<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SILICON ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7999 77-0389433
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
210 HACIENDA AVENUE
CAMPBELL, CALIFORNIA 95008
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID S. MORSE
CHAIRMAN, CEO & PRESIDENT
210 HACIENDA AVENUE
CAMPBELL, CALIFORNIA 95008
(408) 364-6710
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
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<S> <C>
JAMES M. KOSHLAND, ESQ. NORA L. GIBSON, ESQ.
KIRK O. WILLIAMS, ESQ. RICHARD R. PLUMRIDGE, ESQ.
NICOLE D. ALSTON, ESQ. JOHN E. HAYES, ESQ.
GRAY CARY WARE & FREIDENRICH LLP BROBECK, PHLEGER & HARRISON LLP
400 HAMILTON AVENUE SPEAR STREET TOWER, ONE MARKET
PALO ALTO, CALIFORNIA, 94301-1825 SAN FRANCISCO, CALIFORNIA 94105
(650) 833-2000 (415) 442-0900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being 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 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 number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C>
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock ($0.001 par value)............... $46,000,000 $12,788
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</TABLE>
(1) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
------------------------
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 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.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
SHARES
LOGO
COMMON STOCK
This is an initial public offering of shares of common
stock of Silicon Entertainment, Inc. We expect that the public offering price
will be between $ and $ per share.
An application has been submitted for trading and quotation of our common
stock on the Nasdaq National Market under the symbol "SENT."
OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Silicon Entertainment......... $ $
</TABLE>
The underwriters may also purchase up to an additional
shares of common stock at the public offering price, less the underwriting
discounts and commissions, to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
-------------------------
SG COWEN
CIBC WORLD MARKETS
J.C. BRADFORD & CO.
E*OFFERING
, 1999
<PAGE> 3
TABLE OF CONTENTS
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<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Forward-Looking Statements............ 17
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Financial Data............... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business.............................. 32
Management............................ 46
Transactions with Related Parties..... 55
Principal Stockholders................ 57
Description of Capital Stock.......... 59
Shares Eligible for Future Sale....... 63
Underwriting.......................... 65
Legal Matters......................... 66
Experts............................... 67
Where to Find Additional
Information......................... 67
Index to Financial Statements......... F-1
</TABLE>
-------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. WE
ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY SHARES OF OUR COMMON STOCK ONLY
IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS,
REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR
COMMON STOCK.
-------------------------
UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------------
REFERENCES IN THIS PROSPECTUS TO "SILICON ENTERTAINMENT," "WE," "OUR" AND
"US" REFER TO SILICON ENTERTAINMENT, INC., A DELAWARE CORPORATION.
WE HAVE FILED U.S. TRADEMARK AND SERVICE MARK APPLICATIONS FOR "RACING SO
REAL YOU CAN FEEL IT," SILICON ENTERTAINMENT, INC., SILICON MOTOR SPEEDWAY AND
OUR SILICON MOTOR SPEEDWAY LOGO IN THE UNITED STATES. WE USE THE NASCAR SILICON
MOTOR SPEEDWAY LOGO UNDER A LICENSE AGREEMENT WITH THE NATIONAL ASSOCIATION FOR
STOCK CAR AUTO RACING, INC. (NASCAR). WE HAVE ALSO FILED TRADEMARK AND SERVICE
MARK APPLICATIONS IN CANADA AND THE EUROPEAN UNION FOR SILICON ENTERTAINMENT,
INC. ALL OTHER TRADEMARKS, SERVICE MARKS OR TRADE NAMES REFERRED TO IN THIS
PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
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PROSPECTUS SUMMARY
The following is only a summary. You should carefully read the more
detailed information contained in this prospectus, including our financial
statements and related notes. Our business involves significant risks. You
should carefully consider the information under the heading "Risk Factors."
Unless otherwise indicated, all information contained in this prospectus:
- gives effect to the conversion of all outstanding shares of our
mandatorily redeemable convertible preferred stock into common stock upon
the closing of this offering;
- reflects a 1-for-2 reverse stock split to be effected prior to the
completion of this offering;
- assumes our reincorporation in Delaware prior to the consummation of this
offering; and
- assumes the underwriters' over-allotment option is not exercised.
SILICON ENTERTAINMENT, INC.
We own and operate NASCAR Silicon Motor Speedway racing centers. Through
strategic relationships and our proprietary technology, we provide a realistic
racing experience that simulates the motion, sights and sounds of an actual
NASCAR race. Located in high profile, high traffic retail locations, our racing
centers currently have eight or twelve race car simulators per location and sell
a variety of premium motorsports merchandise. Under a licensing agreement with
NASCAR, we have the exclusive right to use the NASCAR name in our simulated
racing experience. In addition to our licensing agreement with NASCAR, we have
licensing agreements with several NASCAR drivers including Dale Earnhardt, Jeff
Gordon, Dale Jarrett, Rusty Wallace and others. To extend our racing experience
into the home or office, our Web site, SMSonline.com, currently provides a range
of information and services including reservations, race results, standings and
other racing center information. As of August 1, 1999, our customers had
completed over one million races at our racing centers.
We design our racing centers to provide a fun, interactive entertainment
experience in an environment that is both social and competitive. Each race car
simulator is 80% of the size of an actual NASCAR race car with the same colors,
sponsor logos and numbers. Our race car simulators have motion platforms that
move in a variety of directions, as well as several video screens and speakers
surrounding each driver, all of which simulate the experience of driving an
actual race car. Our racing centers encourage competition by allowing our
customers to race against each other in individual races, leagues and
competitions. Our racing centers also include pit areas and grandstands that
offer drivers and spectators an opportunity to socialize with each other. We
believe the authentic "look and feel" of our race car simulators combined with
the competitive and social aspects of our racing experience create one of the
most realistic and entertaining simulated racing experiences.
Our racing centers typically require 4,000 to 8,000 square feet of space
and are located in high profile retail locations. These locations currently
include Mall of America in Bloomington (Minneapolis), Minnesota; Dallas Galleria
in Dallas, Texas; Woodfield in Schaumburg (Chicago), Illinois; Irvine Spectrum
in Irvine, California and Palisades Center in West Nyack, New York. We expect to
open 20 to 30 additional racing centers over the next 24 months, and have
already signed leases for eight of these locations including Concord Mills in
Charlotte, North Carolina; Universal CityWalk near Los Angeles, California and
Opry Mills in Nashville, Tennessee.
Motorsports is currently one of the largest and fastest growing spectator
sports in the United States, with more than 83 million people indicating an
interest in auto racing. NASCAR's televised events reached over 126 million
estimated households in 1998 and are covered by major broadcast and cable
television networks. In addition, more than 80 Fortune 500 companies are NASCAR
sponsors and total motorsports sponsorship is expected to reach $1.2 billion in
1999, or 24% of all sports sponsorship. The popularity of motorsports has also
resulted in a large market for motorsports-related merchandise. Retail sales of
NASCAR-licensed merchandise are expected to increase from $950 million in 1998
to more than $1.1 billion in 1999. Based on the growing popularity of
motorsports, we believe a significant opportunity
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<PAGE> 5
exists to provide simulated NASCAR racing and NASCAR-licensed merchandise
throughout retail locations in the United States.
Our objective is to be the leading provider of simulated NASCAR racing. We
intend to achieve this by:
- Expanding the Number of Our Racing Centers -- We plan to accelerate the
roll-out of our racing centers, opening 20 to 30 additional racing
centers over the next 24 months. We expect to open primarily 8-, 10- and
12-simulator racing centers based on customer traffic and the retail
space available at each location. We intend to locate most of our future
racing centers in metropolitan markets that have shown a substantial
interest in NASCAR racing.
- Continuing to Develop SMSonline.com -- We intend to enhance SMSonline.com
and build upon the community of our racing customers by providing online
opportunities to discuss our competitions and racing experiences, and by
offering NASCAR driver testimonials and customer endorsements of our
racing experience. We also intend to offer our customers who purchase our
proprietary software and subscribe to our online services, the ability,
from a personal computer, to: download replays of races, customize their
car set-up, view live racing at our racing centers and race against
customers at the racing centers.
- Continuing to Enhance Our Racing Experience -- We intend to continue to
develop our racing experience by offering additional race tracks,
customized car set-up, real-time racing among our customers who are
located in different racing centers, video recording and sale of
individual races and improved communication during a race between drivers
and racing center spectators.
- Leveraging Strategic and Working Relationships -- We intend to leverage
key relationships with NASCAR, mall developers and others to enhance our
racing experience, enter into sponsorship agreements with selected NASCAR
sponsors, gain entrance into new geographic markets and high profile
retail locations and further promote our racing centers.
We were incorporated in California in November 1994 as LBE Technologies,
Inc. In June 1998, we changed our name to Silicon Entertainment, Inc. We intend
to reincorporate in Delaware prior to the consummation of this offering. Our
principal offices are located at 210 Hacienda Avenue, Campbell, California
95008. Our telephone number is (408) 364-6710. Our Web site address is
www.SMSonline.com. Information contained on our Web site does not constitute
part of this prospectus.
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THE OFFERING
Common stock we are offering.............. shares
Common stock to be outstanding after this
offering.................................. shares (see
"Capitalization")
Underwriters' over-allotment option....... shares
Use of proceeds........................... For the expansion of the number of
our racing centers, the
enhancement of our hardware and
software technology and basic
infrastructure, the promotion of
our racing centers, the addition
of online content and services to
our Web site, the repayment of
loans to certain investors and
working capital and general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.... SENT
The number of shares of our common stock to be outstanding immediately
after the offering is based on the number of shares outstanding on August 1,
1999 and includes 7,887,796 shares of common stock assuming the conversion of
convertible preferred stock outstanding on that date. This number excludes:
- 1,105,598 shares of our common stock subject to options outstanding at a
weighted average exercise price of approximately $1.92 per share;
- warrants to purchase 378,017 shares of our common stock at a weighted
average exercise price of $3.06 per share, 64,001 shares of our Series B
Preferred Stock at an exercise price of $1.50 per share, and 371,641
shares of our Series C Preferred Stock at an exercise price of $6.00 per
share;
- 369,444 shares of our common stock assuming the conversion of $5.7
million of subordinated convertible promissory notes issued in June 1999;
and
- 550,000 shares of our common stock assuming the conversion of $5.5
million of subordinated convertible promissory notes issued in September
1999 and warrants issued concurrently to purchase 68,750 shares of our
common stock at an exercise price of $10.80 per share.
5
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The tables below summarize our financial data set forth in more detail in
the Financial Statements included in this prospectus. The financial data below
is based on the following assumptions:
- The Pro Forma As Adjusted balance sheet data as of August 1, 1999 has
been adjusted to reflect the conversion of mandatorily redeemable
convertible preferred stock into common stock at the closing of this
offering, the issuance of $5.5 million of subordinated convertible
promissory notes in September 1999 and the sale of shares
of our common stock at an assumed initial public offering price of $
per share and the application of the net proceeds from such sale. See
"Use of Proceeds."
- See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing basic and diluted
net loss per common share.
<TABLE>
<CAPTION>
TWENTY-SIX WEEK
FISCAL YEAR ENDED PERIOD ENDED
---------------------------- -----------------
FEB. 2, FEB. 1, JAN. 31, AUG. 2, AUG. 1,
1997 1998 1999 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................................. $ 47 $ 1,052 $ 5,382 $ 1,541 $ 4,169
Total operating expenses........................ 2,664 6,021 16,711 6,888 9,292
Operating loss.................................. (2,617) (4,969) (11,329) (5,347) (5,123)
Net loss........................................ (2,642) (5,192) (11,488) (5,370) (6,295)
Net loss attributable to common stockholders.... $(2,642) $(5,200) $(11,543) $(5,391) $(6,336)
Basic and diluted net loss per share
attributable to common stockholders........... $ (1.65) $ (3.67) $ (5.85) $ (2.95) $ (2.55)
Shares used in computing basic and diluted net
loss per share attributable to common
stockholders.................................. 1,605 1,417 1,973 1,830 2,489
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 1, 1999
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,778 $
Total assets................................................ 16,192
Long-term portion of capital leases and long-term debt...... 7,023
Total liabilities........................................... 14,363
Mandatorily redeemable convertible preferred stock.......... 24,370
Total stockholders' equity (deficit)........................ $(22,541)
</TABLE>
6
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. You should also refer to the other information in this
prospectus, including our financial statements and the related notes. The risks
and uncertainties described below are not the only risks and uncertainties we
face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, results of
operations and financial condition could suffer. In that event, the trading
price of our common stock could decline and you may lose all or part of your
investment in our common stock. The risks discussed below also include those
associated with forward-looking statements, as our actual results may differ
substantially from those discussed in these forward-looking statements.
RISKS RELATED TO THE BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY
We opened our first racing center in August 1997. We have recognized
limited revenues since our inception. In addition, our senior management team
and other employees have worked together at our company for only a short period
of time. Consequently, we have a limited operating history upon which you can
evaluate our business.
WE EXPECT TO INCUR LOSSES FROM OPERATIONS AND OUR FUTURE PROFITABILITY REMAINS
UNCERTAIN
Our ability to generate significant revenues is uncertain. We have incurred
substantial costs to develop our technology, open and operate our racing
centers, build brand awareness and expand our marketing efforts through the
Internet. We had a net loss of approximately $11.5 million for the fiscal year
ended January 31, 1999 and a net loss of approximately $6.3 million for the
twenty-six week period ended August 1, 1999. We expect to continue to incur
losses from operations and generate negative cash flows due to significant
expenses that we plan to incur. These plans include:
- increasing the number of our racing centers;
- enhancing our hardware and software technology and basic infrastructure;
- expanding our marketing efforts;
- expanding our online offerings; and
- hiring additional management and other personnel.
If our revenues do not increase to a level sufficient to meet our
substantial costs, we will not be able to achieve profitability. Even if we do
achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future.
THE DEMAND FOR OUR RACING CENTERS IS UNCERTAIN BECAUSE WE RELY ON A SINGLE
PRODUCT
Substantially all of our revenues are derived from the sale of tickets for
our race car simulators. The market for retail entertainment like our race car
simulators is characterized by rapidly changing customer preferences and
accordingly, may have a limited life. Among the factors that may influence the
demand for our racing centers are:
- the popularity of motorsports, NASCAR, NASCAR drivers, team owners and
other licensors;
- technological advancements in arcade games and in at-home racing
experiences;
- cultural and demographic trends; and
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<PAGE> 9
- general economic conditions, which may have a disproportionate effect on
consumer entertainment spending.
These factors are neither quantifiable nor predictable. Consequently,
although we believe we offer a realistic and entertaining racing experience, we
cannot predict whether demand will continue. Moreover, even if we experience
great demand when we open a new racing center, we may not be able to sustain the
long-term interest of our customers.
WE MAY NOT BE SUCCESSFUL IN IDENTIFYING SITES FOR OUR RACING CENTERS
In identifying sites for our racing centers, we analyze many factors such
as mall and area population demographics and retail traffic patterns.
Nevertheless, it is impossible for us to identify and quantify all of the
factors that may determine the suitability of a site; therefore, it is
impossible for us to determine whether a site ultimately will be successful. For
example, we recently reduced the number of race car simulators from fourteen to
eight at our Dallas Galleria racing center and from twelve to eight at our
Irvine Spectrum racing center. Moreover, because we have only five racing
centers currently in operation, we have limited experience in selecting sites
for our racing centers and there is a limited basis to evaluate our prospects
for future success. If the sites we choose do not generate significant revenue
and cash flow, our business will not be able to grow. If we choose to close or
relocate a racing center, we would incur substantial costs, including costs
relating to the long-term, non-cancelable lease obligations that generally cover
our sites. In addition, closing or downsizing racing centers could damage our
brand image and our relationship with NASCAR, which could affect our future
profitability and our ability to negotiate favorable terms for future leases.
WE DEPEND ON OUR LICENSING AGREEMENT WITH NASCAR, WHICH IS EXCLUSIVE ONLY FOR
OUR SIMULATED RACING EXPERIENCE AND WHICH MAY BE TERMINATED IF WE DEFAULT
We believe that our licensing agreement with NASCAR is vital to the success
of our business and is crucial to the development and enhancement of the racing
experience offered by our racing centers. Our license agreement with NASCAR for
the use of its image and trademarks extends to December 31, 2005 and is
exclusive for a designated category until December 31, 2002, at which time
NASCAR has the sole option to renew the exclusive portion of the agreement. The
exclusive category of the NASCAR license is "operator assisted, location based
interactive stockcar or stock-truck entertainment experiences that consist of no
less than five linked simulator units, with each on a motion-based platform and
each allowing a maximum of two people to participate in each individual
simulator unit." Additionally, under the license each location must be permanent
in nature and in a retail environment. There can be no assurance that NASCAR
will not grant non-exclusive or exclusive licenses for other categories of
simulated racing outside of the category to which our exclusivity applies.
The term of the agreement runs through December 31, 2005 and may be
terminated at the option of NASCAR upon the occurrence of certain events, such
as:
- the closing of five or more of our racing centers;
- the departure of three or more of our current directors;
- the failure by us to operate a total of nine racing centers by January
31, 2000 and a total of thirteen racing centers by August 31, 2000;
- the temporary cessation of operations at any of our racing centers for
reasons other than renovation or repairs; and
- the breach by us of any term in our agreement with NASCAR.
In addition, under our agreement with NASCAR, we must obtain NASCAR's prior
approval for all advertising and promotional activities as well as Web site
activities utilizing NASCAR's name and for each racing center location. Our
agreement also restricts the types of merchandise and food we may sell, as well
as the layout of our racing centers, and requires that we locate our race car
simulators only in our
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<PAGE> 10
racing centers. These restrictions may keep us from adapting to market
conditions and taking advantage of other opportunities that may arise. Also, we
may inadvertently breach one or more of the terms of our agreement with NASCAR
and face the possibility that NASCAR would terminate our agreement.
WE DEPEND ON OUR LICENSING AGREEMENTS WITH NASCAR DRIVERS, TEAM OWNERS AND RACE
TRACK OWNERS
We have licensing arrangements with NASCAR drivers, team owners and race
track owners which vary in scope and duration, but generally authorize us to
incorporate their images and designs into our race car simulators and to use
their names and logos in our marketing. The success of these licensing
arrangements depends on many factors, including the popularity, performance and
public image of the NASCAR drivers and the team owners. Some of these licensing
agreements contain provisions that allow the licensor to terminate the agreement
upon the occurrence of certain events. The majority of our licenses with team
owners will expire before May 31, 2000, unless extended by mutual agreement. For
these reasons, we cannot predict whether we will be able to realize the benefits
of these licensing agreements in the future. Our business could be materially
and adversely affected if our rights under the licensing agreements were
diminished or lost.
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
Our quarterly revenues, expenses and operating results have varied in the
past and may fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. These factors include, among others:
- the pace of the roll-out of our racing centers;
- the demand for racing simulation and merchandise at our racing centers;
- seasonal fluctuations, particularly those associated with retail shopping
patterns and with the NASCAR racing season;
- our ability to enter into new and maintain existing strategic and working
relationships;
- capital expenditures and costs related to our expansion;
- changes in our operating expenses including, in particular, personnel
expenses;
- the introduction of competitive retail entertainment products;
- pricing changes; and
- equipment and software-related failures at our sites.
Additionally, because we currently have only five racing centers in
operation, our operating results are particularly susceptible to fluctuations in
the results from any store. You should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of future performance.
It is possible that in some future periods our results of operations may be
below the expectations of public market analysts and investors.
A FAILURE TO EXPAND THE NUMBER OF OUR RACING CENTERS AND TO PROPERLY MANAGE
EXPANSION WILL PREVENT OUR REVENUES FROM GROWING
Our future growth depends primarily on our ability to increase the number
of our racing centers. We plan to open 20 to 30 racing centers over the next 24
months. To execute our growth plan we must:
- identify appropriate locations;
- negotiate leases on acceptable terms;
- design each racing center;
- build race car simulators according to our expansion schedule, while
maintaining quality;
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- depend upon contractors to construct our new racing centers in a timely
manner while controlling costs;
- obtain and install the necessary equipment on a timely basis;
- obtain the timely approval of local regulatory authorities; and
- hire, train, motivate and retain qualified employees to assist in our
expansion, as well as to staff our racing centers.
We have limited experience in building racing centers, particularly in
building multiple racing centers concurrently. Our planned expansion will place
a significant strain on our limited financial and management resources. Our
resources may not be sufficient to adequately manage the opening of the planned
number of racing centers cost effectively and under a compressed time schedule.
Consequently, it may be difficult for us to meet this growth plan on our short
time schedule while controlling costs. In addition, the delay of rolling out our
racing centers from one quarter to the next could slow the anticipated growth of
our revenues.
OUR EXPANSION PLANS WILL REQUIRE US TO EXPEND SIGNIFICANT CAPITAL RESOURCES, AND
WE MAY NEED ADDITIONAL CAPITAL
The capital resources required to develop each new racing center are
significant. The average initial cost of opening our existing 12-simulator
racing centers, including our Irvine Spectrum racing center which was initially
built as a 12-simulator racing center, was approximately $2.0 million, including
development costs, pre-opening costs and start-up merchandise inventory. We plan
to open 20 to 30 new racing centers over the next 24 months with an estimated
aggregate cost to us of approximately $30.0 to 45.0 million. To date, our cash
flow from operations has been insufficient to cover our expenses and capital
needs. Although we believe our existing capital resources, together with the
proceeds from this offering will be sufficient to meet our needs for the
foreseeable future, including our planned expansion, the rate at which we use
our available funds will depend on factors which are difficult to predict, such
as our ability to control costs in designing and building our racing centers. In
the future, we may require additional capital and there is no assurance that
additional financing will be available at that time on terms favorable to us, or
at all. If adequate funds are not available on acceptable terms, we may be
forced to curtail or cease our operations. Moreover, even if we are able to
continue our operations, our failure to obtain additional financing could have a
material and adverse effect on our business and financial results and may delay
our expansion. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
WE ARE SUBJECT TO LONG-TERM LEASES FOR OUR FACILITIES, MANY OF WHICH ARE
NON-CANCELABLE AND OTHERS OF WHICH WE MAY CANCEL ONLY UNDER LIMITED
CIRCUMSTANCES
The leases we enter into for our racing centers typically have terms
ranging from five to ten years. Approximately half of our existing leases have
limited termination options which generally may only be exercised after a number
of years if our gross receipts do not meet stated thresholds, if no default
exists under the lease, and a cancellation fee is paid. The leases have minimum
annual rents ranging from approximately $180,000 to $395,000, which include
charges for operating expenses, common area maintenance, taxes and utilities,
plus an additional charge if we achieve sales in excess of certain levels. Our
future facilities are likely to be subject to similar non-cancelable long-term
leases or may be subject to limited termination options. In many of our leases,
the landlord agrees to provide an allowance for construction of improvements,
but typically we also make large investments of our own funds to finance tenant
improvements. If an existing or future facility does not perform at a profitable
level, and the decision is made to close that facility without exercising an
option to terminate the lease, we may still be committed to perform our
obligations under the applicable lease. These obligations would include, among
other things, payment of the rent and additional charges as they would have
become due for the balance of the respective lease term. The leases related to
the Concord Mills, North Carolina, and the Katy Mills, Texas, sites are
cancelable by the landlord upon 30 days notice after certain dates if we have
not achieved
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<PAGE> 12
specified sales. If such a termination were to occur at these locations, we
could lose the facility before we are able to receive a return on our
investment.
WE MUST RESPOND TO RAPID MARKET CHANGES
The market for retail entertainment is subject to rapidly changing customer
tastes, a high level of competition, market seasonality and an ongoing need to
identify trends and offer new or enhanced products. Because these factors can
change rapidly, the success of our business may depend on our ability to react
to these factors, to enhance our simulated racing experience or offer new
products at our racing centers. Product development can be time consuming and
expensive and we may not be successful. Our business, operating results and
financial condition could be materially and adversely affected if we are unable
to respond quickly to market changes.
OUR RESULTS OF OPERATIONS WILL DEPEND ON DISCRETIONARY CONSUMER SPENDING
The success of our operations depends to a significant extent upon factors
relating to discretionary consumer spending, including economic conditions
affecting disposable consumer income. These factors include employment, business
conditions, interest rates and taxation. These factors, which may have a
particularly significant impact on the entertainment industry, can impact
attendance at our racing centers. There can be no assurance that consumer
spending will not be adversely affected by economic conditions, thereby
impacting our growth, revenues and profitability.
WE DEPEND ON THIRD-PARTY MANUFACTURERS AND VENDORS
We do not manufacture many of the significant components of our race car
simulators or the merchandise that we sell at our racing centers. Any
difficulties encountered by the third-party manufacturers that result in product
defects, production delays, cost overruns or the inability to fulfill orders on
a timely basis could materially and adversely affect us.
Our suppliers generally do not have long-term contracts with their
third-party manufacturers. We may not meet the demands and expectations of our
customers and our operations may be adversely affected by:
- the loss of these relationships;
- significant damage to the facilities of one or more of our suppliers or
their third-party manufacturers;
- the disruption or termination of the operations of one or more of our
suppliers or their third-party manufacturers; or
- the disruption or termination of transportation of products from one or
more of our suppliers or their manufacturers.
Neither we, nor any of our suppliers, maintain an inventory of sufficient
size to protect us against any material interruption of supply of merchandise or
of components for our race car simulators. We also may be subject to variations
in the prices that we or our suppliers pay to third-party manufacturers for
merchandise and race car simulator components if raw materials, labor and other
costs increase. We may not be able to pass along price increases to our
customers.
EQUIPMENT AND SERVICE FAILURES OR INTERRUPTIONS COULD ADVERSELY AFFECT OUR
BUSINESS
Any sustained or repeated failure or interruption in our equipment, our
simulators or our computer systems could reduce the appeal of our racing centers
to our customers. Unanticipated problems affecting our equipment and systems
would cause us to lose revenues at our racing centers. Interruptions or failures
could result if we fail to maintain our equipment or our computer systems in
effective working order.
Our race car simulators are subject to extensive wear and tear. We expect
to allocate a significant amount of resources to maintaining the equipment and
computer systems at our racing centers. To the
11
<PAGE> 13
extent we are unable to adequately maintain our equipment and computer systems
and interruptions or failures result, customers may stop visiting our racing
centers. Additionally, if maintenance is more costly than we predict, our
profitability will be adversely affected.
OUR MARKETING PLAN DEPENDS ON OUR ABILITY TO ESTABLISH AND MAINTAIN A
HIGH-QUALITY INTERACTIVE WEB SITE
We believe that the marketing of our product and our brand image will be
substantially enhanced if we are able to provide an interactive Web community to
our customers. We intend to enhance SMSonline.com and build upon the community
of our racing customers by providing online opportunities to discuss our
competitions and racing experiences and by offering NASCAR driver testimonials
and customer endorsements of our racing experience. We also intend to offer our
customers who purchase our proprietary software and subscribe to our online
services, the ability, from a personal computer, to: download replays of races,
customize their car set-up, view live racing at the racing centers and race
against customers at the racing centers.
Our failure to develop, introduce and maintain these online products could
diminish the effectiveness of our Web site and possibly reflect negatively on
our racing centers. Additionally, we may use new technologies ineffectively and
may incur substantial costs if we need to modify our services or infrastructure.
Also, growth in the number of users accessing our Web site may strain or exceed
the capacity of our computer systems and lead to impaired performance or system
failures. If this occurs, customer service and satisfaction may suffer, which
could lead to dissatisfied users, reduced traffic and an adverse impact on our
business.
WE DEPEND ON MANAGEMENT AND OTHER KEY PERSONNEL
The development of our operations depends upon the efforts and abilities of
our senior management, particularly David Morse, Rick Moncrief and Christopher
Morse. The loss of services of one or more of our key employees could have a
material adverse effect on our business. To date, we have not entered into
employment agreements with any of these key personnel and we have not purchased
insurance to protect us against the loss of the life of any of these or other
key personnel.
Our success also depends on our ability to continue to attract, retain and
motivate skilled employees. We may be unable to retain our key employees or
attract, motivate or retain other qualified employees in the future. Any failure
to attract and retain key employees will materially and adversely affect our
business.
WE HAVE LIMITED PROTECTION FOR OUR INTELLECTUAL PROPERTY AND OTHERS COULD
INFRINGE ON OR MISAPPROPRIATE OUR RIGHTS
Although we believe that our success is more dependent upon our technical
expertise than our proprietary rights, our future success and ability to compete
is dependent in part upon our proprietary technology. We rely on a combination
of contractual rights and copyright, patent, trademarks and trade secret laws to
establish and protect our proprietary technology. Currently, we have two U.S.
patent applications pending. We generally enter into confidentiality agreements
with our employees and consultants. We also strictly limit access to and
distribution of our source code and further limit the disclosure and use of
other proprietary information. We cannot assure you that the steps taken by us
in this regard will be adequate to prevent misappropriation of our technology or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain or use our products or technology. In addition, the laws of
some foreign countries do not protect our proprietary rights to the same extent
as do the laws of the United States.
We are also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. Third parties may
assert infringement claims in the future with respect to our current or future
products. Any assertion, regardless of its merit, could require us to pay
damages or settlement amounts and could require us to develop non-infringing
technology or pay for a
12
<PAGE> 14
license to the technology that is the subject of asserted infringement. Any
litigation or potential litigation could result in product delays, increased
costs or both. In addition, the cost of any litigation and the resulting
distraction of our management resources could adversely affect our results of
operations. We also cannot assure you that any licenses of technology necessary
for our business will be available or that, if available, such licenses can be
obtained on commercially reasonably terms. Our failure to obtain such licenses,
or to protect our proprietary technology, could have a material adverse effect
on our business and results of operations.
We have filed U.S. trademark and service mark applications for "RACING SO
REAL YOU CAN FEEL IT," SILICON ENTERTAINMENT, INC., SILICON MOTOR SPEEDWAY and
our SILICON MOTOR SPEEDWAY logo in the United States. We have also filed
trademark and service mark applications in Canada and the European Union for
SILICON ENTERTAINMENT, INC. However, we cannot assure you we will be successful
in obtaining registrations for the above marks. Our inability to obtain
trademark protection for our marks could have a material adverse effect on our
business.
We also have licensed from third parties portions of our hardware and
software technology related to our vehicle dynamics model and the force feedback
steering used in our race car simulators. We believe that there are alternative
sources for each of the material components of technology we license from these
third parties. However, the termination of any of these licenses could have a
material adverse effect on our business. None of our license agreements
currently provides exclusive rights to these technologies. Therefore we cannot
prohibit competitors or potential competitors from obtaining licenses to these
technologies and incorporating them into products that may be used to compete
with us.
WE FACE RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
We depend upon complex computer software and systems for certain aspects of
our operations. The failure of any of our software or systems to be Year 2000
compliant could disrupt the operation of our racing centers, our financial and
management controls and reporting systems.
In addition to the systems and software that we use directly, our
operations also depend on the performance of software and systems of our
third-party vendors and service providers. These include providers of the
components for our race car simulators, financial, telecommunications and parcel
delivery services. We cannot assure you that our service providers have, or will
have, operating software and systems that are Year 2000 compliant.
We have begun conducting an analysis of our material operating software and
systems to assess and assure Year 2000 compliance. We also have been
communicating with our third-party vendors and service providers and others with
whom we do business to coordinate Year 2000 readiness. The responses we have
received to date have indicated that steps are currently being undertaken by our
third-party vendors and service providers to address this concern. However, any
failure of our computer software and systems or the software and systems of
third parties to achieve timely Year 2000 compliance could have a material
adverse effect on our business, operating results and financial position. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
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<PAGE> 15
RISKS RELATED TO OUR INDUSTRY
A SUBSTANTIAL DECLINE IN THE POPULARITY OF MOTORSPORTS IN GENERAL, AND IN NASCAR
RACING IN PARTICULAR, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Substantially all of our revenues are derived from the sale of tickets for
our race car simulators. Although motorsports and NASCAR racing have enjoyed
substantial growth in popularity during the 1990s, we cannot predict whether
this growth will continue, particularly in light of the substantial competition
for consumer spending in the sports, entertainment and recreation industries. A
downturn in the popularity of motorsports or NASCAR racing could reduce interest
in simulated racing at our racing centers, as well as diminish sales of
motorsports merchandise, and hamper our ability to enter into strategic
relationships, all of which could materially and adversely affect our business
and financial results.
SEASONAL FLUCTUATIONS IN SALES MAY AFFECT OUR EARNINGS AND THE TRADING PRICE OF
OUR COMMON STOCK
We are subject to seasonal fluctuations in our revenues associated with the
retail shopping season, which affects the level of mall traffic near our racing
centers. We may also be subject to seasonal fluctuations in our revenues due to
the effect of the auto racing season on the demand for tickets for our race car
simulators or merchandise sold at our racing centers. Seasonal and cyclical
patterns that emerge in the number of visitors to our racing centers or consumer
purchasing could result in unfavorable quarterly earnings comparisons. As a
result, it is difficult to predict our future revenues. Any shortfall in
revenues may materially and adversely affect our business and stock price. You
should not rely on quarter-to-quarter comparisons of our operating results as an
indication of future performance. It is possible that our operating results in
some future periods may fall below the expectations of analysts and investors.
In that event, the price of our common stock may decline.
WE FACE DIRECT AND INDIRECT COMPETITION
We face competition from providers of other types of simulated racing and
from other providers of retail entertainment. Two competitors, Illusion, Inc.
and Penske Racing Centers, each operates or provides equipment to one racing
facility using simulated "open wheel" (Formula One or Indy type race cars)
racing. Although neither of these competitors has undertaken a broad geographic
expansion, they may do so in the future. Consequently, we may face direct
competition in the future from these or other operators of simulated racing
entertainment products. Our racing centers also face indirect competition from
other retail entertainment providers, including interactive games, movie
theaters, video arcades and theme restaurants. We also compete with retail
entertainment providers and other retail stores for high profile locations
within retail centers for our racing centers. We believe the primary competitive
factors in attracting customers to our racing centers are the quality of the
experience, strong appeal, facility location, pricing and customer convenience.
While we believe our racing centers provide an entertainment experience that
competes favorably with respect to these factors, most of our competitors,
particularly our indirect competitors such as theme restaurants, are operated by
well-established companies with greater financial, management, technical and
marketing resources than we have. Additionally, some of these providers have
greater name recognition than we do and may provide an entertainment alternative
that appeals to a broader demographic, which may encompass children and
families. By comparison, our core audience is males between the ages of 18 and
45.
REGULATION OF CORPORATE SPONSORSHIP MAY ADVERSELY AFFECT THE MOTORSPORTS
INDUSTRY
Tobacco and alcohol companies provide a significant amount of advertising
and promotional support to racing events, race car drivers and race car owners.
In 1996, the U.S. Food and Drug Administration published regulations that would
substantially restrict tobacco industry sponsorship of sporting events,
including motorsports. The legality of these regulations has been challenged in
court. The U.S. Supreme Court will review these regulations on appeal and we
expect the Court to issue its decision sometime during the year 2000. The FDA
regulations, if ultimately approved and any other legislation, regulations or
other initiatives that limit or prohibit advertisements of tobacco or alcohol
products at racing events could
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<PAGE> 16
adversely affect the popularity of motorsports, which could materially and
adversely affect our business and operating results.
In November 1998, certain major manufacturers of cigarettes and smokeless
tobacco products and the attorneys general of 46 states agreed to settle certain
lawsuits filed by more than 40 of the settling states and potential claims that
could be brought by the remaining settling states. The terms of the settlement,
among other things, limit sponsorship of racing events by the participating
manufacturers and substantially eliminate outdoor advertising of tobacco
products and any marketing or distribution of tobacco brand name merchandise.
Domestic and international tobacco advertisers heavily subsidize certain NASCAR,
NHRA, CART, Formula One and other racing series and teams and those series and
teams may not find similar sponsorships. The limitations on tobacco company
sponsorship imposed by the settlement and any further limitations imposed on
tobacco or alcohol sponsorship of racing events also could ultimately affect the
popularity of motorsports, which could materially and adversely affect our
business and operating results.
RISKS RELATED TO THE OFFERING
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The trading price of our common stock could be subject to wide fluctuations
in response to a number of factors, including the following:
- quarterly variations in our operating results;
- actual or anticipated announcements of new openings of locations,
products or services by us or other business partners or competitors;
- announcements of technological and other innovations by us or our
competitors;
- investor perception of our business prospects or the motorsports and
retail entertainment industries in general;
- changes in analysts' estimates of our financial performance;
- general conditions in the markets in which we compete; and
- worldwide economic and financial conditions.
The stock market also has experienced extreme price and volume fluctuations
that have affected the market prices for many rapidly expanding companies. These
fluctuations often have been unrelated to the operating performance of those
companies. Broad market fluctuations and other factors may adversely affect the
market price of our common stock. If the market price of our common stock
experiences significant market volatility, some stockholders may file a class
action lawsuit. We could incur substantial legal costs and our management's
attention could be diverted to defend this type of litigation, even if we are
ultimately successful in our defense. Declines in the market price of our common
stock also could adversely affect employee morale, our ability to attract and
retain qualified employees and our access to additional capital. All of these
factors could materially and adversely affect our business, operating results
and financial condition.
WE DO NOT ANTICIPATE THAT WE WILL PAY ANY DIVIDENDS
For the foreseeable future, we intend to retain future earnings, if any, to
finance our business operations and do not anticipate paying any cash dividends
with respect to our common stock.
INVESTORS WILL SUFFER IMMEDIATE DILUTION
The initial public offering price per share will exceed our net tangible
book value per share. Accordingly, investors purchasing shares in this offering
will incur immediate and substantial dilution of approximately $ in the book
value per share of the common stock from the assumed offering price of
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<PAGE> 17
$ per share. Any exercises of outstanding options to purchase common stock
will further dilute existing stockholders.
OUR BUSINESS COULD SUFFER IF WE DO NOT USE THE PROCEEDS OF THIS OFFERING IN A
MANNER BENEFICIAL TO US
We intend to use the net proceeds as indicated in "Use of Proceeds."
However, we have not yet determined the actual expenditures and may not be able
to accurately estimate the amounts we will use for each specified purpose. The
actual amounts and timing of these expenditures may vary significantly depending
on a number of factors, including the amount of cash generated by our
operations. Depending on future developments and circumstances, we may use some
of the proceeds for uses other than as described in "Use of Proceeds." Our
management will therefore have significant flexibility in applying the net
proceeds of this offering and you will not have the opportunity, as part of your
investment decision, to assess whether the proceeds are being used
appropriately. If we do not use the proceeds in a manner beneficial to us, our
business could suffer and our stock price could decline.
FUTURE SALES BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK
A substantial number of shares of our common stock are eligible for resale
after this offering immediately upon the expiration of 180-day lock-up
agreements, subject in many cases to the volume limitations and other
restrictions of Rule 144 under the Securities Act. Sales of our common stock in
the public market following this offering could adversely affect the market
price of the common stock. See "Shares Eligible for Future Sale."
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER, EVEN IF SUCH A TRANSACTION WOULD BE BENEFICIAL
TO OUR STOCKHOLDERS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of us by means of a tender offer, a
proxy contest, or otherwise and the removal of incumbent directors and officers.
See "Description of Capital Stock."
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<PAGE> 18
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predicts," "should" or "will" or the negative of such
terms or other comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the
risks outlined under "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In
addition, this prospectus contains forward-looking statements attributed to
third party industry sources relating to their estimates regarding the growth of
motorsports, NASCAR racing and Internet use. You should not place undue reliance
on these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform such statements to actual results, unless required
by law.
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock
we are offering will be approximately $ , at an assumed initial public
offering price of $ per share after deducting estimated underwriting
discounts and commissions and estimated offering expenses. The net proceeds to
us would increase to $ if the underwriters exercise their
over-allotment option in full.
We intend to use the net proceeds of this offering for:
- expansion of the number of our racing centers;
- enhancement of our hardware and software technology and basic
infrastructure;
- promotion of our racing centers;
- additional online content and services to our Web site;
- repayment of $3.0 million of loans to certain investors at a weighted
average interest rate of 10.3% per annum; and
- working capital and other general corporate purposes.
Pending this usage, we will invest the net proceeds in short-term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying such cash dividends in the foreseeable future. We
currently anticipate that we will retain all of our future earnings for use in
the development and expansion of our business and for general corporate
purposes. Any determination to pay dividends in the future will be at the
discretion of our board of directors and will depend upon our results of
operation, financial condition and other factors as the board of directors, in
its discretion, deems relevant.
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<PAGE> 19
CAPITALIZATION
The following table sets forth our capitalization as of August 1, 1999. The
Pro Forma column gives effect to the conversion of each outstanding share of
mandatorily redeemable convertible preferred stock into a share of common stock
upon the closing of this offering. The Pro Forma As Adjusted column gives effect
to the receipt of the net proceeds from the sale of shares of common
stock at an initial public offering price of $ per share and the application
of $3.0 million of such net proceeds to repay loans to certain investors. In
addition, the Pro Forma As Adjusted calculations in the table do not reflect any
of the 1,105,598 shares of common stock issuable upon exercise of outstanding
options at August 1, 1999, nor the issuance of $5.5 million of convertible
promissory notes in September 1999. See "Management -- Stock Option Plans." This
table should be read in conjunction with our Financial Statements and the
related notes included elsewhere in this prospectus. Also see "Use of Proceeds"
and "Transactions with Related Parties."
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF AUGUST 1, 1999
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Long-term portion of capital leases...................... $ 1,969 $ 1,969 $
Long-term debt........................................... 5,054 5,054
Mandatorily redeemable convertible preferred stock,
$0.001 par value: 20,000,000 shares authorized;
7,887,796 shares issued and outstanding, actual; no
shares issued and outstanding, pro forma and as
adjusted............................................... 24,370 -- --
-------- -------- ------
Stockholders' equity (deficit):
Common stock, $.001 par value: 40,000,000 shares
authorized and 2,815,556 shares issued and
outstanding actual; 10,703,352 shares issued and
outstanding pro forma; shares authorized
and shares issued and outstanding as
adjusted............................................ 3 11
Additional paid-in capital............................. 3,284 27,646
Notes receivable from stockholders..................... (247) (247)
Warrants............................................... 2,493 2,493
Deferred stock compensation............................ (942) (942)
Accumulated deficit.................................... (27,132) (27,132)
-------- -------- ------
Total stockholders' equity (deficit)........... (22,541) 1,829
-------- -------- ------
Total capitalization........................... $ 8,852 $ 8,852 $
======== ======== ======
</TABLE>
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<PAGE> 20
DILUTION
Our pro forma net tangible book value as of August 1, 1999 was
approximately $22.8 million or $2.14 per share of common stock. "Net tangible
book value" per share represents the amount of our total tangible assets reduced
by the amount of our total liabilities and divided by the total number of shares
of common stock outstanding, assuming conversion of our outstanding mandatorily
redeemable convertible preferred stock into common stock. After giving effect to
the sale of the shares of common stock offered by us at an initial public
offering price of $ per share and after deducting underwriting discounts and
commissions and estimated offering expenses, and the adjustments set forth
above, our pro forma net tangible book value as of August 1, 1999 would have
been $ million or $ per share of common stock. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering............................................... $2.14
Increase attributable to new investors.................... $
-----
Pro forma net tangible book value after this offering.......
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table summarizes on a pro forma basis, as of August 1, 1999,
the differences between the existing stockholders and new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid to us, and the average price per share paid.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 10,703,352 $26,629,968 $ 2.49
New investors....................
---------- ----- ----------- ------
Totals...........................
========== ===== =========== ======
</TABLE>
The information presented with respect to existing stockholders excludes:
- 1,105,598 shares of our common stock subject to options outstanding at a
weighted average exercise price of approximately $1.92 per share;
- warrants to purchase 378,017 shares of our common stock at a weighted
average exercise price of $3.06 per share, 64,001 shares of our Series B
Preferred Stock at an exercise price of $1.50 per share, and 371,641
shares of our Series C Preferred Stock at an exercise price of $6.00 per
share;
- 369,444 shares of our common stock assuming the conversion of $5.7
million of subordinated convertible promissory notes issued in June 1999;
and
- 550,000 shares of our common stock assuming the conversion of $5.5
million of subordinated convertible promissory notes issued in September
1999 and warrants issued concurrently to purchase 68,750 shares of our
common stock at an exercise price of $10.80 per share.
To the extent that any of these options, warrants or subordinated
convertible debt are exercised, there will be further dilution to investors.
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<PAGE> 21
SELECTED FINANCIAL DATA
The tables that follow present portions of our financial statements and are
not complete. You should read the following selected financial information in
conjunction with our Financial Statements and related Notes and with "Management
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. Our statement of operations data for the
years ended February 2, 1997, February 1, 1998 and January 31, 1999, and our
balance sheet data as of February 1, 1998 and January 31, 1999, are derived from
and are qualified in their entirety by our Financial Statements that have been
audited by PricewaterhouseCoopers LLP, independent accountants, which are
included elsewhere in this prospectus. The historical results presented below
are not necessarily indicative of the results to be expected for any future
fiscal year. Our statement of operations for the date of inception to February
4, 1996, the twenty-six week periods ended August 2, 1998 and August 1, 1999 and
our balance sheet data as of August 1, 1999 are derived from our unaudited
financial statements. In the opinion of management, the unaudited consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments that we consider necessary for a fair presentation of the
financial position and results of operations for the period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We were incorporated in 1994, but did not begin meaningful operations until
the opening of our first racing center in August 1997. Therefore, we have
combined our selected financial data presented for the period ended January 29,
1995 and our fiscal year ended February 4, 1996.
