. CineMaster CE was developed through
RAVISENT's strategic relationship with STMicroelectronics to which
RAVISENT has licensed the product on a nonexclusive basis.
CineMaster CE includes a complete DVD set-top reference design,
including lower level software, a complete hardware design and a
front-end graphical user interface. CineMaster CE was introduced in
late 1998 and Sanyo Electronics and Yamaha have already signed
agreements to license this solution. RAVISENT receives a per unit
license fee for each microprocessor that incorporates its technology
in addition to the license fee it receives on a per unit basis from
the consumer electronics device manufacturer.
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Services
Although RAVISENT's solutions fall into certain basic product formulations
such as its Software CineMaster or Hardware CineMaster solutions, RAVISENT
works with each of its customers to customize elements of its solutions (such
as the graphical user interface) to their products and to mutually agreed upon
specifications. In addition, RAVISENT typically adds specific features that a
customer requests which may be different from those installed in the product of
another customer, even where the solutions installed in both customers'
products are the same basic product (e.g., Software CineMaster 98). RAVISENT
also modifies its software drivers to ensure compatibility with hardware
components (such as different graphics cards) which differ among its customers
and among the various models of a single customer. Finally, RAVISENT assists
its customers in managing Microsoft's "WHQL" process, under which Microsoft
certifies that a particular computer system is compatible with the Microsoft
Windows operating system.
Markets and Applications
Over the next ten years, RAVISENT expects the consumer electronics market to
experience a significant upgrade cycle as analog devices such as VCRs, set-top
cable boxes, audio players and televisions are replaced with digital devices.
RAVISENT believes its digital video and audio solutions will enable personal
computer and consumer electronics manufacturers to provide the next generation
of digital devices required in this upgrade cycle. A few of the current and
future applications for these devices are the following:
Digital Versatile Disk. DVD is the next generation of five-inch optical disc
technology. A DVD is the same size as a compact disc but holds up to twenty-
five times more data and is up to nine times faster. DVD drives are also
"backward-compatible" with compact disc drives. This increased capacity allows
a DVD to store both high-quality digital video and audio and positions DVD as
the natural successor to compact discs, especially in home application segments
such as personal computers, video entertainment and video game consoles. As
this transition occurs and rental markets, software developers and hardware
vendors embrace the new technology, the DVD market is expected to experience
rapid growth. International Data Corporation predicts that the number of DVD
ROM units sold worldwide will grow from 6.1 million units in 1998 to
19.2 million units in 1999 and 97.4 million units in 2002, representing a
compound annual growth rate of 100%. These market projections are based upon
assumptions regarding the level of growth in sales of personal computers, the
desire of personal computer manufacturers to offer additional functionality by
upgrading CD ROM drives to DVD-ROM, the current supply of necessary components
and the speed with which the prices of DVD-ROM drives is expected to decline.
There can be no assurance that these projections will be achieved. RAVISENT is
currently shipping various products for the decoding and playback of DVD titles
on a personal computer, including a software-only solution and a software
solution with a supporting hardware platform design. RAVISENT also offers a
software solution with multiple supporting hardware designs for DVD playback on
consumer electronics platforms and is developing a software-only DVD encoding
solution that enables the recording of video and audio streams in the DVD
format.
Digital Television. A key strategy of RAVISENT is to pursue the DTV market,
which RAVISENT expects to be the next major technological advancement in home
electronics. According to The Yankee Group, there is an installed base of 250
million analog television sets in the United States alone that will ultimately
require a separate set-top box or upgrade to accommodate digital technologies.
Digital broadcast television was first successfully launched in the United
States in 1996 via DBS, with DBS now delivering direct broadcast television to
over five million households today. DTV has also begun to move into the large
over-the-air market and by the end of 1999, there is expected to be one digital
broadcast station in each of the top ten U.S. markets. These market projections
are based upon assumptions that competition, technological advances and
economies of scale will lead prices to decline and sales volume to
correspondingly increase, that digital programming will grow as sales increase,
that consumers receiving broadcast channels will have the equipment to allow
them to tune into digital programming and that major cable providers will be
willing to add digital broadcast channels as digital programming increases and
potential viewership grows. There can be no assurance that these projections
will be achieved. Under the Telecommunications Act of 1996, all broadcasts
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must be in a digital format by 2006. RAVISENT is currently developing a
software-only solution and a software solution with a supporting hardware
platform design that enable the viewing of DTV streams on a personal computer.
RAVISENT is also developing a software solution with multiple supporting
hardware designs for DTV viewing on consumer electronics platforms.
Digital Cable. In an effort to deliver more channels and services, including
online and interactive services, cable providers are beginning to upgrade
analog cable boxes with digital boxes. For example, Tele-Communications, Inc.
and eight other multiple cable system operators announced in January 1999 the
purchase of 15 million digital cable set-tops from General Instrument
Corporation. RAVISENT has not shipped any digital cable products to date, but
is developing a software-only solution and a software solution with a
supporting hardware platform design that will enable the viewing of digital
cable television streams using a personal computer or digital cable set-top
device.
Sales and Marketing
RAVISENT's sales and marketing activities are focused on establishing and
maintaining license arrangements with personal computer, peripherals, consumer
electronics and semiconductor manufacturers. RAVISENT licenses its digital
solutions on a non-exclusive worldwide basis to personal computer, peripherals
and consumer electronics manufacturers which sell products incorporating these
technologies to end users. RAVISENT also licenses its digital solutions on a
non-exclusive worldwide basis to semiconductor manufacturers which incorporate
RAVISENT's technology in products for personal computers and consumer
electronics devices.
RAVISENT sells its digital solutions to personal computer manufacturers in
the United States and Europe through its direct sales force, and to personal
computer manufacturers in Japan through an independent sales representative.
RAVISENT is beginning to market its digital solutions to consumer electronics
manufacturers. Sales to these manufacturers will be managed domestically and in
Europe through its direct sales force and in Japan through a strategic sales
partner.
RAVISENT establishes strategic relationships with peripherals and
semiconductor manufacturers in order to establish RAVISENT's modular software
solution as the standard of the digital video and audio stream management
industry. In addition to its strategic relationships with semiconductor
manufacturers such as STMicroelectronics, RAVISENT works closely with major
software and hardware providers such as Advanced Micro Devices, Inc., ATI
Technologies and Intel in designing its digital solutions so that its final
product will interact smoothly with their software and hardware platforms.
RAVISENT also maintains close relationships with a wide variety of graphics
card vendors to maximize its product flexibility and support. RAVISENT works
closely with its customers to anticipate market demand and user requirements
and to maximize consumer acceptance and long-term viability of its solutions.
RAVISENT intends to supplement its distribution channel in the future by
establishing an Internet presence to maximize direct contact with its
customers, facilitate electronic sales of its products and sell associated
products directly to end users.
RAVISENT participates in industry conferences to market and demonstrate its
technology and distributes quarterly press kits to disseminate information
regarding its latest advances.
Customers
RAVISENT's typical customers are personal computer, consumer electronics,
peripherals and semiconductor manufacturers that benefit from a software-only
or combination software and hardware solution. As of March 31, 1999, computer
and peripherals manufacturers shipping products that incorporate RAVISENT
technology included: ATI Technologies, Compaq Computer, Dell Computer, ELSA,
Fountain Technologies, Fujitsu Microelectronics, Gateway, Hewlett-Packard,
Micron Electronics, Packard-Bell NEC Europe and Sony Electronics, Inc. In
addition, consumer electronics manufacturers who have incorporated RAVISENT's
technology include Sanyo Electronics, STMicroelectronics and Yamaha. In 1998,
one customer, Dell Computer,
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accounted for in excess of 10% of RAVISENT's revenues; in 1997, two customers,
Hi-Val, Inc. and Pacific Digital Products, Inc., accounted for in excess of 10%
of RAVISENT's revenues; and in 1996, one customer, UEP Systems, Inc. accounted
for in excess of 10% of RAVISENT's revenues. With the exception of our
arrangements with ATI Technologies and STMicroelectronics, which have terms in
excess of one year, all of our agreements have a duration of a year or less or
may be cancelled by the customer following notice at any time.
Research and Development
RAVISENT believes that its future competitive position will depend in large
part on its ability to develop new and enhanced digital video and audio
solutions and its ability to meet the evolving and rapidly changing needs of
personal computer, consumer electronics, peripherals and semiconductor
manufacturers. In April 1998, RAVISENT acquired Viona Development Hard &
Software Engineering, in order to bolster RAVISENT's research and development
and engineering capabilities. RAVISENT has invested significant time and
resources in creating a structured process for undertaking all product
development. This process involves several functional groups within RAVISENT
and is designed to provide a framework for defining and addressing the
activities required to bring product concepts and development projects to
market. RAVISENT has assembled a core team of experienced software architects,
software engineers and system hardware engineers.
As of March 31, 1999, RAVISENT employed a total of 63 research and
development personnel in three offices. In the years ending December 31, 1996,
1997 and 1998, RAVISENT's research and development expenditures totaled $1.0
million, $1.8 million and $3.1 million, respectively. To date, RAVISENT has not
capitalized any research and development expenses.
Intellectual Property and Proprietary Rights
RAVISENT relies upon a combination of patent, copyright, trade secret and
trademark laws to protect its intellectual property. RAVISENT currently has
three pending U.S. patent applications related to its digital video and audio
stream management technology. These patents are expected to cover future
products, and do not relate directly to RAVISENT's current products. In
addition, RAVISENT has a pending trademark application for the mark "RAVISENT"
and a second pending trademark application for the mark "CineMaster" which has
been approved for publication by the United States Patent and Trademark Office.
Although RAVISENT relies on patent, copyright, trade secret and trademark laws
to protect its technology, RAVISENT believes that factors such as the
technological and creative skill of its personnel, new product developments,
frequent product enhancements and reliable product maintenance are more
essential to establishing and maintaining technology leadership position.
RAVISENT generally enters into confidentiality or license agreements with
its employees and consultants and corporations with whom it has strategic
relationships, and generally controls access to and distribution of its
software, documentation and other proprietary information. In addition,
RAVISENT often incorporates the intellectual property of its strategic
customers into its designs and has obligations with respect to the use and
disclosure of such intellectual property.
RAVISENT licenses technology from Dolby Laboratories for the audio format
that is used in all DVD-related products. RAVISENT pays a royalty to Dolby on a
per-unit shipped basis. The technology, called Dolby Digital, permits audio
from a DVD to be routed to different speakers in a multi-speaker set up to
permit "theatre quality" audio. The Dolby Digital technology is part of the
industry standard DVD specification. In addition, RAVISENT licenses encryption
and decryption software technology from Matsushita Electric. This technology is
designed to prevent unauthorized persons from accessing DVD content such as
movies. RAVISENT has a royalty-free license from Matsushita. The license for
the Dolby Digital technology is for a term expiring at the expiration of the
patent covered thereby with the furthest expiration date from the date of the
license. The license for the encryption and description technology may be
terminated at any time. If these license agreements were not renewed,
RAVISENT's business would be severely harmed, and it would not be able to ship
product for the DVD market. See "Risk Factors--We depend upon technology
licensed from third parties, and if we do not maintain these license
arrangements, are business will be seriously harmed."
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The market for digital video and audio software and hardware solutions is
characterized by vigorous protection and pursuit of intellectual property
rights. From time to time, RAVISENT has received, and it expects to continue to
receive, notice of claims of infringement of other parties' proprietary rights.
For example, RAVISENT has recently received notice from two of its largest
customers which are personal computer manufacturers that a third party with a
history of litigating its proprietary rights and that has substantial financial
resources has alleged that aspects of MPEG-2 technology infringe upon patents
held by the third party. The third party has invited these customers to license
the technology covered by the patents. These customers have contacted RAVISENT
for assistance in determining whether its technology falls within the scope of
the asserted patent claims and may in the future seek compensation or
indemnification from us arising out of the third-party claims. In addition, a
consortium of companies known as MPEG-LA has notified a number of personal
computer manufacturers, including our customers, that patents owned by members
of the consortium are infringed by the personal computer manufacturers in their
distribution of MPEG-2 technology. MPEG-LA has requested that these personal
computer manufacturers pay license royalties for use of the technology covered
by MPEG-LA patents. These personal computer manufacturers may in the future
seek compensation or indemnification from RAVISENT arising out of the MPEG-LA
claims. Also, a third party has asserted that the parental control features of
RAVISENT's CineMaster products infringe certain patents held by the third
party. RAVISENT believes these claims to be without merit. These and any other
claims of infringement against RAVISENT, whether or not such claims have merit,
could result in litigation which could severely harm our business. See "Risk
Factors--Our business model depends upon licensing our intellectual property,
and if we fail to protect our proprietary rights our business will fail" and
"--We may become involved in costly and time consuming litigation over
proprietary rights."
Competition
RAVISENT competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. RAVISENT competes on the basis of performance,
functionality, feature sets and price in both the software-based and hardware-
based video and audio stream management markets. RAVISENT's competitors in the
software-based digital solution market include Mediamatics, Inc. (a division of
National Semiconductor), Zoran Corporation and Xing Technology Corporation
(which has agreed to be acquired by RealNetworks, Inc.). RAVISENT's competitors
in the hardware-based digital solution market include Sigma Designs, Inc. and
several smaller competitors. RAVISENT also competes with the research and
development departments of other software companies, as well as those of
personal computer, consumer electronics, peripherals and semiconductor
manufacturers who are in the market for specific digital video or audio
software applications. RAVISENT is aware of numerous other major personal
computer manufacturers, software developers and other companies that are
focusing significant resources on developing and marketing products and
services that will compete with RAVISENT's CineMaster products. Currently, at
least two semiconductor manufacturers, C-Cube Microsystems and Zoran
Corporation, are positioning their products to compete with RAVISENT and, in
the future, operating system providers with a larger established customer base,
such as Microsoft, may enter the digital video or audio stream management
markets by building video or audio stream management applications into their
operating systems that competes with those of RAVISENT. For example, Microsoft
currently markets a very basic MPEG-1 compliant digital solution that is
bundled into its operating system, which is used by a substantial number of
personal computer users. If Microsoft were to successfully develop or license a
more sophisticated DVD-compliant digital video solution and incorporate the
solution into its operating system, RAVISENT's revenues could be substantially
harmed. See "Risk Factors--Competition in our markets is likely to continue to
increase and could harm our business."
Employees
As of March 31, 1999, RAVISENT had a total of 106 full-time employees, 63 of
whom were engaged in research and development, 11 in operations, 14 in sales
and marketing, 10 in program management and 8 in administration. RAVISENT's
future performance depends in significant part upon the continued services of
its key technical, sales and senior management personnel. The loss of the
services of one or more of RAVISENT's key employees could harm its business.
RAVISENT's future success also depends on its continuing ability to
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attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for highly qualified personnel is intense, particularly
in the Philadelphia area, where RAVISENT is headquartered. RAVISENT may not be
able to retain or attract key personnel in the future. None of RAVISENT's
employees are represented by a labor union. RAVISENT has not experienced any
work stoppages and considers its relations with employees to be good.
Facilities
RAVISENT leases an aggregate of approximately 12,000 square feet in an
office complex located in Malvern, Pennsylvania. RAVISENT occupies this space
under a lease expiring in September 2003. In addition to its principal office
space in Malvern, RAVISENT also leases office space in Lancaster, Pennsylvania,
San Jose, California and Karlsruhe, Germany. These leases are for facilities
ranging from 1,200 square feet to 8,600 square feet and have terms ranging from
month-to-month to 10 years. As of March 31, 1999, 65 of RAVISENT's employees
worked in its Malvern facility, 10 in its Lancaster facility, 14 in its San
Jose facility and 17 in its Karlsruhe facility. RAVISENT expects that it will
need to obtain additional office space in the next twelve months.
Legal Proceedings
On May 25, 1999 Zoran Corporation filed a complaint against RAVISENT in the
Superior Court of California, Santa Clara County alleging breach of oral and
written contract and other claims totaling approximately $1.2 million. Zoran
was formerly a supplier of semiconductors to RAVISENT used in its Hardware
CineMaster 98 version 1.2 product. The particular semicondutor at issue was
manufactured for Zoran by Motorola Corporation, which in turn had obtained the
part from a third party contract manufacturer. RAVISENT refused to pay amounts
Zoran claimed it was owed as a result of quality problems in the Zoran parts.
RAVISENT is evaluating its options and response to this lawsuit, and intends to
defend it vigorously. This litigation, should it continue, may be costly, may
distract management's attention and be significantly time consuming. The
resolution of this litigation could harm RAVISENT's financial condition.
From time to time, RAVISENT has received, and expects to continue to
receive, notices of claims of infringement of other parties' proprietary
rights. See "Risk Factors--We may become involved in costly and time consuming
litigation over proprietary rights."
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of RAVISENT as of May 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Francis E.J. Wilde III.. 48 Chief Executive Officer, President and Director
Jason C. Liu............ 29 Chief Financial Officer, Vice President, Finance and Secretary
Michael R. Harris....... 30 Chief Technology Officer
Robert S. Russell....... 41 Vice President, Strategic Engineering Projects
Leonard D. Sharp........ 40 Vice President, Internet Division
Sharon K. Taylor........ 31 Vice President, Product Management
E. Joseph Vitetta, 42 Vice President, Worldwide Sales
Jr. ...................
William H. Wagner....... 40 Vice President, Engineering
Frederick J. Beste 53 Director
III(1).................
Peter X. Blumenwitz..... 31 Director
Walter L. 53 Director
Threadgill(2)..........
Paul A. Vais(1)(2)...... 40 Director
</TABLE>
- ----------
(1) Member of compensation committee
(2) Member of audit committee
Francis E.J. Wilde III. Mr. Wilde joined RAVISENT in August 1997 as a
director and President. In April 1998, Mr. Wilde was appointed Chief Executive
Officer. Prior to joining RAVISENT, from March 1995 to August 1997, Mr. Wilde
served as Vice President of Academic Systems Corporation, an instructional
software company. From January 1994 to March 1995, Mr. Wilde served as the
Senior Vice President of Summa Graphics Corporation, a computer-aided design
graphics peripherals company. From January 1993 to December 1993, Mr. Wilde
served as the Chief Executive Officer of Collaborative Technology Corporation,
an electronic meeting software company. Mr. Wilde holds a B.A. in Business
Administration from Seton Hall University.
Jason C. Liu. Mr. Liu joined RAVISENT in November 1994 as the Director of
Operations. In June 1996, he became RAVISENT's Chief Financial Officer, Vice
President of Finance and Secretary. Prior to joining RAVISENT, from July 1992
to August 1994, Mr. Liu was a management consultant with Deloitte & Touche
Management Consulting, an international consulting company. Mr. Liu holds a
B.A. in Finance and Accounting from Washington University and an M.B.A. from
the Wharton School at the University of Pennsylvania.
Michael R. Harris. Mr. Harris is a co-founder of RAVISENT. From May 1994 to
September 1995, he served as its Vice President of Engineering. In September
1995, he became Vice President of Technology and in September 1998, he became
the Chief Technology Officer. Prior to co-founding RAVISENT, from January 1993
to May 1994, Mr. Harris served as Chief Executive Officer and founder of
Checkmate Technologies, a multimedia design consulting firm. Mr. Harris holds a
B.S. in Computer and Electrical Engineering from Purdue University.
Robert S. Russell. Mr. Russell joined RAVISENT in April 1995 as a senior
Software Engineer. In June 1996, Mr. Russell became Director of Engineering and
in November 1997, became Vice President of Engineering. Since March 1999, Mr.
Russell has served as Vice President of Strategic Engineering Projects. Prior
to joining RAVISENT, from July 1992 to April 1995, Mr. Russell served as the
Vice President of Development for JFK Associates, Inc., an engineering services
company. Mr. Russell holds a B.S. in Computer Engineering from Iowa State
University.
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Leonard D. Sharp. Mr. Sharp joined RAVISENT in January 1998 as Vice
President of Marketing & Sales. In September 1998, Mr. Sharp became Vice
President of Marketing and in March 1999, he became Vice President of
RAVISENT's Internet Division. Prior to joining RAVISENT, from August 1996 to
December 1997, Mr. Sharp served as a principal of Sharp Marketing Group, a
marketing and sales consulting company. From November 1995 to August 1996, Mr.
Sharp served as Director of Marketing & Sales for the Paradise Multimedia
Products Division of Philips Electronics, N.A., a consumer electronics company.
From February 1993 to October 1995, Mr. Sharp served as the Vice President of
Marketing for the Imaging Products division of Western Digital Corporation, an
information storage products company.
Sharon K. Taylor. Ms. Taylor joined RAVISENT in August 1998 as Product Line
Director for Consumer Electronics. In February 1999, Ms. Taylor became Vice
President of Product Management. Prior to joining RAVISENT, from September 1994
to July 1998, Ms. Taylor served at Toshiba America Consumer Products, Inc.,
first as Product Marketing Manager and later as Director of Product Marketing.
From November 1993 to August 1994, Ms. Taylor served as Director of New Product
Development at CIDCO, Inc., a telephone and telephony device company. From
August 1990 to October 1993, Ms Taylor served as Production Manager and Quality
Development Manager at AT&T Consumer Products. Ms. Taylor holds an A.A. in
Computer Science from American University of Paris, a B.A. in Linguistics from
the University of California at Davis and an M.B.A. from Columbia University.
E. Joseph Vitetta, Jr. Mr. Vitetta joined RAVISENT in July 1998 as a
Strategic Account Manager. He became Vice President of Worldwide Sales in
December 1998. Prior to joining RAVISENT, from September 1996 to July 1998, Mr.
Vitetta served as Director of Partnerships for Academic Systems Corporation, an
instructional software company. From January 1995 to September 1996, Mr.
Vitetta served as the Vice President of National Sales for C-Phone Corporation,
a video communications company. From April 1994 to January 1995, Mr. Vitetta
served as the Director of National Sales for Zig Ziglar Corporation, a
motivational training company. From February 1993 to April 1994, Mr. Vitetta
served as the Vice President of Sales and Marketing for Collaborative
Technology Corporation, an electronic meeting software company. Mr. Vitetta
holds a B.S. in Industrial Design Graphics from Arizona State University.
William H. Wagner. Mr. Wagner joined RAVISENT in September 1998 as the
Director of Product Development. He became the Vice President of Engineering in
March 1999. Prior to joining RAVISENT, from June 1997 to August 1998, Mr.
Wagner served as President of Eggplant Systems Corporation, a software
consulting company for which he still serves as a director. From July 1992 to
May 1997, Mr. Wagner served as Director of Software Engineering at Cirrus
Logic, Inc., a precision linear circuit supplier. Mr. Wagner holds a B.S. in
Electrical Engineering from Pennsylvania State University.
Frederick J. Beste III. Mr. Beste has served as a director of RAVISENT since
April 1999, and he previously served as a director of RAVISENT from May 1995 to
April 1998. Mr. Beste has served as the President of the general partner of the
NEPA/Mid-Atlantic family of venture capital partnerships since May 1985. From
November 1981 to September 1984, Mr. Beste served as the chief executive
officer of Kentucky Highlands Investment Corp. He also serves on a number of
boards of directors, including: Allegheny Child Care Academy, Inc., Blue Rock
Management Corporation, Delex Systems, Inc., Medtrex, Inc., Outdoor Venture
Corporation, Form Design Corporation, Casecraft Corporation, NEPA II Management
Corporation, MAVF III Management Corporation, Storeroom Solutions, Inc. and the
NET Ben Franklin Technology Center. Mr. Beste holds a B.A. in Economics from
Stetson University.
Peter X. Blumenwitz. Mr. Blumenwitz has served as a Director of RAVISENT
since April 1999. Since August 1997, Mr. Blumenwitz has served as Assistant
Director of Apax Partners & Co. Beteilgungsberatung A.G., a European private
equity firm. From June 1993 to August 1997, Mr. Blumenwitz served as an
Investment Manager for Technologieholding VC GmbH, a German venture capital
firm and KBG, a quasi- governmental investment firm. Prior to June 1993, he
served as a credit analyst for Allgemeine Kredit, a credit insurer based in
Germany. Mr. Blumenwitz also serves on the boards of directors of ENBA p.l.c.,
Dublin, Ireland and iMediation S.A., Paris, France. Mr. Blumenwitz holds a B.S.
in business administration from the Fachhochschule Munich.
59
<PAGE>
Walter L. Threadgill. Mr. Threadgill has served as a director of RAVISENT
since January 1998. Since February 1996, Mr. Threadgill has served as General
Managing Partner of Atlantic Coastal Ventures, L.P., a venture capital firm.
Since June 1979, Mr. Threadgill has also served as President and Chief
Executive Officer of Multimedia Broadcast Investment Corporation (or MBIC), a
venture capital company specializing in broadcast financing. Prior to forming
MBIC, Mr. Threadgill was Divisional Vice President of Fiduciary Trust Company
in New York and Senior Vice President, Chief Operating Officer of United
National Bank in Washington, D.C. He also serves on several boards of directors
including: ICG Communications, Inc., Citywide Broadcasting, Inc. and Unisource
Network Services, Inc. Mr. Threadgill holds a B.A. in Business Administration
from Bernard M. Baruch College, City University of New York, an M.B.A. from
Long Island University and an M.A. in International and Telecommunications Law
from Antioch School of Law.
Paul A. Vais. Mr. Vais has served as a director of RAVISENT since April
1998. Mr. Vais has been a Managing Director of Patricof & Co. Ventures, Inc., a
venture capital firm, since March 1997. From March 1995 to December 1996, Mr.
Vais served as Vice President of Enterprise Partners V.C., a venture capital
firm. From October 1994 to March 1995, Mr. Vais served as a consultant for
International Business Machines and several early stage companies, providing
expertise in strategic marketing and technology development. Mr. Vais also
worked at NeXT Computer, Inc., from July 1988 to October 1994, where he served
as the Executive Director of Worldwide Marketing, and with Apollo Computer, an
engineering workstation company. Mr. Vais serves as a director of Icarian,
Inc., Oblix, Inc. and InfoLibria, Inc. Mr. Vais holds an A.B. in Computer
Science from the University of California at Berkeley.
Board of Directors and Committees
RAVISENT currently has authorized five directors. Following this offering,
the board will consist of five directors divided into three classes, with each
class serving for a term of three years. At each annual meeting of
stockholders, directors will be elected by the holders of common stock to
succeed the directors whose terms are expiring. Mr. Beste is a Class I director
whose term will expire in 2000, Messrs. Blumenwitz and Wilde are Class II
directors whose terms will expire in 2001 and Messrs. Vais and Threadgill are
Class III directors whose terms will expire in 2002. The officers serve at the
discretion of the board. There are no familial relationships between any of
RAVISENT's officers and directors.
RAVISENT has established an audit committee composed of independent
directors, which reviews and supervises RAVISENT's financial controls,
including the selection of its auditors, reviews the books and accounts, meets
with its officers regarding its financial controls, acts upon recommendations
of auditors and takes further actions as the audit committee deems necessary to
complete an audit of RAVISENT's books and accounts, as well as other matters
which may come before it or as directed by the board. The audit committee
currently consists of two directors, Messrs. Vais and Threadgill.
RAVISENT has established a compensation committee, which reviews and
approves the compensation and benefits for RAVISENT's executive officers,
administers its stock plans and performs other duties as may from time to time
be determined by the board. The compensation committee currently consists of
two directors, Messrs. Beste and Vais. None of RAVISENT's executive officers
serve on the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the board or
compensation committee.
Director Compensation
RAVISENT currently does not compensate any non-employee member of the board.
Directors who are also employees of RAVISENT do not receive additional
compensation for serving as directors. Non-employee directors will be eligible
to receive discretionary option grants and stock issuances under the 1999 Stock
Incentive Plan. Individuals who are serving as non-employee board members on
the date of execution of the underwriting agreement for this offering will
receive automatic option grants on such date. In addition, under the 1999 Stock
Incentive Plan, non-employee directors will receive automatic option grants
upon becoming directors and on the date of each annual meeting of stockholders.
See "Management--Benefit Plans."
60
<PAGE>
Executive Compensation
The following table sets forth certain information concerning compensation
during the year ended December 31, 1998 of each person who served as RAVISENT'S
chief executive officer and each of the four other most highly compensated
executive officers who earned more than $100,000 for the fiscal year ended
December 31, 1998, who are referred to in this prospectus as the named
executive officers. No individual who would otherwise have been includable in
such table on the basis of salary and bonus earned during 1998 has resigned or
otherwise terminated his employment during 1998. The compensation table
excludes other compensation in the form of perquisites and other personal
benefits that constitutes the lesser of $50,000 or ten percent (10%) of the
total annual salary and bonus of each of the named executive officers in 1998.
On June 9, 1999, the Company granted options to Mr. Wilde and Mr. Liu to
purchase 150,000 and 20,833 shares, respectively, at an exercise price of
$10.20 per share. Twenty-five percent of the options granted to Mr. Wilde and
Mr. Liu vest one year following the grant date and the remaining 75% vest in 36
equal monthly installments thereafter.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Fiscal Annual Compensation Securities
Name and Principal Year -------------------- Underlying All Other
Position Ended Salary ($) Bonus ($) Options(1) Compensation
------------------ ------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Francis E.J. Wilde
III................... 1998 $123,000 $98,625 173,729 --
Chief Executive
Officer, President
and Director
Jason C. Liu........... 1998 112,875 27,125 59,281 --
Chief Financial
Officer, Vice
President,
Finance and Secretary
Michael R. Harris...... 1998 116,250 22,500 56,875 --
Chief Technology
Officer
Robert S. Russell...... 1998 112,875 25,125 49,490 --
Vice President,
Strategic Engineering
Projects
Leonard D. Sharp....... 1998 123,750 33,125 176,667(2) --
Vice President,
Internet Division
Gregg W. Garnick(3).... 1998 64,437 -- 5,927 $125,000
Former Chief Executive
Officer
</TABLE>
- ----------
(1) Includes pre-existing options, originally granted from 1996 to 1998 but
with a higher exercise price, that were repriced in 1998 as follows:
<TABLE>
<S> <C>
Francis E.J. Wilde III......................................... 169,563
Jason C. Liu................................................... 53,656
Michael R. Harris.............................................. 52,708
Robert S. Russell.............................................. 44,802
Leonard D. Sharp............................................... 84,375
Gregg W. Garnick............................................... 2,802
-------
407,906
=======
</TABLE>
(2) Includes 84,375 shares granted to Mr. Sharp in the last fiscal year, which
were repriced in 1998 at a new exercise price.
(3) Mr. Garnick resigned as chief executive officer in April 1998 and as a
director in April 1999. Mr. Garnick received a severance payment of
$125,000, equal to one year's salary, in June 1998.
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<PAGE>
The following table sets forth certain information with respect to stock
options granted to each of the named executive officers in 1998, including the
potential realizable value over the five-year term of the options, based on an
assumed offering price of $12 per share and assumed rates of stock appreciation
of 5% and 10%, compounded annually. The exercise price per share of each option
was equal to the fair market value of common stock on the date of grant as
determined by the board of directors. In determining the fair market value of
the common stock on each grant date, the board of directors considered, among
other things, RAVISENT's absolute and relative levels of revenues and operating
results, the state of RAVISENT's technology development, increases in operating
expenses, the absence of a public trading market for RAVISENT's securities, the
intensely competitive nature of RAVISENT's market and the appreciation of stock
values of a number of generally comparable companies. These assumed rates of
appreciation comply with the rules of the Securities and Exchange Commission
and do not represent RAVISENT's estimate of future stock price. Actual gains,
if any, on stock option exercises will be dependent on the future performance
of RAVISENT's common stock. No stock appreciation rights were granted during
1998.
<TABLE>
<CAPTION>
Potential
Realizable Value
Using Assumed
Initial Public
Offering Price of
Individual Grants $12
------------------------------------------------------ -------------------
Number of Percent
Securities of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted(#) Fiscal 1998 (%) Per-Share ($) Date 5% 10%
---- ---------- --------------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Francis E.J. Wilde III(4).. 1,042(2) 0.06% $6.00 02/26/03 $ 3,455 $ 7,634
1,042(2) 0.06 4.98 04/13/03 3,455 7,634
166,667(1) 9.30 2.52 09/22/02 552,561 1,221,022
1,042(3) 0.06 2.52 02/26/03 3,455 7,634
813(1) 0.05 2.52 09/22/02 2,695 5,956
1,042(3) 0.06 2.52 04/13/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
Option Grants in 1998
Jason C. Liu(5)............ 1,563(2) 0.09% $6.00 02/26/03 $ 5,182 $ 11,451
1,563(2) 0.09 4.98 04/13/03 5,182 11,451
417 0.02 2.52 09/22/03 1,383 3,055
1,563(3) 0.09 2.52 02/26/03 5,182 11,451
531(1) 0.03 2.52 09/22/02 1,760 3,890
1,563(3) 0.09 2.52 04/13/03 5,182 11,451
50,000(1) 2.79 2.52 09/22/03 165,768 366,306
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
Michael R. Harris.......... 1,042(2) 0.06% $6.00 02/26/03 $ 3,455 $ 7,634
1,042(2) 0.06 4.98 04/13/03 3,455 7,634
1,042(3) 0.06 2.52 02/26/03 3,455 7,634
626(1) 0.03 2.52 09/22/02 2,075 4,586
1,042(3) 0.06 2.52 04/13/03 3,455 7,634
50,000(1) 2.79 2.52 09/22/02 165,768 366,306
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
Robert S. Russell.......... 1,042(2) 0.06% $6.00 02/26/03 $ 3,455 $ 7,634
1,563(2) 0.09 4.98 04/13/03 5,182 11,451
1,042(3) 0.06 2.52 02/26/03 3,455 7,634
531(1) 0.03 2.52 09/22/02 1,760 3,890
1,563(3) 0.09 2.52 04/13/03 5,182 11,451
41,667(1) 2.32 2.52 09/22/02 138,141 305,257
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Potential
Realizable Value
Using Assumed
Initial Public
Offering Price of
Individual Grants $12
----------------------------------------------------- -----------------
Number of Percent
Securities of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted(#) Fiscal 1998(%) Per-Share ($) Date 5% 10%
---- ---------- --------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leonard D. Sharp........ 83,333(2) 4.65% $ 6.00 02/26/03 $276,279 $610,508
5,833(2) 0.33 1.50 02/26/03 19,338 42,733
1,042(2) 0.06 4.98 04/13/03 3,455 7,634
83,333(3) 4.65 2.52 02/26/03 276,279 610,508
1,042(3) 0.06 2.52 04/13/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
Gregg W. Garnick........ 1,042(2) 0.06% $ 6.00 02/26/03 $ 3,455 $ 7,634
1,042(2) 0.06 4.98 04/13/03 3,455 7,634
1,042(3) 0.06 2.52 02/26/03 3,455 7,634
719(1) 0.04 2.52 09/22/03 2,384 5,267
1,042(3) 0.06 2.52 04/13/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
</TABLE>
- ----------
(1) The option was granted prior to 1998 and repriced on September 23, 1998 to
an exercise price of $2.52 per share, the fair market value per share of
common stock on the date of regrant.
(2) The option was originally granted during 1998 with an exercise price in
excess of $2.52 per share and was repriced on September 23, 1998 to an
exercise price of $2.52 per share, the fair market value per share of
common stock on the date of regrant. The repricing of the option is deemed
to be a new option grant and is included in this table. See footnote (3).
(3) This is not a new option grant but instead reflects the repricing on
September 23, 1998 of the options granted during 1998 prior to the
repricing date; the repricing of the options is deemed to be a new option
grant.
(4) On June 9, 1999, RAVISENT granted Mr. Wilde an option to purchase 150,000
shares of common stock at an exercise price of $10.20 per share. Based on
an assumed initial public offering price of $12.00 per share and assumed
rates of stock appreciation of 5% and 10% annually, the potential
realizable value over the five-year term of the option is $2,983,824 and
$693,508, respectively.
(5) On June 9, 1999, RAVISENT granted Mr. Liu an option to purchase 20,833
shares of common stock at an exercise price of $10.20 per share. Based on
an assumed initial public offering price of $12.00 per share and assumed
rates of stock appreciation of 5% and 10% annually, the potential
realizable value over the five-year term of the option is $414,420 and
$915,765, respectively.
In 1998, RAVISENT granted options to purchase up to an aggregate of
1,792,897 shares to employees, directors and consultants, of which 572,170
grants were attributable to deemed regrants of options granted prior to
September 23, 1998 as the result of their repricing on such date to an exercise
price of $2.52 per share. Options to purchase 783,333 shares were granted
outside of RAVISENT's 1995 Stock Option Plan and options to purchase 1,009,563
shares were granted under RAVISENT's 1995 Stock Option Plan at exercise prices
at the fair market value of RAVISENT's common stock on the date of grant, as
determined in good faith by the board of directors. The exercise price may be
paid in cash, with shares of common stock or through a cashless exercise price.
All options became exercisable over a four-year period, with 25% of the shares
vesting on the one year anniversary of the grant date and the remainder vesting
in 36 equal monthly installments. To the extent not already exercisable, all of
these options will become exercisable in the event of an acquisition of
RAVISENT. All options have a term of five years, subject to earlier termination
in certain situations related to termination of employment. Notwithstanding the
foregoing, Mr. Wilde was granted options to purchase
63
<PAGE>
grant. In addition, options granted to Mr. Sharp to purchase 5,833 shares were
subject to certain performance goals for vesting purposes, which were met and
these options have fully vested.
Aggregate Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth information concerning the number and value
of shares of common stock underlying the options held by the named executive
officers. No options or stock appreciation rights were exercised during 1998
and no stock appreciation rights were outstanding as of December 31, 1998. The
value of unexercised in-the-money options at December 31, 1998 is calculated on
the basis of the assumed initial public offering price of $12, less the
aggregate exercise price of such options.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1998 at December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Francis E.J. Wilde III.. 166,921 5,767 $1,582,411 $ 54,671
Jason C. Liu............ 90,691 7,032 859,751 66,663
Michael R. Harris....... 343,453 5,638 3,255,934 53,448
Robert S. Russell....... 46,852 6,095 444,157 57,781
Leonard D. Sharp........ 5,833 86,458 55,297 819,622
Gregg W. Garnick........ 40,105 3,544 380,195 33,597
</TABLE>
Benefit Plans
1999 Stock Incentive Plan
Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to RAVISENT's 1995 Stock Option Plan. RAVISENT's 1999 Stock
Incentive Plan was adopted by the board in April 1999 and is expected to be
approved by the stockholders in June 1999. The 1999 Stock Incentive Plan became
effective upon its adoption by the board. All outstanding options under
RAVISENT's existing 1995 Stock Option Plan will be transferred to the 1999
Stock Incentive Plan on the date of this offering, and no further option grants
will be made under the 1995 Stock Option Plan. The transferred options will
continue to be governed by their existing terms, unless RAVISENT's compensation
committee decides to extend one or more features of the 1999 Stock Incentive
Plan to those options. Except as otherwise noted below, the transferred options
have substantially the same term as will be in effect for grants made under the
discretionary option grant program of RAVISENT's 1999 Stock Incentive Plan.
Share Reserve. 2,725,000 shares of RAVISENT's common stock have been
authorized for issuance under the 1999 Stock Incentive Plan. This share reserve
consists of the number of shares RAVISENT estimates will be carried over from
the 1995 Stock Option Plan plus an additional increase of 891,667 shares. The
share reserve under RAVISENT's 1999 Stock Incentive Plan will automatically
increase on the first trading day in January each year, beginning January 1,
2000, by an amount equal to one percent of the total number of shares of common
stock outstanding on the last trading day of the prior month, but in no event
will this annual increase exceed 200,000 shares. In addition, no participant in
RAVISENT's 1999 Stock Incentive Plan may be granted stock options or direct
stock issuances for more than 700,000 shares of common stock in total in any
calendar year.
Programs. RAVISENT's 1999 Stock Incentive Plan has three separate programs:
. the discretionary option grant program, under which eligible individuals
in RAVISENT's employ may be granted options to purchase shares of
RAVISENT's common stock at an exercise price determined by the plan
administrator;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or upon the completion of a period of service or
as a bonus for past services; and
64
<PAGE>
. the automatic option grant program, under which option grants will be
made at periodic intervals to eligible non-employee board members to
purchase shares of common stock at an exercise price equal to the fair
market value of those shares on the grant date.
The individuals eligible to participate in RAVISENT's plan include its
officers and other employees, its board members and any consultants it hires.
Administration. The discretionary option grant and stock issuance programs
will be administered by RAVISENT's compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory 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.
Plan Features. RAVISENT's 1999 Stock Incentive Plan will include the
following features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of RAVISENT's 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.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from RAVISENT's 1995 Stock Option Plan, 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 RAVISENT's common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from RAVISENT equal
to the fair market value of the shares subject to the surrendered
options less the exercise price payable for those shares. We may make
the payment in cash or in shares of RAVISENT's common stock. None of the
options under RAVISENT's 1995 Stock Option Plan have any stock
appreciation rights.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the automatic option grant program, and these
rights may also be granted to one or more officers as part of their
option grants under the discretionary option grant program. Options with
this feature may be surrendered to RAVISENT upon the successful
completion of a hostile tender offer for more than 50% of RAVISENT's
outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount
per surrendered option share based upon the highest price per share of
RAVISENT's common stock paid in that tender offer.
Change in Control. The 1999 Stock Incentive Plan will include the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
. If RAVISENT is acquired by merger or asset sale or a board-approved sale
of more than fifty percent of RAVISENT's stock by its stockholders, each
outstanding option under the discretionary option grant program which is
not to be assumed or continued by the successor corporation will
immediately become exercisable for all the option shares, and all
outstanding unvested shares will immediately vest, except to the extent
RAVISENT's repurchase rights with respect to those shares are to be
assigned to the successor corporation.
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with RAVISENT or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under RAVISENT's 1999
Stock Incentive Plan may be accelerated upon similar terms and
conditions.
65
<PAGE>
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of RAVISENT's outstanding voting stock or a
change in the majority of RAVISENT's board through one or more contested
elections. Such accelerated vesting may occur either at the time of such
transaction or upon the subsequent termination of the individual's
service.
. The options currently outstanding under RAVISENT's 1995 Stock Option
Plan will immediately vest upon an acquisition of RAVISENT by merger or
asset sale or sale of more than fifty percent of RAVISENT's outstanding
stock by its stockholders. There are no other change in control
provisions currently in effect for those options. However, the
compensation committee may extend the acceleration provisions of
RAVISENT's 1999 Stock Incentive Plan to any or all of those options.
Automatic Option Grant Program. Each individual who is serving as a non-
employee board member on the date the underwriting agreement for this offering
is executed will automatically receive on such date an option to purchase
20,000 shares of RAVISENT's common stock, provided he has not been in the prior
employ of RAVISENT. Each individual who first becomes a non-employee board
member at any time after this offering will automatically receive on the date
of his or her appointment, an option to purchase 20,000 shares of RAVISENT's
common stock. On the date of each annual stockholders meeting following this
offering, each individual who is to continue to serve as a non-employee board
member will automatically be granted an option to purchase 5,000 shares of
RAVISENT's common stock, provided he or she has served on the board for at
least six months.
Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of board service. The option
will be immediately exercisable for all of the option shares; however, any
unvested shares purchased under the option will be subject to repurchase by
RAVISENT, at the exercise price paid per share, should the optionee cease board
service prior to vesting in those shares. The shares subject to each 20,000
share initial automatic option grant will vest over a four year period in
successive equal annual installments upon the individual's completion of each
year of board service over the four year period measured from the option grant
date. Each 5,000 share subsequent automatic option grant will vest upon the
individual's completion of one year of board service measured from the option
grant date. However, the shares subject to each automatic grant will
immediately vest in full upon certain changes in control or ownership of
RAVISENT or upon the optionee's death or disability while a board member.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan
will terminate no later than April 29, 2009.
1999 Employee Stock Purchase Plan
Introduction. RAVISENT's 1999 Employee Stock Purchase Plan was adopted by
the board in April 1999 and is expected to be approved by the stockholders in
June 1999. 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 RAVISENT and its participating subsidiaries to purchase
shares of common stock, at semi-annual intervals, with their accumulated
payroll deductions.
Share Reserve. 500,000 shares of common stock will initially be reserved for
issuance.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for the offering covered by
this prospectus is signed and will end on the last business day in July 2001.
The next offering period will start on the first business day in August 2001,
and subsequent offering periods will be set by RAVISENT's compensation
committee. Shares will generally be purchased on the last business day of
January and July during each offering period.
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Reset Feature. If the fair market value per share of RAVISENT's common stock
on any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of February and August each
year. Individuals who become eligible employees after the start date of an
offering period may join the plan on any subsequent semi-annual entry date
within that offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of January and July
each year. In no event, however, may any participant purchase more than 1,300
shares on any purchase date, and not more than 125,000 shares may be purchased
in total by all participants on any purchase date.
Change in Control. Should RAVISENT be acquired by merger or sale of
substantially all of RAVISENT's assets or more than fifty percent of its voting
securities, then all outstanding purchase rights will automatically be
exercised immediately prior to the effective date of the acquisition. The
purchase price will be equal to 85% of the market value per share on the
participant's entry date into the offering period in which an acquisition
occurs or, if lower, 85% of the fair market value per share immediately prior
to the acquisition.
The plan will terminate no later than the last business day of July 2009.
The board may at any time amend, suspend or discontinue the plan. However,
certain amendments may require stockholder approval.
Employment Contracts, Termination of Employment Agreements and Change in
Control Arrangements
In August 1997, RAVISENT entered into an employment letter agreement with
Mr. Wilde. The annual base salary for Mr. Wilde is $125,000 per annum. Under
the employment letter agreement, RAVISENT paid $25,000 to Mr. Wilde as a
signing bonus and granted to Mr. Wilde a stock option to purchase 166,667
shares of RAVISENT common stock at an exercise price of $6.00 per share. These
stock options have fully vested. These stock options were regranted on
September 23, 1998 at $2.52 per share. In addition, in the event of a sale of
all of the assets or a merger in which RAVISENT is not the surviving entity and
in which RAVISENT is valued at $80,000,000 or more, Mr. Wilde is entitled to
the greater of 2.5% of the proceeds or $2,000,000 in cash.
In November 1997, RAVISENT entered into an employment agreement with Mr.
Harris, in which RAVISENT hired Mr. Harris as its Chief Technology Officer for
a two year term at a base salary of $125,000 per year, an annual cash bonus of
$35,000 and incentive stock options to purchase up to 4,167 shares of common
stock in minimum blocks of 2,083 shares at an exercise price of $1.50 per
share. In addition, if Mr. Harris is terminated for any reason other than gross
malfeasance or gross nonfeasance, he will be paid his then-current salary for
six additional months. Finally, if Mr. Harris is terminated, his options
immediately vest.
In November 1997, RAVISENT entered into an employment agreement with Mr.
Liu, in which RAVISENT hired Mr. Liu as its Chief Financial Officer for a term
of two years at a base salary of $125,000 per year plus an annual cash bonus of
$35,000 and options to purchase up to 4,167 shares of common stock per year for
significant performance and an additional 2,083 shares of common stock for
exceptional performance. In addition, if Mr. Liu is terminated for any reason
other than gross malfeasance or gross nonfeasance, he will be paid his then-
current salary for six additional months.
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<PAGE>
In December 1997, RAVISENT entered into an employment agreement with Mr.
Sharp, in which RAVISENT hired Mr. Sharp as Vice President of Sales and
Marketing for a two year term at a base salary of $125,000 per year, an annual
cash bonus of $35,000, a commission in 1998 of three percent of the gross
contribution margin in excess of $9,236,000 and options to purchase up to
83,333 shares of common stock at an exercise price of $6.00 per share that
immediately vest upon a change of control or the resignation, termination or
demotion of Mr. Wilde. In addition, Mr. Sharp may be awarded additional options
to purchase up to 4,167 shares of common stock per year for significant
performance and options to purchase up to an additional 2,083 shares of common
stock for exceptional performance. Finally, if Mr. Sharp is terminated for any
reason other than gross malfeasance or gross nonfeasance, he will be paid his
then-current salary for six additional months.
In December 1997, RAVISENT entered into an employment agreement with Mr.
Russell, in which RAVISENT hired Mr. Russell as the Director of Engineering for
a two year term for a base salary of $125,000 per year, an annual cash bonus of
$35,000 per year and options to purchase up to 4,167 shares of common stock per
year for significant performance and an additional 2,083 shares of common stock
per year for exceptional performance. In addition, if Mr. Russell is terminated
for any reason other than gross malfeasance or gross nonfeasance, he will be
paid his then-current salary for six additional months.
In February 1998, RAVISENT entered into an employment agreement with Mr.
Garnick, in which RAVISENT employed Mr. Garnick as Chairman of the Board and
Chief Executive Officer for an initial two year term commencing January 1, 1998
at a base salary of $125,000. In March 1998, this employment agreement was
amended, as a result of which Mr. Garnick resigned as Chief Executive Officer
but remained employed by RAVISENT and remained as a director. The amendment
provided that if Mr. Garnick was terminated by RAVISENT (other than for gross
malfeasance or gross non-feasance) or if he resigned his employment at RAVISENT
or if he were removed as Chairman of the Board, he would nonetheless remain a
director of RAVISENT until either a merger or an initial public offering of
RAVISENT stock.
In April 1999, RAVISENT entered into a letter agreement with Gregg W.
Garnick, pursuant to which Mr. Garnick resigned as a director of RAVISENT and
agreed to enter into a consulting agreement to perform marketing and other
special projects for a term expiring on the earlier of one year or seven months
from the closing of this offering. In addition, RAVISENT accelerated 2,635 of
Mr. Garnick's unvested options.
Limitation of Liability and Indemnification
RAVISENT's certificate of incorporation eliminates to the maximum extent
allowed by the Delaware General Corporation Law, subject to certain exceptions,
directors' personal liability to RAVISENT or its stockholders for monetary
damages for breaches of fiduciary duties. The certificate of incorporation does
not, however, eliminate or limit the personal liability of a director for the
following:
. any breach of the director's duty of loyalty to RAVISENT or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
RAVISENT's bylaws provide that RAVISENT shall indemnify its directors and
executive officers to the fullest extent permitted under the Delaware General
Corporation Law and may indemnify its other officers, employees and other
agents as set forth in the Delaware General Corporation Law. In addition,
RAVISENT has entered into an indemnification agreement with each of its
directors and officers. The indemnification agreements contain provisions that
require RAVISENT, among other things, to indemnify its directors and executive
officers against certain liabilities (other than liabilities arising from
intentional or knowing and
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culpable violations of law) that may arise by reason of their status or service
as directors or executive officers of RAVISENT or other entities to which they
provide service at the request of RAVISENT and to advance expenses they may
incur as a result of any proceeding against them as to which they could be
indemnified. RAVISENT believes that these bylaw provisions and indemnification
agreements are necessary to attract and retain qualified directors and
officers. Prior to the consummation of the offering, RAVISENT will obtain an
insurance policy covering directors and officers for claims they may otherwise
be required to pay or for which RAVISENT is required to indemnify them, subject
to certain exclusions.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of RAVISENT where indemnification will be
required or permitted, and RAVISENT is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
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CERTAIN TRANSACTIONS
Sales of Securities
Since January 1996, RAVISENT has raised capital primarily through the sale
of its securities, including:
. In March 1996, RAVISENT sold a combination of subordinated notes and
warrants to purchase an aggregate of 83,635 shares of Series A
preferred stock at an exercise price of $0.746352 per share to NEPA
Venture Fund II, L.P. for an aggregate consideration of $125,000.
. In March 1998, RAVISENT entered into a Development and License
Agreement with ATI Technologies Inc. whereby RAVISENT agreed to allow
ATI Technologies to convert up to $125,000 in prospective royalty
payments due to RAVISENT per quarter in each of the first four
quarters of royalty payments and $500,000 in the fourth quarter of
the second year of royalty payments into 200,803 shares of Series B
preferred stock and warrants to purchase 81,727 shares of common
stock at an exercise price of $0.06 per share.
. In December 1997 and March 1998, RAVISENT borrowed $1,770,000 from
Atlantic Coastal Ventures L.P. pursuant to 6% convertible
subordinated debentures due March and May 1998. In April 1998,
Atlantic Coastal Ventures received interest on the debentures in the
form of common stock and exercised warrants received with the
debentures for 208,682 shares of common stock. In addition, Atlantic
Coastal Ventures converted the debentures into 355,422 shares of
Series B preferred stock.
. In April 1998, RAVISENT sold to various investors including entities
affiliated with Patricof & Co. Ventures, Inc. and Atlantic Coastal
Ventures an aggregate of 3,226,908 shares of Series B preferred stock
and warrants to purchase 1,313,351 shares of its common stock at an
exercise price of $.06 per share for an aggregate consideration of
$16,070,000.
. In May 1998, RAVISENT sold to ATI Technologies an aggregate of
502,008 shares of Series B preferred stock and warrants to purchase
204,317 shares of common stock at $0.06 per share for an aggregate
consideration of $2,500,000.
The following table summarizes the shares of common stock, preferred stock
and warrants purchased by RAVISENT's executive officers, directors and 5%
stockholders and persons associated with them since January 1996. The number
of total shares on an as-converted basis reflects a one-to-one conversion to
common stock ratio for each share of Series A and Series B preferred stock.
<TABLE>
<CAPTION>
Total
Warrants to shares on
Series A Series B Purchase an As-
Common Preferred Preferred Common Converted
Investor Stock Stock Stock Stock Basis
- -------- ------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
NEPA Venture Fund II, L.P. .. 0 83,635 0 0 83,635
Entities affiliated with
Patricof & Co.
Ventures.................... 0 0 2,108,434 858,133 2,966,566
Atlantic Coastal Ventures
L.P. ....................... 208,682 0 355,422 0 564,104
ATI Technologies Inc. ....... 0 0 702,811 286,044 988,855
------- ------ --------- --------- ---------
208,682 83,635 3,166,667 1,144,177 4,603,160
======= ====== ========= ========= =========
</TABLE>
Agreements with Officers and Directors
Messrs. Vais and Threadgill are on the board of directors pursuant to
agreements with RAVISENT.
In March 1996, RAVISENT entered into a series of salary deferral
transactions with each of Gregg W. Garnick, Jason C. Liu and Robert S.
Russell, whereby in exchange for salary deferral, each officer received non-
plan stock options to purchase 50,510 shares of common stock at an exercise
price of $0.60 per share.
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In April 1998, RAVISENT repurchased 200,000 shares of RAVISENT common stock
from Gregg W. Garnick, at a price of $3.60 per share for an aggregate
consideration of $720,000.
In September 1998, RAVISENT entered into an agreement with Michael Harris
and Brenda Harris in which the Harrises borrowed $60,000 payable in three years
with no interest accruing in those three years. In addition, if Mr. Harris
achieves each of his quarterly performance goals with RAVISENT, at the end of
each year, RAVISENT will forgive one-third of the principal amount. If Mr.
Harris voluntarily leaves or is terminated for cause, the note is immediately
due and payable. However, if RAVISENT completes an initial public offering of
its stock, RAVISENT will completely forgive the note. The parties also entered
into an agreement confirming that the note is immediately payable upon
termination and that the outstanding principal will be forgiven upon an initial
public offering of RAVISENT common stock.
Agreement with ATI Technologies Inc.
In March 1998, RAVISENT entered into a Development and License Agreement
with ATI Technologies for a term of two years, and extendable for one year
terms thereafter, pursuant to which RAVISENT granted a worldwide, non-exclusive
license to ATI Technologies to RAVISENT's Software DVD, Video Encoder Software,
and Hardware DVD technology in exchange for a royalty for each copy of Video
Encoder Software sold by ATI Technologies. ATI Technologies agreed to pay to
RAVISENT a minimum quarterly royalty payment of $750,000 during the first year
of royalty payments and $900,000 during the second year of royalty payments;
however, ATI Technologies is allowed to convert up to $125,000 of prospective
quarterly royalty payments in each of the first four quarters of royalty
payments and $500,000 of prospective quarterly royalty payments in the fourth
quarter of the second year of royalty payments into shares of Series B
preferred stock and warrants to purchase common stock. This agreement may be
terminated by either party for a material breach of the agreement or for a
repeated breach of the agreement subject to certain notice requirements. In
April 1999, RAVISENT issued 25,100 shares of Series B preferred stock and
warrants to purchase 10,216 shares of common stock under this agreement. Also
in April 1999, RAVISENT amended the agreement to terminate ATI Technology's
right to receive Series B preferred stock and warrants and issued to ATI
Technologies 100,402 shares of Series B preferred stock and warrants to
purchase 40,863 shares of common stock in exchange for which RAVISENT received
promissory notes with an aggregate value of $500,000. Since March 1998, the
beginning of RAVISENT's relationship with ATI Technologies, ATI Technologies
has contributed approximately $3,775,000 to RAVISENT consisting of equity
investments totaling $2,875,000 ($375,000 of which were made pursuant to the
Development and License Agreement), license fees relating to video encoder
software totaling $1,875,000 (all of which were made pursuant to the
Development and License Agreement) and development fees of $25,000 relating to
the development and assignment of proprietary rights to ATI Technologies with
respect to teletext source code.
Other Related Party Transactions
RAVISENT has entered into employment agreements with its executive officers.
See "Management--Employment Contracts, Termination of Employment and Change in
Control Arrangements."
Holders of shares of preferred stock are entitled to certain registration
rights in respect of the common stock issued or issuable upon conversion
thereof. See "Description of Capital Stock--Registration Rights."
RAVISENT has also granted additional options and issued common stock to
certain of its executive officers and directors. See "Management--Director
Compensation," and "Principal Stockholders."
RAVISENT has entered into an indemnification agreement with each of its
executive officers and directors containing provisions that may require it,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities
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arising from willful misconduct of a culpable nature) and to advance expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. See "Management--Limitation on Liability and Indemnification
Matters."
RAVISENT has entered into non-competition and confidentiality agreements
with certain of its officers.
RAVISENT believes that all of the transactions set forth above were made on
terms no less favorable to RAVISENT than could have been otherwise obtained
from unaffiliated third parties. All future transactions, including loans, if
any, between RAVISENT and its officers, directors and principal stockholders
and their affiliates and any transactions between RAVISENT and any entity with
which its officers, directors or 5% stockholders are affiliated will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors of the board of directors and
will be on terms no less favorable to RAVISENT than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership of
RAVISENT's common stock as of May 31, 1999, by the following individuals or
groups:
. Each person or entity who is known by RAVISENT to own beneficially
more than 5% of RAVISENT's outstanding stock
. Each of the named executive officers
. Each director of RAVISENT
. All directors and executive officers as a group
As used in the table, beneficial ownership refers to the sole or shared
power to vote the shares of RAVISENT's common stock or make decisions regarding
whether to sell the shares of RAVISENT's common stock.
The percentage of shares beneficially owned prior to the offering in the
following table is based upon, for each person or entity listed, 10,488,332
shares of common stock outstanding as of May 31, 1999 (assuming the conversion
of all shares of preferred stock outstanding on May 31, 1999 and the exercise
of all warrants outstanding on May 31, 1999) plus applicable options for the
shareholder.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o RAVISENT Technologies Inc., One Great Valley Parkway,
Malvern, Pennsylvania 19355. Except as otherwise indicated, 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 held by
them.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Name and Address of Number of Shares ------------------------------------
Beneficial Owner Beneficially Owned Prior to Offering After the Offering
- ------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
NEPA Venture Fund II,
L.P.(1)................ 920,006 8.8% 5.9%
Entities affiliated with
Patricof & Co.
Ventures, Inc.(2)...... 2,966,566 28.3% 19.2%
Atlantic Coastal
Ventures L.P.(3)....... 564,104 5.4% 3.6%
ATI Technologies,
Inc.(4)................ 988,855 9.4% 6.4%
Frank E.J. Wilde
III(5)................. 167,651 1.6% 1.1%
Jason C. Liu(6)......... 165,138 1.6% 1.1%
Michael R. Harris(7).... 515,695 4.8% 3.3%
Robert S. Russell(8).... 47,700 * *
Leonard D. Sharp(9)..... 32,179 * *
Frederick J. Beste
III(1)................. 920,006 8.8% 5.9%
Peter X. Blumenwitz(2).. 2,966,566 28.3% 19.2%
Walter L.
Threadgill(3).......... 564,104 5.4% 3.6%
Paul A. Vais(2)......... 2,966,566 28.3% 19.2%
Gregg W. Garnick(10).... 1,046,618 9.9% 6.7%
All directors and
executive officers as a
group
(twelve persons)(11)... 5,395,705 48.2% 33.3%
</TABLE>
- ----------
*Less than 1%.
(1) Principal Address is 125 Goodman Drive, Bethlehem, PA 18015. Includes
warrants to purchase 836,371 shares of Series A preferred stock at an
exercise price of $0.5978262 per share and warrants to purchase 83,635
shares of Series A preferred stock at an exercise price of $0.746352 per
share. NEPA Venture Fund, II, L.P. has one general partner, NEPA II
Management Corporation, which has three
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officers: Frederick Beste, Glen Bressner and Marc Benson. Each of these
officers shares voting and investment power over the shares held by NEPA
Venture Fund. Mr. Beste disclaims beneficial ownership of all RAVISENT
shares except to the extent of his pecuniary interest in NEPA Venture Fund
II, L.P.
(2) Principal Address is 445 Park Avenue, New York, NY 10022. Represents
133,374 shares of common stock and warrants to purchase 54,283 shares of
common stock at an exercise price of $0.06 per share held by Coutts & Co.
(Cayman) Ltd., 602,410 shares of common stock and warrants to purchase
245,181 shares of common stock at an exercise price of $0.01 per share
held by The P/A Fund III, L.P., 602,410 shares of common stock and
warrants to purchase 245,181 shares of common stock at an exercise price
of $0.06 per share held by Apax Germany II L.P., 14,458 shares of common
stock and warrants to purchase 5,884 shares of common stock at an exercise
price of $0.06 per share held by Patricof Private Investment Club, L.P.,
and 755,783 shares of common stock and warrants to purchase 307,604 shares
of common stock at an exercise price of $0.06 per share held by APA
Excelsior IV, L.P. Mr. Vais is a Vice President of Patricof Co. Ventures,
Inc. and a director of RAVISENT. APA Excelsior IV Partners, L.P. is the
general partner of Coutts & Co. (Cayman) Ltd., Patricof Private Investment
Club, L.P. and APA Excelsior IV, L.P. APA Excelsior IV Partners, L.P. has
one general partner, Patricof & Co. Managers, Inc. The sole shareholder of
Patricof & Co. Managers, Inc. is Alan Patricof. APA Pennsylvania Partners
III, L.P. is the general partner of The P/A Fund III, L.P. APA
Pennsylvania Partners III, L.P. has one general partner, Patricof & Co.
Managers, Inc. whose sole shareholder is Alan Patricof. Alan Patricof has
sole voting and investment power over the shares held by Coutts & Co.
(Cayman) Ltd., Patricof Private Investment Club, L.P., APA Excelsior IV,
L.P. and The P/A Fund III, L.P. Apax Partners & Co. (Germany) II, Ltd. is
the managing general partner of Apax Germany II L.P. Apax Partners & Co.
(Germany) II, Ltd. has six directors: Alan Patricof, Maurice Tchenio,
Richard Rich, Ronald Cohen, Patrick de Giovanni and Adrian Beecroft. Each
of these directors shares voting and investment power over the shares held
by Apax Germany II L.P. Mr. Vais disclaims beneficial ownership of all
RAVISENT shares, except to the extent of his pecuniary interest in
Patricof Private Investment Club, L.P. Mr. Blumenwitz is an Assistant
Director of Apax Partners & Co. Beteilgungsberatung A.G. and a director of
RAVISENT. Mr. Blumenwitz disclaims beneficial ownership of all RAVISENT
shares, except to the extent of his pecuniary interest in Apax Germany II
L.P. Mr. Vais disclaims beneficial ownership of all RAVISENT shares,
except to the extent of his pecuniary interest in Patricof Private
Investment Club, L.P. Mr. Blumenwitz is an Assistant Director of Apax
Partners & Co. Beteilgungsberatung A.G. and a director of RAVISENT. Mr.
Blumenwitz disclaims beneficial ownership of all RAVISENT shares, except
to the extent of his pecuniary interest in Apax Germany II L.P.
(3) Principal Address is 3101 South Street N.W., Washington, D.C. 20007.
Includes 564,104 shares of common stock held by Atlantic Coastal Ventures,
L.P. Mr. Threadgill is a General Partner of Atlantic Coastal Ventures,
L.P. and a director of RAVISENT. Mr. Threadgill has sole voting and
investment power over the shares held by Atlantic Coastal Ventures. Mr.
Threadgill disclaims beneficial ownership of all RAVISENT shares, except
to the extent of his pecuniary interest in Atlantic Coastal Ventures, L.P.
(4) Principal address is 33 Commerce Valley Drive East, Thornhill, Ontario
Canada L3T7N6. Includes 702,811 shares of common stock and warrants to
purchase 286,044 shares of common stock at an exercise price of $0.06 per
share. Mr. Hartog is a Vice President of Engineering for ATI Technologies,
Inc. Mr. Hartog disclaims beneficial ownership of all RAVISENT shares. The
board of directors of ATI Technologies, as a whole, has sole dispositive
and voting power over the shares held by ATI Technologies and makes all
dispositive decisions and significant voting decisions to be made with
respect to the shares. As a practical matter, the board acts through the
corporate officers of ATI Technologies, but the discretion of these
officers is limited, except with respect to voting decisions considered to
be insignificant to RAVISENT. The board members of ATI Technologies are
Alan Horn, Jim Fleck, K.Y. Ho, Lee Lau and Paul Fox and the corporate
officers are K.Y. Ho (President and CEO), Jim Chwartacky (Vice President
and CFO) and Tom Ward, Adrian Hartog, Benny Lau, Lee Lau, Ed Grondahl and
Henry Quan, each of whom are Vice Presidents.
(5) Includes 167,651 shares of common stock issuable upon exercise of
immediately exercisable options.
(6) Includes 91,701 shares of common stock issuable upon exercise of
immediately exercisable options.
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<PAGE>
(7) Includes 341,160 shares of common stock issuable upon exercise of
immediately exercisable options.
(8) Includes 47,700 shares of common stock issuable upon exercise of
immediately exercisable options.
(9) Includes 32,179 shares of common stock issuable upon exercise of
immediately exercisable options.
(10) Includes 43,649 shares of common stock issuable upon exercise of
immediately exercisable options.
(11) Includes 700,058 shares of common stock issuable upon exercise of
immediately exercisable options.
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DESCRIPTION OF CAPITAL STOCK
At the closing of this offering, the authorized capital stock of RAVISENT
will consist of 50,000,000 shares of common stock, $.001 par value, and
5,000,000 shares of preferred stock, $.001 par value, covered by the
assumptions contained in the summary. An aggregate of 15,488,332 shares of
common stock will be issued and outstanding, assuming the conversion of all
outstanding shares of preferred stock and the exercise of all outstanding
warrants for the purchase of common stock and preferred stock but excluding
shares issued upon exercise of outstanding options. No shares of preferred
stock will be issued and outstanding.
Common Stock
The holders of 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 that may come into existence,
the holders of common stock are entitled to receive ratably those dividends, if
any, as may be declared from time to time by the board of directors out of
funds legally available for dividends. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of RAVISENT, the holders of 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 common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be outstanding
upon completion of this offering will be fully paid and nonassessable.
Preferred Stock
RAVISENT's board of directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of preferred stock of RAVISENT with any
dividend, redemption, conversion and exchange provisions as may be provided in
the particular series. Any series of preferred stock may possess voting,
dividend, liquidation and redemption rights superior to that of the common
stock. The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching RAVISENT's board
of directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of RAVISENT. RAVISENT has no present plans to issue any shares of or
designate any series of preferred stock.
Warrants
At March 31, 1999, there were warrants outstanding to purchase a total of
1,608,171 shares of common stock on an as-converted basis, including:
. Warrants to purchase 34,970 and 20,982 shares of common stock at
$0.7473 per share, which will expire in June 2003 and November 2003,
respectively.
. Warrants to purchase 12,500, 33,333 and 16,667 shares of common
stock at $3.558 per share, which will expire in June 2004, January
2005 and July 2005, respectively.
. Warrants to purchase 7,500, 20,080 and 10,843 shares of common stock
at $4.98 per share, which will expire in February 2001, March 2001
and April 2001, respectively.
. Warrants to purchase 1,376,452, 40,863, 10,216, 10,216 and 10,216
shares of common stock at $0.06 per share, which will expire in
April 2003, May 2003, July 2003, September 2003 and December 2003,
respectively.
. Warrants to purchase 3,333 shares of common stock at $6.00 per
share, which will expire in April 2003.
76
<PAGE>
Registration Rights
Upon completion of the offering, the holders of an aggregate of
approximately 5,716,192 shares of common stock and the holders of warrants to
purchase up to approximately 2,551,325 shares of common stock will be entitled
to certain rights with respect to the registration of such shares under the
Securities Act of 1933, as amended, or the Securities Act. Under the terms of
the registration rights agreements, if RAVISENT proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of such registration and are entitled to include shares
of common stock in the registration. The rights are subject to conditions and
limitations, among them the right of the underwriters of an offering subject to
the registration to limit the number of shares included in such registration.
Holders of these rights may also require RAVISENT to file a registration
statement under the Securities Act at its expense with respect to their shares
of common stock, and RAVISENT is required to use its best efforts to effect
such registration, subject to conditions and limitations. Furthermore,
stockholders with registration rights may require RAVISENT to file additional
registration statements on Form S-3, subject to conditions and limitations.
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law
RAVISENT's certificate of incorporation authorizes the board to establish
one or more series of undesignated preferred stock, the terms of which can be
determined by the board at the time of issuance without stockholder action. See
"--Preferred Stock." The certificate of incorporation also provides that all
stockholder action must be effected at a duly called meeting of stockholders
and not by written consent. In addition, the certificate of incorporation and
bylaws do not permit stockholders of RAVISENT to call a special meeting of
stockholders. Only RAVISENT's board of directors are permitted to call a
special meeting of stockholders. The certificate of incorporation also provides
that the board of directors is divided into three classes, with each director
assigned to a class with a term of three years, and that the number of
directors may only be determined by the board of directors. The bylaws also
require that stockholders give advance notice to RAVISENT's secretary of any
nominations for director or other business to be brought by stockholders at any
stockholders' meeting, and that the Chairman has the authority to adjourn any
such meeting. The bylaws also require a supermajority vote of members of the
board of directors and/or stockholders to amend certain bylaw provisions. These
provisions of the restated certificate of incorporation and the bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of RAVISENT. These provisions also may have the effect of preventing
changes in the management of RAVISENT. See "Risk Factors--We have adopted
certain anti-takeover provisions."
RAVISENT is subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned:
. by persons who are directors and also officers; and
. by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer; or
77
<PAGE>
. on or subsequent to that date, the business combination is approved
by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the
interested stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of
the assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
. the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
Transfer Agent and Registrar
The transfer agent and registrar for RAVISENT's common stock is BankBoston,
N.A.
78
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has not been any public market for RAVISENT's
common stock, and no prediction can be made as to the effect, if any, that
market sales of shares of common stock or the availability of shares of common
stock for sale will have on the market price of the common stock prevailing
from time to time. Nevertheless, sales of substantial amounts of common stock
in the public market could adversely affect the market price of RAVISENT's
common stock and could impair RAVISENT's future ability to raise capital
through the sale of RAVISENT's equity securities.
Upon the completion of this offering, RAVISENT's will have an aggregate of
15,488,332 shares of common stock outstanding, assuming exercise of all
outstanding warrants but assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options. Of the outstanding
shares, all of the shares sold in the offering will be freely tradable, except
that any shares held by our "affiliates," as that term is defined in Rule 144
promulgated under the Securities Act, and may only be sold in compliance with
the limitations described below. The remaining 10,488,332 shares of common
stock will be deemed "restricted securities" as defined under Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. Subject
to the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ------------------------------------------------------------------
<C> <S>
5,000,000 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
9,726,785 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
761,547 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>
Rule 144
In general, under Rule 144, as currently in effect, a person, or group of
persons whose shares are required to be aggregated, including an affiliate, who
has beneficially owned shares for at least one year is entitled to sell, within
any three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then-outstanding
shares of RAVISENT's common stock, which will be approximately 154,883 shares
immediately after the offering, or the average weekly trading volume in
RAVISENT's common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to certain restrictions. In
addition, a person who is not deemed to have been an affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above. To
the extent that shares were acquired from one of RAVISENT's affiliates, a
person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
Stock Options
As of March 31, 1999, options to purchase a total of 2,252,528 shares of
common stock were outstanding, 1,221,290 of which were currently exercisable.
RAVISENT intends to file a Form S-8 registration statement under the Securities
Act to register all shares of common stock issuable under its option plan.
Accordingly, shares of common stock underlying such options will be eligible
for sale in the public markets, subject to vesting restrictions or the lock-up
agreement described below. See "Management--Benefit Plans."
79
<PAGE>
Lock-up Agreements
RAVISENT, each of its directors and officers and substantially all of its
securityholders have agreed, subject to specified exceptions, not to, without
the prior written consent of the representatives of the underwriters, sell or
otherwise dispose of any shares of RAVISENT's common stock or options to
acquire shares of RAVISENT's common stock during the 180-day period following
the date of this prospectus. Bear, Stearns & Co. Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. See "Underwriting."
Following this offering, under specified circumstances and subject to
customary conditions, holders of 5,716,192 shares of our outstanding common
stock and the holders of warrants to purchase 2,551,325 shares of common stock
will have certain demand registration rights with respect to their shares of
common stock, subject to the 180-day lock-up arrangement described above, to
require RAVISENT to register their shares of common stock under the Securities
Act, and certain rights to participate in any future registration of securities
by RAVISENT. If the holders of these registrable securities request that
RAVISENT register their shares, and if such registration is effected, these
shares will become freely tradable without restriction under the Securities
Act. Any sales of securities by these stockholders could have a material
adverse effect on the trading price of RAVISENT's common stock. See
"Description of Capital Stock--Registration Rights."
80
<PAGE>
UNDERWRITING
The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., SG Cowen Securities Corporation, and Volpe Brown Whelan & Company, LLC
are acting as representatives, have severally agreed with RAVISENT, subject to
the terms and conditions of the underwriting agreement (the form of which has
been filed as an exhibit to the registration statement on Form S-1 of which
this prospectus is a part), to purchase from RAVISENT the aggregate number of
shares of common stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. ........................................
SG Cowen Securities Corporation..................................
Volpe Brown Whelan & Company, LLC................................
---------
Total.......................................................... 5,000,000
=========
</TABLE>
The nature of the respective obligations of the underwriters is such that
all of the shares of common stock (other than shares of common stock covered by
the over-allotment option described below) must be purchased if any are
purchased. Those obligations are subject, however, to various conditions,
including the approval of certain matters by counsel. RAVISENT has agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act, and, where such indemnification is unavailable, to
contribute to payments that the underwriters may be required to make in respect
of such liabilities.
RAVISENT has been advised that the underwriters propose to offer the shares
of common stock directly to the public initially at the public offering price
set forth on the cover page of this prospectus and to certain selected dealers
at such price less a concession not to exceed $ per share, that the
underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $ per share and that after the
commencement of this offering, the public offering price and the concessions
may be changed. The common stock is offered subject to receipt and acceptance
by the underwriters, and to various other conditions, including the right to
reject orders in whole or in part. The representatives of the underwriters have
advised RAVISENT that the underwriters do not expect to confirm sales to any
accounts over which they exercise discretionary authority.
RAVISENT has granted to the underwriters an option to purchase in the
aggregate up to 750,000 additional shares of common stock to be sold in this
offering solely to cover over-allotments, if any. The option may be exercised
in whole or in part at any time within 30 days after the date of this
prospectus. To the extent the option is exercised, the underwriters will be
severally committed, subject to certain conditions, including the approval of
certain matters by counsel, to purchase the additional shares of common stock
in proportion to their respective purchase commitments as indicated in the
preceding table.
The following table shows the per share and total underwriting discounts and
commission to be paid to the underwriters by RAVISENT. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Us
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share............................................. $ $
Total............................................... $ $
</TABLE>
81
<PAGE>
The underwriters have reserved for sale at the initial public offering price
up to 5% of the number of shares of common stock offered hereby for sale to
certain directors, officers, other employees, business affiliates and related
persons of RAVISENT who have expressed an interest in purchasing shares. The
number of shares available for sale to the general public will be reduced to
the extent any reserved shares are purchased. Any reserved shares not so
purchased will be offered by the underwriters on the same basis as the other
shares offered hereby.
RAVISENT, its executive officers, directors and substantially all of its
securityholders have agreed that, subject to certain limited exceptions, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Bear, Stearns & Co. Inc., they will not:
. directly or indirectly, issue, sell, offer or agree to sell or
otherwise dispose of any shares of RAVISENT common stock (or
securities convertible into, exchangeable for or evidencing the
right to purchase shares of common stock);
. nor enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the
economic consequence of RAVISENT ownership of RAVISENT common stock,
whether any such swap transaction is to be settled by delivery of
common stock or other securities, in cash or otherwise, or exercise
their rights, as applicable, to require RAVISENT to register common
stock.
The restrictions described in the previous paragraph do not apply to:
. transactions by any person other than RAVISENT relating to shares of
common stock or other securities acquired in open market
transactions after the completion of this offering; or
. certain specified transfers, provided that, following such
transfers, the transferees are subject to transfer restrictions
similar to those described above.
Bear, Stearns & Co. Inc., may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price will be determined
through negotiations among RAVISENT and the representatives of the
underwriters. Among the factors considered in making such determination were:
. RAVISENT's financial and operating history and condition;
. market valuations of other companies engaged in activities similar
to RAVISENT's;
. RAVISENT's prospects and prospects for the industry in which it does
business in general;
. the management of RAVISENT;
. prevailing equity market conditions; and
. the demand for securities considered comparable to those of
RAVISENT.
In order to facilitate this offering, the underwriters participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock, than have been sold to them by RAVISENT. The underwriters may
elect to cover any such short position by purchasing shares of common stock in
the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the price
of the common stock by bidding for or purchasing shares of common stock in the
open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect
82
<PAGE>
of these transactions may be to stabilize or maintain the market price of the
common stock at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the common
stock to the extent that it discourages resales thereof. No representation is
made as to the magnitude or effect of any such stabilization or other
transactions. Such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered will be passed upon for RAVISENT by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Certain legal matters
in connection with the offering will be passed upon for the underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements and schedule of RAVISENT Inc. as of
December 31, 1997 and 1998 and for each of the years in the three year period
ended December 31, 1998 and the financial statements of Viona Development Hard
& Software Engineering GmbH as of and for the year ended December 31, 1997 have
been included in this prospectus and in the registration statement in reliance
upon the reports of KPMG LLP and KPMG Deutsche Treuhand-Gesellschaft AG,
respectively, independent certified public accountants, appearing elsewhere in
this prospectus, and upon the authority of said firms as experts in accounting
and auditing.
ADDITIONAL INFORMATION
RAVISENT has filed with the Securities and Exchange Commission, Washington,
D.C. 20549, under the Securities Act, as amended, a registration statement on
Form S-1 relating to the common stock offered. This prospectus does not contain
all of the information set forth in the registration statement and its exhibits
and schedules. For further information with respect to RAVISENT and the shares
RAVISENT is offering pursuant to this prospectus you should refer to the
registration statement, including its exhibits and schedules. Statements
contained in this prospectus as to the contents of any contract, agreement or
other document referred to are not necessarily complete, and you should refer
to the copy of that contract or other document filed as an exhibit to the
registration statement or any other document. You may inspect a copy of the
registration statement without charge at the Public Reference Section of the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the
SEC's regional offices at 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036. The SEC maintains an Internet site that contains reports,
proxy information statements and other information regarding registrants that
file electronically with the SEC. The SEC's web site is www.sec.gov.
RAVISENT intends to furnish holders of its common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. RAVISENT intends to furnish these other reports
as it may determine or as may be required by law.
Information contained in RAVISENT's web site is not a prospectus and does
not constitute a part of this prospectus.
83
<PAGE>
RAVISENT TECHNOLOGIES INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements
RAVISENT Technologies Inc.
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets, December 31, 1997 and 1998, and March 31,
1999 (unaudited)..................................................... F-3
Consolidated Statements of Operations, Years ended December 31, 1996,
1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).......................................................... F-4
Consolidated Statements of Changes in Stockholders' Deficiency, Years
ended December 31, 1996, 1997 and 1998, and the three months ended
March 31, 1999 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows, Years ended December 31, 1996,
1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).......................................................... F-6
Notes to Consolidated Financial Statements............................ F-7
Viona Development Hard & Software Engineering GmbH
Independent Auditors' Report.......................................... F-27
Balance Sheets, December 31, 1997 and March 31, 1998 (unaudited)...... F-28
Statements of Operations, Year ended December 31, 1997 and three
months ended March 31, 1998 (unaudited) ............................. F-29
Statements of Stockholders' Equity, Year ended December 31, 1997 and
three months ended March 31, 1998 (unaudited)........................ F-30
Statements of Cash Flows, Year ended December 31, 1997 and three
months ended March 31, 1998 (unaudited) ............................. F-31
Notes to Financial Statements......................................... F-32
Unaudited Pro Forma Financial Statements
Unaudited Pro Forma Financial Information............................. F-36
Unaudited Pro Forma Combined Statement of Operations, Year ended
December 31, 1998.................................................... F-37
Notes to Unaudited Pro Forma Combined Financial Statements............ F-38
</TABLE>
F-1
<PAGE>
When the reverse stock split referred to in Note 19 of the Notes to
Consolidated Financial Statements has been effected, we will be in a position
to render the following report.
KPMG LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
RAVISENT Technologies Inc.:
We have audited the accompanying consolidated balance sheets of RAVISENT
Technologies Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, changes in stockholders'
deficiency, and cash flows for each of the years in the three-year period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RAVISENT
Technologies Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania
April 27, 1999, except as to the last paragraph of Note 19, which is as of June
, 1999
F-2
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------ March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 607 $ 1,024 $ 2,175
Accounts receivable, net of allowance for
doubtful accounts of $467 in 1997 and $265
in 1998 and 1999............................ 999 11,111 4,886
Inventory.................................... 619 1,296 3,783
Prepaid expenses............................. 38 72 109
-------- -------- --------
Total current assets........................ 2,263 13,503 10,953
Furniture and equipment, net................... 175 875 789
Goodwill and other intangibles, net of
accumulated amortization of $664 in 1998 and
$886 in 1999.................................. -- 2,881 2,659
Debt issuance costs, net of accumulated
amortization of $22 in 1997, $62 in 1998 and
$64 in 1999................................... 65 25 23
Loan receivable--officer....................... -- 60 60
Other assets................................... 66 30 27
-------- -------- --------
Total assets................................ $ 2,569 $ 17,374 $ 14,511
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable............................. $ 4,675 $ 9,916 $ 7,255
Secured borrowings........................... 278 -- --
Bank line of credit.......................... 998 -- 1,252
Bridge loan.................................. 1,500 -- --
Deferred revenue............................. 126 -- --
Accrued expenses and other................... 279 1,114 862
Other current liabilities.................... 44 2,560 2,060
Loan payable--officer........................ 4 -- --
Current installments of obligations under
capital leases.............................. 17 13 13
-------- -------- --------
Total current liabilities................... 7,921 13,603 11,442
Subordinated notes payable..................... 625 625 625
Other long-term liabilities.................... 89 788 350
Obligations under capital leases, excluding
current installments.......................... 18 5 2
-------- -------- --------
Total liabilities........................... 8,653 15,021 12,419
-------- -------- --------
Commitments and contingencies (note 13)
Mandatory redeemable convertible preferred
stock, $.06 par value; 31,523,684 shares
authorized; none outstanding in 1997,
3,913,072 Series B outstanding in 1998 and
1999; liquidation preference of approximately
$19,487 at 1998 and 1999; net of subscription
receivable of $625 for 125,502 shares at 1998
and 1999 ..................................... -- 14,589 14,871
Stockholders' deficiency:
Common stock, $.06 par value (80,000,000
shares authorized; 2,103,653, 3,520,851 and
3,520,851 shares issued in 1997, 1998 and
1999)....................................... 126 211 211
Additional paid-in capital................... 3,949 12,889 13,110
Deferred stock compensation.................. -- (749) (1,182)
Accumulated deficit.......................... (10,159) (23,842) (24,152)
Accumulated other comprehensive income....... -- (25) (46)
Treasury stock at cost, 200,000 shares....... -- (720) (720)
-------- -------- --------
Total stockholders' deficiency.............. (6,084) (12,236) (12,779)
-------- -------- --------
Total liabilities and stockholders'
deficiency................................. $ 2,569 $ 17,374 $ 14,511
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License and services.. $ 825 $ 1,445 $ 3,447 $ 10 $ 2,290
Hardware.............. 3,370 5,376 26,841 3,133 8,522
--------- --------- --------- --------- ---------
Total revenues...... 4,195 6,821 30,288 3,143 10,812
Cost of revenues:
License and services.. 472 331 354 15 135
Hardware.............. 2,664 8,072 24,192 3,062 7,264
--------- --------- --------- --------- ---------
Total cost of
revenues........... 3,136 8,403 24,546 3,077 7,399
--------- --------- --------- --------- ---------
Gross profit........ 1,059 (1,582) 5,742 66 3,413
Research and
development............ 1,034 1,828 3,121 498 1,465
Sales and marketing..... 731 1,158 1,964 465 1,062
General and
administrative......... 1,198 1,710 4,673 505 837
Depreciation and
amortization........... 46 86 906 15 314
Compensation related to
stock options.......... -- 1,408 139 -- --
Acquired in-process
research and
development............ -- -- 7,900 -- --
--------- --------- --------- --------- ---------
Operating loss...... (1,950) (7,772) (12,961) (1,417) (265)
Other (income) expense:
Interest expense,
net.................. 105 197 722 127 45
Other income.......... -- (716) -- -- --
--------- --------- --------- --------- ---------
Net loss................ (2,055) (7,253) (13,683) (1,544) (310)
--------- --------- --------- --------- ---------
Accretion of discount on
mandatory redeemable
preferred stock........ -- -- 754 -- 283
--------- --------- --------- --------- ---------
Loss attributable to
common stockholders.... $ (2,055) $ (7,253) $ (14,437) $ (1,544) $ (593)
========= ========= ========= ========= =========
Basic and diluted net
loss per common share.. $ (1.19) $ (3.52) $ (4.94) $ (0.73) $ (0.18)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in per
common share
calculation (basic and
diluted)............... 1,720,922 2,060,668 2,920,677 2,103,654 3,320,851
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common stock Additional Deferred other Total
---------------- paid-in stock Accumulated comprehensive Treasury stockholders'
Shares Amount capital compensation deficit income stock deficiency
--------- ------ ---------- ------------ ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
December 31, 1995....... 1,545,856 $ 44 $ 32 $ -- $ (851) $ -- $ -- $ (775)
Issuance of common
stock................... 444,464 23 1,881 -- -- -- -- 1,904
Adjustment for stock
splits.................. -- 52 (52) -- -- -- -- --
Issuance of warrants to
acquire 501,808 shares
of Series A
preferred stock......... -- -- 3 -- -- -- -- 3
Net loss................ -- -- -- -- (2,055) -- -- (2,055)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of
December 31, 1996....... 1,990,320 119 1,864 -- (2,906) -- -- (923)
Issuance of common
stock................... 113,333 7 619 -- -- -- -- 626
Issuance of warrants to
acquire shares of common
stock................... -- -- 57 -- -- -- -- 57
Compensation related to
stock options........... -- -- 1,409 -- -- -- -- 1,409
Net loss................ -- -- -- -- (7,253) -- -- (7,253)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of
December 31, 1997....... 2,103,653 126 3,949 -- (10,159) -- -- (6,084)
Issuance of warrants in
connection with debt
financing............... -- -- 68 -- -- -- -- 68
Issuance of warrants in
connection with the sale
of Series B preferred
stock, net of
transaction costs....... -- -- 3,754 -- -- -- -- 3,754
Issuance of common stock
to acquire Viona........ 1,204,820 72 4,699 -- -- -- -- 4,771
Repurchase of common
stock................... -- -- -- -- -- -- (720) (720)
Deferred stock
compensation related to
stock options........... -- -- 799 (799) -- -- -- --
Amortization of deferred
stock compensation...... -- -- -- 50 -- -- -- 50
Compensation related to
stock options........... -- -- 139 -- -- -- -- 139
Issuance of common stock
as consideration for
interest payments....... 12,962 1 64 -- -- -- -- 65
Issuance of common stock
upon exercise of
warrants................ 199,416 12 171 -- -- -- -- 183
Accretion of discount on
mandatory redeemable
preferred stock......... -- -- (754) -- -- -- -- (754)
Foreign currency
translation adjustment.. -- -- -- -- -- (25) -- (25)
Net loss................ -- -- -- -- (13,683) -- -- (13,683)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of
December 31, 1998....... 3,520,851 211 12,889 (749) (23,842) (25) (720) (12,236)
Deferred stock
compensation related to
stock options........... -- -- 504 (504) -- -- -- --
Amortization of deferred
stock compensation...... -- -- -- 71 -- -- -- 71
Accretion of discount on
mandatory redeemable
preferred stock......... -- -- (283) -- -- -- -- (283)
Foreign currency
translation adjustment.. -- -- -- -- -- (21) -- (21)
Net loss (unaudited).... -- -- -- -- (310) -- -- (310)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of March 31,
1999 (unaudited)........ 3,520,851 $211 $13,110 $(1,182) $(24,152) $ (46) $(720) $(12,779)
========= ==== ======= ======= ======== ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(2,055) $(7,253) $(13,683) $(1,544) $ (310)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 46 86 906 15 314
Noncash compensation and
other expenses......... 1 1,367 414 28 74
Acquired in-process
research and
development............ -- -- 7,900 -- --
Changes in items
affecting operations:
Accounts receivable... (598) (229) (10,112) (1,380) 6,225
Inventory............. (258) (15) (677) (1,806) (2,487)
Loan receivable--
officer.............. -- -- (60) -- --
Prepaid expenses...... (198) 167 (34) 3 (37)
Accounts payable...... 461 3,686 5,241 2,387 (2,661)
Deferred revenue...... 550 (424) (126) -- --
Accrued expenses and
other................ 71 142 549 176 (253)
------- ------- -------- ------- ------
Net cash provided by (used
in) operating activities.. (1,980) (2,473) (9,682) (2,121) 865
------- ------- -------- ------- ------
Cash flows from investing
activities:
Capital expenditures...... (110) (26) (813) (57) (78)
Proceeds from sale of
furniture and
equipment................ -- -- -- -- 86
Acquisition, net of cash
acquired................. -- -- (3,231) -- --
------- ------- -------- ------- ------
Net cash provided by (used
in) investing activities.. (110) (26) (4,044) (57) 8
------- ------- -------- ------- ------
Cash flows from financing
activities:
Repayments under capital
lease obligations........ (14) (14) (18) (4) (3)
Secured borrowings
(repayments)............. -- 278 (278) 1,198 --
Proceeds from bridge
loans.................... -- 1,500 3,320 2,520 --
Proceeds from
subordinated notes
payable.................. 50 -- -- -- --
Net proceeds from
issuance of common
stock.................... 1,885 626 183 -- --
Net proceeds from Series
B preferred stock........ -- -- 12,769 -- --
Net borrowings
(repayments) under bank
line of credit........... 140 663 (998) 452 1,252
Borrowings (repayments)
under other
liabilities.............. 65 -- (90) -- (950)
Repurchase of common
stock.................... -- -- (720) -- --
------- ------- -------- ------- ------
Net cash provided by
financing activities...... 2,126 3,053 14,168 4,166 299
------- ------- -------- ------- ------
Effect of exchange rate
changes on cash and cash
equivalents............... -- -- (25) -- (21)
------- ------- -------- ------- ------
Net increase in cash and
cash equivalents.......... 36 554 417 1,988 1,151
Cash and cash equivalents:
Beginning of year......... 17 53 607 607 1,024
------- ------- -------- ------- ------
End of year............... $ 53 $ 607 $ 1,024 $ 2,595 $2,175
======= ======= ======== ======= ======
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest................. $ 102 $ 133 $ 683 $ 77 $ 62
Noncash investing and
financing activities:
Equipment acquired under
capital lease
obligations............. 18 -- -- -- --
Issuance of warrants in
connection with bank
line of credit and
bridge loans............ 3 57 68 -- --
Issuance of options in
connection with equity
transactions and grants
below fair value........ 150 1,409 139 -- --
Issuance of common stock
and preferred stock as
consideration for
services (1996) and
private placement fees
(1998).................. 19 -- 542 -- --
Amortization of deferred
stock compensation...... -- -- 50 -- 71
Bridge loans converted
to Series B preferred
stock................... -- -- 4,820 -- --
Issuance of common stock
as consideration for
interest................ -- -- 65 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
(1) Summary of Significant Accounting Policies
(a) Description of Business
RAVISENT Technologies Inc., which changed its name from Divicore Inc. in
June 1999 and from Quadrant International, Inc. in May 1999, designs, develops,
licenses and markets core-based modular software solutions that enable digital
video and audio stream management in personal computer systems and consumer
electronic devices. The company also provides supporting hardware designs to
selected customers as well as customization services and customer support. The
company's solutions enable decoding (playback) and encoding (recording) of
multimedia formats such as digital versatile disk (DVD); direct broadcast
satellite (DBS) and high-definition television (HDTV) on existing personal
computers and consumer electronics platforms. The company's customers consist
principally of personal computer and consumer electronics manufacturers.
During 1998 the company's revenue was substantially generated from selling
hardware-based digital video solutions to personal computer and consumer
electronics original equipment manufacturers and prior to 1998 through
wholesale distributors. The company has recently changed its strategic focus
from selling a hardware-based digital video solution to licensing its
proprietary technology to provide software-based digital video solutions to
primarily personal computer and consumer electronics original equipment
manufacturers.
The company was incorporated in Pennsylvania in April 1994.
The company has sustained significant net losses and negative cash flows
from operations since its inception. The company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private equity financing, bank financing or other sources of capital. During
1998, the company sold approximately $18.6 million of its preferred stock.
Management believes that its current funds combined with other available
sources of funding will be sufficient to enable the company to meet its planned
expenditures through at least December 31, 1999. The company may require
additional capital to finance its future operations and fund its ongoing
research and development activities beyond 1999. Additional financing may not
be available when needed and, if such financing is available, it may not be
available on terms favorable to the company.
(b) Unaudited Interim Financial Information
The interim consolidated financial statements of the company for the three
months ended March 31, 1998 and 1999, included herein have been prepared by the
company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the company
at March 31, 1999, and the results of its operations and its cash flows for the
three months ended March 31, 1998 and 1999.
(c) Principles of Consolidation
The consolidated financial statements include the financial statements of
the company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
F-7
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(d) Cash and Cash Equivalents
For purposes of the statement of cash flows, the company considers all
highly liquid instruments purchased with an original maturity of three months
or less to be cash equivalents.
(e) Inventory
Inventory, which principally consists of finished goods, is valued at the
lower of cost or market. Cost is determined using the first-in, first-out
method (FIFO). Inventory is net of reserves of approximately $400,000 and
$174,000 at December 31, 1997 and 1998, respectively.
(f) Furniture and Equipment
Furniture and equipment are stated at cost. Equipment under capital leases
is stated at the present value of the minimum lease payments. Depreciation and
amortization is calculated on the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Purchased software............................................... 5 years
Computer equipment............................................... 5 years
Research and development equipment............................... 5 years
Furniture and fixtures........................................... 7 years
</TABLE>
(g) Goodwill and Other Intangibles
Goodwill and other intangibles are amortized using the straight-line method
from the date of acquisition over the expected period to be benefited,
estimated at four years. The company assesses the recoverability of goodwill,
as well as other long-lived assets, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of, which requires the
company to review for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. When
such an event occurs, the company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the
undiscounted expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized.
(h) Deferred Offering Costs
As of March 31, 1999, specific incremental costs directly attributable to
the planned initial public offering process have been deferred. These costs
will be charged against additional-paid-in-capital in connection with the
consummation of this offering.
(i) Revenue Recognition
Licensing revenues for one-time license fees are recognized in the period in
which the license agreement is signed, the fee is fixed and determinable,
delivery of the technology has occurred and collectibility is probable. Up-
front license fees are recognized as revenue when the license agreement is
signed, the fee is fixed and determinable, delivery of the technology has
occurred, and collectibility is probable. The up-front license fee terms
generally provide an agreed-upon level of sales of a licensee's products below
which a licensee will not be obligated to remit royalty payments and that the
up-front fees are nonrefundable even in the event such
F-8
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
level is not attained. Licensing revenues consisting of fees paid on a per unit
basis are recognized when earned, which is generally based on receiving
notification from licensees stating the number of products sold which
incorporate the licensed technology from the company and for which license
fees, based on a per unit basis, are due. The terms of the license agreements
generally require the licensees to give notification to the company within 45
to 60 days of the end of the quarter during which the sales of the licensee's
products take place. In a number of cases, the revenue recorded by the company
will occur in the quarter following the sale of the licensee's products to its
customers.
Revenue is recognized upon shipment of products to customers. Prior to 1998
an allowance for returned merchandise was provided for sales to distributors
based on the company's historical experience. The company's sales to original
equipment manufacturers do not provide a right of return unless in the event of
manufacturing defect, which is the responsibility of the company's third party
contract manufacturer. Revenue related to services are recognized upon delivery
of the service in the case of time and material contracts. Revenue related to
development contracts involving significant modifications or customization of
hardware or software under unilateral or joint development arrangements is
recognized using the percentage-of-completion method, based on performance
milestones specified in the contract where such milestones fairly reflect
progress toward contract completion. In other instances, progress toward
completion is based on individual contract costs incurred to date compared with
total estimated contract costs. Losses on contracts are recognized when the
loss is apparent.
Other income represents amounts received in connection with the cancellation
of a development project by a customer during 1997. A total of approximately
$1,134,000 was received from the customer, of which approximately $418,000 was
recorded as revenue based on costs of revenue incurred. The remaining
approximately $716,000 was recorded in other income as a cancellation fee.
(j) Research and Development Costs
Research and development costs are expensed as incurred.
(k) Income Taxes
In September 1996, the stockholders elected "C" corporation status for
federal and state income tax purposes. Effective with this election, income
taxes are accounted for in accordance with SFAS No. 109, Accounting for Income
Taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards.
(l) Financial Instruments
The company's financial instruments principally consist of cash, accounts
receivable, accounts payable, loans payable and capital lease obligations that
are carried at cost which approximates fair value.
(m) Stock Options
In 1996, the company adopted SFAS No. 123, Accounting for Stock-based
Compensation, which provides the alternative to adopt the fair value method for
expense recognition of employee stock options and stock-based awards or to
continue to account for such items using the intrinsic value method as outlined
under
F-9
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) with pro forma disclosures of results of operations as if
the fair value method had been applied. The company has elected to continue to
apply APB 25 for stock options and stock-based awards to employees and has
disclosed pro forma net loss as if the fair value method had been applied (note
12).
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(o) Long-Lived Assets
The company reviews long-lived assets and certain identifiable intangibles
to be held and used by an entity for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
(p) Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of stockholders'
deficiency in the accompanying consolidated financial statements.
(q) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The company adopted SFAS No. 130 during 1998.
(r) Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per
Share
The company computes earnings per share in accordance with SFAS No. 128,
Computation of Earnings Per Share. In accordance with SFAS No. 128, basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period. Dilutive earnings per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method), and the incremental common shares
issuable upon the conversion of the convertible preferred stock (using the if-
converted method). Common equivalent shares are excluded from the calculation
if their effect is anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No.
98, common stock and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of an IPO, are required
to be included in the calculation of basic and diluted net loss per share, as
if they were outstanding for all periods presented. To date, the company has
not had any issuances or grants for nominal consideration.
F-10
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding, including common equivalent shares from
the convertible preferred stock (using the if-converted method), which will
automatically convert into common stock upon an IPO as if converted at the
original date of issuance, for both basic and diluted net loss per share, even
though inclusion is anti-dilutive.
The following table sets forth the computation of loss per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
--------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Basic and diluted loss
per common share:
Numerator: Loss
attributable to common
stockholders........... $ (2,055) $ (7,253) $ (14,437) $ (1,544) $ (593)
Denominator: Weighted-
average shares
outstanding basic and
diluted................ 1,720,922 2,060,668 2,920,677 2,103,654 3,320,851
---------- ---------- --------- ---------- ----------
Basic and diluted loss
per common share..... $(1.19) $ (3.52) $ (4.94) $ (0.73) $ (0.18)
========== ========== ========= ========== ==========
Pro forma loss per
common share:
Numerator: Loss
attributable to common
stockholders........... $ (2,055) $ (7,253) $ (14,437) $ (1,544) $ (593)
Denominator: Weighted-
average shares
outstanding basic and
diluted................ 1,720,922 2,060,668 5,547,260 2,103,654 7,233,923
---------- ---------- --------- ---------- ----------
Basic and diluted loss
per common share..... $ (1.19) $ (3.52) $ (2.60) $ (0.73) $ (0.08)
========== ========== ========= ========== ==========
</TABLE>
(s) Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is
effective for financial statements for the years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The adoption of this standard
did not have a material effect on the company's capitalization policy.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start up activities and organization costs to be expensed as incurred. As
the company has expensed these costs historically, the adoption of this
standard did not have an impact on the company's results of operations,
financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. As the company does not currently engage or plan
to engage in derivative or hedging activities there will be no impact to the
company's results of operations, financial position or cash flows upon the
adoption of this standard.
F-11
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The company does not expect the adoption of SOP 98-9 to have a
material effect on its financial condition or results of operations.
(2) Comprehensive Income
The components of comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
Three months
ended
Years ended December 31, March 31,
-------------------------- --------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Net loss....................... $(2,055) $(7,253) $(13,683) $(1,544) $(310)
Foreign currency translation
adjustment.................... -- -- (25) -- (21)
------- ------- -------- ------- -----
Comprehensive loss........... $(2,055) $(7,253) $(13,708) $(1,544) $(331)
======= ======= ======== ======= =====
</TABLE>
(3) Furniture and Equipment
Furniture and equipment consist of the following at December 31, 1997 and
1998, and March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Furniture and fixtures................................... $ 27 $ 292 $ 288
Leasehold improvements................................... -- 67 72
Computer equipment....................................... 124 547 543
Research and development equipment....................... 122 333 301
Software................................................. 13 138 144
---- ------ ------
286 1,377 1,348
Less: accumulated depreciation........................... 111 502 559
---- ------ ------
Furniture and equipment, net............................. $175 $ 875 $ 789
==== ====== ======
</TABLE>
Assets recorded under capital lease are approximately $58,000 and related
accumulated amortization is approximately $17,000 and $25,000 as of
December 31, 1997 and December 31, 1998, respectively.
(4) Acquisition
In April 1998, the company completed the acquisition of Viona Development
Hard & Software Engineering GmbH (Viona) a company located in Karlsruhe,
Germany specializing in the development of digital video technology.
The company paid a total of $11.4 million consisting of: $5.8 million in
cash, of which $2.6 million was paid at closing, $2.1 million will be paid
during 1999, and $1.35 million, recorded at a discounted value of $1.1 million,
will be paid in equal installments at the end of each of the next three fiscal
years; issued 1,204,820 shares of the company's common stock valued at $4.8
million; and incurred transaction costs of $0.8 million.
F-12
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The acquisition of Viona was recorded under the purchase method of
accounting. The results of operations of Viona have been included in the
company's consolidated financial statements from April 1, 1998. A portion of
the purchase price was allocated to in-process research and development
technology, which resulted in a charge of approximately $7.9 million to the
company's operations in April 1998. At the date of acquisition, Viona had five
development projects that had not reached technological feasibility and for
which there was no alternative future use. The in-process research and
development technology was valued using a cash flow model, under which
projected income and expenses attributable to the purchased technology were
identified, and potential income streams were discounted using a 30%-35%
discount rate for risks, probabilities and uncertainties, including the stage
of development of the technology, viability of target markets and other
factors. The five development projects ranged in percentage of completion at
the date of acquisition from 5% to 80%.
The excess of the purchase price over the fair value of the net identifiable
assets and in-process research and development technology acquired of $3.5
million has been recorded as goodwill and other intangibles and is amortized on
a straight-line basis over four years.
The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired....................................... $ 542
Goodwill............................................................ 3,503
Workforce in place.................................................. 42
In-process research and development technology...................... 7,900
Liabilities acquired................................................ (557)
-------
$11,430
=======
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of the company and Viona as if the acquisition
occurred on January 1, 1997, after giving effect to certain adjustments,
primarily amortization of goodwill and excluding the $7.9 million write-off of
acquired in-process research and development. The unaudited pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the acquisition been completed on January 1, 1997.
<TABLE>
<CAPTION>
Year ended
December 31,
(in thousands
except per
share data)
----------------
1997 1998
------- -------
<S> <C> <C>
Revenues.................................................. $ 6,925 $30,288
Net loss.................................................. $(8,075) $(5,978)
Net loss per common share (basic and diluted)............. $ (3.92) $ (2.03)
</TABLE>
(5) Bank Line of Credit
In June 1997 the company refinanced its line of credit with a bank to an
aggregate amount of $1 million, subject to certain borrowing limitations based
on accounts receivable and inventory. The line of credit charged interest at
the prime rate plus 2% (10.5% at December 31, 1997) and was secured by
substantially all the assets of the company. The bank was provided warrants
(note 12) to acquire 45,833 shares of the company's common stock at an exercise
price of $3.56 per share. The estimated fair value of the warrants issued was
$33,964 and has been recorded as debt issuance costs. This amount was amortized
over the term of the line of credit. The line of credit required the company,
among other things, to maintain certain financial ratios, minimum working
F-13
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
capital and tangible net worth on a quarterly basis. The company was not in
compliance with these covenants at December 31, 1997. In April 1998, the
Company received a waiver of these covenant violations from the bank and issued
warrants to the bank to acquire 16,667 shares of the company's common stock at
an exercise price of $3.56 per share. The estimated fair value of the warrants
issued is $22,600 and has been recorded as interest expense.
In July 1998, the company executed a loan and security agreement with a
commercial bank that provides the company a line of credit in the amount of the
lesser of $5 million or the borrowing base, as defined (principally limited to
a percentage of eligible accounts receivable and eligible inventory). The line
of credit provides for the company to issue a maximum of $2 million in the form
of letters of credit which reduces the amount of available borrowings under the
line of credit. The line of credit matures in July 2000 and bears interest at
the prime rate plus 1% (8.75% at December 31, 1998). The line of credit is
collateralized by substantially all of the assets of the company. The company
is required to comply with a tangible net worth covenant, as defined in the
loan and security agreement, and was not in compliance with this covenant at
December 31, 1998 and March 31, 1999. The company received a waiver of these
covenant violations in April 1999. There was no amount and approximately
$1,252,000 outstanding under the line of credit at December 31, 1998 and March
31, 1999, respectively, and approximately $3,510,000 and $1,696,000 was
available under the terms of the line of credit at December 31, 1998 and
March 31, 1999, respectively.
At December 31, 1998 and March 31, 1999, there were approximately $1,490,000
and $500,000 of letters of credit outstanding, respectively.
(6) Bridge Financing
In December 1997 the company entered into an agreement to borrow $1.5
million of short-term bridge loans. The loans bear interest at 6% with an
original maturity date of March 31, 1998. The term of the debt was extended to
April 30, 1998, and the interest rate was increased to 15%. In connection with
this financing, the company issued warrants (note 12) to acquire 45,000 shares
of the company's common stock. The estimated fair value of the warrants issued
was approximately $23,000. This amount has been recorded as debt issuance costs
and was amortized over the term of the debt.
In February, March and April 1998 the company entered into various
agreements to borrow additional amounts of short-term bridge loans aggregating
$3.32 million. The terms of the debt were substantially identical with the
amount borrowed in December 1997. The company issued warrants (note 12) to
acquire 48,182 shares of the company's common stock at an exercise price equal
to the price per share at the time of closing of the company's round of equity
financing in April 1998. The estimated fair value of the warrants issued was
approximately $46,000 and has been recorded as additional interest expense
through the date of the conversion of the bridge loans into Series B preferred
stock.
The $4.82 million of short-term bridge loans were converted to Series B
preferred stock in April 1998 (note 11).
F-14
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(7) Accrued Expenses
<TABLE>
<CAPTION>
December
31,
----------- March 31,
1997 1998 1999
---- ------ ---------
(in thousands)
<S> <C> <C> <C>
Accrued compensation and related costs................. $ 5 $ 439 $440
Accrued interest....................................... 80 127 141
Other.................................................. 194 548 281
---- ------ ----
$279 $1,114 $862
==== ====== ====
</TABLE>
(8) Loan Payable/Receivable--Officers
At December 31, 1997, approximately $4,000 was owed from an original amount
of approximately $111,000 to the former Chief Executive Officer of the company.
The amount was repaid in full during 1998.
At December 31, 1998, the company has a loan receivable in the amount of
$60,000 due from an officer of the company. The term of the loan receivable is
three years and is non-interest bearing. At the end of each year, if the
officer achieves his quarterly performance goals with the company, the company
will forgive one-third of the principal amount. If the officer voluntarily
leaves or is terminated for cause, the note will become immediately due and
payable. However, if the company completes an initial public offering of its
stock, is acquired by an unrelated third party or sells all or substantially
all of its assets to an unrelated third party, the company will completely
forgive the note.
(9) Other Liabilities
In October 1995 the company entered into an emerging company funding
agreement with the Ben Franklin Technology Center of Southeastern Pennsylvania
(the Center). The Center had agreed to provide up to $100,000 to the company
during the period November 1, 1995 to June 30, 1996. Any amounts funded by the
Center were to be used by the company for the development of certain laptop
computer video capture products. The total amount funded by the Center was
repayable quarterly. The total amount outstanding as of December 31, 1997 was
$90,000. The amount was repaid in full during 1998.
During 1997 the company entered into a factoring arrangement for which
approximately $278,000 of accounts receivables had been pledged as collateral
with recourse to the company. The effective interest rate on such secured
borrowings was approximately 30% at December 31, 1997. The company discontinued
the factoring arrangement during 1998.
In connection with the company's acquisition of Viona during 1998 (note 4),
$1.35 million of the purchase price, recorded at a present value of $1.1
million, is payable in equal annual installments over the next three years. As
such, $0.4 million of the amount is included in other current liabilities with
the remaining amount included in other long-term liabilities.
(10) Subordinated Notes Payable
Subordinated notes payable at December 31, 1997 and 1998 and March 31, 1999,
consist of $625,000 of various subordinated notes payable to NEPA Venture II,
L.P. (NEPA) due May 4, 2003 to November 29, 2003 with a 9% interest rate.