Our selected financial data set forth below contains only a portion of our
financial statements and should be read in conjunction with, the Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. In particular, see Notes to Financial Statements for an explanation
of the calculations of earnings per share and per share amounts.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
NOV. 1, 1994 FISCAL YEARS ENDED ENDED
(DATE OF ---------------------------- -----------------
INCEPTION) TO FEB. 2, FEB. 1, JAN. 31, AUG. 2, AUG. 1,
FEB. 4, 1996 1997 1998 1999 1998 1999
------------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Simulator races.............................. -- $ 47 $ 892 $ 4,357 $ 1,218 $ 3,532
Merchandise.................................. -- -- 104 620 148 462
Other........................................ -- -- 56 405 175 175
------- ------- ------- -------- ------- -------
Total revenues....................... -- 47 1,052 5,382 1,541 4,169
Operating expenses:
Cost of revenue.............................. -- -- 359 1,907 496 1,599
Direct expense............................... -- -- 264 1,875 478 1,580
Marketing and licensing...................... -- -- 484 999 456 786
Research and development..................... -- 1,142 1,767 3,043 1,726 703
General and administration................... 1,502 1,476 2,322 5,770 2,478 2,811
Depreciation and amortization................ -- 46 232 957 215 850
Pre-opening expense.......................... -- -- 571 1,571 915 66
Stock-based compensation expense............. -- -- 22 589 124 897
------- ------- ------- -------- ------- -------
Total operating expense.............. 1,502 2,664 6,021 16,711 6,888 9,292
------- ------- ------- -------- ------- -------
Operating loss................................. (1,502) (2,617) (4,969) (11,329) (5,347) (5,123)
Interest expense, net.......................... 13 25 223 159 23 1,172
------- ------- ------- -------- ------- -------
Net loss............................. (1,515) (2,642) (5,192) (11,488) (5,370) (6,295)
Accretion of mandatorily redeemable convertible
preferred stock.............................. -- -- (8) (55) (21) (41)
------- ------- ------- -------- ------- -------
Net loss attributable to common
stockholders....................... $(1,515) $(2,642) $(5,200) $(11,543) $(5,391) $(6,336)
======= ======= ======= ======== ======= =======
Basic and diluted net loss per share
attributable to common stockholders.......... $ (8.51) $ (1.65) $ (3.67) $ (5.85) $ (2.95) $ (2.55)
Shares used in computing basic and diluted net
loss per share attributable to common
stockholders................................. 178 1,605 1,417 1,973 1,830 2,489
Pro forma basic and diluted net loss per share
attributable to common stockholders
(unaudited).................................. $ (1.36) $ (0.63)
Shares used in computing pro forma basic and
diluted net loss per share attributable to
common stockholders (unaudited).............. 8,459 10,071
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
AS OF
--------------------------------
FEB. 1, JAN. 31, AUG. 1,
1998 1999 1999
------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 129 $ 606 $ 2,778
Total assets................................................ 2,765 13,087 16,192
Long-term portion of capital leases and long-term debt...... 434 2,088 7,023
Total liabilities........................................... 1,691 9,893 14,363
Mandatorily redeemable convertible preferred stock.......... 9,200 21,952 24,370
Total stockholders' deficit................................. (8,126) (18,758) (22,541)
</TABLE>
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes which appear elsewhere in this prospectus. The
following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those discussed below and elsewhere in this prospectus, particularly in "Risk
Factors."
OVERVIEW
We own and operate NASCAR Silicon Motor Speedway racing centers. Through
strategic relationships and our proprietary technology, we provide a realistic
racing experience that simulates the motion, sights and sounds of an actual
NASCAR race. Located in high profile, high traffic retail locations, our racing
centers currently have eight or twelve race car simulators per location and sell
a variety of premium motorsports merchandise. Under a licensing agreement with
NASCAR, we have the exclusive right to use the NASCAR name in our simulated
racing experience. In addition to our licensing agreement with NASCAR, we have
licensing agreements with several NASCAR drivers including Dale Earnhardt, Jeff
Gordon, Dale Jarrett, Rusty Wallace and others. To extend our racing experience
into the home or office, our Web site, SMSonline.com, currently provides a range
of information and services including reservations, race results, standings and
other racing center information. As of August 1, 1999, our customers had
completed over one million races at our racing centers.
We design our racing centers to provide a fun, interactive entertainment
experience in an environment that is both social and competitive. Each race car
simulator is 80% of the size of an actual NASCAR race car with the same colors,
sponsor logos and numbers. Our race car simulators have motion platforms that
move in a variety of directions, as well as several video screens and speakers
surrounding each driver, all of which simulate the experience of driving an
actual race car. Our racing centers encourage competition by allowing our
customers to race against each other in individual races, leagues and
competitions. Our racing centers also include pit areas and grandstands that
offer drivers and spectators an opportunity to socialize with each other. We
believe the authentic "look and feel" of our race car simulators combined with
the competitive and social aspects of our racing experience create one of the
most realistic and entertaining simulated racing experiences.
Prior to 1997, we had minimal revenues, and our operations consisted
primarily of research and development activities. In August 1997, we opened our
first racing center at Mall of America, near Minneapolis, Minnesota. We now have
five racing centers in operation, which are summarized in the following table:
<TABLE>
<CAPTION>
NUMBER OF
EXISTING SQUARE RACE CAR
LOCATIONS CITY FOOTAGE SIMULATORS OPENING DATE
--------- ---- ------- ---------- --------------
<S> <C> <C> <C> <C>
Mall of America........ Bloomington (Minneapolis), MN 5,899 12 August 1997
Woodfield.............. Schaumburg (Chicago), IL 6,111 12 June 1998
Dallas Galleria........ Dallas, TX 6,651 8 August 1998
Irvine Spectrum........ Irvine, CA 5,218 8 August 1998
Palisades Center....... West Nyack, NY 5,700 12 November 1998
</TABLE>
We recently reduced the number of race car simulators from fourteen to
eight at our Dallas Galleria racing center and from twelve to eight at our
Irvine Spectrum racing center. These reductions are intended to better match the
number of simulators at each location with the level of mall traffic. In the
future, we plan to open approximately equal numbers of 8-, 10- and 12-simulator
racing centers. As market opportunities arise, we plan to open 14-simulator
racing centers in selected locations. See also, "Business -- Unit Economics."
22
<PAGE> 24
Our fiscal year is based on a 52 or 53 week year ending on the Sunday
closest to February 1. When we use the term "fiscal year," it refers to the year
that encompasses the majority of months within the twelve month period. For
example, the fiscal year ended January 31, 1999 is referred to as fiscal year
1998.
Revenues are generated primarily from the sale of tickets for our race car
simulators. The price of a ticket for one of our race car simulators ranges from
$7.00 to $8.00 for members of our drivers club and from $7.50 to $8.50 for
non-members. For an additional $2.50 per race, a person may ride in the
passenger seat. We also sell racing-related merchandise at our racing centers.
Other revenue historically has consisted of group sales, such as parties and
corporate events, and accounts for the balance of total revenues. In the future,
we expect other revenue to also reflect revenues related to our Web site.
Revenues from the sale of tickets for our race car simulators and group
sales are recognized when the customer completes a race. Revenues from the sale
of merchandise are recognized at the point of sale.
Cost of revenue includes the cost of merchandise sold and direct racing
center labor and benefits. Cost of revenue also includes a nominal amount of
Internet-related expenses, including development, design and technical support.
Direct expense includes all other expenses incurred directly by a racing
center, such as supplies, racing center marketing, maintenance and repair and
occupancy. Racing center marketing expense includes the costs of implementing
programs such as local media advertising and printing expense.
Marketing and licensing expense reflects corporate marketing expenses and
corporate licensing costs. Corporate marketing expenses include the cost of
developing programs that build our brand as well as customer acquisition and
retention programs. The major components of corporate marketing expenses are
compensation, market research, database support and supplies. Corporate
licensing costs include the amortization of licensing fees for NASCAR, NASCAR
drivers, team owners and race track owners.
Research and development is expensed as incurred. Research and development
expenses consist of racing systems software and hardware development,
compensation and consulting.
General and administration expenses include compensation, travel, supplies,
consulting and occupancy expenses related to our corporate office.
Depreciation and amortization expenses primarily reflect the depreciation
of our race car simulators and our network systems and the amortization of
leasehold improvements in our racing centers. Other components of depreciation
and amortization expenses are corporate headquarters' information systems,
leasehold improvements and equipment.
Pre-opening expense includes the start-up expenses and other expenses
typically incurred during the two-month period prior to the opening of one of
our racing centers. Pre-opening expenses include compensation, training,
recruiting, relocation, travel, occupancy, supplies and marketing.
Historically, we have periodically granted stock options to employees,
consultants, non-employee directors and others and expect to continue to do so
in the future. We use the intrinsic value method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for our
employee stock options and present disclosure of pro forma information required
under Financial Accounting Standards Board Statement No. 123 or SFAS 123,
"Accounting for Stock-Based Compensation." As of August 1, 1999, we have
recorded stock-based compensation expense related to these options in the total
amount of $2.5 million. This amount represents the difference between the deemed
fair market value of our common stock, as determined for accounting purposes,
and the exercise price of the option at the date of grant. Of this amount,
$22,000 had been amortized in fiscal 1997, $589,000 in fiscal 1998 and $897,000
through the first six months of fiscal 1999. Future stock-based compensation
expense arising out of options granted through August 1, 1999 is estimated to be
$300,000 for the remaining six months of fiscal 1999, $400,000 for fiscal 2000,
$200,000 for fiscal 2001, and $100,000 for fiscal 2002. We amortize the deferred
compensation charge monthly over the vesting period of the underlying option.
23
<PAGE> 25
Interest expense includes interest on equipment lease lines, as well as
interest from our convertible debt. We have equipment leases, or commitments to
provide equipment leases, of approximately $1.0 million for each existing racing
center, as well as a smaller lease line for corporate furniture and equipment.
We recorded net losses of $2.6 million, $5.2 million, $11.5 million and
$6.3 million in fiscal year 1996, fiscal year 1997, fiscal year 1998 and the
twenty-six week period ended August 1, 1999, respectively. Accordingly, no
provision for income taxes was recorded in any of these periods. The resulting
deferred tax asset, representing such net operating loss carry-forwards, has
been reduced in full by a valuation allowance in accordance with SFAS 109,
"Accounting for Income Taxes."
Accretion of mandatorily redeemable preferred stock represents the
amortization of the financing costs associated with the placement of our Series
C preferred stock.
The following table sets forth selected financial data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
FISCAL YEARS ENDED ENDED
------------------------------- -------------------
FEB. 2, FEB. 1, JAN. 31, AUG. 2, AUG. 1,
1997 1998 1999 1998 1999
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Simulator races......................... 100.0% 84.8% 81.0% 79.0% 84.7%
Merchandise............................. -- 9.9 11.5 9.6 11.1
Other................................... -- 5.3 7.5 11.4 4.2
--------- -------- -------- -------- --------
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
Operating expenses
Cost of revenue......................... -- 34.1 35.4 32.2 38.3
Direct expense.......................... -- 25.1 34.8 31.0 37.9
Marketing and licensing................. -- 46.0 18.6 29.6 18.9
Research and development................ 2,429.8 168.0 56.5 112.0 16.9
General and administration.............. 3,140.4 220.7 107.2 160.8 67.4
Depreciation and amortization........... 97.9 22.0 17.8 14.0 20.4
Pre-operating expense................... -- 54.3 29.2 59.4 1.6
Stock-based compensation expense........ -- 2.1 11.0 8.0 21.5
--------- -------- -------- -------- --------
Total operating expenses............. 5,668.1 572.3 310.5 447.0 222.9
--------- -------- -------- -------- --------
Operating loss............................ (5,568.1) (472.3) (210.5) (347.0) (122.9)
Interest expense, net..................... 53.2 21.2 3.0 1.5 28.1
--------- -------- -------- -------- --------
Net loss............................. (5,621.3) (493.5) (213.5) (348.5) (151.0)
Net loss attributable to common
stockholders....................... (5,621.3)% (494.3)% (214.5)% (349.8)% (152.0)%
========= ======== ======== ======== ========
</TABLE>
COMPARISON OF THE TWENTY-SIX WEEK PERIOD ENDED AUGUST 2, 1998 WITH THE
TWENTY-SIX WEEK PERIOD ENDED AUGUST 1, 1999
Revenues. Our revenues increased from $1.5 million in the twenty-six week
period ended August 1, 1998 to $4.2 million in the twenty-six week period ended
August 1, 1999. Simulator races revenues increased from $1.2 million to $3.5
million and merchandise revenues increased from $148,000 to $462,000 due to the
opening of four racing centers in fiscal year 1998. Other revenue, which
consisted entirely of
24
<PAGE> 26
group sales, was approximately equal in the twenty-six week period ended August
2, 1998 to the twenty-six week period ended August 1, 1999. We recently hired
additional personnel to focus on increasing group sales at each racing center.
Cost of Revenue. Cost of revenue increased from $496,000 in the twenty-six
week period ended August 2, 1998 to $1.6 million in the twenty-six week period
ended August 1, 1999. The increase in cost of revenue was primarily due to the
impact of opening four racing centers in fiscal year 1998. The increase in such
expenses as a percentage of total revenues from 32.2% to 38.3% was primarily due
to a higher ratio of labor costs to total revenues at our Dallas Galleria and
Irvine Spectrum racing centers.
Direct Expense. Direct expense increased from $478,000 in the twenty-six
week period ended August 2, 1998 to $1.6 million in the twenty-six week period
ended August 1, 1999. The increase in direct expense was primarily due to the
impact of opening four racing centers in fiscal year 1998. The increase in such
expenses as a percentage of total revenues from 31.0% to 37.9% was primarily due
to a higher ratio of occupancy costs to total revenues at our Dallas Galleria
and Irvine Spectrum racing centers.
Marketing and Licensing. Marketing and licensing expense increased from
$456,000 in the twenty-six week period ended August 2, 1998 to $786,000 in the
twenty-six week period ended August 1, 1999. The increase was primarily due to
an increase in licensing fees paid to NASCAR.
Research and Development. Research and development expense decreased from
$1.7 million in the twenty-six week period ended August 2, 1998 to $703,000 in
the twenty-six week period ended August 1, 1999. The decrease was due to a
reassignment of certain research and development personnel to systems support
and maintenance.
General and Administration. General and administration expense increased
from $2.5 million in the twenty-six week period ended August 2, 1998 to $2.8
million in the twenty-six week period ended August 1, 1999. The increase was due
to higher facilities costs resulting from our relocation to a new corporate
headquarters and the continued addition of personnel and systems to support our
infrastructure.
Depreciation and Amortization. Depreciation and amortization expense
increased from $215,000 in the twenty-six week period ended August 2, 1998 to
$850,000 in the twenty-six week period ended August 1, 1999. The increase was
primarily due to the opening of four racing centers in fiscal year 1998 and to
the addition of corporate leasehold improvements and system costs incurred
during the last half of fiscal year 1998 and the first half of fiscal year 1999.
Pre-Opening Expense. Pre-opening expense decreased from $915,000 in the
twenty-six week period ended August 2, 1998 to $66,000 in the twenty-six week
period ended August 1, 1999. The decrease was primarily due to the development
of three racing centers in the twenty-six week period ended August 2, 1998,
compared to none in the twenty-six week period ended August 1, 1999.
Interest Expense. Interest expense increased from $23,000 in the twenty-six
week period ended August 2, 1998 to $1.2 million in the twenty-six week period
ended August 1, 1999. This increase resulted primarily from interest expense
related to the issuance of common stock warrants in connection with short-term
promissory notes.
COMPARISON OF FISCAL YEAR ENDED FEBRUARY 1, 1998 WITH FISCAL YEAR ENDED JANUARY
31, 1999
Revenues. Our revenues increased from $1.1 million in the fiscal year 1997
to $5.4 million in the fiscal year 1998. Simulator races revenues increased from
$892,000 to $4.4 million, merchandise revenues increased from $104,000 to
$620,000 and other revenue increased from $56,000 to $405,000. The increases
were due to opening four racing centers in fiscal year 1998.
Cost of Revenue. Cost of revenue increased from $359,000 in fiscal year
1997 to $1.9 million in fiscal year 1998. The increase was due to opening four
racing centers in fiscal year 1998. The increase in cost of revenue as a
percentage of total revenues from 34.1% to 35.4% was primarily due to a higher
ratio of labor costs to total revenues at our Dallas Galleria and Irvine
Spectrum racing centers.
25
<PAGE> 27
Direct Expense. Direct expense increased from $264,000 in fiscal year 1997
to $1.9 million in fiscal year 1998. The increase was due to opening four racing
centers in fiscal year 1998. The increase in such expenses as a percentage of
total revenue from 25.1% to 34.8% was primarily due to a higher ratio of
occupancy costs to total revenues at our Dallas Galleria and Irvine Spectrum
racing centers.
Marketing and Licensing. Marketing and licensing expense increased from
$484,000 in fiscal year 1997 to $1.0 million in fiscal year 1998. The increase
was due to additional marketing personnel and an increase in the number of
licensing agreements with NASCAR drivers, team owners and race track owners.
Research and Development. Research and development expense increased from
$1.8 million in fiscal year 1997 to $3.0 million in fiscal year 1998. The
increase was due to additional personnel engaged in research and development
activities.
General and Administration. General and administration expense increased
from $2.3 million in fiscal year 1997 to $5.8 million in fiscal year 1998. The
increase was due to higher facilities costs resulting from our relocation to a
new corporate headquarters and the continued addition of personnel and systems
to support our infrastructure.
Depreciation and Amortization. Depreciation and amortization expense
increased from $232,000 in fiscal year 1997 to $1.0 million in fiscal year 1998.
The increase was primarily due to opening four racing centers in fiscal year
1998 and additional leasehold improvements and system costs incurred during
fiscal year 1998.
Pre-Opening Expense. Pre-opening expense increased from $571,000 in fiscal
year 1997 to $1.6 million in fiscal year 1998. The increase resulted primarily
from more racing centers being opened in fiscal year 1998 than in the preceding
fiscal year.
Interest Expense. Interest expense decreased from $223,000 in fiscal year
1997 to $159,000 in fiscal year 1998. This decrease resulted primarily from a
lesser amount of short-term promissory notes outstanding in fiscal year 1998
when compared to fiscal year 1997.
COMPARISON OF FISCAL YEAR ENDED FEBRUARY 2, 1997 WITH FISCAL YEAR ENDED FEBRUARY
1, 1998
Prior to the opening of our first racing center in August 1997, we did not
generate significant revenues from our operations. Total revenues increased from
$47,000 in fiscal year 1996 to $1.1 million in fiscal year 1997. Our operating
expenses increased from fiscal year 1996 to fiscal year 1997 primarily due to
increased personnel in research and development and additional systems costs in
general and administration. Research and development expense increased from $1.1
million in fiscal 1996 to $1.8 million in fiscal 1997, while general and
administration expense increased from $1.5 million in fiscal 1996 to $2.3
million in fiscal 1997. Interest expense also increased during the period
primarily due to additional capital leases and short-term promissory notes.
SEASONALITY
We are subject to seasonal fluctuations in our revenues associated with the
retail shopping season, which affects the level of mall traffic near our racing
centers. We may also be subject to seasonal fluctuations in our revenues due to
the effect of the auto racing season on the demand for tickets for our race car
simulators or merchandise sold at our racing centers.
26
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth selected statement of operations data for
the quarters indicated below in dollars and as a percentage of revenues. This
data has been derived from our unaudited financial statements and is not
necessarily indicative of the results that may be expected for future periods.
In our opinion, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of our financial position and results of
operations for such period have been included.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------
MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31, MAY 2, AUGUST 1,
1998 1998 1998 1999 1999 1999
------- --------- ----------- ----------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Simulator races................ $ 578 $ 640 $ 1,362 $ 1,777 $ 1,893 $ 1,639
Merchandise.................... 49 99 166 306 226 236
Other.......................... 78 97 110 120 95 80
------- ------- ------- ------- ------- -------
Total revenues......... 705 836 1,638 2,203 2,214 1,955
Operating expenses
Cost of revenue................ 181 315 662 749 783 816
Direct expense................. 161 317 612 785 809 771
Marketing and licensing........ 202 254 300 243 375 411
Research and development....... 643 1,083 669 648 379 324
General and administration..... 873 1,605 1,574 1,718 1,511 1,300
Depreciation and
amortization................ 96 119 308 434 423 427
Pre-opening expense............ 196 719 490 166 -- 66
Stock-based compensation
expense..................... 27 97 267 198 353 544
------- ------- ------- ------- ------- -------
Total operating
expenses............. 2,379 4,509 4,882 4,941 4,633 4,659
------- ------- ------- ------- ------- -------
Operating loss................... (1,674) (3,673) (3,244) (2,738) (2,419) (2,704)
Interest expense, net............ 12 11 40 96 188 984
------- ------- ------- ------- ------- -------
Net loss....................... (1,686) (3,684) (3,284) (2,834) (2,607) (3,688)
Net loss attributable to common
stockholders................ $(1,693) $(3,698) $(3,300) $(2,852) $(2,627) $(3,709)
======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues
Simulator races................ 82.0% 76.6% 83.2% 80.7% 85.5% 83.8%
Merchandise.................... 7.0 11.8 10.1 13.9 10.2 12.1
Other.......................... 11.1 11.6 6.7 5.4 4.3 4.1
------- ------- ------- ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0
Operating expenses
Cost of revenue................ 25.7 37.7 40.4 34.0 35.4 41.7
Direct expense................. 22.8 37.9 37.4 35.6 36.5 39.4
Marketing and licensing........ 28.7 30.4 18.3 11.0 16.9 21.0
Research and development 91.2 129.5 40.8 29.4 17.1 16.6
General and administration..... 123.8 192.0 96.1 78.0 68.2 66.5
Depreciation and
amortization................ 13.6 14.2 18.9 19.7 19.1 21.8
Pre-operating expense.......... 27.8 86.0 29.9 7.5 0.0 3.4
Stock-based compensation
expense..................... 3.8 11.6 16.3 9.0 15.9 27.8
------- ------- ------- ------- ------- -------
Total operating
expense.............. 337.4 539.4 298.0 224.3 209.3 238.3
======= ======= ======= ======= ======= =======
Operating loss................... (237.4) (439.4) (198.0) (124.3) (109.3) (138.3)
Interest expense, net............ 1.7 1.3 2.4 4.4 8.5 50.3
------- ------- ------- ------- ------- -------
Net loss....................... (239.1) (440.7) (200.5) (128.6) (117.8) (188.6)
Net loss attributable to common
stockholders................ (240.1)% (442.3)% (201.5)% (129.5)% (118.7)% (189.7)%
======= ======= ======= ======= ======= =======
</TABLE>
27
<PAGE> 29
Simulator races revenues increased during the quarters ended August 2,
1998, November 1, 1998 and January 31, 1999 primarily due to the opening of our
Woodfield racing center in June 1998, our Dallas Galleria and Irvine Spectrum
racing centers in August 1998, and our Palisades racing center in November 1998.
Simulator races revenues increased in the quarter ended May 2, 1999 primarily
due to our Palisades racing center being in operation for the full three months
of the quarter versus only two months in the preceding quarter. Simulator races
revenues declined in the quarter ended August 1, 1999 due to a seasonal decrease
in mall traffic.
Merchandise revenues increased in each of the quarters through the quarter
ended January 31, 1999 primarily due to the opening of our racing centers at
Woodfield in June 1998, Dallas Galleria and Irvine Spectrum in August 1998 and
Palisades in late November 1998. Merchandise revenues also increased in the
quarter ended January 31, 1999 due to a seasonal increase in mall traffic during
the holiday period. Merchandise revenues declined in the quarters ended May 2,
1999 and August 1, 1999 primarily due to seasonal decreases in mall traffic
during the first half of our fiscal year.
Other revenues increased in each of the quarters through the quarter ended
January 31, 1999 primarily due to increases in group sales as we opened
additional racing centers during these periods. Other revenues declined in the
quarters ended May 2, 1999 and August 1, 1999 due to seasonal decreases in mall
traffic during the first half of our fiscal year.
Cost of revenue as a percentage of total revenues increased in the quarter
ended August 2, 1998 primarily due to increased labor costs related to the
opening of our Woodfield racing center. Cost of revenue decreased as a
percentage of total revenues in the quarter ended January 31, 1999 primarily due
to a lower ratio of labor costs to total revenues and the sale of higher margin
merchandise. Cost of revenue increased in absolute dollars and as a percentage
of revenues in the quarter ended August 1, 1999 due to expenses related to the
development of our Web site.
Direct expense as a percentage of total revenues increased in the quarter
ended August 2, 1998 primarily due to increased occupancy costs related to the
opening of our Woodfield racing center.
Marketing and licensing expense has varied from quarter to quarter due to
the timing of various media and other incentive programs. The increase in the
first quarter of 1999 is due to the increase in license payments under our
agreement with NASCAR.
Research and development expense increased in the quarter ended August 2,
1998 due to a one-time technology license expenditure. The decrease in the
quarter ended May 2, 1999 is due to a reassignment of certain research and
development personnel to systems support and maintenance.
General and administration expense increased in the quarter ended August 2,
1998 primarily due to the expenses for management information systems and the
production of customer training videos. The decrease in the quarters ended May
2, 1999 and August 1, 1999 resulted primarily from better management of our
labor costs.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily from the private
placement of debt and equity securities. In the period from November 1, 1994,
our date of inception, through fiscal year 1996, we received net proceeds of
$1.6 million from the issuance of mandatorily redeemable convertible preferred
stock. During fiscal year 1997, we received net proceeds of $107,000 from the
issuance of additional series of mandatorily redeemable convertible preferred
stock. These proceeds were partially offset by the repayment of capital leases,
from working capital uses and from the capital needed to open our first racing
center. During fiscal year 1998, we received net proceeds of $12.9 million from
the issuance of mandatorily redeemable convertible preferred stock, $1.2 million
from the issuance of notes payable and $82,000 from the issuance of common
stock. These proceeds were partially offset by repayments of notes payable and
capital leases, working capital uses and from the capital needed to open four
additional racing centers. During the first half of fiscal year 1999, we have
received $9.9 million from the issuance of notes payable, $2.4 million from the
issuance of mandatorily redeemable convertible preferred stock and $77,000 from
the
28
<PAGE> 30
issuance of common stock. These proceeds have been used for the repayment of
notes payable and capital leases, working capital uses and the investment
necessary for the development of racing centers we currently have in process. As
of August 1, 1999, we had $2.8 million of cash and cash equivalents.
Our operating activities used cash of $4.3 million, $6.7 million and $6.6
million in fiscal year 1997, fiscal year 1998 and the twenty-six weeks ended
August 1, 1999, respectively. Cash used in operations during fiscal year 1997,
fiscal year 1998 and the twenty-six week period ended August 1, 1999 was
primarily a result of our net loss, partially offset by depreciation and
amortization, stock-based compensation charges, changes in working capital and
warrant amortization.
Cash used in investing activities in fiscal year 1997, fiscal year 1998 and
the twenty-six weeks ended August 1, 1999 was $1.6 million, $6.0 million and
$1.0 million, respectively. The investing activities consisted primarily of cash
paid for purchases of equipment and leasehold improvements. These investments
were partially offset by the proceeds from the sale and leaseback of certain
pieces of equipment at our racing centers. See also, "Business -- Unit
Economics."
We currently anticipate that the net proceeds from this offering will be
sufficient to meet our presently anticipated working capital, capital
expenditure and business expansion requirements for the foreseeable future. Our
future capital needs will depend upon numerous factors, including the success of
our racing centers and competing technological and market developments. We may
be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. We cannot guarantee that
additional funding, if needed, will be available on terms acceptable to us, or
at all.
On June 30, 1999, we entered into a secured subordinated convertible note
purchase agreement, issuing three convertible subordinated notes in the amounts
of $2.3 million, $2.3 million and $1.1 million. The notes accrue interest at
8.5%, payable semiannually beginning July 1, 2000. The notes are due on June 30,
2002. At the option of the holders, the notes convert into shares of our common
stock at a conversion price of $15.00 per share. The notes convert automatically
if either the price per share in this offering is greater than $15.00 per share
or if the price of our common stock exceeds $20.00 per share for any four week
period following this offering. If we are involved in an acquisition transaction
resulting in all of our stockholders before the transaction owning less than 50%
of the voting securities of the surviving entity after the transaction, the
holders of these notes may request that we repurchase their notes for 101% of
the face amount of the note, plus any unpaid interest accrued on the notes to
the date of repurchase.
In September 1999, we entered into a second subordinated convertible note
and warrant purchase agreement, issuing convertible subordinated notes in the
amounts of $2.0 million, $500,000, $500,000, $1.0 million and $1.5 million. We
paid each holder a placement fee of one percent of the face value of their note.
The notes accrue interest at 12.0% per annum, payable on maturity. The notes are
due on March 9, 2001. At the option of the note holders, the notes convert into
shares of our common stock at a conversion price of $10.00 per share. If we are
involved in an acquisition transaction resulting in all of our stockholders
before the transaction owning less than 50% of the voting securities of the
surviving entity after the transaction, the holders of these notes may request
that we repurchase their notes for 101% of the face amount of the note, plus any
unpaid interest accrued on the notes to the date of repurchase. Concurrent with
the issuance of these notes, we issued warrants to the holders to purchase an
aggregate of 68,750 shares of common stock at an exercise price of $10.80 per
share. The warrants terminate five years after the date we issued the notes.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." We had no
holdings of derivative financial or commodity instruments at August 1, 1999.
However, we are exposed to financial market risks, including changes in interest
rates. Our revenue and capital spending is transacted in U.S. dollars. We
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<PAGE> 31
have had limited funds available for investment other than in our operations. We
believe that the fair value of our investment portfolio, if any, or related
income would not be significantly impacted by increases or decreases in interest
rates due mainly to the short-term nature of our investment portfolio and amount
of funds available for investment through August 1, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. To date, we have not entered into any
derivative financial instruments or hedging activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999.
In June 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for
Internally Developed Software." SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The impact of
adopting SOP 98-1, which is effective for us in fiscal 1999, is not expected to
have a significant effect on its financial condition and results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This standard requires companies to expense the costs of
start-up activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. We have expensed
the cost of start up activities in the accompanying financial statements as
incurred.
YEAR 2000 COMPLIANCE
We are heavily dependent upon complex computer software and systems for our
operations. Many existing computer programs and systems use only two digits to
identify a year in the date field. These programs and systems were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer applications could fail or create erroneous
results by or at January 1, 2000.
State of Readiness
We developed almost all of our racing center systems internally and we
believe them to be Year 2000 compliant. In addition, all of our material
operating software and our information technology and other systems, including
financial and point-of-sale systems and network routers and servers, were
developed or are supported by third-party vendors. Most of our third-party
vendors have provided written warranties and assurances that the software will
not be affected by the change in century. We are currently in the process of
obtaining assurances from our remaining third-party vendors. We have been
communicating with these third parties to coordinate Year 2000 readiness. The
responses we have received to date have indicated that steps are currently being
taken to prepare for the year 2000.
In addition to the operating systems and software we use directly, our
operations are also dependent upon the performance of operating software and
systems used by our significant service providers. We have contacted most of our
other significant service providers and have obtained written assurances from
some of them that the relevant operating software and systems are Year 2000
compliant or will be by the end of the fourth calendar quarter of 1999. We are
monitoring the status of all our significant service providers' Year 2000
compliance efforts to minimize the risk of any material adverse effect on our
operations resulting from compliance failures. However, we cannot assure you
that our service providers have, or will have operating software and systems
that are Year 2000 compliant.
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Costs
We have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. To date, we have not incurred
any material costs related to Year 2000 compliance activities. We do not believe
that future costs of remediation will have a material effect on our financial
condition or results of operations.
Risks
The failure of our software or systems to be Year 2000 compliant could
prevent us from being able to service and make sales to our customers, could
cause users of our Web site to consider alternative Web content and community
providers, or could disrupt our financial and management controls and reporting
systems. Any such scenario, if not quickly remedied, would materially and
adversely affect us.
We are developing contingency plans with respect to such systems and
software. We expect our contingency plans to be completed by the end of the
third calendar quarter of 1999.
We are also dependent on the Internet and certain T-1 or external ISDN
communication systems, which may have risks that cannot be determined yet.
To date, we have not identified any significant exposure to Year 2000
problems outside of the information technology issues identified above.
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BUSINESS
The following description of our business should be read in conjunction
with the information included elsewhere in this prospectus. The description
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ significantly from the results discussed in these
forward-looking statements as a result of the factors set forth in "Risk
Factors" and elsewhere in the prospectus.
OVERVIEW
We own and operate NASCAR Silicon Motor Speedway racing centers. Through
strategic relationships and our proprietary technology, we provide a realistic
racing experience that simulates the motion, sights and sounds of an actual
NASCAR race. Located in high profile, high traffic retail locations, our racing
centers currently have eight or twelve race car simulators per location and sell
a variety of premium motorsports merchandise. Under a licensing agreement with
NASCAR, we have the exclusive right to use the NASCAR name in our simulated
racing experience. In addition to our licensing agreement with NASCAR, we have
licensing agreements with several NASCAR drivers including Dale Earnhardt, Jeff
Gordon, Dale Jarrett, Rusty Wallace and others. To extend our racing experience
into the home or office, our Web site, SMSonline.com, currently provides a range
of information and services including reservations, race results, standings and
other racing center information. As of August 1, 1999, our customers had
completed over one million races at our racing centers.
We design our racing centers to provide a fun, interactive entertainment
experience in an environment that is both social and competitive. Each race car
simulator is 80% of the size of an actual NASCAR race car with the same colors,
sponsor logos and numbers. Our race car simulators have motion platforms that
move in a variety of directions, as well as several video screens and speakers
surrounding each driver, all of which simulate the experience of driving an
actual race car. Our racing centers encourage competition by allowing our
customers to race against each other in individual races, leagues and
competitions. Our racing centers also include pit areas and grandstands that
offer drivers and spectators an opportunity to socialize with each other. We
believe the authentic "look and feel" of our race car simulators combined with
the competitive and social aspects of our racing experience create one of the
most realistic and entertaining simulated racing experiences.
Our racing centers typically require 4,000 to 8,000 square feet of space
and are located in high profile retail locations. These locations currently
include Mall of America in Bloomington (Minneapolis), Minnesota; Dallas Galleria
in Dallas, Texas; Woodfield in Schaumburg (Chicago), Illinois; Irvine Spectrum
in Irvine, California and Palisades Center in West Nyack, New York. We expect to
open 20 to 30 additional racing centers over the next 24 months, and have
already signed leases for eight of these locations including Concord Mills in
Charlotte, North Carolina; Universal CityWalk near Los Angeles, California and
Opry Mills in Nashville, Tennessee.
INDUSTRY BACKGROUND
Growth and Popularity of the Motorsports Industry
Motorsports is currently one of the largest and fastest growing spectator
sports in the United States. An ESPN poll indicates that more than 83.0 million
people in the United States have an interest in auto racing, while Goodyear
reports that more than 17.1 million fans attended an auto racing event in North
America during 1998. This compares with 1998 attendance for the National
Football League of 15.4 million fans and the National Basketball Association of
21.8 million fans. NASCAR racing is the fastest growing motorsports segment in
terms of attendance and media exposure. Attendance at NASCAR Winston Cup events
increased 52.5% from 1994 to 1998, and NASCAR now accounts for more than 50% of
all auto racing attendance.
In recent years, television coverage has increased for NASCAR-related
events. According to Nielsen Media Research, NASCAR's events reached over 126
million estimated households in 1998 and are covered by major broadcast and
cable television networks. Nielsen Media Research estimated that
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<PAGE> 34
household viewership of NASCAR's televised Winston Cup events on network
television and cable has increased by 20.8% and 40.0%, respectively, from 1993
to 1997. Motorsports coverage is currently provided by broadcast and cable
television networks, including ABC, CBS, NBC, ESPN, TBS, TNN and Speedvision, a
motorsports cable network, in addition to regional sports networks. NASCAR has
announced that it will consolidate all television broadcast rights, currently
held individually by each track, for all NASCAR-sanctioned races. We believe
this will further increase media exposure for NASCAR events.
Large corporate advertisers have recognized the growing popularity of
motorsports and the brand-loyalty of motorsports fans. According to Performance
Research, NASCAR fans are more sponsor-loyal purchasers than fans of other
sports. Accordingly, more than 80 Fortune 500 companies are NASCAR sponsors. The
IEG Sponsorship Report indicates that in 1999 corporate sponsors are expected to
spend an estimated $1.2 billion, or 24% of all sports sponsorship dollars, on
motorsports marketing programs in the United States. We believe that interest in
NASCAR sponsorship will continue to grow.
The growth and popularity of motorsports is expected to continue, in part
due to the recent openings of new speedways in the Los Angeles, Dallas/Ft. Worth
and Las Vegas metropolitan areas. Plans for the development of additional
speedways have been announced for the Chicago, Denver, Kansas City and New York
metropolitan areas. These new speedways are bringing NASCAR and other major
motorsports events to new geographic markets that have larger population bases
than many of the traditional NASCAR venues. We believe that the increased
accessibility of major motorsports events in these previously untapped markets
will stimulate continued growth in the motorsports industry by creating new
racing fans.
The Growth of Retail Entertainment Opportunities
Retail entertainment includes destinations such as theaters, restaurants,
large scale entertainment complexes and other venues that serve customers'
demand for unique entertainment experiences. Traditionally, many of these
destinations have involved passive activities in which little or no
interactivity is required of the participants. However, we believe many
consumers are willing to pay a premium for entertainment that provides a level
of sophistication and interactivity greater than that which can be achieved at
home or through passive entertainment experiences. We believe the most
successful retail entertainment formats will:
- have a strong brand name identity;
- provide an attractive social environment;
- offer unique experiences with strong appeal;
- draw from foot traffic; and
- build repeat business.
We believe that retail entertainment has become an integral part of
enhancing the overall mall experience. Leading mall owners and developers are
continuing to add a significant retail entertainment component to each mall in
order to attract destination traffic, appeal to a broader demographic and
increase the frequency and extend the duration of visits. As a result, we
believe that high quality retail entertainment formats will generally be able to
obtain high profile locations within malls under favorable lease terms.
The Growth of the Internet and Online Communities
The Internet has emerged as a global mass medium, enabling users to access
and share information, socialize and conduct business online. International Data
Corporation estimates that there were 142 million Internet users worldwide at
the end of 1998 and anticipates that the number will increase to approximately
502 million users by the end of 2003. According to Jupiter Communications, the
number of U.S. households connected to the Internet is expected to increase from
37% in 1998 to 63% by the end of 2003.
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Online communities are becoming a popular way for people with similar
interests to locate and interact with each other. Communities such as GeoCities,
theglobe.com and Xoom.com attract millions of people with similar interests. We
believe people tend to visit these sites more frequently and stay longer than at
most other types of Web sites because of the content and interactive experience
they provide. We also believe companies will increasingly use community-based
Web sites to attract and retain customers.
NASCAR SILICON MOTOR SPEEDWAY
We believe our NASCAR Silicon Motor Speedway provides a unique
entertainment experience. The key factors of our simulated racing experience
are:
Racing So Real You Can Feel It
Our NASCAR Silicon Motor Speedway racing centers offer realistic and
interactive simulated NASCAR racing. We provide this authentic racing experience
for the customer by simulating the key aspects of a NASCAR event: the race
tracks, race cars, sights, sounds and competition. Each of our race car
simulators has graphics corresponding to a real NASCAR team, allowing our
customers to choose from race cars driven by Dale Earnhardt, Jeff Gordon, Dale
Jarrett, Rusty Wallace and others. Our race car simulators have motion platforms
that move in a variety of different directions, simulating the actual motion of
a NASCAR race car. The cockpit of each is nearly identical to that of a NASCAR
race car, with the same gauges, gear shift, pedals and steering wheel. Seated in
our race car simulator, the driver is surrounded by 135 degrees of video screens
and has a video rear view mirror, while the passenger has a dashboard video
display which can be easily switched between different views. Our racing centers
also include pit areas, grandstands, a track announcer and video displays for
spectators.
Strong Appeal
We design our racing centers to provide a fun, interactive entertainment
experience in an environment that is both social and competitive. Our racing
centers include pit areas and grandstands designed to offer racers and
spectators locations in which to socialize with friends and other competitors.
We believe that the social aspects of our racing centers greatly enhance the
entertainment value for our customers. In addition to the many individuals and
groups that visit our racing centers purely for a fun entertainment experience,
many customers view our racing simulation as a competitive sport. Many of our
customers cite challenge and competition as primary reasons for returning to our
centers. Each racing center has leagues and competitions that appeal to these
customers and allow them to compete against other drivers. We believe that by
offering a racing experience that is both social and competitive, we will be
able to continue to attract new customers and retain a significant base of
repeat customers. In fact, since September 1997, we have sold 74% of our races
to repeat customers.
High Profile Locations
To capitalize on our strong appeal, we place our racing centers in high
profile, heavy traffic retail locations. We believe our racing centers appeal to
destination customers as well as mall traffic that is drawn to our visually and
audibly exciting environment. Our racing centers are currently located in the
Mall of America in Bloomington (Minneapolis), Minnesota; Dallas Galleria in
Dallas, Texas; Woodfield in Schaumburg (Chicago), Illinois; Irvine Spectrum in
Irvine, California; and Palisades Center in West Nyack, New York. We believe
that it is important to locate in retail locations with characteristics such as
strong sales per square foot, state-of-the-art movie theaters, casual dining,
high traffic food courts and strong retail tenants. We believe there are many
retail entertainment locations such as shopping malls and entertainment centers
with high traffic and favorable demographics where we can locate our racing
centers.
Premium Motorsports Merchandise
Each of our racing centers offers high quality, racing-related merchandise.
Examples include branded hats, t-shirts and die-cast collectible cars featuring
Dale Earnhardt, Jeff Gordon, Dale Jarrett, Rusty
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Wallace and others. We also offer a variety of NASCAR merchandise and NASCAR
Silicon Motor Speedway branded merchandise.
SMSonline.com
Our Web site is designed to build upon the community of our racing
customers and extend our racing experience into the home or office. We provide
our customers with an intuitive, easy to use environment through which they can
access a range of information and services online including:
- Reservations -- Customers are able to book reservations, thereby
eliminating possible wait times at our racing centers.
- Race results -- Customers are able to get a more detailed version of the
race results they receive at the racing centers to further analyze their
performance.
- Standings -- We recognize winners of local and national competitions and
provide the standings of ongoing leagues and competitions.
- Racing Center Information -- We provide the hours of operations and
locations of each racing center, a schedule of events and other
information.
Key Strategic Relationships
We have established strategic relationships with companies and individuals
that help us provide a realistic racing simulation, obtain high profile real
estate locations and offer NASCAR-themed merchandise. See "-- Licensing
Agreements."
- NASCAR. We have entered into a licensing agreement with NASCAR, under
which we have the exclusive right to use the NASCAR name for our
simulated racing experience. We use the NASCAR name on our racing center
signage, selected merchandise and our Web site. Use of the NASCAR name
provides us with immediate name recognition and credibility and increases
the authenticity of our racing experience.
- NASCAR DRIVERS. We have entered into licensing agreements with several
leading NASCAR drivers that provide for scheduled appearances by the
drivers at our racing centers. We utilize the driver appearances to
create additional excitement at our grand openings and other racing
center events. These drivers include Dale Earnhardt, Dale Earnhardt, Jr.,
Jeff Gordon, Kenny Irwin, Dale Jarrett, Bobby Labonte, Jeremy Mayfield,
Rusty Wallace and Michael Waltrip.
- TEAM OWNERS AND RACE TRACK OWNERS. We have also established relationships
with team owners and two race track owners. These relationships allow us
to authentically replicate the look of the team owners' cars and selected
tracks in our racing centers and in our racing simulations. In addition
to relationships with race track owners Speedway Motorsports and Richmond
International Raceway, we have relationships with the following team
owners: Dale Earnhardt, Inc., Penske Racing South, Richard Childress
Racing, Eastman Kodak Company, Hendrick Motorsports, Roush Racing, Joe
Gibbs Racing through Redline Sports Marketing, Wood Brother Racing, JG
Motorsports and Robert Yates Racing.
- SIMON PROPERTY GROUP, INC. We have a strategic relationship with Simon
Investors LLC, whose principals are affiliated with Simon Property Group,
Inc. In particular, Simon Property Group has assisted us in site
selection for our racing centers and has notified us of available sites
from its portfolio of properties.
- ACTION PERFORMANCE COMPANIES, INC. We have a strategic relationship with
Action Performance Companies, Inc. that provides us with selected
merchandise and licensed apparel. This relationship allows us to access
all of Action Performance's top product lines including NASCAR-themed
merchandise such as t-shirts, hats and die-cast cars.
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SILICON ENTERTAINMENT STRATEGY
Our objective is to be the leading provider of simulated NASCAR racing. We
intend to achieve this by:
Expanding the Number of Our Racing Centers
We plan to accelerate the roll-out of our racing centers, focusing on
metropolitan areas throughout the United States with moderate to upper income
levels and high population densities that have shown a substantial interest in
NASCAR racing. We currently operate five racing centers and expect to open 20 to
30 additional racing centers over the next 24 months. Of these, we have signed
leases for eight sites and are currently negotiating leases for another four. Of
these twelve sites, five are currently under construction, six are being
designed and one is in pre-design.
We currently have three 12-simulator racing centers and two 8-simulator
racing centers. In the future, we plan to open an approximately equal number of
8-, 10- and 12-simulator racing centers. As market opportunities arise, we plan
to open 14-simulator racing centers in selected locations.