F-15
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The notes are part of two transactions entered into in May 1995 and March
1996 to provide financing to the company. Interest on the notes is payable
quarterly. In connection with the issuance of the notes, the company issued
warrants to acquire a total of 920,006 shares of the Company's Series A
mandatory redeemable convertible preferred stock at exercise prices of $0.60-
$0.75 per share (note 13). The estimated fair value of the warrants issued is
$30,010 and is amortized over the term of the related debt. In addition, NEPA
obtained board representation and certain other rights which include piggyback
and demand registration rights in certain circumstances following an initial
public offering.
(11) Equity Transactions and Capital Stock
Capital Stock and Stock Splits
The board of directors of the company amended the company's articles of
incorporation in April 1998 to increase the authorized common shares to
80,000,000, to increase the authorized Series A mandatory redeemable
convertible preferred shares to 6,523,684 and authorized 25,000,000 shares of
Series B mandatory redeemable convertible preferred shares.
In August and October 1996 the board of directors authorized a 1.929-to-1
and a 1.088-to-1 stock split, respectively, including common and preferred
shares. The splits coincided with the private placement transactions described
below.
All share and per share information included in the accompanying
consolidated financial statements and notes has been adjusted to give effect to
the stock splits noted above.
Common Stock
In August and October 1996 the company raised a total of $2 million through
a private placement of 347,936 shares of common stock. In connection with this
transaction, the company paid $200,000 as a placement fee, and issued options
to purchase 66,151 shares of common stock at an average exercise price of $4.26
per share to a former director of the company (note 17). The fair value of the
common stock on the date of grant was estimated to be $6.00. The options vested
immediately. The $200,000 of offering costs and the $150,450 value of the
options granted at below fair value have been recorded in additional paid-in
capital as costs of the equity transaction.
During April through July 1996 the company also sold 21,076 shares of common
stock for a total of $55,000, the estimated fair market value per share of the
company's common stock on the date of the transaction, to two employees of the
company. In January 1996, the company sold 7,347 shares of common stock for a
total of $30,000, the estimated fair market value per share of the Company's
common stock on the date of the transaction. In addition, in January 1996 an
employee was given 31,373 shares of the company's common stock as consideration
for previously accrued unpaid wages aggregating $18,750.
In March and April 1997 the company raised a total of $500,000 through a
private placement of 83,333 shares of the company's common stock. In connection
with this transaction, the company issued options to purchase 10,417 shares of
the company's common stock at an exercise price of $4.50 per share to a
director of the company that was actively involved in this fund raising
process. The options vested immediately. The $15,625 value of the options
granted at below fair value has been recorded in additional paid-in-capital as
costs of the equity transaction.
F-16
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
In September and October 1997 the company sold 30,000 shares of common stock
for $207,300 in a private transaction to unrelated third parties.
In April 1998 the company purchased 200,000 shares of common stock for $3.60
per share or $720,000 in the aggregate from the former CEO of the company.
Preferred Stock
In April 1998 the company sold 3,728,916 shares of Series B mandatory
redeemable convertible preferred stock for an aggregate amount of approximately
$18.6 million including the conversion of $4.82 million of bridge notes (note
6). In addition, the investors in the Series B received an aggregate
1,517,668 warrants (note 12) to acquire common stock at an exercise price of
$0.06. The estimated fair value of the warrants of $5.7 million has been
recorded as additional paid-in capital.
The preferred stock has a non-cumulative dividend rate equal to 8% of the
original purchase price which shall become due and payable when and if declared
by the board of directors of the Company. To date, no dividends have been
declared by the board of directors. The holders of the preferred stock have
demand and piggyback registration rights as defined.
Holders of preferred stock have the option to convert such shares into
shares of common stock on a 1:1 ratio. The conversion rate on a particular
class of preferred stock is subject to an adjustment in the event that any
additional common stock, or other shares convertible into common stock, are
issued for a per share price less than the particular class conversion price.
Mandatory conversion occurs upon the closing of an IPO of the company's common
stock, as defined. The Series B is senior to the company's Series A in
liquidation and the holders of Series A and B are entitled to receive an amount
equal to their respective redemption price prior to the distribution to the
common shareholders. At any time after May 4, 2003, each holder of shares of
preferred stock, may at their option, require the company to redeem all or part
of their preferred shares.
The preferred stock votes on an as if converted basis. The Series B
shareholders have the right to elect one member of the board of directors of
the company.
In April 1998, in connection with the company's sale of Series B, the
company paid $1.1 million in cash, issued 108,856 shares of the company's
Series B and issued 44,304 warrants (note 13) to acquire common stock at an
exercise price of $0.06 to the company's placement agent as consideration for
services provided in connection with the equity transaction. The shares and
warrants had an estimated fair value of $542,100. The above amounts as well as
$0.3 million of other transaction costs were recorded as costs of the equity
transaction and charged against additional paid-in capital.
Preferred stock consists of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
December 31,
------------------------
Per share 1997 1998
liquidation ------------------------
value Authorized Issued and outstanding
----------- ---------- ------------------------
<S> <C> <C> <C> <C>
Preferred class
Series A.................... $0.678 6,523,684 -- --
Series B.................... $4.98 25,000,000 -- 3,913,072
---------- -------- --------------
31,523,684 -- 3,913,072
========== ======== ==============
</TABLE>
F-17
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
At December 31, 1998, 4,833,078 shares of common stock are reserved for the
conversion of preferred stock.
Preferred Stock Subscription
In March 1998, the company entered into a subscription and technology
license agreement. This agreement provides, among other things, for the company
to license certain technology to an unrelated third party (the licensee). In
connection with the agreement, the licensee is required to pay a minimum of
$750,000 at the end of each calendar quarter during the first year and a
minimum of $900,000 at the end of each calendar quarter during the second year.
Included in the first year quarterly payments is $125,000 per quarter that will
be applied towards the purchase of the company's Series B preferred stock at
$4.98 per share. The quarterly payment for the fourth quarter of the second
year includes $500,000 that will be applied towards the purchase of the
company's Series B preferred stock at $4.98 per share. The purchase of the
preferred stock under this agreement is on the same terms as the licensee's
purchase of Series B preferred stock in April 1998. The $625,000 minimum
quarterly royalty payments in year one will be recognized as revenue during
each respective quarter. The $900,000 minimum quarterly payments for each of
the first three quarters and the $400,000 for the fourth quarter of the second
year will be recognized as revenue during each of those respective quarters.
As of December 31, 1998, the company has issued 75,301 shares of Series B
preferred stock under this agreement.
In April 1999 the company issued 25,100 shares of Series B preferred stock
under this agreement. In addition, the company amended the above agreement and
issued 100,402 shares of Series B preferred stock and warrants for the purchase
of 40,863 shares of common stock in exchange for which it received a promissory
note with an aggregate value of $500,000 due in April 2000. The $500,000 note
reflects the payment due in the fourth quarter of the second year of the above
agreement.
(12) Stock Options and Warrants
(a) Stock Options
The company adopted the 1995 Stock Option Plan (the 1995 Plan) in May 1995.
The 1995 Plan provides for the grant of incentive stock options and non-
qualified stock options to employees, consultants, advisors to the company, and
members of the board of directors to purchase shares of common stock. Prior to
the adoption of the 1995 Plan, 43,258 options were granted to employees. Under
the terms of the 1995 Plan, authorized options are granted at estimated fair
value. The options generally vest over a period ranging from 2 to 5 years and
expire 5 to 10 years from the grant date.
In the months of November and December 1995, five company managers deferred
payment of their salaries, aggregating approximately $42,000, for a period of
four years which is recorded as accrued compensation payable and is non-
interest bearing. In connection with their deferral of salaries, these managers
received a total of 50,510 non-qualified stock options to acquire shares of
common stock of the company at an exercise price of $0.60, the estimated fair
value at the date of grant. These options were not issued in connection with
the 1995 Plan. The options become exercisable 20% per year commencing with the
grant date and on January 1 of each year thereafter.
In September 1997 the company granted 728,398 options, outside the 1995
Plan, to employees and certain vendors to purchase common stock at exercise
prices ranging from $1.50 to $6.00 per share. The options vest
F-18
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
over a range of periods from immediately to 4 years and expire in 5 years. Of
these options, 299,315 were issued to employees at below fair value or to
vendors which resulted in a noncash charge to operations for the year ended
December 31, 1997 of approximately $1,409,000.
In 1998 the board of directors approved an amendment to the company's 1995
Plan in which the total number of options available for grant was increased to
8,500,000.
In September 1998 the company granted 783,333 options, outside the 1995
Plan, to employees of Viona at an exercise price of $1.50 which was below the
estimated fair value of the company's common stock on the date of grant. The
company recorded deferred stock compensation of $799,000 in connection with
these options which will be amortized over the options' vesting period.
On September 23, 1998 the company, with the approval of the board of
directors, repriced all of the outstanding employee stock options that were in
excess of $2.52 to $2.52.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ -------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance as of beginning
of year................ 167,233 $0.54 223,040 $1.92 974,764 $ 3.60
Options granted....... 129,272 3.12 751,724 4.14 1,149,513 1.74
Options canceled...... (29,385) 0.72 -- -- (10,325) (0.90)
Options exercised..... (44,080) 0.72 -- -- -- --
------- ----- ------- ----- --------- ------
223,040 $1.92 974,764 $3.60 2,113,952 $ 1.80
======= ===== ======= ===== ========= ======
</TABLE>
At December 31, 1998, 1,055,630 options with a weighted-average exercise
price of $1.80, were fully vested and exercisable.
The following summarizes information about the company's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------- -----------------------------------
Weighted Weighted
average average
Number remaining Weighted Number remaining Weighted
outstanding at contractual average outstanding at contractual average
Range of December 31, life exercise December 31, life exercise
exercise prices 1998 (years) price 1998 (years) price
--------------- -------------- ----------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ .03- .75.............. 216,810 4.2 $0.48 203,257 4.0 $0.48
$ .76-1.50.............. 1,087,338 4.6 1.50 351,088 4.9 1.50
$1.51-3.00.............. 792,951 4.1 2.52 484,618 4.0 2.52
$3.01-6.00.............. 16,853 3.8 6.00 16,667 3.8 6.00
--------- ----- --------- -----
Totals................ 2,113,952 $1.80 1,055,630 $1.80
========= ===== ========= =====
</TABLE>
F-19
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The company applies APB 25 and related interpretations in accounting for its
stock option plan. Had compensation cost been recognized pursuant to SFAS No.
123, the company's loss would have been increased to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Loss attributable to common stockholders:
As reported................................... $(2,055) $(7,253) $(14,437)
Pro forma..................................... $(2,078) $(7,630) $(14,919)
Loss per common share:
As reported................................... $ (1.19) $ (3.52) $ (4.94)
Pro forma..................................... $ (1.21) $ (3.70) $ (5.11)
</TABLE>
The per share weighted-average fair value of stock options issued by the
company during 1997 and 1998 was $2.70 and $1.08, respectively, on the date of
grant.
The following range of assumptions were used by the company to determine the
fair value of stock options granted using a minimum value option-price model:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Dividend yield............................................... 0% 0%
Expected volatility.......................................... 0% 0%
Average expected option life................................. 4 years 4 years
Risk-free interest rate...................................... 5.73% 5.15%
</TABLE>
Pro forma net loss reflects only options granted since 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma loss amounts presented above because
compensation cost is reflected over an option's vesting period and compensation
cost for options granted prior to January 1, 1996, is not considered.
F-20
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(b) Warrants
The warrants issued by the company generally contain customary provisions
requiring proportionate adjustment of the exercise price in the event of a
stock split, stock dividend, or dilutive financing in the case of the warrants
for preferred stock.
A summary of warrant activity follows:
<TABLE>
<CAPTION>
Preferred Common
----------------------- -------------------------
Number Weighted Weighted
of average Number of average
warrants exercise price warrants exercise price
-------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Balance as of December
31, 1995............... 836,371 $0.60 34,970 $0.75
Warrants granted...... 83,635 0.75 20,982 0.75
Warrants canceled..... -- -- -- --
Warrants exercised.... -- -- -- --
------- ----- --------- -----
Balance as of December
31, 1996............... 920,006 $0.60 55,952 $0.75
Warrants granted...... -- -- 90,833 3.36
Warrants canceled..... -- -- -- --
Warrants exercised.... -- -- -- --
------- ----- --------- -----
Balance as of December
31, 1997............... 920,006 $0.60 146,785 $2.37
Warrants granted...... -- -- 1,660,802 0.24
Warrants canceled..... -- -- -- --
Warrants exercised.... -- -- (199,416) 0.92
------- ----- --------- -----
Balance as of December
31, 1998................ 920,006 $0.60 1,608,171 $0.35
======= ===== ========= =====
</TABLE>
(13) Commitments and Contingencies
(a) Leases
The company is obligated under certain equipment capital leases that expire
at various dates during the next two years. The company leases its office
facilities and various equipment under operating leases that expire during the
next five years. Future minimum lease payments relating to the noncancelable
capital and operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
<S> <C> <C>
Year ending December 31,
1999................................................... $15 $291
2000................................................... 5 269
2001................................................... -- 218
2002................................................... -- 161
2003................................................... -- 106
---
Total minimum lease payments......................... 20
Less: amount representing interest................... 2
---
Present value of net minimum capital lease payments...... 18
Less: current installments of obligations under capital
leases.................................................. 13
---
Obligations under capital leases excluding current
installments............................................ $ 5
===
</TABLE>
F-21
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Total rent expense for the years ended December 31, 1996, 1997 and 1998, was
approximately $107,000, $150,000 and $328,000, respectively, and approximately
$44,000 and $125,000 for the three months ended March 31, 1998 and 1999,
respectively.
(b) Royalties
Under various licensing agreements, the company is required to pay
royalties, generally on a per unit basis, on the sales of certain products that
incorporate licensed technology. Royalty expense under such agreements was
approximately $188,000, $97,000 and $651,000 for the years ended December 31,
1996, 1997 and 1998, respectively, and approximately $65,000 and $192,000 for
the three months ended March 31, 1998 and 1999, respectively.
(c) Contingencies
The company is party to certain legal actions arising in the normal course
of business. A former supplier of the company has filed a complaint alleging
breach of oral and written contract and other claims totaling approximately
$1.2 million. The company intends to defend the complaint vigorously. However,
at this time it is too early to estimate or predict the outcome of the
complaint. In addition, the company is aware that several entities have
asserted that technology which forms an essential part of the industry standard
for DVD and which is incorporated into the company's DVD solutions, infringes
patents held by such entities. If it is determined that the company has
infringed these patents, the company could be liable for damages and may be
required to pay license fees in connection with the use of the technology.
Management of the company, however, does not believe the resolution of these
potential contingencies will have a material impact on the financial position
or results of operations of the company.
(d) Employment Agreements
The company has entered into employment agreements with certain officers and
employees of the company. The agreements are generally for two to three year
periods, generally provide for annual bonuses and incentive stock options as
determined by the board of directors, and covenants not-to-compete during the
employment term and for two years thereafter. The employment agreements also
generally provide for six months severance in the event the individual is
terminated without cause.
The employment agreement with the company's President and Chief Executive
Officer signed in August 1997 also provides that to the extent the company is
sold for in excess of $80 million, he is entitled to a bonus of 2.5% of the
proceeds or $2 million.
(14) Business Risks and Credit Concentration
The company licenses and sells its products principally in the intensely
competitive personal computer and consumer electronics original equipment
manufacturers industry and for product sales prior to 1998 through a number of
wholesale distributors. This industry has been characterized by price erosion,
rapid technological change, short product life cycles, cyclical market patterns
and heightened foreign and domestic competition. Significant technological
changes in the industry would adversely affect operating results.
The company's customers, including its major customers disclosed in note 18,
have not executed long-term contracts and are not required to purchased minimum
quantities from the company. As such, the company's operating results could be
materially affected by a decrease in business with these customers.
F-22
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The company performs ongoing credit evaluations of its customers' financial
condition, and generally no collateral is required. The company had three
customers representing, in the aggregate, 64%, 88% and 71% of accounts
receivable at December 31, 1997 and 1998 and March 31, 1999, respectively.
The company uses a contract manufacturer to make its hardware products. If
the company is unable to continue its relationship with this manufacturer, it
believes it could establish a similar relationship with another company in a
reasonable period of time. Because of the competitive nature of the technology
industry, the company believes it could ultimately obtain terms as beneficial
as those currently in effect.
(15) Income Taxes
The company elected "C" corporation status in September 1996. Prior to that
election, the company was an "S" corporation.
No federal, foreign, or state income taxes are due as of December 31, 1997
and 1998.
The table below reconciles the U.S. federal statutory income tax rate to the
recorded income tax provision (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
----- ------- -------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. federal statutory
rate................................................ $(699) $(2,479) $(4,659)
State income taxes, net of federal tax benefit....... (83) (198) (1,256)
Change in valuation allowance........................ 788 2,669 5,848
Other................................................ (6) 8 67
----- ------- -------
$ 0 $ 0 $ 0
===== ======= =======
</TABLE>
The components of the net deferred tax assets as of December 31, 1997 and
1998, consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets and (liabilities):
Net operating losses..................................... $ 3,104 $ 5,706
Reserves and accruals not currently deductible........... 270 188
Depreciation/Amortization................................ (3) 3,239
Deferred revenue and other............................... 65 151
------- -------
3,436 9,284
Valuation allowance........................................ (3,436) (9,284)
------- -------
Net deferred tax assets and (liabilities).................. $ -- $ --
======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the company's ability to realize the benefit of the
deferred tax assets, the deferred tax assets are fully offset by a valuation
allowance at December 31, 1997 and 1998.
F-23
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
As of December 31, 1998, the company has approximately $14.1 million of net
operating loss carryforwards for federal tax purposes. These carryforwards will
begin expiring in 2011 if not utilized. In addition, the company has net
operating loss carryforwards in certain states with various expiration periods
beginning in 2006.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to the company's prior and current equity transactions, the
company's net operating loss carryforwards may be subject to an annual
limitation. Any unused annual limitation may be carried forward to future years
for the balance of the net operating loss carryforward period.
(16) Related-Party Transactions
During 1996, the company paid $10,000 to a director of the company for
consulting services. In 1997, the company paid this director a total of
$220,000 for additional consulting services. During 1998, this individual
resigned as a director of the company and received $220,000 for consulting
services.
In connection with certain equity transactions completed in 1996 (note 11),
this director received remuneration for his services in connection with these
equity transactions.
The former Chief Executive Officer of the company received $125,000 in
severance payments during 1998.
(17) Defined Contribution Plan
In 1997, the company established a defined contribution plan for qualified
employees as defined in the plan. Participants may contribute up to 20% of pre-
tax compensation, as defined. Under the plan, the company can make
discretionary contributions. To date, the company has not made any
contributions to the plan.
(18) Segment and Major Customer Information
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which established standards for reporting
information about operating segments in annual financial statements. The
company operates in a single industry segment, which is the development and
licensing of its technology.
The company had the following customers that combined represented in excess
of 31% and 91% of revenues for the years ended December 31, 1997 and 1998,
respectively, and 95% and 91% for the three months ended March 31, 1998 and
1999, respectively (in thousands):
<TABLE>
<CAPTION>
Three months
Years ended ended March
December 31, 31,
------------ -------------
Customer 1997 1998 1998 1999
-------- ---- ------- ------ ------
<S> <C> <C> <C> <C>
1............................................. $639 $25,624 $2,836 $8,041
2............................................. $632 -- $ -- --
3............................................. -- $ 1,900 -- $ 625
4............................................. $809 $ 151 $ 138 --
5............................................. -- -- -- $1,144
</TABLE>
F-24
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The company sells and licenses its technology to customers primarily in
North America, Asia-Pacific and Europe. The loss for all periods presented is
derived primarily from the company's North American operations, which generates
revenues from the following geographic regions (in thousands):
<TABLE>
<CAPTION>
Years ended December Three months
31, ended March 31,
---------------------- ---------------
1996 1997 1998 1998 1999
------ ------ -------- ------- -------
<S> <C> <C> <C> <C> <C>
North America........................ $1,958 $4,278 $ 23,660 $ 2,444 $ 8,198
Asia-Pacific......................... 1,209 932 853 183 368
Europe............................... 521 1,117 5,775 516 2,186
Australia and New Zealand............ 507 494 -- -- 60
------ ------ -------- ------- -------
$4,195 $6,821 $ 30,288 $ 3,143 $10,812
====== ====== ======== ======= =======
</TABLE>
(19) Subsequent Events
(a) Options Granted (unaudited)
In February 1999, the company granted 144,688 options, with an exercise
price of $2.52 per share. The company has recorded $503,514 of deferred stock
compensation in connection with these options that will be amortized over the
option vesting period. In June 1999, 481,555 options were granted with an
exercise price of $10.20 per share.
(b) Stock Incentive Plan (unaudited)
In April 1999, the company, with the approval of the board of directors,
adopted the 1999 Stock Incentive Plan (1999 Plan) as a successor to the 1995
Plan. The 1999 Plan has reserved, subject to shareholder approval, 2,725,000
shares. The 1999 Plan has three separate programs which include; the
discretionary option grant program under which employees may be granted options
to purchase shares of common stock; the stock issuance program under which
eligible employees may be granted shares of common stock; and the automatic
grant program whereby eligible non-employee board members are granted options
to purchase shares of common stock.
(c) Employee Stock Purchase Plan (unaudited)
In April 1999, the company, with the approval of the board of directors,
adopted an Employee Stock Purchase Plan and reserved 500,000 shares of common
stock for issuance thereunder. The purchase plan permits eligible employees to
acquire shares of the company's common stock through periodic payroll
deductions of up to 15% of total compensation. Each offering period will have a
maximum duration of 24 months. The price at which the common stock may be
purchased is 85% of the lesser of the fair market value of the company's common
stock on the first day of the applicable offering period or on the last day of
the respective purchase period. The initial offering period will commence on
the effectiveness of the IPO and will end on the last business day of July
2001.
(d) Sale of Preferred Stock and License of Technology (unaudited)
In April 1999 the company completed a financing in which it issued
convertible securities to an affiliate of Intel for $4.7 million and entered
into a license agreement covering certain Intel technology. The purchase price
received from Intel consisted of cash consideration of $3.0 million and, in
addition, the company was granted a license for Intel technology valued at $1.7
million. The Intel license permits the company to
F-25
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
incorporate the Intel digital content receiver technology into the company's
products on a royalty free basis as the company's products are subsequently
licensed to its customers. The company has capitalized the $1.7 million and
will amortize this cost as products are delivered over its estimated economic
life of four years. The convertible securities were converted into 549,650
shares of the company's Series C preferred stock in May 1999.
(e) Initial Public Offering and Reincorporation (unaudited)
In April 1999, the board of directors authorized the filing of a
registration statement with the SEC that would permit the company to sell
shares of the company's common stock in connection with a proposed IPO.
In addition the board of directors authorized the company to file amended
and restated articles of incorporation causing the company to reincorporate as
a Delaware Corporation. The amended and restated articles of incorporation are
to be effective upon shareholder approval which is anticipated to occur
immediately prior to the effective date of the IPO. Upon the reincorporation,
the company will be authorized to issue 50,000,000 shares of $.001 par value
common stock and 5,000,000 shares of $.001 par value undesignated preferred
stock. In connection therewith, the company authorized a 1 for 6 reverse stock
split which will become effective at the date of the IPO. All shares and per
share amounts in the consolidated financial statements have been restated to
reflect the reverse stock split.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Viona Development Hard & Software Engineering GmbH:
We have audited the accompanying balance sheet of Viona Development Hard &
Software Engineering GmbH as of December 31, 1997, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of Viona's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Viona Development Hard &
Software Engineering GmbH as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with United
States generally accepted accounting principles.
KPMG Deutsche Treuhand-Gesellschaft
AG
Stuttgart, Germany
April 6, 1999
F-27
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $248 $246
Accounts receivable.................................. 147 180
Prepaid expenses..................................... 15 8
---- ----
Total current assets............................... 410 434
---- ----
Furniture and equipment, net........................... 199 169
Other assets........................................... 16 14
---- ----
Total assets....................................... $625 $617
==== ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $153 $395
Accrued expenses..................................... 17 5
Loans payable--officers.............................. 69 69
Income taxes payable................................. 186 76
---- ----
Total current liabilities.......................... 425 545
---- ----
Deferred income taxes.................................. 16 6
---- ----
Total liabilities.................................. 441 551
---- ----
Stockholders' equity:
Capital stock........................................ 36 36
Accumulated other comprehensive loss................. (36) (35)
Retained earnings.................................... 184 65
---- ----
Total stockholders' equity......................... 184 66
---- ----
Total liabilities and stockholders' equity......... $625 $617
==== ====
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Revenues:
Development services................................. $1,001 $253
Net product sales.................................... 32 --
------ ----
Total revenues..................................... 1,033 253
------ ----
Research and development............................... 619 169
Sales and marketing.................................... 36 31
General and administrative............................. 209 37
------ ----
Operating income....................................... 169 16
Other income (expense):
Interest income...................................... 4 1
Interest expense..................................... (2) (1)
Other income......................................... 24 2
------ ----
Income before taxes.................................... 195 18
Income tax expense (benefit)........................... 80 (9)
------ ----
Net income............................................. $ 115 $ 27
====== ====
</TABLE>
(See accompanying notes to financial statements.)
F-29
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated other
comprehensive loss
------------------
Cumulative Total
Capital translation Retained stockholders'
stock adjustment earnings equity
------- ------------------ -------- -------------
<S> <C> <C> <C> <C>
Balance as of January 1,
1997....................... $ 35 $ (4) $ 173 $ 204
Dividends................... -- -- (104) (104)
Net income.................. -- -- 115 115
Other comprehensive loss.... -- (32) -- (32)
-----
Total comprehensive
income................... 83
Capital increase............ 1 -- -- 1
---- ---- ----- -----
Balance as of December 31,
1997....................... 36 (36) 184 184
Dividends................... -- -- (146) (146)
Net income.................. -- -- 27 27
Other comprehensive income.. -- 1 -- 1
-----
Total comprehensive
income................... 28
---- ---- ----- -----
Balance as of March 31, 1998
(unaudited)................ $ 36 $(35) $ 65 $ 66
==== ==== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 115 $ 27
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation...................................... 103 18
(Gains) losses on sales of furniture and
equipment........................................ (9) 16
Deferred income taxes............................. (41) (9)
Changes in items affecting operations:
Accounts receivable............................. 90 (34)
Prepaid expenses................................ (2) 7
Other assets.................................... -- 2
Accounts payable................................ (11) 242
Accrued expenses................................ (42) (12)
Income taxes payable............................ 112 (111)
----- -----
Net cash provided by operating activities............. 315 146
----- -----
Cash flows from investing activities:
Payments for furniture and equipment................ (185) (11)
Proceeds from sales of furniture and equipment...... 15 3
----- -----
Net cash used in investing activities................. (170) (8)
----- -----
Cash flows from financing activities:
Net repayments on bank line of credit............... (13) --
Borrowings under other debt......................... 72 2
Proceeds from increase in capital stock............. 1 --
Dividends paid...................................... (104) (146)
----- -----
Net cash used in financing activities................. (44) (144)
----- -----
Effect of exchange rate changes on cash and cash
equivalents.......................................... (33) 4
----- -----
Net increase (decrease) in cash and cash equivalents.. 68 (2)
Cash and cash equivalents at beginning of year........ 180 248
----- -----
Cash and cash equivalents at end of year.............. $ 248 $ 246
===== =====
Supplemental disclosures of cash flow information:
Cash paid for interest.............................. $ -- $ --
Cash paid for income taxes.......................... 9 --
===== =====
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Description of Operations
Viona Development Hard & Software Engineering GmbH ("Viona") is a limited
liability company, organized under the laws of the Federal Republic of Germany.
Viona conducts research and development in the field of convergence subsystem
products and desktop digital video products for use primarily in desktop
personal computers or other electronic devices.
(2) Summary of Significant Accounting Policies
(a) Foreign Currency Translation
The functional currency of Viona is the German mark and the reporting
currency is the U.S. dollar. Functional currency assets and liabilities are
translated into U.S. dollars using the period-end exchange rate while revenues
and expenses are translated using average exchange rates during the year.
Adjustments resulting from the translation of function currency assets and
liabilities into U.S. dollars are recorded as a separate component of
stockholders' equity.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Fair Value of Financial Instruments
The carrying amounts of Viona's financial instruments approximate fair value
due to the short maturity of those instruments.
(d) Cash and Cash Equivalents
Viona considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
(e) Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line or declining balance method based on the estimated useful
lives of the various classes of furniture and equipment as follows:
<TABLE>
<S> <C>
Software......................................................... 3 years
Computer equipment............................................... 3 years
Research and development equipment............................... 3 years
Furniture and fixtures........................................... 5 years
</TABLE>
(f) Long-Lived Assets
Viona reviews long-lived assets to be held and used by an entity for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-32
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) Revenue Recognition
Revenue is recognized upon shipment of products to customers. Revenue
related to development contracts is recognized using the percentage-of-
completion method, based on performance milestones specified in the contract
where such milestones fairly reflect progress toward contract completion.
Revenue related to the agreement with RAVISENT Technologies Inc. (formerly
Quadrant International Inc.) (see Note 9) is recognized using a cost-plus
methodology, whereby expenses incurred plus a fixed premium are invoiced
monthly.
(h) Research and Development Costs
Research and development costs are expensed as incurred.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(j) Unaudited Interim Financial Information
The accompanying unaudited interim financial statements of Viona reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results of the interim period presented. All such
adjustments are of a normal recurring nature.
These unaudited interim financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 1997 included herein.
In the first quarter of 1998, Viona changed its legal structure from a
limited liability company to a partnership. As a result, Viona was only
required to pay German trade taxes as German federal income taxes are the
responsibility of Viona's shareholders. The income tax benefit for the three
months ended March 31, 1998 reflects $10,778 deferred tax benefit resulting
from the reduction in Viona's statutory tax rate from 56% to 18%. In
conjunction with this change in legal structure, Viona changed its name from
Viona Development Hard & Software Engineering GmbH to Viona Development Hard &
Software Engineering GmbH & Co. KG.
(3) Furniture and Equipment
At December 31, 1997, furniture and equipment consisted of the following (in
thousands)
<TABLE>
<S> <C>
Software............................................................ $ 11
Computer equipment.................................................. 118
Research and development equipment.................................. 77
Furniture and fixtures.............................................. 157
-----
363
Less accumulated depreciation....................................... (164)
-----
$ 199
=====
</TABLE>
Depreciation expense was approximately $103,000 for the year ended December
31, 1997.
F-33
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Commitments under Operating Leases
Viona leases its office facilities and certain equipment under operating
leases. Rent expense amounted to approximately $37,000 for the year ended
December 31, 1997. Future minimum lease payments under existing noncancelable
operating leases are as follows at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
1998................................................................. $30
1999................................................................. 29
2000................................................................. 29
---
$88
===
</TABLE>
(5) Credit and Business Concentration
Viona performs ongoing credit evaluations of its customers financial
condition, and generally no collateral is required.
Viona had one customer representing approximately 70% of accounts
receivable at December 31, 1997.
Viona had one customer which represented approximately 94% of revenues for
the year ended December 31, 1997.
(6) Income Taxes
Income tax expense for the year ended December 31, 1997 is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Current taxes...................................................... $121
Deferred taxes..................................................... (41)
----
$ 80
====
</TABLE>
German tax law applies a split-rate imputation with regard to the taxation
of the income of a company and its stockholders. In accordance with the tax
law in effect for fiscal 1997, retained income is initially subject to a
federal tax of 45% plus a solidarity surcharge of 7.5% on federal taxes
payable. Including the impact of the surcharge, the federal tax rate amounts
to 48.375%. Upon distribution of retained earnings to stockholders, the income
tax rate on the earnings is adjusted to 30%, plus a solidarity surcharge of
7.5% on the distribution tax, for a total of 32.25%, by means of a refund for
taxes previously paid. Upon distribution of retained earnings in the form of a
dividend, stockholders who are taxpayers in Germany are entitled to a tax
credit in the amount of federal income taxes previously paid by the company.
The deferred taxes for 1997 are calculated using an effective income tax
rate of 47.475% plus the after federal tax benefit rate for trade tax of
8.525%.
A reconciliation of income taxes determined using the German tax rate of
47.475% plus the after federal tax benefit rate for trade taxes of 8.525% for
a combined statutory rate of 56% in 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Expected tax expense............................................... $109
Credit for dividend distributions.................................. (31)
Other.............................................................. 2
----
Actual tax expense............................................... $ 80
====
</TABLE>
F-34
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Deferred tax assets--accrued expenses............................. $ 7
Deferred tax liabilities--furniture and equipment, principally due
to differences in depreciation................................... 23
---
Net deferred tax liabilities.................................... $16
===
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible.
(7) Development Agreement
On February 6, 1997, Viona entered into an exclusive development agreement
with RAVISENT Technologies Inc., whereby Viona agreed to exclusively develop
personal computer-convergence products for RAVISENT. Under the agreement, Viona
will receive fees from RAVISENT monthly based on the greater of product
engineering costs incurred plus a premium or $80,000.
(8) Related-party Transactions
In 1997, each of Viona's three owners granted a loan to Viona for
approximately $22,000 (DM 40,000). The loans bear interest at 7% per year and
are payable on demand. At December 31, 1997, each of these loans plus accrued
interest amounted to approximately $23,000. The statement of operations for the
year ended December 31, 1997 includes approximately $2,400 of interest expense
related to these loans. Viona believes the interest expense incurred was
equivalent to the amounts that would be paid under arm's-length transactions.
(9) Subsequent Events
In January 1998, Viona's stockholders agreed to sell Viona to RAVISENT. In
April 1998 the acquisition was completed and was accounted for as a purchase
business combination. The purchase consideration consisted of 1,204,820 shares
of RAVISENT common stock and $6.1 million in cash.
F-35
<PAGE>
RAVISENT TECHNOLOGIES INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is filed herewith:
unaudited combined pro forma statement of operations for the year ended
December 31, 1998.
In April 1998 RAVISENT completed the acquisition of Viona a company located
in Germany specializing in the development of digital video technology. The
purchase price included $6.1 million in cash, 1,204,820 shares of RAVISENT's
common stock valued at $4.8 million and incurred transaction costs of
$0.8 million. The acquisition of Viona was recorded under the purchase method
of accounting. A portion of the purchase price was allocated to in-process
research and development technology, which resulted in a charge of $7.9 million
to RAVISENT's operations in April 1998. The excess of the purchase price over
the fair value of the net identifiable assets and in-process research and
development technology acquired of $3.5 million has been recorded as goodwill
and is amortized on a straight-line basis over four years.
The unaudited combined pro forma statement of operations reflects the
acquisition of Viona as if it occurred on January 1, 1998. Since the pro forma
financial statement which follows is based upon the operating results of Viona
during a period when it was not under the control or management of RAVISENT the
information presented may not be indicative of the results which would have
actually been obtained had the acquisition been completed as of January 1, 1998
nor are they indicative of future financial or operating results. The unaudited
pro forma financial information does not give effect to any synergies that may
occur due to the integration of RAVISENT and Viona. The condensed combined pro
forma financial statement should be read in conjunction with the historical
audited financial statements of RAVISENT and the notes thereto, as well as the
audited historical financial statements of Viona and the notes thereto included
elsewhere in this prospectus.
F-36
<PAGE>
RAVISENT TECHNOLOGIES INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year ended December 31, 1998
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
RAVISENT Pro Forma Pro Forma
Technologies Inc.(1) Viona(2) Adjustments Combined
-------------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................ $ 30,288 $253 $ (253)(a) $ 30,288
Cost of revenues........ 24,546 -- -- 24,546
---------- ---- ------- ----------
Gross profit........ 5,742 253 (253) 5,742
Research and
development............ 3,121 169 (253)(a) 3,037
Sales and marketing..... 1,964 31 -- 1,995
General and
administrative......... 4,673 19 -- 4,692
Depreciation and
amortization........... 906 18 222 (b) 1,146
Compensation related to
stock options.......... 139 -- -- 139
Acquired in-process
research and
development............ 7,900 -- (7,900)(c) --
---------- ---- ------- ----------
Operating income
(loss)................. (12,961) 16 (7,678) (5,267)
---------- ---- ------- ----------
Interest (income)
expense and other,
net.................... 722 (11) -- 711
---------- ---- ------- ----------
Net income (loss)....... (13,683) 27 (7,678) (5,978)
---------- ---- ------- ----------
Accretion of mandatory
redeemable preferred
stock.................. 754 -- -- 754
---------- ---- ------- ----------
Loss attributable to
common stockholders.... $ (14,437) $ 27 $(7,678) $ (6,732)
========== ==== ======= ==========
Pro forma net loss per
common share:
Basic and diluted..... $ (4.94) (d) $ (2.03)
========== ==========
Weighted average
shares outstanding... 2,920,677 3,316,782
========== ==========
</TABLE>
- ----------
(1) Actual for the year ended December 31, 1998
(2) Actual for the three months ended March 31, 1998
See accompanying notes to Unaudited Pro Forma Combined Financial Statements
F-37
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited pro forma combined statements of operations for
the year ended December 31, 1998 give effect to the acquisition of Viona as if
it had occurred on January 1, 1998.
The effects of the acquisition have been presented using the purchase method
of accounting and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based upon management's best estimate of their
fair value.
The pro forma adjustments related to the purchase price allocation of the
acquisition represent management's best estimate of the effects of the
acquisition.
2. The pro forma statement of operations adjustments for the year ended
December 31, 1998 consist of:
(a) Pro forma revenue and research and development expense has been adjusted
to reflect the elimination of the amounts paid by RAVISENT to Viona for
development services.
(b) Pro forma depreciation and amortization expense has been adjusted to
reflect the amortization of goodwill and other intangible assets associated
with the acquisition which has an estimated useful life of four years. ($3.5
million divided by 48 months = $0.07 million per month; $0.2 million
amortization per quarter). No pro forma adjustment for depreciation expense for
fixed assets acquired has been recorded as the expense recorded by Viona
approximates the expense that would be recorded by RAVISENT.
(c) The charge for acquired in-process research and development has been
eliminated as this is a non-recurring charge that resulted directly from the
acquisition of Viona.
(d) Basic and diluted weighted average common shares outstanding and net
loss per share amounts have been adjusted to reflect the issuance of the
1,204,820 shares of the RAVISENT's common stock in connection with the
acquisition, as if the shares had been outstanding from January 1, 1998.
(e) No income tax provision is required due to the RAVISENT's current tax
loss and the inability of RAVISENT to currently use the benefits of the net
operating loss carryforward.
F-38
<PAGE>
(Inside Back Cover)
On the top of the page on the left three quarters of the page is the
RAVISENT logo, which appears on a shaded background and consists of the word
"RAVISEnT(TM)," in capital letters except for the letter "n," with a wave
running through the lower half of each of the letters and below and toward the
right of which appears the word "TECHNOLOGIES" in capital letters. Underneath
the logo are the words "What the digital world watches."
Below the logo centered on the page on a shaded background are three
concentric circles which overlap. The left circle contains the words "Consumer
Electronics" in large print. Below, in smaller print, are the words "Hardware
Vendors," "Component Vendors," and "Retailers." Off to the left side of this
circle is a white oval inside of which are the words "Hardware Design
Royalties" and "Software Licensing Revenue." The right circle contains the
words "Computers" in large print. Below, in smaller print, are the words "PC
OEMs," "Component Vendors," "Software Developers" and "End Users." Off to the
right side of this circle is a white oval inside of which are the words
"Hardware Sales," "Software Licensing Revenue" and "Hardware Design Royalties."
The middle circle is shaded and contains the word "RAVISENT(TM)" in large print
and below in smaller print, the words "Digital Video & Audio Technologies."
Below these circles, in bold, are the words "Applying a suite of technologies
to a variety of digital video & audio sources to create high performance
consumer electronics and PC products."
On the bottom the page is a line extending across the page, above which
appears the words "Our Customers" and below which appears the logos of the
following nine companies: Compaq, Sanyo, Packard Bell NEC, Hewlett-Packard,
Yamaha, Micron Electronics, Dell Gateway (below which is the tag line "Connect
with us") and Fujitsu.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any in-
formation or represent anything not contained in this prospectus. You must not
rely on any unauthorized information. This prospectus does not offer to sell or
buy any shares in any jurisdiction in which it is unlawful. The information in
this prospectus is current as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of these securities.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Corporate Information.................................................... 25
Capitalization........................................................... 26
Dilution................................................................. 28
Selected Consolidated Financial Data..................................... 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business................................................................. 46
Management............................................................... 58
Certain Transactions..................................................... 70
Principal Stockholders................................................... 73
Description of Capital Stock............................................. 75
Shares Eligible for Future Sale.......................................... 78
Underwriting............................................................. 81
Legal Matters............................................................ 83
Experts.................................................................. 83
Additional Information................................................... 83
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
Until July , 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the common stock offered hereby, whether or not par-
ticipating in this distribution, may be required to deliver a prospectus. This
is in addition to the obligations of dealers to deliver a prospectus when act-
ing as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 Shares
[RAVISENT TECHNOLOGIES INC. LOGO]
Common Stock
-------------
PROSPECTUS
-------------
Bear, Stearns & Co. Inc.
SG Cowen
Volpe Brown Whelan & Company
June , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by RAVISENT 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............................................. 16,680
NASD Filing Fee.................................................. 6,500
Nasdaq National Market Listing Fee............................... 90,500
Printing and Engraving Expenses.................................. 200,000
Legal Fees and Expenses.......................................... 625,000
Accounting Fees and Expenses..................................... 350,000
Blue Sky Fees and Expenses....................................... 1,000
Transfer Agent Fees.............................................. 12,000
Miscellaneous.................................................... 198,320
---------
Total........................................................ 1,500,000
=========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6 of RAVISENT's bylaws
provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. RAVISENT's
certificate of incorporation provides that, subject to Delaware law, its
directors shall not be personally liable for monetary damages for breach of
the directors' fiduciary duty as directors to RAVISENT and its stockholders.
This provision in the certificate of incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to RAVISENT or its
stockholders for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws. RAVISENT has entered into indemnification agreements with its officers
and directors, a form of which was previously filed with the Securities and
Exchange Commission (the "Commission") as an exhibit to the registrant's
registration statement on Form S-1 (No. 333-77269). The indemnification
agreements provide RAVISENT's officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is also made to Section 7(b) of the underwriting
agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors
of RAVISENT against certain liabilities, and Section 1.10 of the registration
rights agreement contained in Exhibit 4.2 hereto, indemnifying certain of
RAVISENT's stockholders, including controlling stockholders, against certain
liabilities.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the registrant has issued unregistered
securities to a limited number of persons as described below:
(a) During 1996, the registrant issued and sold 96,529 shares of its
common stock to employees and consultants for an aggregate purchase price
of $103,750 pursuant to direct stock issuances.
II-1
<PAGE>
(b) In February 1996, the registrant issued and sold 44,080 shares of its
common stock to an employee for an aggregate purchase price of $30,000.
(c) In March 1996, the registrant issued and sold 7,347 shares of its
common stock to an employee of the registrant for an aggregate purchase
price of $5,000.
(d) In March and April 1996, the registrant issued and sold an aggregate
of 31,373 shares of its common stock for an aggregate purchase price of
$18,750 to an employee of the registrant.
(e) In March 1996, the registrant issued to NEPA Venture Fund II, L.P. a
subordinated note in the principal amount of $125,000 and warrants to
purchase up to 83,635 shares of Series A preferred stock at an exercise
price of $0.7473 per share (subject to adjustment).
(f) In June 1996, the registrant issued warrants to purchase up to 20,982
shares of its common stock at an exercise price of $0.7473 per share to a
bank.
(g) In August 1996, the registrant issued and sold an aggregate of
194,999 shares of its common stock to several investors for an aggregate
purchase price of $1,050,000.
(h) In November 1996, the registrant issued and sold 166,667 shares of
its common stock to an investor for an aggregate purchase price of
$1,000,000.
(i) In March 1997, the registrant issued and sold 83,333 shares of its
common stock to an investor for an aggregate purchase price of $500,000.
(j) In April 1997, the registrant issued to a lender a warrant to
purchase up to 12,500 shares of its common stock at an exercise price of
$3.558 per share.
(k) In August 1997, the registrant issued and sold 5,000 shares of its
common stock to an investor for an aggregate purchase price of $45,000.
(l) In September 1997, the registrant issued to a lender a warrant to
purchase up to 33,333 shares of its common stock at an exercise price of
$3.558 per share.
(m) In October 1997, the registrant issued and sold to an investor 25,000
shares of its common stock for an aggregate purchase price of $165,000.
(n) In December 1997, the registrant issued to an investor a subordinated
debenture in a principal amount of $1,500,000 convertible into shares of
Series B preferred stock or common stock and warrants to purchase up to
45,000 shares of its common stock at an exercise price of $3.18 per share.
(o) In January 1998, the registrant entered into an agreement to acquire
Viona Development Hard & Software Engineering GmbH, or Viona, whereby the
purchase price was payable in cash and in shares of the registrant's common
stock. In April 1998, the registrant completed the acquisition and paid an
aggregate of $2,550,000 and issued an aggregate of 1,204,820 shares of its
common stock to the principals of Viona in accordance with the terms of the
acquisition agreement.
(p) In February 1998, the registrant issued to an investor a subordinated
debenture in a principal amount of $250,000 which is convertible into
shares of Series B preferred stock or common stock and warrants to purchase
up to 7,500 shares of common stock at an exercise price of $4.98 per share.
(q) In March 1998, the registrant issued to several investors
subordinated debentures in an aggregate principal amount of $2,000,000
which is convertible into shares of Series B preferred stock or common
stock and warrants to purchase up to an aggregate of 20,080 shares of
common stock at an exercise price of $4.98 per share.
(r) In March 1998, the registrant issued to an investor a subordinated
debenture in a principal amount of $270,000 which is convertible into
shares of Series B preferred stock or common stock and a warrant to
purchase up to 9,759 shares of common stock at an exercise price of $3.18
per share.
II-2
<PAGE>
(s) In April 1998, the registrant issued to an investor warrants to
purchase up to 3,333 shares of common stock at an exercise price of $6.00
per share.
(t) In April 1998, the registrant issued to several investors
subordinated debentures in an aggregate principal amount of $300,000 which
is convertible into shares of Series B preferred stock or common stock and
warrants to purchase up to 10,843 shares of common stock at an exercise
price of $4.98.
(u) In April 1998, the registrant issued to an investor subordinated
debentures in an aggregate principal amount of $500,000 which is
convertible into 100,402 shares of Series B preferred stock or common stock
and warrants to purchase up to 40,864 shares of common stock at an exercise
price of $0.06 per share.
(v) In April 1998, the registrant issued to several investors an
aggregate of 12,962 shares of common stock as interest payments on its
outstanding subordinated debentures.
(w) In April 1998, the registrant issued an aggregate of 3,628,514 shares
of its Series B preferred stock and warrants to purchase an aggregate of
1,476,805 shares of common stock at an exercise price of $0.06 per share
(subject to adjustment) to several investors for an aggregate purchase
price of $18,070,000.
(x) In April 1998, the registrant issued an aggregate of 108,856 shares
of its Series B preferred stock and warrants to purchase an aggregate of up
to 44,304 shares of common stock at an exercise price of $0.06 per share
(subject to adjustment) to Lehman Brothers, Inc. as compensation for
services rendered by Lehman Brothers in connection with the Series B
preferred stock financing.
(y) In April 1998, Atlantic Coastal Ventures, L.P. received interest on
its subordinated debentures in the form of common stock and exercised
warrants received with the debentures into 208,862 shares of common stock
for an aggregate purchase price of $182,813. In addition, Atlantic Coastal
Ventures, converted the debentures into 355,422 shares of Series B
preferred stock.
(z) In April 1998, the registrant issued to Progress Capital, Inc., a
warrant to purchase up to 16,667 shares of its common stock at an exercise
price of $3.558 per share.
(aa) In May 1998, an investor of the registrant converted the outstanding
$500,000 principal on a subordinated convertible debenture into 100,402
shares of Series B preferred stock.
(bb) In July, September and December 1998, the registrant issued to an
investor an aggregate of 75,301 shares of Series B preferred stock and
warrants to purchase up to 30,648 shares of common stock for an aggregate
purchase price of $375,000.
(cc) In April 1999 (prior to the filing of the registration statement for
this offering), the registrant issued an aggregate of 125,502 shares of
Series B preferred stock and warrants to purchase 40,863 shares of common
stock for a promissory note of $500,000 and in exchange for certain royalty
obligations.
(dd) In April 1999 (prior to the filing of the registration statement for
this offering), the registrant issued an aggregate of $4,700,000 of
subordinated convertible promissory notes to an investor, which notes were
converted in May 1999 into 549,650 shares of Series C preferred stock of
the registrant.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients in
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the registrant, to
information about the registrant.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The exhibits listed in the exhibit index are filed as part of this
registration statement.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1** Form of Underwriting Agreement among the registrant, Bear, Stearns &
Co. Inc., SG Cowen Securities Corporation and Volpe Brown Whelan &
Company.
2.1* Sales Agreement Concerning Shares, dated January 16, 1998, by and
among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste CINCO
Vermogensverwaltungs GmbH and the registrant.
2.2* Appendix to Sales Agreement Concerning Shares, dated January 16, 1998,
by and among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste
CINCO Vermogensverwaltungs GmbH and the registrant.
2.3 Agreement and Plan of Merger, by and between Divicore Inc., a Delaware
corporation, and the registrant.
3.1 Amended and Restated Certificate of Incorporation, to be effective
upon consummation of this offering.
3.2 Amended and Restated Bylaws, to be effective upon consummation of this
offering.
3.3 Certificate of Incorporation of RAVISENT Technologies Inc., a Delaware
corporation.
3.4 Bylaws of RAVISENT Technologies Inc., a Delaware corporation.
4.1** Form of registrant's Specimen Common Stock Certificate.
4.2* Registration Rights Agreement, dated April 30, 1998, by and among the
registrant and parties listed on Schedule A therein.
4.3* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 75,000 shares of
common stock.
4.4* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 200,000 shares of
common stock.
4.5* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 100,000 shares of
common stock.
4.6* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated June 11, 1996, by and between the registrant and
Meridian Bank.
4.7* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated March 15, 1996, by and between the registrant and
Meridian Bank.
4.8* Subordinated Note and Warrant Purchase Agreement, dated March 18,
1996, by and between the registrant and NEPA Venture Fund II, L.P.
4.9* Convertible Debenture and Warrant Purchase Agreement, dated December
17, 1997, by and between the registrant and Atlantic Coastal
Ventures, L.P.
4.10* Convertible Debenture and Warrant Purchase Agreement, dated February
17, 1998, by and between the registrant and Donald Horton and Marty
Horton, as community property.
4.11* Quadrant International, Inc. Convertible Debenture and Warrant
Purchase Agreement, dated April 7, 1998, by and among the registrant
and the parties who are signatories thereto.
4.12* Convertible Debenture and Warrant Purchase Agreement, dated March 31,
1998, by and among the registrant and the parties who are signatories
thereto.
4.13* Subordinated Note and Warrant Purchase Agreement, dated May 4, 1995,
by and between the registrant and NEPA Venture Fund II, L.P.
4.14* Convertible Promissory Note Purchase Agreement, dated as of April 26,
1999, among the registrant and the parties who are signatories
thereto.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
4.15* Registration Rights Agreement, dated as of April 26, 1999, among the
registrant and the parties listed on Schedule A thereto.
5.1 Form of Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being registered, to be
given upon the closing of the offering.
10.1 Registrant's 1999 Stock Incentive Plan.
10.2 Registrant's 1999 Employee Stock Purchase Plan.
10.3 Form of Directors' and Officers' Indemnification Agreement.
10.4* Letter Agreement, dated October 28, 1997, by and between the
registrant and Dell Products, L.P.
10.5+* License Agreement, dated June 30, 1998, by and between the registrant
and ST Microelectronics, Inc.
10.6* Source and Object Code License Agreement, dated September 1, 1998, by
and between the registrant and Microsoft Corporation.
10.7+ Development and License Agreement, dated March 2, 1998, by and between
the registrant and ATI Technologies Inc.
10.8+* Sti5505 Development Contract, dated February 1, 1999, by and between
the registrant and ST Microelectronics, SA.
10.9+* Digital Audio System License Agreement: Consumer Products-Decoder
Hardware, dated May 20, 1997, by and between the registrant and Dolby
Laboratories Licensing Corporation.
10.10* Agreement of Lease, dated June 5, 1998, by and between the registrant
and Liberty Property Limited Partnership.
10.11* Form of Software License Agreement.
10.12* Silicon Valley Bank Loan and Security Agreement, dated July 14, 1998,
by and between the registrant and Silicon Valley Bank.
10.13* Commercial Rental Agreement, dated October 18, 1995, between Viona
Development Hard & Software Engineering GmbH and Deutsche-Bemanten-
Lebensversicherung AG.
10.14* Letter Agreement, dated August 20, 1997, by and between the registrant
and Francis E.J. Wilde III.
10.15* Employment Agreement, dated November 12, 1997, by and between the
registrant and Michael Harris.
10.16* Employment Agreement, dated November 12, 1997, by and between the
registrant and Jason Liu.
10.17* Employment Agreement, dated December 11, 1997, by and between the
registrant and Leonard Sharp.
10.18* Employment Agreement, dated January 12, 1998, by and between the
registrant and Robert Russell.
10.19* Employment Agreement, dated December 15, 1997, by and between the
registrant and Gregg Garnick.
10.20* Amendment to Employment Agreement, dated March 19, 1998, by and
between the registrant and Gregg Garnick.
10.21+* Software License Agreement, dated as of April 23, 1999, by and between
the registrant and Intel Corporation.
10.22 Amended and Restated CSS Interim License Agreement, dated November 28,
1997, by and between the registrant and Mitsushita Electric
Industrial Co., Ltd.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2 Consent of KPMG Deutsche Treuhand-Gesellschaft AG, Independent
Auditors
23.3 Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion
filed as Exhibit 5.1).
23.4 Consent of International Data Corporation.
23.5 Consent of the Yankee Group.
24.1* Power of Attorney. Reference is made to Page II-7 of the Amendment No.
1 to the registration statement on Form S-1 filed on June 9, 1999.
27.1* Financial Data Schedule. (In EDGAR format only)
</TABLE>
II-5
<PAGE>
- --------
* Previously filed
** To be filed by subsequent amendment
+ Confidential treatment requested for portions of this agreement
(b) Financial Statement Schedule
<TABLE>
<CAPTION>
Balance Charged
at to Costs Charged Balance
Beginning and to Other at End
of Year Expenses Accounts Deductions(1) of Year
--------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Accounts Receivable--
Allowance for doubtful
accounts
For the year ended December
31, 1996.................. $ 35,000 $120,000 -- $ (16,000) $139,000
For the year ended December
31, 1997.................. 139,000 384,038 -- (56,438) 466,600
For the year ended December
31, 1998.................. 466,600 48,347 -- (250,097) 264,850
Inventory--Reserve for
obsolete inventory
For the year ended December
31, 1996.................. 25,000 75,000 -- -- 100,000
For the year ended December
31, 1997.................. 100,000 300,000 -- -- 400,000
For the year ended December
31, 1998.................. 400,000 70,000 -- (295,565) 174,435
</TABLE>
- --------
(1) Represents write-off of uncollectible accounts receivable and obsolete
inventory.