Continuing to Develop SMSonline.com
We intend to enhance SMSonline.com and build upon the community of our
racing customers by providing online opportunities to discuss our competitions
and racing experiences and by offering NASCAR driver testimonials and customer
endorsements of our racing experience.
We also intend to offer our customers who purchase our proprietary software
and subscribe to our online services, the ability, from a personal computer, to:
- download replays of races;
- customize their car set-up;
- view live racing at the racing centers; and
- race against customers at the racing centers.
Continuing to Enhance Our Racing Experience
We have spent approximately $6.7 million since the beginning of fiscal year
1996 developing and refining our technology and we expect to spend approximately
$1.5 to $2.0 million per year continuing to develop our technology. In
particular, we are working on projects that add features to our racing
experience and extend it to the Internet. Some of these projects currently under
development are:
- customized car set-up in our racing centers and on SMSonline.com;
- real-time racing between multiple racing centers;
- incorporation of additional race tracks when licensed;
- sale of replays of races on videotapes or through a video download on
SMSonline.com;
- instant replays of races; and
- communication during a race between drivers and racing center spectators.
Leveraging Strategic and Working Relationships
We intend to continue to leverage our key relationships with NASCAR, NASCAR
drivers, team owners, race track owners, Simon Property Group and Action
Performance Companies to help us provide a realistic racing simulation, secure
high profile real estate locations and offer NASCAR-themed merchandise.
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We intend to continue to leverage our relationship with NASCAR. In
particular, we expect NASCAR to continue to incorporate the NASCAR Silicon Motor
Speedway name into selected marketing promotions. We also intend to leverage our
relationship with NASCAR to gain exposure on various motorsports-related
television programming, and to enter into sponsorship agreements with selected
NASCAR sponsors.
We intend to continue to leverage our relationships with NASCAR drivers,
team owners and race track owners to incorporate additional drivers, cars and
tracks into our racing experience and instructional and promotional materials.
We also plan to continue the use of driver appearances to generate additional
business and media coverage at our racing centers. We intend to use our team of
NASCAR drivers to advise us on enhancing our technology to ensure authentic
simulator handling and a realistic racing experience.
We believe that relationships with key mall property owners such as Simon
Property Group, Mills Corp., General Growth Properties and Pyramid Crossgate
Company will offer us opportunities to continue to secure attractive racing
center sites. We intend to become involved at an early stage in the development
of new malls so that the design of our sites will be incorporated into these
malls. We also believe that our continued relationships with merchandise
suppliers such as Action Performance will help us to improve merchandise
selection and sales.
OUR RACING EXPERIENCE
After buying a ticket for between $7.00 and $8.50 and reserving a race
time, a customer goes to our training room and is shown, via video presentation,
the basics of racing in our race car simulators by our team of leading NASCAR
drivers. After training, each customer races for approximately six minutes on a
simulated race track, such as Atlanta Motor Speedway, Lowes Motor Speedway
(Charlotte) and Richmond International Raceway. The race is a real-time
interactive experience where our customers compete in a field of 32 cars against
each other and computer-generated cars, known as drones. Actions taken by any
driver impact the racing environment of the other drivers. We offer each driver
the opportunity to have a crew member in the passenger seat who can use a video
screen in the dashboard to assist the driver by spotting other race cars and
following the standings.
After the race, our customers meet in the winner's circle to receive their
race results sheet that includes personalized information on individual lap
time, speeds in the corners, finishing order and other important data. Our
racers often talk about the race and compare their statistics with other
drivers, which leads to significant interaction among the racers and spectators.
This interaction and competition among the drivers, crew and spectators as well
as the challenge of improving upon their race results are key factors causing
many customers to visit our centers repeatedly.
Our racing centers also are designed to draw potential customers into our
centers and to turn them into participating racers. Our racing centers offer a
spectator area including grandstands from which spectators can view races on
large video screens placed throughout the racing center that display various
statistics and views of the race. We believe that the visual and audio
stimulation is important in drawing mall traffic into our centers and in turning
potential customers in the spectator areas into participating racers.
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LOCATIONS
The following table summarizes our existing and planned locations:
<TABLE>
<CAPTION>
NUMBER OF
SQUARE RACE CAR
EXISTING LOCATIONS CITY FOOTAGE SIMULATORS OPENING DATE TYPE OF SITE
------------------ ---- ------- ---------- -------------- ------------------------
<S> <C> <C> <C> <C> <C>
Mall of America.......... Bloomington (Minneapolis), MN 5,899 12 August 1997 Super Regional Mall
Woodfield................ Schaumburg (Chicago), IL 6,111 12 June 1998 Regional Mall
Dallas Galleria.......... Dallas, TX 6,651 8 August 1998 Regional Mall
Irvine Spectrum.......... Irvine, CA 5,218 8 August 1998 Entertainment Center
Palisades Center......... West Nyack, NY 5,700 12 November 1998 Super Regional Mall
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SQUARE RACE CAR
PLANNED LOCATIONS CITY FOOTAGE SIMULATORS STATUS(1) TYPE OF SITE
----------------- ---- ------- ---------- -------------- ------------------------
<S> <C> <C> <C> <C> <C>
Concord Mills............ Charlotte, NC 7,865 14 Construction Value Entertainment Mall
Arbor Place.............. Douglasville (Atlanta), GA 5,055 10 Construction Super Regional Mall
Mall of Georgia.......... Buford (Atlanta), GA 5,895 12 Construction Super Regional Mall
Katy Mills............... Katy (Houston), TX 6,172 12 Construction Value Entertainment Mall
Rivertown Crossings...... Grand Rapids, MI 6,100 10 Construction Super Regional Mall
Carousel Mall............ Syracuse, NY 4,597 8 Design Super Regional Mall
Walden Galleria.......... Buffalo, NY 4,124 8 Design Super Regional Mall
Universal CityWalk....... Universal City (Los Angeles), CA 5,000 12 Design Theme Park/
Entertainment Center
Crossgates Mall.......... Albany, NY 4,167 8 Design Super Regional Mall
Riverchase Galleria...... Birmingham, AL 6,188 10 Design Regional Mall
Opry Mills............... Nashville, TN 6,007 12 Design Value Entertainment Mall
Peabody Place............ Memphis, TN 6,000 12 Pre-Design Entertainment Center
</TABLE>
- -------------------------
(1) In some instances, construction or design may begin on a site prior to our
signing a definitive lease agreement. For our planned location at Peabody
Place, we have signed a definitive lease, but we have not yet begun design.
UNIT ECONOMICS
As of August 1, 1999, we had five racing centers open and each has a
limited history of operations. We opened our first racing center in August 1997
and our most recent racing center in November 1998. Accordingly, we have a
limited amount of historical financial data to analyze and evaluate their
performances.
Of our five existing racing centers, only Mall of America and Woodfield are
12-simulator racing centers that have been open for longer than a year. We
recently reduced the number of race car simulators from fourteen to eight at our
Dallas Galleria racing center and from twelve to eight at our Irvine Spectrum
racing center. These reductions were intended to better match the number of
simulators at each location with the levels of mall traffic. Total revenues for
our Dallas Galleria and Irvine Spectrum racing centers averaged $1.3 million in
the twelve month period ended August 29, 1999. Our Palisades Center racing
center is a 12-simulator racing center that has been opened for less than a
year. In the twenty-six week period ended August 1, 1999, total revenues at this
racing center were $931,000.
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In the twelve month period ended August 1, 1999, combined average operating
performance for the Mall of America and Woodfield racing centers is shown in the
following table:
<TABLE>
<CAPTION>
AVERAGE PER CENTER
FOR MALL OF AMERICA
AND WOODFIELD
----------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Total revenues.............................................. $2,073
Profit contribution(1)...................................... $ 400
Profit contribution margin.................................. 19.3%
Earnings before interest, taxes, depreciation and
amortization(2)........................................... $ 638
Earnings before interest, taxes, depreciation and
amortization margin....................................... 30.8%
Initial investment (including build-out costs, pre-opening
expense and initial merchandise inventory)................ $2,129
Payback (in years)(3)....................................... 3.3
</TABLE>
- ---------------
(1) Profit contribution is defined as total revenues less direct expense of the
racing center and merchandise cost of goods sold. Profit contribution also
excludes pre-opening expenses.
(2) Earnings before interest, taxes, depreciation and amortization excludes
pre-opening expenses.
(3) Payback is defined as the total initial cash investment of opening a racing
center divided by the earnings before interest, taxes, depreciation and
amortization in the twelve months ended August 1, 1999.
The information presented above is historical and not necessarily
indicative of future results. In addition to the factors discussed elsewhere in
this prospectus, including "Risk Factors," in evaluating this information you
should consider that of our five existing racing centers, only Mall of America
had total revenues in excess of the average total revenues shown above. In
addition, our Mall of America and Woodfield racing centers have 12 simulators
each, while our planned racing centers will have approximately equal numbers of
8-, 10- and 12-simulator racing centers. As market opportunities arise, we plan
to open 14-simulator racing centers in selected locations.
Since the opening of our five existing race centers, we believe our site
selection methodology has been improved and is considerably more research-based
than in the past. We determine the market potential and size of each racing
center based on location and traffic analysis and through the use of a site
selection model developed by Thompson & Associates. Based on this site selection
methodology, we believe we are now better able to match the revenue potential of
a new market with the number of simulators placed in a new racing center.
In addition, we believe we have made progress in reducing the initial cost
of opening our racing centers primarily by improving their design and planning,
as well as our sourcing of equipment, fixtures and inventory. The average
initial cost of opening our existing 12-simulator racing centers, including our
Irvine Spectrum racing center which was initially built as a 12-simulator racing
center, was approximately $2.0 million, including development costs, pre-opening
costs and start-up merchandise inventory. The average cost of opening our next
three 12-simulator racing centers is expected to be approximately $1.6 million.
The cost of opening our 14-simulator Dallas Galleria racing center was
approximately $2.3 million. The cost of opening our next 14-simulator racing
center is expected to be $1.8 million.
We also expect to incur lower operating expenses at our planned locations
than at our existing locations. In particular, we expect lower labor costs from
better personnel scheduling, including increased use of part-time employees, and
lower rent expense from the realization of more favorable lease terms.
We believe that expected improvements in site selection, lower opening
costs and lower operating expenses will result in improved financial performance
at our planned racing centers. Nevertheless, controlling these costs depends on
a number of factors, many of which are beyond our control. Therefore, there can
be no assurance that we will be able to achieve these cost reductions.
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<PAGE> 41
EXPANSION AND SITE SELECTION
We continually seek to identify and evaluate new markets and locations for
expansion. We expect to open approximately 20 to 30 additional racing centers
over the next 24 months. Of these, we have signed leases for eight sites and are
in negotiations for another four. Of these twelve sites, five are currently
under construction, six are being designed and one is in pre-design. We believe
that the location of our racing centers is critical to our success and devote
significant time and resources to analyzing each prospective site. We primarily
perform three types of analysis for each potential site:
Location Analysis
In general, we target high profile retail locations with strong sales per
square foot within metropolitan areas with high interest in NASCAR racing. We
place emphasis on locations that balance traditional retail stores with
entertainment experiences such as megaplex movie theaters, large scale
entertainment complexes and restaurants, which make ideal co-tenants for our
racing centers.
Traffic Analysis
Once we have identified a potential location in an existing mall, we
perform extensive traffic analysis. We count the mall traffic of our target
customer in front of potential sites and compare it to our existing locations.
Our data continues to show that at the existing locations, revenue performance
correlates positively with the mall traffic of our target customer.
Site Selection Model
We also use a site selection model developed by Thompson & Associates, a
nationally-recognized market research firm. We use this model to predict the
number of potential races at a location based on surrounding demographics and
additional market data. The model is also used to identify potential target
markets.
MARKETING & PROMOTION
Our marketing and promotional programs are targeted towards our typical
customer who is between the ages of 18 and 45 and who is an auto racing fan
and/or plays video games. We intend to build NASCAR Silicon Motor Speedway into
a nationally known and respected brand name through a variety of marketing and
promotional programs. These programs focus on two areas:
New Customers
We primarily rely on mall traffic in front of our racing centers and
word-of-mouth referrals to attract new customers. Historically, approximately
50% of our new customers visit our racing centers as a result of walking by the
storefront, while approximately 37% of our new customers visit as a result of
word-of-mouth. We also target potential customers through:
- broadcast advertising during NASCAR Winston Cup races;
- advertising at local race tracks; and
- appearances at our racing centers by a member of our team of NASCAR
drivers.
We expect to attract strong media interest when we open a racing center in
a new geographic market because of our unique concept and the power of the
NASCAR brand. Openings that feature a member of our team of NASCAR drivers
usually attract substantial television, radio and print media coverage.
Customer Retention
We have developed targeted programs that focus on customer loyalty. Since
September 1997, we have sold 74% of our races to repeat customers.
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<PAGE> 42
We have the following programs designed to retain customers:
- local and national competitions;
- promotion of new features and technology;
- appearances by NASCAR drivers;
- customer competitions against NASCAR drivers;
- special discounts and promotions (e.g., buy 2 tickets, get 1 free);
- gift certificate promotions; and
- drivers club affinity programs.
We intend to collect data from our racing centers and our Web site to
analyze the behavior and purchasing cycles of our existing and potential
customers in order to more effectively target promotions. Anticipated promotions
will include:
- new technology introduction campaigns;
- special offers tailored to customer behavior or purchasing decisions;
- frequent driver rewards; and
- special campaigns to existing customers.
OPERATIONS AND MANAGEMENT
Our ability to manage our racing centers is critical to our success. We
strive to maintain a superior level of service and consistency in each of our
racing centers through the hiring, training and supervision of personnel.
Accordingly, we have established and adhere to high standards relating to
personnel performance and maintenance of our racing centers.
Our corporate operations management team consists of a Vice President of
Operations, regional directors (typically one director for every six to eight
centers), directors of group sales, directors of training and directors of
merchandise. In addition, staffing levels at each racing center vary according
to the size of the location, but typically have the following personnel: a
general manager, one or two assistant general managers and a supervisor, 20 to
25 full and part-time employees, a technical manager and an assistant technical
manager.
We provide extensive training programs for both employees and managers. New
employees are given a thorough orientation on our policies and procedures and
three to five days of training. New managers must complete a four-week training
program that covers all aspects of each racing center.
LICENSING AGREEMENTS
We have entered into numerous licensing agreements with the goal of
creating an authentic NASCAR racing experience. Creating an authentic
environment is a key to our ability to attract new customers and retain existing
customers. We believe that our licensing agreements create a significant barrier
to entry for competition. We have relationships with the following:
- NASCAR. We have entered into a licensing agreement with NASCAR under
which NASCAR receives guaranteed minimum royalties and royalties based on
the sale of tickets for our race car simulators and merchandise. Under
this agreement, we have the right to use the NASCAR marks and trade dress
solely for display in, and promotion of, our racing centers, all subject
to certain limitations on the use of the marks and NASCAR's prior
approval of such uses. Our license agreement with NASCAR for the use of
its image and trademarks extends to December 31, 2005 and is exclusive
for a designated category until December 31, 2002, at which time NASCAR
has the sole option to renew the exclusive portion of the agreement. The
exclusive category of the
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<PAGE> 43
NASCAR license is "operator assisted, location-based interactive stockcar
or stock-truck entertainment experiences that consist of no less than
five linked simulator units, with each on a motion-based platform and
each allowing a maximum of two people to participate in each individual
simulator unit." Additionally, under the license each location must be
permanent in nature and in a retail environment. In addition, NASCAR has
the right to terminate the agreement upon the occurrence of certain
events. See "Risk Factors -- We depend on our licensing agreement with
NASCAR, which is exclusive only for our simulated racing experience and
which may be terminated if we default."
- NASCAR Drivers. Our licensing agreements with our team of NASCAR drivers
generally provide for the NASCAR drivers to give feedback on our race car
simulators and allow us to use their names, voices and likenesses for the
promotion of our business. All of the agreements also provide that the
NASCAR drivers will make personal appearances and act as spokespeople for
our racing experience. We use these NASCAR driver appearances to promote
our racing centers as well as to enhance the racing experience for the
customer. The agreements generally provide that the NASCAR drivers are
compensated by guaranteed fees and the granting of stock options as
consideration for their personal appearances and use of their likenesses.
The agreements typically expire four years after execution and may be
terminated by either party if the other party commits an illegal or
immoral act. In addition, we generally have the right to terminate an
agreement if the driver stops racing. Our team of NASCAR drivers includes
the following:
<TABLE>
<S> <C> <C>
- - Dale Earnhardt - Kenny Irwin - Jeremy Mayfield
- - Dale Earnhardt, Jr. - Dale Jarrett - Rusty Wallace
- - Jeff Gordon - Bobby Labonte - Michael Waltrip
</TABLE>
- Team Owners. Our licensing agreements with the team owners allow us to
use the designs and accompanying trademarks of team cars either as actual
simulators, as images on the video screen or simply as computer-generated
cars on the video screen. The agreements generally set forth a schedule
of fee payments and expire three years after execution. They also
typically allow us to terminate an agreement if a particular race car is
no longer racing. Some of these agreements are expected to terminate May
31, 2000, unless extended by mutual agreement. The following is a list of
teams with which we have licensing agreements:
Race Car Simulators
<TABLE>
<CAPTION>
CAR NO. TEAM OWNERS
------- -----------
<C> <S>
1 Dale Earnhardt, Inc.
2 Penske Racing South
3 Richard Childress Racing
4 Eastman Kodak Company
5 Hendrick Motorsports
6 Roush Racing
</TABLE>
<TABLE>
<CAPTION>
CAR NO. TEAM OWNERS
------- -----------
<C> <S>
18 Joe Gibbs Racing through
Redline Sports Marketing
21 Wood Brother Racing
24 JG Motorsports
28 Robert Yates Racing
88 Robert Yates Racing
99 Roush Racing
</TABLE>
Computer-Generated Race Cars
<TABLE>
<CAPTION>
CAR NO. RACE CAR OWNERS
- ------- ---------------
<C> <S>
22 The Source International
30 Bahari Racing, Inc.
43 Petty Enterprises
55 The Motorsports Decision Group
75 Butch Mock Motorsports
97 Roush Racing through Moore & Cotter
</TABLE>
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<PAGE> 44
- Race Track Owners. We also have licensing agreements with the following
race track owners that allow us to authentically replicate the following
tracks through use of the simulators:
- Speedway Motorsports, Inc. (all of the Speedway Motorsports, Inc.
racing tracks)
- Richmond International Raceway
These agreements typically expire five years after execution and allow us
to terminate the agreement if the track is no longer used for certain types
of races. We also plan to obtain licenses for additional tracks in the
future.
NASCAR and the NASCAR drivers, team owners and race track owners all have
approval rights for the use of their marks.
TECHNOLOGY
We have designed and installed state-of-the-art technology at our racing
centers. This technology is based on Intel PC systems, graphics engines from
3Dfx Interactive, Inc. and licensed and proprietary software. Our system is
inexpensive, modular and easy to upgrade. The technology consists of several
integrated components.
Central Control System
All of the activity at each racing center is monitored or directed by its
central control system. This system consists of a Pentium-based control computer
and three high-speed communications networks. All racing functions, as well as
the entertainment and business functions, are controlled or interconnected here.
All systems are orchestrated and synchronized by the central control system
to the race schedule. During our normal race schedule, a new race starts every
eight minutes. Racing activities such as collision management, drone generation,
safety monitoring, generation of the race event stream for use with the
entertainment systems and race recording for future Web download are additional
functions of the central control system.
Racing Activities Network
The core simulation technology is contained within the Racing Activities
Network. The race car simulators are connected together on a high speed, low
latency network. The three displays in front of each race car simulator are
driven by five dedicated 600 MHz Pentium III processor systems that display
approximately 1.1 million polygons and over 85 million pixels each second. All
of the images are updated sixty times per second. All of the display systems are
connected to each race car simulator's individual high speed Ethernet. The
interactivity of our race car simulators is based on the network infrastructure
carrying time sensitive data throughout the simulation system, and managed by
the central control system.
The motion of our race car simulators is created by our acceleration sled,
which has a patent pending on its technology, that can simulate acceleration,
flat or banked turns and collisions. Similar to the display system, the sled has
a very low signal-to-motion response time that significantly reduces the
occurrence of simulation motion sickness. The sled is powered by a two
horsepower high flow/low pressure hydraulic system.
The manner in which each race car simulator handles depends on a
proprietary vehicle dynamics model. Our vehicle dynamics model, in combination
with quick response times, a nearly full-size race car, 135 degrees of
surrounding graphics, working gauges, pedals, gear shifter, roll cage,
directional sound and interactivity, provides a realistic driving experience.
Our team of NASCAR drivers works with us to confirm the reality of our racing
experience.
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Racing Center Entertainment Systems Network
Spectators at a racing center are entertained through our Racing Center
Entertainment Systems Network, an audio and video system operating a high-speed
Ethernet and displayed on monitors located throughout our racing center. The
lighting in the racing center is also controlled by this system. Races are shown
on this system with alternating camera angles and audio commentary, much like a
NASCAR race telecast. Between races, a variety of content, including music,
announcements, prerecorded information on NASCAR related subjects and commentary
from our team of drivers is broadcast over this system. This patent-pending
system also controls storefront video attractions, crew table displays and
post-race replay in our Winner's Circle. In the Winner's Circle, our system
displays the last few laps completed by the winner and also provides a ceremony
for the top driver while others receive their race results sheets.
Registration and Customer Tracking Network
Our Registration and Customer Tracking Network gathers personal data about
a customer and stores it in our databases. A unique identifier is given to each
customer and then used for all subsequent interactions, including Internet
reservations. This system also manages the customer training videos shown in our
training room before each race. The data collected during each race is archived
for later use at one of our racing centers or over the Internet.
COMPETITION
We face competition from providers of other types of simulated racing and
from other providers of retail entertainment. Two competitors, Illusion, Inc.
and Penske Racing Centers, each operates or provides equipment to one racing
facility using simulated "open wheel" (Formula One or Indy type race cars)
racing. Although neither of these competitors has undertaken a broad geographic
expansion, they may do so in the future. Consequently, we may face direct
competition in the future from these or other operators of simulated racing
entertainment products. Our racing centers also face indirect competition from
other retail entertainment providers, including interactive games, movie
theaters, video arcades and theme restaurants. We also compete with retail
entertainment providers and other retail stores for high profile locations
within retail centers for our racing centers. We believe the primary competitive
factors in attracting customers to our racing centers are the quality of the
experience, strong appeal, facility location, pricing and customer convenience.
While we believe our racing centers provide an entertainment experience that
competes favorably with respect to these factors, most of our competitors,
particularly our indirect competitors such as theme restaurants, are operated by
well-established companies with greater financial, management, technical and
marketing resources than we have. Additionally, some of these providers have
greater name recognition than we do and may provide an entertainment alternative
that appeals to a broader demographic, which may encompass children and
families. By comparison, our core audience is males between the ages of 18 and
45.
PROPRIETARY RIGHTS
Although we believe that our success is more dependent upon our technical
expertise than our proprietary rights, our future success and ability to compete
is dependent in part upon our proprietary technology. We rely on a combination
of contractual rights and copyright, patent, trademarks and trade secret laws to
establish and protect our proprietary technology. Currently, we have two U.S.
patent applications pending. We generally enter into confidentiality agreements
with our employees and consultants. We also strictly limit access to and
distribution of our source code and further limit the disclosure and use of
other proprietary information. We cannot assure you that the steps taken by us
in this regard will be adequate to prevent misappropriation of our technology or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain or use our products or technology. In addition, the laws of
some foreign countries do not protect our proprietary rights to the same extent
as do the laws of the United States.
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<PAGE> 46
We are also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. Third parties may
assert infringement claims in the future with respect to our current or future
products. Any assertion, regardless of its merit, could require us to pay
damages or settlement amounts and could require us to develop non-infringing
technology or pay for a license to the technology that is the subject of
asserted infringement. Any litigation or potential litigation could result in
product delays, increased costs or both. In addition, the cost of any litigation
and the resulting distraction of our management resources could adversely affect
our results of operations. We also cannot assure you that any licenses of
technology necessary for our business will be available or that, if available,
such licenses can be obtained on commercially reasonably terms. Our failure to
obtain such licenses, or to protect our proprietary technology, could have a
material adverse effect on our business and results of operations.
EMPLOYEES
As of August 1, 1999, we had a total of 181 employees. Of those, 6 are in
senior management, 4 are in sales and marketing, 47 are in technology, 109 are
in operations and 15 are in accounting and administrative positions. We also
retain independent contractors to support activities such as product
development. Our success depends on our ability to attract and retain qualified,
experienced employees and management. None of our employees is represented by a
labor union or subject to a collective unit and we have never experienced a work
stoppage. We consider our relations with our employees to be good.
FACILITIES
Our headquarters are located in a leased facility in Campbell, California,
consisting of approximately 40,000 square feet of office space under a lease
expiring in June 2003. We lease an additional 5,000 square feet of warehouse
space in San Jose, California. We believe our current facilities will be
adequate to meet our needs for the foreseeable future.
LEGAL PROCEEDINGS
On October 5, 1998, we were served with a summons and complaint for a civil
case by Dark Horse Trading Co., Inc. in a federal court for the alleged
infringement of Dark Horse's patents. The complaint focused on our reservation
method and not on our core simulation technology. We filed an answer with the
same court denying any infringement.
We believe that we have meritorious defenses against the alleged claims and
intend to defend ourselves vigorously. However, due to the nature of litigation
and the fact that discovery is still in its early stages, we cannot determine
the possible loss, if any, that may ultimately be incurred either in the context
of a trial or as a result of a negotiated settlement. We may also incur
substantial legal fees in this matter. After consideration of the nature of the
claims and facts relating to the litigation, we believe that the resolution of
this matter will not harm our business. However, the results of these
proceedings, including any potential settlement, are uncertain and there can be
no assurance that they will not harm our business.
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<PAGE> 47
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth certain information regarding our directors
and executive officers as of August 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David S. Morse................. 56 Chairman of the Board of Directors, Chief
Executive Officer and President
Ross C. Mulholland............. 56 Vice President, Finance and Chief Financial
Officer
Rick L. Moncrief............... 50 Vice President and Chief Technical Officer
Lee E. Knowlton................ 37 Vice President, Operations
Christopher O. Morse........... 29 Vice President, Marketing and Business Development
Russell J. Friend.............. 38 Vice President, Real Estate
William Hart(1)................ 59 Director
Robert H. Manschot(1).......... 56 Director
Christopher S. Besing(2)....... 39 Director
Robert V. Cheadle(2)........... 57 Director
</TABLE>
- -------------------------
(1) Member of the compensation committee
(2) Member of the audit committee
David S. Morse is a founder of Silicon Entertainment and has been the
Chairman of the Board of Directors since January 1995. Mr. Morse has also served
as our President and Chief Executive Officer from January 1997 to June 1997 and
from August 1998 to the present. In 1992, Mr. Morse founded Crystal Dynamics,
Inc., a developer of games for the 32-bit game market. He served as its Chairman
of the board of directors from September 1992 to April 1996 and as its Chief
Executive Officer from October 1994 to May 1995. From January 1994 to December
1995, Mr. Morse also served as a partner of Interactive Partners, a venture
capital firm. Mr. Morse also founded Silicon Gaming, Inc. in 1993 and served as
its Chief Executive Officer from August 1998 to January 1999, Chairman of the
board of directors from September 1993 to September 1996 and as a director from
September 1993 to May 1999. Mr. Morse received a B.S. from Tufts University and
an M.B.A. from the Amos Tuck School at Dartmouth. Mr. Morse's son, Christopher
O. Morse, serves as our Vice President, Marketing and Business Development.
Ross C. Mulholland has served as our Vice President, Finance and Chief
Financial Officer since February 1998 and as our Assistant Secretary since April
1998. From February 1993 to February 1995 and from January 1997 to February
1998, Mr. Mulholland was self-employed as a retail consultant. From February
1995 to January 1997, Mr. Mulholland served as Senior Vice President and Chief
Financial Officer of The Nature Company/Discovery Channel Store. Mr. Mulholland
received a B.A. and an M.B.A. from Wayne State University.
Rick L. Moncrief has served as our Vice President and Chief Technical
Officer since February 1995. From March 1977 to February 1995, Mr. Moncrief held
various senior positions in technology and technology management, the most
recent of which was Director of Applied Research for Time Warner Interactive,
Inc. (a.k.a. Atari Games, Inc.). Mr. Moncrief received a B.S.E.E. from the
University of Utah.
Lee E. Knowlton has served as our Vice President, Operations since April
1997. From April 1994 to March 1997, Mr. Knowlton held various positions at
Planet Hollywood, Inc., most recently as Regional Director of Operations. From
August 1990 to March 1994, Mr. Knowlton held various positions at TGI Fridays,
including the Director of Operations, Northwest/Southwest territories from
August 1992 to March 1994. Mr. Knowlton attended West Valley College and majored
in Restaurant Management.
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<PAGE> 48
Christopher O. Morse is a founder of Silicon Entertainment and has served
as our Vice President, Marketing and Business Development since September 1997.
Mr. Morse previously served as our Director of Business Development from July
1996 to August 1997 and as Project Manager from January 1995 to June 1996. From
May 1993 to January 1995, Mr. Morse served as an account executive for Crystal
Dynamics, Inc. Mr. Morse received a B.A. from the University of California at
Berkeley. Mr. Morse's father, David S. Morse, serves as the Chairman of the
Board of Directors, Chief Executive Officer and President.
Russell J. Friend has served as our Vice President, Real Estate since July
1999. From January 1999 to July 1999, Mr. Friend worked for Blatteis Realty
Company, where he served as Vice President and as a consultant to Silicon
Entertainment. From August 1998 to December 1998, Mr. Friend served as Managing
Partner of Retail Reps, a real estate consulting firm. Prior to that time, from
August 1996 to August 1998, Mr. Friend served as Vice President, Real Estate for
Sega GameWorks, L.L.C., an entertainment retail venture. From September 1993 to
August 1996, Mr. Friend was the Director of Lease Negotiations for the Wolfgang
Puck Food Company. Mr. Friend is a member of the International Council of
Shopping Centers and the Urban Land Institute. Mr. Friend attended the
University of Arizona and majored in Business.
William Hart has served as a member of our board of directors since our
inception in November 1994. Mr. Hart has served as general partner and managing
member of Technology Partners V L.P., a venture capital management firm, since
August 1979. Mr. Hart serves on the boards of directors of Trimble Navigation
Ltd. and Silicon Gaming, Inc., as well as on the boards of directors of several
private companies. Mr. Hart received a B.E. Mgmt. from Rensselaer Polytechnic
Institute and an M.B.A. from the Amos Tuck School at Dartmouth.
Robert H. Manschot has served as a member of our board of directors since
April 1996. Mr. Manschot currently serves as Managing Director and Chairman of
the Manschot Investment Group L.L.C. and as Chairman of Seceurop Security
Services Group, a privately held emergency services corporation in the United
Kingdom. Mr. Manschot also serves as Chief Executive Officer and Chairman of
RHEM International Enterprises, Inc. Mr. Manschot served as President and Chief
Executive Officer of Rural/Metro Corporation, a publicly held provider of
ambulance and fire protection services, from October 1988 until March 1995,
after serving as Executive Vice President, Chief Operating Officer and a
director since October 1987. Mr. Manschot currently serves as a director of
Samoth Capital Corporation, Action Performance Companies, Inc. and DenAmerica
Corp., as well as on the boards of directors of several privately held
companies. Mr. Manschot received a B.A. from the School for Hospitality
Management, The Hague, Netherlands and an M.B.A. from Boston University.
Christopher S. Besing has served as a member of our board of directors
since June 1999. Mr. Besing has served as the Chief Executive Officer of
goracing.com, Inc. since May 1999 and has served as Vice President and Chief
Financial Officer of Action Performance Companies, Inc. since January 1994.
Prior to joining Action Performance, Mr. Besing held several financial and
accounting positions with Orbital Sciences Corporation from September 1986 to
December 1993, most recently as Director of Accounting and Controller of OSC's
Launch Systems Group in Chandler, Arizona. Mr. Besing serves as a director of
goracing.com, Inc. and Action Performance, which is a publicly traded company.
Mr. Besing received a B.S. from the American University. Mr. Besing is a
Certified Public Accountant.
Robert V. Cheadle has served as a member of our board of directors since
June 1999. Mr. Cheadle has been self-employed as a financial consultant since
June 1998. From October 1983 to June 1998, Mr. Cheadle was a Senior Managing
Director at NationsBanc Montgomery Securities and initiated coverage on the
motorsports industry. Mr. Cheadle also serves on the board of directors of
CornerHardware.com, Inc. Mr. Cheadle received a B.S. from San Jose State
University and an M.B.A. from the University of Southern California.
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<PAGE> 49
BOARD COMMITTEES
The board of directors has established an audit committee and a
compensation committee. The audit committee, which consists of Messrs. Besing
and Cheadle, reviews the results and scope of the annual audit and meets with
our independent auditors to review our internal accounting policies and
procedures. The compensation committee, which consists of Messrs. Hart and
Manschot, makes recommendations to the board of directors with respect to our
general and specific compensation policies and practices and administers our
stock option plans.
DIRECTOR COMPENSATION
Our outside directors currently do not receive any cash compensation from
Silicon Entertainment for their services as members of our board of directors,
although we are authorized to pay members for attendance at meetings or a salary
in addition to reimbursement for expenses in connection with attendance at
meetings. Our non-employee directors receive stock options to purchase 10,000
shares of common stock upon joining the board and stock options to purchase
2,500 shares of common stock each year thereafter. See "-- Stock Option Plans,"
"Principal Stockholders" and "Transactions with Related Parties."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently or has been,
at any time since our formation, an officer or employee of Silicon
Entertainment. No member of the compensation committee serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or compensation
committee.
INDEMNIFICATION
We have adopted provisions in our certificate of incorporation, permitted
by Delaware General Corporation Law ("Delaware Law"), which provide that our
directors shall not be personally liable for monetary damages to us or our
stockholders for a violation of the directors' duty to act with care and in the
best interests of the stockholders, except for liability:
- for acts or omissions that are not in good faith, are deliberately
improper or are known to be illegal;
- under section 174 of the Delaware Law relating to improper dividends or
distributions; or
- for any transaction from which the director obtained an improper personal
benefit.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws authorize us to indemnify our officers, directors, employees and
agents to the extent permitted by the Delaware Law. Section 145 of the Delaware
Law empowers us to enter into indemnification agreements with our officers,
directors, employees and agents. We have entered into separate indemnification
agreements with our directors and executive officers which may in some cases be
broader than the specific indemnification provisions contained in the Delaware
Law. The indemnification agreements may require us, among other things, to
indemnify such executive officers and directors against liabilities that may
arise by reason of status or service as directors or executive officers and to
advance expenses they spend as a result of any proceeding against them as to
which they could be indemnified.
At present, there is no material litigation or proceeding pending involving
any of our directors, officers, employees or agents of Silicon Entertainment
where indemnification will be required or permitted and we are not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
48
<PAGE> 50
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned during
the fiscal year ended January 31, 1999 by our current and former Chief Executive
Officer and our four other most highly compensated executive officers, each of
whose total salary and bonus exceeded $100,000 for services rendered to us in
all capacities during such fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL ----------------------------
COMPENSATION SECURITIES
------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
David S. Morse.................................. $202,500 $ -- 175,000 $ --
Chairman, Chief Executive Officer and
President(2)
Lee E. Knowlton................................. 130,833 10,000 35,000 --
Vice President, Operations
Rick L. Moncrief................................ 163,125 20,000 35,000 --
Vice President and Chief Technical Officer
Christopher O. Morse............................ 97,917 10,000 35,000 --
Vice President, Marketing and Business
Development
Ross C. Mulholland.............................. 165,000 -- 97,500 16,013
Vice President, Finance and Chief Financial
Officer
FORMER EXECUTIVE OFFICER:
Damon Danielson(2).............................. 108,333 25,000 -- 4,000
</TABLE>
- -------------------------
(1) Represents moving and living cost adjustments.
(2) Mr. Danielson served as our President and Chief Executive Officer from June
1997 to July 1998. Mr. Morse became our Chief Executive Officer and
President effective August 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information about the stock option grants
during the fiscal year 1998 to the executive officers described in the first
sentence of "Executive Compensation." The table is based on an aggregate of
929,000 options we granted to our employees and consultants during the fiscal
year 1998. The exercise price per share of each option was equal to the fair
market value of the common stock on the date of grant as determined by the board
of directors. These options were granted under our 1996 Stock
49
<PAGE> 51
Option Plan and 1998 Executive Stock Option Plan. Such options expire 10 years
from the date of grant, or earlier upon termination of employment. See "Stock
Option Plans."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------- ANNUAL RATES
NUMBER OF % OF OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
---- ---------- ------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David S. Morse............... 175,000 18.8% $1.00 08/11/08 $110,057 $278,905
Lee E. Knowlton.............. 35,000 3.8 0.70 06/09/08 15,408 39,047
Rick L. Moncrief............. 35,000 3.8 0.70 06/09/08 15,408 39,047
Christopher O. Morse......... 35,000 3.8 0.70 06/09/08 15,408 39,047
Ross C. Mulholland........... 62,500 6.7 0.15 02/26/08 5,896 14,941
Ross C. Mulholland........... 35,000 3.8 0.70 06/09/08 15,408 39,047
FORMER EXECUTIVE OFFICER:
Damon Danielson(1)........... -- -- -- -- -- --
</TABLE>
- -------------------------
(1) Mr. Danielson served as our President and Chief Executive Officer from June
1997 to July 1998. Mr. Morse became our Chief Executive Officer and
President effective August 1998.
Amounts reported in the Potential Realizable Value column above represent
hypothetical values that may be realized upon exercise of the options
immediately prior to the expiration of their term, assuming that the stock price
on the date of grant appreciates at the specified annual rates of appreciation,
compounded annually over the term of the options. These numbers are calculated
based on rules promulgated by the Securities and Exchange Commission. Actual
gains, if any, on stock option exercises and common stock holdings are dependent
on the time of such exercise and the future performance of our common stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The table below provides information about the number and value of options
held by the executive officers described above at January 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END(1) OPTIONS AT FISCAL YEAR END(3)
--------------------------------- ---------------------------------
NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
---- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
David S. Morse........... 175,000 -- $ -- $ --
Lee E. Knowlton.......... 95,000 -- 61,500 --
Rick L. Moncrief......... 70,000 -- 40,250 --
Christopher O. Morse..... 55,000 -- 27,500 --
Ross C. Mulholland....... 97,500 -- 53,125 --
FORMER EXECUTIVE OFFICER:
Damon Danielson(4)....... -- -- -- --
</TABLE>
- -------------------------
(1) All options were granted under our 1996 Stock Option Plan and 1998 Executive
Stock Option Plan. These options vest over four years and otherwise
generally conform to the terms of the option plans.
(2) All stock options granted under our stock option plans are immediately
exercisable. We have certain repurchase rights in our favor in the event of
early termination of employment.
(3) Calculated on the basis of the fair market value of our common stock of
$1.00 per share on January 31, 1999, as determined by our board of
directors, minus the applicable exercise price.
50
<PAGE> 52
(4) Mr. Danielson served as our President and Chief Executive Officer from June
1997 to July 1998. Mr. Morse became our Chief Executive Officer and
President effective August 1998.
STOCK OPTION PLANS
1996 Stock Option Plan
Our 1996 Stock Option Plan (the "1996 Plan") was approved by the board of
directors in October 1996, subsequently approved by our stockholders and amended
in 1997 to increase the share reserve. The 1996 Plan provides for the grant of
incentive stock options within the meaning of section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") to employees and for grants of
nonstatutory stock options to employees, non-employee directors and consultants.
A total of 1,850,000 shares of common stock have been reserved for issuance
under the 1996 Plan which amount will automatically be increased on the first
day of each of our fiscal years on and after January 1, 2000 by a number of
shares equal to 4% of the number of shares of our common stock issued and
outstanding on the last day of the preceding fiscal year. Because non-employee
directors are eligible to receive grants under the 1996 Plan, we have not
adopted a separate plan which provides for the formula grant of stock options to
non-employee directors.
The 1996 Plan is administered by the board of directors or a committee
thereof. Subject to the provisions of the 1996 Plan, the board or committee has
the authority to select the persons to whom options are granted and determine
the terms of each option, including:
- the number of shares of common stock covered by the option;
- when the option becomes exercisable;
- the per share option exercise price, which in the case of incentive stock
options must be at least equal to the fair market value of a share of
common stock on the grant date (or 110% of such fair market value for
incentive stock options granted to 10% stockholders) and, in the case of
nonstatutory stock options, must be at least 85% of the fair market value
of a share of common stock on the grant date; and
- the duration of the option (which may not exceed ten years, or, with
respect to incentive stock options granted to 10% stockholders, five
years).
Generally, options granted under the 1996 Plan are immediately exercisable,
subject to our right to repurchase any unvested shares upon the optionee's
termination of service. Options granted under the 1996 Plan generally vest over
four years, although the board or committee may specify a different vesting
schedule for a particular grant. Options granted under the 1996 Plan are
nontransferable other than by will or the laws of descent and distribution.
In the event of our change in control, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the 1996 Plan. The outstanding options will terminate to the extent that such
options are neither exercised nor assumed or substituted for by the acquiring or
successor corporation.
As of August 1, 1999, 705,808 shares have been issued upon the exercise of
options granted under the 1996 Plan, options to purchase of a total of 585,219
shares at a weighted average exercise price of $2.78 per share were outstanding
under the 1996 Plan and, after taking into account 1,979 shares we repurchased,
560,953 shares were available for future grant under the 1996 Plan.
1997 Nonstatutory Stock Option Plan
Our 1997 Nonstatutory Stock Option Plan (the "1997 Plan") was approved by
the board of directors in July 1997, and was subsequently approved by our
stockholders and amended to increase the share reserve. The 1997 Plan provides
for the grant of nonstatutory stock options to consultants. A total of 625,000
shares of common stock have been reserved for issuance under the 1997 Plan.
51
<PAGE> 53
The 1997 Plan is administered by the board of directors or a committee
thereof. Subject to the provisions of the 1997 Plan, the board or committee has
the authority to select the persons to whom options are granted and determine
the terms of each option, including:
- the number of shares of common stock covered by the option;
- when the option becomes exercisable;
- the per share option exercise price, which must be at least equal to 85%
of the fair market value of a share of common stock on the grant date;
and
- the duration of the option (which may not exceed ten years).
Generally, options granted under the 1997 Plan are immediately exercisable,
subject to our right to repurchase any unvested shares upon the optionee's
termination of service. Options granted under the 1997 Plan generally vest over
four years, although the board or committee may specify a different vesting
schedule for a particular grant. Options granted under the 1997 Plan are
nontransferable other than by will or the laws of descent and distribution.
In the event of our change in control, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the 1997 Plan. The outstanding options will terminate to the extent that such
options are neither exercised nor assumed or substituted for by the acquiring or
successor corporation.
As of August 1, 1999, 70,000 shares have been issued upon the exercise of
options granted under the 1997 Plan, options to purchase of a total of 270,667
shares at a weighted average exercise price of $0.32 per share were outstanding
under the 1997 Plan and 284,331 shares were available for future grant under the
1997 Plan.
1998 Executive Stock Option Plan
Our 1998 Executive Stock Option Plan (the "1998 Plan") was approved by the
board of directors in June 1998 and was subsequently approved by our
stockholders. The 1998 Plan provides for the grant of incentive stock options
within the meaning of section 422 of the Code to employees and for grants of
nonstatutory stock options to employees, non-employee directors and consultants.
A total of 350,000 shares of common stock have been reserved for issuance under
the 1998 Plan.
The 1998 Plan is administered by the board of directors or a committee
thereof. Subject to the provisions of the 1998 Plan, the board or committee has
the authority to select the persons to whom options are granted and determine
the terms of each option, including:
- the number of shares of common stock covered by the option;
- when the option becomes exercisable;
- the per share option exercise price, which in the case of incentive stock
options must be at least equal to the fair market value of a share of
common stock on the grant date (or 110% of such fair market value for
incentive stock options granted to 10% stockholders) and, in the case of
nonstatutory stock options, must be at least 85% of the fair market value
of a share of common stock on the grant date; and
- the duration of the option (which may not exceed ten years, or, with
respect to incentive stock options granted to 10% stockholders, five
years).
Generally, options granted under the 1998 Plan are immediately exercisable,
subject to our right to repurchase any unvested shares upon the optionee's
termination of service. Options granted under the 1998 Plan generally vest over
four years, although the board or committee may specify a different vesting
schedule for a particular grant. Options granted under the 1998 Plan are
nontransferable other than by will or the laws of descent and distribution.
52
<PAGE> 54
In the event of our change in control, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the 1998 Plan. The outstanding options will terminate to the extent that such
options are neither exercised nor assumed or substituted for by the acquiring or
successor corporation.
As of August 1, 1999, 253,500 shares have been issued upon the exercise of
options granted under the 1998 Plan, options to purchase of a total of 86,500
shares at a weighted average exercise price of $1.36 per share were outstanding
under the 1998 Plan and 10,000 shares were available for future grant under the
1998 Plan although we do not intend to continue to grant options under this
plan.
Stock Bonus Plan
Our Stock Bonus Plan (the "Bonus Plan") was approved by the board of
directors in August 1998 and was subsequently approved by our stockholders. A
total of 15,000 shares of common stock has been reserved for issuance under our
Bonus Plan. The Bonus Plan provides for the grant of stock bonus awards to
employees and does not require any monetary payment by an employee who receives
an award. Stock bonus awards are generally granted on a quarterly basis to
hourly employees at our racing centers and are fully vested at the time of
grant.