Item 17. Undertakings
RAVISENT 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 RAVISENT
pursuant to the Delaware General Corporation Law, the certificate of
incorporation or the bylaws of RAVISENT, indemnification agreements entered
into between RAVISENT and its officers and directors, the underwriting
agreement, or otherwise, RAVISENT has been advised that in the opinion of the
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
RAVISENT of expenses incurred or paid by a director, officer, or controlling
person of RAVISENT 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, RAVISENT 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:
(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 RAVISENT 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Amendment No. 2 to
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Malvern, Commonwealth of
Pennsylvania, on this 17th day of June, 1999.
RAVISENT TECHNOLOGIES INC.
/s/ Francis E. J. Wilde III
By: _________________________________
Francis E. J. Wilde III
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to registration statement has been signed by the persons
whose signatures appear below, which persons have signed such registration
statement in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Francis E. J. Wilde III Chief Executive Officer, June 17, 1999
____________________________________ President and Director
Francis E. J. Wilde III (Principal Executive
Officer)
/s/ Jason C. Liu Chief Financial Officer, June 17, 1999
____________________________________ Vice President, Finance
Jason C. Liu and Secretary (Principal
Accounting Officer)
* Director
____________________________________
Frederick J. Beste III
* Director
____________________________________
Peter X. Blumenwitz
* Director
____________________________________
Walter L. Threadgill
* Director
____________________________________
</TABLE> Paul A. Vais
/s/ Jason C. Liu June 17, 1999
*By: __________________________
Jason C. Liu
Attorney-in-fact
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1** Form of Underwriting Agreement among the registrant, Bear, Stearns &
Co. Inc., SG Cowen Securities Corporation and Volpe Brown Whelan &
Company.
2.1* Sales Agreement Concerning Shares, dated January 16, 1998, by and
among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste CINCO
Vermogensverwaltungs GmbH and the registrant.
2.2* Appendix to Sales Agreement Concerning Shares, dated January 16, 1998,
by and among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste
CINCO Vermogensverwaltungs GmbH and the registrant.
2.3 Agreement and Plan of Merger, by and between Divicore Inc., a Delaware
corporation, and the registrant.
3.1 Amended and Restated Certificate of Incorporation to be effective upon
consummation of the initial public offering.
3.2 Amended and Restated Bylaws to be effective upon consummation of this
offering.
3.3 Certificate of Incorporation of RAVISENT Technologies Inc., a Delaware
corporation.
3.4 Bylaws of RAVISENT Technologies Inc., a Delaware corporation.
4.1** Form of registrant's Specimen Common Stock Certificate.
4.2* Registration Rights Agreement, dated April 30, 1998, by and among the
registrant and parties listed on Schedule A therein.
4.3* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 75,000 shares of
common stock.
4.4* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 200,000 shares of
common stock.
4.5* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 100,000 shares of
common stock.
4.6* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated June 11, 1996, by and between the registrant and
Meridian Bank.
4.7* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated March 15, 1996, by and between the registrant and
Meridian Bank.
4.8* Subordinated Note and Warrant Purchase Agreement, dated March 18,
1996, by and between the registrant and NEPA Venture Fund II, L.P.
4.9* Convertible Debenture and Warrant Purchase Agreement, dated December
17, 1997, by and between the registrant and Atlantic Coastal
Ventures, L.P.
4.10* Convertible Debenture and Warrant Purchase Agreement, dated February
17, 1998, by and between the registrant and Donald Horton and Marty
Horton, as community property.
4.11* Quadrant International, Inc. Convertible Debenture and Warrant
Purchase Agreement, dated April 7, 1998, by and among the registrant
and the parties who are signatories thereto.
4.12* Convertible Debenture and Warrant Purchase Agreement, dated March 31,
1998, by and among the registrant and the parties who are signatories
thereto.
4.13* Subordinated Note and Warrant Purchase Agreement, dated May 4, 1995,
by and between the registrant and NEPA Venture Fund II, L.P.
4.14* Convertible Promissory Note Purchase Agreement, dated as of April 28,
1999, among the registrant and the parties who are signatories
thereto.
4.15* Registration Rights Agreement, dated as of April 28, 1999, among the
registrant and the parties listed on Schedule A thereto.
5.1 Form of Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being registered, to be
given upon the closing of the offering.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.1 Registrant's 1999 Stock Incentive Plan.
10.2 Registrant's 1999 Employee Stock Purchase Plan.
10.3 Form of Directors' and Officers' Indemnification Agreement.
10.4* Letter Agreement, dated October 28, 1997, by and between the
registrant and Dell Products, L.P.
10.5+* License Agreement, dated June 30, 1998, by and between the registrant
and ST Microelectronics, Inc.
10.6* Source and Object Code License Agreement, dated September 1, 1998, by
and between the registrant and Microsoft Corporation.
10.7+ Development and License Agreement, dated March 2, 1998, by and between
the registrant and ATI Technologies Inc.
10.8+* Sti5505 Development Contract, dated February 1, 1999, by and between
the registrant and ST Microelectronics, SA.
10.9+* Digital Audio System License Agreement: Consumer Products-Decoder
Hardware, dated May 20, 1997, by and between the registrant and Dolby
Laboratories Licensing Corporation.
10.10* Agreement of Lease, dated June 5, 1998, by and between the registrant
and Liberty Property Limited Partnership.
10.11* Form of Software License Agreement.
10.12* Silicon Valley Bank Loan and Security Agreement, dated July 14, 1998,
by and between the registrant and Silicon Valley Bank.
10.13* Commercial Rental Agreement, dated October 18, 1995, between Viona
Development Hard & Software Engineering GmbH and Deutsche-Bemanten-
Lebensversicherung AG.
10.14* Letter Agreement, dated August 20, 1997, by and between the registrant
and Francis E.J. Wilde III.
10.15* Employment Agreement, dated November 12, 1997, by and between the
registrant and Michael Harris.
10.16* Employment Agreement, dated November 12, 1997, by and between the
registrant and Jason Liu.
10.17* Employment Agreement, dated December 11, 1997, by and between the
registrant and Leonard Sharp.
10.18* Employment Agreement, dated January 12, 1998, by and between the
registrant and Robert Russell.
10.19* Employment Agreement, dated December 15, 1997, by and between the
registrant and Gregg Garnick.
10.20* Amendment to Employment Agreement, dated March 19, 1998, by and
between the registrant and Gregg Garnick.
10.21+* Software License Agreement, dated as of April 23, 1999, by and between
the registrant and Intel Corporation.
10.22 Amended and Restated CSS Interim License Agreement, dated November 28,
1997, by and between the registrant and Matsushita Electric
Industrial Co., Ltd.
21.1 Subsidiaries of the registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2 Consent of KPMG Deutsche Treuhand-Gesellschaft AG, Independent
Auditors
23.3 Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion
filed as Exhibit 5.1).
23.4 Consent of International Data Corporation.
23.5 Consent of the Yankee Group.
24.1* Power of Attorney. Reference is made to Page II-7 of the Amendment No.
1 to the registration statement on Form S-1 filed on June 9, 1999.
27.1* Financial Data Schedule. (In EDGAR format only)
</TABLE>
- ----------
* Previously filed
** To be filed by subsequent amendment
+ Confidential treatment requested for portions of this agreement
<PAGE>
EXHIBIT 2.3
AGREEMENT AND PLAN OF MERGER
OF
DIVICORE INC.
a Pennsylvania corporation,
INTO
DIVICORE INC.
a Delaware corporation
This AGREEMENT AND PLAN OF MERGER is entered into as of June , 1999, by
---
and between DIVICORE INC., a Pennsylvania corporation ("Divicore Pennsylvania"),
and DIVICORE INC., a Delaware corporation and a wholly-owned subsidiary of
Divicore Pennsylvania ("Divicore Delaware").
WITNESSETH:
WHEREAS, the Board of Directors of each of Divicore Pennsylvania and
Divicore Delaware deems it advisable and in the best interests of each
corporation and its shareholders that Divicore Pennsylvania be merged with and
into Divicore Delaware (the "Merger") as permitted by law for the sole purpose
of changing Divicore Pennsylvania's state of incorporation from Pennsylvania to
Delaware; and
WHEREAS, this Merger is intended to be a reorganization within the
provisions of Section 368(a)(1)(F) of the Internal Revenue Code of 1986;
NOW, THEREFORE, in consideration of the premises, covenants and agreements
contained herein, the parties hereto agree and covenant as follows:
1. Merger: On the Effective Date (as hereinafter defined), Divicore
------
Pennsylvania shall be merged with and into Divicore Delaware, with Divicore
Delaware continuing its corporate existence and being the "Surviving
Corporation." From and after the Merger, the corporate existence of Divicore
Pennsylvania will terminate, all of its rights, privileges and immunities shall
be merged into Divicore Delaware, and Divicore Delaware shall, as the Surviving
Corporation, be fully vested therewith.
2. Certificate of Incorporation: The Certificate of Incorporation of Divicore
----------------------------
Delaware as in effect immediately preceding the Effective Date shall remain in
effect as the Certificate of Incorporation of the Surviving Corporation.
3. Bylaws: The Bylaws of Divicore Delaware as in effect immediately preceding
------
the Effective Date shall remain in effect as the Bylaws of the Surviving
Corporation.
<PAGE>
4. Officers and Directors: The officers and directors of Divicore Pennsylvania
----------------------
immediately preceding the Effective Date shall remain as the officers and
directors of the Surviving Corporation.
5. Conversion of Shares: Each share of Common Stock, Class A Convertible
--------------------
Preferred Stock, Class B Convertible Preferred Stock and Class C Convertible
Preferred Stock of Divicore Pennsylvania outstanding on the Effective Date of
the Merger and all rights in respect thereto shall, upon such Effective Date, be
converted into one share of Common Stock, Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock of Divicore Delaware, respectively.
Each outstanding and unexercised option, warrant and other right to purchase
shares of capital stock of Divicore Pennsylvania shall be assumed and become an
option, warrant or right to purchase shares of the same type and number of the
capital stock of Divicore Delaware. On the Effective Date, each share of
Divicore Delaware capital stock outstanding immediately prior to the Merger
shall cease to exist and be cancelled.
6. State Filings: The proper officers of Divicore Delaware and Divicore
-------------
Pennsylvania shall make and execute the appropriate certificates or articles of
merger, and such other documents, as are required by the Commonwealth of
Pennsylvania and the State of Delaware to effectuate the Merger and to cause the
same to be filed, in the manner provided by law, with the appropriate state
offices.
7. Effective Date: The Merger provided for by this Plan shall become effective
--------------
("Effective Date") on the date of filing of the appropriate documents with the
Secretaries of State of Pennsylvania and Delaware.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
and Plan of Merger on the day and year first above written.
DIVICORE INC., a Pennsylvania corporation
By:
-----------------------------------------
Name:
Title:
DIVICORE INC., a Delaware corporation
By:
-----------------------------------------
Name:
Title:
-2-
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RAVISENT TECHNOLOGIES INC.
The undersigned, Francis E.J. Wilde III and Jason C. Liu, hereby
certify that:
ONE: They are the duly elected and acting President and Secretary,
---
respectively, of said corporation.
TWO: The Certificate of Incorporation of said corporation was
---
originally filed in the Office of the Secretary of State of the State of
Delaware on June __, 1999.
THREE: The Certificate of Incorporation of said corporation shall be
-----
amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is RAVISENT Technologies Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is the
Corporation Trust Corporation.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares that the Corporation is authorized to issue is fifty five million
(55,000,000). Fifty million (50,000,000) shares shall be Common Stock, par value
$0.001 per share, and five million (5,000,000) shares shall be Preferred Stock,
par value $0.001 per share.
<PAGE>
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon each series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or of any of them. The rights, privileges, preferences and
restrictions of any such additional series may be subordinated to, pari passu
----------
with (including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote), or senior to any of those of any present or future class or series of
Preferred Stock or Common Stock. The Board of Directors is also authorized to
increase or decrease the number of shares of any series prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
Upon the filing of this Amended and Restated Certificate of
Incorporation, each outstanding share of Common Stock shall be converted into
_____ (___) shares of Common Stock or Preferred Stock, as the case may be (the
"Stock Split"). No fractional shares of Common Stock or Preferred Stock, as the
case may be, shall be issued upon the Stock Split. In lieu of any fractional
shares to which the holder would otherwise be entitled (after aggregating all
such shares of Common Stock, to which such holder is entitled), the Corporation
shall pay such holder such amount in cash as such fractional share represents
based on the fair market value of the Common Stock as of the date hereof.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.
At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.
<PAGE>
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the closing of the initial public
offering of the Corporation's Common Stock, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three (3) years. At the third annual meeting of stockholders following the
initial public offering of the Corporation's Common Stock, the term of office of
the Class III directors shall expire and Class III directors shall be elected
for a full term of three (3) years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three (3) years to
succeed the directors of the class whose terms expire at such annual meeting.
If the number of directors is hereafter changed, each director then serving as
such shall nevertheless continue as a director of the Class of which he is a
member until the expiration of his current term and any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
even if less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.
ARTICLE VII
Stockholders of the Corporation shall take action by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Board of Directors of the
Corporation. The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.
ARTICLE VIII
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by
<PAGE>
applicable Delaware law (statutory or non-statutory), with respect to action for
breach of duty to the Corporation, its stockholders, and others.
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving intentional misconduct or a knowing
violation of law, or (3) shall have derived an improper personal benefit. If
the GCL is hereafter amended to authorize the further elimination or limitation
of the liability of a director, the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the GCL, as so
amended.
Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.
If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that
<PAGE>
the claimant has not met the standards of conduct which make it permissible
under the GCL for the Corporation to indemnify the claimant for the amount
claimed, but the claimant shall be presumed to be entitled to indemnification
and the Corporation shall have the burden of proving that the claimant has not
met the standards of conduct for permissible indemnification set forth in the
GCL.
If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.
FOUR: The foregoing amendment and restatement has been duly adopted
----
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
FIFTH: The foregoing amendment and restatement was approved by the
-----
holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
_______ __, 1999.
__________________________________________
Francis E.J. Wilde III
President
__________________________________________
Jason C. Liu
Secretary
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
RAVISENT TECHNOLOGIES INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
----------
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
----------
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
----------
directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such date
----------
and time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. At each annual meeting, the stockholders
shall elect directors to succeed those directors whose terms expire in that year
and shall transact such other business as may properly be brought before the
meeting.
<PAGE>
Section 3. Written notice of the annual meeting stating the place,
----------
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
----------
corporation shall prepare and make available, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
----------
purposes, may only be called by the Board.
Section 6. Written notice of a special meeting stating the place,
----------
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
----------
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
----------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all
2
<PAGE>
meetings of the stockholders for the transaction of business except as otherwise
provided by statute or by the certificate of incorporation. If, however, such
quorum shall not be present or represented at any meeting of the stockholders,
either the Chairman of the Board, or the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted that might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
----------
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of applicable statute
or of the certificate of incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of such
question.
Section 10. Unless otherwise provided in the certificate of
-----------
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
Section 11. Nominations for election to the Board of Directors must
-----------
be made by the Board of Directors or by a committee appointed by the Board of
Directors for such purpose
3
<PAGE>
or by any stockholder of any outstanding class of capital stock of the
corporation entitled to vote for the election of directors. Nominations by
stockholders must be preceded by notification in writing received by the
secretary of the corporation not less than one-hundred twenty (120) days prior
to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the following information as to each proposed
nominee and as to each person, acting alone or in conjunction with one or more
other persons as a partnership, limited partnership, syndicate or other group,
who participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies to
vote for the nominee:
(a) the name, age, residence, address, and business address of
each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such person;
and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the corporation
will or may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
4
<PAGE>
Section 12. At any meeting of the stockholders, only such business
-----------
shall be conducted as shall have been brought before the meeting (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than one hundred twenty (120) days prior to the date of the meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, and the name
and address of the beneficial owner, if any, on whose behalf the proposal is
made, (c) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder of record and by the beneficial
owner, if any, on whose behalf of the proposal is made and (d) any material
interest of such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 12. The presiding officer of the meeting shall, if the
facts warrant, determine and declare to the
5
<PAGE>
meeting that business was not properly brought before the meeting and in
accordance with the procedures prescribed by this Section 12, and if such person
should so determine, such person shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Section 12, a stockholder shall
also comply with all applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder with respect to the
matters set forth in this Section 12.
Section 13. Effective upon the closing of the corporation's initial
-----------
public offering of securities pursuant to a registration statement filed under
the Securities Act of 1933, as amended, the stockholders of the Corporation may
not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting in accordance with these
Bylaws and the Certificate of Incorporation.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
----------
constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an incumbent director. The Board of
Directors shall be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible, as
determined by the Board of Directors, one class to hold office initially for a
term expiring at the annual meeting to be held in 2000, another class to hold
office initially for a term expiring at the annual meeting of stockholders held
in 2001 and another class to hold office initially for a term expiring at the
annual meeting of stockholders to be held in 2002, with the members of each
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class to hold office until their successors are elected and qualified. At each
annual meeting of stockholders, the successors of the class of directors whose
term expires at that meeting shall be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election.
Section 2. Vacancies and newly created directorships resulting from
----------
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
election of the class for which such directors were chosen and until their
successors are duly elected and qualified or until earlier resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by statute.
Section 3. The business of the corporation shall be managed by or
----------
under the direction of its Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
----------
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of
----------
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the
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stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors.
Section 6. Regular meetings of the Board of Directors may be held
----------
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
----------
Chairman of the Board or the president on twelve (12) hours' notice to each
director by phone, fax or electronic mail; special meetings shall be called by
the Chairman of the Board, the president or secretary in like manner and on like
notice on the written request of a majority of the Board unless the Board
consists of only one director, in which case special meetings shall be called by
the Chairman of the Board, the president or secretary in like manner and on like
notice on the written request of the sole director.
Section 8. At all meetings of the board a majority of the directors
----------
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
----------
incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or
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committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
-----------
majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
9
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agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
-----------
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
----------
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice (except as provided in Section 7 of Article III of these Bylaws), but
such notice may be given in writing, by mail, addressed to such director or
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<PAGE>
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
----------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
----------
Board of Directors and shall be a president, a chief financial officer and a
secretary. The Board of Directors may elect from among its members a Chairman
of the Board. The Board of Directors may also choose one or more vice-
presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
----------
annual meeting of stockholders shall choose a president, a chief financial
officer, and a secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
----------
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
11
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Section 4. The salaries of all officers of the corporation shall be
----------
fixed by the Board of Directors or any committee established by the Board of
Directors for such purpose. The salaries of agents of the corporation shall,
unless fixed by the Board of Directors, be fixed by the president or any vice-
president of the corporation.
Section 5. The officers of the corporation shall hold office until
----------
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
----------
meetings of the Board of Directors and of the stockholders at which he/she shall
be present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him/her by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the
----------
president, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He shall have and may exercise such
powers as are, from time to time, assigned to him by the Board and as may be
provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
----------
corporation; and in the absence of the Chairman of the Board he/she shall
preside at all meetings of the stockholders and the Board of Directors; he/she
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
12
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Section 9. The president or any vice president shall execute bonds,
----------
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
-----------
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
-----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he/she shall be. He/she shall have custody
of the corporate seal of the corporation and he/she, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by his signature or by the signature of such
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<PAGE>
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 12. The assistant secretary, or if there be more than one,
-----------
the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
THE CHIEF FINANCIAL OFFICER
Section 13. The chief financial officer shall be the chief financial
-----------
officer of the corporation, shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He/she shall disburse the funds of the corporation as may
-----------
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Chief Financial Officer and of the financial condition
of the corporation.
Section 15. If required by the Board of Directors, he/she shall give
-----------
the corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his/her office and for the
restoration to the corporation, in case of his/her death,
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<PAGE>
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his/her
control belonging to the corporation.
Section 16. The treasurer or an assistant treasurer, in the order
-----------
determined by the Board of Directors (or if there be no such determination, then
in the order of their election) shall, in the absence of the Chief Financial
Officer or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the Chief Financial Officer and shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
----------
to have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of Directors, or the president or a vice-president and the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent
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<PAGE>
such class or series of stock, provided that, except as otherwise provided in
section 202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate that
the corporation shall issue to represent such class or series of stock, a
statement that the corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he/she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
----------
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
16
<PAGE>
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
----------
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the
----------
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
17
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share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
----------
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
----------
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
----------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
----------
resolution of the Board of Directors.
SEAL
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Section 5. The Board of Directors may adopt a corporate seal having
----------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized
----------
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section
6 shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or
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was serving at the corporation's request as a director or officer of another
corporation) shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized by relevant sections of the General Corporation Law of Delaware.
Notwithstanding the foregoing, the corporation shall not be required to advance
such expenses to an agent who is a party to an action, suit or proceeding
brought by the corporation and approved by a majority of the Board of Directors
of the corporation which alleges willful misappropriation of corporate assets by
such agent, disclosure of confidential information in violation of such agent's
fiduciary or contractual obligations to the corporation or any other willful and
deliberate breach in bad faith of such agent's duty to the corporation or its
stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been
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"fiduciaries" of any employee benefit plan of the corporation which may exist
from time to time, Section 145 of the General Corporation Law of Delaware shall,
for the purposes of this Section 6, be interpreted as follows: an "other
enterprise" shall be deemed to include such an employee benefit plan, including
without limitation, any plan of the corporation which is governed by the Act of
Congress entitled "Employee Retirement Income Security Act of 1974," as amended
from time to time; the corporation shall be deemed to have requested a person to
serve an employee benefit plan where the performance by such person of his
duties to the corporation also imposes duties on, or otherwise involves services
by, such person to the plan or participants or beneficiaries of the plan; excise
taxes assessed on a person with respect to an employee benefit plan pursuant to
such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
----------
bylaws may be adopted by the affirmative vote of holders of at least 66-2/3%
vote of the outstanding voting stock of the corporation. These bylaws may also
be altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred
upon the Board of Directors by the certificate of incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal bylaws.
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EXHIBIT 3.3
CERTIFICATE OF INCORPORATION
OF
RAVISENT TECHNOLOGIES INC.
ARTICLE I.
The name of this Corporation is RAVISENT Technologies Inc.
ARTICLE II.
The address of the registered office of the Corporation in the State
of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, and
the name of the registered agent of the Corporation in the State of Delaware at
such address is CSC The United States Corporation Company.
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV.
The name of the Corporation's incorporator is Jonathan G. Shapiro and
the incorporator's mailing address is c/o Brobeck, Phleger & Harrison LLP, Two
Embarcadero Place, 2200 Geng Road, Palo Alto, California 94303.
ARTICLE V.
The names and address of the initial directors are Francis E.J. Wilde
III, Frederick J. Beste III, Peter X. Blumenwitz, Walter L. Threadgill and Paul
A. Vais, and the address of each is c/o RAVISENT Technologies Inc., One Great
Valley Parkway, Malvern, Pennsylvania 19355.
ARTICLE VI.
This Corporation is authorized to issue two classes of stock to be
designated "Common Stock" and "Preferred Stock." The aggregate number of
shares which the Corporation shall have
<PAGE>
authority to issue is One Hundred Fourteen Million Eight Hundred Twenty One
Thousand Five Hundred and Eighty-Six (114,821,586), Eighty Million (80,000,000)
shares of which shall be designated Common Stock, par value $.001 per share; and
Thirty-Four Million Eight Hundred Twenty-One Thousand Five Hundred and Eighty-
Six (34,821,586) shares of which shall be designated Preferred Stock, par value
$.001 per share, of which (i) Six Million Five Hundred Twenty-Three Thousand Six
Hundred and Eighty-Four (6,523,684) shares shall be designated Series A
Preferred Stock, (ii) Twenty-Five Million (25,000,000) shares shall be
designated Series B Preferred Stock and (iii) Three Million Two Hundred Ninety-
Seven Thousand Nine Hundred and Two (3,297,902) shares shall be designated
Series C Preferred Stock. The Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock shall have the designations, preferences,
privileges and relative rights as are more particularly set forth below in this
Article VI.
The Board of Directors may issue Preferred Stock from time to time in one
or more series. The Board of Directors is hereby authorized to adopt a
resolution or resolutions from time to time, within the limitations and
restrictions stated in this Certificate of Incorporation, to fix or alter the
voting powers, designations, preferences, rights, qualifications, limitations
and restrictions of any wholly unissued class of Preferred Stock, or any wholly
unissued series of any such class, and the number of shares constituting any
such series and the designation thereof, or any of them, and to increase or
decrease the number of shares of any series subsequent to the issuance of shares
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
The following is a statement of the designations, preferences, limitations
and relative rights in respect of the shares of Common Stock, Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock of the Corporation:
1. Common Stock.
------------
a. Voting Rights.
-------------
(i) Each holder of record of Common Stock shall have the
right to one vote for each share of Common Stock standing in the name of such
holder on the books of the Corporation.
(ii) A vacancy in a directorship to be elected by the
holders of the Common Stock may be filled only by vote, in person or by proxy,
or by written consent in lieu of a meeting of the holders of a majority of the
shares of such Common Stock then outstanding, or by a unanimous written consent
of the Corporation's Board of Directors.
2.
<PAGE>
b. Preemptive Rights. The holders of Common Stock shall not
-----------------
have preemptive rights, and the Corporation shall have the right to issue and to
sell to any person or persons any shares of its capital stock without first
offering such shares, options, rights, warrants or securities to any holders of
Common Stock.
c. Dividends. Subject to the rights of the holders of the
---------
Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock, each holder of record of Common Stock shall be entitled to
dividends in such amounts and at such times as may be declared by the Board of
Directors.
2. Series A Preferred Stock.
------------------------
a. Dividends.
---------
(i) So long as any shares of Series A Preferred Stock
shall be outstanding, the Corporation shall not declare or pay any dividends
(other than on the Series B Preferred Stock and the Series C Preferred Stock and
other than dividends payable solely in shares of Common Stock or cash in lieu of
fractional shares) on the Common Stock or any other class of stock with
designations, rights, preferences, terms and conditions subordinate to the
Series A Preferred Stock (collectively, including the Common Stock, the "Series
A Subordinate Stock"), or make, directly or indirectly, any other distribution
in respect to the Series A Subordinate Stock, unless, on the date of such
distribution or other payment, all payments then due and payable pursuant to
these Certificate of Incorporation shall have been paid in full or set apart for
payment in full.
(ii) From and after the date on which any shares of
Series A Preferred Stock are issued, the holders of Series A Preferred Stock
shall be entitled to receive, subject to the prior rights to payment in full of
the holders of Series B Preferred Stock set forth in Section 3(a)(i) and the
holders of Series C Preferred Stock set forth in Section 4(a)(i), but in
preference to the holders of Series A Subordinate Stock, dividends at the annual
rate of 8% of the stated value per share of Series A Preferred Stock, which
shall initially be $.1132239, and which shall be adjusted for stock splits,
stock dividends, recapitalizations, reclassifications, and similar events that
affect the number of outstanding shares of Series A Preferred Stock (the "Series
A Stated Value"). Such dividends shall be paid as declared fifty percent in cash
and fifty percent in shares of Common Stock, on the last business day of each
year (such business day being hereinafter referred to as the "Series A Dividend
Date"), to holders of shares of Series A Preferred Stock as they appear on the
stock register of the Corporation on the date (a "Record Date") fixed by the
Board of Directors, which Record Date shall not be more than 60 days prior to
the Series A Dividend Date and shall not precede the date on which the
resolution fixing such Record Date is adopted. The Common Stock issued pursuant
to this Section 2(a) shall be valued at the lower of (i) its then existing fair
market value as determined by the Board of Directors or (ii) the Series A Stated
Value. The foregoing dividends shall become due and payable when, as and if
declared by the Board of Directors of the Corporation and shall be paid to the
holders of the Series A Preferred Stock to the extent permitted by law. The
dividends payable to the holders of the Series A Preferred Stock as aforesaid
shall accrue on each Series A Dividend Date to the extent payable on such date
as hereinabove provided and shall not be cumulative. Should at the time such
dividend is payable the Corporation not have available from its authorized but
3.
<PAGE>
unissued Common Stock sufficient shares to pay such dividend, the Corporation
shall take all action necessary to amend these Certificate of Incorporation to
increase the number of authorized shares of Common Stock so that it may make
that dividend payment required by this Certificate.
(iii) So long as any shares of Series A Preferred Stock
shall be outstanding, the Corporation shall not declare or pay any dividends
(other than on the Series B Preferred Stock and the Series C Preferred Stock and
other than dividends payable solely in shares of Common Stock or cash in lieu of
fractional shares) on any Series A Subordinate Stock or make directly or
indirectly, any other distribution in respect of the Series A Subordinate Stock,
unless, at the date of such distribution or other payments: (i) all dividends on
the then outstanding shares of Series B Preferred Stock for the then current
Series B Dividend Date (as defined below) shall have been paid in full and
declared and set apart for payment in full, (ii) all redemptions then due and
payable pursuant to Section 3(f) of this Article shall have been paid in full or
set apart for payment in full, (iii) all dividends on the then outstanding
shares of Series C Preferred Stock for the then current Series C Dividend Date
(as defined below) shall have been paid in full and declared and set apart in
full, (iv) all redemptions then due and payable pursuant to Section 4(f) of this
Article shall have been paid in full or set apart for payment in full, (v) all
dividends on the then outstanding Series A Preferred Stock for the then current
Series A Dividend Date shall have been paid in full and declared and set apart
for payment in full, and (vi) all redemptions then due and payable pursuant to
Section 2(f) of this Article shall have been paid in full or set apart for
payment in full.
b. Voting Rights.
-------------
(i) Except as otherwise provided herein or by law, the
holders of Series A Preferred Stock shall have full voting rights and powers,
shall be entitled to vote on all matters as to which holders of the Common Stock
shall be entitled to vote, shall vote together with the holders of the Common
Stock as a single class and shall be entitled to one vote for each share of
Common Stock which would be held by them if all of their shares of Series A
Preferred Stock would be converted into shares of Common Stock under Section
2(e) of this Article.
(ii) Whenever holders of the Series A Preferred Stock
are required or permitted to take any action by vote, such action may be taken
without a meeting by written consent, setting forth the action so taken and
signed by the holders of all shares of Series A Preferred Stock, except as
otherwise expressly provided herein.
c. Rights of Liquidation.
---------------------
(i) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation (any such event being
hereinafter referred to as a "Liquidation"), before any distribution of assets
of the Corporation shall be made to or set apart for the holders of the Common
Stock, subject to the prior right of (i) the holders of the Series B Preferred
Stock to receive the Series B Liquidation Preference (as defined below) and (ii)
the holders of the Series C Preferred Stock to receive the Series C Liquidation
Preference (as defined below), in each such case in preference to the Series A
Preferred Stock payment, the holders of the Series A Preferred Stock shall be
entitled to receive payment out of such assets of the
4.
<PAGE>
Corporation in an amount per share equal to the Series A Stated Value per share
(at the amount of such Series A Stated Value at the time of such Liquidation)
for each share of Series A Preferred Stock held (the "Series A Liquidation
Preference"), plus any declared but unpaid dividends on such shares of Series A
Preferred Stock. If the assets of the Corporation available for distribution to
the holders of the Series A Preferred Stock shall not be sufficient to make in
full the payments required by this Section 2(c)(i), subject to its prior payment
to the holders of the Series B Preferred Stock and the holders of the Series C
Preferred Stock, such assets shall be distributed ratably among the holders of
the Series A Preferred Stock based upon the aggregate Series A Liquidation
Preferences of the shares of Series A Preferred Stock held by each such holder.
(ii) If the assets of the Corporation available for
distribution to shareholders exceed the aggregate amounts payable pursuant to
Sections 4(c)(i), 3(c)(i) and 2(c)(i) of this Article, the remainder of such
assets shall be distributed to the holders of Common Stock.
(iii) A liquidation, dissolution or winding up of the
Corporation or merger or consolidation involving the Corporation or a sale,
lease or transfer of all or substantially all of the assets of the Corporation
or one transaction or series of related transactions in which more than 50% of
the voting power of the Corporation is transferred to new shareholders of the
Corporation or other change of control has been effected (other than a
Qualifying Public Offering (as defined below)) shall, at the option of holders
representing a majority of the Series A Preferred Stock immediately prior to
such transaction, be deemed a Liquidation, unless in connection with such
transactions the holders of Series A Preferred Stock receive a preferred stock
having designations, preferences, terms and conditions that are no less
favorable than the designations, preferences, terms and conditions of the Series
A Preferred Stock.
(iv) Subject to the preferential rights of the Series B
Preferred Stock and the Series C Preferred Stock and provided that each of the
Series B Preferred Stock and the Series C Preferred Stock received its full
liquidation preference, notwithstanding the provisions contained in Section
2(c)(iii) of this Article, in the event of a merger or consolidation involving
the Corporation, or a sale, lease or transfer of all or substantially all of the
assets of the Corporation, in which a holder of Series A Preferred Stock would
receive cash and/or marketable securities (i.e., securities registered under the
Securities Act of 1933, as amended, at the time of delivery, or securities
committed to be so registered with 60 days after delivery) in an amount less
than the aggregate Series A Liquidation Preference of the shares of Series A
Preferred Stock held by such holder, together with all declared, accrued and
unpaid dividends with respect to such shares of Series A Preferred Stock, then
such holder may elect, in lieu of all other rights under the terms of the
transaction or this Article, to receive an amount equal to such aggregate Series
A Liquidation Preference for such shares of Series A Preferred Stock, together
with all such declared, accrued and unpaid dividends on such shares of Series A
Preferred Stock. Subject to the preferential rights of the Series B Preferred
Stock and the Series C Preferred Stock, and provided that the Series B Preferred
Stock and the Series C Preferred ed Stock have received their full liquidation
preference, if the holder makes such an election, such holder shall have a
priority on all cash and marketable securities received in such transaction to
the extent of the aggregate Series A Liquidation Preference for such holder's
shares of Series A Preferred Stock and the
5.
<PAGE>
aggregate declared and unpaid dividends with respect thereto. Such election
shall be made by the holder by written notice to the Corporation within 30 days
after the date of shareholder approval of the transaction (or within 30 days
after receiving notice of such transaction from the Corporation if the
transaction is not submitted for shareholder approval).
(v) Any securities or other non-cash consideration to
be delivered to the holders of the Series A Preferred Stock upon any Liquidation
in accordance with the terms hereof shall be valued as follows:
(a) If traded on a nationally recognized securities
exchange or inter-dealer quotation system, the value shall be deemed to be the
average of the closing prices of the securities on such exchange or system over
the 30-day period ending three (3) business days prior to the closing;
(b) If traded over-the-counter, the value shall be
deemed to be the average of the closing bid prices over the 30-day period ending
three (3) business days prior to the closing; and
(c) If there is no active public market, the value
shall be the fair market value thereof, as determined in good faith by the Board
of Directors of the corporation, which shall include the director designee of
the Series B Preferred Stock.
d. Actions Requiring the Consent of the Holders of the
---------------------------------------------------
Series A Preferred Stock. As long as any shares of Series A Preferred Stock
- ------------------------
remain outstanding, the consent of the holders of at least a majority of the
shares of the Series A Preferred Stock at the time outstanding, given in person
or by proxy, either in writing without a meeting or by vote at a meeting called
for such purpose, shall be necessary for effecting or validating any of the
following transactions:
(i) Any amendment, alteration or repeal of any of the
provisions of the Certificate of Incorporation or the Bylaws of the Corporation
which (i) materially adversely affects the designations, rights, preferences or
powers of the Series A Preferred Stock or of the holders thereof, or (ii)
materially decreases the required time for the giving of any notice to which the
holders of the Series A Preferred Stock may be entitled; or
(ii) The issuance of any shares of Series A Preferred
Stock other than the shares issuable upon exercise of the Warrants originally
issued to NEPA Venture Fund II, L.P. to purchase such Series A Preferred Stock.
e. Conversion.
----------
(i) Right To Convert. A holder of record of any share
or shares of Series A Preferred Stock shall have the right at any time, at such
holder's option, to convert, without the payment of any additional
consideration, each share of Series A Preferred Stock held by such holder into
that number of fully paid and nonassessable shares of Common Stock as is
determined by dividing (i) the then applicable Series A Stated Value by (ii) the
Series A Conversion Factor (as defined in Section 2(e)(iv) of this Article) then
in effect for the Series A Preferred Stock. No fractional shares or scrip
representing fractional shares shall be issued upon
6.
<PAGE>
the conversion of any Series A Preferred Stock. With respect to any fraction of
a share of Common Stock called for upon any conversion after completion of the
calculation of the aggregate number of shares of Common Stock to be issued to
such holder, the Corporation shall pay to such holder an amount in cash equal to
any fractional share to which such holder would be entitled, multiplied by the
current market value of a share, as unanimously determined in good faith by the
Board of Directors of the Corporation.
(ii) Mechanics of Conversion. If the holder of shares
-----------------------
of Series A Preferred Stock desires to exercise such right of conversion, such
holder must give written notice to the Corporation (the "Conversion Notice") of
the election by such holder to convert a stated number of shares of Series A
Preferred Stock (the "Series A Conversion Shares") into shares of Common Stock
on the date specified in the Conversion Notice (which date shall not be earlier
than three business days after the date on which the Corporation receives the
Conversion Notice (the "Conversion Date")), and by surrender of the certificate
or certificates representing such Series A Conversion Shares. The Conversion
Notice shall also contain a statement of the name or names (with addresses) in
which the certificate or certificates for Common Stock shall be issued. Promptly
after the Conversion Date, receipt of the Conversion Notice and the surrender of
the Series A Conversion Shares, the Corporation shall issue and deliver, or
cause to be delivered, to the holder of the Series A Conversion Shares or such
holder's nominee or nominees, a certificate or certificates for the number of
shares of Common Stock issuable upon the conversion of such Series A Conversion
Shares. Such con version shall be deemed to have been effected as of the close
of business on the Conversion Date, and the person or persons entitled to
receive the shares of Common Stock issuable upon conversion shall be treated for
all purposes as the holder or holders of record of such shares of Common Stock
as of the close of business on such date.
(iii) Common Stock Reserved. The Corporation shall at
---------------------
all times reserve and keep available out of its authorized but unissued Common
Stock, solely for issuance upon the conversion of shares of Series A Preferred
Stock as herein provided, such number of shares of Common Stock as shall from
time to time be issuable upon the conversion of all of the shares of Series A
Preferred Stock at the time outstanding.
(iv) Conversion Factor. The initial conversion factor
-----------------
for the Series A Preferred Stock shall be .1132239, subject to adjustment in
accordance with the provisions in this Section 2(e)(iv). Such conversion factor
in effect from time to time, as adjusted upon changes in the Series A Stated
Value and pursuant to this Section 2(e)(iv), are referred to herein as the
"Series A Conversion Factor." All of the remaining provisions of this Section
2(e)(iv) shall apply separately to the respective Series A Conversion Factors in
effect from time to time.
(a) Except as set forth in subsection (ii) below,
in the event that the Corporation shall, at any time or from time to time after
the issuance of any shares of Series A Preferred Stock, issue or sell any shares
of the capital stock of the Corporation (including treasury shares) or in any
manner grant (whether directly or otherwise) any rights to subscribe for or to
purchase any capital stock, or any options for the purchase of any capital
stock, whether or not such rights or options are immediately exercisable, for a
consideration per share or payable in the aggregate upon both the issuance and
exercise of any such rights or
7.
<PAGE>
options, on a per share basis, less than the amount of the Series A Conversion
Factor in effect immediately prior to the time of such issuance or sale,
expressed in U.S. Dollars, then, immediately upon such issuance or sale, the
Series A Conversion Factor shall be reduced as follows:
(1) The Series A Conversion Factor shall be
reduced to a number determined by multiplying the Series A Conversion Factor in
effect immediately prior to such issuance by the following fraction:
A + B
------
C
-----
A + D
wherein:
A = the number of Outstanding Shares (as defined in Section 3(e)(iv)(a)(1)
below) immediately prior to the subject issuance;
B = the aggregate consideration for the shares then being issued;
C = the Series A Conversion Factor in effect immediately prior to the
subject issuance; and
D = the number of shares then being issued.
The Series A Conversion Factor shall be further reduced from time to time
thereafter whenever any shares are so issued or converted for a price per share
lower than the amount of the then Series A Conversion Factor, as adjusted prior
to that date. The Series A Conversion Factor shall be further reduced from time
to time thereafter whenever any shares are so issued or converted for a price
per share lower than the amount of the Series A Conversion Factor, then in
effect, as adjusted prior to that date.
(2) In the event that any shares shall be
issued or sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Corporation therefor, without deduction therefrom
of any expenses incurred or any underwriting commissions or concessions paid or
allowed by the Corporation in connection therewith. In the event that any shares
shall be issued for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall be deemed to be
the fair value of such consideration, without deduction of any expenses incurred
or any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. Whenever shares are issued upon the
exercise of warrants, options or other conversion rights, the consideration
received therefor shall include both the consideration paid upon the issuance
and upon the exercise of such warrant, option or other right.
(3) Notwithstanding the foregoing, upon
consent of the holders of 51% of the Series A Preferred Stock then outstanding,
no such reduction in the Series A Conversion Factor, as set forth above, shall
occur.
8.
<PAGE>
(b) The adjustment provided for in Section 2(e)(iv)(a)
above shall not be made (A) upon the issuance of shares of Common Stock upon the
conversion of the Series A Preferred Stock or upon the issuance of Series A
Preferred Stock upon the exercise of warrants therefor, (B) upon the grant or
exercise of up to 11,000,000 options or rights pursuant to the Company's stock
option or purchase plans approved by the Board of Directors of the Company, (C)
upon the exercise of any rights to subscribe for or to purchase, or the exercise
of up to 43,863,046 options or warrants for the purchase of, any shares of
Common Stock, or upon the conversion or exchange of any securities convertible
into or exchangeable for shares of Common Stock, in each of the above case,
which rights, options, warrants, or conversion or exchange rights are
outstanding prior to the adoption of this Certificate of Incorporation, (D) in
connection with a merger or acquisition of another business entity by the
Corporation approved by the Board of Directors of the Corporation or (E) upon
the exercise by ATI Technologies, Inc. of its right to purchase $500,000 of
Series B Preferred Stock or its warrants to purchase 245,180 shares of Common
Stock (the foregoing are collectively the "Excluded Transactions").
(c) Each adjustment in a Series A Conversion Factor
shall be calculated to the nearest .000 1.
(d) In the event that the Corporation shall, at any
time after the issuance of any shares of Series A Preferred Stock, issue any
shares of Common Stock (A) by stock dividend or any other distribution upon any
stock of the Corporation payable in shares of Common Stock or in shares of
Series A Preferred Stock, or (B) by subdivision of its shares of outstanding
Common Stock, by reclassification or otherwise, the Series A Conversion Factor
then in effect shall be reduced proportionately, and, in like manner, in the
event of any combination of shares of Common Stock, by reclassification or
otherwise, the Series A Conversion Factor then in effect shall be
proportionately increased.
(e) In addition to and not in limitation of the
foregoing, if any capital reorganization or reclassification of the Common Stock
of the Corporation, or consolidation or merger of the Corporation with or into
another corporation, or the sale or conveyance of all or substantially all of
its assets to another corporation shall be effected, other than due to a
"Qualifying Sale" (as defined in Section 2(g) below), then, as a condition of
such reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holders of the Series A Preferred
Stock shall thereafter have the right to receive, in lieu of the shares of
Common Stock of the Corporation immediately theretofore receivable with respect
to such shares of Series A Preferred Stock upon the exercise of their conversion
rights, such shares of stock, securities or assets as would have been issued or
payable with respect to or in exchange for the number of outstanding shares of
such Common Stock immediately theretofore receivable with respect to such shares
of Series A Preferred Stock upon the exercise of such rights had such
reorganization, reclassification, consolidation, merger or sale not taken place.
In any such case, appropriate provision shall be made with respect to the rights
and interests of the holders of the Series A Preferred Stock to the end that
such conversion rights (including, without limitation, provisions for adjustment
of the Series A Conversion Factor ) shall thereafter be applicable, as nearly as
may be practicable in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise thereof. The Corporation shall not
effect any such consolidation, merger or sale, unless it provides the holders of
the Series A Preferred Stock at least 30 days advance notice thereof, and prior
to or simultaneously with the
9.
<PAGE>
consummation thereof the successor corporation (if other than the Corporation)
resulting from such consolidation or merger or the corporation purchasing such
assets, shall assume by written instrument, executed and mailed or delivered to
the holders of the Series A Preferred Stock, the obligation to deliver to such
holders the shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holders may be entitled to receive upon conversion of
the shares of Series A Preferred Stock held by such holder.
(f) If any event occurs as to which the other
provisions of this Section 2(e)(iv) are not applicable, or if applicable would
not fairly protect the conversion rights of the issued Series A Preferred Stock
in accordance with the intent and principles of such provisions, then the Board
of Directors shall make an adjustment in the application of such provisions, in
accordance with such intent and principles, so as to protect such conversion
rights as aforesaid, but in no event shall any such adjustment have the effect
of increasing the Series A Conversion Factor as otherwise determined pursuant to
this Section 2(e)(iv).
(v) Stock Transfer Taxes. The issuance of stock
--------------------
certificates upon the conversion of the Series A Preferred Stock shall be made
without charge to the converting holder for any tax in respect of such issuance.
The Corporation shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
shares in any name other than that of the holder of such shares of Series A
Preferred Stock converted, and the Corporation shall not be required to issue or
deliver any such stock certificate unless and until the person or persons
requesting the issuance thereof shall have paid to the Corporation the amount of
such tax or shall have established to the satisfaction of the Corporation that
such tax has been paid.
(vi) Certificate as to Adjustments. Upon the occurrence of
-----------------------------
each adjustment or readjustment of the Series A Conversion Factor, the
Corporation, at its expense, promptly shall compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series A Conversion Factor at the time in effect for the
Series A Preferred Stock, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of such Series A Preferred Stock owned by such holder.
(vii) Notices of Record Date. In the event of any fixing by
----------------------
the Corporation of a record date for the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any shares of
Common Stock or other securities, or any right to subscribe for, purchase or
otherwise acquire, or any option for the purchase of, any shares of stock of any
class or any other securities or property, or to receive any other right, the
Corporation shall mail to each holder of Series A Preferred Stock at least 30
days prior to the date specified therein, a notice specifying the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
10.
<PAGE>
(viii) Notices. Any notice required by the provisions of
-------
this Section 2(e) of this Article to be given to the holders of shares of Series
A Preferred Stock shall be deemed given if deposited in the United States mail,
first class postage prepaid, and addressed to each holder of record at his
address appearing on the books of the Corporation.
f. Redemption.
----------
(i) Redemption at Option of Holder. At any time after May
------------------------------
4, 2003, each holder of shares of Series A Preferred Stock (hereinafter
collectively referred to as the "Series A Redeemable Stock") may, at the option
of such holder, require the Corporation to redeem all or any portion of the
shares of Series A Redeemable Stock held by such holder in accordance with the
provisions contained in this Section 2(f); provided, however, that in no event
shall the Corporation redeem any Series A Redeemable Stock on a Series A
Redemption Date (as defined below) unless and until (i) the Series B Redemption
Price (as defined below) shall be paid on all shares of Series B Redeemable
Stock (as defined below) and (ii) the Series C Redemption Price (as defined
below) shall be paid on all shares of Series C Redeemable Stock (as defined
below), and in no event shall the Corporation be required to redeem any shares
in excess of the amount permitted by law; provided, further however, that such
inability to redeem shall not have any impact or effect upon the per-share
Series A Redemption Price (as hereinafter defined). All redemptions shall be
made in the order of the month in which they are received, and, if less than all
of the shares submitted for redemption in a particular month are capable of
being redeemed, then such shares shall be redeemed subject to the prior rights
in full of the holders of Series B Preferred Stock set forth in Section 3(f)(i)
and of the holders of Series C Preferred Stock set forth in Section 4(f)(i), on
a pro rata basis, based on the number of shares that each shareholder submitted
for redemption.
(ii) Redemption Price. The price at which each share of
----------------
Series A Stock shall be redeemed (the "Series A Redemption Price") shall be
equal to the sum of all declared and accrued but unpaid dividends respecting
such share, plus the highest of: (i) one hundred and ten percent (110%) of the
Series A Stated Value at the time of such redemption; (ii) an amount equal to:
(A) twenty times the average of the Corporation's after tax earnings for two
consecutive prior full fiscal years, calculated in accordance with generally
accepted accounting principles consistently applied, divided by (B) the sum of
the number of then outstanding issued and outstanding shares of Common Stock
plus the number of issued and outstanding shares of Series A Preferred Stock; or
(iii) the Corporation's book value per share, calculated in accordance with
generally accepted accounting principles consistently applied.
(iii) Exercise of Option to Redeem. If a holder of Series A
----------------------------
Redeemable Stock desires to exercise such holder's option to redeem some or all
of such holder's shares of Series A Redeemable Stock pursuant to this Section
2(f), such holder must give written notice to the Corporation specifying the
number of shares to be redeemed. Redemptions shall be made on a date 15 calendar
days after the end of the month in which the Corporation receives such notice
(or the first business day thereafter). Each such date of redemption shall be a
"Series A Redemption Date." To receive the Series A Redemption Price, the holder
of shares of Series A Redeemable Stock must present and surrender the
certificate or certificates representing such shares (duly endorsed for
transfer) to the Corporation at the principal executive offices of the
Corporation no later than three business days prior to the
11.
<PAGE>
Series A Redemption Date. The Corporation shall pay the Series A Redemption
Price to, or to the order of, the person whose name appears on such certificate
or certificates as the owner thereof. If the number of shares represented by the
certificate or certificates surrendered shall exceed the number of shares to be
redeemed, the Corporation shall issue and deliver on the Series A Redemption
Date to the person entitled thereto a certificate or certificates representing
the unredeemed balance of such shares.
(iv) Effect of Redemption. From and after the Series A
--------------------
Redemption Date, unless the Corporation shall default in providing for the
payment of the Series A Redemption Price, all dividends (if any) on such shares
requested to be redeemed pursuant to this Section 2(f) shall cease to accrue,
and all rights of the holders of any shares subject to redemption as
shareholders of the Corporation, except the right to receive the Series A
Redemption Price, shall cease and terminate. Any shares of Series A Redeemable
Stock that are redeemed by the Corporation shall be retired and shall not be
reissued (it being understood that if notes have been issued to evidence such
redemption obligations, redemption does not occur until such notes and any
interest thereon have been paid in full).
(v) Failure to Redeem. If the Corporation shall for any reason
-----------------
fail to redeem any shares of Series A Redeemable Stock as required by this
Section 2(f), and such failure shall continue for a period of 30 days, then
notwithstanding anything to the contrary contained in the Certificate of
Incorporation, with respect to all shares of Series A Redeemable Stock then
outstanding: (i) the conversion rights set forth in Section 2(e) of this Article
hereof shall continue beyond any date for redemption specified in said Section,
and said rights may be exercised at any time; (ii) the Corporation may not incur
any indebtedness for money borrowed or borrow or reborrow any amounts under any
lines of credit which it may then have outstanding without the prior written
consent of the holders of at least 67% of the then outstanding shares of Series
A Redeemable Stock, unless the proceeds of such incurrence of such indebtedness
or borrowing or reborrowing are to be used to make all redemptions then required
to be made; and (iii) dividends shall continue to accrue and be paid in
accordance with Section 2(a) of this Article, and, to the extent not paid, shall
be added to the Series A Redemption Price. Nothing herein shall limit the
Corporation's obligations to redeem as set forth above, or limit the remedies
available to the holders of Series A Redeemable Stock in the event of a failure
of the Corporation to honor such obligations.
g. Mandatory Conversion on Qualifying Sale. The Corporation shall
---------------------------------------
have the right, at its option, to cause the conversion of all, but not less than
all, of the shares of Series A Preferred Stock into fully paid and nonassessable
shares of Common Stock in the event of a merger or consolidation involving the
Corporation, or a sale, lease or transfer of all or substantially all of the
assets of the Corporation, in which the shareholders of the Corporation, in the
aggregate, receive cash and/or marketable securities (i.e., securities
registered under the Securities Act of 1933, as amended, at the time of
delivery, or securities committed to be so registered with 60 days after
delivery) in a net aggregate amount of not less than $7,500,000 (a "Qualifying
Sale"). A Qualifying Sale shall result in a Mandatory Conversion (as defined
below), and the Mandatory Conversion Date (as defined below) which such
Mandatory Conversion of the Series A Preferred Stock shall be deemed to occur is
the date on which the shareholders of the Corporation receive, in a closing, the
net consideration attributable to the Qualifying Sale.
12.
<PAGE>
3. Series B Preferred Stock.
-------------------------
a. Dividends.
---------
(i) So long as any shares of Series B Preferred Stock
shall be outstanding, the Corporation shall not declare or pay any dividends
(other than dividends payable solely in shares of Common Stock or cash in lieu
of fractional shares) on the Series A Preferred Stock or the Common Stock or any
other class of stock with designations, rights, preferences, terms and
conditions subordinate to the Series B Preferred Stock (collectively, including
the Common Stock, the "Subordinate Stock"), make, directly or indirectly, any
other distribution in respect to the Subordinate Stock, unless, on the date of
such distribution or other payment, all payments then due and payable pursuant
to these Certificate of Incorporation this Certificate shall have been paid in
full or set apart for payment in full.
(ii) From and after the date on which any shares of
Series B Preferred Stock are issued, the holders of Series B Preferred Stock
shall be entitled to receive, in preference to the holders of the Subordinate
Stock and pari passu with the holders of the Series C Preferred Stock, dividends
at the annual rate of 8% of the stated value per share of Series B Preferred
Stock, which shall initially be $0.83, and which shall be adjusted for stock
splits, stock dividends, recapitalizations, reclassifications, and similar
events that affect the number of outstanding shares of Series B Preferred Stock
(the "Series B Stated Value"). Such dividends shall be paid as declared, fifty
percent in cash and fifty percent in shares of Common Stock, on the last
business day of each year (such business day being hereinafter referred to as
the "Series B Dividend Date"), to holders of shares of Series B Preferred Stock
as they appear on the stock register of the Corporation on the Record Date fixed
by the Board of Directors, which Record Date shall not be more than 60 days
prior to the Series B Dividend Date and shall not precede the date on which the
resolution fixing such Record Date is adopted. The Common Stock issued pursuant
to this Section 3(a) shall be valued at the lower of (i) its then existing fair
market value as determined by the Board of Directors or (ii) the Series B Stated
Value. The foregoing dividends shall become due and payable when, as and if
declared by the Board of Directors of the Corporation and shall be paid to the
holders of the Series B Preferred Stock to the extent permitted by law. The
dividends payable to the holders of the Series B Preferred Stock as aforesaid
shall accrue on each Series B Dividend Date to the extent payable on such date
as hereinabove provided and shall not be cumulative. Should at the time such
dividend is payable the Corporation not have available from its authorized but
unissued Common Stock sufficient shares to pay such dividend, the Corporation
shall take all action necessary to amend this Certificate of Incorporation to
increase the number of authorized shares of Common Stock so that it may make
that dividend payment required by this Article.
(iii) So long as any shares of Series B Preferred Stock
shall be outstanding, the Corporation shall not declare or pay any dividends
(other than dividends payable solely in shares of Common Stock or cash in lieu
of fractional shares) on any Subordinate Stock or make directly or indirectly,
any other distribution in respect of the Subordinate Stock or payment on account
of the redemption, purchase or other acquisition of such stock, unless, at the
date of such distribution or other payments: (i) all declared dividends on the
then outstanding shares of Series B Preferred Stock for the then current Series
B Dividend Date shall have been paid in full and declared and set apart for
payment in full, (ii) all redemptions then due and
13.
<PAGE>
payable pursuant to Section 3(f) of this Article shall have been paid in full or
set apart for payment in full, (iii) all declared dividends on the then
outstanding shares of Series C Preferred stock for the then current Series C
Dividend Date (as defined below) shall have been paid in full and declared and
set apart for payment in full, and (iv) all redemptions then due and payable
pursuant to Section 4(f) of this Article shall have been paid in full or set
apart for payment in full.
b. Voting Rights.
-------------
(i) Except as otherwise provided herein or by law, the
holders of Series B Preferred Stock shall have full voting rights and powers,
shall be entitled to vote on all matters as to which holders of the Common Stock
shall be entitled to vote, shall vote together with the holders of the Common
Stock as a single class and shall be entitled to one vote for each share of
Common Stock which would be held by them if all of their shares of Series B
Preferred Stock would be converted into shares of Common Stock under Section
3(e) of this Article.
(ii) Unless otherwise approved by the Board of Directors
in which the Director designated in accordance with this subsection (ii) votes
with the majority or by the holders of the Common Stock and the holders of
Series B Preferred Stock, voting together as a single class, the Board of
Directors shall consist of not fewer than two (2) and not more than five (5)
directors. The holders of the Series B Preferred Stock shall have the exclusive
and special right to elect one (1) member of such Board of Directors of the
Corporation and to remove and replace such director (the "Series B Director").
The Series B Director shall be a member of all committees of the Board of
Directors and all committees of the Board of Directors shall consist of not less
than two and not more than three members. The Series B Director shall be
elected, removed, and replaced by the vote of the holders of the majority of the
shares of Series B Preferred Stock then outstanding. The right of the holders of
the Series B Preferred Stock contained in this Section 3(b)(ii) may be exercised
either at a special meeting of the holders of the Series B Preferred Stock, or
at any annual or special meeting of the shareholders of the Corporation, or by
written consent of the holders of the Series B Preferred Stock in lieu of a
meeting. Upon the request of the holders of record of at least 33% of the Series
B Preferred Stock then outstanding, the secretary of the Corporation shall call
a special meeting of the holders of such Series B Preferred Stock for the
purpose of (i) removing and replacing the Series B Director and/or (ii) electing
a director to fill a vacancy in the directorships authorized to be filled by the
holders of such Series B Preferred Stock pursuant to this Section 3(b)(ii) of
this Article. Such meeting shall be held at the earliest practicable date.
(iii) A vacancy in the directorships to be elected by the
holders of Series B Preferred Stock pursuant to Section 3(b)(ii) of this Article
may be filled only by a vote, in person or by proxy, at a meeting of the holders
of the Series B Preferred Stock then outstanding or by written consent in lieu
of a meeting of the holders of the majority of the shares of the Series B
Preferred Stock then outstanding.
(iv) Whenever holders of the Series B Preferred Stock are
required or permitted to take any action by vote, such action may be taken
without a meeting by written consent, setting forth the action so taken and
signed by the holders of all shares of Series B Preferred Stock, except as
otherwise expressly provided herein.
14.
<PAGE>
c. Rights of Liquidation.
---------------------
(i) In the event of any Liquidation, before any
distribution of assets of the Corporation shall be made to or set apart for the
holders of the Subordinate Stock and pari passu with any distribution of assets
of the Corporation which shall be made to or set apart for the Series C
Preferred Stock, the holders of the Series B Preferred Stock shall be entitled
to receive payment out of such assets of the Corporation, prior to any payment
in respect of the Series A Preferred Stock and Common Stock, in an amount per
share equal to the Series B Stated Value per share (at the amount of such Series
B Stated Value at the time of such Liquidation) for each share of Series B
Preferred Stock held, plus any declared but unpaid dividends on such shares of
Series B Preferred Stock (the "Series B Liquidation Preference"). If the assets
of the Corporation available for distribution to the holders of the Series B
Preferred Stock and the holders of the Series C Preferred Stock shall not be
sufficient to make in full the payments required by this Section 3(c)(i) and
Section 4(c)(i) of this Article, such assets shall be distributed ratably among
the holders of the Series B Preferred Stock and the holders of the Series C
Preferred Stock based upon the aggregate Series B Liquidation Preferences of the
shares of Series B Preferred Stock and the aggregate Series C Liquidation
Preferences (as defined below) of the shares of Series C Preferred Stock, as
applicable, held by each such holder.
(ii) If the assets of the Corporation available for
distribution to shareholders exceed the aggregate amounts payable pursuant to
Sections 3(c)(i) and 4(c)(i) of this Article, the remainder of such assets shall
be distributed to the holders of Series A Preferred Stock and Common Stock in
accordance with Section 2(c)(i) and 2(c)(ii) of this Article.
(iii) A liquidation, dissolution or winding up of the
Corporation or merger or consolidation involving the Corporation or a sale,
lease or transfer of all or substantially all of the assets of the Corporation
or one transaction or series of related transactions in which more than 50% of
the voting power of the Corporation is transferred to new shareholders of the
Corporation or other change of control has been effected (other than a
Qualifying Public Offering) shall, at the option of holders representing a
majority of the Series B Preferred Stock and the Series C Preferred Stock voting
together as a single class immediately prior to such transaction, be deemed a
Liquidation, unless in connection with such transaction, the holders of Series B
Preferred Stock and Series C Preferred Stock receive a preferred stock having
designations, preferences, terms and conditions that are no less favorable than
the designations, preferences, terms and conditions of the Series B Preferred
Stock and the Series C Preferred Stock.
(iv) Provided the Series B Preferred Stock has not
received its full liquidation preference, notwithstanding the provisions
contained in Section 3(c)(iii) of this Article, in the event of a merger or
consolidation involving the Corporation, or a sale, lease or transfer of all or
substantially all of the assets of the Corporation, in which a holder of Series
B Preferred Stock would receive cash and/or marketable securities (i.e.,
securities registered under the Securities Act of 1933, as amended, at the time
of delivery, or securities committed to be so registered with 60 days after
delivery) in an amount less than the aggregate Series B Liquidation Preference
of the shares of Series B Preferred Stock held by such holder, together with all
declared, accrued and unpaid dividends with respect to such shares of Series B
Preferred Stock, then such holder may elect, in lieu of all other rights under
the terms of the transaction or this
15.
<PAGE>
Article, to receive an amount equal to such aggregate Series B Liquidation
Preference for such shares of Series B Preferred Stock, together with all such
declared, accrued and unpaid dividends on such shares of Series B Preferred
Stock prior and in preference to Series A Preferred Stock and Common Stock
payments and pari passu with the Series C Preferred Stock. If the holder makes
such an election, such holder shall have a priority on all cash and marketable
securities received in such transaction to the extent of the aggregate Series B
Liquidation Preference for such holder's shares of Series B Preferred Stock and
the aggregate declared and unpaid dividends with respect thereto prior and in
preference to Series A Preferred Stock payments, but shall be pari passu with
the Series C Preferred Stock with respect to the right to receive such cash and
securities. Such election shall be made by the holder by written notice to the
Corporation within 30 days after the date of shareholder approval of the
transaction (or within 30 days after receiving notice of such transaction from
the Corporation if the transaction is not submitted for shareholder approval).
(v) Any securities or other non-cash consideration to be
delivered to the holders of the Series B Preferred Stock upon any Liquidation in
accordance with the terms hereof shall be valued as follows:
(a) If traded on a nationally recognized securities
exchange or inter-dealer quotation system, the value shall be deemed to be the
average of the closing prices of the securities on such exchange or system over
the 30-day period ending three (3) business days prior to the closing;
(b) If traded over-the-counter, the value shall be
deemed to be the average of the closing bid prices over the 30-day period ending
three (3) business days prior to the closing; and
(c) If there is no active public market, the value
shall be the fair market value thereof, as determined in good faith by the Board
of Directors of the corporation, which shall include the director designee of
the Series B Preferred Stock.
d. Actions Requiring the Consent of the Holders of the Series B
------------------------------------------------------------
Preferred Stock. As long as any shares of Series B Preferred Stock remain
- ---------------
outstanding, the consent of the holders of at least a majority of the shares of
the Series B Preferred Stock at the time outstanding, given in person or by
proxy, either in writing without a meeting or by vote at a meeting called for
such purpose, shall be necessary for effecting or validating any of the
following transactions:
(i) Any amendment, alteration or repeal of any of the
provisions of the Article of Incorporation or the Bylaws of the Corporation
which (i) increases the number of authorized shares of any class of capital
stock, (ii) decreases the authorized number of shares of Series B Preferred
Stock, (iii) adversely affects the designations, rights, preferences or powers
of the Series B Preferred Stock or of the holders thereof, or (iv) decreases the
required time for the giving of any notice to which the holders of the Series B
Preferred Stock may be entitled;
16.
<PAGE>
(ii) The creation, authorization or issuance of any
additional shares of any class or series of capital stock, any rights to acquire
any shares of any class or series of capital stock or any other security;
(iii) The sale, lease or other disposition of (whether in
one transaction or a series of related transactions) all or substantially all of
the assets of the Corporation;
(iv) The merger with or into or consolidation of the
Corporation with another entity;
(v) The voluntary dissolution, liquidation or winding-up
of the Corporation's operations;
(vi) The declaration or making of dividend payments or
any distributions of cash, property or securities of the Corporation on any
shares of its Common Stock or any other class of its capital stock.
(vii) The creation, reclassification or obligation of the
Corporation to create or reclassify any class or series of shares having
preference over or being on a parity with the Series B Preferred Stock;
(viii) The entering into of any agreement or arrangement or
the taking of any other action that eliminates, amends, restricts or otherwise
adversely affects the rights of the holders of the Series B Preferred Stock or
the Corporation's ability to perform its obligations hereunder;
(ix) The increase in the size of the Board of Directors
to more than seven (7) members; or
(x) The amendment to Section 3 of this Article or any
other amendment to this Certificate of Incorporation or any amendment to the
Bylaws of the Corporation that eliminates, amends or restricts the rights and
preferences of or otherwise adversely affects the holders of the Series B
Preferred Stock.
Further, the Corporation shall not, by amendment of this Certificate
of Incorporation or through any extraordinary transaction or other
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation and each subsidiary of the Corporation but shall at
all times in good faith assist in the carrying out of all the provisions of
Section 3 of this Article and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the holders of the
Series B Preferred Stock set forth in this Certificate of Incorporation against
impairment. Any successor to the Corporation or any subsidiary of the
Corporation shall agree, as a condition to such succession, to carry out and
observe the obligations of the Corporation hereunder with respect to the Series
B Preferred Stock.
17.
<PAGE>
e. Conversion.
----------
(i) Right To Convert. A holder of record of any share or
----------------
shares of Series B Preferred Stock shall have the right at any time, at such
holder's option, to convert, without the payment of any additional
consideration, each share of Series B Preferred Stock held by such holder into
that number of fully paid and nonassessable shares of Common Stock as is
determined by dividing (i) the then applicable Series B Stated Value by (ii) the
Series B Conversion Factor (as defined in Section 3(e)(iv) of this Article) then
in effect for the Series B Preferred Stock. No fractional shares or scrip
representing fractional shares shall be issued upon the conversion of any Series
B Preferred Stock. With respect to any fraction of a share of Common Stock
called for upon any conversion after completion of the calculation of the
aggregate number of shares of Common Stock to be issued to such holder, the
Corporation shall pay to such holder an amount in cash equal to any fractional
share to which such holder would be entitled, multiplied by the current market
value of a share, as unanimously determined in good faith by the Board of
Directors of the Corporation.
(ii) Mechanics of Conversion. If the holder of shares of
-----------------------
Series B Preferred Stock desires to exercise such right of conversion, such
holder must give the Corporation a Conversion Notice of the election by such
holder to convert a stated number of shares of Series B Preferred Stock (the
"Series B Conversion Shares") into shares of Common Stock on the Conversion
Date, and by surrender of the certificate or certificates representing such
Series B Conversion Shares. The Conversion Notice shall also contain a statement
of the name or names (with addresses) in which the certificate or certificates
for Common Stock shall be issued. Promptly after the Conversion Date, receipt of
the Conversion Notice and the surrender of the Series B Conversion Shares, the
Corporation shall issue and deliver, or cause to be delivered, to the holder of
the Series B Conversion Shares or such holder's nominee or nominees, a
certificate or certificates for the number of shares of Common Stock issuable
upon the conversion of such Series B Conversion Shares. Such conversion shall be
deemed to have been effected as of the close of business on the Conversion Date,
and the person or persons entitled to receive the shares of Common Stock
issuable upon conversion shall be treated for all purposes as the holder or
holders of record of such shares of Common Stock as of the close of business on
such date.
(iii) Common Stock Reserved. The Corporation shall at all
---------------------
times reserve and keep available out of its authorized but unissued Common
Stock, solely for issuance upon the conversion of shares of Series B Preferred
Stock as herein provided, such number of shares of Common Stock as shall from
time to time be issuable upon the conversion of all of the shares of Series B
Preferred Stock at the time outstanding.
(iv) Conversion Factor. The initial conversion factor for
-----------------
the Series B Preferred Stock shall be $0.83, subject to adjustment in accordance
with the provisions in 3(e)(iv) of this Article. Such respective conversion
factor in effect from time to time, as adjusted upon changes in the Series B
Stated Value and pursuant to this Section 3(e)(iv), is referred to herein as the
"Series B Conversion Factor." All of the remaining provisions of this Section
3(e)(iv) shall apply separately to the respective Series B Conversion Factors in
effect from time to time.
18.
<PAGE>
(a) In the event that the Corporation shall, at any
time or from time to time after the issuance of any shares of Series B Preferred
Stock, issue or sell any shares of the capital stock of the Corporation or in
any manner grant (whether directly or otherwise) any rights to subscribe for or
to purchase any capital stock, any securities exchangeable for or convertible
into any capital stock or any options for the purchase of any capital stock,
whether or not such rights, convertible securities or options are immediately
exercisable, including treasury shares but excluding (i) any Excluded
Transaction or the shares of Common Stock issuable upon the conversion of shares
of Series A Preferred Stock, Series B Preferred Stock, the Series C Preferred
Stock or the Convertible Promissory Notes for a consideration per share or
payable in the aggregate upon both the issuance and exercise of any such rights
or options, on a per share basis, less than the amount of the Series B
Conversion Factor in effect immediately prior to the time of such issuance or
sale, expressed in U.S. Dollars, then, immediately upon such issuance or sale,
the Series B Conversion Factor shall be reduced as follows:
(1) The Series B Conversion Factor shall be
reduced to a number determined by multiplying the Series B Conversion Factor in
effect immediately prior to such issuance by the following fraction:
A + B
-------
C
-------
A + D
wherein:
A = the number of Outstanding Shares immediately prior to the subject
issuance;
B = the aggregate consideration for the shares then being issued;
C = the Series B Conversion Factor in effect immediately prior to the
subject issuance; and
D = the number of shares then being issued.
"Outstanding Shares" shall mean the number of shares of Common Stock of all
classes outstanding immediately prior to the issuance of such additional shares
of Common Stock (excluding treasury shares but including all shares of Common
Stock, Series C Preferred Stock, Series B Preferred Stock or Series A Preferred
Stock issuable upon conversion or exercise of any outstanding Preferred Stock,
options, warrants, rights or convertible securities). The Series B Conversion
Factor shall be further reduced from time to time thereafter whenever any shares
are so issued or converted for a price per share lower than the amount of the
then Series B Conversion Factor, as adjusted prior to that date.
(2) In the event that any shares shall be issued
or sold for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor, without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid or allowed
by the Corporation in connection therewith. In the event that any shares shall
be issued for a consideration other than cash, the amount of the consideration
other than cash received by the Corporation shall be deemed to be
19.
<PAGE>
the fair value of such consideration, without deduction of any expenses incurred
or any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. Whenever shares are issued upon the
exercise of warrants, options or other conversion rights, the consideration
received therefor shall include both the consideration paid upon the issuance
and upon the exercise of such warrant, option or other right. If the
consideration per share provided for in any options or rights to subscribe for
shares of Common Stock or any securities exchangeable for or convertible into
shares of Common Stock, changes at any time, the Series B Conversion Factor in
effect at the time of such change shall be readjusted to the Series B Conversion
Factor which would have been in effect at such time had such options or
convertible securities provided for such changed consideration per share
(determined as provided in Section 3(e)(iv)(a)(1) hereof), at the time initially
--------
granted, issued or sold; provided, that such adjustment of the Series B
Conversion Factor will be made only as and to the extent that the Series B
Conversion Factor effective upon such adjustment remains less than or equal to
the Series B Conversion Factor that would be in effect if such options, rights
or securities had not been issued.
(b) Each adjustment in a Series B Conversion Factor
shall be calculated to the nearest .0001.
(c) In the event that the Corporation shall, at any
time after the issuance of any shares of Series B Preferred Stock, issue any
shares of Common Stock (A) by stock dividend or any other distribution upon any
stock of the Corporation payable in shares of Subordinate Stock or in shares of
Series B Preferred Stock, or (B) by subdivision of its shares of outstanding
Common Stock, by reclassification or otherwise, the Series B Conversion Factor
then in effect shall be reduced proportionately, and, in like manner, in the
event of any combination of shares of Common Stock, by reclassification or
otherwise, the Series B Conversion Factor then in effect shall be
proportionately increased.
(d) In addition to and not in limitation of the foregoing,
if any capital reorganization or reclassification of the Common Stock of the
Corporation, or consolidation or merger of the Corporation with or into another
corporation, or the sale or conveyance of all or substantially all of its assets
to another corporation shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holders of the Series B Preferred
Stock shall thereafter have the right to receive, in lieu of the shares of
Common Stock of the Corporation immediately theretofore receivable with respect
to such shares of Series B Preferred Stock upon the exercise of their conversion
rights, such shares of stock, securities or assets as would have been issued or
payable with respect to or in exchange for the number of outstanding shares of
such Common Stock immediately theretofore receivable with respect to such shares
of Series B Preferred Stock upon the exercise of such rights had such
reorganization, reclassification, consolidation, merger or sale not taken place.
In any such case, appropriate provision shall be made with respect to the rights
and interests of the holders of the Series B Preferred Stock to the end that
such conversion rights (including, without limitation, provisions for adjustment
of the Series B Conversion Factor) shall thereafter be applicable, as nearly as
may be practicable in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise thereof. The Corporation shall not
effect any such consolidation, merger or sale, unless it provides the holders of
the Series B Preferred Stock at least 30 days advance notice thereof, and
20.
<PAGE>
prior to or simultaneously with the consummation thereof the successor
corporation (if other than the Corporation) resulting from such consolidation or
merger or the corporation purchasing such assets, shall assume by written
instrument, executed and mailed or delivered to the holders of the Series B
Preferred Stock, the obligation to deliver to such holders the shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holders may be entitled to receive upon conversion of the shares of Series B
Preferred Stock held by such holder.
(e) If any event occurs as to which the other
provisions of this Section 3(e)(iv) are not strictly applicable, or if strictly
applicable would not fairly protect the conversion rights of the issued Series B
Preferred Stock in accordance with the intent and principles of such provisions,
then the Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such intent and principles, so as to protect such
conversion rights as aforesaid, but in no event shall any such adjustment have
the effect of increasing the Series B Conversion Factor as otherwise determined
pursuant to this Section 3(e)(iv).
(v) Stock Transfer Taxes. The issuance of stock
--------------------
certificates upon the conversion of the Series B Preferred Stock shall be made
without charge to the converting holder for any tax in respect of such issuance.
The Corporation shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
shares in any name other than that of the holder of such shares of Series B
Preferred Stock converted, and the Corporation shall not be required to issue or
deliver any such stock certificate unless and until the person or persons
requesting the issuance thereof shall have paid to the Corporation the amount of
such tax or shall have established to the satisfaction of the Corporation that
such tax has been paid.
(vi) Certificate as to Adjustments. Upon the occurrence of
-----------------------------
each adjustment or readjustment of the Series B Conversion Factor, the
Corporation, at its expense, promptly shall compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series B Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series B Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series B Conversion Factor at the time in effect for the
Series B Preferred Stock, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of such Series B Preferred Stock owned by such holder.
(vii) Notices of Record Date. In the event of any fixing by
----------------------
the Corporation of a record date for the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any shares of
Common Stock or other securities, or any right to subscribe for, purchase or
otherwise acquire, or any option for the purchase of, any shares of stock of any
class or any other securities or property, or to receive any other right, the
Corporation shall mail to each holder of Series B Preferred Stock at least 30
days prior to the date specified therein, a notice specifying the date on which
any such record is to be taken for the
21.
<PAGE>
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right.
(viii) Notices. Any notice required by the provisions of this
-------
Section 3(e) to be given to the holders of shares of Series B Preferred Stock
shall be deemed given if deposited in the United States mail, first class
postage prepaid, and addressed to each holder of record at his address appearing
on the books of the Corporation.
f. Redemption.
----------
(i) Redemption at Option of Holder. At any time after May 4,
------------------------------
2003, each holder of shares of Series B Preferred Stock (hereinafter
collectively referred to as the "Series B Redeemable Stock") may, at the option
of such holder, require the Corporation to redeem all or any portion of the
shares of Series B Redeemable Stock held by such holder in accordance with the
provisions contained in this Section 3(f). In no event shall the Corporation be
required to redeem shares in excess of the amount permitted by law; provided,
--------
however, that such inability to redeem shall not have any impact or effect upon
- -------
the per-share Series B Redemption Price (as hereinafter defined). All
redemptions shall be made in the order of the month in which any shares of the
Corporation's capital stock entitled to redemption are received, and, if less
than all of the shares submitted for redemption in a particular month are
capable of being redeemed, then all such shares shall be redeemed on a pro rata
basis, based on the aggregate redemption prices for the shares that each
shareholder submitted for redemption.
(ii) Redemption Price. The price at which each share of Series
----------------
B Preferred Stock shall be redeemed (the "Series B Redemption Price") shall be
equal to the sum of all declared and accrued but unpaid dividends respecting
such share, plus the highest of: (i) one hundred and ten percent (110%) of the
Series B Stated Value at the time of such redemption; (ii) an amount equal to:
(A) twenty times the average of the Corporation's after tax earnings for two
consecutive prior full fiscal years, calculated in accordance with generally
accepted accounting principles consistently applied, divided by (B) the sum of
the number of then outstanding issued and outstanding shares of Common Stock
plus the number of issued and outstanding shares of Series B Preferred Stock; or
(iii) the Corporation's book value per share as of the Series B Redemption Date
(as defined below), calculated in accordance with generally accepted accounting
principles consistently applied.
(iii) Exercise of Option to Redeem. If a holder of Series B
----------------------------
Redeemable Stock desires to exercise such holder's option to redeem some or all
of such holder's shares of Series B Redeemable Stock pursuant to this Section
3(f), such holder must give written notice to the Corporation, each other holder
of Series B Redeemable Stock and each holder of Series C Redeemable Stock (as
defined below) specifying the number of shares to be redeemed. Redemptions shall
be made on a date 15 calendar days after the end of the month in which the
Corporation receives such initial notice (or the first business day thereafter),
unless prior to such time the Corporation receives any additional written
redemption notices from holders of Series B Redeemable Stock or Series C
Redeemable Stock, in which case Redemptions shall be made on a date 30 calendar
days after the end of the month in which the Corporation receives such initial
notice (or the first business day thereafter). Each such date of redemption
shall be a "Series B Redemption Date." To receive the Series B Redemption Price,
22.
<PAGE>
the holder of shares of Series B Redeemable Stock must present and surrender the
certificate or certificates representing such shares (duly endorsed for
transfer) to the Corporation at the principal executive offices of the
Corporation no later than three business days prior to the Series B Redemption
Date. The Corporation shall pay the Series B Redemption Price to, or to the
order of, the person whose name appears on such certificate or certificates as
the owner thereof. If the number of shares represented by the certificate or
certificates surrendered shall exceed the number of shares to be redeemed, the
Corporation shall issue and deliver on the Series B Redemption Date to the
person entitled thereto a certificate or certificates representing the
unredeemed balance of such shares.
(iv) Effect of Redemption. From and after the Series B
--------------------
Redemption Date, unless the Corporation shall default in providing for the
payment of the Series B Redemption Price, all dividends (if any) on such shares
requested to be redeemed pursuant to this Section 3(f) shall cease to accrue,
and all rights of the holders of any shares subject to redemption as
shareholders of the Corporation, except the right to receive the Series B
Redemption Price, shall cease and terminate. Any shares of Series B Redeemable
Stock that are redeemed by the Corporation shall be retired and shall not be
reissued (it being understood that if notes have been issued to evidence such
redemption obligations, redemption does not occur until such notes and any
interest thereon have been paid in full).
(v) Failure to Redeem. If the Corporation shall for any reason
-----------------
fail to redeem any shares of Series B Redeemable Stock as required by this
Section 3(f), and such failure shall continue for a period of 30 days, then
notwithstanding anything to the contrary contained in the Certificate of
Incorporation, with respect to all shares of Series B Redeemable Stock then
outstanding: (i) the conversion rights set forth in Section 3(e) of this Article
hereof shall continue beyond any date for redemption specified in said Section,
and said rights may be exercised at any time; (ii) the Corporation may not incur
any indebtedness for money borrowed or borrow or reborrow any amounts under any
lines of credit which it may then have outstanding without the prior written
consent of the holders of at least 67% of the then outstanding shares of Series
B Redeemable Stock, unless the proceeds of such incurrence of such indebtedness
or borrowing or reborrowing are to be used to make all redemptions then required
to be made; and (iii) dividends shall continue to accrue and be paid in
accordance with Section 3(a) of this Article, and, to the extent not paid, shall
be added to the Series B Redemption Price. Nothing herein shall limit the
Corporation's obligations to redeem as set forth above, or limit the remedies
available to the holders of Series B Redeemable Stock in the event of a failure
of the Corporation to honor such obligations.
4. Series C Preferred Stock.
------------------------
a. Dividends.
---------
(i) So long as any shares of Series C Preferred Stock shall be
outstanding, the Corporation shall not declare or pay any dividends (other than
dividends payable solely in shares of Common Stock or cash in lieu of fractional
shares) on the Subordinate Stock, make, directly or indirectly, any other
distribution in respect to the Subordinate Stock, unless, on the date of such
distribution or other payment, all payments then due and payable pursuant to
23.
<PAGE>
this Certificate of Incorporation shall have been paid in full or set apart for
payment in full.
(ii) From and after the date on which any shares of Series C
Preferred Stock are issued, the holders of Series C Preferred Stock shall be
entitled to receive, in preference to the holders of the Subordinate Stock and
pari passu with the holders of the Series B Preferred Stock, dividends at the
annual rate of 8% of the stated value per share of Series C Preferred Stock,
which shall initially be $1.43, and which shall be adjusted for stock splits,
stock dividends, recapitalizations, reclassifications, and similar events that
affect the number of outstanding shares of Series C Preferred Stock (the "Series
C Stated Value"). Such dividends shall be paid as declared in cash on the last
business day of each year (such business day being hereinafter referred to as
the "Series C Dividend Date"), to holders of shares of Series C Preferred Stock
as they appear on the stock register of the Corporation on the Record Date fixed
by the Board of Directors, which Record Date shall not be more than 60 days
prior to the Series C Dividend Date and shall not precede the date on which the
resolution fixing such Record Date is adopted. The foregoing dividends shall
become due and payable when, as and if declared by the Board of Directors of the
Corporation and shall be paid to the holders of the Series C Preferred Stock to
the extent permitted by law. The dividends payable to the holders of the Series
C Preferred Stock as aforesaid shall accrue on each Series C Dividend Date to
the extent payable on such date as hereinabove provided and shall be cumulative.
(iii) So long as any shares of Series C Preferred Stock shall be
outstanding, the Corporation shall not declare or pay any dividends (other than
dividends payable solely in shares of Common Stock or cash in lieu of fractional
shares) on any Subordinate Stock or make directly or indirectly, any other
distribution in respect of the Subordinate Stock or payment on account of the
redemption, purchase or other acquisition of such stock, unless, at the date of
such distribution or other payments: (i) all declared dividends on the then
outstanding shares of Series B Preferred Stock for the then current Series B
Dividend Date shall have been paid in full and declared and set apart for
payment in full, (ii) all redemptions then due and payable pursuant to Section
3(f) of this Article shall have been paid in full or set apart for payment in
full, (iii) all declared dividends on the then outstanding shares of Series C
Preferred stock for the then current Series C Dividend Date (as defined below)
shall have been paid in full and declared and set apart for payment in full, and
(iv) all redemptions then due and payable pursuant to Section 4(f) of this
Article shall have been paid in full or set apart for payment in full.
b. Voting Rights.
-------------
(i) Except as otherwise provided herein or by law, the holders
of Series C Preferred Stock shall have full voting rights and powers, shall be
entitled to vote on all matters as to which holders of the Common Stock shall be
entitled to vote, shall vote together with the holders of the Common Stock as a
single class and shall be entitled to one vote for each share of Common Stock
which would be held by them if all of their shares of Series C Preferred Stock
would be converted into shares of Common Stock under Section 4(e) of this
Article.
(ii) Whenever holders of the Series C Preferred Stock are
required or permitted to take any action by vote, such action may be taken
without a meeting by
24.
<PAGE>
written consent, setting forth the action so taken and signed by the holders of
all shares of Series C Preferred Stock, except as otherwise expressly provided
herein.
c. Rights of Liquidation.
---------------------
(i) In the event of any Liquidation, before any distribution
of assets of the Corporation shall be made to or set apart for the holders of
the Subordinate Stock and pari passu with any distribution of assets of the
Corporation which shall be made to or set apart for the Series B Preferred
Stock, the holders of the Series C Preferred Stock shall be entitled to receive
payment out of such assets of the Corporation, prior to any payment in respect
of the Series A Preferred Stock and Common Stock in an amount per share equal to
the Series C Stated Value per share (at the amount of such Series C Stated Value
at the time of such Liquidation) for each share of Series C Preferred Stock
held, plus any declared but unpaid dividends on such shares of Series B
Preferred Stock (the "Series C Liquidation Preference"). If the assets of the
Corporation available for distribution to the holders of the Series B Preferred
Stock and the holders of the Series C Preferred Stock shall not be sufficient to
make in full the payments required by this Section 4(c)(i) and Section 3(c)(i)
of this Article, such assets shall be distributed ratably among the holders of
the Series B Preferred Stock and the holders of the Series C Preferred Stock
based upon the aggregate Series B Liquidation Preferences of the shares of
Series B Preferred Stock and the aggregate Series C Liquidation Preferences (as
defined below) of the shares of Series C Preferred Stock, as applicable, held by
each such holder.
(ii) If the assets of the Corporation available for
distribution to shareholders exceed the aggregate amounts payable pursuant to
Sections 3(c)(i) and 4(c)(i) of this Article, the remainder of such assets shall
be distributed to the holders of Series A Preferred Stock and Common Stock in
accordance with Section 2(c)(i) and 2(c)(ii) of this Article.
(iii) A liquidation, dissolution or winding up of the
Corporation or merger or consolidation involving the Corporation or a sale,
lease or transfer of all or substantially all of the assets of the Corporation
or one transaction or series of related transactions in which more than 50% of
the voting power of the Corporation is transferred to new shareholders of the
Corporation or other change of control has been effected (other than a
Qualifying Public Offering) shall, at the option of holders representing a
majority of the Series B Preferred Stock and the Series C Preferred Stock voting
together as a single class immediately prior to such transaction, be deemed a
Liquidation, unless in connection with such transaction, the holders of Series B
Preferred Stock and Series C Preferred Stock receive a preferred stock having
designations, preferences, terms and conditions that are no less favorable than
the designations, preferences, terms and conditions of the Series B Preferred
Stock and the Series C Preferred Stock.
(iv) Provided the Series C Preferred Stock has not received its
full liquidation preference, notwithstanding the provisions contained in Section
4(c)(iii) of this Article, in the event of a merger or consolidation involving
the Corporation, or a sale, lease or transfer of all or substantially all of the
assets of the Corporation, in which a holder of Series C Preferred Stock would
receive cash and/or marketable securities (i.e., securities registered under the
Securities Act of 1933, as amended, at the time of delivery, or securities
committed to be so registered with 60 days after delivery) in an amount less
than the aggregate Series C Liquidation
25.
<PAGE>
Preference of the shares of Series C Preferred Stock held by such holder,
together with all declared and unpaid dividends with respect to such shares of
Series C Preferred Stock, then such holder may elect, in lieu of all other
rights under the terms of the transaction or this Certificate, to receive an
amount equal to such aggregate Series C Liquidation Preference for such shares
of Series C Preferred Stock, together with all such declared and unpaid
dividends on such shares of Series C Preferred Stock prior and in preference to
Series A Preferred Stock and Common Stock payments and pari passu with the
Series B Preferred Stock. If the holder makes such an election, such holder
shall have a priority on all cash and marketable securities received in such
transaction to the extent of the aggregate Series C Liquidation Preference for
such holder's shares of Series C Preferred Stock and the aggregate declared and
unpaid dividends with respect thereto prior and in preference to Series A
Preferred Stock and Common Stock payments, but pari passu with the Series B
Preferred Stock with respect to the right to receive such cash and securities.
Such election shall be made by the holder by written notice to the Corporation
within 30 days after the date of shareholder approval of the transaction (or
within 30 days after receiving notice of such transaction from the Corporation
if the transaction is not submitted for shareholder approval).
(v) Any securities or other non-cash consideration to be
delivered to the holders of the Series C Preferred Stock upon any Liquidation in
accordance with the terms hereof shall be valued as follows:
(a) If traded on a nationally recognized securities exchange
or inter-dealer quotation system, the value shall be deemed to be the average of
the closing prices of the securities on such exchange or system over the 30-day
period ending three (3) business days prior to the closing;
(b) If traded over-the-counter, the value shall be deemed to
be the average of the closing bid prices over the 30-day period ending three (3)
business days prior to the closing; and
(c) If there is no active public market, the value shall be
the fair market value thereof, as determined in good faith by the Board of
Directors of the corporation.
d. Actions Requiring the Consent of the Holders of the Series C
------------------------------------------------------------
Preferred Stock.
- ---------------
(i) As long as any shares of Series C Preferred Stock remain
outstanding, the consent of the holders of at least a majority of the shares of
the Series C Preferred Stock and the Series B Preferred Stock voting together as
a single class at the time outstanding, given in person or by proxy, either in
writing without a meeting or by vote at a meeting called for such purpose, shall
be necessary for effecting or validating any of the following transactions:
(a) Any amendment, alteration or repeal of any of the
provisions of the Certificate of Incorporation or the Bylaws of the Corporation
which increases the number of authorized shares of any class of capital stock;
26.
<PAGE>
(b) The creation, authorization or issuance of any
additional shares of any class or series of capital stock, any rights to acquire
any shares of any class or series of capital stock or any other security;
(c) The sale, lease or other disposition of (whether in one
transaction or a series of related transactions) all or substantially all of the
assets of the Corporation;
(d) The merger with or into or consolidation of the
Corporation with another entity;
(e) The voluntary dissolution, liquidation or winding-up of
the Corporation's operations; or
(f) The increase in the size of the Board of Directors to
more than seven (7) members.
(ii) As long as any shares of Series C Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds (66.6%) of the
shares of the Series C Preferred Stock at the time outstanding, given in person
or by proxy, either in writing without a meeting or by vote at a meeting called
for such purpose, shall be necessary for effecting or validating any of the
following transactions:
(a) Any amendment, alteration or repeal of any of the
provisions of the Certificate of Incorporation or the Bylaws of the Corporation
which (i) decreases the authorized number of shares of Series C Preferred Stock,
(ii) adversely affects the designations, rights, preferences or powers of the
Series C Preferred Stock or of the holders thereof, or (iii) decreases the
required time for the giving of any notice to which the holders of the Series C
Preferred Stock may be entitled;
(b) The declaration or making of dividend payments or any
distributions of cash, property or securities of the Corporation on any shares
of its Common Stock or any other class of its capital stock.
(c) The creation, reclassification or obligation of the
Corporation to create or reclassify any class or series of shares having
preference over or being on a parity with the Series C Preferred Stock;
(d) The entering into of any agreement or arrangement or the
taking of any other action that eliminates, amends, restricts or otherwise
adversely affects the rights of the holders of the Series C Preferred Stock; or
(e) Any amendment to its Certificate of Incorporation or any
amendment to its Bylaws that eliminates, amends or restricts the rights and
preferences of or otherwise adversely affects the holders of the Series C
Preferred Stock.
(iii) Further, the Corporation shall not, by amendment of this
Certificate of Incorporation or through any extraordinary transaction or other
reorganization,
27.
<PAGE>
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation and each subsidiary of the Corporation but shall at all times in
good faith assist in the carrying out of all the provisions of this Section 4
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the holders of the Series C Preferred Stock set forth
in this Certificate of Incorporation against impairment. Any successor to the
Corporation or any subsidiary of the Corporation shall agree, as a condition to
such succession, to carry out and observe the obligations of the Corporation
hereunder with respect to the Series C Preferred Stock.
e. Conversion.
----------
(i) Right To Convert. A holder of record of any share or
----------------
shares of Series C Preferred Stock shall have the right at any time, at such
holder's option, to convert, without the payment of any additional
consideration, each share of Series C Preferred Stock held by such holder into
that number of fully paid and nonassessable shares of Common Stock as is
determined by dividing (i) the then applicable Series C Stated Value by (ii) the
Series C Conversion Factor (as defined in Section 4(e)(iv) of this Article) then
in effect for the Series C Preferred Stock. No fractional shares or scrip
representing fractional shares shall be issued upon the conversion of any Series
C Preferred Stock. With respect to any fraction of a share of Common Stock
called for upon any conversion after completion of the calculation of the
aggregate number of shares of Common Stock to be issued to such holder, the
Corporation shall pay to such holder an amount in cash equal to any fractional
share to which such holder would be entitled, multiplied by the current market
value of a share, as unanimously determined in good faith by the Board of
Directors of the Corporation.
(ii) Mechanics of Conversion. If the holder of shares of Series
-----------------------
C Preferred Stock desires to exercise such right of conversion, such holder must
give the Corporation a Conversion Notice of the election by such holder to
convert a stated number of shares of Series C Preferred Stock (the "Series C
Conversion Shares") into shares of Common Stock on the Conversion Date, and by
surrender of the certificate or certificates representing such Series C
Conversion Shares. The Conversion Notice shall also contain a statement of the
name or names (with addresses) in which the certificate or certificates for
Common Stock shall be issued. Promptly after the Conversion Date, receipt of the
Conversion Notice and the surrender of the Series C Conversion Shares, the
Corporation shall issue and deliver, or cause to be delivered, to the holder of
the Series C Conversion Shares or such holder's nominee or nominees, a
certificate or certificates for the number of shares of Common Stock issuable
upon the conversion of such Series C Conversion Shares. Such conversion shall be
deemed to have been effected as of the close of business on the Conversion Date,
and the person or persons entitled to receive the shares of Common Stock
issuable upon conversion shall be treated for all purposes as the holder or
holders of record of such shares of Common Stock as of the close of business on
such date.
(iii) Common Stock Reserved. The Corporation shall at all times
---------------------
reserve and keep available out of its authorized but unissued Common Stock,
solely for issuance upon the conversion of shares of Series C Preferred Stock as
herein provided, such number of
28.
<PAGE>
shares of Common Stock as shall from time to time be issuable upon the
conversion of all of the shares of Series C Preferred Stock at the time
outstanding.
(iv) Conversion Factor. The initial conversion factor for the
-----------------
Series C Preferred Stock shall be $1.43, subject to adjustment in accordance
with the provisions in this Section 4(e)(iv). Such respective conversion factor
in effect from time to time, as adjusted upon changes in the Series C Stated
Value and pursuant to this Section 4(e)(iv), is referred to herein as the
"Series C Conversion Factor." All of the remaining provisions of this Section
4(e)(iv) shall apply separately to the respective Series C Conversion Factors in
effect from time to time.
(a) In the event that the Corporation shall, at any time or from
time to time after the issuance of any shares of Series C Preferred Stock, issue
or sell any shares of the capital stock of the Corporation or in any manner
grant (whether directly or otherwise) any rights to subscribe for or to purchase
any capital stock, any securities exchangeable for or convertible into any
capital stock or any options for the purchase of any capital stock, whether or
not such rights, convertible securities or options are immediately exercisable,
including treasury shares but excluding (i) any Excluded Transaction or the
shares of Common Stock issuable upon the conversion of shares of Series A
Preferred Stock, Series C Preferred Stock, the Series C Preferred Stock or the
Convertible Promissory Notes for a consideration per share or payable in the
aggregate upon both the issuance and exercise of any such rights or options, on
a per share basis, less than the amount of the Series C Conversion Factor in
effect immediately prior to the time of such issuance or sale, expressed in U.S.
Dollars, then, immediately upon such issuance or sale, the Series C Conversion
Factor shall be reduced as follows:
(1) The Series C Conversion Factor shall be reduced to a
number determined by multiplying the Series C Conversion Factor in effect
immediately prior to such issuance by the following fraction:
A + B
-------
C
-------
A + D
wherein:
A = the number of Outstanding Shares (as defined in Section 3(e)(iv)(a)(1)
above) immediately prior to the subject issuance;
B = the aggregate consideration for the shares then being issued;
C = the Series C Conversion Factor in effect immediately prior to the
subject issuance; and
D = the number of shares then being issued.
The Series C Conversion Factor shall be further reduced from time to time
thereafter whenever any shares are so issued or converted for a price per share
lower than the amount of the then Series C Conversion Factor, as adjusted prior
to that date.
29.
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(2) In the event that any shares shall be issued or
sold for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor, without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid or allowed
by the Corporation in connection therewith. In the event that any shares shall
be issued for a consideration other than cash, the amount of the consideration
other than cash received by the Corporation shall be deemed to be the fair value
of such consideration, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation in
connection therewith. Whenever shares are issued upon the exercise of warrants,
options or other conversion rights, the consideration received therefor shall
include both the consideration paid upon the issuance and upon the exercise of
such warrant, option or other right. If the consideration per share provided for
in any options or rights to subscribe for shares of Common Stock or any
securities exchangeable for or convertible into shares of Common Stock, changes
at any time, the Series C Conversion Factor in effect at the time of such change
shall be readjusted to the Series C Conversion Factor which would have been in
effect at such time had such options or convertible securities provided for such
changed consideration per share (determined as provided in Section
4(e)(iv)(a)(1) hereof), at the time initially granted, issued or sold; provided,
--------
that such adjustment of the Series C Conversion Factor will be made only as and
to the extent that the Series C Conversion Factor effective upon such adjustment
remains less than or equal to the Series C Conversion Factor that would be in
effect if such options, rights or securities had not been issued.
(b) Each adjustment in a Series C Conversion Factor shall
be calculated to the nearest .0001.
(c) In the event that the Corporation shall, at any time
after the issuance of any shares of Series C Preferred Stock, issue any shares
of Common Stock (A) by stock dividend or any other distribution upon any stock
of the Corporation payable in shares of Subordinate Stock or in shares of Series
C Preferred Stock, or (B) by subdivision of its shares of outstanding Common
Stock, by reclassification or otherwise, the Series C Conversion Factor then in
effect shall be reduced proportionately, and, in like manner, in the event of
any combination of shares of Common Stock, by reclassification or otherwise, the
Series C Conversion Factor then in effect shall be proportionately increased.
(d) In addition to and not in limitation of the foregoing,
if any capital reorganization or reclassification of the Common Stock of the
Corporation, or consolidation or merger of the Corporation with or into another
corporation, or the sale or conveyance of all or substantially all of its assets
to another corporation shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holders of the Series C Preferred
Stock shall thereafter have the right to receive, in lieu of the shares of
Common Stock of the Corporation immediately theretofore receivable with respect
to such shares of Series C Preferred Stock upon the exercise of their conversion
rights, such shares of stock, securities or assets as would have been issued or
payable with respect to or in exchange for the number of outstanding shares of
such Common Stock immediately theretofore receivable with respect to such shares
of Series C Preferred Stock upon the exercise of such rights had such
reorganization, reclassification, consolidation, merger or sale not taken place.
In any such case, appropriate provision shall be
30.
<PAGE>
made with respect to the rights and interests of the holders of the Series C
Preferred Stock to the end that such conversion rights (including, without
limitation, provisions for adjustment of the Series C Conversion Factor) shall
thereafter be applicable, as nearly as may be practicable in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
thereof. The Corporation shall not effect any such consolidation, merger or
sale, unless it provides the holders of the Series C Preferred Stock at least 30
days advance notice thereof, and prior to or simultaneously with the
consummation thereof the successor corporation (if other than the Corporation)
resulting from such consolidation or merger or the corporation purchasing such
assets, shall assume by written instrument, executed and mailed or delivered to
the holders of the Series C Preferred Stock, the obligation to deliver to such
holders the shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holders may be entitled to receive upon conversion of
the shares of Series C Preferred Stock held by such holder.
(e) If any event occurs as to which the other provisions of
this Section 4(e)(iv) are not strictly applicable, or if strictly applicable
would not fairly protect the conversion rights of the issued Series C Preferred
Stock in accordance with the intent and principles of such provisions, then the
Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such intent and principles, so as to protect such
conversion rights as aforesaid, but in no event shall any such adjustment have
the effect of increasing the Series C Conversion Factor as otherwise determined
pursuant to this Section 4(e)(iv).
(v) Stock Transfer Taxes. The issuance of stock certificates upon
--------------------
the conversion of the Series C Preferred Stock shall be made without charge to
the converting holder for any tax in respect of such issuance. The Corporation
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of shares in any name
other than that of the holder of such shares of Series C Preferred Stock
converted, and the Corporation shall not be required to issue or deliver any
such stock certificate unless and until the person or persons requesting the
issuance thereof shall have paid to the Corporation the amount of such tax or
shall have established to the satisfaction of the Corporation that such tax has
been paid.
(vi) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Series C Conversion Factor, the Corporation,
at its expense, promptly shall compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of
Series C Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series C Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series C Conversion Factor at the time in effect for the
Series C Preferred Stock, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of such Series C Preferred Stock owned by such holder.
(vii) Notices of Record Date. In the event of any fixing by the
----------------------
Corporation of a record date for the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash
31.
<PAGE>
dividend) or other distribution, any shares of Common Stock or other securities,
or any right to subscribe for, purchase or otherwise acquire, or any option for
the purchase of, any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall mail to each
holder of Series C Preferred Stock at least 30 days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
(viii) Notices. Any notice required by the provisions of
-------
this Section 4(e) to be given to the holders of shares of Series C Preferred
Stock shall be deemed given if deposited in the United States mail, first class
postage prepaid, and addressed to each holder of record at his address appearing
on the books of the Corporation.
f. Redemption.
----------
(i) Redemption at Option of Holder. At any time after May
------------------------------
4, 2003, each holder of shares of Series C Preferred Stock (hereinafter
collectively referred to as the "Series C Redeemable Stock") may, at the option
of such holder, require the Corporation to redeem all or any portion of the
shares of Series C Redeemable Stock held by such holder in accordance with the
provisions contained in this Section 4(f). In no event shall the Corporation be
required to redeem shares in excess of the amount permitted by law; provided,
--------
however, that such inability to redeem shall not have any impact or effect upon
- -------
the per-share Series C Redemption Price (as hereinafter defined). All
redemptions shall be made in the order of the month in which any shares of the
Corporation's capital stock entitled to redemption received, and, if less than
all of the shares submitted for redemption in a particular month are capable of
being redeemed, then all such shares shall be redeemed on a pro rata basis,
based on the aggregate purchase price for the shares that each shareholder
submitted for redemption.
(ii) Redemption Price. The price at which each share of
----------------
Series C Preferred Stock shall be redeemed (the "Series C Redemption Price")
shall be equal to the sum of all declared but unpaid dividends respecting such
share, plus the highest of: (i) one hundred and ten percent (110%) of the Series
C Stated Value at the time of such redemption; (ii) an amount equal to: (A)
twenty times the average of the Corporation's after tax earnings for two
consecutive prior full fiscal years, calculated in accordance with generally
accepted accounting principles consistently applied, divided by (B) the sum of
the number of then outstanding issued and outstanding shares of Common Stock
plus the number of issued and outstanding shares of Series C Preferred Stock; or
(iii) the Corporation's book value per share as of the Series C Redemption Date
(as defined below), calculated in accordance with generally accepted accounting
principles consistently applied.
(iii) Exercise of Option to Redeem. If a holder of Series B
----------------------------
Redeemable Stock desires to exercise such holder's option to redeem some or all
of such holder's shares of Series B Redeemable Stock pursuant to this Section
3(f), such holder must give written notice to the Corporation, each other holder
of Series C Redeemable Stock and each holder of Series B Redeemable Stock (as
defined below) specifying the number of shares to be redeemed. Redemptions
shall be made on a date 15 calendar days after the end of the month in which the
Corporation receives such initial notice (or the first business day thereafter),
unless
32.
<PAGE>
prior to such time the Corporation receives any additional written redemption
notices from holders of Series B Redeemable Stock or Series C Redeemable Stock,
in which case Redemptions shall be made on a date 30 calendar days after the end
of the month in which the Corporation receives such initial notice (or the first
business day thereafter). Each such date of redemption shall be a "Series C
Redemption Date." To receive the Series C Redemption Price, the holder of shares
of Series C Redeemable Stock must present and surrender the certificate or
certificates representing such shares (duly endorsed for transfer) to the
Corporation at the principal executive offices of the Corporation no later than
three business days prior to the Series C Redemption Date. The Corporation shall
pay the Series C Redemption Price to, or to the order of, the person whose name
appears on such certificate or certificates as the owner thereof. If the number
of shares represented by the certificate or certificates surrendered shall
exceed the number of shares to be redeemed, the Corporation shall issue and
deliver on the Series C Redemption Date to the person entitled thereto a
certificate or certificates representing the unredeemed balance of such shares.
(iv) Effect of Redemption. From and after the Series C
--------------------
Redemption Date, unless the Corporation shall default in providing for the
payment of the Series C Redemption Price, all dividends (if any) on such shares
requested to be redeemed pursuant to this Section 4(f) shall cease to accrue,
and all rights of the holders of any shares subject to redemption as
shareholders of the Corporation, except the right to receive the Series C
Redemption Price, shall cease and terminate. Any shares of Series C Redeemable
Stock that are redeemed by the Corporation shall be retired and shall not be
reissued (it being understood that if notes have been issued to evidence such
redemption obligations, redemption does not occur until such notes and any
interest thereon have been paid in full).
(v) Failure to Redeem. If the Corporation shall for any reason
-----------------
fail to redeem any shares of Series C Redeemable Stock as required by this
Section 4(f), and such failure shall continue for a period of 30 days, then
notwithstanding anything to the contrary contained in the Certificate of
Incorporation, with respect to all shares of Series C Redeemable Stock then
outstanding: (i) the conversion rights set forth in Section 4(e) of this Article
shall continue beyond any date for redemption specified in said Section, and
said rights may be exercised at any time; (ii) the Corporation may not incur any
indebtedness for money borrowed or borrow or reborrow any amounts under any
lines of credit which it may then have outstanding without the prior written
consent of the holders of at least 67% of the then outstanding shares of Series
C Redeemable Stock, unless the proceeds of such incurrence of such indebtedness
or borrowing or reborrowing are to be used to make all redemptions then required
to be made; and (iii) dividends shall continue to accrue and be paid in
accordance with Section 4(a) of this Article, and, to the extent not paid, shall
be added to the Series C Redemption Price. Nothing herein shall limit the
Corporation's obligations to redeem as set forth above, or limit the remedies
available to the holders of Series C Redeemable Stock in the event of a failure
of the Corporation to honor such obligations.
33.
<PAGE>
5. Default.
-------
The following events shall constitute events of default ("Events of
Default"):
a. The accrual of dividends on the Series A, Series B or Series C
Preferred Stock which are required to be paid under Sections 2(a), 3(a) or 4(a),
respectively, of this Article, and which are not paid on or within ten (10) days
following written notice thereof from any holder of Series A, Series B or Series
C Preferred Stock, regardless of whether such failure is due to a legal
inability or incapacity of the Corporation to make any such payment;
b. The failure of the Corporation to make any payments due under
Section 2(f), 3(f) or 4(f) of this Article regarding redemption, which failure
shall continue for a period of ten (10) days following written notice thereof
from any holder of Series A Preferred Stock, Series B Preferred Stock or Series
C Preferred Stock, respectively, regardless of whether such failure is due to a
legal inability or incapacity of the Corporation to make any such payments.
c. If there shall occur an Event of Default, and in each and every
case, the holders of not less than 75% in interest of the Series A Preferred
Stock, the Series B Preferred Stock or the Series C Preferred Stock may, by vote
at a meeting of shareholders or by written notice to the Corporation of any such
class, declare the Corporation to be in default hereunder, whereupon if such
holders shall so specify in such vote or notice, the shares of Series A
Redeemable Stock, Series B Redeemable Stock or Series C Redeemable Stock, as
applicable, shall immediately become redeemable at the option of the holder,
subject to the preferences set forth herein, and shall be redeemed by the
Corporation in accordance with the provisions of Section 2(f), 3(f) or 4(f) of
this Article, as applicable; provided, however, that no shares of Series A
-------- -------
Redeemable Stock shall be redeemed by the Corporation until all shares of Series
B Redeemable Stock and Series C Redeemable Stock shall first be redeemed by the
Corporation.
6. Mandatory Conversion.
--------------------
a. All, but not less than all, of the shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall automatically
convert (a "Mandatory Conversion") into fully paid and nonassessable shares of
Common Stock at the conversion rate then in effect upon the occurrence of (i)
the affirmative vote of a majority of the Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock, voting together as a class, or
(ii) a Qualifying Public Offering. A "Qualifying Public Offering" shall mean the
closing of the Corporation's first underwritten offering to the public pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, provided that (i) such registration statement covers the offer and sale
of Common Stock of which the aggregate net proceeds attributable to sales for
the account of the Corporation exceed $20,000,000 with a price per share of not
less than $4.29 (as adjusted for stock splits, stock dividends,
reclassifications or other similar events), and (ii) such Common Stock is listed
for trading on either the New York Stock Exchange or the Nasdaq National Market
System.
34.
<PAGE>
b. The date ("Mandatory Conversion Date") on which such Mandatory
Conversion shall be deemed to occur is the date on which the Corporation
receives, in a closing, the gross proceeds of the Qualifying Public Offering
after a Registration Statement filed under the Securities Act of 1933, as
amended, has been declared effective by the Securities and Exchange Commission.
c. On the Mandatory Conversion Date, all rights of the holders of
shares of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock as such holders shall cease and determine except their right to
receive payment of any dividends accrued, declared and unpaid to such date; such
shares shall no longer be deemed to be outstanding; and the holders thereof
shall on and after such date be conclusively deemed for all purposes to be
holders of the shares of Common Stock into which their shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock were
converted.
d. All holders of record of shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock shall be given at least
twenty days' prior written notice of the date that a Qualifying Public Offering
will occur or is anticipated to occur. Such notice shall also specify the place
designated for exchanging the shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock for shares of Common Stock. Such
notice shall be sent by first class mail, postage prepaid, to each holder of
record of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock at such holder's address as shown in the records of the
Corporation. On or before the Mandatory Conversion Date, each holder of shares
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock shall surrender such holder's certificate or certificates for all such
shares to the Corporation or the transfer agent at the place designated in such
notice and shall thereafter receive certificates for the number of shares of
Common Stock to which such holder is entitled.
e. For the purpose of calculating the conversion ratio of Series A
Preferred Stock into Common Stock in the event of a Mandatory Conversion, such
calculation shall be made in accordance with Section 2(e) of this Article, for
the purpose of calculating the conversion ratio of Series B Preferred Stock into
Common Stock in the event of a Mandatory Conversion, such calculation shall be
made in accordance with Section 3(e) of this Article, and for the purpose of
calculating the conversion ratio of Series C Preferred Stock into Common Stock
in the event of a Mandatory Conversion, such calculation shall be made in
accordance with Section 4(e) of this Article.