As of August 1, 1999, 2,413 shares have been granted pursuant to the Bonus
Plan, 1,525 shares have been issued pursuant to the Bonus Plan and 12,763 shares
were available for future grant under the Bonus Plan.
1999 Employee Stock Purchase Plan
A total of 250,000 shares of common stock has been reserved for issuance
under our 1999 Employee Stock Purchase Plan (the "Purchase Plan") which amount
will automatically be increased on the first day of each of our fiscal years on
and after January 1, 2000 by a number of shares equal to the lesser of (i)
50,000 shares or (ii) 2% of the number of shares of our common stock issued and
outstanding on the last day of the preceding fiscal year. No shares have been
issued under the Purchase Plan as of the effective date of this offering. The
Purchase Plan, which is intended to qualify under section 423 of the Code, is
administered by the board or by a committee thereof. Our employees (including
our officers and employee directors) or employees of any subsidiary designated
by our board for participation in the Purchase Plan are eligible to participate
in the Purchase Plan if they are customarily employed for more than 20 hours per
week and more than five months per year. The Purchase Plan will be implemented
by sequential offerings of approximately six months duration, the first of which
will commence on the effective date of this offering and will terminate on
August 31, 2000. Shares will be purchased on the last day of each offering
period. After the effective date of this offering, offering periods under the
Purchase Plan will generally begin on March 1 and September 1 of each year. The
board may change the dates or duration of one or more offerings, but no offering
may exceed 27 months. The Purchase Plan permits eligible employees to purchase
common stock through payroll deductions at a price no less than 85% of the lower
of the fair market value of the common stock on (a) the first day of the
offering, or (b) the purchase date. Participants generally may not purchase more
than 500 shares on a purchase date or stock having a value (measured at the
beginning of the offering) greater than $25,000 in any calendar year. If we were
to experience a change in control, our board could accelerate the purchase date
of the then current offering period to a date prior to the change in control
unless the acquiring or successor corporation assumed or replaced the purchase
rights outstanding under the Purchase Plan.
401(K) PLAN
We have established a tax-qualified employee savings and retirement plan,
or a 401(k) plan, which covers all of our full-time employees who have completed
60 days of service. Under our 401(k) plan, eligible employees may defer up to
20% of their pre-tax earnings, subject to the Internal Revenue Service's annual
contribution limit. The 401(k) plan permits additional discretionary matching
contributions by us on behalf of all participants in the 401(k) plan in such a
percentage amount as may be determined
53
<PAGE> 55
annually by the board of directors. To date, we have made no matching
contributions. Our 401(k) plan is intended to qualify under section 401 of the
Code so that contributions by employees or by us to the 401(k) plan and income
earned on plan contributions are not taxable to employees until withdrawn from
the 401(k) plan and so that our contributions, if any, will be deductible by us
when made. The trustee under the 401(k) plan, at the direction of each
participant, invests the assets of the 401(k) plan in any of a number of
investment options.
EMPLOYMENT AGREEMENTS
We routinely deliver written offer letters containing provisions on salary,
bonuses, benefits and stock option grants to prospective employees.
In addition, we entered into a written employment agreement with Russell
Friend, Vice President, Real Estate, in August 1999. The agreement sets forth
Mr. Friend's base salary, benefits, bonuses and stock option grant. The
agreement provides that if Mr. Friend is terminated without due cause, we will
pay Mr. Friend severance pay equal to six months' salary, unless the net fair
market value of his vested stock equals or exceeds six months' salary. If the
net fair market value of Mr. Friend's vested stock exceeds six months' salary,
we have agreed to provide Mr. Friend with sixty days' notice of termination and
continue to pay his salary until the termination date.
54
<PAGE> 56
TRANSACTIONS WITH RELATED PARTIES
Since January 1, 1996, there has not been, nor is there currently, any
transaction or series of similar transactions to which we were or are a party in
which the amount involved exceeds $60,000 and in which any of our directors,
executive officers or holders of more than five percent of our capital stock had
or will have a direct or indirect material interest other than (a) agreements
which are described where required under the caption "Management" and (b) the
transactions described below.
SALES OF STOCK TO DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
The following directors, executive officers, holders of more than 5% of a
class of voting securities and members of each such person's immediate families
purchased shares of our Series A Preferred Stock, Series B Preferred Stock, or
Series C Preferred Stock:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PURCHASER PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------- --------------- --------------- ---------------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
David S. Morse............................... -- 99,628 --
Rick L. Moncrief............................. -- 38,802 --
Christopher S. Besing........................ -- 2,500 8,334
Robert V. Cheadle............................ -- -- 41,667
Robert H. Manschot........................... -- 6,667 333,333
5% STOCKHOLDERS
Technology Partners Fund V L.P............... 1,633,334 605,521 293,837
</TABLE>
In February 1996, we sold 1,633,334 shares of our Series A Preferred Stock
to Technology Partners Fund V L.P. for $0.60 per share, for an aggregate
purchase price of approximately $980,000.
From May 1996 through May 1997, we sold an aggregate of 2,769,016 shares of
our Series B Preferred Stock to various investors for $1.50 per share, for an
aggregate purchase price of $4,153,524. Of such $4,153,524 aggregate purchase
price, $2,452,037 was applied towards the payment of principal and interest
under notes and other indebtedness payable to the investors.
During the period beginning March 1997 through November 1997, we issued an
aggregate of $5,258,000 in convertible subordinated promissory notes to various
existing investors, all of which converted into Series C Preferred Stock at or
around the first closing of the sale of our Series C Preferred Stock. Concurrent
with the issuance of these notes, we also issued warrants to purchase
approximately 232,584 shares of our Series C Preferred Stock to such note
holders at a price per share equal to the price of the Series C Preferred Stock.
All of these warrants are expected to be exercised in connection with the
closing of this offering.
From December 1997 through July 1999, we sold an aggregate of 3,485,446
shares of Series C Preferred Stock at a price of $6.00 per share, for an
aggregate purchase price of $20,912,676. Of such $20,912,676 aggregate purchase
price, $5,264,000 was applied towards the payment of principal and interest
under notes and other indebtedness payable to the investors.
On February 7, 1996, we entered into a promissory note and warrant
agreement with RPM International Investments, GbR, of which Mr. Manschot is the
President and Chief Executive Officer, in the amount of $150,000, which gives
RPM a warrant to purchase 50,000 shares of our common stock at a price of $1.50
per share. This note accrued interest at the rate of 8% per annum. We paid this
promissory note in May 1996.
On April 12, 1996, we issued a convertible demand note to Technology
Partners Fund V L.P., a 5% stockholder, in the amount of $200,000. This note
accrued interest at the rate of 8% and was subsequently converted into 136,722
shares of Series B Preferred Stock in May 1996.
55
<PAGE> 57
From March 2, 1997 to November 19, 1997, in connection with our Series C
Preferred Stock financing, we issued warrants to purchase 108,750 shares of our
Series C Preferred Stock to Technology Partners Fund V L.P. at an exercise price
of $6.00 per share.
See the notes to the table of beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
LOAN TO EXECUTIVE OFFICER
On April 30, 1999, we loaned $175,000 to David S. Morse, the Chairman of
the Board of Directors, Chief Executive Officer and President, secured by a
promissory note and pledge agreement, in connection with his exercise of options
to purchase 175,000 shares of our common stock at an exercise price of $1.00 per
share, a portion of which is subject to a right of repurchase in our favor. This
note accrues interest at the rate of 6% per annum and is due on April 1, 2004.
LOAN FROM EXECUTIVE OFFICER
On November 23, 1998, David S. Morse loaned us $150,000. This note accrued
interest at the rate of 8% per annum and was due on demand. We repaid $50,000 of
this loan on January 29, 1999 and the remainder on February 8, 1999.
INDEMNIFICATION
We have entered into indemnification agreements with each of our officers
and directors containing provisions which may require us, among other things, to
indemnify our officers and directors against liabilities that may arise by
reasons of their status or service as officers or directors and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. We also intend to execute such agreements with our future
directors and executive officers. See "Management -- Indemnification."
CONFLICT OF INTEREST POLICY
We believe that all transactions with affiliates described above were made
on terms no less favorable to us than could have been obtained from unaffiliated
third parties. Our policy is to require that a majority of the independent and
disinterested outside directors on our board of directors approve all future
transactions between us and our officers, directors, principal stockholders and
their affiliates. We intend that these kinds of transactions will continue to be
on terms no less favorable to us than we could obtain from unaffiliated third
parties.
For a description of other transactions between our affiliates and us, see
"Management -- Compensation Committee Interlocks and Insider Participation."
56
<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the shares of our common stock as of August 1, 1999 and
as adjusted to give effect to the sale of shares of common stock in this
offering, assuming (a) conversion of all of our outstanding shares of
convertible preferred stock into common stock and (b) no exercise of the
underwriters' over-allotment option, by:
- each person who is known by us to beneficially own 5% or more of the
outstanding shares of our common stock;
- each executive officer listed in the Summary Compensation Table;
- each of our directors; and
- all of our executive officers and directors as a group.
Percentage of ownership prior to the offering is based on 10,703,351 shares
outstanding on August 1, 1999, excluding an aggregate of 813,659 shares subject
to outstanding warrants to purchase common stock or convertible preferred stock,
1,105,624 shares subject to outstanding options and shares underlying
approximately $5.6 million in outstanding promissory notes. Percentage of
ownership after the offering is based on shares outstanding
assuming no exercise of the underwriters' over-allotment option. The number and
percentage of shares beneficially owned are determined in accordance with rules
and regulations of the Securities and Exchange Commission. All shares of common
stock underlying options are immediately exercisable with all unvested shares of
common stock being subject to a right of repurchase in our favor which lapses
over time in the event of early termination. Shares of common stock underlying
options currently exercisable or exercisable within 60 days after August 1, 1999
are deemed outstanding for the purpose of computing the number of shares
beneficially owned and the percentage ownership of the person holding these
options but are not deemed outstanding for computing the percentage ownership of
any other person. Except in cases where community property laws apply or as
indicated in the footnotes to this table, we believe that each stockholder
identified in the table possesses sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by that stockholder.
Unless otherwise indicated, the address of each listed stockholder is c/o
Silicon Entertainment, 210 Hacienda Avenue, Campbell, CA 95008.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES --------------------
NAME AND ADDRESS BENEFICIALLY BEFORE AFTER
OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------- ---------------- -------- --------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
David S. Morse(1)................................. 791,145 7.3%
Lee E. Knowlton(2)................................ 95,000 *
Rick L. Moncrief(3)............................... 345,302 3.2
Christopher O. Morse(4)........................... 145,000 1.4
Ross C. Mulholland(5)............................. 97,500 *
Damon Danielson................................... 109,375 1.0
William Hart(6)................................... 2,808,942 25.9
Robert H. Manschot(7)............................. 754,956 7.0
Christopher S. Besing(8).......................... 207,501 1.9
Robert V. Cheadle(9).............................. 51,667 *
5% STOCKHOLDERS
Technology Partners Fund V L.P.(10)............... 2,808,942 25.9
Attn: William Hart
1550 Tiburon Blvd., Suite A
Belvedere, CA 94920
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
(10 persons)(11)................................ 5,339,512 47.5
</TABLE>
- -------------------------
* Less than 1%.
57
<PAGE> 59
(1) Includes (i) 697,128 shares registered in the name of the Morse Family
Trust, of which Mr. Morse is a trustee, of which 127,604 shares are subject
to a right of repurchase in our favor which lapses over time, (ii) 75,000
shares subject to a fully-vested option held by Mr. Morse and (iii) 19,017
shares subject to warrants held by Morse & Co., of which Mr. Morse is the
owner, exercisable within 60 days of August 1, 1999. The warrants are
expected to be exercised upon the closing of this offering.
(2) Includes (i) 26,729 shares subject to a right of repurchase in our favor
which lapses over time and (ii) 22,750 shares subject to immediately
exercisable options subject to our right of repurchase.
(3) Includes (i) 38,021 shares subject to a right of repurchase in our favor
which lapses over time, (ii) 26,250 shares subject to immediately
exercisable options held by Mr. Moncrief subject to our right of repurchase
and (iii) 1,500 shares subject to an immediately exercisable option held by
Carrie Moncrief, Mr. Moncrief's wife, subject to our right of repurchase.
(4) Includes 33,021 shares subject to a right of repurchase in our favor which
lapses over time.
(5) Includes (i) 37,761 shares subject to a right of repurchase in our favor
which lapses over time, and (ii) 35,000 shares subject to an immediately
exercisable option, of which 24,063 shares are subject to our right of
repurchase.
(6) Includes (i) 108,750 shares subject to warrants registered in the name of
Technology Partners Fund V, L.P. ("Technology Partners"), of which Mr. Hart
is the general and managing partner, exercisable within 60 days at August
1, 1999 and (ii) 5,000 shares subject to a fully vested option held by
Technology Partners. Also includes 12,500 shares subject to fully-vested
options held by TPW Management V, L.P., the general partner of Technology
Partners and a venture capital fund of which Mr. Hart is a general partner.
The warrants are expected to be exercised upon the closing of this
offering.
(7) Includes (i) 333,333 shares registered in the name of the Manschot
Opportunity Fund ("Manschot Fund"), of which Mr. Manschot is the managing
director and (ii) 22,500 shares subject to warrants held by Manschot Fund
exercisable within 60 days of August 1, 1999. Also includes (i) 166,373
shares registered in the name of RPM International Investments, GbR, of
which Mr. Manschot is the President and Chief Executive Officer and (ii)
60,417 shares subject to warrants held by RPM International GbR exercisable
within 60 days of August 1, 1999. Also includes (i) 57,500 shares subject
to warrants held by Mr. Manschot exercisable within 60 days of August 1,
1999 and (ii) 7,500 shares subject to a fully-vested option held by Mr.
Manschot. The warrants are expected to be exercised upon closing of this
offering.
(8) Includes (i) 166,667 shares registered in the name to Action Performance
Companies, of which Mr. Besing is a director and (ii) 20,000 shares subject
to warrants held by Action Performance Companies exercisable within 60 days
of August 1, 1999. Also includes 10,000 shares subject to a fully-vested
option held by Mr. Besing. The warrants are expected to be exercised upon
the closing of this offering.
(9) Includes 10,000 shares subject to a fully-vested option. Also includes
41,667 shares registered in the name of The Robert Cheadle Trust, of which
Mr. Cheadle is the trustee.
(10) All shares listed are registered in the name of Technology Partners and
include (i) 108,750 shares subject to warrants exercisable within 60 days
of August 1, 1999 and (ii) 5,000 shares subject to a fully-vested option.
Also includes 12,500 shares subject to fully-vested options held by TPW
Management V, L.P., the general partner of Technology Partners. The
warrants are expected to be exercised upon the closing of this offering.
(11) Includes (i) 375,199 shares subject to a right of repurchase in our favor
which lapses over time, (ii) 288,184 shares subject to warrants exercisable
within 60 days of August 1, 1999 and (iii) 243,000 shares subject to
options, each of which is exercisable within 60 days of August 1, 1999. The
warrants are expected to be exercised upon the closing of this offering.
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<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 40,000,000 shares of common stock,
par value $0.001 per share and 500,000 shares of preferred stock, par value
$0.001 per share. Each outstanding share of convertible preferred stock will be
automatically converted into one share of common stock upon the closing of this
offering. Upon the conversion, the convertible preferred stock will be canceled
and retired. The following summary of our common stock and preferred stock is
not complete and a full understanding requires a review of our certificate of
incorporation and bylaws that are included as exhibits to this registration
statement of which this prospectus is a part and applicable laws.
COMMON STOCK
As of August 1, 1999, we had 10,703,352 shares of common stock outstanding,
assuming the conversion of all of our preferred stock into common stock. These
shares are held by 290 stockholders of record after giving effect to the
conversion of our mandatorily redeemable convertible preferred stock into
common. Options to purchase an aggregate of 1,105,598 shares of our common stock
were also outstanding. The holders of common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of the
stockholders. Subject to preferences that may be applicable to any then
outstanding preferred stock, holders of common stock are entitled to receive
proportionate dividends, if any, as may be declared by our board of directors
out of any available funds. See "Dividend Policy."
In the event that we liquidate, dissolve or wind up, holders of our common
stock and preferred stock are entitled to share ratably on an as-converted basis
in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding preferred stock. Our common stock has no
preemptive or conversion rights or other subscription rights and also has no
applicable redemptive or sinking fund provisions. We have received full payment
for all outstanding shares of our common stock and cannot require our
stockholders to make further payments on the stock. In addition, the common
stock that will be outstanding upon completion of this offering will have the
same status.
PREFERRED STOCK
The board of directors has the authority, without further action by the
stockholders, to issue from time to time the preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers and
relative, participating, optional or other special rights and the qualifications
or restrictions thereof. The preferences, powers, rights and restrictions of
different series of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and purchase funds and other matters. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock and
may have the effect of delaying, deferring or preventing our change in control.
See Notes to Consolidated Financial Statements for a description of the
currently outstanding preferred stock.
WARRANTS
As of August 1, 1999, we had issued warrants to purchase a total of 378,017
shares of common stock at exercise prices ranging between $1.50 per share and
$6.00 per share, 64,001 shares of Series B Preferred Stock at $1.50 per share
and 371,641 shares of Series C Preferred Stock at $6.00 per share, on an as-
converted basis. These warrants generally terminate upon the sooner to occur of
three to five years after the date the warrants were issued or the completion of
our initial public offering. Those warrants that do not terminate upon the
completion of the offering terminate ten years after the date those warrants
were issued. We expect that all of these warrants will be exercised prior to the
completion of this offering. Some of these warrants have rights to registration,
all of which we expect will be waived in connection with this offering. See
"-- Registration Rights."
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<PAGE> 61
In connection with a subordinated convertible note purchase agreement we
entered into in September 1999, we issued warrants to purchase an aggregate of
68,750 shares of common stock at an exercise price of $10.80 per share. The
warrants terminate five years after the date they were issued.
CONVERTIBLE PROMISSORY NOTES
On June 30, 1999, we entered into a secured subordinated convertible note
purchase agreement, issuing three convertible subordinated notes in the amounts
of $2.3 million, $2.3 million and $1.1 million. The notes accrue interest at
8.5%, payable semiannually beginning 12 months after the date we issued the
notes. The notes are due on June 30, 2002. At the option of the holders, the
notes convert into shares of our common stock at a conversion price of $15.00
per share. The notes convert automatically if either the price per share in this
offering is greater than $15.00 per share or if the price of our common stock
exceeds $20.00 per share for any four week period following this offering. If we
are involved in an acquisition transaction resulting in all of our stockholders
before the transaction owning less than 50% of the voting securities of the
surviving entity after the transaction, the holders of these notes may request
that we repurchase their notes for 101% of the face amount of the note, plus any
unpaid interest accrued on the notes to the date of repurchase.
In September 1999, we entered into a second subordinated convertible note
purchase agreement, issuing convertible subordinated notes in the amounts of
$2.0 million, $500,000, $500,000, $1.0 million and $1.5 million. We paid each
holder a placement fee of one percent of the face value of their note. The notes
accrue interest at 12.0% per annum, payable on maturity. The notes are due on
March 9, 2001. At the option of the note holders, the notes convert into shares
of our common stock at a conversion price of $10.00 per share. If we are
involved in an acquisition transaction resulting in all of our stockholders
before the transaction owning less than 50% of the voting securities of the
surviving entity after the transaction, the holders of these notes may request
that we repurchase their notes for 101% of the face amount of the note, plus any
unpaid interest accrued on the notes to the date of repurchase. Concurrent with
the issuance of these notes, we issued warrants to the holders to purchase an
aggregate of 68,750 shares of common stock at an exercise price of $10.80 per
share. The warrants terminate five years after the date we issued the notes.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certificate of Incorporation and Bylaws
Effective upon the closing of this offering, our certificate of
incorporation will provide that any action permitted to be taken by our
stockholders must be effected at a duly-called annual or special meeting of
stockholders and will not be able to be effected by a consent in writing. Our
certificate of incorporation will also require the approval of at least
two-thirds of the total number of authorized directors in order to adopt, amend
or repeal our bylaws. In addition, our certificate of incorporation will
similarly permit the stockholders to adopt, amend or repeal our bylaws only upon
the affirmative vote of the holders of at least two-thirds of the voting power
of all then outstanding shares of stock entitled to vote. Also, a director will
be removable by stockholders only for cause. Vacancies on the board of directors
resulting from death, resignation, removal or other reason may be filled by a
majority of the directors or a majority of the shares entitled to vote. In
general, other vacancies are to be filled by a majority of the directors.
Lastly, the provisions in our certificate of incorporation described above and
other provisions pertaining to the limitation of liability and indemnification
of directors will be able to be amended or repealed only with the affirmative
vote of the holders of at least two-thirds of the voting power of all then
outstanding shares of stock entitled to vote. These provisions may have the
effect of deterring hostile takeovers or delaying changes in our control or
management, which could have an adverse effect on the market price of our common
stock.
Upon the closing of this offering, our bylaws will also contain many of the
above provisions found in our certificate of incorporation. Our bylaws will not
permit stockholders to call a special meeting. In addition, our bylaws will
establish an advance notice procedure with regard to matters to be brought
before an annual or special meeting of our stockholders, including the election
of directors. Business
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<PAGE> 62
permitted to be conducted in any annual meeting or special meeting of
stockholders will be limited to business properly brought before the meeting.
DELAWARE TAKEOVER STATUTE
We are subject to section 203 of the Delaware Law, which, subject to
limited 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 such stockholder became an interested stockholder,
unless:
- prior to such 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 (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 of the Delaware Law defines business combination to include:
- 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 specified 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 such entity or person.
REGISTRATION RIGHTS
After this offering and under a Third Amended and Restated Rights
Agreement, as amended on June 30, 1999, the holders of approximately 9,091,598
shares of common stock will have registration rights with respect to their
shares. Of these shares, 763,134 are held by certain holders of our common
stock, 7,887,796 shares are issuable upon conversion of our convertible
preferred stock, 64,001 shares are issuable upon exercise and conversion of
warrants to purchase convertible preferred stock, and 376,667 shares are
issuable upon conversion of outstanding subordinated convertible promissory
notes, or persons to whom some of these holders transferred the common stock. If
we propose to register any of our securities under the Securities Act, either
for our own account or for the account of other security holders, holders of
shares entitled to registration rights are entitled to notice of and are
entitled to include their shares in this registration, at our expense. However,
the underwriters of any such offering have the right to limit the number of
shares included in such registration. In addition, beginning 180 days after the
effective date of
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<PAGE> 63
this offering, holders of at least 40% of the shares entitled to registration
rights outstanding may require us to prepare and file a registration statement
under the Securities Act, at our expense, covering their shares and we are
generally required to use our best efforts to effect such registration. We are
not obligated to effect more than two of these stockholder-initiated
registrations. Further, holders of shares entitled to registration rights
generally may require us to file additional registration statements on Form S-3.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Boston Equiserve,
which can be reached at (201) 222-4099.
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<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering there has been no public market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect market prices prevailing from time to time. As described below,
only a limited number of shares will be available for sale shortly after this
offering due to certain contractual and legal restrictions on resale.
Nevertheless, sales of substantial amounts of our common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price at such time and our ability to raise equity capital in the future.
- Upon the closing of this offering, we will have outstanding an aggregate
of approximately shares of common stock based on the
number of shares of convertible preferred stock and common stock
outstanding as of August 1, 1999 and assuming no exercise of the
underwriters' over-allotment option.
- Of these shares, the shares of common stock to be sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless these shares are held by
our "affiliates" as that term is defined in Rule 144 of the Securities
Act.
- All remaining shares held by our existing stockholders were issued and
sold by us in private transactions and are eligible for public sale if
registered under the Securities Act or sold in accordance with Rule 144
or Rule 701, which are summarized below.
Our directors, executive officers and 5% stockholders will collectively
hold an aggregate of approximately 5,339,512 shares of common stock after the
offering and after giving effect to conversion of the convertible preferred
stock. These stockholders have signed lock-up agreements which prevent them from
selling any common stock owned by them for a period of 180 days from the date of
this prospectus without the prior written consent of SG Cowen Securities
Corporation. When determining whether or not to release shares from the lock-up
agreements, SG Cowen Securities Corporation will consider, among other factors,
the stockholder's reasons for requesting the release, the number of shares for
which the release is being requested and market conditions at the time. As a
result of lock-up agreements with SG Cowen Securities Corporation and the
provisions of Rule 144 and 701, approximately additional
outstanding shares of common stock will be eligible for sale in the public
market upon expiration of the lock-up period.
In general, under Rule 144 as currently in effect, a person or persons
whose shares are aggregated, including an "affiliate", who has beneficially
owned shares for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of either 1% of the
then outstanding shares of common stock or the average weekly trading volume of
the common stock on the Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to such sale. One
percent of the outstanding shares of common stock would be shares
immediately after the offering. Sales under Rule 144 are also subject to
prescribed requirements regarding the manner of sale, notice and availability of
current public information about us. Under Rule 144(k), a person who is not
deemed to have been one of our "affiliates" at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least one year, would be entitled to sell such shares without complying
with the manner of sale, public information, volume limitation or notice
requirements described above. Therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately following completion of the offering without
limitations as to volume.
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchased shares from us in
connection with a compensatory stock or option plan or written employment
agreement is eligible to resell such shares 90 days after the effective date of
the offering in reliance on Rule 144, by complying with the applicable
requirements of Rule 144 other than the holding period conditions. On the date
90 days after the effective date of this offering, options to purchase
approximately shares of common stock not subject to lock-up
agreements will be vested and exercisable and upon exercise may be sold pursuant
to Rule 701.
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We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all of our shares of common stock issued or reserved
for future issuance under our stock option and employee stock purchase plans.
These registration statements are expected to be filed soon after the date of
this prospectus and will automatically become effective upon filing.
Accordingly, shares registered under this registration statement will be
available for sale in the open market, unless those shares are subject to
vesting restrictions imposed by us or the lock-up restrictions described above.
Beginning 180 days after this offering, the holders of approximately
9,091,597 shares of common stock will be entitled to certain rights to cause us
to register the sale of such shares under the Securities Act. Registration of
such shares under the Securities Act would generally result in such shares
becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of such registration. However, shares
purchased by our affiliates would not be freely tradable. See
"Management -- Stock Option Plans," "Management -- Stock Option Plans -- 1999
Employee Stock Purchase Plan," and "Description of Capital Stock -- Registration
Rights."
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<PAGE> 66
UNDERWRITING
Silicon Entertainment and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. SG Cowen Securities Corporation, CIBC World Markets Corp., J.C.
Bradford & Co. and E*OFFERING Corp. are the representatives of the underwriters.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
SG Cowen Securities Corporation.............................
CIBC World Markets Corp.....................................
J.C. Bradford & Co..........................................
E*OFFERING Corp.............................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their discretion based on
their assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of the other events
specified in the underwriting agreement. The underwriters are severally
committed to purchase all of the common stock being offered by us if any shares
are purchased, other than those covered by the over-allotment option described
below.
The underwriters, at our request, have reserved for sale to our employees,
friends and family members of employees and to certain other persons, at the
initial public offering price, up to five percent of the shares of common stock
to be sold in this offering. The number of shares available for sale to the
general public will be reduced to the extent that any reserved shares are
purchased. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares offered
hereby.
The underwriters propose to offer the common stock directly to the public
at the public offering price set forth on the cover page of this prospectus. The
underwriters may offer the common stock to securities dealers at that price less
a concession not in excess of $ per share. Securities dealers may reallow a
concession not in excess of $ per share to other dealers. After the shares
of the common stock are released for sale to the public, the underwriters may
vary the offering price and other selling terms from time to time.
We have granted to the underwriters an option to purchase up to
additional shares of common stock at the public offering price
set forth on the cover of this prospectus to cover over-allotments, if any. The
option is exercisable for a period of 30 days. If the underwriters exercise
their over-allotment option, the underwriters have severally agreed to purchase
shares in approximately the same proportion as shown in the table above.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act and to contribute to payments
that the underwriters may be required to make in respect of those liabilities.
Silicon Entertainment, our directors and executive officers, all principal
stockholders and other existing stockholders who hold an aggregate of
shares, together with the holders of options to purchase
shares of common stock and holders of warrants to purchase
shares of common stock, have agreed with the underwriters that
for a period of 180 days following the date of this prospectus, without the
prior written consent of SG Cowen Securities Corporation, they will not dispose
of or hedge any shares of common stock or any securities convertible into or
exchangeable for common stock.
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<PAGE> 67
Certain employees of SG Cowen Securities Corporation own 8,000 shares of
our common stock and 34,880 shares of our preferred stock. Also, certain
employees of CIBC World Markets Corp. and its affiliates own an aggregate of
23,168 shares of our preferred stock. In addition, J.C. Bradford Venture Fund
IV, an affiliate of J.C. Bradford & Co., owns 16,667 shares of our common stock.
All of these shares were acquired from us on the same terms as other purchases
of our capital stock during the periods in which these shares were acquired.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when the
common stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. In passive
market making, market makers in the common stock who are underwriters or
prospective underwriters may, subject to certain limitations, make bids for or
purchases of the common stock until the time, if any, at which a stabilizing bid
is made. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The underwriters have advised us that they do not intend to confirm sales
in excess of 5% of the common stock offered hereby to any account over which
they exercise discretionary authority.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price was determined by
negotiations between us and the underwriters. Among the factors considered in
these negotiations were prevailing market conditions, the market capitalizations
and the stages of development of other companies that we and the underwriters
believe to be comparable to us, estimates of our business potential, our results
of operation in recent periods, the present state of our development and other
factors deemed relevant.
SG Cowen Securities Corporation acted as the placement agent of a private
placement of our Series C Preferred Stock and, in connection with that
placement, received a customary fee for its services.
We estimate that our out of pocket expenses for this offering will be
approximately $1,000,000.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for Silicon Entertainment by Gray Cary Ware & Freidenrich LLP, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California.
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EXPERTS
The financial statements as of February 1, 1998 and January 31, 1999 and
for each of the three years in the period ended January 31, 1999 included in
this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers L.L.P., independent accountants, given on the authority
of said firm as experts in auditing and accounting.
WHERE TO FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (SEC) a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered in this prospectus. When used in this prospectus, the term
"registration statement" includes amendments to the registration statement. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement. The term
"registration statement" means the initial registration statement, including the
exhibits, schedules, financial statements and notes filed as part of the
registration statement, including any and all amendments. This prospectus omits
certain information contained in the registration statement as permitted by the
rules and regulations of the SEC. Investors should read the registration
statement for further information about us and the common stock we are offering
in this prospectus. Statements herein concerning the contents of any contract or
other document are not necessarily complete and in each instance, reference is
made to the copy of such contract or other document filed with the SEC as an
exhibit to the registration statement, each such statement being qualified by
and subject to such reference in all respects. With respect to each such
document filed with the SEC as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matter
involved.
As a result of this offering, we will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended and in
accordance therewith, will file reports and other information with the SEC.
Reports, registration statements, proxy statements and other information filed
by us with the SEC can be inspected and copied at the public reference
facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
New York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. The SEC maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of the site is
http://www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited 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. We intend to furnish such other reports as it may determine or as may be
required by law.
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SILICON ENTERTAINMENT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Deficit......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Silicon Entertainment, Inc.
In our opinion, the accompanying balance sheets, and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Silicon Entertainment, Inc. at
February 1, 1998 and January 31, 1999 and the results of its operations and its
cash flows for each of the three years in the period ended January 31, 1999, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
June 7, 1999 (except for Note 11, as to which date is September 8, 1999)
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Silicon Entertainment, Inc.
The financial statements and notes thereto included herein have been
adjusted to give effect to the reincorporation of the Company in the state of
Delaware and the recapitalization as described more fully in Note 11 to the
financial statements. The above report is in the form that will be signed by
PricewaterhouseCoopers LLP upon the effectiveness of such reincorporation and
recapitalization assuming that, from June 7, 1999 to the effective date of such
reincorporation and recapitalization, no other events shall have occurred that
would affect the accompanying financial statements or notes thereto.
/s/ PricewaterhouseCoopers LLP
San Jose, California
June 7, 1999 (except for Note 11, as to which date is September 8, 1999)
F-2
<PAGE> 71
SILICON ENTERTAINMENT, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
FEBRUARY 1, JANUARY 31, AUGUST 1, AUGUST 1,
1998 1999 1999 1999
----------- ----------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Currents assets:
Cash and cash equivalents........................ $ 129 $ 606 $ 2,778
Inventory........................................ 54 188 295
Prepaid expenses and other....................... 224 1,611 1,310
------- -------- --------
Total current assets..................... 407 2,405 4,383
Property and equipment, net........................ 2,287 10,322 10,888
Other assets....................................... 71 360 921
------- -------- --------
Total assets............................. $ 2,765 $ 13,087 $ 16,192
======= ======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Notes payable to related parties.............. $ -- $ 1,111 $ 3,832
Accounts payable.............................. 604 3,962 684
Accrued expenses.............................. 349 1,740 1,723
Current portion of capital leases............. 304 992 1,101
------- -------- --------
Total current liabilities................ 1,257 7,805 7,340
Long-term portion of capital leases................ 434 2,088 1,969
Long-term debt..................................... -- -- 5,054
------- -------- --------
Total liabilities........................ 1,691 9,893 14,363
------- -------- --------
Commitments (Notes 4 and 5)
Mandatorily redeemable convertible preferred stock,
$0.001 par value:
Authorized: 20,000 shares; Issued and
outstanding: 5,279, 7,481, 7,888 shares at
February 1, 1998, January 31, 1999 and August
1, 1999 and no pro-forma shares (Liquidation
value: $10,393, $23,602 and $26,047 at
February 1, 1998, January 31, 1999 and August
1, 1999)...................................... 9,200 21,952 24,370 $--
------- -------- -------- ---
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized: 40,000, 40,000 and 40,000 shares
at February 1, 1998, January 31, 1999 and
August 1, 1999 and shares
pro-forma
Issued and outstanding: 1,798, 2,301 and 2,815
shares at February 1, 1998, January 31, 1999
and August 1, 1999 and shares
pro-forma................................... 2 2 3 --
Additional paid-in capital....................... 158 1,733 3,284 --
Notes receivable from stockholders............... -- -- (247) --
Warrants......................................... 1,139 1,379 2,493
Deferred stock compensation...................... (76) (1,035) (942) --
Accumulated deficit.............................. (9,349) (20,837) (27,132) --
------- -------- -------- ---
Total stockholders' equity (deficit)..... (8,126) (18,758) (22,541) --
------- -------- -------- ---
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity (deficit)......... $ 2,765 $ 13,087 $ 16,192 $--
======= ======== ======== ===
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 72
SILICON ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
YEAR ENDED ENDED
----------------------------------------- ----------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31, AUGUST 2, AUGUST 1,
1997 1998 1999 1998 1999
----------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Simulator races.................... $ 47 $ 892 $ 4,357 $ 1,218 $ 3,532
Merchandise........................ -- 104 620 148 462
Other.............................. -- 56 405 175 175
------- ------- -------- ------- -------
Total revenues................ 47 1,052 5,382 1,541 4,169
OPERATING EXPENSES
Cost of revenue.................... -- 359 1,907 496 1,599
Direct expense..................... -- 264 1,875 478 1,580
Marketing and licensing............ -- 484 999 456 786
Research and development........... 1,142 1,767 3,043 1,726 703
General and administration......... 1,476 2,322 5,770 2,478 2,811
Depreciation and amortization...... 46 232 957 215 850
Pre-opening expense................ -- 571 1,571 915 66
Stock-based compensation expense... -- 22 589 124 897
------- ------- -------- ------- -------
Total operating expenses...... 2,664 6,021 16,711 6,888 9,292
------- ------- -------- ------- -------
Operating loss....................... (2,617) (4,969) (11,329) (5,347) (5,123)
Interest expense, net................ 25 223 159 23 1,172
------- ------- -------- ------- -------
Net loss........................ (2,642) (5,192) (11,488) (5,370) (6,295)
Accretion of mandatorily redeemable
convertible preferred stock........ -- (8) (55) (21) (41)
------- ------- -------- ------- -------
Net loss attributable to
common stockholders........ $(2,642) $(5,200) $(11,543) $(5,391) $(6,336)
======= ======= ======== ======= =======
Basic and diluted net loss per share
attributable to common
stockholders....................... $ (1.65) $ (3.67) $ (5.85) $ (2.95) $ (2.55)
======= ======= ======== ======= =======
Shares used in computing basic and
diluted net loss per share
attributable to common
stockholders....................... 1,605 1,417 1,973 1,830 2,489
======= ======= ======== ======= =======
Pro forma basic and diluted net loss
per share attributable to common
stockholders (unaudited)........... $ (1.36) $ (0.63)
======== =======
Shares used in computing pro forma
basic and diluted net loss per
share attributable to common
stockholders (unaudited)........... 8,459 10,071
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 73
SILICON ENTERTAINMENT, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
--------------- PAID-IN FROM UNEARNED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS WARRANTS COMPENSATION DEFICIT DEFICIT
------ ------ ---------- ------------ -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, February 5,
1996...................... 1,605 $ 2 $ 1 $ -- $ -- $ -- $ (1,515) $ (1,512)
Net loss.................... -- -- -- -- -- -- (2,642) (2,642)
----- ------ ------ ----- ------ ------- -------- --------
Balances, February 2,
1997...................... 1,605 2 1 -- -- -- (4,157) (4,154)
Accretion of mandatorily
redeemable preferred
stock..................... -- -- (8) -- -- -- -- (8)
Issuance of common stock for
cash...................... 5 -- 1 -- -- -- -- 1
Buyback of common stock from
founder pursuant to
termination in March
1997...................... (252) -- -- -- -- -- -- --
Issuance of common stock for
note receivable........... 325 -- 49 -- -- -- -- 49
Issuance of common stock
pursuant to exercise of
stock options............. 115 -- 17 -- -- -- -- 17
Deferred compensation
related to grants of stock
options................... -- -- 98 -- -- (98) -- --
Amortization of deferred
stock compensation........ -- -- -- -- -- 22 -- 22
Issuance of warrants........ -- -- -- -- 1,139 -- -- 1,139
Net loss.................... -- -- -- -- -- -- (5,192) (5,192)
----- ------ ------ ----- ------ ------- -------- --------
Balances, February 1,
1998...................... 1,798 2 158 -- 1,139 (76) (9,349) (8,126)
Accretion of mandatorily
redeemable preferred
stock..................... -- -- (55) -- -- -- -- (55)
Issuance of common stock for
cash...................... 39 -- 19 -- -- -- -- 19
Issuance of common stock
pursuant to exercise of
stock options............. 466 -- 63 -- -- -- -- 63
Buyback of common stock
pursuant to termination... (2) -- -- -- -- -- -- --
Deferred compensation
related to grants of stock
options................... -- -- 1,548 -- -- (1,548) -- --
Amortization of deferred
stock compensation........ -- -- -- -- -- 589 -- 589
Issuance of warrants........ -- -- -- -- 240 -- -- 240
Net loss.................... -- -- -- -- -- -- (11,488) (11,488)
----- ------ ------ ----- ------ ------- -------- --------
Balances, January 31,
1999...................... 2,301 2 1,733 -- 1,379 (1,035) (20,837) (18,758)
Unaudited:
Accretion of mandatorily
redeemable preferred
stock..................... -- -- (41) -- -- -- -- (41)
Issuance of common stock
pursuant to exercise of
stock options............. 496 1 312 (247) -- -- -- 66
Issuance of stock under
Stock Bonus Plan.......... 1 -- -- -- -- -- -- --
Issuance of stock for
services.................. 17 -- 11 -- -- -- -- 11
Deferred compensation
related to grants of stock
options................... -- -- 1,269 -- -- (804) -- 465
Amortization of deferred
stock compensation........ -- -- -- -- -- 897 -- 897
Issuance of warrants........ -- -- -- -- 1,114 -- -- 1,114
Net loss.................... -- -- -- -- -- -- (6,295) (6,295)
----- ------ ------ ----- ------ ------- -------- --------
Balances, August 1, 1999
(unaudited)............... 2,815 $ 3 $3,284 $(247) $2,493 $ (942) $(27,132) $(22,541)
===== ====== ====== ===== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 74
SILICON ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
ENDED
----------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31, AUGUST 2, AUGUST 1,
1997 1998 1999 1998 1999
----------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(2,642) $(5,192) $(11,488) $(5,370) $(6,295)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 46 232 957 215 850
Deferred compensation charge................ -- 22 589 124 1,050
Amortization of warrants.................... -- -- -- -- 818
Changes in assets and liabilities:
Prepaid expenses and other assets......... (29) (195) (1,387) (189) 301
Inventories............................... -- (54) (134) (48) (107)
Accounts payable.......................... 88 481 3,358 550 (3,278)
Accrued expenses.......................... 8 415 1,402 283 103
------- ------- -------- ------- -------
Net cash used in operating
activities........................... (2,529) (4,291) (6,703) (4,435) (6,558)
------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets...................... (340) (2,159) (8,992) (3,385) (1,411)
Sale of fixed assets.......................... 309 621 3,303 -- 483
Increase in other assets...................... (31) (30) (274) (926) (27)
------- ------- -------- ------- -------
Net cash used in investing
activities........................... (62) (1,568) (5,963) (4,311) (955)
------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable....... 1,720 5,115 1,150 400 9,890
Repayment of notes payable obligation......... (14) -- (50) (400) (2,229)
Repayment of capital lease obligations........ (13) (179) (961) (146) (493)
Proceeds from issuance of mandatorily
redeemable convertible preferred stock, net
of cancellations............................ 1,642 107 12,922 10,828 2,440
Proceeds from issuance of common stock........ -- 66 82 27 77
------- ------- -------- ------- -------
Net cash provided by financing
activities........................... 3,335 5,109 13,143 10,709 9,685
------- ------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................... 744 (750) 477 1,963 2,172
Cash and cash equivalents, beginning of
period........................................ 135 879 129 129 606
------- ------- -------- ------- -------
Cash and cash equivalents, end of period........ $ 879 $ 129 $ 606 $ 2,092 $ 2,778
======= ======= ======== ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES:
Fixed assets acquired under capital lease..... $ 309 $ 621 $ 3,303 $ -- $ 483
======= ======= ======== ======= =======
Conversion of notes payable to Series A
Preferred Stock............................. $ 980 $ -- $ -- $ -- $ --
======= ======= ======== ======= =======
Conversion of notes payable and interest
thereon to Series B preferred stock......... $ 2,344 $ -- $ -- $ -- $ --
======= ======= ======== ======= =======
Conversion of notes payable and interest
thereon to Series C Preferred Stock......... $ -- $ 5,258 $ -- $ -- $ 6
======= ======= ======== ======= =======
Valuation of warrants issued.................. $ -- $ 1,139 $ 225 $ 225 $ 69
======= ======= ======== ======= =======
Accretion of Series C Preferred Stock......... $ -- $ -- $ 55 $ 21 $ 41
======= ======= ======== ======= =======
Cash paid for interest:....................... $ 2 $ 43 $ 173 $ 33 $ --
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 75
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS:
Silicon Entertainment, Inc. (the "Company"), a California corporation, was
incorporated in November 1994. The Company owns and operates NASCAR Silicon
Motor Speedway racing centers, that provide a racing experience that simulates
the motions, sights and sounds of an actual NASCAR race.
The Company's fiscal year is a 52/53 week year that ends on the Sunday
closest to February 1. Fiscal year references relate to the year that
encompasses the majority of months within the twelve month period. Consequently,
the Company's fiscal 1996, 1997 and 1998 years encompass the years ended
February 2, 1997, February 1, 1998 and January 31, 1999, respectively.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
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 amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of August 1, 1999 and the statements of
operations and cash flows for the twenty-six week period ended August 2, 1998
and August 1, 1999 and the statement of stockholders' deficit for the twenty-six
week period ended August 1, 1999 are unaudited. In the opinion of management,
the unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods. The
results of operations for the twenty-six week period ended August 1, 1999 are
not necessarily indicative of operating results to be expected for the full
fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original or
remaining maturity of three months or less at the date of purchase to be cash
equivalents.
CERTAIN RISKS AND CONCENTRATIONS
The Company's services are concentrated in the retail entertainment
industry which is highly competitive and rapidly changing. The Company opened
its first racing center in August 1997 and has a limited operating history. The
Company expects to incur significant losses from operations and its future
profitability remains uncertain. The Company also relies on a single product and
the demand for the Company's racing centers is uncertain. The Company's success
also depends in large part upon the success in identifying sites for its racing
centers. Additional financing is required to accomplish the opening of new
racing centers and management is in the process of investigating alternative
methods of financing.
The Company licenses technology that is incorporated into its products from
certain third parties. Any significant interruption in the supply or support of
any licensed software could adversely affect the Company's sales, unless and
until the Company can replace the functionality provided by this licensed
software. Because the Company's race car simulators incorporate software
developed and maintained by third parties, the Company depends on such third
parties to deliver and support reliable products, enhance their current
products, develop new products on a timely and cost-effective basis and respond
to emerging
F-7
<PAGE> 76
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
industry standards and other technological changes. The failure of these third
parties to meet these criteria could adversely impact the Company's business.
The Company licenses certain trademarks and endorsements as part of its
strategy. These trademarks and endorsements authorize the Company to incorporate
their images and designs into the Company's retail racing centers. Certain
agreements contain provisions that allow the licensor to terminate the agreement
upon the occurrence of certain events. The Company's business would be
materially and adversely affected if the Company's rights under the licensing
agreements were diminished or lost.