ARTICLE VII.
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to
35.
<PAGE>
authorize corporation action further eliminating or limiting the personal
liability of directors then the liability of a director of the corporation shall
be eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article VII
by the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE VIII.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred on stockholders herein
are granted subject to this reservation.
ARTICLE IX.
Election of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
ARTICLE X.
The number of directors which shall constitute the whole Board of Directors
shall be fixed from time to time by, or in the manner provided in, the Bylaws or
in an amendment thereof duly adopted by the Board of Directors or by the
stockholders, subject to the restrictions set forth elsewhere in this
Certificate of Incorporation.
ARTICLE XI.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XII.
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the Corporation.
ARTICLE XIII.
The Corporation expressly elects not to be governed by Section 203 of the
Delaware General Corporation Law.
36.
<PAGE>
ARTICLE XIV.
Whenever a compromise or arrangement is proposed between this corporation
and its creditors or any class of them and/or between this corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
37.
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Exhibit 3.4
BYLAWS
OF
RAVISENT TECHNOLOGIES INC.,
a Delaware corporation
ARTICLE I.
OFFICES
Section 1. Registered Office. The registered office shall be at the office
-----------------
of CSC The United States Corporation Company in the City of Wilmington, County
of New Castle, State of Delaware.
Section 2. Other Offices. The corporation may also have offices at such
-------------
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders for the
--------------
election of directors shall be held at such place either within or without the
State of Delaware as shall be designated on an annual basis by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof. Any other proper business may be transacted
at the annual meeting.
Section 2. Notice of Annual Meeting. Written notice of the annual meeting
------------------------
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 3. Voting List. The officer who has charge of the stock ledger of
-----------
the corporation shall prepare and make, or cause a third party to prepare and
make, at least ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be
<PAGE>
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 4. Special Meetings. Special meetings of the stockholders of this
----------------
corporation, for any purpose or purposes, unless otherwise prescribed by statute
or by the Certificate of Incorporation, shall be called by the President or
Secretary at the request in writing of a majority of the members of the Board of
Directors or holders of a majority of the total voting power of all outstanding
shares of stock of this corporation then entitled to vote, and may not be called
absent such a request. Such request shall state the purpose or purposes of the
proposed meeting.
Section 5. Notice of Special Meetings. As soon as reasonably practicable
--------------------------
after receipt of a request as provided in Section 4 of this Article II, written
notice of a special meeting, stating the place, date (which shall be not less
than ten nor more than sixty days from the date of the notice) and hour of the
special meeting and the purpose or purposes for which the special meeting is
called, shall be given to each stockholder entitled to vote at such special
meeting.
Section 6. Scope of Business at Special Meeting. Business transacted at any
------------------------------------
special meeting of stockholders shall be limited to the purposes stated in the
notice.
Section 7. Quorum. The holders of a majority of the stock issued and
------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the chairman of the meeting or
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting as provided in Section 5 of this Article
II.
Section 8. Qualifications to Vote. The stockholders of record on the books
----------------------
of the corporation at the close of business on the record date as determined by
the Board of Directors and only such stockholders shall be entitled to vote at
any meeting of stockholders or any adjournment thereof.
Section 9. Record Date. The Board of Directors may fix a record date for the
-----------
determination of the stockholders entitled to notice of or to vote at any
stockholders' meeting and at any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action. The record date shall not be more
than sixty nor less than ten days before the date of such meeting, and not more
than sixty days prior to any other action. If no record date is fixed by the
Board of Directors, the record date for determining stockholders
2
<PAGE>
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given, or
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 10. Action at Meetings. When a quorum is present at any meeting, the
------------------
vote of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of
applicable law or of the Certificate of Incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 11. Voting and Proxies. Unless otherwise provided in the Certificate
------------------
of Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Each proxy shall be revocable unless expressly provided therein to be
irrevocable and unless it is coupled with an interest sufficient in law to
support an irrevocable power.
Section 12. Action by Stockholders Without a Meeting. Unless otherwise
----------------------------------------
provided in the Certificate of Incorporation, any action required to be taken at
any annual or special meeting of stockholders of the corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and shall be
delivered to the corporation by delivery to its registered office in Delaware
(by hand or by certified or registered mail, return receipt requested), to its
principal place of business, or to an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded; provided, however, that action by written consent to elect directors,
if less than unanimous, shall be in lieu of holding an annual meeting only if
all the directorships to which directors could be elected at an annual meeting
held at the effective time of such action are vacant and are filled by such
action. Prompt notice of the taking of corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing and who, if the action had been taken at a
meeting, would have been entitled to notice of the meeting if the record date
for such meeting had been the date that written consents signed by a sufficient
number of stockholders to take the action were delivered to the corporation by
delivery to its registered office in Delaware (by hand or by certified or
registered mail, return receipt requested), to its principal place of business,
or to an officer or agent of the corporation having custody of the book in which
proceedings or meetings of stockholders are recordedthe preceding language is
derived from Section 228 of the Delaware General Corporation Law.
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<PAGE>
Section 13. Nominations for Board of Directors. Nominations for election to
----------------------------------
the Board of Directors must be made by the Board of Directors or by any
stockholder of any outstanding class of capital stock of the corporation
entitled to vote for the election of directors. Nominations, other than those
made by the Board of Directors of the corporation, must be preceded by
notification in writing in fact received by the Secretary of the corporation not
less than sixty days prior to any meeting of stockholders called for the
election of directors. Such notification shall contain the written consent of
each proposed nominee to serve as a director if so elected and the following
information as to each proposed nominee and as to each person, acting alone or
in conjunction with one or more other persons as a partnership, limited
partnership, syndicate or other group, who participates or is expected to
participate in making such nomination or in organizing, directing or financing
such nomination or solicitation of proxies to vote for the nominee:
(a) the name, age, residence, address, and business address of each
proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of business
and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially, either
directly or indirectly, by each proposed nominee and each such person; and
(d) a description of any arrangement or understanding of each proposed
nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the
corporation will or may be a party.
The presiding officer of the meeting shall have the authority to determine
and declare to the meeting that a nomination not preceded by notification made
in accordance with the foregoing procedure shall be disregarded.
ARTICLE III.
DIRECTORS
Section 1. Powers. The business of the corporation shall be managed by or
------
under the direction of its Board of Directors, which may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
applicable law or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 2. Number; Election; Tenure and Qualification. The number of
------------------------------------------
directors which shall constitute the whole Board of Directors shall be five (5).
With the exception of the first Board of Directors, which shall be elected by
the incorporator, and except as provided in the corporation's Certificate of
Incorporation or in Section 3 of this Article III, the directors shall be
elected at the annual meeting of the stockholders by a plurality vote of the
shares represented in person or by proxy and each director elected shall hold
office until his successor is elected and qualified unless he shall resign,
become disqualified, disabled, or otherwise removed. Directors need not be
stockholders.
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<PAGE>
Section 3. Vacancies and Newly Created Directorships. Unless otherwise
-----------------------------------------
provided in the Certificate of Incorporation, vacancies and newly-created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director. The directors so chosen shall serve
until the next annual election and until their successors are duly elected and
shall qualify, unless sooner displaced. If there are no directors in office,
then an election of directors may be held in the manner provided by statute.
If, at the time of filling any vacancy or any newly created directorship, the
directors then in office shall constitute less than a majority of the whole
board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent of the total number of shares at the time outstanding having
the right to vote for such directors, summarily order an election to be held to
fill any such vacancies or newly created directorships, or to replace the
directors chosen by the directors then in office.
Section 4. Location of Meetings. The Board of Directors of the corporation
--------------------
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 5. Meeting of Newly Elected Board of Directors. The first meeting of
-------------------------------------------
each newly elected Board of Directors shall be held immediately following the
annual meeting of stockholders and no notice of such meeting shall be necessary
to the newly elected directors in order legally to constitute the meeting,
provided a quorum shall be present. In the event such meeting is not held at
such time, the meeting may be held at such time and place as shall be specified
in a notice given as hereinafter provided for special meetings of the Board of
Directors, or as shall be specified in a written waiver signed by all of the
directors.
Section 6. Regular Meetings. Regular meetings of the Board of Directors may
----------------
be held without notice at such time and at such place as shall from time to time
be determined by the Board of Directors; provided that any director who is
absent when such a determination is made shall be given notice of such location.
Section 7. Special Meetings. Special meetings of the Board of Directors may
----------------
be called by the President on two days' notice to each director by mail,
overnight courier service or facsimile; special meetings shall be called by the
President or Secretary in a like manner and on like notice on the written
request of two directors unless the Board of Directors consists of only one
director, in which case special meetings shall be called by the President or
Secretary in a like manner and on like notice on the written request of the sole
director. Notice may be waived in accordance with Section 229 of the Delaware
General Corporation Law.
Section 8. Quorum and Action at Meetings. At all meetings of the Board of
-----------------------------
Directors, a majority of the directors then in office shall constitute a quorum
for the transaction of business, and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by statute or by
the Certificate of Incorporation. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
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<PAGE>
Section 9. Action Without a Meeting. Unless otherwise restricted by the
------------------------
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 10. Telephonic Meeting. Unless otherwise restricted by the
------------------
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
Section 11. Committees. The Board of Directors may, by resolution passed by
----------
a majority of the whole board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
Section 12. Committee Authority. Any such committee, to the extent provided
-------------------
in the resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to (a) approving, adopting or recommending
to the stockholders, any action or matter expressly required by the Delaware
General Corporation Law to be submitted to stockholders for approval, or (b)
adopting, amending or repealing any Bylaw of the corporation. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the Board of Directors.
Section 13. Committee Minutes. Each committee shall keep regular minutes of
-----------------
its meetings and report the same to the Board of Directors when required to do
so by the Board of Directors.
Section 14. Directors Compensation. Unless otherwise restricted by the
----------------------
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
6
<PAGE>
Section 15. Resignation. Any director or officer of the corporation may
-----------
resign at any time. Each such resignation shall be made in writing and shall
take effect at the time specified therein, or, if no time is specified, at the
time of its receipt by either the Board of Directors, the President or the
Secretary. The acceptance of a resignation shall not be necessary to make it
effective unless expressly so provided in the resignation.
Section 16. Removal. Unless otherwise restricted by the Certificate of
-------
Incorporation, these Bylaws or applicable law, any director or the entire Board
of Directors may be removed, with or without cause, by the holders of a majority
of shares entitled to vote at an election of directors.
ARTICLE IV.
NOTICES
Section 1. Notice to Directors and Stockholders. Whenever, under the
------------------------------------
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, notice is required to be given to any director or stockholder, it shall
not be construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director or stockholder, at his address as
it appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the corporation that the notice
has been given shall in the absence of fraud, be prima facie evidence of the
facts stated therein. Notice to directors may also be given by telephone,
facsimile or telegram (with confirmation of receipt).
Section 2. Waiver. Whenever any notice is required to be given under the
------
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto. The written waiver need not specify the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors. Attendance of
a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of objecting at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Attendance at the meeting is not a
waiver of any right to object to the consideration of matters required by the
Delaware General Corporation Law to be included in the notice of the meeting but
not so included, if such objection is expressly made at the meeting.
ARTICLE V.
OFFICERS
Section 1. Enumeration. The officers of the corporation shall be chosen by
-----------
the Board of Directors and shall include a President, a Secretary, a Treasurer
or Chief Financial Officer and such other officers with such other titles as the
Board of Directors shall determine. The Board of Directors may elect from among
its members a Chairman or Chairmen of the Board and a Vice Chairman of the
Board. The Board of Directors may also choose one or more Vice Presidents,
7
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Assistant Secretaries and Assistant Treasurers. Any number of offices may be
held by the same person, unless the Certificate of Incorporation or these Bylaws
otherwise provide.
Section 2. Election. The Board of Directors at its first meeting after each
--------
annual meeting of stockholders shall elect a President, a Secretary, a Treasurer
and such other officers with such other titles as the Board of Directors shall
determine.
Section 3. Appointment of Other Agents. The Board of Directors may appoint
---------------------------
such other officers and agents as it shall deem necessary, who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.
Section 4. Compensation. The salaries of all officers of the corporation
------------
shall be fixed by the Board of Directors or a committee thereof. The salaries of
agents of the corporation shall, unless fixed by the Board of Directors, be
fixed by the President or any Vice President of the corporation.
Section 5. Tenure. The officers of the corporation shall hold office until
------
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the directors of the Board of Directors. Any vacancy occurring in
any office of the corporation shall be filled by the Board of Directors.
Section 6. Chairman of the Board and Vice-Chairman of the Board. The
----------------------------------------------------
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which the Chairman shall be present. The
Chairman shall have and may exercise such powers as are, from time to time,
assigned to the Chairman by the Board of Directors and as may be provided by
law. In the absence of the Chairman of the Board, the Vice Chairman of the
Board, if any, shall preside at all meetings of the Board of Directors and of
the stockholders at which the Vice Chairman shall be present. The Vice Chairman
shall have and may exercise such powers as are, from time to time, assigned to
such person by the Board of Directors and as may be provided by law.
Section 7. President. The President shall be the Chief Executive Officer of
---------
the corporation unless such title is assigned to another officer of the
corporation; in the absence of a Chairman and Vice Chairman of the Board, the
President shall preside as the chairman of meetings of the stockholders and the
Board of Directors; and the President shall have general and active management
of the business of the corporation and shall see that all orders and resolutions
of the Board of Directors are carried into effect. The President or any Vice
President shall execute bonds, mortgages and other contracts requiring a seal,
under the seal of the corporation, except where required or permitted by law to
be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the corporation.
Section 8. Vice President. In the absence of the President or in the event
--------------
of the President's inability or refusal to act, the Vice President, if any (or
in the event there be more than one Vice President, the Vice Presidents in the
order designated by the Board of Directors, or
8
<PAGE>
in the absence of any designation, then in the order of their election) shall
perform the duties of the President, and when so acting shall have all the
powers of and be subject to all the restrictions upon the President. The Vice
President shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe. The Chief Financial Officer
and Chief Technology Officer shall be considered Vice Presidents for purposes of
these Bylaws and be entitled to all of the powers and privileges and subject to
all of the obligations applicable to Vice Presidents, as set forth herein.
Section 9. Secretary. The Secretary shall attend all meetings of the Board
---------
of Directors and all meetings of the stockholders and record all the proceedings
of the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision the Secretary shall be subject. The
Secretary shall have custody of the corporate seal of the corporation and the
Secretary, or an Assistant Secretary, shall have authority to affix the same to
any instrument requiring it and when so affixed, it may be attested by the
Secretary's signature or by the signature of such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the corporation and to attest the affixing by such officer's signature.
Section 10. Assistant Secretary. The Assistant Secretary, or if there be
-------------------
more than one, the Assistant Secretaries in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
Section 11. Treasurer. The Treasurer shall have the custody of the corporate
---------
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the corporation as may be ordered by the Board of
Directors, President, Chief Executive Officer or Chief Financial Officer, taking
proper vouchers for such disbursements, and shall render to the President, Chief
Executive Officer and Chief Financial Officer and the Board of Directors, at its
regular meetings, or when the Board of Directors so requires, an account of all
such transactions as Treasurer and of the financial condition of the
corporation. If required by the Board of Directors, the Treasurer shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of the Treasurer's office and for the
restoration to the corporation, in case of the Treasurer's death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in the possession or under the control of the
Treasurer that belongs to the corporation.
Section 12. Assistant Treasurer. The Assistant Treasurer, or if there be
-------------------
more than one, the Assistant Treasurers in the order determined by the Board of
Directors (or if there be no such
9
<PAGE>
determination, then in the order of their election) shall, in the absence of the
Treasurer or in the event of the Treasurer's inability or refusal to act,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
ARTICLE VI.
CAPITAL STOCK
Section 1. Certificates. The shares of the corporation shall be represented
------------
by a certificate, unless and until the Board of Directors adopts a resolution
permitting shares to be uncertificated. Certificates shall be signed by, or in
the name of the corporation by, (a) the Chairman of the Board, the Vice-Chairman
of the Board, the President or a Vice President, and (b) the Chief Financial
Officer, Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary, certifying the number of shares owned by such stockholder in the
corporation. Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor and the
amount paid thereon shall be specified.
Section 2. Class or Series. If the corporation shall be authorized to issue
---------------
more than one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in Section 202 of the Delaware General
Corporation Law, in lieu of the foregoing requirements, there may be set forth
on the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Within a
reasonable time after the issuance or transfer of uncertificated stock, the
corporation shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates
pursuant to Sections 151, 156, 202(a) or 218(a) of the Delaware Corporation Law
or a statement that the corporation will furnish without charge, to each
stockholder who so requests, the powers, designations, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Section 3. Signature. Any of or all of the signatures on a certificate may
---------
be facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
Section 4. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the
10
<PAGE>
corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or such owner's legal representative, to
advertise the same in such manner as it shall require and/or to give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
Section 5. Transfer of Stock. Upon surrender to the corporation or the
-----------------
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. Upon receipt of proper transfer instructions from
the registered owner of uncertificated shares such uncertificated shares shall
be canceled and issuance of new equivalent uncertificated shares or certificated
shares shall be made to the person entitled thereto and the transaction shall be
recorded upon the books of the corporation.
Section 6. Record Date. In order that the corporation may determine the
-----------
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 7. Registered Stockholders. The corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
ARTICLE VII.
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the corporation,
---------
subject to the applicable provisions, if any, of the Certificate of
Incorporation, may be declared by the Board of Directors at any regular or
special meeting, pursuant to law. Dividends may be paid in cash, in property or
in shares of capital stock, subject to the provisions of the Certificate of
Incorporation. Before payment of any dividend, there may be set aside out of
any funds of the
11
<PAGE>
corporation available for dividends such sum or sums as the Board of Directors
from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purposes as the
Board of Directors shall think conducive to the interest of the corporation,
and the Board of Directors may modify or abolish any such reserve in the manner
in which it was created.
Section 2. Checks. All checks or demands for money and notes of the
------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed by
-----------
resolution of the Board of Directors.
Section 4. Seal. The Board of Directors may adopt a corporate seal having
----
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 5. Loans. The Board of Directors of this corporation may, without
-----
stockholder approval, authorize loans to, or guaranty obligations of, or
otherwise assist, including, without limitation, the adoption of employee
benefit plans under which loans and guarantees may be made, any officer or other
employee of the corporation or of its subsidiary, including any officer or
employee who is a director of the corporation or its subsidiary, whenever, in
the judgment of the Board of Directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty or other
assistance may be with or without interest, and may be unsecured, or secured in
such manner as the Board of Directors shall approve, including, without
limitation, a pledge of shares of stock of the corporation.
ARTICLE VIII.
INDEMNIFICATION
Section 1. Scope. The corporation shall, to the fullest extent permitted by
-----
Section 145 of the Delaware General Corporation Law, as that Section may be
amended and supplemented from time to time, indemnify any director, officer,
employee or agent of the corporation, against expenses (including attorneys'
fees), judgments, fines, amounts paid in settlement and/or other matters
referred to in or covered by that Section, by reason of the fact that such
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.
Section 2. Advancing Expenses. Expenses (including attorneys' fees) incurred
------------------
by a present or former director or officer of the corporation in defending a
civil, criminal, administrative or investigative action, suit or proceeding by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation (or is or was serving at the
12
<PAGE>
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise) shall be
paid by the corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized by
relevant provisions of the Delaware General Corporation Law; provided, however,
the corporation shall not be required to advance such expenses to a director (i)
who commences any action, suit or proceeding as a plaintiff unless such advance
is specifically approved by a majority of the Board of Directors, or (ii) who is
a party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors which alleges willful misappropriation
of corporate assets by such director, disclosure of confidential information in
violation of such director's fiduciary or contractual obligations to the
corporation, or any other willful and deliberate breach in bad faith of such
director's duty to the corporation or its stockholders.
Section 3. Liability Offset. The corporation's obligation to provide
----------------
indemnification under this Article VIII shall be offset to the extent the
indemnified party is indemnified by any other source including, but not limited
to, any applicable insurance coverage under a policy maintained by the
corporation, the indemnified party or any other person.
Section 4. Continuing Obligation. The provisions of this Article VIII shall
---------------------
be deemed to be a contract between the corporation and each director of the
corporation who serves in such capacity at any time while this bylaw is in
effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts.
Section 5. Nonexclusive. The indemnification and advancement of expenses
------------
provided for in this Article VIII shall (i) not be deemed exclusive of any other
rights to which those indemnified may be entitled under any bylaw, agreement or
vote of stockholders or disinterested directors or otherwise, both as to action
in their official capacities and as to action in another capacity while holding
such office, (ii) continue as to a person who has ceased to be a director and
(iii) inure to the benefit of the heirs, executors and administrators of such a
person.
Section 6. Other Persons. In addition to the indemnification rights of
-------------
directors, officers, employees, or agents of the corporation, the Board of
Directors in its discretion shall have the power on behalf of the corporation to
indemnify any other person made a party to any action, suit or proceeding who
the corporation may indemnify under Section 145 of the Delaware General
Corporation Law.
Section 7. Definitions. The phrases and terms set forth in this Article VIII
-----------
shall be given the same meaning as the identical terms and phrases are given in
Section 145 of the Delaware General Corporation Law, as that Section may be
amended and supplemented from time to time.
13
<PAGE>
ARTICLE IX.
AMENDMENTS
Except as otherwise provided in the Certificate of Incorporation, these
Bylaws may be altered, amended or repealed, or new Bylaws may be adopted, by the
holders of a majority of the outstanding voting shares or by the Board of
Directors, when such power is conferred upon the Board of Directors by the
Certificate of Incorporation, at any regular meeting of the stockholders or of
the Board of Directors or at any special meeting of the stockholders or of the
Board of Directors if notice of such alteration, amendment, repeal or adoption
of new Bylaws be contained in the notice of such special meeting. If the power
to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the
Certificate of Incorporation, it shall not divest or limit the power of the
stockholders to adopt, amend or repeal Bylaws.
14
<PAGE>
EXHIBIT 5.1
July __, 1999
RAVISENT Technologies Inc.
One Great Valley Parkway
Malvern, PA 19355
Re: RAVISENT Technologies Inc. Registration Statement on Form S-1
for 5,000,000 Shares of Common Stock
-------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to RAVISENT Technologies Inc., a Delaware
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company of up to 5,000,000 shares of the Company's Common Stock (the
"Shares") pursuant to the Company's Registration Statement on Form S-1 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and if, as and when issued in accordance with the Registration
Statement and the related prospectus (as amended and supplemented through the
date of issuance) will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion,
<PAGE>
RAVISENT Technologies Inc.
Page 2
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 10.1
RAVISENT TECHNOLOGIES INC.
1999 STOCK INCENTIVE PLAN
-------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Ravisent Technologies 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 three 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 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), and
(iii) 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.
B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. 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.
<PAGE>
(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.
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
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<PAGE>
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 non-employee Board members shall be eligible to participate
in the Automatic Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, 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
two million seven hundred and twenty-five thousand (2,725,000). Such authorized
share reserve consists of (i) the number of shares estimated to be available for
issuance, as of the Plan Effective Date, under the Predecessor Plan as last
approved by the Corporation's stockholders, 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
approximately eight hundred and ninety-two thousand (892,000) additional shares.
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 2000 calendar year, by an
amount equal to one percent (1%) 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 two hundred thousand (200,000) shares.
C. No one person participating in the Plan may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances for more than seven hundred thousand (700,000) shares of
Common Stock in the aggregate per calendar year, beginning with the 1999
calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plans) 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
3
<PAGE>
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 maximum number 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 this 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 Plans. 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.
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.
2. The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Section II of Article Five
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,
4
<PAGE>
(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.
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 held by the Optionee at the time of death
may be subsequently exercised by his or her Beneficiary to the extent that
option is exercisable for one or more vested shares at the time of
Optionee's death.
(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.
5
<PAGE>
(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 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 by will or by the laws of descent
and distribution 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 to one or more members of the Optionee's
immediate family or to a trust in which the Optionee and/or one or more such
family members have more than a fifty percent (50%) of the beneficial interest
or to any other entity in which the Optionee and/or one or more such family
members own more than fifty percent (50%) of the voting interests. 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.
Notwithstanding the foregoing, the Optionee may also designate a Beneficiary or
Beneficiaries of his or her outstanding options under this Article Two, and
those options shall, in accordance with such designation, be automatically
transferred to such Beneficiary or Beneficiaries upon Optionee's death while
holding those options. Such Beneficiary or Beneficiaries shall take the
transferred options subject to the all the terms and conditions of the
applicable agreement evidencing each
6
<PAGE>
such transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
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 Seven 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.
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 by the successor corporation (or parent thereof) or otherwise
continued in full force and effect 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.
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
7
<PAGE>
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 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 expiration or sooner termination
of the option term. 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
8
<PAGE>
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.
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening 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.
2. Subject to the provisions of Section II of Article Five,
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
9
<PAGE>
(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.
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.
10
<PAGE>
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 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.
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. GRANT DATES. Options shall be made on the dates specified below:
-----------
1. Each individual who is serving as a non-employee Board member
on the Underwriting Date shall automatically be granted at that time a Non-
Statutory Option to purchase Twenty Thousand (20,000) shares of Common Stock,
provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary.
2. 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 Twenty Thousand (20,000) shares of Common
Stock, provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary.
11
<PAGE>
3. On the date of each Annual Stockholders Meeting, beginning
with the first Annual Meeting held after the Underwriting Date, each individual
who is to continue to serve as a non-employee Board member, whether or not that
individual is standing for re-election to the Board, shall automatically be
granted a Non-Statutory Option to purchase Five Thousand (5,000) shares of
Common Stock, provided such individual has served as a non-employee Board member
for at least six (6) months.
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 Twenty Thousand (20,000)-share
option shall vest, and the Corporation's repurchase right shall lapse, in a
series of four (4) successive equal annual installments upon the Optionee's
completion of each year of Board service over the four (4)-year period measured
from the grant date. Each annual Five Thousand (5,000)-share option shall vest,
and the Corporation's repurchase right shall lapse, upon the Optionee's
completion of one (1) year of Board service measured from the grant date.
E. LIMITED TRANSFERABILITY OF OPTIONS. Each option under this
----------------------------------
Article Four may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust in which the Optionee and/or one or
more such family members have more than a fifty percent (50%) of the beneficial
interest or to any other entity in which the Optionee and/or one or more such
family members own more than fifty percent (50%) of the voting interests. 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. The Optionee may also designate a Beneficiary or Beneficiaries of
his or her outstanding options under this Article Four, and those options shall,
in accordance with such designation, be automatically transferred to such
Beneficiary or Beneficiaries upon Optionee's death while holding those options.
Such Beneficiary or Beneficiaries shall take the transferred options subject to
the all the terms and conditions of the applicable agreement evidencing each
such transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
12
<PAGE>
F. 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 held by the Optionee at the time of
death may be subsequently exercised by his or her Beneficiary to the extent
that option is exercisable for one or more vested shares at the time of
Optionee's death.
(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 in which the Optionee was vested 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 in which the Optionee is not otherwise
at that time vested.
(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 the Hostile
Take-Over, be exercised for all or any portion 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 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 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
13
<PAGE>
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.
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 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.
ARTICLE FIVE
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.
14
<PAGE>
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 to which such holders may become subject 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-Statutory 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
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. Options may be granted under the Discretionary Option Grant or
Automatic 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) April 20,
--------
2009 (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
15
<PAGE>
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 Program and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under 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.
16
<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 to 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 RAVISENT Technologies Inc., a Delaware
-----------
corporation, and its successors.
A-1.
<PAGE>
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
----------------------------------
option grant program in effect under the Plan.
I. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
J. EXERCISE DATE shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
K. FAIR MARKET VALUE per 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 options 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.
L. 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
A-2.
<PAGE>
tender or exchange offer made directly to the Corporation's stockholders
which the Board does not recommend such stockholders to accept, or
(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.
M. INCENTIVE OPTION shall mean an option which satisfies the
----------------
requirements of Code Section 422.
N. 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.
O. 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).
P. 1934 ACT shall mean the Securities Exchange Act of 1934, as
--------
amended.
Q. NON-STATUTORY OPTION shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
R. 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
A-3.
<PAGE>
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.
S. OPTIONEE shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant or Automatic Option Grant Program.
T. 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.
U. PARTICIPANT shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
V. 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
Program, 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.
W. PLAN shall mean the Corporation's 1999 Stock Incentive Plan, as
----
set forth in this document.
X. 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 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.
Y. PLAN EFFECTIVE DATE shall mean April 21, 1999, the date on which
-------------------
the Plan was adopted by the Board.
Z. PREDECESSOR PLAN shall mean the Corporation's pre-existing 1995
-----------------
Stock Option Plan, as in effect immediately prior to the Plan Effective Date
hereunder.
AA. 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.
A-4.
<PAGE>
BB. 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.
CC. 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.
DD. 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.
EE. STOCK EXCHANGE shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
FF. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
----------------------
effect under the Plan.
GG. 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.
HH. 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).
II. UNDERWRITING DATE shall mean the date on which the underwriting
-----------------
agreement for the initial public offering of the Common Stock is executed and
priced.
JJ. 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 10.2
RAVISENT TECHNOLOGIES INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This 1999 Employee Stock Purchase Plan is intended to promote the
interests of RAVISENT Technologies 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 over the term of the Plan shall not exceed Five Hundred
Thousand (500,000) shares.
B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable by all Participants 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.
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
<PAGE>
period. However, the initial offering period shall commence at the Effective
Time and terminate on the last business day in July 2001. 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 February to the last business day in July each year and from
the first business day in August each year to the last business day in January
in 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 January 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.
E. Notwithstanding anything to the contrary herein, should the total
number of shares of Common Stock to be purchased on any particular date exceed
the number of shares then available for issuance under the Plan, then the Plan
Administrator shall have the right to terminate the offering period during which
such purchase occurs and to determine when a new offering period shall commence.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any 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.
VI. PAYROLL DEDUCTIONS
2
<PAGE>
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.
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
3
<PAGE>
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 Three Hundred (1,300) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.
In addition, the maximum aggregate number of shares of Common Stock purchasable
by all Participants on any one Purchase Date shall not exceed One Hundred
Twenty-Five Thousand (125,000) shares, subject to periodic adjustments in the
event of certain changes in the Corporation's capitalization. However, the Plan
Administrator shall have the discretionary authority, exercisable prior to the
start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per participant
and in the aggregate by all Participants on each Purchase Date within that
offering period.
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
4
<PAGE>
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 Purchase Date. If no such election is made at the
timesuch 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 IN CONTROL. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in 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 in Control occurs or (ii) the Fair Market Value per share
of Common Stock immediately prior to the effective date
5
<PAGE>
of such Change in Control. However, the applicable limitations on the
number of shares of Common Stock purchasable per Participant shall continue
to apply to any such purchase, but not the limitation applicable to the
maximum number of shares of Common Stock purchasable in the aggregate.
The Corporation shall use its best efforts to provide at least
ten (10)-days prior written notice of the occurrence of any Corporate
Transaction, 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 Corporate Transaction.
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
6
<PAGE>
Stock (determined on the basis of the Fair Market Value per 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 in April 1999 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 July 2009, (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 the
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.
8
<PAGE>
SCHEDULE A
----------
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
------------------------
RAVISENT Technologies 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. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
D. COMMON STOCK shall mean the Corporation's common stock.
------------
E. 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.
F. CHANGE IN CONTROL shall mean a change in ownership or control of
-----------------
the Corporation pursuant to any of the following transactions::
(i) a stockholder-approved 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) a stockholder-approved 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 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.
A-1
<PAGE>
G. CORPORATION shall mean RAVISENT Technologies Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Divicore Inc. which shall by appropriate action adopt
the Plan.
H. EFFECTIVE TIME shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering. 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. 1934 ACT shall mean the Securities Exchange Act of 1934, as
--------
amended.
A-2
<PAGE>
N. PARTICIPANT shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
O. 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.
P. PLAN shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.
Q. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
R. PURCHASE DATE shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be January 31, 2000.
S. 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.
T. SEMI-ANNUAL ENTRY DATE shall mean the first business day in
----------------------
February and August each year on which an Eligible Employee may first enter an
offering period.
U. STOCK EXCHANGE shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
V. 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.
W. UNDERWRITING DATE shall mean the date the Underwriting Agreement
-----------------
is executed and the Common Stock priced for the initial public offering.
A-3
<PAGE>
EXHIBIT 10.3
RAVISENT TECHNOLOGIES INC.
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into this ____ day of ______, between Ravisent Technologies Inc., a Delaware
corporation (the "Company"), and ___________________ ("Indemnitee").
WHEREAS, Indemnitee, a member of the Board of Directors or an officer,
employee or agent of the Company, performs a valuable service in such capacity
for the Company;
WHEREAS, the stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
employees and agents of the Company to the maximum extent authorized by Section
145 of the Delaware General Corporation Law, as amended (the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature,
permit contracts between the Company and the members of its Board of Directors,
officers, employees or agents with respect to indemnification of such directors,
officers, employees or agents;
WHEREAS, in accordance with the authorization as provided by the Code,
the Company either has purchased and presently maintains or intends to purchase
and maintain a policy or policies of Directors and Officers Liability Insurance
("D & O Insurance") covering certain liabilities which may be incurred by its
directors and officers in the performance of their duties as directors and
officers of the Company;
WHEREAS, as a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors or officers,
employees or agents by such D & O Insurance and by statutory and bylaw
indemnification provisions; and
WHEREAS, in order to induce Indemnitee to continue to serve as a
member of the Board of Directors, officer, employee or agent of the Company, the
Company has determined and agreed to enter into this contract with Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's continued service as
a director, officer, employee or agent after the date hereof, and for other good
and valid consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Indemnification of Indemnitee. The Company hereby agrees to hold
-----------------------------
harmless and indemnify Indemnitee to the fullest extent authorized or permitted
by the provisions of the Code, as may be amended from time to time.
<PAGE>
2. Additional Indemnity. Subject only to the exclusions set forth in
--------------------
Sections 3 and 6(c) hereof, the Company hereby further agrees to hold harmless
and indemnify Indemnitee:
(a) against any and all expenses (including attorneys' fees),
witness fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Company) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Indemnitee is, was or at any time becomes a
director, officer, employee or agent of the Company or any subsidiary of the
Company, or is or was serving or at any time serves at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and
(b) otherwise to the fullest extent as may be provided to
Indemnitee by the Company under the non-exclusivity provisions of Article VII,
Section 6 of the Bylaws of the Company and the Code.
3. Limitations on Additional Indemnity.
-----------------------------------
(a) No indemnity pursuant to Section 2 hereof shall be paid by
the Company:
i) in respect to remuneration paid to Indemnitee if it
shall be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
ii) on account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
iii) on account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest or to
constitute willful misconduct;
iv) on account of Indemnitee's conduct which is the subject
of an action, suit or proceeding described in Section 6(c)(ii) hereof;
v) on account of any action, claim or proceeding (other
than a proceeding referred to in Section 7(b) hereof) initiated by the
Indemnitee unless such action, claim or proceeding was authorized in the
specific case by action of the Board of Directors;
vi) if a final decision by a Court having jurisdiction in
the matter shall determine that such indemnification is not lawful (and, in this
respect, both the Company and Indemnitee have been advised that the Securities
and Exchange Commission
2
<PAGE>
believes that indemnification for liabilities arising under the federal
securities laws is against public policy and is, therefore, unenforceable and
that claims for indemnification should be submitted to appropriate courts for
adjudication); and
vii) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of (a) such losses for which the
Indemnitee is indemnified pursuant to Section 1 hereof and (b) any additional
amount paid to the Indemnitee pursuant to any D & O Insurance purchased and
maintained by the Company.
(b) No indemnity pursuant to Section 1 or 2 hereof shall be
paid by the Company if the action, suit or proceeding with respect to which a
claim for indemnity hereunder is made arose from or is based upon any of the
following:
i) Any solicitation of proxies by Indemnitee, or by a
group of which he was or became a member consisting of two or more persons that
had agreed (whether formally or informally and whether or not in writing) to act
together for the purpose of soliciting proxies, in opposition to any
solicitation of proxies approved by the Board of Directors.
ii) Any activities by Indemnitee that constitute a
breach of or default under any agreement between Indemnitee and the Company.
4. Contribution. If the indemnification provided in Sections
------------
1 and 2 hereof is unavailable by reason of a Court decision described in Section
3(a)(vi) hereof based on grounds other than any of those set forth in paragraphs
(i) through (v) of Section 3 (a) hereof, then in respect of any threatened,
pending or completed action, suit or proceeding in which the Company is jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), the Company shall contribute to the amount of expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and Indemnitee on the other hand from the transaction from which such
action, suit or proceeding arose, and (ii) the relative fault of the Company on
the one hand and of Indemnitee on the other in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the Company
on the one hand and of Indemnitee on the other shall be determined by reference
to, among other things, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent the circumstances resulting in
such expenses, judgments, fines or settlement amounts. The Company agrees that
it would not be just and equitable if contribution pursuant to this Section 4
were determined by pro rata allocation or any other method of allocation which
does not take account of the foregoing equitable considerations.
5. Notification and Defense of Claim. Not later than thirty
---------------------------------
(30) days after receipt by Indemnitee of notice of the commencement of any
action, suit or proceeding, Indemnitee shall, if a claim in respect thereof is
to be made against the Company under this Agreement, notify the Company of the
commencement thereof; but Indemnitee's omission so to notify the Company will
not relieve the Company from any liability which it may have to
3
<PAGE>
Indemnitee otherwise than under this Agreement. With respect to any such action,
suit or proceeding as to which Indemnitee notifies the Company of the
commencement thereof:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, to the extent that it may
wish, the Company shall, jointly with any other indemnifying party similarly
notified, be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from the Company to Indemnitee of its
election to assume the defense thereof, the Company will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof, other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its own counsel in such action, suit or
proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of the Company's assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Company; (ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and Indemnitee in
the conduct of the defense of such action; or (iii) the Company shall not in
fact have employed counsel to assume the defense of such action; in each of
which cases the fees and expenses of Indemnitee's separate counsel shall be paid
by the Company. The Company shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of the Company or as to which
Indemnitee shall have made the conclusion provided for in (ii) above.
(c) The Company shall not be liable to indemnify Indemnitee under
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall be permitted to settle
any action except that it shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither the Company nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
6. Advancement and Repayment of Expenses.
-------------------------------------
(a) In the event that Indemnitee employs his or her own counsel
pursuant to Sections 5(b)(i) through (iii) above, the Company shall advance to
Indemnitee, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving from Indemnitee copies of invoices presented to Indemnitee
for such expenses.
(b) Indemnitee agrees that Indemnitee will reimburse the Company
for all reasonable expenses paid by the Company in investigating or defending
any civil or criminal action, suit or proceeding against Indemnitee in the event
and only to the extent it shall be ultimately determined by a final judicial
decision (from which there is no right of appeal) that Indemnitee is not
entitled, under the provisions of the Code, the Bylaws, this Agreement or
otherwise, to be indemnified by the Company for such expenses.
4
<PAGE>
(c) Notwithstanding the foregoing, the Company shall not be
required to advance such expenses to Indemnitee in respect of any action arising
from or based upon any of the matters set forth in subsection (b) of Section 3
or if Indemnitee (i) commences any action, suit or proceeding as a plaintiff
unless such advance is specifically approved by a majority of the Board of
Directors or (ii) is a party to an action, suit or proceeding brought by the
Company and approved by a majority of the Board which alleges willful
misappropriation of corporate assets by Indemnitee, disclosure of confidential
information in violation of Indemnitee's fiduciary or contractual obligations to
the Company, or any other willful and deliberate breach in bad faith of
Indemnitee's duty to the Company or its shareholders.
7. Enforcement.
-----------
(a) The Company expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on the Company hereby in
order to induce Indemnitee to continue as a director, officer, employee or other
agent of the Company, and acknowledges that Indemnitee is relying upon this
Agreement in continuing in such capacity.
(b) In the event Indemnitee is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, the Company shall reimburse Indemnitee for all Indemnitee's
reasonable fees and expenses, including attorney's fees, in bringing and
pursuing such action.
8. Subrogation. In the event of payment under this agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
9. Continuation of Obligations. All agreements and obligations of
---------------------------
the Company contained herein shall commence upon the date that Indemnitee first
became a member of the Board of Directors or an officer, employee or agent of
the Company, as the case may be, and shall continue during the period Indemnitee
is a director, officer, employee or agent of the Company (or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) and shall continue thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal or investigative, by reason of the fact
that Indemnitee was a director, officer, employee or agent of the Company or
serving in any other capacity referred to herein.
10. Survival of Rights. The rights conferred on Indemnitee by this
------------------
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of the Company and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
11. Non-Exclusivity of Rights. The rights conferred on Indemnitee by
-------------------------
this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of the Company's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office; provided, however, that this
5
<PAGE>
Agreement shall supersede and replace any prior indemnification agreements
entered into by and between the Company and Indemnitee and that any such prior
indemnification agreement shall be terminated upon the execution of this
Agreement.
12. Separability. Each of the provisions of this Agreement is a
------------
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the Company
to indemnify the Indemnitee to the full extent provided by the Bylaws or the
Code.
13. Governing Law. This Agreement shall be interpreted and enforced
-------------
in accordance with the laws of the State of Delaware.
14. Binding Effect. This Agreement shall be binding upon Indemnitee
--------------
and upon the Company, its successors and assigns, and shall inure to the benefit
of Indemnitee, his or her heirs, personal representatives and assigns and to the
benefit of the Company, its successors and assigns.
15. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless it is in
writing and is signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
RAVISENT TECHNOLOGIES INC.
a Delaware corporation
By:______________________________
INDEMNITEE
_________________________________
Address: ________________________
_________________________________
6
<PAGE>
EXHIBIT 10.7
DEVELOPMENT AND LICENSE AGREEMENT
This Development and License Agreement (the "Agreement") is effective as of
March 2, 1998 (the "Effective Date") and made by and between ATI Technologies
Inc.("ATI"), an Ontario corporation, with a principal place of business at 33
Commerce Valley Dr., Thornhill, Ontario, L3T 7N6 and Quadrant International,
Inc. ("QI"), a Pennsylvania corporation located at 269 Great Valley Parkway,
Malvern, Pennsylvania 19355 U.S.A.
RECITALS
ATI is in the business of developing integrated circuits and more
specifically graphics and multimedia controller integrated circuits.
QI is the owner of a software DVD product currently marketed by QI under the
brand name CINEMASTER.
ATI wishes to license rights to QI's current and future software DVD products
and QI desires to grant such rights to ATI.
NOW THEREFORE, intending to be legally bound and in consideration of
the mutual promises herein, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Definitions. The following definitions apply to this Agreement:
-----------
1.1. "ATI Affiliate" means a company or entity which ATI effectively owns
or controls, directly or indirectly, more than fifty (50%) of the
voting stock or ownership interest therein.
1.2. "AC-3 Licensee" shall mean anyone licensed by Dolby Laboratories
Licensing Corporation ("Dolby"), a corporation organized under the
laws of the State of New York, having its principle place of business
at 100 Potrero Avenue, San Francisco, California 94103, to
manufacture products containing digital audio coding technology known
as Dolby AC-3 .
1.3. "ATI Trademarks" shall mean ATI's trademarks, service marks and
logos.
1.3. "CSS Compliant" shall mean a DVD product which complies with CSS
Specifications.
1.4. "Entity" shall mean the organization to administer CSS currently
being established by MEI, Toshiba and other DVD industry members.
1.5. "CSS Licensee" shall mean anyone that enters into a CSS License
agreement with MEI or the Entity to the extent such agreement is
valid and in effect. ATI and QI are CSS Licensees.
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
1.6. "CSS" shall mean Contents Scramble System developed by MEI and
Toshiba to provide protection for the contents of digital versatile
discs (DVD discs) as described in CSS Specifications.
1.7. "CSS Specification" shall mean the documentation relating to CSS
entitled "CSS Specifications", including Procedural Specifications
and Technical Specifications, that MEI makes available to a CSS
Licensee.
1.8. "Derivative" shall mean (a) for copyrightable or copyrighted
material (including materials subject to mask work rights), a work
which is based upon one or more pre-existing works, such as a
revision, modification, translation, abridgment, condensation,
expansion, collection, compilation, or any other form in which such
pre-existing works may be recast, transformed, or adapted; (b) for
patentable or patented materials, any adaptation, addition,
improvement, or combination based on a preexisting work; and (c) for
material subject to trade secret protection, any new material,
information, or data relating to and derived from such existing
trade secret material, including new material which may be
protectable by copyright, patent, or other proprietary rights.
1.9. "Deliverables and Development Schedule" shall mean the mutually
agreed upon deliverables and schedule as described in the Marketing
Requirements Document set out in Exhibit A and as revised from time
---------
to time by mutual written agreement of the parties.
1.10. "Documentation" shall mean user manuals and other written materials
that relate to QI's Software DVD, including materials useful for
design (for example, logic manuals, flow charts, and principles of
operation), and machine-readable text or graphic files subject to
display or print-out which comply with CSS, Dolby and Macrovision
license requirements. The definition of "Documentation" excludes
those written materials that might otherwise come within the
definition but for which QI is prohibited from providing to ATI
because QI is contractually bound with one or more third parties not
to disclose such materials due to their confidential nature.
1.11. "Dolby Certified" shall mean the design approval and performance
testing by Dolby of an AC-3 product to be manufactured by an AC-3
Licensee.
1.12. "Dolby Royalties" shall mean royalties payable to Dolby pursuant to
an AC-3 license by an AC-3 Licensee.
1.13. "Version" shall mean new versions of software incorporating new or
next generation acceleration features in ATI integrated circuit
products. Other maintenance modifications or revisions to correct
any mistake, problem or defect causing incorrect or non-functioning
of the software, or new releases that improve functions, add new
functions or features or improve performance by changes in system
design or coding not directly related to ATI acceleration hardware
shall not be deemed such new versions.
2
<PAGE>
1.14. "Intellectual Property Rights" shall mean (a) all Patent Rights; (b)
all trade secret rights arising under the laws of any jurisdiction;
(c) all United States and foreign semiconductor mask work rights and
registrations for such rights; and (d) all copyright rights and all
other literary property and author rights, whether or not
copyrightable, and all copyrights and copyrighted interests,
including any renewals thereof but will not include any rights in
any trademarks, trade names, service marks, logos and the goodwill
associated therewith. "Patent Rights" shall mean all United States
and foreign letters patent and applications for letters patent,
industrial models, industrial designs, utility models, certificates
of invention, and other indicia of invention ownership, including
any such rights granted upon any reissue, division, continuation or
continuation-in-part applications now or hereafter filed.
1.15. "Level 1 Support" shall mean support for End Users relating to
program usage, program and hardware compatibility and program
requirements
1.16. "Level 2 Support" shall mean technical support which is back-up for
Level 1 Support and isolates problems and defects relating to
program and hardware compatibility and program requirements.
1.17. "Level 3 Support" shall mean development and manufacturing support
to fix program defects.
1.18. "Macrovision" shall mean Macrovision Corporation, a Delaware
corporation, having its principal place of business at 1341 Orleans
Drive, Sunnyvale, California 94089.
1.19. "Macrovision Certified" shall mean the provision of a certificate by
Macrovision evidencing testing and approval.
1.20. "Microsoft Certified" shall mean the provision of a certificate by
Microsoft evidencing WHQL (Windows Hardware Quality Labs) qualified
and/or approved.
1.21. "Object Code" shall mean the machine readable form computer
programming code as opposed to the human readable form of computer
programming code.
l.22. "Project Manager" shall mean the primary contact person designated
by each party in writing, who will coordinate the activities of the
parties hereunder. Each party may change its designated Project
Manager from time to time during the term of this Agreement by
written notice.
1.23. "QI Software DVD" shall mean software DVD developed by QI and
currently marketed under the brand name Cinemaster and all
subsequent versions and modifications thereof and enhancements and
Derivatives thereto and tools, including diagnostic tools and
utilities used in QI's software DVD build process.
3
<PAGE>
1.24. "Accelerated Software DVD" shall mean QI Software DVD including
motion compensation or any other form of hardware assisted
acceleration provided by a graphics component.
1.25. "Unaccelerated Software DVD" shall mean QI Software DVD not
including motion compensation or any other form of graphics hardware
assisted acceleration.
1.26. "Hardware DVD" shall mean an ATI board and supporting software
including QI's DVD application software or a Derivative thereof used
in combination with the IBM CD1. 1 MPEG2 decoder.
1.27. "Source Code" shall mean the human readable form computer
programming code and related system level documentation, including
all comments and any procedural code such as job control language.
1.28. "Shippable Software DVD" shall mean a version of the QI Software DVD
which is CSS Compliant and has been Dolby Certified, Macrovision
Certified, Microsoft Certified and meets any further certification
obligations, including DVD, imposed as a requirement to provide DVD
products and has met and passed all of ATI's internal quality
assurance tests and qualifications.
1.29. "Video Encoder Software" shall mean QI's real-time software video
encoder engine as set out in Schedule A.
1.30. "Viona" shall mean Viona Development Hard & Software Engineering
GmbH, a German corporation located at Karlstrasse 27, Karlsruhe D
76133 Germany.
1.31 As used herein, the terms "sale," "sell," or "sold" in the context
of a copy of any software product hereunder means the sale, or other
disposition, of a license for a copy of such software but shall not
include samples or upgrades provided to correct any mistake, problem
or defect in the software.
2. Responsibilities and Obligations.
--------------------------------
2.1. Upon execution of this Agreement, QI shall provide ATI with the
current version of QI Software DVD in Object Code form. QI shall
work with ATI in accordance with the Deliverables and Development
Schedule to provide future enhanced versions of the QI Software DVD.
2.2. The parties shall assist each other in testing and certifying the QI
Software DVD as required under the parties' respective CSS License
agreements.
2.3. QI shall deliver to ATI, as early as possible, but not later than
April 30th, 1998, Shippable Software DVD and supporting
Documentation for ATI to sell and distribute in accordance with the
terms of this Agreement.
4
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2.4. During the term of this Agreement QI will deliver to ATI the Source
Code for QI Software DVD. The first delivery of such Source Code
will be made promptly after ATI has made its first royalty payment
to Ql hereunder. The parties acknowledge and agree the Source Code
contain trade secrets and proprietary information of third parties;
and that QI is contractually bound not to disclose the Source Code
to others, including ATI. Accordingly, QI will not deliver to ATI
such portions of the Source Code that contain or comprise trade
secrets or proprietary information of any third parties unless the
license with said third party permits delivery to ATI. QI will
deliver to ATI, from time to time, only such portions of the Source
Code for QI Software DVD that does not contain or comprise trade
secrets or proprietary information of any third parties.
2.5. QI shall promptly provide to ATI any Derivatives, improvements,
modifications, enhancements, or bug fixes made to QI Software DVD or
Shippable Software DVD during the term of this Agreement.
2.6. ATI shall provide Level 1 and Level 2 Support to ATI customers. QI
shall provide, at no additional charge, Level 3 Support directly to
ATI for Shippable Software DVD for the full term of the Agreement.
In the event of a critical bug or problem severely restricting the
operations of an OEM or reseller, QI will make best efforts to fix
the problem within two business days. In the event that QI is unable
to fix the problem within such two business days, QI will provide
ATI with a written detailed plan, including a schedule and outlining
the problem and possible resolutions.
2.7. If either party's CSS License requires any modification or
enhancement to the Shippable Software DVD, QI shall modify the
Shippable Software DVD currently being distributed by ATI, as soon
as reasonably possible, to ensure the software is CSS Compliant
within the time period required by both parties' CSS License and the
CSS Specifications.
2.8. During the term of this Agreement, QI shall designate an appropriate
number of its engineering staff members to work with ATI in
accordance with the Development Schedule.
2.9. The Project Managers shall schedule formal meetings at mutually
agreeable times during the term hereof, to be attended by personnel
of each party, to discuss the status of the Deliverables and
Development Schedule.
2.10. QI shall use best efforts to obtain rights to sublicense any third
party rights encompassed within the Deliverables and/or
Documentation to ATI.
3. Ownership.
---------
Intellectual Property Rights arising, developed or delivered hereunder shall be
owned as follows: Intellectual Property Rights originated, discovered or
developed by ATI, shall be owned by ATI, and Intellectual Property Rights
originated, discovered or developed by QI shall be owned by QI.
5
<PAGE>
Intellectual Property Rights originated, discovered or developed jointly by both
parties ("Jointly Owned Intellectual Property") shall be jointly owned and each
party shall have the unrestricted right under Jointly Owned Intellectual
Property to make, use, sub-license and/or sell any product anywhere in the
world, in Object Code form only, without any restriction by the other party.
Both parties agree to execute without further consideration any and all further
documents or assurances as may be necessary to effect the above or to assist one
party in protecting (including the filing of patents) the Jointly Owned
Intellectual Property. To the extent that any ATI owned Intellectual Property
Rights or any Jointly Owned Intellectual Property Rights comprise or contain
derivative works based on owned Intellectual Property Rights, then ATI will pay
to QI a Royalty for the sale of each copy of such work a royalty in accordance
with Section 7. For purposes of the foregoing sentence, and for purposes of
Section 7 of this Agreement, a `derivative work', shall be as defined by, and
interpreted under, the Copyright Act of 1976, as amended, 17 U.S.C. (S) 101.
4. License Grants.
--------------
4.1 ATI and QI hereby grant to each other a world-wide, non-exclusive
license under Intellectual Property Rights covering the manufacture,
development, importation, offer for sale, sale, modification, or use
of Derivatives of QI Software DVD, Shippable Software DVD, Video
Encoder Software and/or Hardware DVD, but only for sale or
distribution in Object Code form.
4.2 QI hereby grants ATI a world-wide, non-exclusive, license under the
QI Intellectual Property Rights to use, reproduce and modify QI
Software DVD, Shippable Software DVD, Video Encoder Software,
Hardware DVD and Documentation for the purpose of supporting and
developing existing and future ATI and QI products.
4.3 QI hereby grants ATI a world-wide, non-exclusive (subject to the
exclusivity provisions set out below), license under QI Intellectual
Property Rights to make, import, offer for sale and sell the
Shippable Software DVD, QI Software DVD, Video Encoder Software and
Hardware DVD but solely in Object Code. ATI has the right to
sublicense ATI Affiliates the right to import, offer for sale and
sell such Shippable Software DVD, QI Software DVD, Video Encoder
Software and Hardware DVD.
4.4 ATI and ATI's permitted sublicensees may only sell or distribute any
software hereunder comprising Shippable Software DVD, QI Software
DVD, Video Encoder Software and Hardware DVD, and Derivatives of the
foregoing, in such manner that ATI would have the ability to account
for, and does in fact account for, the exact number of such copies
of the software sold or distributed so that the appropriate royalty
payments may be made to QI hereunder.
4.5 ATI will only permit independent contractors to have access to the
Source Code if QI has given its prior written approval to have such
access, and the independent contractor has signed a non-disclosure
agreement. ATI shall be primarily
6
<PAGE>
responsible for all unauthorized uses and/or disclosures of such
Source Code by any employee or independent contractor of ATI,
notwithstanding the fact that such person may have signed non-
disclosure, non-competition and or other agreement with QI.
5. Exclusivity.
-----------
For each new Version of the Accelerated Software DVD that QI develops and
delivers to ATI, ATI shall have a limited period of exclusivity, during which QI
will not sell such Version of the Accelerated Software DVD to third parties (the
"Exclusivity Period") as set forth in this Section. The Exclusivity Period for
each new Version of the Accelerated Software DVD shall extend from the date that
ATI first sells or ships Shippable Software DVD incorporating such new Version
until either six (6) months thereafter, or the date that ATI first sells or
ships Shippable Software DVD incorporating the next new Version, whichever is
earlier. The parties agree that with respect to the first Version of the
Accelerated Software DVD that QI is delivering to ATI hereunder, the Exclusivity
Period shall not extend beyond October 1, 1998. ATI has the option of
terminating its right to have such Exclusivity Periods, on written notice to QI
at any time up to sixty (60) days prior to the end of the first year of the
first term of this Agreement. In the event of timely termination of its right
to have such Exclusivity Periods as set forth in the preceding sentence, ATI
will not be obligated to prepay a minimum royalty during the second year of the
first term of this Agreement. Except as set forth in Section 7.7, QI agrees
that during each respective Exclusivity Period, QI will not sell, license or
distribute the Shippable Software DVD incorporating such new Version of QI
Software DVD to any third party. The parties acknowledge and agree that
Versions of QI Software DVD that incorporate Unaccelerated Software DVD shall
not be subject to any Exclusivity Period.
ATI shall, for the term of this Agreement, have the exclusive right to market
and sell QI Software DVD for use in association with ATI graphics components.
For (3) three months after QI delivers a Shippable Software DVD capable of
running on a Windows NT operating system ("NT Software DVD"), ATI shall have
exclusivity during which time QI shall not sell or license the NT Software DVD
to any other third party.
6. Right of First Refusal.
----------------------
ATI and QI each acknowledge that it is their respective intentions to work
together on an ongoing basis to build a mutually beneficial business
relationship. ATI and QI acknowledge that there may be future projects under
which the parties could collaborate including but not limited to digital TV
decoding. QI agrees to discuss any QI initiated future development projects with
ATI to assist the parties in determining whether future collaboration or teaming
between the parties is possible. Prior to QI entering into a license or
development agreement with any third party relating to any future development,
product or project, initiated by QI, QI shall notify ATI of the potential of
such a transaction at least thirty (30) days prior to QI entering into such an
agreement ("Negotiation Period"). During such Negotiation Period, QI agrees to
negotiate in good faith with ATI an agreement or license relating to such future
development, product or project. QI's obligation under this section shall
terminate upon the termination of this Agreement. Notwithstanding the foregoing,
QI shall have no obligation to advise ATI of any
7
<PAGE>
future development projects with third parties in situations where such project
discussions were not initiated by QI. The parties acknowledge that QI currently
has existing business relationships and projects either underway or under
consideration with various third parties. The parties further acknowledge that
much of the information concerning such existing business relationships and
projects involve confidential information. Accordingly, notwithstanding the
foregoing, QI shall have no obligation to advise ATI at any time about the
existence of, or any other information relating in any way to, any of QI's
existing business relationships with third parties or about projects underway
with, under consideration with such third parties.
7. Financial Terms.
---------------
7.1. Royalty Payments by ATI. During the term of this Agreement and at
-----------------------
all times ATI shall pay QI royalties based on ATI's sale of each
copy of Shippable DVD Software, or any derivative work of Shippable
DVD Software and Hardware DVD, within thirty (30) days after the end
of each calendar quarter (ending on March 31, June 30, September 30
and December 3 1), for the sale of Hardware DVD, Shippable DVD
Software, or such derivative work, during such quarter. The royalty
rate shall be as follows:
Cumulative Volume Royalty Per Copy
----------------- ----------------
* *
Notwithstanding the foregoing, upon both parties agreement, in the event that an
ATI customer demands royalties of less than * (in the case where ATI is
paying to QI royalties of * ) or royalties of less than * (in the case
where ATI is paying to QI royalties of * ), both parties may agree to split
the royalty payment by the customer equally between ATI and QI.
ATI will be responsible for Dolby Royalties or any other royalties arising out
of the DVD or CSS forum payable on Shippable DVD Software sold by ATI.
7.2. During the term of this Agreement and at all times thereafter, ATI
shall pay QI royalties based on ATI's sale of each copy of Video
Encoder Software, or any derivative work of Video Encoder Software,
within thirty (30) days after the end of each calendar quarter
(ending on March 31, June 30, September 30 and December 31), for
sale of Video Encoder Software, or such derivative work, during such
quarter. The royalty rate shall be as follows:
Cumulative Volume Royalty Per Unit
----------------- ----------------
* *
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
8
<PAGE>
* *
7.3. Minimum Prepaid Royalties. At the end of each calendar quarter
-------------------------
during the first year of royalty payments, commencing on the date
that Shippable Software DVD is provided to ATI by QI, ATI shall pay
to QI, a minimum prepaid royalty payment of seven hundred fifty
thousand dollars ($750,000). At the end of each three (3) month
period during the second year of royalty payments, ATI shall pay to
Quadrant, a minimum prepaid royalty of nine hundred thousand dollars
($900,000). These royalties shall be credited towards the royalties
earned during such calendar quarter. In the event that the royalties
for any calendar quarter plus credits from previous quarters exceed
the actual royalties earned during such calendar quarter, such
excess royalties will be credited towards future royalties in the
following calendar quarters. After the conclusion of the eighth
quarter, ATI will not be required to make minimal royalty payments.
7.4. ATI may apply $125,000 of the minimum prepaid royalty due in each of
the first four (4) quarters of the first year of royalty payments to
purchase further equity in Quadrant in the form of convertible
preferred stock and warrants such further equity shall also
constitute prepaid royalties by ATI and shall reduce ATI's minimum
prepaid royalty accordingly. Provided that ATI is still obligated to
pay a minimum prepaid royalty, ATI may further apply $500,000 of the
minimum prepaid royalty due twenty-four (24) months after ATI is
first provided with a Shippable Software DVD to purchase further
equity in Quadrant in the form of convertible preferred stock and
warrants.
7.5 Favoured Pricing for ATI and ATI Customers. Under the terms of this
------------------------------------------
Agreement, QI agrees that ATI and ATI customers shall be provided
with a no less favourable royalty rate than QI may grant or has
granted to any other entity. In the event that QI has licensed any
version of its QI Software DVD at a more favorable royalty rate
and/or on terms more favorable than those described herein, ATI
shall be automatically entitled to the same royalty rate and/or
terms granted by QI to the other entity.
7.6 The parties acknowledge that there may arise situations where an OEM
of ATI would like to incorporate QI's Accelerated Software DVD that
is then currently subject to the ATI's Exclusivity Period in a
product line that does not include ATI graphics technology. In such
situations, ATI may, within its discretion, waive its right to
exclusivity during the relevant Exclusivity Period and permit QI to
sell that Version of QI's Accelerated Software DVD to such OEM, and
in such event, QI will pay to ATI a reverse royalty,during the
Exclusivity Period, equal to the lesser of: (a) * per copy of the
Accelerated Software DVD incorporating such Version sold to the OEM
during such Exclusivity Period, or (b) * of the license fees
received by QI from the OEM attributable to QI's Accelerated
Software DVD incorporating such Version that is sold during such
Exclusivity Period. QI shall make such reverse royalty
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
9
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payments to ATI on a quarterly basis, with respect to applicable
sales during the preceding calendar quarter.
7.7 Records and Reports.
-------------------
ATI shall maintain complete, clear and accurate records of the number of copies
of Shippable Software DVD and QI Software DVD sold or otherwise disposed of by
either ATI or QI. On a calendar quarterly basis, ATI shall provide QI with a
written summary, broken out by month, of the number of copies sold in such
calendar quarter.
QI shall maintain complete, clear and accurate record(s) of the number of copies
of Accelerated Software DVD sold to OEM(s) pursuant to Section 7.7. On a
calendar quarterly basis, QI shall provide ATI with a written summary, broken
out by month, of the number of copies sold in such calendar quarter, but only if
there were applicable copies sold to OEM(s) during the relevant calendar
quarter.
7.8 Audit. Each party shall have the right during the term of this
-----
Agreement and for one (1) year thereafter, and QI shall have the
right after termination of this Agreement for so long as ATI is
obligated to make royalty payments to QI hereunder, to have an
inspection and audit of the records maintained by the other party
conducted by a mutually agreeable third party auditor, which
inspection and audit shall be conducted during regular business
hours at the other party's offices, upon seven (7) days notice and
in such a manner as not to interfere with normal business
activities. This audit right shall be limited to twice per year
unless a discrepancy is shown. The party requesting the audit shall
be responsible for the fees and costs of such audit. In the event an
audit reveals an underpayment of fees and/or royalties of more than
five percent (5%), the delinquent party shall promptly pay the other
Party the amount of any such underpayment and the costs of such
audit. Such audit will be conducted under a confidentiality
agreement wherein only the amount of any overpayment or underpayment
may be disclosed.
7.9 U.S. Currency. All payments specified herein are in U.S. dollars
-------------
and all payments made hereunder will be made in U.S. dollars.
8. Warranties.
----------
8.1 QI represents and warrants that it has no actual knowledge that QI's
Software DVD infringes any valid Intellectual Property Right of any
third party.
8.2 QI represents and warrants that the Shippable Software DVD shall be
free of any known viruses.
8.3 QI represents and warrants that QI either owns the copyright in the
Shippable Software DVD or has been licensed to grant the rights and
licenses granted hereunder to ATI.
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8.4 QI represents and warrants that the Shippable Software DVD shall be
Year 2000 compliant in that it shall provide and/or receive data
within and between the 20/th/ and 21/st/ centuries, provided that
all hardware, software and firmware used with the Shippable Software
DVD properly exchanges accurate date data with it. QI shall be
liable for direct damages in the event of a breach of this express
warranty.
8.5 QI represents and warrants that QI is a CSS Licensee and that the
Shippable Software DVD, when provided to ATI, shall be CSS
Compliant.
8.6 QI represents and warrants that QI is an AC-3 Licensee and the
Shippable Software DVD, when provided to ATI, meets all the
technical, marketing and other requirements imposed by Dolby on its
AC-3 Licensees.
8.7 ATI and QI represent and warrant that they are a CSS Licensee and
will at all times perform within the scope of its duties under the
CSS License agreement.
8.8 ATI represents and warrants that there will be no unauthorized
disclosure or use of any Source Code by ATI, or any employee or
contractor of ATI, and that no unauthorized party shall have access
to copies of any Source Code in ATI's possession or control.
8.9 QI represents and warrants that it does not have any agreements with
Viona to prevent the disclosure of Source Code of the QI Software
DVD to ATI and further that QI has the right to grant licenses under
Viona Intellectual Property Rights subsisting in the QI Software DVD
to ATI under the terms of this Agreement.
9. Confidentiality.
---------------
"Confidential Information" means any information provided to either party by the
other party in connection with this Agreement, including this Agreement, which
is confidential and proprietary to the disclosing party and conspicuously marked
as confidential at the time provided by the disclosing party. Any information
provided orally by a party is presumed to be non-confidential, unless designated
as confidential at the time of disclosure and summarized in a written notice
within fifteen (15) calendar days of such oral disclosure. All Source Code is
hereby deemed Confidential Information. Each party shall hold in confidence all
Confidential information during the term of this Agreement and at all times
thereafter. Each party agrees to take precautions to prevent any unauthorized
disclosure or use of Confidential Information, and such precautions will be
consistent with the precautions used to protect such party's own confidential
information, but in no event less than reasonable care. The obligations of the
parties hereunder shall not apply to any materials or information which a party
can demonstrate, through documented evidence (a) is now, or hereafter becomes,
through no act or failure to act on the part of the receiving party, generally
known or available; (b) is known by the receiving party at the time of receiving
such information as evidenced by its records; (c) is hereafter furnished to the
receiving party by a third party, as a matter of right and without restriction
on disclosure; (d) is independently developed by the receiving party without any
breach of this Agreement; or (e) is the subject of a written permission to
disclose provided by the disclosing party. Notwithstanding any other provision
of this Agreement, disclosure of Confidential Information shall not be
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precluded if such disclosure: (a) is in response to a valid order of a court or
other governmental body of the United States or Canada or any political
subdivision thereof; provided, however, that the responding party shall first
have given notice to the other party hereto so that such other party may attempt
to prevent such disclosure and if disclosed, the responding party shall have
made a reasonable effort to obtain a protective order requiring that the
Confidential Information so disclosed be used only for which the order was
issued and be treated as confidential and under seal; (b) is otherwise required
by law; or (c) is otherwise necessary to establish rights or enforce obligations
under this Agreement, but only to the extent that any such disclosure is
reasonably necessary.
10. Excluded Damages.
----------------
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL,
EXEMPLARY, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER ARISING OUT OF CONTRACT,
TORT, STRICT LIABILITY OR OTHERWISE, RESULTING FROM OR RELATED TO THIS AGREEMENT
(WHETHER OR NOT SUCH PARTY KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF ANY
SUCH DAMAGES). THIS SECTION WILL APPLY NOTWITHSTANDING ANY OTHER PROVISIONS OF
THIS AGREEMENT.
11. Indemnification.
---------------
11.1 Each party agrees to defend, indemnify and hold harmless the other
party and its officers, directors, employees, agents and contractors
("Indemnitees") from and against any and all claims, actions,
liabilities, obligations, damages, losses, demands, recoveries,
deficiencies, costs or expenses, including without limitation,
reasonable attorneys fees and expenses, which an Indemnitee may
suffer or incur connected with, resulting from or arising out of
such party's breach of its representations, warranties and/or
covenants made in this Agreement.
11.2 QI agrees to defend, indemnify and hold harmless ATI from and
against any and all claims, actions, liabilities, obligations,
damages, losses, demands, recoveries, deficiencies, costs or
expenses, including without limitation, reasonable attorneys fees
and expenses, which ATI may suffer or incur connected with,
resulting from or arising out of the infringement or
misappropriation of a third party Intellectual Property Right by the
materials supplied by QI, including the Shippable DVD Software. The
foregoing indemnity will not apply to any infringement or
misappropriation claim arising from (a) any modifications to the
Shippable DVD Software wherein the claim arises as a result of such
modification and the modification was made by parties other than QI,
or (b) any combination of any Shippable DVD Software with other
products or components where there would be no infringement absent
such use with such other products or components.
11.3 The indemnification provisions set forth herein are predicated on
the indemnitee giving prompt written notice of any claim for which
indemnification is required, tender the defense of any such claim to
the indemnifying party, providing full cooperation for such defense
at the indemnifying party's expense, and not settling
12
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without the indemnifying party's prior written approval, not to be
unreasonably withheld. The indemnitee may participate in any such
defense or settlement with counsel of its own choosing at its own
expense.
12. Trademarks and Logos.
--------------------
QI agrees that the Shippable Software DVD to be marketed and sold by ATI shall
be sold and marketed under ATI Trademarks. QI agrees to prominently mark, with
ATI Trademarks, as identified and approved by ATI, the Shippable Software DVD,
Documentation and packaging to be sold and distributed by ATI. QI acknowledges
and agrees that QI trademarks and brand name will not be used in association
with the above product. ATI agrees not to remove any copyright notices, which
will acknowledge the copyrights of both parties, from any version of the
Shippable Software DVD.
QI recognizes ATI's ownership and title to the ATI Trademarks and the goodwill
attaching thereto. QI agrees not to contest or take any action to contest the
ATI Trademarks, or to use, employ or attempt to register any trademark which is
confusingly similar to the ATI Trademarks.
14. Co-Marketing.
------------
The parties agree to provide reasonable assistance to each other, within each
party's sole discretion, in the promotion, marketing and advertising of the
other parties DVD products.
15. Term and Termination.
--------------------
15.1 Term. Unless otherwise terminated under this Section, this
----
Agreement shall commence on the Effective Date and shall continue
for an initial term of two (2) years. This Agreement will be
automatically extended for one (1) year terms, unless written notice
of its intention of non-renewal from one party is received by the
other no later than (60) days prior to the end of the initial or
extended term.
15.2 Termination of Agreement. This Agreement may be terminated at any
------------------------
time by a party: (a) for material breach of this Agreement by the
other party, if such breaching party does not cure such breach
within thirty (30) days after receiving written notice thereof; and
(b) for a repeated breach of this Agreement by the other party, if
such breaching party does not cease committing such repeated
breaches within thirty (30) days after receiving written notice
thereof.
15.3 Survival. The rights and obligations contained in the following
--------
sections shall survive any termination or expiration of this
Agreement: Section 3, Section 4, Section 8.7, 8.8, Section 9,
Section 10, Section 11, Section 12, and Section 16. 1, Section 16.2,
Section 16.3, Section 16.4, and Section 16.8. In the event the
Agreement is terminated, licenses granted to ATI under this
Agreement shall survive along with ATI's obligations as set out in
Section 7.1, 7.2, 7.3, 7.8 and 7.9. ATI's obligations under Sections
2.4 and 4.5 shall also survive any termination of this Agreement.
13
<PAGE>
15.4 Upon termination of this Agreement for any reason, each party shall
have all rights and remedies available to it in law or in equity
with respect to the other party.
16. General Provisions
------------------
16.1 Export Control. Both parties agree to comply strictly and fully
--------------
with all export control laws and regulations of both the United
States and Canada.
16.2 Public Announcements. No press release or public notice relating to
--------------------
this Agreement may be made by either party without receiving the
other party's prior written consent. If requested by one party, the
other party shall promptly supply the other party with copies of all
public statements and of all publicity and promotional material
relating to this Agreement and the sale and promotion of QI's
Software DVD.
16.3 Assignment. Neither party may assign this Agreement, or any of its
----------
rights or obligations under this Agreement to any third party
without the other party's written consent. Notwithstanding the
foregoing, either party shall have the right to assign or transfer
this Agreement in the case of a merger, acquisition or sale of
substantially all of such party's assets.
16.4 Governing Law. This Agreement shall be governed by and interpreted
-------------
in accordance with the laws of the Commonwealth of Pennsylvania,
excluding its choice of law rules. The parties hereby agree that any
dispute regarding the interpretation or validity of, or otherwise
arising out of, this Agreement shall be subject to the exclusive
jurisdiction of the Pennsylvania state and Federal courts if legal
action is commenced by ATI, and in the Ontario Provincial Courts of
Canada or Canadian Federal Court if legal action is commenced by QI,
and the parties agree to submit to the personal and exclusive
jurisdiction and venue of these courts. The parties hereby expressly
waive any right to a jury trial and agree that any proceeding
hereunder shall be tried by a judge without a jury. The parties
exclude the application of the United Nations Convention on
Contracts for the International Sale of Goods, even if otherwise
applicable.
16.5 Headings. The paragraph headings appearing in this Agreement are
--------
inserted only as a matter of convenience and in no way define,
limit, construe or describe the scope or extent of such paragraph,
or in any way affect such agreements.
16.6 Counterparts. This Agreement may be executed simultaneously in two
------------
or more counterparts, each of which will be considered an original,
but all of which together will constitute one and the same
instrument.
16.7 Notices. Any notice required under this Agreement shall be given in
-------
writing and shall be deemed effective upon delivery to the party to
whom addressed by (a) express courier, upon written verification of
actual receipt, (b) facsimile, upon confirmation of receipt
generated by the sending device, or (c) five days after
14
<PAGE>
sending, via certified mail, return receipt requested. All notices
shall be sent to the applicable address on the cover page hereof or
to such other address as the parties may designate in writing, with
a copy to the legal department of such party.
16.9 Amendments. Any amendments to this Agreement must be in writing and
----------
executed by the authorized representatives of the parties.
16.10 Severability. The illegality or unenforceability of the whole or
------------
any part of the provisions of this Agreement will not affect the
continued operation of the remaining provisions of this Agreement.
16.11 Waiver. The failure of either party at any time to insist upon
------
strict performance of any of the terms and conditions contained in
this Agreement will not be deemed a waiver of its right at any time
thereafter to insist upon strict performance.
16.12 Relationship of the Parties. Nothing in this Agreement shall
---------------------------
constitute, nor shall any party represent that there is any
relationship of employer and employee, principal and agent or
partnership between the parties as a result of this Agreement.
16.13 Force Majeure. Neither party will be responsible for delays or
-------------
failures in performance resulting from acts beyond the control of
such party, including, without limitation, acts of God, riots, acts
of war, epidemics, fire, earthquakes or other natural disasters.
16.14 Entire Agreement. This Agreement and the exhibits hereto are the
----------------
complete agreement of the parties relating to the subject matter
hereof. This Agreement supersedes and governs any other prior or
collateral agreements or understandings, whether written or oral
with respect to the subject matter hereof
16.15 Escrow. Upon ATI's request, QI shall place the Source Code of the
------
QI Software DVD in escrow. The choice of the escrow agent and the
instructions given will be mutually agreed upon by both parties.
IN WITNESS WHEREOF, the authorized representatives of the parties have executed
this Agreement as of the date last signed below.
ATI QI
ATI Technologies Inc. Quadrant International, Inc.
By: /s/ Lee K. Lau By: /s/ Francis E. Wilde
Print Name: Lee K. Lau Print Name: Francis E. Wilde
Title: Vice President Title: President
15
<PAGE>
Date: March 18, 1998 Date: March 18, 1998
16
<PAGE>
EXHIBIT 10.22
AMENDED AND RESTATED CSS INTERIM LICENSE AGREEMENT
This AMENDED AND RESTATED CSS INTERIM LICENSE AGREEMENT, including the related
CSS PROCEDURAL AND AMENDED AND RESTATED TECHNICAL SPECIFICATIONS, (collectively,
this "Agreement"), is made and entered into as of 11/28/99 (the "Effective
--------- ---------
Date") by and between: (i) MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD., a Japanese
corporation having offices located at 1006 Kadoma, Osaka 571 Japan ("MEI"); and
---
(ii) QUADRANT INTERNATIONAL INC., a Pennsylvania corporation having offices
located at Malvern, PA USA ("Licensee"). This Agreement shall be effective as
--------
of the Effective Date provided that it is executed by the parties hereto.
RECITALS
A. MEI and Toshiba (as defined below) have developed a Contents Scramble
System as defined below) to provide reasonable security to the contents of
DVD Discs and thereby provide protection for copyrighted content against
unauthorized consumer copying, and have filed patent applications with
respect to the Content Scramble System.
B. MEI and Toshiba intend to license the Contents Scramble System to a new
independent entity which will administer such system.
C. The independent entity is expected to be established by MEI, Toshiba and
others in the DVD industry within several months.
D. During the period from the Effective Date until the establishment and
operation of the entity, Toshiba has granted to MEI a license to Toshiba's
rights to the Contents Scramble System, and MEI will serve as the licensing
agent for the Contents Scramble System to grant licenses to third parties
which desire to implement such system in DVD products.
E. This Agreement: (i) is intended to be an interim agreement that is
effective until the entity is established and makes available its standard
license agreement; and (ii) sets forth the terms and conditions under which
MEI will grant Licensee the right to implement the security system on its
DVD products.
AGREEMENT
1. DEFINITIONS. In addition to the other capitalized terms used in this
Agreement and in addition to the terms defined in the CSS Procedural
Specifications (which terms shall have the meanings set forth in the
Procedural Specifications), the following terms shall have the following
meanings:
<PAGE>
1.1 "Absolutely Necessary Claim" shall mean any claim(s) of patent(s) or patent
--------------------------
application(s) which are infringed by the manufacture, import, use or sale
of CSS Compliant Products because: (i) the CSS Specifications pertaining to
CSS are read on by such claim(s); or (ii) products that, solely because of
the requirement to implement the CSS Specifications pertaining to CSS,
cannot be manufactured, used, distributed, offered to be sold, sold,
imported, or otherwise transferred without infringing such claim(s).
1.2 "Associate Licensee" shall mean any third party that enters into an
------------------
agreement, containing substantially the same terms as those set out in
Attachment E ("Associate License").
1.3 "Associate Licensee Reseller" shall mean an Associate Licensee entering an
---------------------------
Associate License for the purpose of being authorized to purchase and
resell Schedule 1 and Schedule 2 Products, subject to the redistribution
requirements of the Associate License.
1.4 "Confidential Information" shall mean Proprietary Information that is
------------------------
either marked "confidential" or "proprietary" when disclosed in written
form or indicated as "confidential" or "proprietary" when disclosed orally
and confirmed in writing within thirty (30) days after such disclosure.
1.5 "Controlled Company" shall mean (i) any Majority-Owned Affiliate, and (ii)
------------------
any other entity that controls, is controlled by, or is under common
control with another entity. For purposes of this Section, "control" means
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of an entity with respect to the
matters set out in this Agreement, whether through the possession of voting
power or by contract encompassing such matters. In determining whether an
entity is covered by (ii) above, where a Licensee's control does not extend
to directing the commencement or termination of legal actions as described
herein, "control" is not deemed to be present.
1.6 "CSS" or "Contents Scramble System" shall mean the Contents Scramble System
--- ------------------------
developed by MEI and Toshiba and designed to provide reasonable protection
for the contents of DVD Discs, as more fully described in the CSS
Specifications, excluding any unrelated or independent technology
incidentally referenced by or used with the CSS Specifications such as MPEG
technology and DVD technology.
1.7 "CSS Complaint Products" shall mean DVD Products which are compliant with
----------------------
the CSS Specifications.
1.8 "CSS Licensee" shall mean any third party that enters into an agreement
------------
with MEI where such agreement contains substantially the same terms as
those set forth in this Agreement and is valid and in effect. CSS Licensees
shall include MEI and Toshiba in each of their respective capacities in
manufacturing, using,
2
<PAGE>
distributing, offering for sale, selling, importing or otherwise
transferring DVD Products.
1.9 "CSS Specifications" shall mean the documentation relating to CSS entitled
------------------
"CSS Specifications" (including the Procedural Specifications and the
Technical Specifications) that MEI makes available to Licensee pursuant to
the Membership Categories selected by Licensee, as such documentation may
be revised from time to time consistent with Sections 4.2 and 10.7 hereof.
1.10 "Disc IP" shall mean any copyright, trade secret, or other intellectual
-------
property inherent in the CSS Specifications pertaining to CSS or any
patent claim(s) (including but not limited to any Absolutely Necessary
Claims or Relatively Necessary Claims) relating to implementation of CSS
in any DVD Disc.
1.11 "DVD Products" shall mean the following products if they incorporate any
------------
portion of CSS: DVD Players, DVD-ROM Drives, Descramblers, Authenticators,
DVD Decoders (implemented in hardware as DVD Decoder Cards and/or in
software as DVD Decoder Software), DVD Disc Formatters, DVD Discs and
Integrated Products.
1.12 "Entity" shall mean the organization to administer CSS to be established
------
by MEI, Toshiba, and other DVD industry members.
1.13 "Highly Confidential Information" shall mean Proprietary Information that
-------------------------------
is either marked "Highly Confidential Information" when disclosed in
written form or indicated as "Highly Confidential Information" when
disclosed orally and confirmed in writing within thirty (30) days after
such disclosure. Such information shall be limited to information
constituting or disclosing: (i) the algorithms used for scrambling,
descrambling, authentication and key recovery; (ii) master, disc, title or
authentication keys; and (iii) information for testing product compliance
with CSS where such information makes use of or reveals information
described in (i) or (ii).
1.14 "Integrated Product" shall mean a combination of any one or more of a DVD
------------------
Player, DVD-ROM Drive, Descrambler, Authenticator, or DVD Decoder with any
other product, device or component into a single integrated unit that
permits, or that is designed for further integration into a product that
permits, the transmission of unscrambled content in digital or analog
format to any internal or external output or connection, provided that use
of the term "Integrated Product" does not affect the obligations or
provisions pertaining to any separately defined DVD Product. Integrated
Products may include by way of example and not of limitation: (i)
integration of DVD-ROM Drives or DVD Decoder Cards with or into computer
systems; and (ii) integration of DVD-ROM Drives or DVD Players with or
into television receivers and videocassette recorders. The term
"Integrated Product" shall include a combination of products linked
together through a form of common operation that controls the transfer of
CSS Data among the products.
3
<PAGE>
1.15 "Licensed Rights" shall mean all Absolutely Necessary Claims, copyrights,
---------------
trade secret rights, and other proprietary rights in any jurisdiction, and
all applications and registrations therefor in and to CSS (including the
Proprietary Information), that MEI (during the term of this Agreement)
owns or has the right to grant licenses of the scope granted herein
without the agreement of, or requirement for payment (or provision of
other consideration) to any person or entity.
1.16 "Majority-Owned Affiliate" shall mean any corporation, partnership or
------------------------
other entity that, directly or indirectly, owns, is owned by, or is under
common ownership with, Licensee, for so long as such ownership exists. For
purposes of the foregoing, "own," "owned" or "ownership" shall mean
holding ownership, or the right, to more than fifty percent (50%) of the
voting stock or ownership interest entitled to elect a board of directors
or a comparable managing authority.
1.17 "Proprietary Information" shall mean any and all information relating to
-----------------------
CSS made available to Licensee directly by MEI, by any other CSS Licensee
or pursuant to Section 5.3 prior hereto or during the term of this
Agreement including, without limitation, CSS Specifications, software,
hardware, firmware, documentation, designs, flow charts, technical data,
outlines, blueprints, notes, drawings, prototypes, templates, systems,
manuals, know-how, processes and methods of operation.
1.18 "Protected" shall mean a configuration in which a data stream or signal is
---------
not output except (i) via encrypted, scrambled, or otherwise secure link
or method authorized hereunder either through a device's or component's
authorized output or to the next component or device which in turn has an
authorized output; or (ii) directly as uncompressed video data to a
graphics subsystem via an internal computer path. For purposes of this
definition, authorized outputs and methods hereunder are those compliant
with requirements contained in Section 6.2 of the CSS Procedural
Specifications, including any upgrades or modifications thereto. By way of
example and not limitation, the following CSS Compliant Products, if so
configured, would be considered to be Protected:
(a) A DVD Decoder Card incorporating MPEG decoding and any or all of the
following outputs:
(i) NTSC with appropriate AGC and Colorstripe;
(ii) Computer Monitor SVGA (or other computer monitor RGB); or
(iii) Uncompressed digital video directed via an internal computer
path to a computer graphic subsystem for display;
(b) DVD Decoder Software incorporating MPEG decoding and supporting the
output described in subsection (a)(iii);
4
<PAGE>
(c) A DVD Decoder which implements the interrogation or identification
functions referenced in Section 6.2.8.2 of the CSS Procedural
Specifications; and
(d) A DVD Player which meets the requirements of section 6.2.1 of the CSS
Procedural Specifications.
1.19 "Relatively Necessary Claim" shall mean, any claim(s) of patent(s) or
--------------------------
patent application(s), that: (i) are not Absolutely Necessary Claims; and
(ii) with respect to which the implementation of all or any portions of
the CSS Specifications pertaining to CSS involves a design-around to such
patent claim(s) which would have a commercially significant effect on
performance, manufacturability or manufacturing cost, although the cost of
designing-around itself shall not be taken into account.
1.20 "Reseller" shall mean an entity that purchases Schedule 1 or Schedule 2
--------
Products from a CSS Licensee for the purpose of reselling such products
without modification and only to another CSS Licensee.
1.21 "Schedule 1 Product" shall mean a CSS Compliant Product licensed hereunder
------------------
which:
(a) is not a Schedule 2 or 3 Product, or
(b) is
(i) an Authenticator, or
(ii) a Descrambler, or
(iii) a CSS Decoder or partial implementation thereof or otherwise
is a device which has an output which is not permitted in a
Schedule 2 or 3 Product, or
(c) is a DVD Disc Formatter.
1.22 "Schedule 2 Product" shall mean a CSS Compliant Product licensed hereunder
------------------
which is not Protected and which outputs descrambled CSS Video Data only
in decompressed form.
1.23 "Schedule 3 Product" shall mean (a) a CSS Compliant Product licensed
------------------
hereunder which outputs CSS Data only in a Protected manner or (b) a DVD
Disc.
1.24 "Toshiba" shall mean Toshiba Corporation and is a registered trademark
-------
thereof.
2. LICENSES FROM MEI.
5
<PAGE>
2.1 Nonexclusive License. Subject to the terms and conditions of this
--------------------
Agreement, MEI grants Licensee a royalty-free, non-exclusive,
nontransferable right, under the Licensed Rights:
(a) to use and implement CSS to develop, design, manufacture and use CSS
Compliant Products that are in the Membership Categories selected by
Licensee in Exhibit "A", and to practice any methods necessary for the
------- -
manufacture or use of such CSS Compliant Products; and
(b) according to Licensee's membership categories, to purchase,
distribute, offer to sell, sell, import and otherwise transfer CSS
Compliant Products either made or received pursuant to authority
hereunder only as follows:
(i) Schedule 1 Products only to CSS Licensees or to Associate
Licensee Resellers;
(ii) Schedule 2 Products only to CSS Licensees or to Associate
Licensees; or
(iii) Schedule 3 Products to any person or entity.
(c) to provide prototype or sample DVD Products incorporating CSS to
prospective customers or retained test companies, in each case solely
for evaluation in contemplation of purchase of such products or
performance of specified testing of such products, as applicable,
provided that Licensee (i) may not provide such customers or test
companies with any CSS Confidential or Highly Confidential Information
unless such information would be provided to companies subject to
MEI's CSS Non-Disclosure Agreement; and (ii) must have a written
agreement with each such customer and test company that effectively
protects the confidentiality of CSS Confidential and Highly
Confidential Information by providing at least equivalent protections
as are provided in MEI's CSS Non-Disclosure Agreement (Exhibit F).
(d) Licensee agrees not distribute, offer to sell, sell, import, or
otherwise transfer any DVD Products that it makes or receives except
in accordance with Sections 2.1(b) and (c) above.
2.2 Copyright License. Subject to the terms and conditions of this Agreement,
-----------------
including without limitation the confidentiality provisions of Section 5.2,
for any copyrightable information included in CSS Specifications, MEI
grants Licensee a royalty-free, non-exclusive, nontransferable copyright
license to use and reproduce CSS Specifications for internal purposes
solely in connection with the implementation of CSS as permitted under
Section 2.1 hereof.
2.3 Right to Have Made. Licensee shall have the right under the licenses
------------------
granted herein to have third parties make CSS Compliant Products or
subparts thereof for
6
<PAGE>
the sole account of Licensee, but only if said CSS Compliant Products or
subparts thereof
(a) are to be sold, used, leased or otherwise disposed of, by Licensee
under the trademark, tradename, or other commercial indicia
(i) of Licensee or
(ii) of a person or entity to which Licensee is authorized by this
Agreement to sell
(1) the CSS Compliant Product that is the subject of
the "have made" agreement or
(2) an Integrated Product that is a CSS Compliant
Product made using such CSS Compliant Product,
and
(b) are made by such third parties using design specifications
or manufacturing drawings supplied by Licensee.
Such third parties shall be required to be either CSS Licensees
or subject to an applicable MEI CSS Non-Disclosure Agreement with
MEI (Exhibit F) if such manufacture requires disclosure to such
third parties of (1) Confidential Information or Highly
Confidential Information; or (2) other information or materials
from which Confidential Information or Highly Confidential
Information could reasonably be derived. Licensee shall remain
liable for such third parties' compliance with Sections 2.5, 4.2,
5.3, 5.4, 6.2, and 6.3 under this Agreement and with the Non-
Disclosure Agreement, if applicable, where such third parties are
not CSS Licensees. Such third parties shall receive no license,
sublicense, or implied license.
2.4 Sublicenses to Majority-Owned Affiliates. Subject to the requirements of
----------------------------------------
the following subsections (a) and (b), Licensee shall have the right to
sublicense to any of its Majority-Owned Affiliates, and such sublicensed
Majority-Owned Affiliates shall be referred to elsewhere in this Agreement
as "Permitted Sublicensees."
(a) Licensee shall have the right to sublicense to any of its
Majority-Owned Affiliates owned directly by Licensee ("Majority-Owned
--------------
Subsidiaries"), at Licensee's sole discretion, any of Licensee's
------------
rights under Sections 2.1, 2.2 and 2.3 provided that: (i) Licensee
notifies MEI of the identity of each Majority-Owned Subsidiary
receiving a sublicense and the type of Confidential Information or
Highly Confidential Information provided to such Majority-Owned
Subsidiary; (ii) each such Majority-Owned Subsidiary receiving a
sublicense shall abide by the terms of this Agreement with the same
rights (without the right to grant any sublicense) and the same
obligations as Licensee, including without limitation, the
7
<PAGE>
covenant not to sue and patent license offer provisions of
Section 5.1 hereof; (iii) such sublicense coterminates with this
Agreement and/or terminates at any time such Majority-Owned
Subsidiary ceases to qualify as a " Majority-Owned Subsidiary";
and (iv) Licensee may sublicense only those rights for the
Membership Categories to which Licensee currently belongs.
(b) Licensee shall further have the right to sublicense to any of its
Majority Owned Affiliates (other than Majority-Owned
Subsidiaries) any of Licensee's rights under Sections 2.1, 2.2
and 2.3 provided that: (i) each such Majority-Owned Affiliate
receiving a sublicense shall execute and deliver to MEI a written
acknowledgment and agreement that such Majority-Owned Affiliate
has read and agrees to abide by the terms of this Agreement which
acknowledgment and agreement shall be in the form attached hereto
as Exhibit "B"; and (ii) Licensee may sublicense only those
----------
rights for the Membership Categories to which Licensee currently
belongs.
(c) Licensee shall be responsible and liable jointly and severally
for its Permitted Sublicensees' compliance with the terms and
conditions of this Agreement.
2.5 No Sublicense or Implied Licenses. Except as set forth in Section 2.4,
---------------------------------
Licensee's licenses hereunder include no right to sublicense any
rights hereunder. No products or services provided by Licensee give
rise to any implied licenses to third parties. Licensee acknowledges
and agrees that the licenses granted herein are the only licenses
granted to Licensee, and that no other licenses are granted,
expressly, by implication or estoppel, now or in the future. All
rights not expressly granted to Licensee under this Agreement in and
to CSS and the Proprietary Information are reserved and retained by
MEI.
3. MEMBERSHIP CATEGORIES AND ADMINISTRATION FEE.
3.1 Selection of Membership Categories. Upon the execution of this
----------------------------------
Agreement, Licensee shall select one or more membership categories set
forth in Exhibit "A" (the "Membership Categories"). Licensee may from
---------- ---------------------
time to time add or delete Membership Categories upon providing MEI
prior written notice and payment of the Administration Fee (as defined
below) for each additional Membership Category in accordance with
Section 3.2 hereof.
3.2 Administration Fee. Concurrent with Licensee's selection of the
------------------
Membership Categories pursuant to Section 3.1, Licensee shall pay MEI
a nonrefundable sum of 1,000,000 Japanese Yen for each Membership
Category selected by Licensee (the "Administration Fee"), which fee
------------------
shall be used to offset the costs associated with MEI's administration
of CSS. Licensee shall not be entitled to any refund in connection
with any deletion of Membership Categories. As of June 1, 1997, MEI
shall have the right to assess from time to time reasonable and
nondiscriminatory
8
<PAGE>
increases to the Administration Fee as necessary to offset the costs
associated with MEI's administration of CSS; provided that such
increases shall not in the aggregate in any calendar year exceed three
hundred percent of the Administration Fee. Unless Licensee shall have
exercised its right to terminate this Agreement pursuant to Section
6.1(d) hereof, Licensee shall pay such assessments.
4. CSS SPECIFICATIONS.
4.1 Delivery of CSS Specifications. Upon Licensee's selection of one or
------------------------------
more Membership Categories in accordance with Article 3, payment of
appropriate Administration Fee(s) and after the appropriate approval
by the Japanese Government, MEI shall distribute to Licensee the
portions of Proprietary Information and/or CSS Specifications
appropriate to its Membership Category or Categories. In the event
Licensee deletes any Membership Categories, Licensee shall within ten
(10) days thereafter return such portions of Proprietary Information
and/or CSS Specifications relevant to such deleted Membership
Categories.
4.2 Compliance with CSS Specifications. Licensee shall comply with the CSS
----------------------------------
Specifications as may be amended by MEI from time to time. Each DVD
Product shall comply with the version of the CSS Specifications which
is in effect at the time such DVD Product is manufactured. With
respect to any changes to the CSS Specifications made after the date
on which this Agreement is entered into the following rules shall
apply. All changes shall be notified to all CSS Licensees and shall
provide Licensee with sufficient information to incorporate the
changes in its design and manufacture of CSS Compliant Products. All
changes shall be applied on a non-discriminatory basis among all CSS
Licensees. MEI may make changes to clarify or amplify elements of the
CSS Specifications in order to preserve essential functions of the CSS
Specifications ("Emergency Changes"). Licensee shall implement an
Emergency Change as soon as reasonably possible, taking into account
the danger to Content Providers being addressed by the Emergency
Change. It shall be presumed that Licensee shall implement an
Emergency Change not later than 60 days from receipt of notice of the
Emergency Change if it does not require a material change in product
design or manufacturing processes. Licensee shall implement all other
changes to the CSS Specifications not later than eighteen (18) months
from the date MEI notifies Licensee of a change in the CSS
Specifications. MEI may request that the eighteen-month time period
be shortened with respect to a specific change in the CSS
Specifications, and Licensee agrees not to unreasonably withhold its
consent to such request. Licensee may request that such time period
be extended with respect to a specific change in the CSS
Specifications, and MEI agrees not to unreasonably withhold its
consent to such request, provided that any such consent will not be
effective without the further consent of all other CSS Licensees where
the request is subject to the provisions of Section 10.7. The
foregoing time periods for implementation of changes in the CSS
Specifications shall not be interpreted or applied so as to alter any
time limitations set forth in the CSS Procedural Specifications.
9
<PAGE>
5. ADDITIONAL LICENSEE OBLIGATIONS.
5.1 Access to Intellectual Property.
-------------------------------
(a) Absolutely Necessary Claim. Licensee shall not, and shall cause
--------------------------
each of its Controlled Companies not to, assert any Absolutely
Necessary Claim(s) allegedly contained in the portions of the CSS
Specifications pertaining to CSS, against MEI or any CSS Licensee
(including its Permitted Sublicensees) or vendor, distributor,
purchaser or other person in the chain of distribution for the
manufacture, use, distribution, offer to sell, sale, import, or
other transfer of a CSS Compliant Product which was made under
license from MEI, provided that this Section 5.1(a) only applies
to those aspects of such CSS Compliant Product which are required
for compliance with CSS Specifications and which cannot be
implemented without infringing (but for this covenant) the
Absolutely Necessary Claim(s) and further provided that this
Covenant shall not apply with respect to an entity which is
asserting an Absolutely Necessary Claim against Licensee.
(b) Disc Immunity. Licensee shall not, and shall cause each of its
-------------
Controlled Companies not to, assert any claim(s) based on Disc IP
against any CSS Licensee who is a Content Provider, Authoring
Studio, or DVD Disc Replicator or vendor, distributor, purchaser
or other person in the chain of distribution for the manufacture,
use, distribution, offer to sell, sale, import, or other transfer
of DVD Disc that: (i) is a CSS Compliant Product; and (ii) was
made under license from MEI, provided that (1) this paragraph
only applies to those aspects of such DVD Discs which are present
for the purpose of complying with the portions of the CSS
Specifications pertaining to CSS; and (2) this section shall only
apply to DVD Discs themselves, and shall not apply to any
apparatus for the manufacture thereof.
(c) Termination of Suits.
--------------------
(i) If Licensee or any of its Controlled Companies asserts any
Absolutely Necessary Claim(s) or Disc IP claim(s) in
violation of the above provisions, Licensee shall terminate
or cause to be terminated such assertion of claim.
(ii) In the case of an entity which is not a Controlled Company
but in which Licensee or any of its Controlled Companies
holds any voting security or any other ownership interest (a
"Partially Owned Company"), Licensee shall not knowingly
vote, and shall cause each Controlled Company not to vote,
any voting security or ownership interest in any such
Partially Owned Company in favor of asserting any claim
which Licensee would be prohibited from asserting
10
<PAGE>
hereunder. Licensee agrees to use reasonable efforts to
vote, and use reasonable efforts to cause each Controlled
Company to vote, all voting securities and ownership
interests in each Partially Owned Company to terminate any
such claim(s). The termination of any such claim(s) under
Absolutely Necessary Claim(s) or Disc IP claim(s), as the
case may be, shall relieve Licensee of all liability for
voting in favor of such claim without knowledge that such
claim(s) was under any Absolutely Necessary Claim(s) or Disc
IP claim(s), as applicable.
(d) Patent License Offer. Licensee shall offer, and shall cause its
--------------------
Controlled Companies to offer, a patent license for any of
its/their claims for which Relatively Necessary Claim(s) exist,
provided that such license may be limited to Relatively Necessary
Claim(s) that are within the scope of the other CSS Licensee's
license from MEI. Such license shall be made available on
reasonable and non-discriminatory terms to any CSS Licensee in
good standing and/or its Permitted Sublicensees. To the extent
that a Relatively Necessary Claim that would otherwise be
governed by this paragraph is subject to the Disc Immunity
governed by Section 5.1(b), such Relatively Necessary Claim shall
be governed by Section 5.1(b) rather than this paragraph.
(e) Applicability.
-------------
(1) The provisions of this Section 5.1 related to Absolutely
Necessary Claims and Relatively Necessary Claims shall apply
with respect to the CSS Specifications in effect on the date
on which this Agreement is entered and to any subsequent
revision to CSS Specifications where Licensee has
specifically agreed in writing to apply Section 5.1 to such
revisions.
(2) Subject to the terms of Section 6.2 hereof, the covenant
shall remain in effect for the life of any patent issued
throughout the world with a first priority date prior to or
during the term of the license granted to Licensee under
Article 2.
(3) Any executed patent license entered into pursuant to Section
5.1(d) shall survive the termination of this Agreement in
accordance with its terms.
(4) Notwithstanding the termination of this Agreement, the
obligation to offer a patent license under Section 5.1(d)
shall continue after such termination with respect to CSS
Compliant Products that were made prior to, or are in
production as of, the date of such termination for a license
period ending concurrently with the
11
<PAGE>
applicable permitted period of distribution set forth in
Sections 6.2(a), (b), or (c) as the case may be.
5.2 Confidentiality.
---------------
(a) Permitted Use. Licensee and its Permitted Sublicensees shall use
-------------
Proprietary Information, Confidential Information and/or Highly
Confidential Information (and tangible embodiments of any of the
foregoing) solely for purposes of its own implementation of CSS
in accordance with the terms of this Agreement and the CSS
Specifications, and shall not use any mentally-retained
recollections thereof to circumvent or copy the methods disclosed
in Proprietary Information or Confidential Information or to
circumvent any obligations under this Agreement.
(b) Highly Confidential Information. Licensee and its Permitted
-------------------------------
Sublicensees shall maintain the confidentiality of Highly
Confidential Information in the following manner:
(i) Licensee and its Permitted Sublicensees shall employ
procedures for safeguarding Highly Confidential Information
at least as rigorous as Licensee and/or its Permitted
Sublicensees would employ for its own most highly
confidential information, such procedures to include, at a
minimum: (1) maintaining on Licensee's and/or Permitted
Sublicensees' premises a secure location in which any and
all Highly Confidential Information shall be stored; (2)
such secure location shall be accessible only by Authorized
Employees (as defined below); (3) Authorized Employees shall
sign in and out each time such employees visit such secure
location; and (4) when Highly Confidential Information is
not in use, such information shall be stored in a locked
safe at such secure location.
(ii) Licensee may disseminate Highly Confidential Information
only to the strictest minimum possible number of full-time
employees of Licensee or its Permitted Sublicensees: (1) who
have an absolute need to know such Highly Confidential
Information in order to enable Licensee or its Permitted
Sublicensees to implement CSS in compliance with the CSS
Specifications; (2) who are bound in writing by obligations
of confidentiality sufficient to protect the Highly
Confidential Information in accordance with the terms of
this Agreement; (3) who, prior to the disclosure of such
Highly Confidential Information, have: (x) been identified
in writing by Licensee to MEI; and (y) read and executed the
acknowledgment attached as Exhibit "C" hereto (a copy of
------- -
such executed acknowledgment to be sent
12
<PAGE>
to MEI) ("Authorized Employee"). Licensee and its Permitted
-------------------
Sublicensees shall at all times cause Authorized Employees
to strictly abide by their obligations hereunder and shall
use the same efforts to enforce the confidentiality
obligations of each Authorized Employee after the
termination of his/her employment as Licensee uses to
enforce with respect to Licensee's own similarly
confidential information provided that Licensee shall not
use less than reasonable efforts in such enforcement.
Licensee and its Permitted Sublicensees shall make all
reasonable efforts to assist MEI in relation to any claim,
action, suit, proceeding, or litigation with respect to the
acts of any of its former employees. Notwithstanding any
contrary provision, Licensee shall under no circumstances
disseminate any DVD Keys (as defined in the CSS
Specifications) to more than three (3) Authorized Employees
for each Membership Category to which Licensee is licensed
and is entitled to disclosure of DVD Keys from MEI ("Key
---
Employees"). Licensee may only substitute a Key Employee in
---------
the event of the death, permanent or long-term disability or
resignation or termination of an existing Key Employee or
reassignment of an existing Key Employee to a substantially
different department, section, division or other type of
business unit that is not involved in the development,
manufacture or sale of CSS Compliant Product. Licensee shall
inform MEI in writing prior to the substitution of any Key
Employee.
(iii) Licensee shall not make any copies of any document
containing Highly Confidential Information. Licensee may
request MEI to provide Licensee with additional copies of
such documents. MEI may, in its sole discretion, fulfill any
such request, provided that MEI shall not unreasonably
refuse to provide requested additional copies.
(c) Confidential Information. Licensee may disclose Confidential
------------------------
Information only to full-time employees of Licensee and/or its
Permitted Sublicensees who have a reasonable need-to-know and are
bound in writing by obligations of confidentiality sufficient to
protect the Confidential Information in accordance with the terms
of this Agreement. Licensee and/or its Permitted Sublicensees shall
use the same degree of care, but no less than a reasonable degree
of care, to avoid unauthorized disclosure or use of Confidential
Information as such party employs with respect to its comparably
important confidential information. Licensee may discuss or
disclose Confidential Information with other CSS Licensees,
provided such CSS Licensees are licensed to receive the same type
of Confidential Information and are obligated in writing to treat
the
13
<PAGE>
Confidential Information as if received directly from MEI.
Furthermore, Licensee may disclose to potential customers or
suppliers the fact that Licensee has obtained a license to CSS
from MEI, and show a certificate to such effect provided by MEI
to Licensee. Upon Licensee's written request to MEI, MEI shall
maintain the fact that such Licensee is a CSS Licensee
confidential during the period prior to Licensee's public
announcement of its DVD Product intentions or its actual
marketing of a DVD Product, whichever is earlier. Except as
provided in the immediately preceding sentence, MEI shall have
the right to disclose to third parties the fact that Licensee has
a license to CSS and the membership categories to which such
license is applicable.
(d) Contact Person and Provision of CSS Information. Licensee shall
-----------------------------------------------
designate a single Authorized Employee who shall receive all
Confidential Information and Highly Confidential Information (the
"Licensee Contact") disclosed by MEI. The initial Licensee
----------------
Contact shall be the individual designated on Exhibit "C" hereto.
------- -
Prior to the provision of any Highly Confidential Information to
the Licensee Contact, such Licensee Contact shall have complied
with all of his/her obligations under Section 5.2(b) hereof.
Furthermore, prior to providing any Highly Confidential
Information to the Licensee Contact, MEI shall provide the
Licensee Contact a brief non-confidential description of the
generic nature of such Highly Confidential Information. Within
five (5) days after such notice, Licensee shall notify MEI in
writing whether it desires to receive or decline to receive such
Highly Confidential Information, provided that any decision to
decline shall have no effect on any of Licensee's obligations
under this Agreement and Licensee shall have no right or license
whatsoever with respect to the declined portions of the Highly
Confidential Information. Notwithstanding the foregoing, Licensee
may waive its rights to receive MEI's prior notice of the generic
nature of Highly Confidential Information set forth above by
notifying MEI of such waiver in writing.
(e) No Publication. Except as otherwise expressly provided in
--------------
Sections 2.2 and 5.2, Licensee shall not publish, disseminate or
otherwise disclose or make available Proprietary Information
received hereunder to any person, firm or corporation without
prior written consent of MEI.
(f) Notification of Unauthorized Use or Disclosure. Licensee shall
----------------------------------------------
notify MEI in writing immediately upon discovery of any
unauthorized use or disclosure of Proprietary Information, and
will cooperate with MEI in every reasonable way to regain
possession of Proprietary Information and prevent its further
unauthorized use or disclosure.
(g) Disclosure Required by Law. In the event Licensee is required by
--------------------------
law, regulation or order of a court or other authority of
competent jurisdiction to disclose Confidential Information or
Highly Confidential Information,
14
<PAGE>
Licensee shall notify MEI as promptly as possible, and shall,
upon such MEI request, reasonably cooperate in challenging or
restricting the scope of such required disclosure.
(h) Confidentiality Exceptions. The confidentiality restrictions
--------------------------
contained in Sections 5.2(a), (b) and (c) herein shall not apply
to information that Licensee can demonstrate: (i) is either
Confidential or Highly Confidential Information which is or
becomes generally known to the public through no breach of
Licensee's obligations owed to MEI hereunder and which MEI failed
to remove from public availability or to enjoin such public
disclosure within ninety (90) days after the date such
information is or becomes generally known as set forth above; or
(ii) is or has been developed by Licensee's employees (whether
independently or jointly with others) without having access
(whether directly or through any intermediaries) to any such
Confidential Information or Highly Confidential Information (or
any translation, derivation or abstractions of Confidential
Information or Highly Confidential Information) and without any
breach of Licensee's obligations to MEI, provided that the
confidentiality restrictions shall continue to apply to DVD Keys
provided to Licensee.
(i) Prior Agreements. The obligations of this Section 5.2 shall
----------------
apply to any and all disclosures of Proprietary Information to
Licensee prior to the execution of this Agreement. This
Agreement shall supersede any inconsistent provisions contained
in any confidentiality agreement relating to CSS between the
parties hereto including that certain Confidential Disclosure
Agreement dated as of November 25, 1996.
5.3 Reverse Engineering. Licensee shall under no circumstances reverse
-------------------
engineer, decompile, disassemble or otherwise determine the operation
of CSS Specifications, including, without limitation, any
encryption/decryption or scrambling/descrambling algorithm or logic of
CSS, except that Licensee may, to the minimum extent necessary for the
purposes of testing, debugging, integration or tuning of Licensee's
own CSS Compliant Product to ensure that it works in its intended
operational environment with other CSS Compliant Products (the
"Analysis Purpose") conduct performance or electrical analyses with
respect to the operation of other CSS Compliant Products that form
part of such intended operational environment ("Analysis"), subject to
the following conditions:
(a) Licensee shall not perform any Analysis, in whole or in part, for
the purpose of deriving or discovering CSS Specifications that
have not been made available and licensed by MEI to Licensee
hereunder (the "Derived Information").