Cash and cash equivalents are invested in deposits with one major bank in
the United States. Deposits in this bank may exceed the amount of insurance
provided on such deposits. The Company has not experienced any losses on its
deposits of cash and cash equivalents.
REVENUES AND OPERATING EXPENSES
Revenues are generated primarily from the sale of tickets for the Company's
race car simulators. The Company also sells racing-related merchandise at its
racing centers. Other revenue historically has consisted of group sales, such as
parties and corporate events, and accounts for the balance of total revenues.
Revenues from the sale of tickets for the Company's race car simulators and
group sales are recognized when the customer completes a race. Revenues from the
sale of merchandise are recognized at the point of sale.
Cost of revenue includes the cost of merchandise sold and direct racing
center labor and benefits.
Direct expense includes all other expenses incurred directly by a racing
center, such as supplies, racing center marketing, maintenance and repair and
occupancy. Racing center marketing expense includes the costs of implementing
programs such as local media advertising and printing expense.
Marketing and licensing expense reflects corporate marketing expenses and
corporate licensing costs. Corporate marketing expenses include the cost of
developing programs that build the Company's brand as well as customer
acquisition and retention programs.
Pre-opening expense includes the start-up expenses and other expenses
typically incurred during the two-month period prior to the opening of one of
the Company's racing centers. Pre-opening expenses include compensation,
training, recruiting, relocation, travel, occupancy, supplies and marketing.
INVENTORY
Inventory, which consists of racing-related merchandise, is stated at the
lower of cost (computed using the average cost method which approximates the
first-in, first-out method) or market. Provision, when necessary, has been made
to reduce excess or obsolete inventory to its net realizable value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts payable and other accrued
liabilities approximate fair value due to their short maturities. Based on
borrowing rates currently available to the Company for loans with similar terms,
the carrying value of the notes payable approximates fair value.
F-8
<PAGE> 77
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost less accumulated depreciation and
leasehold amortization. Depreciation and leasehold amortization are calculated
using the straight-line method over the estimated useful lives of the assets, as
follows:
<TABLE>
<S> <C>
Computer and other equipment................................ 3 years
Simulation equipment........................................ 7 years
Software.................................................... 3 to 5 years
Furniture and fixtures...................................... 5 years
Leasehold improvement....................................... Life of lease
</TABLE>
LONG LIVED ASSETS
The Company evaluates the recoverability of its 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." SFAS No. 121 requires recognition of impairment of long lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its
employee stock options and presents disclosure of pro forma information required
under SFAS 123, "Accounting for Stock Based Compensation."
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in the research and development of new software products are
expensed as incurred, including minimum payments made and due to third parties
for technology incorporated into the Company's product, until technological
feasibility is established. Development costs are capitalized beginning when a
product's technological feasibility has been established and ending when the
product is available for general release to customers. To date, products and
enhancements have generally reached technological feasibility and have been
released for incorporation into the Company's product at substantially the same
time.
NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. Options, warrants, shares subject
to repurchase and preferred stock were not included in the computation of
diluted net loss per share because the effect would be antidilutive.
Unaudited pro forma net loss per share has been computed as described above
and also gives effect, even if antidilutive, to common equivalent shares from
the mandatorily redeemable convertible preferred stock that will automatically
convert upon the closing of the Company's initial public offering (using the
F-9
<PAGE> 78
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
as-if-converted method). If the offering contemplated by this Prospectus is
consummated, all of the mandatorily redeemable convertible preferred stock
outstanding as of the closing date will automatically be converted into an
aggregate of approximately 7,888 shares of common stock based on the shares of
convertible preferred stock outstanding at August 1, 1999 (unaudited). The pro
forma effect of this conversion of preferred stock is presented on the pro forma
balance sheet.
F-10
<PAGE> 79
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of shares used in the calculation of net loss per share
and unaudited pro forma net loss per share follows:
<TABLE>
<CAPTION>
TWENTY-SIX WEEK
YEAR ENDED PERIOD ENDED
----------------------------------------- ----------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31, AUGUST 2, AUGUST 1,
1997 1998 1999 1998 1999
----------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss per share, basic and
diluted:
Net loss attributable to common
stockholders.................... $(2,642) $(5,200) $(11,543) $(5,391) $(6,336)
======= ======= ======== ======= =======
Weighted average shares of common
stock outstanding............... 1,605 1,421 2,077 1,919 2,558
Less weighted average shares
subject to repurchase........... -- (4) (104) (89) (69)
------- ------- -------- ------- -------
Shares used in computing net loss
per share, basic and diluted.... 1,605 1,417 1,973 1,830 2,489
======= ======= ======== ======= =======
Net loss per share, basic and
diluted......................... $ (1.65) $ (3.67) $ (5.85) $ (2.95) $ (2.55)
======= ======= ======== ======= =======
Antidilutive options, warrant,
shares subject to repurchase and
preferred stock not included in
loss per share calculations..... 428 1,642 1,896 2,256 1,919
======= ======= ======== ======= =======
Pro forma net loss per share, basic
and diluted:
Net loss........................ $(11,543) $(6,336)
========
Shares used in computing net
loss per share, basic and
diluted....................... 1,973 2,489
Adjustments to reflect the
effect of the assumed
conversion of weighted average
shares of convertible
preferred stock outstanding... 6,486 7,582
-------- -------
Shares used in computing pro
forma net loss per share,
basic and diluted............. $ 8,459 10,071
======== -------
Pro forma net loss per share,
basic and diluted............. $ (1.36) $ (0.63)
======== -------
</TABLE>
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company implemented SFAS No. 130 during fiscal 1998
and has restated all prior periods to comply with SFAS No. 130. There was no
difference between the Company's net loss applicable to common stockholders and
its total comprehensive income for the years ended February 2, 1997, February 1,
1998 and January 31, 1999 and for the twenty-six week periods ended August 2,
1998 and August 1, 1999.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value
F-11
<PAGE> 80
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
be recognized currently in earnings unless specific hedge accounting criteria
are met. To date, the Company has not entered into any derivative financial
instruments or hedging activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999.
In June 1997, the American Institute of Certified Public Accountants
("AICPA") issued statement of Position 98-1 ("SOP 98-1"), "Accounting for
Internally Developed Software." SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The impact of
adopting SOP 98-1, which is effective for the Company in fiscal 1999, is not
expected to have a significant effect on its financial condition and results of
operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This standard requires companies to expense the costs of
start-up activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The Company has
expensed the cost of start up activities in the accompanying financial
statements as incurred.
NOTE 3 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, AUGUST 1,
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
PREPAID AND OTHER ASSETS:
Rebate receivable............................... $ 200 $ 974 $ 280
Prepaid rental fees............................. -- 329 1,003
Other........................................... 24 308 27
------ ------- -------
$ 224 $ 1,611 $ 1,310
====== ======= =======
FIXED ASSETS:
Computer and other equipment.................... $ 209 $ 831 $ 2,202
Simulation equipment............................ 1,786 5,341 5,361
Software........................................ 18 115 247
Furniture and fixtures.......................... 41 530 566
Leasehold improvements.......................... 510 4,782 4,634
------ ------- -------
2,564 11,599 13,010
Less accumulated depreciation and
amortization................................. (277) (1,277) (2,122)
------ ------- -------
$2,287 $10,322 $10,888
====== ======= =======
ACCRUED LIABILITIES
Sales taxes..................................... $ 31 $ 234 $ 171
Payroll and related expenses.................... 97 236 240
Deferred revenue................................ 144 335 238
License fees.................................... 25 151 256
Professional services........................... 18 445 777
Other........................................... 34 339 41
------ ------- -------
$ 349 $ 1,740 $ 1,723
====== ======= =======
</TABLE>
F-12
<PAGE> 81
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- NOTES PAYABLE, LONG TERM DEBT AND RELATED PARTY TRANSACTIONS:
Notes payable and long-term debt activity is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, AUGUST 1,
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
NOTES PAYABLE:
Beginning balance..................................... $ -- $ -- $ 1,111
Notes............................................... 5,115 1,100 4,890
Accrued interest.................................... 143 11 66
Payments made....................................... -- -- (2,229)
Notes and accrued interest converted to Series C
mandatorily redeemable convertible preferred
stock............................................ (5,258) -- (6)
------- ------ -------
$ -- $1,111 $ 3,832
======= ====== =======
</TABLE>
At January 31, 1999, the Company's balance of $1,111 is due on demand to a
founder and certain investors. The founder note of $100 bears interest at 8%.
The investor notes of $1,000 bear interest at 12% per annum. At August 1, 1999,
the Company's balance of $3,832 is due on demand to certain investors. The notes
bear interest at rates of between 6% to 13%, payable semi-annually.
During fiscal 1997, notes totaling $5,115 together with $143 of accrued
interest were converted into Series C mandatorily redeemable convertible
preferred stock at the rate of one share for each $6.00 of debt. Accordingly,
876 shares of Series C mandatorily redeemable convertible preferred stock were
issued.
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, AUGUST 1,
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LONG-TERM DEBT:
Notes............................................... $ -- $ -- $ 5,000
Accrued interest.................................... -- -- 54
------- ------ -------
$ -- $ -- $ 5,054
======= ====== =======
</TABLE>
In June 1999, the Company issued convertible notes to certain investors in
the principal amount of $5,650. The notes bear interest at 8 1/2% per annum and
become due on June 30, 2002. The Company received $5,000 proceeds from these
issuances and will amortize the discount, $650, as additional interest using the
effective interest method over the term of the notes.
The notes are convertible, at the option of the holder, into shares of
common stock at the rate of one share of common stock for each $15 of principal
amount subject to certain adjustments as provided for in the agreements, should
the notes be converted prior to June 30, 2000.
RELATED PARTY TRANSACTIONS:
The Company utilizes management services provided by a related company,
which is owned by a founder of Silicon Entertainment. The Company paid fees to
this company of $91, $125, $203, $90 and $137 during fiscal 1997, 1998, 1999 and
the twenty six week period ended August 2, 1998 (unaudited) and the twenty six
week period ended August 1, 1999 (unaudited), respectively.
F-13
<PAGE> 82
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- COMMITMENTS :
OPERATING LEASES
The Company leases its facilities and retail locations under noncancelable
operating leases expiring from 2002 to 2010. Total rent expense for the years
ended February 2, 1997, February 1, 1998, January 31, 1999 was $124, $394 and
$1,732, respectively. Future minimum lease payments under noncancelable
operating leases, including lease commitments entered into subsequent to January
31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
FISCAL YEAR END
1999........................................................ $ 2,024
2000........................................................ 2,779
2001........................................................ 2,975
2002........................................................ 2,954
2003........................................................ 1,975
Thereafter.................................................. 3,511
-------
$16,218
=======
</TABLE>
CAPITAL LEASES
The Company has certain furniture, equipment and software under capital
leases expiring in December 1999 through August 2002. An analysis of leased
assets under capital leases is as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, AUGUST 1,
1998 1999 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers................................. $ 35 $ 35 $ 65
Simulation equipment...................... 903 1,919 3,621
Software.................................. 1 1 1
Furniture and fixtures.................... 35 35 35
Leasehold improvements.................... -- -- 84
---- ------ ------
974 1,990 3,806
Less accumulated depreciation and
amortization............................ (81) (406) (760)
---- ------ ------
$893 $1,584 $3,046
==== ====== ======
</TABLE>
Future minimum lease payments as of January 31, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
FISCAL YEAR END
1999........................................................ $1,287
2000........................................................ 1,088
2001........................................................ 960
2002........................................................ 324
------
3,659
Less amount representing interest........................... (579)
------
3,080
Less current portion........................................ (992)
------
$2,088
======
</TABLE>
F-14
<PAGE> 83
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On June 30, 1999 (unaudited) the Company entered into a new capital lease
agreement for equipment purchases. The lease term is 36 months and future
minimum lease payments under this agreement are $110, $188, $188 and $151, in
fiscal 1999, 2000, 2001 and 2002 respectively.
LICENSING AGREEMENTS
The Company has various licensing agreements with NASCAR, NASCAR drivers,
team owners and race track owners.
The Company has entered into a licensing agreement with NASCAR under which
NASCAR receives guaranteed minimum royalties and royalties based on the sale of
tickets for the Company's race car simulators and merchandise. Under this
agreement, the Company has the right to use the NASCAR marks and trade dress
solely for display in, and promotion of, its racing centers, all subject to
certain limitations on the use of the marks and NASCAR's prior approval of such
uses. The Company's license agreement with NASCAR for the use of its image and
trademarks extends to December 31, 2005 and is exclusive for a designated
category until December 31, 2002, at which time NASCAR has the sole option to
renew the exclusive portion of the agreement. The exclusive category of the
NASCAR license is "operator assisted location-based interactive stockcar or
stock-truck entertainment experiences that consist of no less than five linked
simulator units, with each on a motion-based platform and each allowing a
maximum of two people to participate in each individual simulator unit."
Additionally, under the license each location must be permanent in nature and in
a retail environment. In addition, NASCAR has the right to terminate the
agreement upon the occurrence of certain events.
The Company's licensing relationships with NASCAR drivers generally provide
for the NASCAR drivers to give feedback on the Company's race car simulators and
allow the Company to use the names, voices and likenesses of the NASCAR drivers
for the promotion of its business. All of the agreements also provide that the
NASCAR drivers will make personal appearances and act as spokespeople for the
NASCAR Silicon Motor Speedway experience. The Company uses these NASCAR driver
appearances to promote its racing centers as well as to enhance the racing
experience for the customer. The agreements generally provide that the NASCAR
drivers are compensated by guaranteed fees and the granting of stock options as
consideration for their personal appearances and use of their likenesses. The
agreements typically expire four years after execution and may be terminated by
either party if the other party commits an illegal or immoral act. In addition,
the Company generally has the right to terminate an agreement if the driver
stops racing.
The Company's licensing relationships with the team owners allow the
Company to use the designs and accompanying trademarks of team cars either as
actual simulators, as images on the video screen or simply as computer-generated
cars on the video screen. The agreements generally set forth a schedule of fee
payments and expire three years after execution. They also typically allow the
Company to terminate an agreement if a particular race car is no longer racing.
Some of these agreements are expected to terminate May 31, 2000, unless extended
by mutual agreement.
The Company also has agreements with race track owners that allow the
Company to replicate race tracks. These agreements typically expire three years
after execution and allow the Company to terminate the agreement if the track is
no longer used for certain types of races.
F-15
<PAGE> 84
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum commitments under these agreements as of January 31, 1999
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR END
--------------------
1999 2000 2001
---- ---- ----
<S> <C> <C> <C>
NASCAR...................................................... $500 $800 $650
Physical cars............................................... 94 4 --
On-screen cars.............................................. 14 -- --
Tracks...................................................... 27 27 27
Consultants................................................. 46 -- --
---- ---- ----
Total............................................. $681 $831 $677
==== ==== ====
</TABLE>
NOTE 6 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A, Series B and Series C mandatorily redeemable convertible
preferred stock were issued following the conversion of notes payable as part of
private placement offerings at $0.60 per share, $1.50 per share and $6.00 per
share, respectively.
The rights, preferences and privileges of the preferred stockholders are as
follows (numbers in thousands):
<TABLE>
<CAPTION>
AUTHORIZED ISSUED AND OUTSTANDING PROCEEDS, NET
--------------------------------------- ---------------------------------------- -----------
FEBRUARY 1, JANUARY 31, AUGUST 1, FEBRUARY 1, JANUARY 31, AUGUST 1, FEBRUARY 1,
1998 1999 1999 1998 1999 1999 1998
----------- ----------- ----------- ----------- ----------- ------------ -----------
STOCK (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Series A............. 1,634 1,634 1,634 1,634 1,634 1,634 $ 973
Series B............. 3,111 3,111 3,111 2,769 2,769 2,769 4,112
Series C............. 2,500 4,250 4,250 876 3,078 3,485 5,246
Undesignated......... 2,755 1,005 1,005 -- -- -- --
------ ------ ------ ------ ------ ------ -------
Total preferred...... 10,000 10,000 10,000 5,279 7,481 7,888 $10,331
====== ====== ====== ====== ====== ====== =======
<CAPTION>
PROCEEDS, NET
--------------------------
JANUARY 31, AUGUST 1,
1999 1999
----------- ------------
STOCK (UNAUDITED)
<S> <C> <C>
Series A............. $ 973 $ 973
Series B............. 4,112 4,112
Series C............. 18,168 20,608
Undesignated......... -- --
------- -------
Total preferred...... $23,253 $25,693
======= =======
</TABLE>
REDEMPTIONS
At any time on or after January 31, 2001, upon request of the holders of
the majority of the then outstanding shares of Series A, Series B, or Series C
Preferred Stock, the holders may require the Company to redeem for cash up to
one-third of the number of such shares outstanding of record on that date (the
Redemption Request). Redemptions of each share shall be made at the original
price plus an amount equal to the amount of all declared or accrued but unpaid
dividends as of that date. A further one-third and one-third of the number of
such shares outstanding shall be redeemed for cash on the first and second
anniversaries of the Redemption Request upon the request of the holders of the
majority of the then outstanding shares of Series A, Series B, or Series C
Preferred Stock.
DIVIDENDS
The holders of Series A, Series B and Series C mandatorily redeemable
convertible preferred stock, in preference to the holders of any common stock of
the Company, shall be entitled to receive, when and as declared by the Board of
Directors, non-cumulative dividends in cash on a pari passu basis at the rate
per annum of $0.06 per share of Series A Preferred Stock and $0.15 per share of
Series B preferred stock, and $0.60 per share of Series C Preferred Stock,
respectively, as adjusted for any consolidations, combinations, stock
distributions, stock splits or similar events. Dividends may be declared and
paid for common stock in any fiscal year of the Company only if dividends on the
preferred stock have been paid or set aside.
F-16
<PAGE> 85
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
VOTING
Each share of preferred stock is entitled to vote on an "as converted"
basis along with common stockholders.
CONVERSION RIGHTS
Shares of Series A, Series B and Series C mandatorily redeemable
convertible preferred stock are convertible into fully paid and non-assessable
shares of common stock at the option of the holder or automatically upon a
public offering of the Company's securities with aggregate proceeds to the
Company of at least $10,000,000 and an offering price per share equal to or
greater than $6.00. The conversion rate is one share of common stock for one
share of preferred stock (subject to certain anti-dilution adjustments).
LIQUIDATION RIGHTS
Upon liquidation, dissolution, or winding up of the Company, before any
distribution or payment is made to the holders of common stock, the holders of
Series A, Series B and Series C mandatorily redeemable convertible preferred
stock are entitled to a liquidation preference to common stockholders of $0.60,
$1.5 and $6.00, per share, respectively, plus all declared and unpaid dividends
thereon to the date fixed for such distribution. After setting apart or paying
in full the preferential amount due the holders of preferred stock, the
remaining assets of the Company shall be distributed ratably to the holders of
common stock.
NOTE 7 -- STOCKHOLDERS' EQUITY:
COMMON STOCK
At August 1, 1999, the Company has issued and outstanding 2,815 shares of
its common stock to the founders and key employees of the Company and to
investors under stock purchase agreements. Each share of common stock has the
right to one vote. The holders of common stock are also entitled to receive
dividends whenever funds are legally available and when declared by the Board of
Directors, subject to the prior rights of holders of all classes of stock at the
time outstanding who have prior rights as to dividends.
WARRANTS
During fiscal 1995, 1996, and 1998, in conjunction with notes payable, the
Company issued warrants to purchase 40, 206, and 10 shares of common stock at an
exercise price of $1.50 per share and 10 shares of common stock at an exercise
price of $6.00 per share. During the twenty-six week period ended August 1,
1999, in conjunction with notes payable, the Company issued warrants to purchase
121 shares of common stock at an exercise price of $6.00 per share. The fair
value of the warrants of $1,060 was estimated using the Black-Scholes model and
the following assumptions: divided yield of 0%, volatility of 60%, risk-free
interest rate of 6% and a five year life. The estimated value of the warrants
has been recorded as interest expense.
During 1997, in conjunction with notes payable, the Company issued warrants
to purchase 232 shares of Series C Preferred Stock at an exercise price of $6.00
per share. The fair value of the warrants of $1,433 was estimated using the
Black-Scholes model and the following assumptions: dividend yield of 0%,
volatility of 60%, risk-free interest rate of 6% and a five year life. The
estimated value of the warrants has been recorded as additional consideration
for the notes payable and recorded as a discount on the debt.
During fiscal 1996, 1998 and the twenty-six week period ended August 1,
1999, the Company entered into various equipment line of credit agreements. In
conjunction with these line of credit agreements, the
F-17
<PAGE> 86
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company issued warrants to the institution to purchase 64 shares of Series B
preferred stock at an exercise price of $1.50 per share and 36 shares of Series
C Preferred Stock at an exercise price of $6.00 per share. The estimated fair
value of these warrants is being accreted as interest expense to be amortized
over the term of the lease agreements.
During 1997 and 1998, warrants to purchase 140 shares as Series C Preferred
Stock at an exercise price of $6.00 per share were issued to certain strategic
investors. The estimated fair value of these warrants is being accreted as
marketing and licensing expense over the period of the relationship.
All warrants remain outstanding at August 1, 1999. All warrants have an
exercise period of three to ten years from the date of issuance. Certain
warrants terminate upon the completion of an initial public offering.
STOCK OPTION PLAN
In October 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") for the issuance of stock options to employees, directors, or consultants
under terms and provisions established by the Board of Directors. The 1996 Plan
expires in 2006. Under the 1996 Plan, the Company is authorized to issue up to
1.8 million shares of Common Stock.
In July 1997, the Company adopted the 1997 Non Statutory Stock Option Plan
(the "1997 Plan"). The 1997 Plan provides for the issuance of non qualified
stock options to Company employees and consultants. The Company has reserved
approximately 625,000 shares of common stock for issuance under the Plan.
In June 1998, the Company adopted the 1998 Executive Stock Option Plan (the
"1998 Plan") and reserved 350,000 shares of common stock for issuance under the
Plan. The 1998 Plan provides for the issuance of shares to executives of the
Company.
In July 1998, the Company adopted the Stock Bonus Plan and reserved 15,000
shares of common stock for issuance under the plan.
Options to purchase the Company's common stock may be granted at a price
not less than 85% of fair market value in the case of nonstatutory stock
options, and at fair market value in the case of incentive stock options. Fair
market value is determined by the Board of Directors. Options become exercisable
as determined by the Board of Directors but generally at a rate of 25% after the
first year and 1/48 per month thereafter. Options expire as determined by the
Board of Directors but not more than ten years after the date of grant.
F-18
<PAGE> 87
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Activity under the Company's stock option plan is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
WEIGHTED
AVAILABLE AVERAGE
FOR PRICE PER EXERCISE
GRANT SHARES SHARE AMOUNT PRICE
--------- ------ ---------- ------ --------
<S> <C> <C> <C> <C> <C>
Shares reserved......................... 487 -- $ -- -- $0.15
Options granted......................... (154) 154 0.15 23 0.15
------ ----- ---------- ------ -----
Balance, February 2, 1997............... 333 154 0.15 23 0.15
Additional shares reserved.............. 1,235 -- -- -- 0.15
Options granted......................... (1,055) 1,055 0.15 158 0.15
Options canceled........................ 9 (9) 0.15 (1) 0.15
Options exercised....................... (115) 0.15 (17) 0.15
------ ----- ---------- ------ -----
Balance, February 1, 1998............... 522 1,085 0.15 163 0.15
Additional shares reserved.............. 375 -- -- -- 0.15
Options granted......................... (929) 929 0.15-1.00 678 0.73
Options canceled........................ 342 (342) 0.15-1.00 (97) 0.28
Options exercised....................... -- (466) 0.15-0.70 (75) 0.16
------ ----- ---------- ------ -----
Balance, January 31, 1999............... 310 1,206 0.15-1.00 669 0.55
Additional shares reserved.............. 952 -- -- -- --
Options granted (unaudited)............. (449) 449 1.00-6.00 1,752 3.90
Options canceled (unaudited)............ 53 (53) 0.15-1.00 (39) 0.73
Options exercised (unaudited)........... -- (497) 0.15-1.00 (314) 0.63
------ ----- ---------- ------ -----
Balance, August 1, 1999................. 866 1,105 $0.15-6.00 $2,068 $1.87
====== ===== ========== ====== =====
</TABLE>
The following table summaries information with respect to stock options
outstanding at January 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
- -----------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE
PRICE OUTSTANDING LIFE IN YEARS PRICE
- ------------ ----------- ------------- --------
<S> <C> <C> <C>
$ 0.15 457 8.50 $0.15
0.50 54 9.25 0.50
0.70 408 9.33 0.70
1.00 287 9.54 1.00
-----
$0.15 - 1.00 1,206 $0.55
=====
</TABLE>
F-19
<PAGE> 88
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information with respect to stock options
outstanding at August 1, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
- -----------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE
PRICE OUTSTANDING LIFE IN YEARS PRICE
- ------------ ----------- ------------- --------
<S> <C> <C> <C>
$ 0.15 284 7.92 $0.15
0.50 29 8.75 0.50
0.70 282 8.83 0.70
1.00 250 9.42 1.00
6.00 260 9.87 6.00
-----
$0.15 - 6.00 1,105 $1.87
=====
</TABLE>
DEFERRED STOCK COMPENSATION
During fiscal year end 1997, 1998 and the twenty-six week period ended
August 1, 1999, the Company issued options to certain employees under the Plan
with exercise prices below the deemed fair market value for financial reporting
purposes of the Company's common stock at the date of grant. In accordance with
the requirements of APB 25, the Company has recorded deferred compensation for
the difference between the exercise price of the stock options and such deemed
fair market value at the date of grant. This deferred compensation is amortized
to expense over the period during which the Company's right to repurchase the
stock lapses or the options become exercisable, generally four years.
In connection with the grant of options for the purchase of 2,587 shares of
Common Stock to employees during the period from October 1996 through August 1,
1999, the Company recorded aggregate deferred compensation expense of
approximately $98 in fiscal 1997, $1,548 in fiscal 1998 and $804 in the
twenty-six week period ended August 1, 1999. Such deferred compensation will be
amortized over the forty-eight month vesting period relating to these options,
of which approximately $22, $589 and $897 has been amortized during the fiscal
years ending 1997 and 1998 and the twenty-six week period ended August 1, 1999,
respectively, and is included in the statement of operations within the caption
"operating expenses."
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Had compensation cost been determined based on
the fair value at the grant date for awards in fiscal year end 1996, 1997 and
1998 consistent with the provisions of SFAS No. 123, the Company's net loss for
fiscal year end 1996, 1997 and 1998 would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss attributable to common
stockholders -- as reported............... $(2,642) (5,200) (11,543)
Net loss attributable to common
stockholders -- pro forma................. $(2,643) (5,225) (11,634)
Net loss per share as reported.............. $ (1.65) (3.67) (5.85)
Net loss per share -- pro forma............. $ (1.65) (3.69) (5.90)
</TABLE>
F-20
<PAGE> 89
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Such pro forma disclosure may not be representative of future compensation
cost because options vest over several years and additional grants are made each
year.
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following weighted-average assumptions
used for grants in fiscal 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Expected average life of option................... 5 years 5 years 5 years
Risk-free interest rate........................... 6.25% 6.27% 5.38%
Expected dividends................................ -- -- --
Expected volatility............................... 60% 60% 60%
</TABLE>
The weighted average per share value of common stock options granted during
fiscal 1996, 1997 and 1998 were $0.00, $0.02 and $0.45, respectively.
NOTE 8 -- INCOME TAXES:
The tax effect of temporary differences that give rise to significant
components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Research and development.................... $ 579 $ 998 $ 1,571
Net operating loss carryforward............. 875 2,392 5,800
Research and development credit
carryforward.............................. 100 268 457
Other....................................... -- (7) (32)
------- ------- --------
Total............................. 1,554 3,651 7,796
Less: Valuation allowance................... (1,554) (3,651) (7,796)
------- ------- --------
Net deferred tax asset...................... $ -- $ -- $ --
======= ======= ========
</TABLE>
As of January 31, 1999, the Company had approximately $15,550 and $10,243
for federal and state net operating loss carryforwards, respectively, available
to offset future regular and alternative minimum taxable income. As of January
31, 1999, the Company had approximately $273 and $184 of federal and state
research and development tax credits available to offset future U.S. federal and
state income taxes. The Company's federal and state net operating loss and
research and development carryforwards expire between January 1, 2003 and
January 31, 2019, if not used before such time to offset future taxable income
or tax liabilities. For federal and state income tax purposes, a portion of the
Company's net operating loss and research and development credit carryforwards
is subject to certain limitations on annual utilization as a result of a change
in ownership, as defined by federal and state tax laws.
Management believes that, based on a number of factors, it is more likely
than not that the deferred tax assets will not be utilized, such that a full
valuation allowance has been recorded. The valuation allowance increased by
$1,004, $2,097 and $4,145 in fiscal 1996, 1997 and 1998, respectively.
F-21
<PAGE> 90
SILICON ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate........... (34)% (34)% (34)%
Net operating loss not benefited............ 34% 34% 34%
---- ---- ----
Net deferred tax asset...................... $ --% $ --% --%
==== ==== ====
</TABLE>
NOTE 9 -- SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION:
The Company has adopted the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 131, or SFAS 131, "Disclosure
about Segments of an Enterprise and Related Information," effective for fiscal
years beginning after December 31, 1997.
The Company has one reportable segment. Management uses one measurement of
profitability for its business. The Company markets its products and related
services to customers in the United States.
No customer individually accounted for more than 10% of revenue in fiscal
1996, 1997 or 1998 or the twenty-six week periods ended August 2, 1998 and
August 1, 1999.
NOTE 10 -- PROFIT SHARING PLAN:
The Company sponsors a 401(k) Profit Sharing Plan covering all of its
full-time employees who have completed 60 days of services. Under this plan,
participating employees may defer up to 20% of their cash pre-tax earnings,
subject to certain limitations. The Company may elect to make contributions to
the plan at the discretion of the Board of Directors. No contributions have been
made by the Company as of August 1, 1999.
NOTE 11 -- SUBSEQUENT EVENTS:
INITIAL PUBLIC OFFERING REGISTRATION
On August 24, 1999, the board of directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission covering the proposed sale of its common stock to the public Upon
completion of the sale, all outstanding shares of mandatorily redeemable
convertible preferred stock will automatically convert into common stock.
REINCORPORATION
On August 24, 1999, the board of directors authorized the reincorporation
of the Company in the state of Delaware subject to shareholder approval.
RECAPITALIZATION
On August 24, 1999, the board of directors authorized a one-for-two reverse
split of the outstanding shares of mandatorily redeemable convertible preferred
stock and common stock. All share data is restated to reflect the stock split.
CONVERTIBLE DEBT
In September 1999, the Company issued convertible notes to certain
investors in the principal amount of $5.5 million. The notes bear interest at
12% per annum and are due in March 2001. The notes are convertible, at the
option of the holder, into shares of common stock at the rate of one share of
common stock for each $10 of principal amount. The notes may be repaid at the
Company's option after 90 days. Concurrent with the issuance of these notes, the
Company issued warrants to the holders to purchase an aggregate of 68,750 shares
of common stock at an exercise price of $10.80 per share. The warrants terminate
five years after the date the Company issued the notes.
F-22
<PAGE> 91
INSIDE FRONT COVER OF PROSPECTUS:
Graphic depicts the NASCAR Silicon Motor Speedway logo in the shape of a rotated
oval with the tagline "Racing so real you can feel it" situated along the base
of the oval.
INSIDE GATEFOLD:
Graphic is a rectangle depicting the inside of one of Silicon Entertainment's
racing centers.
The top left hand corner of the graphic depicts the "NASCAR Silicon Motor
Speedway" logo in the shape of a rotated oval, with the slogan "Racing so real
you can feel it" situated along the base of the oval.
Centered at the top of the graphic is the following caption: "NASCAR Silicon
Motor Speedway" with the caption "We're putting fans in the driver's seat" just
beneath it.
Two smaller graphics are overlayed on top of the larger rectangular graphic. The
first is located just beneath the NASCAR Silicon Motor Speedway logo and is a
square-shaped graphic with a caption entitled "www.SMSonline.com." This graphic
depicts an online view of a frame of Silicon Entertainment's Web site. The
second small graphic is a rectangle situated along the bottom of the larger
graphic which contains two smaller pictures of the outside of one of Silicon
Entertainment's racing centers and an outside view of a customer racing a race
car simulator. This graphic has a caption entitled "Palisades Center West Nyack,
NY."
INSIDE BACK COVER OF PROSPECTUS:
The graphic depicts a view of two customers racing from inside a race car
simulator.
The top of the graphic bears a long horizontal oval inside which is the caption
"NASCAR Silicon Motor Speedway Team of Drivers." Just under this caption is a
rectangular picture of nine uniformed NASCAR drivers.
One smaller graphic is located in the bottom left and is overlayed on top of the
larger graphic. This graphic has a caption entitled "Racing Gear" and depicts
two customers perusing the merchandise at a racing center.
<PAGE> 92
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
LOGO
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
SG COWEN
CIBC WORLD MARKETS
J.C. BRADFORD & CO.
E*OFFERING
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the common stock being registered. All amounts shown are estimates except for
the registration fee, the NASD filing fee and the Nasdaq National Market fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 12,788
NASD filing fee............................................. 5,100
Nasdaq National Market fee..................................
Blue sky qualification fees and expenses....................
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 200,000
Transfer agent and registrar fees...........................
Miscellaneous...............................................
----------
Total............................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware Law permits indemnification of officers,
directors and other corporate agents under certain circumstances and subject to
certain limitations. The Registrant's Certificate of Incorporation and By-laws
provide that the Registrant shall indemnify its directors, officers, employees
and agents to the full extent permitted by the Delaware Law, including
circumstances in which indemnification is otherwise discretionary under Delaware
law. In addition, the Registrant has entered into separate indemnification
agreements with its directors and executive officers which require the
Registrant, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from acts or omissions not in good faith or willful misconduct).
These indemnification provisions and the indemnification agreements entered
into between the Registrant and its executive officers and directors may be
sufficiently broad to permit indemnification of the Registrant's executive
officers and directors for liabilities (including reimbursement of expenses
incurred) arising under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1996, we sold and issued the following unregistered
securities:
1. From inception through August 1, 1999, we granted stock options to
purchase an aggregate of 2,588,141 shares of our common stock at an average
weighted exercise price of approximately $1.90 per share to employees,
consultants, directors and other service providers pursuant to our 1996
Stock Option Plan, 1997 Nonstatutory Stock Option Plan, and 1998 Executive
Stock Option Plan.
2. From inception through August 1, 1999, we issued and sold an
aggregate of 1,078,368 shares of our common stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $2,050,085 pursuant to exercise of options
granted under our 1996 Stock Option Plan, 1997 Nonstatutory Stock Option
Plan, and 1998 Executive Stock Option Plan. Of the $2,050,085
consideration, $382,000 was received in the form of promissory notes and
$1,558 was received in the form of prior services rendered.
II-1
<PAGE> 94
3. From January 5, 1996 through May 16, 1996, in connection with the
issuance of promissory notes, we issued warrants to certain of our existing
private investors to purchase an aggregate of 106,667 shares of our common
stock at an exercise price of $1.50 per share.
4. On February 7, 1996, we sold 1,633,334 shares of Series A Preferred
Stock for $0.60 per share to a private investor for an aggregate purchase
price of $980,000.10.
5. On October 15, 1996, in connection with an equipment lease line, we
issued a warrant to Phoenix Leasing Incorporated to purchase 26,667 shares
of our Series B Preferred Stock at an exercise price of $1.50 per share.
6. From May 16, 1996 through May 12, 1997, we issued and sold an
aggregate of 2,769,016 shares of Series B Preferred Stock for $1.50 per
share to a group of private investors for an approximate aggregate purchase
price of $4,153,524.
7. From March 27, 1997 through November 19, 1997, we issued warrants
to certain of our existing private investors to purchase an aggregate of
232,584 shares of our Series C Preferred Stock at an exercise price of
$6.00 per share.
8. On August 14, 1997, in connection with a strategic partnership and
license transaction, we issued a warrant to one of our strategic partners
to purchase 50,000 shares of our Series C Preferred Stock at an exercise
price of $6.00 per share.
9. On August 18, 1997, in connection with a strategic partnership and
licensing agreement, we issued an option to one of our strategic partners
to purchase 20,000 shares of our common stock at $0.15 per share.
10. From December 1997 through July 1999, we issued and sold an
aggregate of 3,485,446 shares of Series C Preferred Stock for $6.00 per
share to a group of private investors for an aggregate purchase price of
$20,912,676. SG Cowen Securities Corporation acted as a broker in this
transaction.
11. On April 23, 1998, in connection with a strategic partnership
transaction, we issued a warrant to John Force to purchase 7,500 shares of
our Series C Preferred Stock at an exercise price of $6.00 per share.
12. On May 17, 1998, in connection with a strategic partnership
transaction, we issued a warrant to Simon Investors to purchase 25,000
shares of our Series C Preferred Stock at an exercise price of $6.00 per
share.
13. On July 1, 1998, in connection with a strategic partnership
transaction, we issued a warrant to Action Performance Companies to
purchase 20,000 shares of our Series C Preferred Stock at an exercise price
of $6.00 per share.
14. On July 1, 1998, in connection with an equipment lease line, we
issued a warrant to Phoenix Growth Capital Corporation to purchase 13,334
shares of our Series C Preferred Stock at an exercise price of $6.00 per
share.
15. From February 2, 1999 through June 18, 1999, we granted 2,413
shares of our common stock to our employees pursuant to our 1999 Employee
Stock Bonus Plan. Of these shares, 1,525 shares have been exercised.
16. From January 22, 1999 through July 1, 1999, we issued warrants to
certain of our existing private investors to purchase an aggregate of
131,000 shares of our common stock at an exercise price of $6.00 per share.
17. On June 17, 1999, we issued a warrant to LINC to purchase 3,224
shares of our Series C Preferred Stock in connection with a capital
equipment lease agreement.
II-2
<PAGE> 95
18. On July 1, 1999, we issued a warrant to Pentech Financial
Services, Inc. to purchase 20,000 shares of our Series C Preferred Stock at
$6.00 per share in connection with a capital equipment lease agreement.
19. On June 30, 1999, we issued a secured subordinated convertible
note to each of Galladio Holding B.V., Wagenaarkwartier's-Gravenhage B.V.
and Van der Lee Partnership in the principal amount of $2,260,000,
$2,260,000 and $1,130,000, respectively.
20. On February 2, 1999, we issued an option to purchase 100,000
shares of our common stock at $1.00 per share to one of our strategic
partners in connection with a strategic partnership and license agreement.
21. On April 23, 1998, August 11, 1998 and June 17, 1999, we issued
1,817, 3,421 and 4,420 shares, respectively, of our common stock at $0.50,
$1.00 and $6.00 per share, respectively, to Michael DiLorenzo in connection
with consultant stock purchase agreements.
22. On June 17, 1999, we issued 4,000 and 1,000 shares of our common
stock at $6.00 per share to Nagle & Ferri, L.L.C. and Michael Nichols,
respectively, in connection with a consultant stock purchase agreement.
23. On February 2, 1999 and April 7, 1999, we issued an aggregate of
3,393 shares of our common stock at $1.00 per share to Madeline Canepa in
connection with a consultant common stock purchase agreement.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances described in Items 15.3 through 15.14 and 15.16 through 15.23
were deemed to be exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act as transactions by an issuer not involving
a public offering. In addition, the issuances described in Item 15.1, 15.2 and
15.15 were deemed exempt from registration under the Securities Act in reliance
on Rule 701 promulgated thereunder as transactions pursuant to compensatory
benefit plans and contracts relating to compensation. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Restated Certificate of Incorporation of the Registrant.
*3.2 Amended and Restated Bylaws of the Registrant.
4.1 Third Amended and Restated Rights Agreement, dated as of
December 31, 1998, as amended to date.
*4.2 Specimen Common Stock Certificate.
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
*10.1 Form of Indemnification Agreement for directors and
executive officers.
10.2 1996 Stock Option Plan and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement
thereunder.
10.3 1997 Nonstatutory Stock Option Plan and form of Nonstatutory
Stock Option Agreement thereunder.
10.4 1998 Executive Stock Option Plan and forms of Incentive
Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder.
</TABLE>
II-3
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.5 Stock Bonus Plan and form of Stock Bonus Agreement
thereunder.
*10.6 1999 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.7+ License Agreement by and between National Association for
Stock Car Auto Racing, Inc. and the Registrant, dated August
18, 1997, as amended.
*10.8+ The Registrant and Action Performance Companies, Inc.
Terms -- Strategic Partnership, dated April 20, 1998.
*10.9+ Letter Agreement with Simon Investors, LLC, dated May 17,
1998.
*10.10+ Industrial Complex Lease (California) between MP Hacienda,
Inc. and the Registrant, dated as of April 30, 1998.
*10.11+ Dallas Galleria Lease between Dallas Galleria Limited as
"Landlord" and the Registrant, as "Tenant" d/b/a/ Nascar
Silicon Motor Speedway, dated as of May 22, 1998, as
amended.
*10.12+ Lease by and between Mall of America Company, a Minnesota
General Partnership, and the Registrant, dated as of August
12, 1997.
*10.13+ Irvine Retail Properties Company Retail Space Lease, dated
as of April 22, 1998.
*10.14+ The Palisades Center Shopping Center Lease, dated as of July
27, 1998.
*10.15+ Lease, the Registrant, Tenant, "NASCAR Silicon Motor
Speedway," Trade Name, Woodfield Mall, dated as of December
18, 1997.
*10.16+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway
and/or Silicon Motor Speedway, Trade Name, Concord Mills,
dated as of June 30, 1999.
*10.17+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway
and/or Silicon Motor Speedway, Trade Name, Katy Mills, dated
as of March 17, 1999.
*10.18+ Universal Studios CityWalk Hollywood Lease between Universal
Studios CityWalk Hollywood, a division of Universal Studios,
Inc. as Landlord and the Registrant, executed as of July 20,
1999.
*10.19+ Standard Shopping Center Lease, dated as of August 12, 1999
(Walden Galleria, Buffalo, New York).
*10.20+ Standard Shopping Center Lease, dated as of August 12, 1999
(Crossgates Mall, Albany, New York).
*10.21+ Retail Lease Agreement between Peabody Place Centre, L.P., a
Tennessee limited partnership and Silicon Entertainment,
Inc., a California corporation, dated as of May 24, 1999.
*10.22+ Standard Shopping Center letter, dated as of August 18, 1999
(Carousel Center, Syracuse, New York).
*10.23+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway
and/or Silicon Motor Speedway, Trade Name, Opry Mills, dated
as of August 23, 1999.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants.
*23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
*24.1 Power of Attorney (see page II-6).
*27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
+ Confidential treatment will be requested for portions of this exhibit.
(b) FINANCIAL STATEMENT SCHEDULES.
No schedules have been filed because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 97
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, employee or agent of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, employee or agent in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(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-5
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Campbell, County of Santa Clara, State of California, on the 13th day of
September, 1999.
SILICON ENTERTAINMENT, INC.
By: /s/ DAVID S. MORSE
------------------------------------
David S. Morse
Chairman of the Board,
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below hereby constitutes and appoints David S. Morse and Ross C. Mulholland and
each of them, their true and lawful attorneys and agents, with full power of
substitution, each with power to act alone, to sign and execute on behalf of the
undersigned any amendment or amendments to this Registration Statement on Form
S-1 and to perform any acts necessary in order to file such amendments and each
of the undersigned does hereby ratify and confirm all that said attorneys and
agents, or their or his substitutes, shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID S. MORSE Chairman of the Board, Chief September 13,
- --------------------------------------------- Executive Officer and President 1999
David S. Morse
/s/ ROSS C. MULHOLLAND Vice President Finance and Chief September 13,
- --------------------------------------------- Financial Officer 1999
Ross C. Mulholland
/s/ WILLIAM HART Director September 13,
- --------------------------------------------- 1999
William Hart
/s/ ROBERT H. MANSCHOT Director September 13,
- --------------------------------------------- 1999
Robert H. Manschot
/s/ CHRISTOPHER S. BESING Director September 13,
- --------------------------------------------- 1999
Christopher S. Besing
/s/ ROBERT V. CHEADLE Director September 13,
- --------------------------------------------- 1999
Robert V. Cheadle
</TABLE>
II-6
<PAGE> 99
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Restated Certificate of Incorporation of the Registrant.
*3.2 Amended and Restated Bylaws of the Registrant.
4.1 Third Amended and Restated Rights Agreement, dated as of
December 31, 1998, as amended to date.
*4.2 Specimen Common Stock Certificate.
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
*10.1 Form of Indemnification Agreement for directors and
executive officers.
10.2 1996 Stock Option Plan and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement
thereunder.
10.3 1997 Nonstatutory Stock Option Plan and form of Nonstatutory
Stock Option Agreement thereunder.
10.4 1998 Executive Stock Option Plan and forms of Incentive
Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder.
10.5 Stock Bonus Plan and form of Stock Bonus Agreement
thereunder.
*10.6 1999 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.7+ License Agreement by and between National Association for
Stock Car Auto Racing, Inc. and the Registrant, dated August
18, 1997, as amended.
*10.8+ The Registrant and Action Performance Companies, Inc. Terms
-- Strategic Partnership, dated April 20, 1998.
*10.9+ Letter Agreement with Simon Investors, LLC, dated May 17,
1998.
*10.10+ Industrial Complex Lease (California) between MP Hacienda,
Inc. and the Registrant, dated as of April 30, 1998.
*10.11+ Dallas Galleria Lease between Dallas Galleria Limited as
"Landlord" and the Registrant, as "Tenant" d/b/a/ Nascar
Silicon Motor Speedway, dated as of May 22, 1998, as
amended.
*10.12+ Lease by and between Mall of America Company, a Minnesota
General Partnership, and the Registrant, dated as of August
12, 1997.
*10.13+ Irvine Retail Properties Company Retail Space Lease, dated
as of April 22, 1998.
*10.14+ The Palisades Center Shopping Center Lease, dated as of July
27, 1998.
*10.15+ Lease, the Registrant, Tenant, "NASCAR Silicon Motor
Speedway," Trade Name, Woodfield Mall, dated as of December
18, 1997.
*10.16+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway
and/or Silicon Motor Speedway, Trade Name, Concord Mills,
dated as of June 30, 1999.
*10.17+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway
and/or Silicon Motor Speedway, Trade Name, Katy Mills, dated
as of March 17, 1999.
*10.18+ Universal Studios CityWalk Hollywood Lease between Universal
Studios CityWalk Hollywood, a division of Universal Studios,
Inc. as Landlord and the Registrant, executed as of July 20,
1999.
*10.19+ Standard Shopping Center Lease, dated as of August 12, 1999
(Walden Galleria, Buffalo, New York).
*10.20+ Standard Shopping Center Lease, dated as of August 12, 1999
(Crossgates Mall, Albany, New York).
*10.21+ Retail Lease Agreement between Peabody Place Centre, L.P., a
Tennessee limited partnership and Silicon Entertainment,
Inc., a California corporation, dated as of May 24, 1999.
*10.22+ Standard Shopping Center letter, dated as of August 18, 1999
(Carousel Center, Syracuse, New York).
*10.23+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway
and/or Silicon Motor Speedway, Trade Name, Opry Mills, dated
as of August 23, 1999.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants.
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
*23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
*24.1 Power of Attorney (see page II-6).
*27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
+ Confidential treatment will be requested for portions of this exhibit.
<PAGE> 1
EXHIBIT 4.1
SILICON ENTERTAINMENT, INC.
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
THIS THIRD AMENDED AND RESTATED RIGHTS AGREEMENT (the "Agreement") is
entered into as of December 31, 1998, by and among Silicon Entertainment, Inc.,
a California corporation (the "Company"), the undersigned purchasers of Series C
Preferred Stock of the Company (the "Purchasers"), the existing holders of
registration and investor rights of the Company by virtue of their being parties
to the Second Amended and Restated Rights Agreement (the "Second Amended and
Restated Rights Agreement") dated July 23, 1998 (the "Existing Holders"), and,
with respect to Section 3 below, the undersigned holders of Common Stock of the
Company (the "Common Holders").
RECITALS:
A. Concurrently herewith, the Purchasers and the Company are entering
into the Second Amended Series C Preferred Stock Purchase Agreement (the
"Amended Series C Agreement") pursuant to which the Purchasers are purchasing
from the Company shares of the Company's Series C Preferred Stock.
B. By this Agreement, the Company, the Existing Holders and the Common
Holders desire to amend and restate the Second Amended and Restated Rights
Agreement and with the Purchasers desire to set forth certain registration and
other rights of the parties as set forth below.
<PAGE> 2
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, the parties agree as follows:
1. Registration Rights.
1.1. Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
(a) The terms "register", "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
and the declaration or ordering of the effectiveness of such registration
statement.
(b) The term "Registrable Securities" means (i) any and all
shares of Common Stock of the Company issued or issuable upon conversion of the
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock issued and sold by the Company and held by the Existing Holders,
any and all shares of Common Stock of the Company issued or issuable upon
conversion of the shares of Series C Preferred Stock issued and sold by the
Company pursuant to the Amended Series C Agreement, the Series B Preferred Stock
issuable or issued upon exercise of the Warrant to Purchase Shares of Series B
Preferred Stock, dated October 15, 1996, issued to Phoenix Leasing Incorporated
and any and all Common Shares (as defined in Section 3.1(d) below); (ii) stock
issued in lieu thereof in any reorganization which have not been sold to the
public; or (iii) stock issued in respect of the stock referred to in (i) and
(ii) as a result of a stock split, stock dividend, recapitalization or the like,
which has not been sold to the public.
(c) The terms "Holder" or "Holders" means any person or persons
to whom Registrable Securities were originally issued or qualifying transferees
under subsection 1.10 hereof who hold Registrable Securities.
(d) The term "Initiating Holders" means any Holder or Holders
40% or greater of the aggregate of the Registrable Securities then outstanding.
(e) The term "SEC" means the Securities and Exchange
Commission.
(f) The term "Registration Expenses" shall mean all expenses
incurred by the Company in complying with subsections 1.2, 1.3 and 1.4 hereof,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company.)
1.2. Demand Registration.
(a) Request for Registration. In case the Company shall receive
from Initiating Holders a written request that the Company effect any
registration, qualification or
<PAGE> 3
compliance with respect to at least 40% of the aggregate number of Registrable
Securities then outstanding, or any lesser percentage if the anticipated
aggregate offering price of such registration, qualification or compliance, net
of standard underwriting discounts, would exceed $5,000,000, the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect
all such registrations, qualifications and compliances (including, without
limitation, the execution of an undertaking to file post-effective amendments,
appropriate qualifications under the applicable blue sky or other state
securities laws and appropriate compliance with exemptive regulations issued
under the Securities Act and any other governmental requirements or regulations)
as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Initiating Holder's or Initiating
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any Holder or Holders
joining in such request as are specified in a written request given within 30
days after receipt of such written notice from the Company; provided that the
Company shall not be obligated to take any action to effect such registration,
qualification or compliance pursuant to this subsection 1.2:
(A) at any time prior to the earlier of (i) 6 months
following the effective date of the registration statement under the Securities
Act for the Company's initial registered underwritten public offering (the
"IPO") of its securities to the general public (other than a registration
statement relating either to the sale of securities to employees of the Company
pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145
transaction) or (ii) February 7, 2002;
(B) in any particular jurisdiction in which the
Company would be required to execute a general qualification or compliance
unless the Company is already subject to service in such jurisdiction and except
as required by the Securities Act; or
(C) after the Company has effected two (2) such
registrations pursuant to this subsection 1.2(a) and such registrations have
been declared or ordered effective.
Subject to the foregoing clauses (A) through (C), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practical, but in any event within 90 days, after
receipt of the request or requests of the Initiating Holders; provided, however,
that if the Company shall furnish to such holders a certificate signed by the
President of the Company stating that in the good faith judgment of the Board of
Directors it would be detrimental to the Company and its shareholders for such
registration statement to be filed at the date filing would be required and it
is therefore essential to defer the filing of such registration statement, the
Company shall have an additional period of not more than 90 days after the
expiration of the initial 90-day period within which to file such registration
statement.
(b) Underwriting. If the Initiating Holders intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise
3
<PAGE> 4
the Company as part of their request made pursuant to subsection 1.2 and the
Company shall include such information in the written notice referred to in
subsection 1.2(a)(i). In such event, the underwriter shall be selected by a
majority in interest of the Initiating Holders and shall be reasonably
acceptable to the Company. The right of any Holder to registration pursuant to
subsection 1.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. The Company
shall (together with all Holders proposing to distribute their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters. Notwithstanding any other provision
of this subsection 1.2, if the underwriter advises the Initiating Holders in
writing that marketing factors require a limitation of the number of shares to
be underwritten, the Initiating Holders shall so advise all Holders, and the
number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all Holders thereof in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Holders; provided, however, that the number of shares of
Registrable Securities, other than the Common Shares, to be included in such
underwriting shall not be reduced unless all other securities, including the
Common Shares, are first entirely excluded from the underwriting. If any Holder
of Registrable Securities disapproves of the terms of the underwriting, such
Holder may elect to withdraw therefrom by written notice to the Company, the
underwriter and the Initiating Holders. Any Registrable Securities which are
excluded from the underwriting by reason of the underwriter's marketing
limitation or withdrawn from such underwriting shall be withdrawn from such
registration.
(c) Company Shares. If the managing underwriter has not limited
the number of Registrable Securities to be underwritten, the Company may include
securities for its own account or for the account of others in such registration
if the managing underwriter so agrees and if the number of Registrable
Securities which would otherwise have been included in such registration and
underwriting will not thereby be limited.
1.3. Company Registration.
(a) Registration. If at any time or from time to time, the
Company shall determine to register any of its securities, for its own account
or the account of any of its shareholders, other than a registration on Form S-8
relating solely to employee stock option or purchase plans, or a registration on
Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on
any other form (other than Form S-1, S-2, S-3 or S-18, or their successor forms)
or any successor to such forms, which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
(i) promptly give to each Holder written notice thereof and
(ii) include in such registration (and compliance), and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made within 20 days after receipt of such written
notice from the Company, by any Holder or Holders, except as set forth in
subsection 1.3(b) below.
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(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to subsection 1.3(a)(i). In such event the right of any Holder to
registration pursuant to subsection 1.3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other shareholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provision of this
subsection 1.3, if the underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, and (i) if such
registration is the first registered offering of the sale of the Company's
securities to the general public, the underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting, or
may exclude Registrable Securities entirely from such registration and
underwriting, or (ii) if such registration is other than the first registered
offering of the sale of the Company's securities to the general public, the
underwriter may limit the amount of securities to be included in the
registration and underwriting by the Company's shareholders; provided however,
the number of Registrable Securities to be included in such registration and
underwriting under this subsection 1.3(b)(ii) shall not be reduced to less than
twenty percent (20%) of the aggregate securities included in such registration
without the prior consent of at least a majority of the Holders who have
requested their shares to be included in such registration and underwriting. The
Company shall so advise all Holders of Registrable Securities which would
otherwise be registered and underwritten pursuant hereto, and the number of
shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among Holders requesting registration in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by each of such Holders as of the date of the notice pursuant to
subsection 1.3(a)(i) above. If any Holder disapproves of the terms of the any
such underwriting, he may elect to withdraw therefrom by written notice to the
Company and the underwriter. Any Registrable Securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration.
(c) Registration Rights of Officers, Directors and Employees.
Upon any sale by the Company of its securities to the public in a firmly
underwritten public offering, the officers, directors and employees of the
Company shall be entitled to include any of their securities of the Company in
any registration by the Company under this subsection 1.3 provided that such
inclusion shall not diminish the number of securities included by the Company or
the number of Registrable Securities which may be included by the Holders as set
forth in subsection 1.3(b) above in the event that the underwriters determine
that marketing factors require a limitation on the number of shares included in
the registration and underwriting.
1.4. Form S-3. In addition to the rights and obligations set forth
in subsection 1.2 above, if Initiating Holders request that the Company file a
registration statement on Form S-3 (or any successor to Form S-3) for a public
offering of shares of Registrable Securities, the reasonably anticipated
aggregate price to the public of which (net of underwriting discounts and
commissions) would exceed $500,000 and the Company is then a registrant entitled
to use Form S-3 to register the shares for such an offering, the Company shall
use its best efforts to cause such shares to be registered for the offering as
soon as practicable on Form S-3
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(or any successor form to Form S-3); provided, however the Company shall not be
required to effect a registration pursuant to this subsection 1.4:
(a) in any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(b) if the Company, within 10 days of the receipt of the
request of the Initiating Holders, gives notice of its bona fide intention to
effect the filing of a registration statement with the SEC within 45 days of
receipt of such request (other than with respect to a registration statement
relating to a Rule 145 transaction, an offering solely to employees or any other
registration which is not appropriate for the registration of Registrable
Securities);
(c) during the period starting with the date of filing of, and
ending on a date 90 days following the effective date of, a registration
statement described in (b) above or pursuant to subsection 1.2, provided that
the Company is actively employing in good faith all reasonable efforts to cause
such registration statement to become effective and further provided that no
other person or entity could require the Company to file a registration
statement in such period;
(d) if the Company has effected 2 registrations pursuant to
this subsection 1.4 within a 12-month period from the date of such request; or
(e) if the Company shall furnish to such Initiating Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be detrimental
to the Company and its shareholders for such registration statement to be filed
on or before the date filing would be required and it is therefore essential to
defer the filing of such registration statement, in which case the Company shall
have the right to defer such filing for a period of not more than 90 days after
the furnishing of such a certificate of deferral, provided that the Company may
not defer such filing pursuant to this subsection 1.4 more than twice in any 12
month period.
In the event such Initiating Holders propose to offer the shares of
Registrable Securities pursuant to this subsection 1.4 by means of an
underwriting, the proposed underwriter(s) shall be reasonably acceptable to the
Company, provided, however, that in the event such underwriter(s) is (are) not
reasonably acceptable to the Company, the Company shall be required to furnish
to the Holders, within 20 days of the receipt of the request for registration
from Initiating Holders pursuant to this subsection 1.4, the names of at least 2
underwriters acceptable to the Company, who agree to act as underwriter for the
proposed offering on terms no less favorable to the Holders than those terms
proposed in writing by the underwriter(s) selected by the Initiating Holders.
The Company shall give written notice to all Holders of the receipt of a request
for registration pursuant to this subsection 1.4 and shall provide a reasonable
opportunity for other Holders to participate in the registration, provided that
if the registration is for an underwritten offering, the terms of subsection
1.2(b) shall apply to all participants in such offering.
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1.5. Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Section 1 shall be borne by the Company except as follows:
(a) The Company shall not be required to pay for expenses of
any registration proceeding begun pursuant to subsection 1.2, the request for
which has been subsequently withdrawn by the Initiating Holders, in which latter
such case, such expenses shall be borne by the Holders requesting such
withdrawal.
(b) The Company shall not be required to pay fees or
disbursements of legal counsel of a Holder unless all the Holders specify one
special counsel.
(c) The Company shall not be required to pay underwriters'
fees, discounts or commissions relating to Registrable Securities.
(d) The Company shall only pay the Registration Expenses of the
first two (2) registrations pursuant to subsection 1.4 and any Registration
Expenses of additional registration pursuant to subsection 1.4 shall be borne
pro rata by the Holders participating in such registration.
1.6. Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Rights
Agreement, the Company will keep each Holder participating therein advised in
writing as to the initiation of each registration, qualification and compliance
and as to the completion thereof. Except as otherwise provided in subsection
1.5, at its expense the Company will:
3 (a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to 120 days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
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<PAGE> 8
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act or the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
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<PAGE> 9
1.7. Indemnification.
(a) The Company will indemnify each Holder of Registrable
Securities and each of its officers, directors and partners, agents and each
person controlling such Holder, with respect to which such registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter of the
Registrable Securities held by or issuable to such Holder, against all claims,
losses, expenses, damages and liabilities (or actions in respect thereto)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any prospectus, offering circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, qualification or compliance, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statement therein not misleading, or any
violation or alleged violation by the Company of the Securities Act, the
Securities Exchange Act of 1934, as amended, ("Exchange Act") or any state
securities law applicable to the Company or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any such state law and relating to
action or inaction required of the Company in connection with any such
registration, qualification of compliance, and will reimburse each such Holder,
each of its officers, directors and partners, agents and each person controlling
such Holder, each such underwriter and each person who controls any such
underwriter, within a reasonable amount of time after incurred for any
reasonable legal and any other expenses incurred in connection with
investigating, defending or settling any such claim, loss, damage, liability or
action; provided, however, that the indemnity agreement contained in this
subsection 1.7(a) shall not apply to amounts paid in settlement of any such
claim, loss, damage, liability, or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld);
and provided further, that the Company will not be liable in any such case to
the extent that any such claim, loss, damage or liability arises out of or is
based on any untrue statement or omission based upon written information
furnished to the Company by an instrument duly executed by such Holder or
underwriter specifically for use therein.
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, agents, each underwriter, if any,
of the Company's securities covered by such a registration statement, each
person who controls the Company within the meaning of the Securities Act, and
each other such Holder, each of its officers, directors and partners, agents and
each person controlling such Holder, against all claims, losses, expenses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, such Holders, such
directors, officers, partners, persons or underwriters for any reasonable legal
or any other expenses incurred in connection with investigating, defending or
settling any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by the Holder in
an instrument
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<PAGE> 10
duly executed by such Holder specifically for use therein; provided, however,
that the indemnity agreement contained in this subsection 1.7(b) shall not apply
to amounts paid in settlement of any such claim, loss, damage, liability or
action if such settlement is effected without the consent of the Holder, (which
consent shall not be unreasonably withheld); and provided further, that the
total amount for which any Holder shall be liable under this subsection 1.7(b)
shall not in any event exceed the aggregate proceeds received by such Holder
from the sale of Registrable Securities held by such Holder in such
registration.
(c) Each party entitled to indemnification under this
subsection 1.7 (an "Indemnified Party") shall give notice to the party required
to provide indemnification (an "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom; provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the Indemnified Party may participate in such
defense at such party's expense; and provided further, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations hereunder, unless such failure resulted in
prejudice to the Indemnifying Party; and provided further, that an Indemnified
Party (together with all other Indemnified Parties which may be represented
without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the Indemnifying Party, if
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between such Indemnified Party and any other party represented by such
counsel in such proceeding. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) any
Holder of Registrable Securities exercising rights under this Agreement, or any
controlling person of any such Holder, makes a claim for indemnification
pursuant to this Section 1.7 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 1.7 provides for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any such selling
Shareholder or any such controlling person in circumstances for which
indemnification is provided under this Section 1.7; then, in each such case, the
Company and such Shareholder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportions as is appropriate to reflect the relative fault of
the Indemnifying
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Party on the one hand and of the Indemnified Party on the other in connection
with the statement or omission or misstatement that resulted in such loss,
claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission provided, however, that, in any such case, (A) no such
Holder will be required to contribute any amount in excess of the proceeds to it
of all Registrable Securities sold by it pursuant to such registration
statement, and (B) no person or entity guilty of fraudulent misrepresentation,
within the meaning of Section 11(f) of the Securities Act, shall be entitled to
contribution from any person or entity who is not guilty of such fraudulent
misrepresentation.
1.8. Information by Holder. Any Holder or Holders of Registrable
Securities included in any registration shall promptly furnish to the Company
such information regarding such Holder or Holders and the distribution proposed
by such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to herein.
1.9. Rule 144 Reporting. With a view to making available to Holders the
benefits of certain rules and regulations of the SEC which may permit the sale
of the Registrable Securities to the public without registration, the Company
agrees at all times to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, after 90 days after the effective date
of the first registration filed by the Company for an offering of its securities
to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to furnish
to such Holder forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company for an offering of its securities to the general public), and of
the Securities Act and the Exchange Act (at any time after it has become subject
to such reporting requirements), a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so filed by the
Company as the Holder may reasonably request in complying with any rule or
regulation of the SEC allowing the Holder to sell any such securities without
registration.
1.10. Transfer of Registration Rights. Holders' rights to cause the
Company to register their securities and keep information available, granted to
them by the Company under subsections 1.2, 1.3, 1.4 and 1.9, may be assigned to
a transferee or assignee of at least 50,000 shares (as adjusted for stock
splits, stock dividends, recapitalization and like events) of a Holder's
Registrable Securities not sold to the public, provided, that the Company is
given written notice by such Holder at the time of or within a reasonable time
after said transfer, stating the name and address of said transferee or assignee
and identifying the securities with respect to which such registration rights
are being assigned. The Company may prohibit the transfer of any Holders' rights
under this subsection 1.10 to any proposed transferee or assignee who the
Company reasonably believes is a competitor of the Company. Notwithstanding
anything else in this subsection 1.10, any Holder may transfer rights to a
transferee of fewer than 50,000 shares
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(as adjusted for stock splits, stock dividends, recapitalizations and like
events) of a Holder's Registrable Securities if such transferee is a partner,
member or a retired partner of such Holder.
1.11. Limitations on Subsequent Registration Rights. From and after the
date hereof, the Company shall not, without the prior written consent of the
Holders of not less than a majority of the Registrable Securities then
outstanding enter into any agreement, with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder to demand any registration or include such securities in any registration
filed under subsections 1.2, 1.3 or 1.4 hereof if such inclusion would adversely
affect the rights of any Holder (or any qualifying transferee under subsection
1.10) under such subsections.
1.12. "Market Stand-Off" Agreement. Each Holder hereby agrees that,
during the period of duration (not to exceed 180 days) specified by the Company
and an underwriter of common stock or other securities of the Company following
the effective date of a registration statement of the Company filed under the
Securities Act, it shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase,
pledge or otherwise transfer or dispose of (other than to donees who agree to be
similarly bound) any securities of the Company held by it at any time during
such period except common stock included in such registration; provided,
however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers common stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
and
(b) such agreement shall not be required unless all officers
and directors and employees of the Company and all other persons with
registration rights (whether or not pursuant to this Agreement) or purchasing
common stock of the Company enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares of securities of every other person subject to the
foregoing restriction) until the end of such period.
2. Affirmative Covenants of the Company. The Company hereby covenants
and agrees as follows:
2.1. Annual Financial Information. The Company shall deliver to each
Holder as soon as practicable after the end of each fiscal year of the Company,
but in any event within 90 days thereafter, statements of operations,
shareholders' equity and cash flows of the Company for such year, and a balance
sheet of the Company as of the end of such year, such year-end financial reports
to be in reasonable detail, prepared in accordance with generally accepted
accounting principles ("gaap"), and audited by independent public accountants of
national standing selected by the Company's Board of Directors.
2.2. Quarterly Financial Information. The Company shall deliver to
each Holder as soon as practicable after the end of each fiscal quarter of the
Company, and in any
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event within 45 days thereafter, a balance sheet of the Company as of the end of
each such quarterly period, and statements of operations of the Company for such
period, prepared in accordance with gaap, all in reasonable detail and signed by
the principal financial or accounting officer of the Company.
2.3. Budgets; Additional Information. The Company will provide each
Holder with the Company's annual (and, as applicable, quarterly) budget as
approved by the Company's Board of Directors and access to such other
information as may be reasonably requested by the Holder all at such reasonable
times as may be requested by the Holder; provided, however that the Company
shall not be obligated pursuant to this subsection 2.3 to provide access to any
information which it reasonably considers to be a trade secret or similar
confidential information.
2.4. Termination of Information Covenants and Confidentiality of
Information. The covenants of the Company set forth in subsections 2.1, 2.2 and
2.3 shall terminate as to the Holder and be of no further force or effect (i)
upon the consummation by the Company of the IPO (as defined in subsection 1.2
above), or (ii) when the Company first becomes subject to the periodic reporting
requirements of Section 12(g) or 15(d) of the Exchange Act, whichever event
shall first occur. Each Holder agrees that it will keep confidential and will
not disclose or divulge any confidential, proprietary or secret information
which such Holder may obtain from the Company, and which the Company has
prominently marked "confidential", "proprietary" or "secret" or has otherwise
identified as being such, pursuant to financial statements, reports and other
materials submitted by the Company as required hereunder, unless such
information is or becomes known to the Holder from a source other than the
Company without violation of any rights of the Company, or is or becomes
publicly known, or except as otherwise required by law, legal process or
regulatory authority, or unless the Company gives its written consent to the
Holder's release of such information, except that no such written consent shall
be required (and the Holder shall be free to release such information to such
recipient) if such information is to be provided to a Holder's counsel or
accountant (and the provision of such information is directly necessary in order
for such recipient provide services to Holder), or to an officer, director or
partner of a Holder, provided that the Holder shall inform the recipient of the
confidential nature of such information, and such recipient agrees in writing in
advance of disclosure to treat the information as confidential.
2.5. Assignment of Rights of Information. The rights granted
pursuant to subsections 2.1, 2.2 and 2.3 may be assigned by each Holder upon
sale or transfer by such Holder of at least 50,000 shares of Registrable
Securities (as adjusted for stock splits, stock dividends, recapitalizations and
like events), provided that any holder may transfer rights to a transferee of
fewer than 50,000 shares (as adjusted for stock splits, stock dividends,
recapitalizations and like events) of a holder's Registrable Securities if such
transferee is a partner, a retired partner or member of such Holder.
Notwithstanding anything else in this subsection 2.5, rights may not be assigned
to a transferee which the Company reasonably believes is a competitor or intends
to become a competitor of the Company and provided further that any transferee
shall agree to become subject to the obligations of the transferring party
hereunder.
2.6. Right of First Refusal.
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(a) If, at any time prior to the termination of this right of
first refusal pursuant to subsection 2.6(f), the Company should desire to issue
in a transaction not registered under the Securities Act in reliance upon a
claimed exemption thereunder, any Equity Securities (as hereinafter defined), it
shall give each Holder the first right to purchase such Holder's pro rata share
(or any part thereof) of all of such privately offered Equity Securities on the
same terms as the Company is willing to sell such Equity Securities to any other
person. Each Holder's pro rata share of the Equity Securities shall be equal to
that percentage of the outstanding Common Stock of the Company held by such
Holder on the date hereof. For purposes of this subsection 2.6, the outstanding
Common Stock of the Company shall include (i) outstanding shares of Common
Stock, and (ii) shares of Common Stock issued or issuable upon conversion of any
then outstanding Preferred Stock of the Company.
(b) Prior to any sale or issuance by the Company of any Equity
Securities, the Company shall notify each Holder in writing of its intention to
sell and issue such securities, setting forth the terms under which it proposes
to make such sale. Within 30 days after receipt of such notice, each Holder
shall notify the Company whether such Holder desires to exercise the option to
purchase such Holder's pro rata share (or any part thereof) of the Equity
Securities so offered. If a Holder elects to purchase such Holder's pro rata
share, then such Holder shall have a right of over-allotment such that if any
other Holder fails to purchase such Holder's pro rata share of the Equity
Securities, such Holder(s) who have elected to purchase their pro rata shares
may purchase, on a pro rata basis, that portion of the Equity Securities which
such other Holders elected not to purchase.
(c) After termination of the 30 day period specified in
subsection 2.6(b) above, the Company may, during a period of 60 days following
the end of such 30 day period, sell and issue such Equity Securities as to which
the Holders do not indicate a desire to purchase to another person as well as
those additional shares of Equity Securities it originally intended to issue to
other persons, upon the same terms and conditions as those set forth in the
notice to the Holders. In the event the Company has not sold the Equity
Securities, or has not entered into an agreement to sell the Equity Securities,
within said 60 day period, the Company shall not thereafter issue or sell any
Equity Securities without first offering such securities to the Holders in the
manner provided above.
(d) If a Holder gives the Company notice that such Holder
desires to purchase any of the Equity Securities offered by the Company, payment
for the Equity Securities shall be by check, or wire transfer, against delivery
of the Equity Securities at the executive offices of the Company within 10 days
after giving the Company such notice, or, if later, the closing date for the
sale of such Equity Securities. The Company shall take all such action as may be
required by any regulatory authority in connection with the exercise by a Holder
of the right to purchase Equity Securities as set forth in this subsection 2.6.
(e) The right of first refusal contained in this Section 2
shall not apply to the issuance by the Company of Equity Securities (i) to
employees, directors or consultants of the Company approved by the Company's
Board of Directors, (ii) as part of an acquisition by the Company of all or
substantially all of the assets or shares of another company or entity whether
through a merger, exchange, reorganization or the like, (iii) pursuant to
equipment financing or leasing arrangements or in connection with strategic
partnering transactions approved by the
14
<PAGE> 15
Company's Board of Directors, (iv) issued upon conversion of the Series A
Shares, the Series B Shares or the Series C Shares, (v) issued in connection
with any stock split, stock dividend, recapitalization or similar event or (vi)
issued in connection with the IPO (as defined in subsection 1.2 above).
(f) The right of first refusal contained in this subsection 2.6
shall terminate upon the closing of the IPO (as defined in subsection 1.2
above).
(g) The term "Equity Securities" shall mean (i) Common Stock,
rights, options or warrants to purchase Common Stock; (ii) any security other
than Common Stock having voting rights in the election of the Board of
Directors, not contingent upon a failure to pay dividends; (iii) any security
convertible into or exchangeable for any of the foregoing except that Equity
Securities shall not include the Series C Shares; and (iv) any agreement or
commitment to issue any of the foregoing.
(h) A Purchaser's right to purchase any Equity Securities
pursuant to this subsection 2.6 may be assigned by a Purchaser to an affiliate
of a Purchaser. For the purposes of this subsection 2.6, an "affiliate" shall
mean any partner, member or shareholder of a Purchaser or any person or entity
that directly or indirectly through one or more intermediaries controls or is
controlled by or is under common control with a Purchaser.
3. Agreements Between Holders and Common Holders.
3.1. Right of Co-Sale.
(a) The Right. If at any time one or more of the Common Holders
propose to sell or otherwise transfer any Common Shares (as defined in Section
3.1(d) below) to parties other than the Holders (on a pro rata basis) in a
transaction (the "Transaction") not registered under the Securities Act then any
Holder (a "Selling Holder" for purposes of this subsection 3.1) which notifies
such Common Holder in writing within 30 days after receipt of the notification
from such Common Holder referred to in subsection 3.1(b), shall have the
opportunity to sell up to a pro rata portion of the Common Shares which the
Common Holder proposes to sell to such third party in the Transaction. In such
instance, the Common Holder shall assign so much of his interest in the proposed
agreement of sale as the Selling Holder shall be entitled to and shall request
hereunder, and the Selling Holder shall assume such part of the obligations of
the Common Holder under such agreement as shall relate to the sale of the
securities by the Selling Holder. For the purposes of this subsection 3.1, the
"pro rata portion" which the Selling Holder shall be entitled to sell shall be
an amount of Common Shares equal to a fraction of the total amount of Common
Shares proposed to be sold to such third party. The numerator of such fraction
shall be the number of equity securities of the Company (assuming the conversion
of all such securities to Common Stock) owned by a Selling Holder and the
denominator shall be the total number of equity securities (assuming the
conversion of all such securities to Common Stock) owned by all participating
Selling Holders and the Common Holder proposing to sell shares in the
Transaction. Each Selling Holder shall notify the Common Holder whether it
elects to sell an amount equal to or less than its pro rata share of the Common
Shares so offered. Each Selling Holder shall be entitled to apportion Common
Shares to be sold among its partners and affiliates (as defined in subsection
2.6(h) above), provided that such
15
<PAGE> 16
Selling Holder notifies the Common Holder of such allocation, and provided that
such allocation does not threaten the Company's reliance on any exemption from
the registration provisions of the Securities Act or the applicable
qualifications provisions. For purposes of this subsection 3.1, the stock of the
Company shall be arithmetically adjusted for stock dividends, stock splits,
recapitalizations and the like.
(b) Failure to Notify. If within 30 days after the Common
Holder gives his aforesaid notice to the Holders, the Holders do not notify the
Common Holder that they desire to sell all of their pro rata portions of the
Common Shares described in such notice for the price and on the terms and
conditions set forth therein, then the Common Holder may sell during the period
set forth in subsection 3.1(c) such Common Shares as to which the Holders do not
elect to sell. Any such sale shall be made only to persons identified in the
Common Holder's notice and at the same price and upon the same terms and
conditions as those set forth in the notice. In the event the Common Holder has
not sold the Common Shares or entered into an agreement to sell the Common
Shares within the period set forth in Section 3.1(c), the Common Holder shall
not thereafter sell any Common Shares without first notifying the Holders in the
manner provided above.
(c) Notice. Prior to any sale by a Common Holder of any Common
Shares, the Common Holder shall notify each Holder, in writing, of his intention
to sell and issue such securities (the "Offered Securities"), setting forth in
reasonable detail the general terms under which he proposed to make such sale
including the number of Common Shares to be sold or transferred, the nature of
the sale or transfer, the consideration to be paid and the identity of the
Holder. Within 30 days after receipt of such notice, any Holder which desires to
exercise its rights under this subsection 3.1 shall notify the Common Holder
that it desires to sell its pro rata share of the Offered Securities. Each
Holder shall be entitled to apportion Offered Securities to be sold among its
partners and affiliates (as defined in subsection 2.6(h) above), provided that
such Holder notifies the Common Holder of such allocation.
(d) Definition. The term "Common Shares" shall mean all shares
of Common Stock of the Company owned or subsequently acquired by Common Holder
and all shares of Common Stock issuable upon exercise or conversion of any
exercisable or convertible securities held or subsequently acquired by Common
Holder.
3.2. Limitations to Rights of Co-Sale. Without regard and not
subject to the provisions of subsection 3.1;
(a) A Common Holder may sell or otherwise assign, without
consideration, Common Shares to any or all of his ancestors, descendants,
spouse, or members of his immediate family, or to a custodian, trustee
(including a trustee of a voting trust), executor, or other fiduciary for the
account of his ancestors, descendants, spouse, or members of his immediate
family without compliance with this Section 3, provided that each such
transferee or assignee, prior to the completion of the sale, transfer, or
assignment, shall have executed documents assuming the obligations of such
Common Holder under this Agreement with respect to the transferred securities;
16
<PAGE> 17
(b) The Company may exercise in full its rights to repurchase
unvested Common Stock issued pursuant to stock purchase or option agreements
entered into between the Company and the Common Holders without compliance with
this Section 3.
(c) A Common Holder may sell, transfer or pledge up to fifteen
percent (15%), in the aggregate, of the Common Stock of the Company held by such
Common Holder as of the date hereof without compliance with this Section 3.
(d) A Common Holder may sell the Common Stock of the Company
held by such Common Holder in connection with the IPO without compliance with
this Section 3.
3.3. Legends. All instruments evidencing Common Shares held by the
Common Holders shall be legended, describing the obligations of the Common
Holders under his Section 3.
3.4. Termination. The obligations of the Common Holders under this
Section 3 shall terminate and be of no further force and effect upon the closing
of the registration statement relating to the IPO (as defined in subsection 1.2
above).
3.5. Assignment. Upon written notice to the Common Holders, the
rights granted pursuant to this Section 3 may be assigned by a Holder or its
transferees upon a sale or transfer (other than a sale thereof to the public) of
Preferred Shares and/or Common Shares held by such Holder or transferee;
provided that any transferee of a Holder shall agree to become subject to the
obligations of the Holders hereunder.
3.6. Amendment. The rights and obligations of the Common Holders and
the Holders under this Section 3 may only be amended (either generally or in a
particular instance) by a statement in writing signed by (i) each Common Holder
whose rights and obligations are to be amended and (ii) a majority of the
Registrable Securities held by the Holders.
3.7. No Waiver. The exercise or non-exercise of the rights of a
Holder hereunder to participate in one or more sales of Common Shares made by a
Common Holder shall not adversely affect their rights to participate in
subsequent sales of Common Shares subject to Section 3.
17
<PAGE> 18
4. General.
4.1. Waivers and Amendments.
(a) Subject to subsection 3.6, with the written consent of the
record or beneficial holders of at least a majority of the Registrable
Securities, the obligations of the Company and the rights of the parties under
this agreement may be waived (either generally or in a particular instance,
either retroactively or prospectively, and either for a specified period of time
or indefinitely), and with the same consent the Company, when authorized by
resolution of its Board of Directors, may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement; provided, however, that no
such modification, amendment or waiver shall reduce the aforesaid percentage of
Registrable Securities without the consent of all of the Holders of the
Registrable Securities and provided further that no amendment or waiver may be
made which would affect a Holder differently than any other Holder without the
written consent of the Holder to be affected differently. Upon the effectuation
of each such waiver, consent, agreement of amendment or modification, the
Company shall promptly give written notice thereof to the record holders of the
Registrable Securities who have not previously consented thereto in writing.
This Agreement or any provision hereof may be changed, waived, discharged or
terminated only by a statement in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought, except to
the extent provided in this subsection 4.1.
(b) The Company and the Additional Purchasers purchasing Series
C Shares at each Additional Closing (as each term is defined under the Second
Amended Series C Agreement) will execute counterpart signature pages to this
Agreement as "Purchasers" and such Additional Purchasers will, upon delivery to
the Company of such signature pages, become parties to, and be bound by this
Agreement.
4.2. Governing Law. This Agreement shall be governed in all respects
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
4.3. Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
4.4. Entire Agreement. Except as set forth below, this Agreement and
the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and this Agreement shall supersede and cancel all prior
agreements between the parties hereto with regard to the subject matter hereof.
4.5. Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered by overnight
courier service of mailed by first class mail, postage prepaid, certified or
registered mail, return receipt requested, addressed (a) if to any Holder, at
such party's address as set forth in the Company's records, or at such other
address as such party shall have furnished to the Company in writing, or (b) if
to the
18
<PAGE> 19
Company, at 10401 Bubb Road, Cupertino, CA 95014, or at such other
address as the Company shall have furnished to the Purchaser in writing.
4.6. Severability. In case any provision of this Agreement shall be
invalid, illegal, or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
4.7. Titles and Subtitles. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
4.8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
19
<PAGE> 20
IN WITNESS WHEREOF, the parties hereby have executed this Agreement
on the date first above written.
"COMPANY"
SILICON ENTERTAINMENT, INC., a
California corporation
By: /s/
------------------------------
Its:
------------------------------
In consideration of the execution and delivery of this Agreement and
the transactions contemplated hereby, the undersigned agree to Section 3 hereof.
"EXISTING HOLDERS" "COMMON HOLDERS"
/s/ Ned P. DeWitt
- -------------------------- --------------------------
(Printed Name) Ned P. DeWitt
If Purchaser is an entity:
By: /s/ /s/ Rick Moncrief
- -------------------------- --------------------------
Rick Moncrief
Its: /s/ Christopher Morse
- -------------------------- --------------------------
Christopher Morse
If Purchaser is an individual:
/s/
- --------------------------
(Signed Name)
20
<PAGE> 21
PURCHASER'S COUNTERPART SIGNATURE PAGE
SILICON ENTERTAINMENT, INC. THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
December 31, 1998
"PURCHASER"
- -------------------------------
(Printed Name)
If Purchaser is an entity:
By: /s/
-----------------------------
Its:
-----------------------------
If Purchaser is an individual:
/s/
- -------------------------------
(Signed Name)
- -------------------------------
(Printed Name)
21
<PAGE> 22
SILICON ENTERTAINMENT, INC.
AMENDMENT NO. 1
TO THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
This Amendment No. 1 dated June 30, 1999 (this "Amendment") to the
Third Amended and Restated Rights Agreement dated December 31, 1998 (the "Rights
Agreement") is entered into by and among Silicon Entertainment, Inc., a
California corporation (the "Company"), the undersigned holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock of the
Company (the "Prior Investors") and certain holders of the Company's Common
Stock (the "Common Holders"). Capitalized terms used herein and not otherwise
defined herein shall have the same meanings as in the Rights Agreement.
RECITALS
A. The Company, the Prior Investors and the Common Holders have
previously entered into the Rights Agreement.
B. The Company and certain investors (the "New Investors") have entered
into a Secured Subordinated Convertible Note Purchase Agreement dated June 30,
1999 providing for the issuance of shares of the Company's equity securities
(the "Securities") upon conversion of Secured Subordinated Convertible
Promissory Notes (the "Convertible Notes") issued by the Company, and such New
Investors desire to have the Securities be included as Registrable Securities
under the Rights Agreement.
C. Under Section 4.1 of the Rights Agreement, the Rights Agreement may
be amended only with the written consent of the Company and the record or
beneficial holders of at least a majority of the Registrable Securities.
D. The Board of Directors of the Company has determined that it is in
the best interests of the Company and its shareholders to amend the Rights
Agreement in the form hereof.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. Amendment. The following definition contained in Section 1.1(b) of
the Rights Agreement is hereby amended to read in full as follows:
"(b) the Term "Registrable Securities" means (i) any and all
shares of Common Stock of the Company issued or issuable upon
conversion of the shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock issued and sold by the
Company and held by the Existing Holders, any and all shares of Common
Stock of the Company issued or issuable upon conversion of the shares
of Series C Preferred Stock issued and sold by the Company pursuant to
the Amended Series C Agreement, the Series B Preferred Stock issuable
or issued upon exercise of the Warrant to Purchase Shares of Series B
Preferred Stock, dated October 15, 1996, issued to Phoenix Leasing
Incorporated and any
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<PAGE> 23
and all Common Shares (as defined in Section 3.1(d) below); (ii) any
and all shares of Common Stock of the Company issued or issuable upon
conversion of the Convertible Notes; (iii) stock issued in lieu thereof
in any reorganization which have not been sold to the public; or (iv)
stock issued in respect of the stock referred to in (i), (ii) and (iii)
as a result of a stock split, stock dividend, recapitalization or the
like, which has not been sold to the public."
2. Miscellaneous.
a. Effect on Rights Agreement. Except as amended hereby, the Rights
Agreement shall remain in full force and effect.
b. Separability. In case any provision of this Amendment shall be
declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
c. Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Amendment are for convenience of reference only and are
not to be considered in construing this Amendment.
d. Termination. This Amendment shall be terminated and be of no
further force and effect upon the termination of the Rights Agreement.
e. Governing Law. All questions concerning the construction,
validity and interpretation of this Amendment, and the performance of the
obligations imposed by this Amendment, shall be governed by the laws of the
State of California applicable to contracts made and wholly to be performed in
that state.
f. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
g. Waiver of Right of First Offer. Each Prior Investor hereby waives
its right to notice and right of first offer granted under the Section 2.6 of
the Rights Agreement, solely with respect to the sale and issuance of the
Convertible Notes.
2
<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
No. 1 to Third Amended and Restated Rights Agreement as of the date referenced
above.
THE COMPANY:
SILICON ENTERTAINMENT, INC.
By: /s/
---------------------------
Name:
---------------------------
Title:
---------------------------
<PAGE> 25
THE HOLDERS OF COMMON STOCK:
/s/ Ned P. DeWitt
--------------------------------------
Ned P. DeWitt
/s/ Rick Moncrief
--------------------------------------
Rick Moncrief
/s/ Christopher Morse
--------------------------------------
Christopher Morse
THE PRIOR INVESTORS:
--------------------------------------
(Printed Name)
If Prior Investor is an Entity:
By: /s/
-----------------------------------
Its:
----------------------------------
If Prior Investor is an Individual:
/s/
--------------------------------------
(Signed Name)
COUNTERPART SIGNATURE PAGE
AMENDMENT NO. 1 TO THIRD AMENDED
AND RESTATED RIGHTS AGREEMENT
SILICON ENTERTAINMENT, INC.
<PAGE> 1
EXHIBIT 10.2
SILICON ENTERTAINMENT, INC.
1996 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1 ESTABLISHMENT. The Silicon Entertainment, Inc. 1996 Stock Option
Plan (the "PLAN") is hereby established effective as of October 15, 1996 (the
"EFFECTIVE DATE").
2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed. However, all Options shall be granted, if at
all, within ten (10) years from the earlier of the date the Plan is adopted by
the Board or the date the Plan is duly approved by the shareholders of the
Company.
2. DEFINITIONS AND CONSTRUCTION.
1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Silicon Entertainment, Inc., a California
corporation, or any successor corporation thereto.
1
<PAGE> 2
(e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "FAIR MARKET VALUE" means, as of any date, the value of a
share of stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.
(i) "INCENTIVE STOCK OPTION" means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(j) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(k) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(l) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(m) "OPTIONEE" means a person who has been granted one or more
Options.
(n) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(q) "STOCK" means the common stock, without par value, of the
Company, as adjusted from time to time in accordance with Section 4.2.
2
<PAGE> 3
(r) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(s) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
2 POWERS OF THE BOARD. In addition to any other powers set forth in
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or
other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of
3
<PAGE> 4
employment or service with the Participating Company Group on any of the
foregoing, and (vii) all other terms, conditions and restrictions applicable to
the Option or such shares not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option
in substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the exercisability
of any Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee's termination of
employment or service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(i) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
4. SHARES SUBJECT TO PLAN.
1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Eight Hundred Ninety Thousand (890,000)
and shall consist of authorized but unissued or reacquired shares of Stock or
any combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number and class of shares subject
to the Plan and to any outstanding Options and in the exercise price per share
of any outstanding Options. If a majority of the shares which are of the same
class as the shares that are subject to outstanding Options are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event, as defined in Section 8.1) shares of another corporation (the "NEW
SHARES"), the Board may unilaterally amend the
4
<PAGE> 5
outstanding Options to provide that such Options are exercisable for New Shares.
In the event of any such amendment, the number of shares subject to, and the
exercise price per share of, the outstanding Options shall be adjusted in a fair
and equitable manner as determined by the Board, in its sole discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 4.2 shall be rounded up or down to the nearest whole
number, as determined by the Board, and in no event may the exercise price of
any Option be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees" shall include prospective Employees to whom Options are granted in
connection with written offers of employment with the Participating Company
Group, and "Consultants" shall include prospective Consultants to whom Options
are granted in connection with written offers of engagement with the
Participating Company Group. Eligible persons may be granted more than one (1)
Option.
2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on
the effective date of the grant of an Option to such person may be granted only
a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
3 FAIR MARKET VALUE LIMITATION. To the extent that the aggregate
Fair Market Value of stock with respect to which options designated as Incentive
Stock Options are exercisable by an Optionee for the first time during any
calendar year (under all stock option plans of the Participating Company Group,
including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.3, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of stock shall be determined as of the time the option
with respect to such stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.3, such different
limitation shall be deemed incorporated herein effective as of the date and with
respect to such Options as required or permitted by such amendment to the Code.
If an Option is treated as an Incentive Stock Option in part and as a
Nonstatutory Stock Option in part by reason of the limitation set forth in this
Section 5.3, the Optionee may designate which portion of such Option the
Optionee is exercising and may request that separate certificates representing
each such portion be issued upon the exercise of the Option. In the absence of
such designation, the Optionee shall be deemed to have exercised the Incentive
Stock Option portion of the Option first.