-------------------
(b) To the extent Licensee obtains Derived Information, inadvertently
or otherwise, Licensee shall immediately notify MEI, and upon the
instruction of MEI, Licensee shall within ten (10) days
thereafter return or
15
<PAGE>
destroy any portion of Derived Information that is not solely
necessary for the Analysis Purpose and cease any use of the same
for any purpose.
(c) Subject to Section 5.3(b) above, the Derived Information: (i)
shall only be used for the Analysis Purpose and for no other
purposes; and (ii) shall be treated as confidential in the manner
corresponding to the same type of information as specified in
Section 5.2.
(d) Nothing herein shall be construed as an inducement for Licensee
to reverse engineer any products of any CSS Licensee or third
party.
(e) For purposes of this Section 5.3: (i) "testing" shall mean a
process of evaluating Licensee's CSS Compliant Product to ensure
proper operation; (ii) "debugging" shall mean a process of
finding the cause of an error in a Licensee's or other's CSS
Compliant Product, but not analysis for the purpose of exposing
possible design features; (iii) "integration" shall mean a
process of evaluating the performance of Licensee's CSS Compliant
Product in combination with other CSS Compliant Products to
ensure that they properly operate together; and (iv) "tuning"
shall mean a process of evaluating and improving Licensee's CSS
Compliant Products to work more efficiently with other CSS
Compliant Products.
5.4 Export. Licensee will comply with all applicable rules and regulations
------
of the United States, Japan and other countries and jurisdictions
relating to the export or re-export of commodities, software and
technical data insofar as they relate to the activities under this
Agreement, and shall obtain an approval required under such rules and
regulations whenever it is necessary for such export or re-export.
Licensee agrees that commodities, software and technical data provided
under this Agreement are subject to restrictions under the export
control laws and regulations of the United States, Japan and other
countries and jurisdictions, as applicable, including but not limited
to the U.S. Export Administration Act and the U.S. Export
Administration Regulations and the Japanese Foreign Exchange and
Foreign Trade Control Law, and shall obtain any approval required
under such laws and regulations whenever it is necessary for such
export or re-export.
6. TERM/TERMINATION.
6.1 Termination. This Agreement shall be effective upon the Effective Date
-----------
and shall continue until earlier terminated in accordance with any of
the following events:
(a) Breach. If a party hereto defaults on any of its obligations
------
under this Agreement (the "Defaulting Party"), the other party
----------------
hereto (the "Non-Defaulting Party") shall have the right to
--------------------
terminate this Agreement by written notice describing the nature
of the default, wherein such notice shall automatically result in
termination unless within thirty (30) calendar days of receiving
such written notice of such default, the Defaulting Party
Cure Period is not intended to imply that an acceptable remedy of
remedies the default (the "Cure Period"). The provision of a
-----------
Cure Period
16
<PAGE>
is not intended to imply that an acceptable remedy of a default
is limited in any particular case to prospective activities.
Notwithstanding the foregoing, the Non-defaulting Party shall
have the right to immediately terminate the Defaulting Party upon
notice without any Cure Period in the event of the Defaulting
Party's material breach of Section 5.2 hereof. Notwithstanding
the foregoing, (i) Eligible Licensees shall be entitled to
equitable remedies as provided in Sections 9.2 and 9.4 without
regard to the foregoing Cure Period; and (ii) the foregoing Cure
Period shall not be interpreted or applied so as to extend any
time limitations set forth in the CSS Procedural Specifications.
(b) Failure to Manufacture and Distribute CSS Compliant. If Licensee
---------------------------------------------------
has failed to exercise the rights granted under Article 2 to
manufacture and commercially distribute CSS Compliant Products:
(i) within the first twelve (12) month period commencing upon the
execution of this Agreement, provided that such period shall be
eighteen (18) months if Licensee is a DVD Disc Formatter, or (ii)
during any consecutive twelve (12) month period thereafter during
the term of this Agreement, then MEI may terminate this Agreement
upon thirty (30) days prior written notice to Licensee if
Licensee continues to manufacture and commercially distribute CSS
Compliant Products during such thirty (30) day period. For these
purposes, Licensee shall be deemed to have failed to exercise the
rights granted under Article 2 to manufacture and commercially
distribute CSS Compliant Products only if neither Licensee, nor
any other CSS Licensee for which Licensee has designed or
manufactured to CSS Compliant Product, shall have manufactured
and commercially distributed a CSS Compliant Product.
(c) Upon Establishment of the Entity. In the event the Entity is
--------------------------------
formed, MEI's interests in this Agreement shall be automatically
assigned to the Entity effective ten (10) days after the Entity
first commences operations, and this Agreement shall thereafter
continue in full force and effect (subject to Sections 6.1(a) and
(b)) until the earlier of: (i) the effective date of a new
agreement between Licensee and the Entity; (ii) the effective
date of the termination of this Agreement pursuant to written
notice provided by Licensee; or (iii) ninety (90) days after the
effective date of MEI's assignment of this Agreement to the
Entity, unless this time period has been extended by the Entity,
in which case this clause (iii) shall be deemed to be
automatically and without any further action by any party be
amended to the date established in the extension; and/or
(d) Failure to Establish the Entity. In the event the Entity is not
-------------------------------
formed and operating as of October 1, 1997 ("Preliminary Target
Date") or an applicable Extended Date as set forth below, MEI or
Licensee may thereafter terminate this Agreement by sending the
other party ninety (90) days prior written notice, in which case
the provisions of Section 6.2(c) shall apply. Prior to the
Preliminary Target Date, if reasonable terms to
17
<PAGE>
establish the Entity as soon as possible are being negotiated in
good faith, then the date in this provision shall automatically
be extended for a period of two months ("Extended Date") so that
the right to terminate for failure to establish the Entity does
not come into being. Prior to the Extended Date, if the Entity is
not yet formed and operating but if reasonable terms to establish
the Entity as soon as possible are being negotiated in good
faith, said Extended Date shall be automatically extended for a
further period of two months so that the right to terminate for
failure to establish the Entity will not come into being. Such
extensions will continue to be made in the same manner until the
Entity is formed, provided that reasonable terms to establish the
Entity as soon as possible are being negotiated in good faith.
For purposes of the foregoing, automatic extension as aforesaid
shall be deemed to occur, unless MEI gives written notice to the
contrary not later that two (2) weeks prior to the Preliminary
Target Date or Extended Date (as applicable). For purposes of the
foregoing, the fact that any party to the negotiations takes a
position with respect to one or more issues during the course of
the negotiations or fails to reach an agreement with respect to
one or more issues during the course of negotiations shall not
constitute failure to negotiate in good faith on reasonable
terms. If MEI gives Licensee notice that it is terminating this
Agreement, MEI agrees that a similar notice will be provided to
all CSS Licensees within a reasonable period of time before or
after MEI provides such notice to Licensee.
6.2 Effect of Termination.
---------------------
(a) Material Breach or Failure to Manufacture or Distribute CSS
-----------------------------------------------------------
Compliant Products. If MEI terminates this Agreement pursuant to
------------------
Section 6.1(a) or 6.1(b), all licenses granted by MEI to Licensee
shall terminate. If Licensee terminates this Agreement pursuant
to Section 6.1(a), the covenant not to sue granted by Licensee
under Section 5.1(a) shall terminate, provided, however, Licensee
agrees that MEI and the CSS Licensees, and their Permitted
Sublicensees, for a period of ninety (90) days after termination,
shall have the right, subject to the conditions of Section
2.1(d), to distribute all CSS Compliant Products that have been
produced or are in production as of the date of Licensee's
termination notice. If MEI terminates this Agreement pursuant to
Section 6.1 (a) or 6.1(b), the covenant not to sue granted by
Licensee under Section 5.1 shall terminate, provided, however,
that MEI and the CSS Licensees, and their Permitted Sublicensees,
for a period of one (1) year after termination, shall have the
right subject to the conditions of Section 2.1(d), to distribute
all CSS Compliant Products that have been produced or are in
production as of the date of MEI's termination notice.
Notwithstanding any of the foregoing, the covenant not to sue
granted in Sections 5.1(b) and Section 5.1(c) with respect to
Disc IP shall not terminate in any event.
18
<PAGE>
(b) Upon Establishment of Entity. If this Agreement is terminated
----------------------------
pursuant to Section 6.1(c): (i) all licenses granted by MEI to
Licensee shall terminate, provided, however, that Licensee, for a
period of ninety (90) days after termination, shall have the
right, subject to the conditions contained in Section 2.1(d), to
distribute all CSS Compliant Products that have been produced or
are in production as of the date of MEI's termination notice; and
(ii) the covenant not to sue granted by Licensee under Section
5.1 (a) shall terminate, provided, however, that MEI and the CSS
Licensees, and their Permitted Sublicensees, for a period of
ninety (90) days after termination, shall have the right, subject
to the conditions of Section 2.1(d), to distribute all CSS
Compliant Products that have been produced or are in production
as of the effective date of termination. Notwithstanding any of
the foregoing, the covenant not to sue granted in Sections 5.1(b)
and Section 5.1(c) with respect to Disc IP shall not terminate in
any event.
(c) Upon Failure to Establish the Entity. If this Agreement is
------------------------------------
terminated pursuant to Section 6.1(d): (i) all licenses granted
by MEI to Licensee shall terminate, provided, however, that
Licensee, for a period of eighteen (18) months after termination,
shall have the right, subject to the conditions of Section
2.1(d), to distribute all CSS Compliant Products that have been
produced or are in production as of the date of MEI's termination
notice; and (ii) the covenant not to sue granted by Licensee
under Section 5.1(a) shall terminate, provided, however, that MEI
and the CSS Licensees, and their Permitted Sublicensees, for a
period of eighteen (18) months after termination, shall have the
right, subject to the conditions of Section 2.1(d), to distribute
all CSS Compliant Products that have been produced or are in
production as of the date of termination. MEI agrees that, after
such notices have been provided to CSS Licensees, it will not
itself engage in any act that would have been permitted pursuant
to this Agreement but would be prohibited to a Licensee whose
license has been terminated pursuant to Section 6.1(d).
Notwithstanding any of the foregoing, the covenant not to sue
granted in Sections 5.1(b) and Section 5.1(c) with respect to
Disc IP shall not terminate in any event.
6.3 Return of Materials. Within thirty (30) days after termination of this
-------------------
Agreement, Licensee shall either: (i) return all Proprietary
Information to MEI; or (ii) destroy all Proprietary Information in its
possession and certify such destruction in writing to MEI, unless: (a)
Licensee has then executed a license agreement for CSS with the
Entity; and (b) Licensee sends written notice to MEI certifying that
Licensee has entered into such agreement.
6.4 Survival. The terms of Sections 1, 5.1 (subject to Sections 6.2(a)-
--------
(c)), 5.2, 5.3, 5.4, 6.2 and 6.3 and Articles 7, 8, 9 and 10 shall
survive the termination of this Agreement.
19
<PAGE>
7. OWNERSHIP. All Proprietary Information and media containing Proprietary
Information as provided by MEI to Licensee shall remain the property of MEI or
its licensors. Except as provided in Article 2, this Agreement does not give
Licensee any license or other right to the Proprietary Information.
8. DISCLAIMER AND LIMITATION OF LIABILITY.
8.1 Disclaimer. ALL PROPRIETARY INFORMATION IS PROVIDED "AS IS." MEI MAKES
----------
NO REPRESENTATIONS OR WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR
OTHERWISE, AND EXPRESSLY DISCLAIMS IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND ANY
EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION THAT MIGHT ARISE FROM
THE PROPRIETARY INFORMATION OR LICENSEE'S IMPLEMENTATION OR ATTEMPTED
IMPLEMENTATION OF SUCH INFORMATION OR CSS. MEI FURTHER DISCLAIMS ANY
WARRANTY THAT CSS AND/OR THE CONTENTS OF THE PROPRIETARY INFORMATION,
OR ANY PRODUCT IMPLEMENTING CSS OR SUCH PROPRIETARY INFORMATION, IN
WHOLE OR IN PART, WILL BE FREE FROM INFRINGEMENT OF ANY THIRD PARTY
INTELLECTUAL PROPERTY OR PROPRIETARY RIGHTS.
8.2 Limitation of Liability. SUBJECT TO SECTION 10.8, MEI OR TOSHIBA, OR
-----------------------
THEIR RESPECTIVE DIRECTORS, OFFICERS, OR EMPLOYEES (COLLECTIVELY, THE
"AFFECTED PARTIES") SHALL NOT BE LIABLE TO LICENSEE FOR ANY DIRECT,
INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES
ARISING OUT OF ANY CAUSE OF ACTION RELATING TO THIS AGREEMENT, OR
BASED ON MAKING, USING, SELLING OR IMPORTING ANY PRODUCTS OF LICENSEE
THAT IMPLEMENT PROPRIETARY INFORMATION OR CSS, WHETHER UNDER THEORY OF
CONTRACT, TORT, INDEMNITY, PRODUCT LIABILITY OR OTHERWISE. TO THE
EXTENT THAT ANY COURT OF COMPETENT JURISDICTION RENDERS JUDGMENT
AGAINST MEI NOTWITHSTANDING THE ABOVE LIMITATION, MEI'S TOTAL
LIABILITY TO LICENSEE IN CONNECTION WITH THIS AGREEMENT OR CSS SHALL
IN NO EVENT EXCEED THE AMOUNTS OF MONEY RECEIVED BY MEI FROM LICENSEE
UNDER THIS AGREEMENT. THIS LIMITATION OF LIABILITY SHALL NOT BE
CONSTRUED TO LIMIT OR RELIEVE MEI OR TOSHIBA, RESPECTIVELY, FOR ANY
BREACH OF ITS OBLIGATIONS IN ITS CAPACITY AS A CSS LICENSEE.
9. REMEDIES.
9.1 Indemnification. Licensee shall indemnify and hold, in their roles as
---------------
developers and licensors of CSS, MEI, Toshiba and their respective
Controlled Companies, each of their respective officers, directors and
employees, harmless from and against any and all any claims, actions,
suits, proceedings or litigation and any
20
<PAGE>
losses, deficiencies, damages, liabilities, costs and expenses
including without limitation, reasonable attorneys' fees and all
related costs and expenses, to be paid or otherwise incurred in
connection with the defense of any claim, action, suit, proceeding or
litigation ("Claims") which result from: (i) any breach of any
------
covenant, agreement, representation and warranties herein by Licensee,
its employees, former employees who had access to Confidential
Information or Highly Confidential Information pursuant to this
Agreement, provided that Licensee's indemnity with respect to acts of
former employees shall be limited to circumstances in which Licensee
has failed to comply with its obligations as to former employees
pursuant to Section 5.2(b)(ii) hereof, (ii) Licensee's manufacture,
sale or use of any DVD Products, provided, that such indemnity shall
not extend to: (a) any Claim that the CSS Specifications infringe the
intellectual property rights of any third parties, or (b) any Claim or
any portions thereof that is independently attributable to the terms
of the CSS Specifications themselves; and/or (iii) Licensee's
activities under Section 5.3.
9.2 Equitable Relief. Licensee and MEI recognize and agree that due to the
----------------
unique nature of certain provisions hereof and the lasting effect of
and harm from a breach of such provisions, including making available
the means for widespread unauthorized copying of copyrighted content
intended to be protected using CSS, in the event that Licensee
breaches its obligations under Section 2.1, 2.3, 2.5, 4.2, 5, or 10
hereof, money damages alone will not adequately compensate an injured
party, including an injured Eligible Licensee pursuant to Section 9.4,
and that injury to such party will be irreparable. Licensee and MEI
therefore agree that, in addition to all other remedies available to
the injured party at law, in equity, by agreement or otherwise, the
injured party, including an Eligible Licensee pursuant to Section 9.4,
upon showing to the relevant court's satisfaction that applicable
factors other than the fact that harm will be irreparable and that
monetary damages are not sufficient to remedy the injury have been
fulfilled, shall be entitled to specific performance or other
temporary, preliminary, or permanent injunctive or equitable relief
including corrective actions appropriate to the circumstances for the
enforcement of any such obligation (whether or not there have been
commercial sales of products subject to the requested relief).
9.3 Specific Remedies. Licensee acknowledges that due to the critical
-----------------
importance of maintaining the integrity of CSS and the inability to
calculate the damage to CSS users in the event of any material breach
of Section 5.2, MEI, in addition to any other remedies in equity, but
in lieu of any and all other claims for monetary damages, may recover
liquidated damages for each material breach from Licensee in the
amount of one million U.S. dollars ($1,000,000), provided that the
parties agree that Licensee may request and the court may grant such
request that this amount be reduced to take account of the fact that
Licensee brought the breach to MEI's attention in a timely and
reasonable manner. For purposes of this Section 9.3, a series of
substantially related events shall constitute a single material
breach. For purposes of this Section 9.3, the following is a non-
exclusive list of circumstances in which there is no material breach
of Section 5.2: (1) if no Confidential Information or Highly
Confidential Information was released to a
21
<PAGE>
third party not permitted hereunder to have such information or could
reasonably have been expected to have been released to such third
party as a result of the breach; (2) if Licensee maintains an internal
program to assure compliance with Section 5.2 (including a program to
assure maintenance of confidentiality of information for purposes in
addition to compliance with this Agreement), the breach was
inadvertent or otherwise unintentional, and the breach did not have a
material adverse effect on the integrity or security of CSS; or (3) if
Licensee brought the breach to MEI's attention in a timely manner as
required by this Agreement and such breach did not have a material
adverse effect on the integrity or security of CSS.
9.4 Third Party Beneficiary Rights. The parties hereto acknowledge and
------------------------------
agree that the compliance of Licensee, other CSS Licensees, and
Associate Licensees with the terms of the licenses granted by this
Agreement or the Associate License, as applicable, is essential to
maintain the integrity and security of the Contents Scramble System in
order to protect prerecorded motion pictures contained on DVD Discs.
As part of the consideration of the licenses granted herein, Licensee,
for itself and its Permitted Sublicensees, hereby confers a third-
party beneficiary right upon certain CSS Licensees ("Eligible
--------
Licensees") that fall into one of two classes: (i) Content Providers
---------
("Eligible Content Providers") or (ii) manufacturers of CSS Compliant
--------------------------
Products other than DVD Discs ("Eligible Implementers"), in order to
---------------------
enforce certain of Licensee's obligations, subject to the following
conditions:
(a) Either an Eligible Content Provider who has commercially released
one or more prerecorded motion pictures on DVD Disc or an
Eligible Implementer who has commercially released one or more
CSS Compliant Products other than DVD Discs shall be entitled to
initiate or institute a claim or action ("Beneficiary Claim") to
-----------------
enforce only those obligations of Licensee specified as follows
(collectively, the "Eligible Obligations"): (i) for any
--------------------
Beneficiary Claim initiated by Eligible Content Providers,
Licensee's obligations under Section 2.1 [Nonexclusive License],
2.3 [Right to Have Made], 2.4 [Sublicenses], 2.5 [No Sublicense
or Implied Licenses], 4.2 [Compliance with Specifications], 5.1
[Access to Intellectual Property], 5.2 [Confidentiality], 5.3
[Reverse Engineering], 9.2 [Equitable Relief], 9.4(d) [Settlement
Restrictions] and Section 10 [Miscellaneous] and including any
equivalent provisions contained in any Associate License (Exhibit
E) and (ii) for any Beneficiary Claim initiated by Eligible
Implementers, Licensee's obligations under Section 4.2
[Compliance with Specifications] solely as such obligations
pertain to Section 5.4 [Non-alteration of the Secured Disc Key
Set] and Section 6.3 [Motion Picture Scrambling] of the CSS
Procedural Specifications, Section 5.1 [Access to Intellectual
Property] and Section 9.4(d) [Settlement Restrictions]. Each
Eligible Licensee who has not initiated the Beneficiary Claim but
falls into the same class of Eligible Licensee as the initiating
Eligible Licensee pursuant to this Section 9.4, shall be eligible
to join such Beneficiary Claim. The remedies for any Beneficiary
22
<PAGE>
Claim shall be limited to equitable relief provided under Section
9.2, subject to Section 9.5.
(b) Prior to initiating or instituting any Beneficiary Claim against
Licensee ("Defendant Licensee"), an Eligible Licensee ("Plaintiff
------------------ ---------
Licensee") shall provide MEI notice and consultation reasonable
--------
under the circumstances regarding a proposed Beneficiary Claim;
provided that such consultation with MEI shall not affect an
Eligible Licensee's complete discretion in initiating such a
Beneficiary Claim. Such Eligible Licensee shall further provide
MEI with notice of actual filing of a Beneficiary Claim and upon
MEI's request, any copies of material documents to be filed in
Plaintiff Licensee's initiation or pursuit of such Beneficiary
Claim. MEI shall cooperate reasonably with such Eligible
Licensee in providing appropriate and necessary information in
connection with the Beneficiary Claim to the extent that such
cooperation is consistent with the preservation of the integrity
and security of CSS. Documents provided to MEI under this
Section 9.4(b) shall not include any documents filed or to be
filed under seal in connection with such Beneficiary Claim.
(c) MEI shall provide all Eligible Content Providers or Eligible
Implementers, as the case may be, with prompt notice of Plaintiff
Licensee's Beneficiary Claim against Defendant Licensee (a "Claim
-----
Notice") in accordance with Section 10.6. Within sixty (60) days
------
of the date of mailing of a Claim Notice, all such Eligible
Licensees shall elect whether to join in such Beneficiary Claim,
and the failure of any such Eligible Licensee to provide written
notice to MEI of such election and to join in such Beneficiary
Claim within such sixty (60) day period shall be deemed a waiver
of such Eligible Licensee's third party beneficiary right under
this Section 9.4 with respect to all Beneficiary Claims against
such Defendant Licensee arising out of the alleged breach by such
Defendant Licensee raised in such Beneficiary Claims. Plaintiff
Licensee shall support, and Defendant Licensee shall not oppose,
any motion to intervene by such Eligible Licensees or MEI
electing to join such Beneficiary Claim within such sixty (60)
day period. Neither an Eligible Licensee's failure to notify or
consult with MEI or provide copies of documents to MEI as
required by Section 9.4(b), nor MEI's failure to give notice
under this Section 9.4(c) shall be a defense against any
Beneficiary Claim or grounds for a request to delay the granting
of any preliminary relief requested.
(d) Eligible Licensees shall have no right to, and Licensee agrees
that it will not, enter into any settlement that: (i) amends any
material term of this Agreement or of the Associate License
(Exhibit E), (ii) has a material adverse effect on the integrity
and/or security of CSS; or (iii) impacts any of MEI's rights in
and to CSS or any intellectual property right embodied therein
unless MEI shall have provided prior written consent thereto.
23
<PAGE>
(e) NOTWITHSTANDING SECTION 10.4(b), LICENSEE AGREES THAT ALL
BENEFICIARY CLAIMS INSTITUTED UNDER THIS SECTION 9.4 SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA, EXCLUDING THAT BODY OF LAW RELATING TO
CONFLICTS OF LAW PRINCIPLES, AND SHALL BE CONDUCTED IN FEDERAL
AND STATE COURTS LOCATED IN ANY COUNTY IN THE STATE OF CALIFORNIA
AND HEREBY IRREVOCABLY CONSENTS TO (i) THE EXCLUSIVE JURISDICTION
AND VENUE IN THE FEDERAL AND STATE COURTS LOCATED IN THE STATE OF
CALIFORNIA; AND (ii) THE SERVICE OF PROCESS OF SAID COURTS IN ANY
MATTER ARISING OUT OF THIS SECTION 9.4 BY PERSONAL DELIVERY OR BY
MAILING OF PROCESS BY REGISTERED OR CERTIFIED MAIL, POSTAGE
PREPAID, AT THE ADDRESSES AS SPECIFIED IN THIS AGREEMENT OR TO
THE AGENT REQUIRED BY SECTION 10.4(c). LICENSEE WAIVES ANY
OBJECTION TO THE JURISDICTION, PROCESS, AND VENUE OF ANY SUCH
COURT, AND TO THE EFFECTIVENESS, EXECUTION, AND ENFORCEMENT OF
ANY ORDER OR JUDGMENT (INCLUDING, BUT NOT LIMITED TO, A DEFAULT
JUDGMENT) OF SUCH COURT PERTAINING TO THIS AGREEMENT, TO THE
MAXIMUM EXTENT PERMITTED BY THE LAW OF THE PLACE WHERE
ENFORCEMENT OR EXECUTION OF ANY SUCH ORDER OR JUDGMENT MAY BE
SOUGHT AND BY THE LAW OF ANY PLACE WHOSE LAW MIGHT BE CLAIMED TO
BE APPLICABLE REGARDING THE EFFECTIVENESS, ENFORCEMENT, OR
EXECUTION OF SUCH ORDER OR JUDGMENT, INCLUDING PLACES OUTSIDE OF
THE STATE OF CALIFORNIA AND OF THE UNITED STATES.
9.5 Nothing contained in Section 9.2 or Section 9.4 is intended to limit
remedies or relief available pursuant to statutory or other claims
that a CSS Licensee may have under separate legal authority.
10. MISCELLANEOUS.
10.1 Entire Agreement. This Agreement, the exhibits hereto and the CSS
----------------
Specifications constitute the entire Agreement between the parties
hereto and supersede all oral or written agreements, either entered
prior to or contemporaneously with this Agreement. Subject to Section
10.7, this Agreement may not be modified except by written agreement
dated subsequent to the date of this Agreement and signed by both
parties.
10.2 Assignment. The licenses granted hereunder are personal to Licensee,
----------
and Licensee's rights under this Agreement shall not be assigned or
otherwise transferred without the written approval of MEI, which shall
not be unreasonably withheld, except where such assignment is to a
corporation controlling, controlled
24
<PAGE>
by or under common control with Licensee or to the purchaser of all or
substantially all of the outstanding capital stock or assets of
Licensee or to the surviving entity in a merger, reorganization, or
other business combination and where notice of such assignment has
been provided in advance to MEI. Subject to the limitations set forth
in this Agreement, this Agreement will inure to the benefit of and be
binding upon the parties, their successors and permitted assigns. MEI
may assign or transfer this Agreement to another party that agrees to
assume MEI's obligations hereunder, and will provide Licensee with
written notice thereof. Either party may assign or transfer any of its
Disc IP, Absolutely Necessary Claims, or Relatively Necessary Claims
provided that the successor-in-interest agrees to be bound by such
party's obligations with respect to the Disc IP, Absolutely Necessary
Claims, and Relatively Necessary Claims under the terms of this
Agreement.
10.3 Presumptions. In construing the terms of this Agreement, no
------------
presumption shall operate in either party's favor as a result of its
counsel's role in drafting the terms or provisions hereof.
10.4 Governing Law; Jurisdiction. (a) THIS AGREEMENT SHALL BE GOVERNED BY
---------------------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA,
EXCLUDING THAT BODY OF LAW RELATING TO CONFLICTS OF LAW PRINCIPLES.
(b) IN CONNECTION WITH ANY LITIGATION BETWEEN THE PARTIES HERETO
ARISING OUT OF OR RELATING TO THIS AGREEMENT, EACH PARTY HERETO
IRREVOCABLY CONSENTS TO: (i) THE EXCLUSIVE JURISDICTION AND VENUE IN
THE FEDERAL AND STATE COURTS LOCATED IN THE COUNTY OF SANTA CLARA,
CALIFORNIA; AND (ii) THE SERVICE OF PROCESS OF SAID COURTS IN ANY
MATTER RELATING TO THIS AGREEMENT BY PERSONAL DELIVERY OR BY MAILING
OF PROCESS BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, AT THE
ADDRESSES SPECIFIED IN THIS AGREEMENT. OR TO THE AGENT TO BE
APPOINTED PURSUANT TO (c), BELOW. (c) LICENSEE SHALL APPOINT AN AGENT
IN THE STATE OF CALIFORNIA FOR ACCEPTANCE OF SERVICE OF PROCESS
PROVIDED FOR UNDER THIS AGREEMENT AND SHALL NOTIFY MEI OF THE IDENTITY
AND ADDRESS OF SUCH AGENT WITHIN THIRTY (30) DAYS AFTER THE EFFECTIVE
DATE; (d) LICENSEE WAIVES ANY OBJECTION TO THE JURISDICTION, PROCESS,
AND VENUE OF ANY SUCH COURT, AND TO THE EFFECTIVENESS, EXECUTION, AND
ENFORCEMENT OF ANY ORDER OR JUDGMENT (INCLUDING, BUT NOT LIMITED TO, A
DEFAULT JUDGMENT) OF SUCH COURT PERTAINING TO THIS AGREEMENT, TO THE
MAXIMUM EXTENT PERMITTED BY THE LAW OF THE PLACE WHERE ENFORCEMENT OR
EXECUTION OF ANY SUCH ORDER OR JUDGMENT MAY BE SOUGHT AND BY THE LAW
OF ANY PLACE WHOSE LAW MIGHT BE CLAIMED TO BE APPLICABLE REGARDING THE
EFFECTIVENESS, ENFORCEMENT, OR EXECUTION
25
<PAGE>
OF SUCH ORDER OR JUDGMENT, INCLUDING PLACES OUTSIDE OF THE STATE OF
CALIFORNIA AND OF THE UNITED STATES.
10.5 Severability; Waiver. Subject to Section 10.7, should any clause,
--------------------
sentence, or paragraph of this Agreement judicially be declared to be
invalid, unenforceable, or void, such decision shall not have the
effect of invalidating or voiding the remainder of this Agreement.
The parties agree that the part or parts of this Agreement so held to
be invalid, unenforceable, or void shall be reformed without further
action by the parties hereto and only to the extent necessary to make
such part or parts valid and enforceable. Subject to Section 10.7, a
waiver by either of the parties hereto of any of the covenants to be
performed by the other party or any breach thereof shall not be
effective unless made in writing and signed by the waiving party and
shall not be construed to be a waiver of any succeeding breach thereof
or of any covenant herein contained.
10.6 Notice. All notices to be provided pursuant to this Agreement shall
------
be given in writing and shall be effective when either served by
personal delivery or upon receipt via certified mail, return receipt
requested, postage prepaid, overnight courier service or sent by
facsimile transmission with hard copy confirmation sent by certified
mail, in each case to the party at the addresses listed below:
If to MEI:
Matsushita Electric Industrial Co., Ltd.
1006 Kadoma
Osaka 571, Japan
Attn: General Manager, International Contracts Department
Fax: 011-81-6-906-3760
If to Licensee:
Quadrant International
269 Great Valley Parkway
Malvern, PA 19355
Attn: Jason Liu
Fax: (610) 722-9747
10.7 Amendment. No agreement pertaining to CSS similar to this Agreement
---------
or to the Associate License that is Exhibit E hereto between MEI and
any CSS Licensee or Associate Licensee may be entered into on terms
other than those contained in this Agreement or the Associate License,
as applicable, to the extent that any modified terms would have a
material adverse effect on the integrity or security of CSS or the
protections provided to Eligible Licensees pursuant to Section 9.4
hereof (including any of the Sections referenced therein) or in the
Associate License, and no agreement between MEI and any CSS Licensee
or Associate Licensee having terms contained herein or the Associate
License, as applicable
26
<PAGE>
may be modified or its terms waived if such modification or waiver
would have a material adverse effect on the integrity or security of
CSS or the protections provided to Eligible Licensees pursuant to
Section 9.4 hereof (including any of the Sections referenced therein)
or in the Associate License.
10.8 MEI Obligations. MEI agrees that as the interim licensor, it shall
---------------
have the following affirmative obligations, breach of which shall be
subject to the remedies provided below.
(a) Prior to the transfer of this Agreement to the Entity, and
consistent with its roles as developer of CSS, interim licensor
of CSS, and promoter of adoption of CSS, MEI agrees that it will
make good faith efforts to maintain the confidentiality of CSS
Confidential Information and Highly Confidential Information.
MEI shall not be liable for breaches of this Section that are not
material. As non-exclusive examples of situations in which a
breach is not material under this section, the situations
described in Section 9.3 (1), (2), and (3) shall be applicable to
MEI in any determination of whether a breach is material. In the
event that MEI materially breaches its confidentiality obligation
set forth in this Section, MEI's total liability to all CSS
Licensees for such breach shall be limited to one million dollars
($1,000,000) for each such material breach. For purposes of this
Section, a series of related events shall constitute a single
material breach.
(b) MEI and Licensee acknowledge that MEI's affirmative obligations
under this Agreement (other than as provided in subsection (a)
above), consist of the following:
(i) having filed patent applications as stated in Recital A;
(ii) delivery of the CSS Specifications pursuant to Section
4.1;
(iii) providing written notice and extending the date of the
Entity's formation pursuant to Section 6.1(d);
(iv) cooperating reasonably in providing appropriate and
necessary information in connection with a Beneficiary
Claim filed by Eligible Licensees pursuant to Section 9.4;
(v) providing prompt notice to all Eligible Licensees of a
Beneficiary Claim pursuant to Section 9.4(c);
(vi) providing written notice to Licensee in the event MEI
assigns this Agreement pursuant to Section 10.2;
(vii) amending, as soon as reasonably possible following the
finalization of this Agreement, the specifications
applicable to licensees of CSS that entered licenses prior
to the use of
27
<PAGE>
this Agreement, so that (1) such specifications contain
these Procedural Specifications and related Technical
Specifications, and (2) each such licensee of CSS is
required to comply with such amended specifications no
later than 30 days following receipt of MEI's notice
containing the amended specifications;
(viii) making all reasonable efforts, as soon as possible, to
obtain all required consents, from all licensees of CSS
that entered licenses prior to the use of this Agreement,
to an amended and restated license conforming to this
Agreement;
(ix) not amending or waiving provisions of this Agreement or of
the Associate License pursuant to the conditions set forth
in Section 10.7;
(x) not unreasonably withholding its consent where such
consent is called for under this Agreement;
(xi) notifying and applying to Licensee modifications to the
Specifications in accordance with Section 4.2;
(xii) not unreasonably withholding agreement for Licensee to
receive additional copies of documents containing Highly
Confidential Information pursuant to Section 5.2(b)(iii);
and
(xiii) maintaining confidentiality regarding Licensee in
accordance with Section 5.2(c).
In the event that MEI fails to perform any of the affirmative
obligations set forth in this Section 10.8(b) above, Licensee's
sole and exclusive remedy against MEI shall be to have MEI
specifically perform such obligations.
28
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MATSUSHITA ELECTRIC INDUSTRIAL QUADRANT INTERNATIONAL INC.
CO., LTD.
/s/ Jiro Kajino /s/ Jason Liu
- ----------------------------------- --------------------------------------
Signature Signature
JIRO KAJINO Jason Liu
- ----------------------------------- --------------------------------------
Printed Name Printed Name
Director, CSS Interim License
Organization Chief Financial Officer
- ----------------------------------- --------------------------------------
Title Title
November 20, 1997 November 28, 1997
- ----------------------------------- --------------------------------------
Date Date
[Signature Page to Amended and Restated CSS Interim License Agreement]
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF THE REGISTRANT
Jurisdiction of Incorporation
Subsidiary or Organization
---------- -----------------------------
1. Liuco, Inc. Delaware
2. Divico, Inc. Delaware
3. *DVA, Inc. Nevada
4. Erste Cinco Vermogensverwaltungs GmbH Germany
5. Viona Vervatungs GmbH Germany
6. *Viona Development Hard & Software
Engineering GmbH Germany
* DVA, Inc. and Viona Development Hard and Software Engineering GmbH are
indirect wholly-owned subsidiaries of RAVISENT Technologies Inc.
<PAGE>
EXHIBIT 23.1
When the reverse stock split referred to in Note 19 of the Notes to
Consolidated Financial Statements has been effected, we will be in a position to
render the following report.
KPMG LLP
Consent of Independent Auditors
The Board of Directors RAVISENT Technologies Inc.:
The audits referred to in our report dated April 27, 1999 except as to the
last paragraph of Note 19, which is as of June __, 1999, included the related
consolidated financial statement schedule for each of the years in the three
year period ended December 31, 1998, included in the registration statement.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basis consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" and "Selected Consolidated Financial
Data" in the prospectus.
Philadelphia, Pennsylvania
June 15, 1999
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors RAVISENT Technologies Inc.:
We consent to the use of our report dated April 6, 1999, with respect to
the balance sheet of Viona Development Hard & Software Engineering GmbH as of
December 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended, which report is included herein
and to the reference to our firm under the heading "Experts" in the prospectus.
KPMG Deutsche Treuhand-Gesellschaft AG
Stuttgart, Germany
June 15, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INTERNATIONAL DATA CORPORATION
We hereby consent to the references to our company and to the use of information
contained in our report "Storage Mechanisms: Optical/Removable, Bulletin:
Quarterly CD and DVD Market Update" (April 1999) in that certain registration
statement on Form S-1 (Registration Statement No. 333-77269), including all
amendments thereto and all related prospectuses, filed by Divicore Inc. for an
offering of common stock of Divicore Inc.
Date June 8, 1999
INTERNATIONAL DATA CORPORATION
By: /s/ Alexa McCloghan
--------------------------------
Name: Alexa McCloghan
------------------------------
Title: Senior Vice President
-----------------------------
<PAGE>
EXHIBIT 23.5
AGREEMENT
This agreement (the "Agreement") is entered into as of September 5, 1998
by and between Yankee Group Research, Inc. ("Yankee"), a Massachusetts
corporation having its principal place of business at 31 St. James Avenue,
Boston, Massachusetts and Volpe Brown Whelan & Company, LLC ("VBW"), a Delaware
limited liability company having its principal place of business at One Maritime
Plaza, San Francisco, California.
RECITALS
WHEREAS, VBW is a registered broker dealer providing investment banking
and brokerage services to corporations, institutions, other entities and
individuals;
WHEREAS, Yankee is an information technology market assessment
consulting firm serving corporate clients; and
WHEREAS, VBW and Yankee desire to enter into a strategic alliance
pursuant to which Yankee will provide its research to VBW and assist VBW in its
brokerage, investment banking and related activities.
NOW, THEREFORE, in consideration of the mutual promises of the parties
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
AGREEMENT
1. SERVICES
a. Use of Research. Yankee will make available to VBW all of
Yankee's research services. Additionally, Yankee will provide VBW with all
Yankee work product and analysis (the "Yankee Materials"), including, without
limitation through full and unencumbered direct access to all Yankee analysts
and written research, data compilations, surveys and reports of any kind. Yankee
hereby grants to VBW the world-wide right to use, distribute, sell, resell,
reproduce, make derivative works of, publicly perform, and publicly display in
any form or medium, whether now known or later developed, Yankee Material for
the purpose of developing, distributing, marketing, selling or providing
products or services for or to the Investment Market. Such right includes,
without limitation, the right to distribute and republish all Yankee Material to
or for the Investment Market as well as to customize and reformat such Yankee
Material to or for the Investment Market as well as to customize and reformat
such Yankee Material and to include additional investment-related or other
information in such distribution or reproduction. Except as provided in Section
5 below, such right is exclusive. For purposes of this Agreement, "Investment
Market" shall mean entities and natural persons whose principal use of the
research material is for the purpose of (i) making investment decisions or (ii)
making (or advising or influencing others with respect to making) decisions
regarding the use of investment banking services such as corporate finance or
M&A. Yankee recognizes that VBW has historically distributed and intends to
continue to distribute its
<PAGE>
research, including future research incorporating Yankee Material, to investment
banking clients and prospective clients as well as to service organizations that
influence investment banking decisions, including, without limitation, venture
capitalists, attorneys, accountants, consultants and the press. In addition,
Yankee hereby grants to VBW the world-wide right to distribute in any form or
medium, whether now known or later developed, Yankee Material (or any derivative
work incorporating Yankee Material) to persons involved in reporting on the
Investment Market.
b. Deliverables. Without limiting the foregoing, for no additional fees
or charges other than those provided in this Agreement:
(i) Yankee shall promptly deliver to VBW all printed Yankee
research for all technology and telecommunications topics covered by Yankee;
(ii) Yankee shall provide VBW with electronic access to "Yankee On-
Line," which includes all Yankee research plus a bulletin board of upcoming
events;
(iii) Yankee shall use its best efforts to secure free admission for
VBW employees and clients to all seminars sponsored exclusively by Yankee;
(iv) Yankee shall use its best efforts to secure free admission for
VBW employees and clients to all events co-sponsored by Yankee;
(v) Yankee shall provide VBW employees and clients with access to
all video and audio conferences sponsored by Yankee; and
(vi) Yankee shall provide VBW employees and clients with direct
access to Yankee research staff for discussions and ongoing consultations,
including, without limitation, audio and video conferences between Yankee staff
and VBW clients, participation by Yankee staff in VBW investment conferences,
and visits by Yankee staff to VBW investor and corporate clients and prospects
with VBW's equity research, institutional sales or investment banking staff.
c. Additional Services. Yankee further agrees, for no additional fees
or charges other than those provided in this Agreement, to assist VBW in:
(i) VBW's efforts to sell, bundle and package its services to the
Investment Market;
(ii) VBW's ongoing corporate finance and M&A activities; and
(iii) VBW's ongoing company and industry sector research efforts
across the technology and telecommunications industries.
d. Space. Yankee will provide VBW with an office and nearby space
within Yankee's current headquarters, or any subsequent headquarters, sufficient
to accommodate two VBW employees (an executive and an administrative assistant)
and the use of the telephone and computer systems, reception, conference and
meeting rooms.
2
<PAGE>
e. Exclusions. Notwithstanding any provision to the contrary,
Yankee Material will not include and Yankee will not be required to provide to
VBW:
(i) Copies of proprietary consulting work performed for
individual Yankee clients; or
(ii) Information which Yankee is obligated to keep confidential
due to any fiduciary duties owed by Yankee to any third party.
2. FEES
a. Research Retainer. In consideration of the rights granted to VBW
and the other obligations of Yankee set forth in this Agreement, VBW shall make
payments to Yankee during the term of this Agreement as follows:
(i) Upon execution and delivery of this Agreement, VBW shall
pay Yankee $100,000;
(ii) Beginning with the first quarter of 1999, VBW shall pay
Yankee a quarterly research retainer equal to (x) $125,000, as increased or
decreased by (y) the percentage change in the Russell 2000 (or a mutually
agreeable index measuring the performance of small and mid-cap technology
stocks) since January 1, 1999, as determined as of the beginning of such
quarter.
(iii) Notwithstanding the provisions of paragraph (ii) above
however, VBW shall pay Yankee a minimum of $500,000 in 1999, $600,000 in 2000
and $500,000 per year thereafter. Any Payment to be made by VBW to Yankee
pursuant to this paragraph (iii) shall be made concurrently with the fourth
quarterly payment for such year.
b. Investment Banking Fees. In addition to the amounts set forth
above, VBW agrees to pay Yankee as follows:
(i) For providing VBW with Qualified Leads not previously known
to VBW, VBW shall pay Yankee a fee equal to 1% of the Net Fees received by VBW
for any investment banking transaction completed by VBW for such Qualified Lead
during the term of this Agreement or within six months of the termination of
this Agreement. For purposes of this section, a Qualified Lead shall mean an
investment banking prospect whose CEO or CFO initiates contact with VBW or
responds to contact from VBW as a result of a referral by Yankee.
(ii) For assisting VBW in pitching its investment banking
services to a company at the request of VBW, VBW shall pay Yankee a fee equal to
1% of the Net Fees received by VBW for any investment banking transaction
completed by VBW for said company during the term of this Agreement or within
six months of the termination of this Agreement. For purposes of this section,
providing assistance in pitching investment banking services shall mean
providing such assistance as VBW may reasonably request in connection with
securing such investment banking business, including, without limitation,
assistance by Yankee staff in preparing a positioning presentation for the
company, attendance by Yankee staff
3
<PAGE>
at a presentation to the company or use by Yankee staff of its influence with
the management of the company to steer the investment banking decision in VBW's
favor.
(iii) For assisting VBW in marketing an investment banking
transaction to a prospective investor (e.g. marketing an underwriting to the
investment community or marketing an M&A idea to a prospective corporate buyer
or seller after VBW has been engaged in the transaction) at the request of VBW,
VBW shall pay Yankee a fee equal to 1% of the Net Fees received by VBW for said
investment banking transaction directly relating to any sale to such prospective
investor during the term of this Agreement or within six months of the
termination of this Agreement. For purposes of this section, providing
assistance in marketing an investment banking transaction shall mean providing
such assistance as VBW may reasonably request in connection with securing orders
or closing on investment banking transactions, including, without limitation,
participation by Yankee staff in a conference call with, or a presentation by
Yankee staff to, an investment audience in connection with an underwriting
transaction or a corporate management team in connection with an M&A
transaction.
(iv) The above fees may be awarded in combination.
(v) For purposes of this section, "Net Fees" shall mean, (x)
in the case of an M&A advisory engagement or a private placement, the gross fee,
less finders fees (other than those payable to Yankee) and unreimbursed
expenses, and (y) in the case of a public offering, the gross revenue from
selling concessions, management fees and underwriting fees, less finders fees
(other than those payable to Yankee) and net of all deal related expenses,
including, without limitation, stabilization losses.
c. Expenses. VBW shall reimburse Yankee for travel related expenses
incurred by Yankee staff at the request of VBW provided that such travel is in
accordance with VBW travel policies.
3. OVERSIGHT
a. Ongoing day-to-day relations between Yankee and VBW shall be
under the direction of a senior Yankee executive selected by Yankee and approved
by VBW, which approval will not be unreasonably withheld, and the liaison hired
by VBW. Such liaison will have an office at Yankee's headquarters and will have
access to all non-proprietary consulting Yankee meetings with vendors and other
companies meeting with Yankee analysts.
b. In addition to the day-to-day coordination between the above
individuals, Yankee senior management (CEO or President) and VBW Senior
Management (Head of Research, Head of Investment Banking, CEO or President) will
meet quarterly to review progress in the relationship and to discuss new ways of
strengthening and enhancing the relationship.
4. TERM
a. The initial term of this Agreement shall begin on the date
hereof and will remain in effect until December 31, 2000 (the "Initial Term").
Following the Initial
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Term, this Agreement shall automatically renew for consecutive one year terms
unless either party has given the other party written notice of its intent not
to renew this Agreement at least ninety (90) days prior to the end of the then-
current term.
b. This Agreement may be terminated at any time after the end of
the Initial Term by either party, for any or no reason, upon at least ninety
(90) days prior written notice. Such termination shall be effective at the end
of the quarter following the 90 day notice period.
c. If Yankee elects to not renew this Agreement pursuant to
paragraph (a) above or elects to terminate this Agreement pursuant to paragraph
(b) above, Yankee shall pay VBW a termination fee equal to the total amount paid
to Yankee by VBW during the twelve month period preceding the effective date of
the expiration or termination of this Agreement.
d. If VBW elects to not renew this Agreement pursuant to paragraph
(a) above or elects to terminate this Agreement pursuant to paragraph (b) above,
VBW shall pay Yankee a termination fee equal to the total amount paid to Yankee
by VBW during the six month period preceding the effective date of the
expiration or termination of this Agreement.
5. EXCLUSIVITY
a. During the term of this Agreement, Yankee shall not enter into
any agreement with any other bank, brokerage firm, financial advisory firm or
other party permitting such party to use, distribute, sell, resell, reproduce,
make derivative works of, publicly perform or publicly display in any form or
medium, whether now known or later developed, any Yankee Material or other
research created by Yankee for the purpose of developing, distributing,
marketing, selling or providing products or services for or to the Investment
Market. Notwithstanding the foregoing, Yankee may renew currently existing
agreements providing Yankee research to other banks, brokerage firms, financial
advisory firms or other parties for their own internal use, provided that such
internal use is specifically limited to use in credit analysis for prospective
lending transactions or to use by the internal information technology ("IT")
organizations of any such party in connection with such party's analysis of its
internal IT organizational needs and provided further such agreements
specifically prohibit the access to, or use of, such licensed Yankee Material or
other research created by Yankee by the research, sales & trading and investment
banking departments of such party. VBW acknowledges that currently existing
agreements providing Yankee Material or other research to other banks, brokerage
firms and financial advisory firms for their own internal use shall remain in
full force and effect until such agreements expire. To the extent any such
agreement includes an automatic renewal provision, Yankee shall deliver timely
notice to such third party of its intent not to renew such agreement except to
the extent such renewal is permitted hereunder.
b. Notwithstanding Section 1 above, Yankee shall be entitled to
sell Yankee Material directly to venture capitalists, attorneys, accountants,
consultants and the press.
6. CONFIDENTIALITY. Yankee acknowledges that it will from time to time
receive confidential information from VBW. Yankee agrees that it will, and will
cause each
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of its employees, contractors and other affiliates to, hold all such
confidential information in confidence and that it will not, and will cause each
of its employees, contractors and other affiliates not to, disclose any such
confidential information to any third party. Yankee further agrees that it will
inform its employees, contractors and other affiliates of their obligation not
to trade in the securities markets on the basis of such confidential
information. Confidential information will mean any information identified by
VBW as being confidential or proprietary, including, without limitation, client
lists, investment banking transactions in progress and investment
recommendations that are not yet public information. Notwithstanding the
foregoing, confidential information shall not include any information that (i)
was known to the public prior to disclosure by VBW, (ii) becomes known to the
public through no fault of Yankee or (iii) is disclosed to Yankee on a non-
confidential basis by a third party having a legal right to make such
disclosure.
7. WARRANTY AND LIMITATION OF LIABILITY. YANKEE WARRANTS THAT THE
SERVICES, OPINIONS AND MARKET ASSESSMENTS PROVIDED BY YANKEE ARE BASED ON
INFORMATION THAT IT BELIEVES IN GOOD FAITH TO BE RELIABLE AND ACCURATE AT THE
TIME PROVIDED. THIS EXPRESS WARRANTY REPLACES AND IS IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR APPLICATION OR USE. VBW FURTHER ACKNOWLEDGES THAT
THE SERVICES ARE NOT INTENDED TO SERVE AS A BASIS FOR MAKING INVESTMENT
DECISIONS. IN NO EVENT SHALL YANKEE BE LIABLE TO VBW OR ANY CUSTOMER OF VBW FOR
ANY LOST PROFITS OR SPECIAL OR CONSEQUENTIAL DAMAGES. IN THE EVENT OF A CLAIM BY
VBW OR A CUSTOMER OF VBW, YANKEE AND VBW SHALL ATTEMPT TO RESOLVE THE MATTER IN
GOOD FAITH FOR A PERIOD OF AT LEAST NINETY (90) DAYS. IN THE EVENT THE CLAIM
CANNOT BE RESOLVED BETWEEN THE VBW AND YANKEE, THE DISPUTE SHALL BE RESOLVED BY
AN ARBITRATION AS SET FORTH IN SECTION 11 HEREOF.
8. INDEMNITY. It is acknowledged that the opinions and market
assessments provided by Yankee are based on information that it believes to be
reliable and accurate at the time it is provided. VBW further acknowledges that
Yankee research, products and services are not intended to serve as a basis for
making investment decisions. VBW agrees to indemnify and hold Yankee and its
affiliates harmless from any claims, damages or liability incurred by Yankee or
its affiliates in connection with any claim by VBW or any client, customer or
other third party dealing with VBW; provided that such claim is directly related
to Yankee Material supplied by Yankee pursuant to this Agreement and used by VBW
or redistributed by VBW to such client, customer or third party. Notwithstanding
the foregoing however, VBW shall not be required to indemnify and hold Yankee
harmless from any claim, damage or liability to the extent such claim, damage or
liability results from the bad faith or gross negligence of Yankee or its
affiliates. Yankee agrees not to settle, compromise, consent to the entry of any
judgment in or otherwise seek to terminate any action, claim, suit or proceeding
in respect of which indemnification may be sought hereunder without the prior
written consent of VBW. Yankee further agrees to provide VBW with prompt notice
of any event which might result in Yankee seeking indemnification hereunder.
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9. ASSIGNMENT. Neither this Agreement nor any rights or obligations of
VBW hereunder may be assigned or delegated (by operation of law or otherwise) by
VBW in whole or in part without the prior written consent of Yankee. Neither
this Agreement nor any rights or obligations of Yankee hereunder may be assigned
or delegated (by operation of law or otherwise) by Yankee in whole or in part
without the prior written consent of VBW.
10. AMENDMENT; WAIVER; DISCHARGE; THIRD PARTY BENEFICIARIES. This
Agreement may not be amended, released, discharged, abandoned, terminated, or
otherwise modified in any manner, except by an instrument in writing signed on
behalf of each of the parties to be bound thereby by their duly authorized
representatives. The failure of any party hereto to enforce at any time any of
the provisions of this Agreement shall not in any way be construed to be a
waiver of this Agreement or any part hereof or of the right of any party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to be a waiver of any other or subsequent breach.
No third party shall be entitled to the rights and benefits of this Agreement.
11. ARBITRATION. Any dispute arising under this Agreement shall be
submitted for resolution in the Commonwealth of Massachusetts to a panel of
three arbitrators in accordance with the rules of American Arbitration
Association. Each party shall be bound by the decision of the arbitrators and
judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof.
12. NOTICES. All notices or reports permitted or required under this
Agreement shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified; (ii) when sent by confirmed
facsimile if sent during normal business hours of the recipient, if not, then
the next business day; (iii) two (2) business days after being sent by a
commercial express courier service, specifying priority delivery, with written
verification of receipt; or (iv) seven (7) days after having been sent by
registered or certified mail, return receipt requested. Notices shall be sent to
the addresses set forth at the beginning of this Agreement or such other address
as either party may specify in writing.
13. SEVERABILITY. Any provision, or clause of any provision, of this
Agreement that may be found to be contrary to applicable law or otherwise
unenforceable will not affect the remaining terms of this Agreement, which will
be construed as if the unenforceable provision or clause were absent form this
Agreement, so long as the economic or legal substance of the transactions
contemplated by this Agreement is not affected in any manner materially adverse
to any party to this Agreement. Upon the determination that such provision or
clause is contrary to applicable law or otherwise unenforceable, the parties
will negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible.
14. HEADINGS. The headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the interpretation
or construction of this Agreement.
15. PUBLICITY. This Agreement, including the specific terms hereof,
shall be considered confidential information of VBW and shall not be disclosed
by Yankee to any third party except to the extent contained in press releases
issued by VBW or in research
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materials published by VBW. In connection with this Agreement and the resulting
new relationship between Yankee and VBW, VBW intends to draft a joint press
release and develop an overall publicity strategy in which both VBW and Yankee
will participate. Yankee agrees that it shall not issue any press release or
other statement regarding this Agreement and the relationship between Yankee and
VBW without the prior written approval of VBW.
16. COUNTERPARTS. This Agreement may be executed simultaneously in
several counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
17. BINDING EFFECT. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns.
18. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
and all prior or contemporaneous agreements or understandings relating to the
subject matter hereof.
19. GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts as such laws are
applied to agreements entered into and to be performed entirely within
Massachusetts solely between Massachusetts residents.
IN WITNESS WHEREOF, Yankee and VBW have caused this instrument to be
properly executed by their duly authorized officers, in their respective
corporate names, the date and year first above written.
Yankee Group Research, Inc. Volpe Brown Whelan & Company, LLC
By: /s/ Howard Anderson By: /s/ Jeffrey Andrews
------------------------------- ---------------------------------
Howard Anderson Jeffrey Andrews
President & CEO Chief Financial Officer
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