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<PAGE> 6
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Option granted
to a Ten Percent Owner Optionee shall have an exercise price per share less than
one hundred ten percent (110%) of the Fair Market Value of a share of Stock on
the effective date of grant of the Option. Notwithstanding the foregoing, an
Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Option shall be exercisable after the expiration of ten (10) years
after the effective date of grant of such Option, (b) no Incentive Stock Option
granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the effective date of grant of such Option,
and (c) no Option granted to a prospective Employee or prospective Consultant
may become exercisable prior to the date on which such person commences service
with a Participating Company.
3 PAYMENT OF EXERCISE PRICE.
(A) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do
6
<PAGE> 7
not permit all of the foregoing forms of consideration to be used in payment of
the exercise price or which otherwise restrict one or more forms of
consideration.
(B) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(C) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
(D) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to
a right of first refusal, one or more repurchase options, or other conditions
and restrictions as determined by the Board in its sole discretion at the time
the Option is granted. The Company
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<PAGE> 8
shall have the right to assign at any time any repurchase right it may have,
whether or not such right is then exercisable, to one or more persons as may be
selected by the Company. Upon request by the Company, each Optionee shall
execute any agreement evidencing such transfer restrictions prior to the receipt
of shares of Stock hereunder and shall promptly present to the Company any and
all certificates representing shares of Stock acquired hereunder for the
placement on such certificates of appropriate legends evidencing any such
transfer restrictions.
7. STANDARD FORMS OF OPTION AGREEMENT.
1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board at
the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Immediately Exercisable Incentive Stock Option Agreement adopted
by the Board concurrently with its adoption of the Plan and as amended from time
to time.
2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the Board
at the time the Option is granted, an Option designated as a "Nonstatutory Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Immediately Exercisable Nonstatutory Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
3 STANDARD TERM OF OPTIONS. Except as otherwise provided in
Section 6.2 or by the Board in the grant of an Option, any Option granted
hereunder shall have a term of ten (10) years from the effective date of grant
of the Option.
4 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement shall be in
accordance with the terms of the Plan. Such authority shall include, but not by
way of limitation, the authority to grant Options which are not immediately
exercisable.
8. TRANSFER OF CONTROL.
1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
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<PAGE> 9
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. Any Options which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the Transfer of Control nor exercised as of the date of the Transfer of
Control shall terminate and cease to be outstanding effective as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the outstanding Options immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Transfer of Control
is the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the
outstanding Options shall not terminate unless the Board otherwise provides in
its sole discretion.
9. PROVISION OF INFORMATION. At least annually, copies of the Company's
balance sheet and income statement for the just completed fiscal year shall be
made available to each
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<PAGE> 10
Optionee and purchaser of shares of Stock upon the exercise of an Option. The
Company shall not be required to provide such information to persons whose
duties in connection with the Company assure them access to equivalent
information.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. TRANSFER OF COMPANY'S RIGHTS. In the event any Participating
Company assigns, other than by operation of law, to a third person, other than
another Participating Company, any of the Participating Company's rights to
repurchase any shares of Stock acquired upon the exercise of an Option, the
assignee shall pay to the assigning Participating Company the value of such
right as determined by the Company in the Company's sole discretion. Such
consideration shall be paid in cash. In the event such repurchase right is
exercisable at the time of such assignment, the value of such right shall be not
less than the Fair Market Value of the shares of Stock which may be repurchased
under such right (as determined by the Company) minus the repurchase price of
such shares. The requirements of this Section 11 regarding the minimum
consideration to be received by the assigning Participating Company shall not
inure to the benefit of the Optionee whose shares of Stock are being
repurchased. Failure of a Participating Company to comply with the provisions of
this Section 11 shall not constitute a defense or otherwise prevent the exercise
of the repurchase right by the assignee of such right.
12. INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan, or any right granted hereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such person
is liable for gross negligence, bad faith or intentional misconduct in duties;
provided, however, that within sixty (60) days after the institution of such
action, suit or proceeding, such person shall offer to the Company, in writing,
the opportunity at its own expense to handle and defend the same.
13. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend
the Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
shareholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no expansion in the class of persons
eligible
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<PAGE> 11
to receive Nonstatutory Stock Options. In any event, no termination or amendment
of the Plan may adversely affect any then outstanding Option or any unexercised
portion thereof, without the consent of the Optionee, unless such termination or
amendment is required to enable an Option designated as an Incentive Stock
Option to qualify as an Incentive Stock Option or is necessary to comply with
any applicable law or government regulation.
14. SHAREHOLDER APPROVAL. The Plan or any increase in the maximum
number of shares of Stock issuable thereunder as provided in Section 4.1 (the
"MAXIMUM SHARES") shall be approved by the shareholders of the Company within
twelve (12) months of the date of adoption thereof by the Board. Options granted
prior to shareholder approval of the Plan or in excess of the Maximum Shares
previously approved by the shareholders shall become exercisable no earlier than
the date of shareholder approval of the Plan or such increase in the Maximum
Shares, as the case may be.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing Silicon Entertainment, Inc. 1996 Stock Option Plan was duly
adopted by the Board on October 15, 1996.
/s/ James Koshland
---------------------------------
Secretary
11
<PAGE> 12
STANDARD FORM OF
SILICON ENTERTAINMENT, INC.
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
<PAGE> 13
STANDARD FORM OF
SILICON ENTERTAINMENT, INC.
IMMEDIATELY EXERCISABLE
NONSTATUTORY STOCK OPTION AGREEMENT
<PAGE> 14
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
SILICON ENTERTAINMENT, INC.
IMMEDIATELY EXERCISABLE
NONSTATUTORY STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (the
"OPTION AGREEMENT") is made and entered into as of [Date_of_Grant] by and
between Silicon Entertainment, Inc. and [Optionee] (the "OPTIONEE").
The Company has granted to the Optionee pursuant to the Silicon
Entertainment, Inc. 1997 Nonstatutory Stock Option Plan (the "PLAN") an option
to purchase certain shares of Stock, upon the terms and conditions set forth in
this Option Agreement (the "OPTION"). The Option shall in all respects be
subject to the terms and conditions of the Plan, the provisions of which are
incorporated herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan. Whenever used
herein, the following terms shall have their respective meanings set forth
below:
(a) "DATE OF OPTION GRANT" means [Date_of_Grant].
(b) "NUMBER OF OPTION SHARES" means
[No_of_Shares] shares of Stock, as adjusted from time to time pursuant to
Section 9.
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<PAGE> 15
(c) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(d) "EXERCISE PRICE" means $[Option_Price] per share of
Stock, as adjusted from time to time pursuant to Section 9.
(e) "INITIAL EXERCISE DATE" means the later of the Date of
Option Grant or the date the Optionee's Service commences.
(f) "INITIAL VESTING DATE" means the date occurring one (1)
year after (check one):
X the Date of Option Grant.
_ ___________ , 199 , the date the Optionee's Service
commenced.
(g) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, provided the Optionee's Service is 1/4
continuous from the later of the Date of Option Grant or the
Optionee's Service commencement date until the Initial Vesting
Date
Plus
For each full month of the Optionee's continuous Service from 1/48
the Initial Vesting Date until the Vested Ratio equals 1/1, an
additional
</TABLE>
(h) "OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.
(i) "COMPANY" means Silicon Entertainment, Inc., a California
corporation, or any successor corporation thereto.
(j) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's
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<PAGE> 16
position with the Participating Company Group because of the sickness or injury
of the Optionee.
(k) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(l) "SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Optionee's Service
has terminated and the effective date of such termination.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX CONSEQUENCES.
2.1 TAX STATUS OF OPTION. This Option is intended to be a
Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option
within the meaning of Section 422(b) of the Code.
2.2 ELECTION UNDER SECTION 83(b) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of
forfeiture if, for example, (a) they are unvested and are subject to a right of
the Company to repurchase such shares at the Optionee's original purchase price
if the Optionee's Service terminates, or (b) the Optionee is subject to a
restriction on transfer to comply with "Pooling-of-Interests Accounting" rules.
Failure to file an election under Section 83(b), if appropriate, may result in
adverse tax consequences to the Optionee. The Optionee acknowledges that the
Optionee has been advised to consult with a tax advisor prior to the exercise of
the Option regarding the tax consequences to the Optionee of the exercise of the
Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE
DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE
EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b)
ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS
THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
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<PAGE> 17
3. ADMINISTRATION.
All questions of interpretation concerning this Option Agreement
shall be determined by the Board, including any duly appointed Committee of the
Board. All determinations by the Board shall be final and binding upon all
persons having an interest in the Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, or election which is the responsibility of or which
is allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
4. EXERCISE OF THE OPTION.
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares less the number of shares previously acquired
upon exercise of the Option, subject to the Optionee's agreement that any shares
purchased upon exercise are subject to the Company's repurchase rights set forth
in Section 11 and Section 12.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased and
(ii) an executed copy, if required herein, of the then current forms of escrow
and security agreement referenced below. The Option shall be deemed to be
exercised upon receipt by the Company of such written notice, the aggregate
Exercise Price, and, if required by the Company, such executed agreements.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the
Company's sole discretion at the time the Option is exercised, by the Optionee's
promissory note for the aggregate Exercise Price, or (v) by any combination of
the foregoing.
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<PAGE> 18
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if an exercise of the Option using a promissory note would be a
violation of any law. The promissory note permitted in clause (iv) of Section
4.3(a) shall be a full recourse note in a form satisfactory to the Company, with
principal payable no more than four (4) years after the date the Option is
exercised. Interest on the principal balance of the promissory note shall be
payable in annual installments at the minimum interest rate necessary to avoid
imputed interest pursuant to all applicable sections of the Code. Such recourse
promissory note shall be secured by the shares of Stock acquired pursuant to the
then current form of security agreement as approved by the Company. At any time
the Company is subject to the regulations promulgated by the Board of Governors
of the Federal Reserve System or any other governmental entity affecting the
extension of credit in connection with the Company's securities, any promissory
note shall comply with such applicable regulations, and the Optionee shall pay
the unpaid principal and accrued interest, if any, to the extent necessary to
comply with such applicable regulations. Except as the Company in its sole
discretion shall determine, the Optionee shall pay the unpaid principal balance
of the promissory note and any accrued interest thereon upon termination of the
Optionee's Service with the Participating Company Group for any reason, with or
without cause.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is vested,
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and the Company shall have no obligation to issue a certificate for such shares
or release such shares from any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION.
The Option may be exercised during the lifetime of the Optionee only
by the Optionee or the Optionee's guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of
descent and distribution. Following the death of the Optionee, the Option, to
the extent provided in Section 7, may be exercised by the Optionee's legal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
6. TERMINATION OF THE OPTION.
The Option shall terminate and may no longer be exercised on the
first to occur of (a) the Option Expiration Date, (b) the last date for
exercising the Option following termination
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of the Optionee's Service as described in Section 7, or (c) a Transfer of
Control to the extent provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's legal
representative, or other person who acquired the right to exercise the Option by
reason of the Optionee's death) at any time prior to the expiration of six (6)
months after the date on which the Optionee's Service terminated, but in any
event no later than the Option Expiration Date. The Optionee's Service shall be
deemed to have terminated on account of death if the Optionee dies within thirty
(30) days after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service
with the Participating Company Group terminates for any reason, except
Disability or death, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee's Service terminated, may be
exercised by the Optionee within thirty (30) days (or such other longer period
of time as determined by the Board, in its sole discretion) after the date on
which the Optionee's Service terminated, but in any event no later than the
Option Expiration Date.
7.2 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11. Except as the Company and the Optionee otherwise
agree, exercise of the Option pursuant to Section 7.1 following termination of
the Optionee's Service may not be made by delivery of a promissory note as
provided in Section 4.3(a).
7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the
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Exchange Act, the Option shall remain exercisable until the earliest to occur of
(i) the tenth (10th) day following the date on which a sale of such shares by
the Optionee would no longer be subject to such suit, (ii) the one hundred and
ninetieth (190th) day after the Optionee's termination of Service, or (iii) the
Option Expiration Date.
7.5 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Optionee's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Optionee's right to reemployment with the Participating Company Group remains
guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company (or required by law), a leave of absence
shall not be treated as Service for purposes of determining the Optionee's
Vested Ratio.
8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
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8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. The Option shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate unless
the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
In the event of any stock dividend, stock split, reverse stock
split, recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a
majority of the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to
provide that the Option is exercisable for New Shares. In the event of any such
amendment, the Number of Option Shares and the Exercise Price shall be adjusted
in a fair and equitable manner, as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 9 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the
Exercise Price be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 9 shall be final, binding and conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT.
The Optionee shall have no rights as a shareholder with respect to
any shares covered by the Option until the date of the issuance of a certificate
for the shares for which the Option has been exercised (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends, distributions
or other rights for which the record date is prior to the date such certificate
is issued, except as provided in Section 9. Nothing in this Option Agreement
shall confer upon the Optionee any right to continue in the Service of a
Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee's Service as an Employee
or Consultant, as the case may be, at any time.
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11. UNVESTED SHARE REPURCHASE OPTION.
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Company Group is terminated for any
reason or no reason, with or without cause, or, if the Optionee, the Optionee's
legal representative, or other holder of shares acquired upon exercise of the
Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of
(other than pursuant to an Ownership Change Event) any shares acquired upon
exercise of the Option which exceed the Vested Shares as defined in Section 11.2
below (the "UNVESTED SHARES"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this Section 11 (the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "VESTED SHARES"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
SHARES" shall mean the number of shares of Stock acquired upon exercise of the
Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice delivered
personally or forwarded by first class mail to the Optionee within sixty (60)
days after (a) termination of the Optionee's Service (or exercise of the Option,
if later) or (b) the Company has received notice of the attempted disposition of
Unvested Shares. If the Company fails to give notice within such sixty (60) day
period, the Unvested Share Repurchase Option shall terminate unless the Company
and the Optionee have extended the time for the exercise of the Unvested Share
Repurchase Option. The Unvested Share Repurchase Option must be exercised, if at
all, for all of the Unvested Shares, except as the Company and the Optionee
otherwise agree.
11.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The
purchase price per share being repurchased by the Company shall be an amount
equal to the Optionee's original cost per share, as adjusted pursuant to Section
9 (the "REPURCHASE PRICE"). The Company shall pay the aggregate Repurchase Price
to the Optionee in cash within thirty (30) days after the date of personal
delivery or mailing of the written notice of the Company's exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of
any indebtedness of the Optionee to any Participating Company shall be treated
as payment to the Optionee in cash to the extent of the unpaid principal and any
accrued interest canceled. The shares being repurchased shall be delivered to
the Company by the Optionee at the same time as the delivery of the Repurchase
Price to the Optionee.
11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company
shall have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such option is then exercisable, to one or more persons as may be
selected by the Company.
11.6 OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership
Change Event, any and all new, substituted or additional securities or other
property to which the Optionee is entitled by reason of the Optionee's ownership
of Unvested Shares shall be
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<PAGE> 24
immediately subject to the Unvested Share Repurchase Option and included in the
terms "Stock" and "Unvested Shares" for all purposes of the Unvested Share
Repurchase Option with the same force and effect as the Unvested Shares
immediately prior to the Ownership Change Event. While the aggregate Repurchase
Price shall remain the same after such Ownership Change Event, the Repurchase
Price per Unvested Share upon exercise of the Unvested Share Repurchase Option
following such Ownership Change Event shall be adjusted as appropriate. For
purposes of determining the Vested Ratio following an Ownership Change Event,
credited Service shall include all Service with any corporation which is a
Participating Company at the time the Service is rendered, whether or not such
corporation is a Participating Company both before and after the Ownership
Change Event.
12. RIGHT OF FIRST REFUSAL.
12.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section
12.7 below, in the event the Optionee, the Optionee's legal representative, or
other holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the
"TRANSFER SHARES") to any person or entity, including, without limitation, any
shareholder of the Participating Company Group, the Company shall have the right
to repurchase the Transfer Shares under the terms and subject to the conditions
set forth in this Section 12 (the "RIGHT OF FIRST REFUSAL").
12.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
the Transfer Shares, the Optionee shall give a written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. In the event of a bona fide gift or involuntary transfer,
the proposed transfer price shall be deemed to be the Fair Market Value of the
Transfer Shares, as determined by the Board in good faith. If the Optionee
proposes to transfer any Transfer Shares to more than one Proposed Transferee,
the Optionee shall provide a separate Transfer Notice for the proposed transfer
to each Proposed Transferee. The Transfer Notice shall be signed by both the
Optionee and the Proposed Transferee and must constitute a binding commitment of
the Optionee and the Proposed Transferee for the transfer of the Transfer Shares
to the Proposed Transferee subject only to the Right of First Refusal.
12.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Optionee in the Transfer Notice is insufficient to
establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Optionee written notice of the Optionee's failure to comply with
the procedure described in this Section 12, and the Optionee shall have no right
to transfer the Transfer Shares without first complying with the procedure
described in this Section 12. The Optionee shall not be permitted to transfer
the Transfer Shares if the proposed transfer is not bona fide.
12.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines
the proposed transfer to be bona fide, the Company shall have the right to
purchase all, but not less than all, of the Transfer Shares (except as the
Company and the Optionee otherwise agree) at the purchase price and on the terms
set forth in the Transfer
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Notice by delivery to the Optionee of a notice of exercise of the Right of First
Refusal within thirty (30) days after the date the Transfer Notice is delivered
to the Company. The Company's exercise or failure to exercise the Right of First
Refusal with respect to any proposed transfer described in a Transfer Notice
shall not affect the Company's right to exercise the Right of First Refusal with
respect to any proposed transfer described in any other Transfer Notice, whether
or not such other Transfer Notice is issued by the Optionee or issued by a
person other than the Optionee with respect to a proposed transfer to the same
Proposed Transferee. If the Company exercises the Right of First Refusal, the
Company and the Optionee shall thereupon consummate the sale of the Transfer
Shares to the Company on the terms set forth in the Transfer Notice within sixty
(60) days after the date the Transfer Notice is delivered to the Company (unless
a longer period is offered by the Proposed Transferee); provided, however, that
in the event the Transfer Notice provides for the payment for the Transfer
Shares other than in cash, the Company shall have the option of paying for the
Transfer Shares by the present value cash equivalent of the consideration
described in the Transfer Notice as reasonably determined by the Company. For
purposes of the foregoing, cancellation of any indebtedness of the Optionee to
any Participating Company shall be treated as payment to the Optionee in cash to
the extent of the unpaid principal and any accrued interest canceled.
12.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company
fails to exercise the Right of First Refusal in full (or to such lesser extent
as the Company and the Optionee otherwise agree) within the period specified in
Section 12.4 above, the Optionee may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and conditions described in the
Transfer Notice, provided such transfer occurs not later than ninety (90) days
following delivery to the Company of the Transfer Notice. The Company shall have
the right to demand further assurances from the Optionee and the Proposed
Transferee (in a form satisfactory to the Company) that the transfer of the
Transfer Shares was actually carried out on the terms and conditions described
in the Transfer Notice. No Transfer Shares shall be transferred on the books of
the Company until the Company has received such assurances, if so demanded, and
has approved the proposed transfer as bona fide. Any proposed transfer on terms
and conditions different from those described in the Transfer Notice, as well as
any subsequent proposed transfer by the Optionee, shall again be subject to the
Right of First Refusal and shall require compliance by the Optionee with the
procedure described in this Section 12.
12.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer
Shares or any interest therein, other than the Company, shall be required as a
condition of such transfer to agree in writing (in a form satisfactory to the
Company) that such transferee shall receive and hold such Transfer Shares or
interest therein subject to all of the terms and conditions of this Option
Agreement, including this Section 12 providing for the Right of First Refusal
with respect to any subsequent transfer. Any sale or transfer of any shares
acquired upon exercise of the Option shall be void unless the provisions of this
Section 12 are met.
12.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of
First Refusal shall not apply to any transfer or exchange of the shares acquired
upon exercise of the Option if such transfer or exchange is in connection with
an Ownership Change Event. If the consideration received pursuant to such
transfer or exchange consists of stock of a Participating Company, such
consideration shall remain subject to the Right of First Refusal unless the
provisions of Section 12.9 below result in a termination of the Right of First
Refusal.
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12.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have
the right to assign the Right of First Refusal at any time, whether or not there
has been an attempted transfer, to one or more persons as may be selected by the
Company.
12.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Option Agreement notwithstanding, the Right of First Refusal
shall terminate and be of no further force and effect upon (a) the occurrence of
a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (b)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (ii) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
13. ESCROW.
13.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Unvested Share Repurchase Option or the Right of First Refusal or securing any
promissory note will be available for repurchase, the Company may require the
Optionee to deposit the certificate evidencing the shares which the Optionee
purchases upon exercise of the Option with an agent designated by the Company
under the terms and conditions of escrow and security agreements approved by the
Company. If the Company does not require such deposit as a condition of exercise
of the Option, the Company reserves the right at any time to require the
Optionee to so deposit the certificate in escrow. Upon the occurrence of an
Ownership Change Event or a change, as described in Section 9, in the character
or amount of any of the outstanding stock of the corporation the stock of which
is subject to the provisions of this Option Agreement, any and all new,
substituted or additional securities or other property to which the Optionee is
entitled by reason of the Optionee's ownership of shares of Stock acquired upon
exercise of the Option that remain, following such Ownership Change Event or
change described in Section 9, subject to the Unvested Share Repurchase Option,
the Right of First Refusal or any security interest held by the Company shall be
immediately subject to the escrow to the same extent as such shares of Stock
immediately before such event. The Company shall bear the expenses of the
escrow.
13.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after
the expiration of the Unvested Share Repurchase Option and the Right of First
Refusal and after full repayment of any promissory note secured by the shares or
other property in escrow, but not more frequently than twice each calendar year,
the escrow agent shall deliver to the Optionee the shares and any other property
no longer subject to such restrictions and no longer securing any promissory
note.
13.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share Repurchase Option or the Right of First Refusal, the notices required to
be given to the Optionee shall be given to the escrow agent, and any payment
required to be given to the Optionee shall be given to the escrow agent. Within
thirty (30) days after payment by the Company, the escrow agent shall deliver
the shares and any other property which the Company has purchased to the Company
and shall deliver the payment received from the Company to the Optionee.
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14. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT.
If, from time to time, there is any stock dividend, stock split or
other change, as described in Section 9, in the character or amount of any of
the outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, then in such event any and all new,
substituted or additional securities to which the Optionee is entitled by reason
of the Optionee's ownership of the shares acquired upon exercise of the Option
shall be immediately subject to the Unvested Share Repurchase Option, the Right
of First Refusal, and any security interest held by the Company with the same
force and effect as the shares subject to the Unvested Share Repurchase Option,
the Right of First Refusal, and such security interest immediately before such
event.
15. LEGENDS.
The Company may at any time place legends referencing the Unvested
Share Repurchase Option, the Right of First Refusal, and any applicable federal,
state or foreign securities law restrictions on all certificates representing
shares of stock subject to the provisions of this Option Agreement. The Optionee
shall, at the request of the Company, promptly present to the Company any and
all certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to carry out the provisions of this Section.
Unless otherwise specified by the Company, legends placed on such certificates
may include, but shall not be limited to, the following:
15.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
15.2 Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
15.3 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
15.4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S
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PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THIS CORPORATION."
16. PUBLIC OFFERING.
The Optionee hereby agrees that in the event of any underwritten
public offering of stock, including an initial public offering of stock, made by
the Company pursuant to an effective registration statement filed under the
Securities Act, the Optionee shall not offer, sell, contract to sell, pledge,
hypothecate, grant any option to purchase or make any short sale of, or
otherwise dispose of any shares of stock of the Company or any rights to acquire
stock of the Company for such period of time from and after the effective date
of such registration statement as may be established by the underwriter for such
public offering; provided, however, that such period of time shall not exceed
one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing
limitation shall not apply to shares registered in the public offering under the
Securities Act. The Optionee shall be subject to this Section provided and only
if the officers and directors of the Company are also subject to similar
arrangements.
17. BINDING EFFECT.
Subject to the restrictions on transfer set forth herein, this
Option Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns.
18. TERMINATION OR AMENDMENT.
The Board may terminate or amend the Plan or the Option at any time;
provided, however, that except as provided in Section 8.2 in connection with a
Transfer of Control, no such termination or amendment may adversely affect the
Option or any unexercised portion hereof without the consent of the Optionee
unless such termination or amendment is necessary to comply with any applicable
law or government regulation. No amendment or addition to this Option Agreement
shall be effective unless in writing.
19. INTEGRATED AGREEMENT.
This Option Agreement and the Plan constitute the entire
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein and therein and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein or therein. To the
extent contemplated herein or therein, the provisions of this Option Agreement
shall survive any exercise of the Option and shall remain in full force and
effect.
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<PAGE> 29
20. APPLICABLE LAW.
This Option Agreement shall be governed by the laws of the State of
California as such laws are applied to agreements between California residents
entered into and to be performed entirely within the State of California.
SILICON ENTERTAINMENT, INC.
By:
-------------------------
Title:
-----------------------
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in Section 11 and the Right of First Refusal set forth in
Section 12, and hereby accepts the Option subject to all of the terms and
provisions thereof. The Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under this Option Agreement. The undersigned acknowledges receipt of a
copy of the Plan.
OPTIONEE
Date:
------------------------------ ----------------------------
[Optionee]
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<PAGE> 30
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
SILICON ENTERTAINMENT, INC.
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT (the
"OPTION AGREEMENT") is made and entered into as of [Date_of_Grant], by and
between Silicon Entertainment, Inc. and [Optionee] (the "OPTIONEE").
The Company has granted to the Optionee pursuant to the Silicon
Entertainment, Inc. 1996 Stock Option Plan (the "PLAN") an option to purchase
certain shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION"). The Option shall in all respects be subject to the
terms and conditions of the Plan, the provisions of which are incorporated
herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan. Whenever used
herein, the following terms shall have their respective meanings set forth
below:
(a) "DATE OF OPTION GRANT" means [Date_of_Grant].
(b) "NUMBER OF OPTION SHARES" means
[No_of_Shares] shares of Stock, as adjusted from time to time pursuant to
Section 9.
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<PAGE> 31
(c) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(d) "EXERCISE PRICE" means $[Option_Price] per share of
Stock, as adjusted from time to time pursuant to Section 9.
(e) "INITIAL EXERCISE DATE" means the Date of Option Grant.
(f) "INITIAL VESTING DATE" means the date occurring one (1)
year after (check one):
X the Date of Option Grant.
_ _______, 199 , the date the Optionee's Service commenced.
(g) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, provided the Optionee's Service is 1/4
continuous from the Date of Option Grant until the Initial
Vesting Date
Plus
For each full month of the Optionee's continuous Service from 1/48
the Initial Vesting Date until the Vested Ratio equals 1/1, an
additional
</TABLE>
(h) "OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.
(i) "COMPANY" means Silicon Entertainment, Inc., a California
corporation, or any successor corporation thereto.
(j) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company Group because
of the sickness or injury of the Optionee.
(k) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
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<PAGE> 32
(l) "SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Optionee's Service
has terminated and the effective date of such termination. (NOTE: If the Option
is exercised more than three (3) months after the date on which the Optionee
ceased to be an Employee (other than by reason of death or a permanent and total
disability as defined in Section 22(e)(3) of the Code), the Option will be
treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to
the extent required by Section 422 of the Code.)
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX CONSEQUENCES.
2.1 TAX STATUS OF OPTION. This Option is intended to be an Incentive
Stock Option within the meaning of Section 422(b) of the Code, but the Company
does not represent or warrant that this Option qualifies as such. The Optionee
should consult with the Optionee's own tax advisor regarding the tax effects of
this Option and the requirements necessary to obtain favorable income tax
treatment under Section 422 of the Code, including, but not limited to, holding
period requirements. (NOTE: If the aggregate Exercise Price of the Option (that
is, the Exercise Price multiplied by the Number of Option Shares) plus the
aggregate exercise price of any other Incentive Stock Options held by the
Optionee (whether granted pursuant to the Plan or any other stock option plan of
the Participating Company Group) is greater than One Hundred Thousand Dollars
($100,000), the Optionee should contact the Chief Financial Officer of the
Company to ascertain whether the entire Option qualifies as an Incentive Stock
Option.)
2.2 ELECTION UNDER SECTION 83(b) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of
forfeiture if, for example, (a) they are unvested and are subject to a right of
the Company to repurchase such shares at the Optionee's original purchase price
if the Optionee's Service terminates, or (b) the Optionee is subject to a
restriction on transfer to comply with "Pooling-of-Interests Accounting" rules.
Failure to file an election under Section 83(b), if appropriate, may result in
adverse tax consequences to the
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<PAGE> 33
Optionee. The Optionee acknowledges that the Optionee has been advised to
consult with a tax advisor prior to the exercise of the Option regarding the tax
consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER
SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE
PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES
THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S SOLE
RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE
TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION.
All questions of interpretation concerning this Option Agreement
shall be determined by the Board, including any duly appointed Committee of the
Board. All determinations by the Board shall be final and binding upon all
persons having an interest in the Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, or election which is the responsibility of or which
is allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
4. EXERCISE OF THE OPTION.
4.1 RIGHT TO EXERCISE.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the Number
of Option Shares less the number of shares previously acquired upon exercise of
the Option, subject to the Optionee's agreement that any shares purchased upon
exercise are subject to the Company's repurchase rights set forth in Section 11
and Section 12. Notwithstanding the foregoing, except as provided in Section
4.1(b), the aggregate Fair Market Value of the shares of Stock with respect to
which the Optionee may exercise the Option for the first time during any
calendar year, when added to the aggregate Fair Market Value of the shares
subject to any other options designated as Incentive Stock Options granted to
the Optionee under all stock option plans of the Participating Company Group
prior to the Date of Option Grant with respect to which such options are
exercisable for the first time during the same calendar year, shall not exceed
One Hundred Thousand Dollars ($100,000). For purposes of the preceding sentence,
options designated as Incentive Stock Options shall be taken into account in the
order in which they were granted, and the Fair Market Value of shares of stock
shall be determined as of the time the option with respect to such shares is
granted. Such limitation on exercise shall be referred to in this Option
Agreement as the "ISO EXERCISE LIMITATION." If Section 422 of the Code is
amended to provide for a different limitation from that set forth in this
Section 4.1(a), the ISO Exercise Limitation shall be deemed amended effective as
of the date required or permitted by such amendment to the Code. The ISO
Exercise Limitation shall terminate upon the earlier of (i) the Optionee's
termination of Service, (ii) the day immediately prior to the effective date of
a Transfer of Control in which the Option is not assumed or substituted for by
the Acquiring Corporation as provided in Section 8, or (iii) the day ten (10)
days prior to the Option Expiration Date. Upon such termination of the ISO
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<PAGE> 34
Exercise Limitation, the Option shall be deemed a Nonstatutory Stock Option to
the extent of the number of shares subject to the Option which would otherwise
exceed the ISO Exercise Limitation.
(b) Notwithstanding any other provision of this Option
Agreement, if compliance with the ISO Exercise Limitation as set forth in
Section 4.1(a) will result in the exercisability of any Vested Shares (as
defined in Section 11.2) being delayed more than thirty (30) days beyond the
date such shares become Vested Shares (the "VESTING DATE"), the Option shall be
deemed to be two (2) options. The first option shall be for the maximum portion
of the Number of Option Shares that can comply with the ISO Exercise Limitation
without causing the Option to be unexercisable in the aggregate as to Vested
Shares on the Vesting Date for such shares. The second option, which shall not
be treated as an Incentive Stock Option as described in section 422(b) of the
Code, shall be for the balance of the Number of Option Shares; that is, those
such shares which, on the respective Vesting Date for such shares, would be
unexercisable if included in the first option and thereby made subject to the
ISO Exercise Limitation. Shares treated as subject to the second option shall be
exercisable on the same terms and at the same time as set forth in this Option
Agreement; provided, however, that (i) the second sentence of Section 4.1(a)
shall not apply to the second option and (ii) each such share shall become a
Vested Share on the Vesting Date such share must first be allocated to the
second option pursuant to the preceding sentence. Unless the Optionee
specifically elects to the contrary in the Optionee's written notice of
exercise, the first option shall be deemed to be exercised first to the maximum
possible extent and then the second option shall be deemed to be exercised.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased and
(ii) an executed copy, if required herein, of the then current forms of escrow
and security agreement referenced below. The Option shall be deemed to be
exercised upon receipt by the Company of such written notice, the aggregate
Exercise Price, and, if required by the Company, such executed agreements.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements
5
<PAGE> 35
with an underwriter for the Company) not less than the aggregate Exercise Price,
(iii) by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the
Company's sole discretion at the time the Option is exercised, by the Optionee's
promissory note for the aggregate Exercise Price, or (v) by any combination of
the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if an exercise of the Option using a promissory note would be a
violation of any law. The promissory note permitted in clause (iv) of Section
4.3(a) shall be a full recourse note in a form satisfactory to the Company, with
principal payable no more than four (4) years after the date the Option is
exercised. Interest on the principal balance of the promissory note shall be
payable in annual installments at the minimum interest rate necessary to avoid
imputed interest pursuant to all applicable sections of the Code. Such recourse
promissory note shall be secured by the shares of Stock acquired pursuant to the
then current form of security agreement as approved by the Company. At any time
the Company is subject to the regulations promulgated by the Board of Governors
of the Federal Reserve System or any other governmental entity affecting the
extension of credit in connection with the Company's securities, any promissory
note shall comply with such applicable regulations, and the Optionee shall pay
the unpaid principal and accrued interest, if any, to the extent necessary to
comply with such applicable regulations. Except as the Company in its sole
discretion shall determine, the Optionee shall pay the unpaid principal balance
of the promissory note and any accrued interest thereon upon termination of the
Optionee's Service with the Participating Company Group for any reason, with or
without cause.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole
6
<PAGE> 36
or in part, of the Option, (ii) the transfer, in whole or in part, of any shares
acquired upon exercise of the Option, (iii) the operation of any law or
regulation providing for the imputation of interest, or (iv) the lapsing of any
restriction with respect to any shares acquired upon exercise of the Option. The
Optionee is cautioned that the Option is not exercisable unless the tax
withholding obligations of the Participating Company Group are satisfied.
Accordingly, the Optionee may not be able to exercise the Option when desired
even though the Option is vested, and the Company shall have no obligation to
issue a certificate for such shares or release such shares from any escrow
provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION.
The Option may be exercised during the lifetime of the Optionee only
by the Optionee or the Optionee's guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of
descent and distribution. Following the death of the Optionee, the Option, to
the extent provided in Section 7, may be exercised by
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<PAGE> 37
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION.
The Option shall terminate and may no longer be exercised on the
first to occur of (a) the Option Expiration Date, (b) the last date for
exercising the Option following termination of the Optionee's Service as
described in Section 7, or (c) a Transfer of Control to the extent provided in
Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date. (NOTE: If
the Option is exercised more than three (3) months after the date on which the
Optionee's Service as an Employee terminated as a result of a Disability other
than a permanent and total disability as defined in Section 22(e)(3) of the
Code, the Option will be treated as a Nonstatutory Stock Option and not as an
Incentive Stock Option to the extent required by Section 422 of the Code.)
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's legal
representative, or other person who acquired the right to exercise the Option by
reason of the Optionee's death) at any time prior to the expiration of six (6)
months after the date on which the Optionee's Service terminated, but in any
event no later than the Option Expiration Date. The Optionee's Service shall be
deemed to have terminated on account of death if the Optionee dies within thirty
(30) days after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service
with the Participating Company Group terminates for any reason, except
Disability or death, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee's Service terminated, may be
exercised by the Optionee within thirty (30) days (or such other longer period
of time as determined by the Board, in its sole discretion) after the date on
which the Optionee's Service terminated, but in any event no later than the
Option Expiration Date.
7.2 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11. Except as the Company and the Optionee otherwise
agree, exercise of the Option pursuant to Section 7.1 following
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<PAGE> 38
termination of the Optionee's Service may not be made by delivery of a
promissory note as provided in Section 4.3(a).
7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date. The Company makes no representation as to
the tax consequences of any such delayed exercise. The Optionee should consult
with the Optionee's own tax advisor as to the tax consequences of any such
delayed exercise.
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date. The Company makes no representation as to the tax consequences of any such
delayed exercise. The Optionee should consult with the Optionee's own tax
advisor as to the tax consequences of any such delayed exercise.
7.5 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Optionee's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Optionee's right to reemployment with the Participating Company Group remains
guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company (or required by law), a leave of absence
shall not be treated as Service for purposes of determining the Optionee's
Vested Ratio.
8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
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<PAGE> 39
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. The Option shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate unless
the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
In the event of any stock dividend, stock split, reverse stock
split, recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a
majority of the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event) shares of another
corporation (the "NEW SHARES"), the
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<PAGE> 40
Board may unilaterally amend the Option to provide that the Option is
exercisable for New Shares. In the event of any such amendment, the Number of
Option Shares and the Exercise Price shall be adjusted in a fair and equitable
manner, as determined by the Board, in its sole discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 9 shall be rounded up or down to the nearest whole number, as determined
by the Board, and in no event may the Exercise Price be decreased to an amount
less than the par value, if any, of the stock subject to the Option. The
adjustments determined by the Board pursuant to this Section 9 shall be final,
binding and conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT.
The Optionee shall have no rights as a shareholder with respect to
any shares covered by the Option until the date of the issuance of a certificate
for the shares for which the Option has been exercised (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends, distributions
or other rights for which the record date is prior to the date such certificate
is issued, except as provided in Section 9. Nothing in this Option Agreement
shall confer upon the Optionee any right to continue in the Service of a
Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee's Service as an Employee
or Consultant, as the case may be, at any time.
11. UNVESTED SHARE REPURCHASE OPTION.
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Company Group is terminated for any
reason or no reason, with or without cause, or, if the Optionee, the Optionee's
legal representative, or other holder of shares acquired upon exercise of the
Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of
(other than pursuant to an Ownership Change Event) any shares acquired upon
exercise of the Option which exceed the Vested Shares as defined in Section 11.2
below (the "UNVESTED SHARES"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this Section 11 (the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "VESTED SHARES"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
SHARES" shall mean the number of shares of Stock acquired upon exercise of the
Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice delivered
personally or forwarded by first class mail to the Optionee within sixty (60)
days after (a) termination of the Optionee's Service (or exercise of the Option,
if later) or (b) the Company has received notice of the attempted disposition of
Unvested Shares. If the Company fails to give notice within such sixty (60) day
period, the Unvested Share Repurchase Option shall terminate unless the
11
<PAGE> 41
Company and the Optionee have extended the time for the exercise of the Unvested
Share Repurchase Option. The Unvested Share Repurchase Option must be exercised,
if at all, for all of the Unvested Shares, except as the Company and the
Optionee otherwise agree.
11.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The
purchase price per share being repurchased by the Company shall be an amount
equal to the Optionee's original cost per share, as adjusted pursuant to Section
9 (the "REPURCHASE PRICE"). The Company shall pay the aggregate Repurchase Price
to the Optionee in cash within thirty (30) days after the date of personal
delivery or mailing of the written notice of the Company's exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of
any indebtedness of the Optionee to any Participating Company shall be treated
as payment to the Optionee in cash to the extent of the unpaid principal and any
accrued interest canceled. The shares being repurchased shall be delivered to
the Company by the Optionee at the same time as the delivery of the Repurchase
Price to the Optionee.
11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company
shall have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such option is then exercisable, to one or more persons as may be
selected by the Company.
11.6 OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership
Change Event, any and all new, substituted or additional securities or other
property to which the Optionee is entitled by reason of the Optionee's ownership
of Unvested Shares shall be immediately subject to the Unvested Share Repurchase
Option and included in the terms "Stock" and "Unvested Shares" for all purposes
of the Unvested Share Repurchase Option with the same force and effect as the
Unvested Shares immediately prior to the Ownership Change Event. While the
aggregate Repurchase Price shall remain the same after such Ownership Change
Event, the Repurchase Price per Unvested Share upon exercise of the Unvested
Share Repurchase Option following such Ownership Change Event shall be adjusted
as appropriate. For purposes of determining the Vested Ratio following an
Ownership Change Event, credited Service shall include all Service with any
corporation which is a Participating Company at the time the Service is
rendered, whether or not such corporation is a Participating Company both before
and after the Ownership Change Event.
12. RIGHT OF FIRST REFUSAL.
12.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section
12.7 below, in the event the Optionee, the Optionee's legal representative, or
other holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the
"TRANSFER SHARES") to any person or entity, including, without limitation, any
shareholder of the Participating Company Group, the Company shall have the right
to repurchase the Transfer Shares under the terms and subject to the conditions
set forth in this Section 12 (the "RIGHT OF FIRST REFUSAL").
12.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
the Transfer Shares, the Optionee shall give a written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is
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<PAGE> 42
voluntary, the proposed transfer price, and containing such information
necessary to show the bona fide nature of the proposed transfer. In the event of
a bona fide gift or involuntary transfer, the proposed transfer price shall be
deemed to be the Fair Market Value of the Transfer Shares, as determined by the
Board in good faith. If the Optionee proposes to transfer any Transfer Shares to
more than one Proposed Transferee, the Optionee shall provide a separate
Transfer Notice for the proposed transfer to each Proposed Transferee. The
Transfer Notice shall be signed by both the Optionee and the Proposed Transferee
and must constitute a binding commitment of the Optionee and the Proposed
Transferee for the transfer of the Transfer Shares to the Proposed Transferee
subject only to the Right of First Refusal.
12.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Optionee in the Transfer Notice is insufficient to
establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Optionee written notice of the Optionee's failure to comply with
the procedure described in this Section 12, and the Optionee shall have no right
to transfer the Transfer Shares without first complying with the procedure
described in this Section 12. The Optionee shall not be permitted to transfer
the Transfer Shares if the proposed transfer is not bona fide.
12.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines
the proposed transfer to be bona fide, the Company shall have the right to
purchase all, but not less than all, of the Transfer Shares (except as the
Company and the Optionee otherwise agree) at the purchase price and on the terms
set forth in the Transfer Notice by delivery to the Optionee of a notice of
exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's right to
exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other Transfer
Notice is issued by the Optionee or issued by a person other than the Optionee
with respect to a proposed transfer to the same Proposed Transferee. If the
Company exercises the Right of First Refusal, the Company and the Optionee shall
thereupon consummate the sale of the Transfer Shares to the Company on the terms
set forth in the Transfer Notice within sixty (60) days after the date the
Transfer Notice is delivered to the Company (unless a longer period is offered
by the Proposed Transferee); provided, however, that in the event the Transfer
Notice provides for the payment for the Transfer Shares other than in cash, the
Company shall have the option of paying for the Transfer Shares by the present
value cash equivalent of the consideration described in the Transfer Notice as
reasonably determined by the Company. For purposes of the foregoing,
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
12.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company
fails to exercise the Right of First Refusal in full (or to such lesser extent
as the Company and the Optionee otherwise agree) within the period specified in
Section 12.4 above, the Optionee may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and conditions described in the
Transfer Notice, provided such transfer occurs not later than ninety (90) days
following delivery to the Company of the Transfer Notice. The Company shall have
the right to demand further assurances from the Optionee and the Proposed
Transferee (in a form satisfactory
13
<PAGE> 43
to the Company) that the transfer of the Transfer Shares was actually carried
out on the terms and conditions described in the Transfer Notice. No Transfer
Shares shall be transferred on the books of the Company until the Company has
received such assurances, if so demanded, and has approved the proposed transfer
as bona fide. Any proposed transfer on terms and conditions different from those
described in the Transfer Notice, as well as any subsequent proposed transfer by
the Optionee, shall again be subject to the Right of First Refusal and shall
require compliance by the Optionee with the procedure described in this Section
12.
12.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer
Shares or any interest therein, other than the Company, shall be required as a
condition of such transfer to agree in writing (in a form satisfactory to the
Company) that such transferee shall receive and hold such Transfer Shares or
interest therein subject to all of the terms and conditions of this Option
Agreement, including this Section 12 providing for the Right of First Refusal
with respect to any subsequent transfer. Any sale or transfer of any shares
acquired upon exercise of the Option shall be void unless the provisions of this
Section 12 are met.
12.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of
First Refusal shall not apply to any transfer or exchange of the shares acquired
upon exercise of the Option if such transfer or exchange is in connection with
an Ownership Change Event. If the consideration received pursuant to such
transfer or exchange consists of stock of a Participating Company, such
consideration shall remain subject to the Right of First Refusal unless the
provisions of Section 12.9 below result in a termination of the Right of First
Refusal.
12.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have
the right to assign the Right of First Refusal at any time, whether or not there
has been an attempted transfer, to one or more persons as may be selected by the
Company.
12.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Option Agreement notwithstanding, the Right of First Refusal
shall terminate and be of no further force and effect upon (a) the occurrence of
a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (b)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (ii) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
13. ESCROW.
13.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Unvested Share Repurchase Option or the Right of First Refusal or securing any
promissory note will be available for repurchase, the Company may require the
Optionee to deposit the certificate evidencing the shares which the Optionee
purchases upon exercise of the Option with an agent designated by the Company
under the terms and conditions of escrow and security agreements approved by the
Company. If the Company does not require such deposit as a condition of exercise
of the Option, the Company reserves the right at any time to require the
Optionee to so
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<PAGE> 44
deposit the certificate in escrow. Upon the occurrence of an Ownership Change
Event or a change, as described in Section 9, in the character or amount of any
of the outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, any and all new, substituted or additional
securities or other property to which the Optionee is entitled by reason of the
Optionee's ownership of shares of Stock acquired upon exercise of the Option
that remain, following such Ownership Change Event or change described in
Section 9, subject to the Unvested Share Repurchase Option, the Right of First
Refusal or any security interest held by the Company shall be immediately
subject to the escrow to the same extent as such shares of Stock immediately
before such event. The Company shall bear the expenses of the escrow.
13.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after
the expiration of the Unvested Share Repurchase Option and the Right of First
Refusal and after full repayment of any promissory note secured by the shares or
other property in escrow, but not more frequently than twice each calendar year,
the escrow agent shall deliver to the Optionee the shares and any other property
no longer subject to such restrictions and no longer securing any promissory
note.
13.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share Repurchase Option or the Right of First Refusal, the notices required to
be given to the Optionee shall be given to the escrow agent, and any payment
required to be given to the Optionee shall be given to the escrow agent. Within
thirty (30) days after payment by the Company, the escrow agent shall deliver
the shares and any other property which the Company has purchased to the Company
and shall deliver the payment received from the Company to the Optionee.
14. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT.
If, from time to time, there is any stock dividend, stock split or
other change, as described in Section 9, in the character or amount of any of
the outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, then in such event any and all new,
substituted or additional securities to which the Optionee is entitled by reason
of the Optionee's ownership of the shares acquired upon exercise of the Option
shall be immediately subject to the Unvested Share Repurchase Option, the Right
of First Refusal, and any security interest held by the Company with the same
force and effect as the shares subject to the Unvested Share Repurchase Option,
the Right of First Refusal, and such security interest immediately before such
event.
15. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION.
The Optionee shall dispose of the shares acquired pursuant to the
Option only in accordance with the provisions of this Option Agreement. In
addition, the Optionee shall promptly notify the Chief Financial Officer of the
Company if the Optionee disposes of any of the shares acquired pursuant to the
Option within one (1) year after the date of the Optionee exercises all or part
of the Option or within two (2) years after the Date of Option Grant. Until such
time as the Optionee disposes of such shares in a manner consistent with the
provisions of this Option Agreement, unless otherwise expressly authorized by
the Company, the Optionee
15
<PAGE> 45
shall hold all shares acquired pursuant to the Option in the Optionee's name
(and not in the name of any nominee) for the one-year period immediately after
the exercise of the Option and the two-year period immediately after Date of
Option Grant. At any time during the one-year or two-year periods set forth
above, the Company may place a legend on any certificate representing shares
acquired pursuant to the Option requesting the transfer agent for the Company's
stock to notify the Company of any such transfers. The obligation of the
Optionee to notify the Company of any such transfer shall continue
notwithstanding that a legend has been placed on the certificate pursuant to the
preceding sentence.
16. LEGENDS.
The Company may at any time place legends referencing the Unvested
Share Repurchase Option, the Right of First Refusal, and any applicable federal,
state or foreign securities law restrictions on all certificates representing
shares of stock subject to the provisions of this Option Agreement. The Optionee
shall, at the request of the Company, promptly present to the Company any and
all certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to carry out the provisions of this Section.
Unless otherwise specified by the Company, legends placed on such certificates
may include, but shall not be limited to, the following:
16.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE
IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES
AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY
TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
16.2 Any legend required to be placed thereon by the
Commissioner of Corporations of the State of California.
16.3 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
AN UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE
SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR
SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THIS CORPORATION."
16.4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S
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<PAGE> 46
PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THIS CORPORATION."
16.5 "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY
THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK
OPTION AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED ("ISO"). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO
ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO . SHOULD THE
REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND
FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE
CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE
NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED
ABOVE."
17. PUBLIC OFFERING.
The Optionee hereby agrees that in the event of any underwritten
public offering of stock, including an initial public offering of stock, made by
the Company pursuant to an effective registration statement filed under the
Securities Act, the Optionee shall not offer, sell, contract to sell, pledge,
hypothecate, grant any option to purchase or make any short sale of, or
otherwise dispose of any shares of stock of the Company or any rights to acquire
stock of the Company for such period of time from and after the effective date
of such registration statement as may be established by the underwriter for such
public offering; provided, however, that such period of time shall not exceed
one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing
limitation shall not apply to shares registered in the public offering under the
Securities Act. The Optionee shall be subject to this Section provided and only
if the officers and directors of the Company are also subject to similar
arrangements.
18. BINDING EFFECT.
Subject to the restrictions on transfer set forth herein, this
Option Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns.
19. TERMINATION OR AMENDMENT.
The Board may terminate or amend the Plan or the Option at any time;
provided, however, that except as provided in Section 8.2 in connection with a
Transfer of Control, no such termination or amendment may adversely affect the
Option or any unexercised portion hereof without the consent of the Optionee
unless such termination or amendment is necessary to comply with any applicable
law or government regulation or is required to enable the Option to qualify as
an Incentive Stock Option. No amendment or addition to this Option Agreement
shall be effective unless in writing.
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<PAGE> 47
20. INTEGRATED AGREEMENT.
This Option Agreement and the Plan constitute the entire
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein and therein and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein or therein. To the
extent contemplated herein or therein, the provisions of this Option Agreement
shall survive any exercise of the Option and shall remain in full force and
effect.
21. APPLICABLE LAW.
This Option Agreement shall be governed by the laws of the State of
California as such laws are applied to agreements between California residents
entered into and to be performed entirely within the State of California.
SILICON ENTERTAINMENT, INC.
By:
------------------------------
Title:
---------------------------
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in Section 11 and the Right of First Refusal set forth in
Section 12, and hereby accepts the Option subject to all of the terms and
provisions thereof. The Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under this Option Agreement. The undersigned acknowledges receipt of a
copy of the Plan.
OPTIONEE
Date:
------------------------------ ----------------------------
[Optionee]
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<PAGE> 48
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
SILICON ENTERTAINMENT, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (the
"OPTION AGREEMENT") is made and entered into as of [Date_of_Grant] by and
between Silicon Entertainment, Inc. and [Optionee] (the "OPTIONee").
The Company has granted to the Optionee pursuant to the Silicon
Entertainment, Inc. 1996 Stock Option Plan (the "PLAN") an option to purchase
certain shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION"). The Option shall in all respects be subject to the
terms and conditions of the Plan, the provisions of which are incorporated
herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan. Whenever used
herein, the following terms shall have their respective meanings set forth
below:
(a) "DATE OF OPTION GRANT" means [Date_of_Grant].
(b) "NUMBER OF OPTION SHARES" means
[No_of_Shares] shares of Stock, as adjusted from time to time pursuant to
Section 9.
(c) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
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<PAGE> 49
(d) "EXERCISE PRICE" means $[Option_Price] per share of
Stock, as adjusted from time to time pursuant to Section 9.
(e) "INITIAL EXERCISE DATE" means the later of the Date of
Option Grant or the date the Optionee's Service commences.
(f) "INITIAL VESTING DATE" means the Date of Option Grant.
(g) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, 1/1
</TABLE>
(h) "OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.
(i) "COMPANY" means Silicon Entertainment, Inc., a California
corporation, or any successor corporation thereto.
(j) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company Group because
of the sickness or injury of the Optionee.
(k) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(l) "SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Optionee's Service
has terminated and the effective date of such termination.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX CONSEQUENCES.
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<PAGE> 50
2.1 TAX STATUS OF OPTION. This Option is intended to be a
Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option
within the meaning of Section 422(b) of the Code.
2.2 ELECTION UNDER SECTION 83(b) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of
forfeiture if, for example, (a) they are unvested and are subject to a right of
the Company to repurchase such shares at the Optionee's original purchase price
if the Optionee's Service terminates, or (b) the Optionee is subject to a
restriction on transfer to comply with "Pooling-of-Interests Accounting" rules.
Failure to file an election under Section 83(b), if appropriate, may result in
adverse tax consequences to the Optionee. The Optionee acknowledges that the
Optionee has been advised to consult with a tax advisor prior to the exercise of
the Option regarding the tax consequences to the Optionee of the exercise of the
Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE
DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE
EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b)
ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS
THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION.
All questions of interpretation concerning this Option Agreement
shall be determined by the Board, including any duly appointed Committee of the
Board. All determinations by the Board shall be final and binding upon all
persons having an interest in the Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, or election which is the responsibility of or which
is allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
4. EXERCISE OF THE OPTION.
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares less the number of shares previously acquired
upon exercise of the Option, subject to the Optionee's agreement that any shares
purchased upon exercise are subject to the Company's repurchase rights set forth
in Section 11 and Section 12.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to
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the provisions of this Option Agreement. The written notice must be signed by
the Optionee and must be delivered in person, by certified or registered mail,
return receipt requested, by confirmed facsimile transmission, or by such other
means as the Company may permit, to the Chief Financial Officer of the Company,
or other authorized representative of the Participating Company Group, prior to
the termination of the Option as set forth in Section 6, accompanied by (i) full
payment of the aggregate Exercise Price for the number of shares of Stock being
purchased and (ii) an executed copy, if required herein, of the then current
forms of escrow and security agreement referenced below. The Option shall be
deemed to be exercised upon receipt by the Company of such written notice, the
aggregate Exercise Price, and, if required by the Company, such executed
agreements.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the
Company's sole discretion at the time the Option is exercised, by the Optionee's
promissory note for the aggregate Exercise Price, or (v) by any combination of
the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if an exercise of the Option using a promissory note would be a
violation of any law. The promissory note permitted in clause (iv) of Section
4.3(a) shall be a full recourse note in a form satisfactory to the Company, with
principal payable no more than four (4) years after the date the Option is
exercised. Interest on the principal balance of the promissory note shall be
payable in annual installments at the minimum interest rate necessary to avoid
imputed interest pursuant to all applicable sections of the Code. Such recourse
promissory note shall be secured
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by the shares of Stock acquired pursuant to the then current form of security
agreement as approved by the Company. At any time the Company is subject to the
regulations promulgated by the Board of Governors of the Federal Reserve System
or any other governmental entity affecting the extension of credit in connection
with the Company's securities, any promissory note shall comply with such
applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations. Except as the Company in its sole discretion shall determine, the
Optionee shall pay the unpaid principal balance of the promissory note and any
accrued interest thereon upon termination of the Optionee's Service with the
Participating Company Group for any reason, with or without cause.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is vested, and the Company shall have
no obligation to issue a certificate for such shares or release such shares from
any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any
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regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION.
The Option may be exercised during the lifetime of the Optionee only
by the Optionee or the Optionee's guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of
descent and distribution. Following the death of the Optionee, the Option, to
the extent provided in Section 7, may be exercised by the Optionee's legal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
6. TERMINATION OF THE OPTION.
The Option shall terminate and may no longer be exercised on the
first to occur of (a) the Option Expiration Date, (b) the last date for
exercising the Option following termination of the Optionee's Service as
described in Section 7, or (c) a Transfer of Control to the extent provided in
Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's legal
representative, or other person who acquired the right to exercise the Option by
reason of the Optionee's death) at any time prior to the expiration of six (6)
months after the date on which the Optionee's Service terminated, but in any
event no later than the Option Expiration Date. The Optionee's Service shall be
deemed to have terminated on account of death if the Optionee dies within thirty
(30) days after the Optionee's termination of Service.
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(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service
with the Participating Company Group terminates for any reason, except
Disability or death, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee's Service terminated, may be
exercised by the Optionee within thirty (30) days (or such other longer period
of time as determined by the Board, in its sole discretion) after the date on
which the Optionee's Service terminated, but in any event no later than the
Option Expiration Date.
7.2 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11. Except as the Company and the Optionee otherwise
agree, exercise of the Option pursuant to Section 7.1 following termination of
the Optionee's Service may not be made by delivery of a promissory note as
provided in Section 4.3(a).
7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
7.5 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Optionee's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Optionee's right to reemployment with the Participating Company Group remains
guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company (or required by law), a leave of absence
shall not be treated as Service for purposes of determining the Optionee's
Vested Ratio.
8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
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(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. The Option shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate unless
the Board otherwise provides in its sole discretion.
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9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
In the event of any stock dividend, stock split, reverse stock
split, recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a
majority of the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to
provide that the Option is exercisable for New Shares. In the event of any such
amendment, the Number of Option Shares and the Exercise Price shall be adjusted
in a fair and equitable manner, as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 9 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the
Exercise Price be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 9 shall be final, binding and conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT.
The Optionee shall have no rights as a shareholder with respect to
any shares covered by the Option until the date of the issuance of a certificate
for the shares for which the Option has been exercised (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends, distributions
or other rights for which the record date is prior to the date such certificate
is issued, except as provided in Section 9. Nothing in this Option Agreement
shall confer upon the Optionee any right to continue in the Service of a
Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee's Service as an Employee
or Consultant, as the case may be, at any time.
11. RIGHT OF FIRST REFUSAL.
11.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section
11.7 below, in the event the Optionee, the Optionee's legal representative, or
other holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the
"TRANSFER SHARES") to any person or entity, including, without limitation, any
shareholder of the Participating Company Group, the Company shall have the right
to repurchase the Transfer Shares under the terms and subject to the conditions
set forth in this Section 11 (the "RIGHT OF FIRST REFUSAL").
11.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
the Transfer Shares, the Optionee shall give a written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. In the event of a bona fide gift or involuntary transfer,
the proposed transfer price shall be deemed to be the Fair Market Value of the
Transfer Shares, as determined by the Board in good faith. If the Optionee
proposes to transfer any Transfer
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Shares to more than one Proposed Transferee, the Optionee shall provide a
separate Transfer Notice for the proposed transfer to each Proposed Transferee.
The Transfer Notice shall be signed by both the Optionee and the Proposed
Transferee and must constitute a binding commitment of the Optionee and the
Proposed Transferee for the transfer of the Transfer Shares to the Proposed
Transferee subject only to the Right of First Refusal.
11.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Optionee in the Transfer Notice is insufficient to
establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Optionee written notice of the Optionee's failure to comply with
the procedure described in this Section 11, and the Optionee shall have no right
to transfer the Transfer Shares without first complying with the procedure
described in this Section 11. The Optionee shall not be permitted to transfer
the Transfer Shares if the proposed transfer is not bona fide.
11.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines
the proposed transfer to be bona fide, the Company shall have the right to
purchase all, but not less than all, of the Transfer Shares (except as the
Company and the Optionee otherwise agree) at the purchase price and on the terms
set forth in the Transfer Notice by delivery to the Optionee of a notice of
exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's right to
exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other Transfer
Notice is issued by the Optionee or issued by a person other than the Optionee
with respect to a proposed transfer to the same Proposed Transferee. If the
Company exercises the Right of First Refusal, the Company and the Optionee shall
thereupon consummate the sale of the Transfer Shares to the Company on the terms
set forth in the Transfer Notice within sixty (60) days after the date the
Transfer Notice is delivered to the Company (unless a longer period is offered
by the Proposed Transferee); provided, however, that in the event the Transfer
Notice provides for the payment for the Transfer Shares other than in cash, the
Company shall have the option of paying for the Transfer Shares by the present
value cash equivalent of the consideration described in the Transfer Notice as
reasonably determined by the Company. For purposes of the foregoing,
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
11.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company
fails to exercise the Right of First Refusal in full (or to such lesser extent
as the Company and the Optionee otherwise agree) within the period specified in
Section 11.4 above, the Optionee may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and conditions described in the
Transfer Notice, provided such transfer occurs not later than ninety (90) days
following delivery to the Company of the Transfer Notice. The Company shall have
the right to demand further assurances from the Optionee and the Proposed
Transferee (in a form satisfactory to the Company) that the transfer of the
Transfer Shares was actually carried out on the terms and conditions described
in the Transfer Notice. No Transfer Shares shall be transferred on the books of
the Company until the Company has received such assurances, if so demanded, and
has approved the proposed transfer as bona fide. Any proposed transfer on terms
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and conditions different from those described in the Transfer Notice, as well as
any subsequent proposed transfer by the Optionee, shall again be subject to the
Right of First Refusal and shall require compliance by the Optionee with the
procedure described in this Section 11.
11.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer
Shares or any interest therein, other than the Company, shall be required as a
condition of such transfer to agree in writing (in a form satisfactory to the
Company) that such transferee shall receive and hold such Transfer Shares or
interest therein subject to all of the terms and conditions of this Option
Agreement, including this Section 11 providing for the Right of First Refusal
with respect to any subsequent transfer. Any sale or transfer of any shares
acquired upon exercise of the Option shall be void unless the provisions of this
Section 11 are met.
11.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of
First Refusal shall not apply to any transfer or exchange of the shares acquired
upon exercise of the Option if such transfer or exchange is in connection with
an Ownership Change Event. If the consideration received pursuant to such
transfer or exchange consists of stock of a Participating Company, such
consideration shall remain subject to the Right of First Refusal unless the
provisions of Section 11.9 below result in a termination of the Right of First
Refusal.
11.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have
the right to assign the Right of First Refusal at any time, whether or not there
has been an attempted transfer, to one or more persons as may be selected by the
Company.
11.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Option Agreement notwithstanding, the Right of First Refusal
shall terminate and be of no further force and effect upon (a) the occurrence of
a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (b)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (ii) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
12. LEGENDS.
The Company may at any time place legends referencing the Unvested
Share Repurchase Option, the Right of First Refusal, and any applicable federal,
state or foreign securities law restrictions on all certificates representing
shares of stock subject to the provisions of this Option Agreement. The Optionee
shall, at the request of the Company, promptly present to the Company any and
all certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to carry out the provisions of this Section.
Unless otherwise specified by the Company, legends placed on such certificates
may include, but shall not be limited to, the following:
12.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
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MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES
REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT."
12.2 Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
12.3 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
12.4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
13. LOCK-UP AGREEMENT.
The Optionee hereby agrees that in the event of any underwritten
public offering of stock, including an initial public offering of stock, made by
the Company pursuant to an effective registration statement filed under the
Securities Act, the Optionee shall not offer, sell, contract to sell, pledge,
hypothecate, grant any option to purchase or make any short sale of, or
otherwise dispose of any shares of stock of the Company or any rights to acquire
stock of the Company for such period of time from and after the effective date
of such registration statement as may be established by the underwriter for such
public offering; provided, however, that such period of time shall not exceed
one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing
limitation shall not apply to shares registered in the public offering under the
Securities Act.
14. RESTRICTIONS ON TRANSFER OF SHARES.
No shares acquired upon exercise of the Option may be sold,
exchanged, transferred (including, without limitation, any transfer to a nominee
or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed
of, including by operation of law, in any manner which violates any of the
provisions of this Option Agreement and any such attempted disposition shall be
void. The Company shall not be required (a) to transfer on its books any shares
which will have been transferred in violation of any of the provisions set forth
in this
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Option Agreement or (b) to treat as owner of such shares or to accord the right
to vote as such owner or to pay dividends to any transferee to whom such shares
will have been so transferred.
15. BINDING EFFECT.
Subject to the restrictions on transfer set forth herein, this
Option Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns.
16. TERMINATION OR AMENDMENT.
The Board may terminate or amend the Plan or the Option at any time;
provided, however, that except as provided in Section 8.2 in connection with a
Transfer of Control, no such termination or amendment may adversely affect the
Option or any unexercised portion hereof without the consent of the Optionee
unless such termination or amendment is necessary to comply with any applicable
law or government regulation. No amendment or addition to this Option Agreement
shall be effective unless in writing.
17. INTEGRATED AGREEMENT.
This Option Agreement and the Plan constitute the entire
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein and therein and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein or therein. To the
extent contemplated herein or therein, the provisions of this Option Agreement
shall survive any exercise of the Option and shall remain in full force and
effect.
18. APPLICABLE LAW.
This Option Agreement shall be governed by the laws of the State of
California as such laws are applied to agreements between California residents
entered into and to be performed entirely within the State of California.
SILICON ENTERTAINMENT, INC.
By:
-----------------------
Title:
--------------------
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement, including the Right of First Refusal
set forth in Section 11, and hereby accepts the Option subject to all of the
terms and provisions thereof. The Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board
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<PAGE> 61
upon any questions arising under this Option Agreement. The undersigned
acknowledges receipt of a copy of the Plan.
OPTIONEE
Date:
------------------------------ ----------------------------
[Optionee]
<PAGE> 1
EXHIBIT 10.3
SILICON ENTERTAINMENT, INC.
1997 NONSTATUTORY STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Silicon Entertainment, Inc. 1997 Nonstatutory
Stock Option Plan (the "PLAN") is hereby established effective as of July 11,
1997 (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options
shall be granted, if at all, within ten (10) years from the earlier of the date
the Plan is adopted by the Board or the date the Plan is duly approved by the
shareholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
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<PAGE> 2
(d) "COMPANY" means Silicon Entertainment, Inc., a California
corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an employee
or a director.
(f) "FAIR MARKET VALUE" means, as of any date, the value of a
share of stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.
(g) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be or which does not qualify as an incentive stock option within the meaning of
Section 422(b) of the Code.
(h) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. Options granted under the Plan shall be Nonstatutory Stock Options.
(i) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(j) "OPTIONEE" means a person who has been granted one or more
Options.
(k) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(l) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(m) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(n) "STOCK" means the common stock, without par value, of the
Company, as adjusted from time to time in accordance with Section 4.2.
(o) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(p) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of
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<PAGE> 3
the total combined voting power of all classes of stock of a Participating
Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2 POWERS OF THE BOARD. In addition to any other powers set forth
in the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to determine the Fair Market Value of shares of Stock or
other property;
(c) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
(d) to approve one or more forms of Option Agreement;
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<PAGE> 4
(e) to amend, modify, extend, or renew, or grant a new Option
in substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(f) to accelerate, continue, extend or defer the exercisability
of any Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee's termination of
service with the Participating Company Group;
(g) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(h) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Seven Hundred Thousand (700,000) and shall
consist of authorized but unissued or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options and in the exercise price per
share of any outstanding Options. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Options are exchanged
for, converted into, or otherwise become (whether or not pursuant to an
Ownership Change Event, as defined in Section 8.1) shares of another corporation
(the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to
provide that such Options are exercisable for New Shares. In the event of any
such amendment, the number of shares subject to, and the exercise price per
share of, the outstanding Options shall be adjusted in a fair and equitable
manner as determined by the Board, in its sole discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded up or down to the nearest whole
4
<PAGE> 5
number, as determined by the Board, and in no event may the exercise price of
any Option be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY. Options may be granted only to Consultants. For
purposes of the foregoing sentence, "Consultants" shall include prospective
Consultants to whom Options are granted in connection with written offers of
engagement with the Participating Company Group. Eligible persons may be granted
more than one (1) Option.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Option shall be not less than eighty-five
percent (85%) of the Fair Market Value of a share of Stock on the effective date
of grant of the Option, and (b) no Option granted to a Ten Percent Owner
Optionee shall have an exercise price per share less than one hundred ten
percent (110%) of the Fair Market Value of a share of Stock on the effective
date of grant of the Option. Notwithstanding the foregoing, an Option may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Option shall be exercisable after the expiration of ten (10) years
after the effective date of grant of such Option and (b) no Option granted to a
prospective Consultant may become exercisable prior to the date on which such
person commences service with a Participating Company. Except as otherwise
provided or by the Board in the grant of an Option, any Option granted hereunder
shall have a term of ten (10) years from the effective date of grant of the
Option.
6.3 PAYMENT OF EXERCISE PRICE.
(A) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as
5
<PAGE> 6
determined by the Company without regard to any restrictions on transferability
applicable to such stock by reason of federal or state securities laws or
agreements with an underwriter for the Company) not less than the exercise
price, (iii) by the assignment of the proceeds of a sale or loan with respect to
some or all of the shares being acquired upon the exercise of the Option
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by the
Optionee's promissory note in a form approved by the Company, (v) by such other
consideration as may be approved by the Board from time to time to the extent
permitted by applicable law, or (vi) by any combination thereof. The Board may
at any time or from time to time, by adoption of or by amendment to the standard
forms of Option Agreement described in Section 7, or by other means, grant
Options which do not permit all of the foregoing forms of consideration to be
used in payment of the exercise price or which otherwise restrict one or more
forms of consideration.
(B) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(C) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
(D) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market
6
<PAGE> 7
Value, as determined by the Company, equal to all or any part of the federal,
state, local and foreign taxes, if any, required by law to be withheld by the
Participating Company Group with respect to such Option or the shares acquired
upon the exercise thereof. Alternatively or in addition, in its sole discretion,
the Company shall have the right to require the Optionee, through cash payment
or otherwise, including by means of a Cashless Exercise, to make adequate
provision for any such tax withholding obligations of the Participating Company
Group arising in connection with the Option or the shares acquired upon the
exercise thereof. The Company shall have no obligation to deliver shares of
Stock or to release shares of Stock from an escrow established pursuant to the
Option Agreement until the Participating Company Group's tax withholding
obligations have been satisfied by the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject
to a right of first refusal, one or more repurchase options, or other conditions
and restrictions as determined by the Board in its sole discretion at the time
the Option is granted. The Company shall have the right to assign at any time
any repurchase right it may have, whether or not such right is then exercisable,
to one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
7. STANDARD FORM OF OPTION AGREEMENT.
7.1 GENERAL. Unless otherwise provided by the Board at the time the
Option is granted, an Option shall comply with and be subject to the terms and
conditions set forth in the form of Immediately Exercisable Nonstatutory Stock
Option Agreement adopted by the Board concurrently with its adoption of the Plan
and as amended from time to time.
7.2 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of the standard form of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement shall be in
accordance with the terms of the Plan. Such authority shall include, but not by
way of limitation, the authority to grant Options which are not immediately
exercisable.
8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
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<PAGE> 8
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. Any Options which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the Transfer of Control nor exercised as of the date of the Transfer of
Control shall terminate and cease to be outstanding effective as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the outstanding Options immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Transfer of Control
is the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning
8
<PAGE> 9
of Section 1504(a) of the Code without regard to the provisions of Section
1504(b) of the Code, the outstanding Options shall not terminate unless the
Board otherwise provides in its sole discretion.
9. PROVISION OF INFORMATION. At least annually, copies of the Company's
balance sheet and income statement for the just completed fiscal year shall be
made available to each Optionee and purchaser of shares of Stock upon the
exercise of an Option. The Company shall not be required to provide such
information to persons whose duties in connection with the Company assure them
access to equivalent information.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan, or any right granted hereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such person
is liable for gross negligence, bad faith or intentional misconduct in duties;
provided, however, that within sixty (60) days after the institution of such
action, suit or proceeding, such person shall offer to the Company, in writing,
the opportunity at its own expense to handle and defend the same.
12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend
the Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
shareholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), and (b) other amendment of the Plan that would
require the approval of the Company's shareholders under any applicable law,
regulation or rule. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Option or any unexercised portion thereof,
without the consent of the Optionee, unless such termination or amendment is
necessary to comply with any applicable law, regulation or rule.
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<PAGE> 10
13. SHAREHOLDER APPROVAL. The Plan or any increase in the maximum
number of shares of Stock issuable thereunder as provided in Section 4.1 (the
"MAXIMUM SHARES") shall be approved by the shareholders of the Company within
twelve (12) months of the date of adoption thereof by the Board. Options granted
prior to shareholder approval of the Plan or in excess of the Maximum Shares
previously approved by the shareholders shall become exercisable no earlier than
the date of shareholder approval of the Plan or such increase in the Maximum
Shares, as the case may be.
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<PAGE> 11
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
SILICON ENTERTAINMENT, INC.
IMMEDIATELY EXERCISABLE
NONSTATUTORY STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (the
"OPTION AGREEMENT") is made and entered into as of [Date_of_Grant] by and
between Silicon Entertainment, Inc. and [Optionee] (the "OPTIONee").
The Company has granted to the Optionee pursuant to the Silicon
Entertainment, Inc. 1997 Nonstatutory Stock Option Plan (the "PLAN") an option
to purchase certain shares of Stock, upon the terms and conditions set forth in
this Option Agreement (the "OPTION"). The Option shall in all respects be
subject to the terms and conditions of the Plan, the provisions of which are
incorporated herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan. Whenever used
herein, the following terms shall have their respective meanings set forth
below:
(a) "DATE OF OPTION GRANT" means [Date_of_Grant].
(b) "NUMBER OF OPTION SHARES" means [No_of_Shares] shares of
Stock, as adjusted from time to time pursuant to Section 9.
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<PAGE> 12
(c) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(d) "EXERCISE PRICE" means $[Option_Price] per share of Stock,
as adjusted from time to time pursuant to Section 9.
(e) "INITIAL EXERCISE DATE" means the later of the Date of
Option Grant or the date the Optionee's Service commences.
(f) "INITIAL VESTING DATE" means the Date of Option Grant.
(g) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, 1/4
</TABLE>
(h) "OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.
(i) "COMPANY" means Silicon Entertainment, Inc., a California
corporation, or any successor corporation thereto.
(j) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating
Company Group because of the sickness or injury of the Optionee.
(k) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(l) "SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Optionee's Service
has terminated and the effective date of such termination.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
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2. TAX CONSEQUENCES.
2.1 TAX STATUS OF OPTION. This Option is intended to be a
Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option
within the meaning of Section 422(b) of the Code.
2.2 ELECTION UNDER SECTION 83(b) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of
forfeiture if, for example, (a) they are unvested and are subject to a right of
the Company to repurchase such shares at the Optionee's original purchase price
if the Optionee's Service terminates, or (b) the Optionee is subject to a
restriction on transfer to comply with "Pooling-of-Interests Accounting" rules.
Failure to file an election under Section 83(b), if appropriate, may result in
adverse tax consequences to the Optionee. The Optionee acknowledges that the
Optionee has been advised to consult with a tax advisor prior to the exercise of
the Option regarding the tax consequences to the Optionee of the exercise of the
Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE
DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE
EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b)
ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS
THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION.
All questions of interpretation concerning this Option Agreement
shall be determined by the Board, including any duly appointed Committee of the
Board. All determinations by the Board shall be final and binding upon all
persons having an interest in the Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, or election which is the responsibility of or which
is allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
4. EXERCISE OF THE OPTION.
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares less the number of shares previously acquired
upon exercise of the Option, subject to the Optionee's agreement that any shares
purchased upon exercise are subject to the Company's repurchase rights set forth
in Section 11 and Section 12.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as
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to the Optionee's investment intent with respect to such shares as may be
required pursuant to the provisions of this Option Agreement. The written notice
must be signed by the Optionee and must be delivered in person, by certified or
registered mail, return receipt requested, by confirmed facsimile transmission,
or by such other means as the Company may permit, to the Chief Financial Officer
of the Company, or other authorized representative of the Participating Company
Group, prior to the termination of the Option as set forth in Section 6,
accompanied by (i) full payment of the aggregate Exercise Price for the number
of shares of Stock being purchased and (ii) an executed copy, if required
herein, of the then current forms of escrow and security agreement referenced
below. The Option shall be deemed to be exercised upon receipt by the Company of
such written notice, the aggregate Exercise Price, and, if required by the
Company, such executed agreements.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the
Company's sole discretion at the time the Option is exercised, by the Optionee's
promissory note for the aggregate Exercise Price, or (v) by any combination of
the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if an exercise of the Option using a promissory note would be a
violation of any law. The promissory note permitted in clause (iv) of Section
4.3(a) shall be a full recourse note in a form satisfactory to the Company, with
principal payable no more than four (4) years after the date the Option is
exercised. Interest on the principal balance of the promissory note shall be
payable in annual installments at the minimum interest rate necessary to avoid
imputed interest pursuant to all applicable sections of the Code. Such recourse
promissory note shall be secured
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by the shares of Stock acquired pursuant to the then current form of security
agreement as approved by the Company. At any time the Company is subject to the
regulations promulgated by the Board of Governors of the Federal Reserve System
or any other governmental entity affecting the extension of credit in connection
with the Company's securities, any promissory note shall comply with such
applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations. Except as the Company in its sole discretion shall determine, the
Optionee shall pay the unpaid principal balance of the promissory note and any
accrued interest thereon upon termination of the Optionee's Service with the
Participating Company Group for any reason, with or without cause.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is vested, and the Company shall have
no obligation to issue a certificate for such shares or release such shares from
any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel
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to be necessary to the lawful issuance and sale of any shares subject to the
Option shall relieve the Company of any liability in respect of the failure to
issue or sell such shares as to which such requisite authority shall not have
been obtained. As a condition to the exercise of the Option, the Company may
require the Optionee to satisfy any qualifications that may be necessary or
appropriate, to evidence compliance with any applicable law or regulation and to
make any representation or warranty with respect thereto as may be requested by
the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION.
The Option may be exercised during the lifetime of the Optionee only
by the Optionee or the Optionee's guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of
descent and distribution. Following the death of the Optionee, the Option, to
the extent provided in Section 7, may be exercised by the Optionee's legal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
6. TERMINATION OF THE OPTION.
The Option shall terminate and may no longer be exercised on the
first to occur of (a) the Option Expiration Date, (b) the last date for
exercising the Option following termination of the Optionee's Service as
described in Section 7, or (c) a Transfer of Control to the extent provided in
Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's legal
representative, or other person who acquired the right to exercise the Option by
reason of the Optionee's death) at any time prior to the expiration of six (6)
months after the date on which the Optionee's Service terminated, but in any
event no later than the Option Expiration Date. The Optionee's Service shall be
deemed to have terminated on account of death if the Optionee dies within thirty
(30) days after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service
with the Participating Company Group terminates for any reason, except
Disability or death, the Option,
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to the extent unexercised and exercisable by the Optionee on the date on which
the Optionee's Service terminated, may be exercised by the Optionee within
thirty (30) days (or such other longer period of time as determined by the
Board, in its sole discretion) after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
7.2 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11. Except as the Company and the Optionee otherwise
agree, exercise of the Option pursuant to Section 7.1 following termination of
the Optionee's Service may not be made by delivery of a promissory note as
provided in Section 4.3(a).
7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
7.5 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Optionee's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Optionee's right to reemployment with the Participating Company Group remains
guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company (or required by law), a leave of absence
shall not be treated as Service for purposes of determining the Optionee's
Vested Ratio.
8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
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(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. The Option shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate unless
the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
In the event of any stock dividend, stock split, reverse stock
split, recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a
majority of the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or otherwise become
(whether or not
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pursuant to an Ownership Change Event) shares of another corporation (the "NEW
SHARES"), the Board may unilaterally amend the Option to provide that the Option
is exercisable for New Shares. In the event of any such amendment, the Number of
Option Shares and the Exercise Price shall be adjusted in a fair and equitable
manner, as determined by the Board, in its sole discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 9 shall be rounded up or down to the nearest whole number, as determined
by the Board, and in no event may the Exercise Price be decreased to an amount
less than the par value, if any, of the stock subject to the Option. The
adjustments determined by the Board pursuant to this Section 9 shall be final,
binding and conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT.
The Optionee shall have no rights as a shareholder with respect to
any shares covered by the Option until the date of the issuance of a certificate
for the shares for which the Option has been exercised (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends, distributions
or other rights for which the record date is prior to the date such certificate
is issued, except as provided in Section 9. Nothing in this Option Agreement
shall confer upon the Optionee any right to continue in the Service of a
Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee's Service as an Employee
or Consultant, as the case may be, at any time.
11. UNVESTED SHARE REPURCHASE OPTION.
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Company Group is terminated for any
reason or no reason, with or without cause, or, if the Optionee, the Optionee's
legal representative, or other holder of shares acquired upon exercise of the
Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of
(other than pursuant to an Ownership Change Event) any shares acquired upon
exercise of the Option which exceed the Vested Shares as defined in Section 11.2
below (the "UNVESTED SHARES"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this Section 11 (the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "VESTED SHARES"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
SHARES" shall mean the number of shares of Stock acquired upon exercise of the
Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice delivered
personally or forwarded by first class mail to the Optionee within sixty (60)
days after (a) termination of the Optionee's Service (or exercise of the Option,
if later) or (b) the Company has received notice of the attempted disposition of
Unvested Shares. If the Company fails to give notice within such sixty (60) day
period, the Unvested Share Repurchase Option shall terminate unless the Company
and the Optionee have extended the time for the exercise of the Unvested Share
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Repurchase Option. The Unvested Share Repurchase Option must be exercised, if at
all, for all of the Unvested Shares, except as the Company and the Optionee
otherwise agree.
11.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The
purchase price per share being repurchased by the Company shall be an amount
equal to the Optionee's original cost per share, as adjusted pursuant to Section
9 (the "REPURCHASE PRICE"). The Company shall pay the aggregate Repurchase Price
to the Optionee in cash within thirty (30) days after the date of personal
delivery or mailing of the written notice of the Company's exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of
any indebtedness of the Optionee to any Participating Company shall be treated
as payment to the Optionee in cash to the extent of the unpaid principal and any
accrued interest canceled. The shares being repurchased shall be delivered to
the Company by the Optionee at the same time as the delivery of the Repurchase
Price to the Optionee.
11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company
shall have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such option is then exercisable, to one or more persons as may be
selected by the Company.
11.6 OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership
Change Event, any and all new, substituted or additional securities or other
property to which the Optionee is entitled by reason of the Optionee's ownership
of Unvested Shares shall be immediately subject to the Unvested Share Repurchase
Option and included in the terms "Stock" and "Unvested Shares" for all purposes
of the Unvested Share Repurchase Option with the same force and effect as the
Unvested Shares immediately prior to the Ownership Change Event. While the
aggregate Repurchase Price shall remain the same after such Ownership Change
Event, the Repurchase Price per Unvested Share upon exercise of the Unvested
Share Repurchase Option following such Ownership Change Event shall be adjusted
as appropriate. For purposes of determining the Vested Ratio following an
Ownership Change Event, credited Service shall include all Service with any
corporation which is a Participating Company at the time the Service is
rendered, whether or not such corporation is a Participating Company both before
and after the Ownership Change Event.
12. RIGHT OF FIRST REFUSAL.
12.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section
12.7 below, in the event the Optionee, the Optionee's legal representative, or
other holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the
"TRANSFER SHARES") to any person or entity, including, without limitation, any
shareholder of the Participating Company Group, the Company shall have the right
to repurchase the Transfer Shares under the terms and subject to the conditions
set forth in this Section 12 (the "RIGHT OF FIRST REFUSAL").
12.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
the Transfer Shares, the Optionee shall give a written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. In the event of a bona fide gift or involuntary transfer,
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the proposed transfer price shall be deemed to be the Fair Market Value of the
Transfer Shares, as determined by the Board in good faith. If the Optionee
proposes to transfer any Transfer Shares to more than one Proposed Transferee,
the Optionee shall provide a separate Transfer Notice for the proposed transfer
to each Proposed Transferee. The Transfer Notice shall be signed by both the
Optionee and the Proposed Transferee and must constitute a binding commitment of
the Optionee and the Proposed Transferee for the transfer of the Transfer Shares
to the Proposed Transferee subject only to the Right of First Refusal.
12.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Optionee in the Transfer Notice is insufficient to
establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Optionee written notice of the Optionee's failure to comply with
the procedure described in this Section 12, and the Optionee shall have no right
to transfer the Transfer Shares without first complying with the procedure
described in this Section 12. The Optionee shall not be permitted to transfer
the Transfer Shares if the proposed transfer is not bona fide.
12.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines
the proposed transfer to be bona fide, the Company shall have the right to
purchase all, but not less than all, of the Transfer Shares (except as the
Company and the Optionee otherwise agree) at the purchase price and on the terms
set forth in the Transfer Notice by delivery to the Optionee of a notice of
exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's right to
exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other Transfer
Notice is issued by the Optionee or issued by a person other than the Optionee
with respect to a proposed transfer to the same Proposed Transferee. If the
Company exercises the Right of First Refusal, the Company and the Optionee shall
thereupon consummate the sale of the Transfer Shares to the Company on the terms
set forth in the Transfer Notice within sixty (60) days after the date the
Transfer Notice is delivered to the Company (unless a longer period is offered
by the Proposed Transferee); provided, however, that in the event the Transfer
Notice provides for the payment for the Transfer Shares other than in cash, the
Company shall have the option of paying for the Transfer Shares by the present
value cash equivalent of the consideration described in the Transfer Notice as
reasonably determined by the Company. For purposes of the foregoing,
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
12.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company
fails to exercise the Right of First Refusal in full (or to such lesser extent
as the Company and the Optionee otherwise agree) within the period specified in
Section 12.4 above, the Optionee may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and conditions described in the
Transfer Notice, provided such transfer occurs not later than ninety (90) days
following delivery to the Company of the Transfer Notice. The Company shall have
the right to demand further assurances from the Optionee and the Proposed
Transferee (in a form satisfactory to the Company) that the transfer of the
Transfer Shares was actually carried out on the terms and conditions described
in the Transfer Notice. No Transfer Shares shall be transferred on the books of
the Company until the Company has received such assurances, if so
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demanded, and has approved the proposed transfer as bona fide. Any proposed
transfer on terms and conditions different from those described in the Transfer
Notice, as well as any subsequent proposed transfer by the Optionee, shall again
be subject to the Right of First Refusal and shall require compliance by the
Optionee with the procedure described in this Section 12.
12.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer
Shares or any interest therein, other than the Company, shall be required as a
condition of such transfer to agree in writing (in a form satisfactory to the
Company) that such transferee shall receive and hold such Transfer Shares or
interest therein subject to all of the terms and conditions of this Option
Agreement, including this Section 12 providing for the Right of First Refusal
with respect to any subsequent transfer. Any sale or transfer of any shares
acquired upon exercise of the Option shall be void unless the provisions of this
Section 12 are met.
12.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of
First Refusal shall not apply to any transfer or exchange of the shares acquired
upon exercise of the Option if such transfer or exchange is in connection with
an Ownership Change Event. If the consideration received pursuant to such
transfer or exchange consists of stock of a Participating Company, such
consideration shall remain subject to the Right of First Refusal unless the
provisions of Section 12.9 below result in a termination of the Right of First
Refusal.
12.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have
the right to assign the Right of First Refusal at any time, whether or not there
has been an attempted transfer, to one or more persons as may be selected by the
Company.
12.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Option Agreement notwithstanding, the Right of First Refusal
shall terminate and be of no further force and effect upon (a) the occurrence of
a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (b)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (ii) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
13. ESCROW.
13.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Unvested Share Repurchase Option or the Right of First Refusal or securing any
promissory note will be available for repurchase, the Company may require the
Optionee to deposit the certificate evidencing the shares which the Optionee
purchases upon exercise of the Option with an agent designated by the Company
under the terms and conditions of escrow and security agreements approved by the
Company. If the Company does not require such deposit as a condition of exercise
of the Option, the Company reserves the right at any time to require the
Optionee to so deposit the certificate in escrow. Upon the occurrence of an
Ownership Change Event or a change, as described in Section 9, in the character
or amount of any of the outstanding stock of the corporation the stock of which
is subject to the provisions of this Option Agreement, any and all new,
substituted or additional securities or other property to which the Optionee is
entitled by
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reason of the Optionee's ownership of shares of Stock acquired upon exercise of
the Option that remain, following such Ownership Change Event or change
described in Section 9, subject to the Unvested Share Repurchase Option, the
Right of First Refusal or any security interest held by the Company shall be
immediately subject to the escrow to the same extent as such shares of Stock
immediately before such event. The Company shall bear the expenses of the
escrow.
13.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after
the expiration of the Unvested Share Repurchase Option and the Right of First
Refusal and after full repayment of any promissory note secured by the shares or
other property in escrow, but not more frequently than twice each calendar year,
the escrow agent shall deliver to the Optionee the shares and any other property
no longer subject to such restrictions and no longer securing any promissory
note.
13.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share Repurchase Option or the Right of First Refusal, the notices required to
be given to the Optionee shall be given to the escrow agent, and any payment
required to be given to the Optionee shall be given to the escrow agent. Within
thirty (30) days after payment by the Company, the escrow agent shall deliver
the shares and any other property which the Company has purchased to the Company
and shall deliver the payment received from the Company to the Optionee.
14. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT.
If, from time to time, there is any stock dividend, stock split or
other change, as described in Section 9, in the character or amount of any of
the outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, then in such event any and all new,
substituted or additional securities to which the Optionee is entitled by reason
of the Optionee's ownership of the shares acquired upon exercise of the Option
shall be immediately subject to the Unvested Share Repurchase Option, the Right
of First Refusal, and any security interest held by the Company with the same
force and effect as the shares subject to the Unvested Share Repurchase Option,
the Right of First Refusal, and such security interest immediately before such
event.
15. LEGENDS.
The Company may at any time place legends referencing the Unvested
Share Repurchase Option, the Right of First Refusal, and any applicable federal,
state or foreign securities law restrictions on all certificates representing
shares of stock subject to the provisions of this Option Agreement. The Optionee
shall, at the request of the Company, promptly present to the Company any and
all certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to carry out the provisions of this Section.
Unless otherwise specified by the Company, legends placed on such certificates
may include, but shall not be limited to, the following:
15.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT
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COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE
701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER
OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
15.2 Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
15.3 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
15.4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
16. PUBLIC OFFERING.
The Optionee hereby agrees that in the event of any underwritten
public offering of stock, including an initial public offering of stock, made by
the Company pursuant to an effective registration statement filed under the
Securities Act, the Optionee shall not offer, sell, contract to sell, pledge,
hypothecate, grant any option to purchase or make any short sale of, or
otherwise dispose of any shares of stock of the Company or any rights to acquire
stock of the Company for such period of time from and after the effective date
of such registration statement as may be established by the underwriter for such
public offering; provided, however, that such period of time shall not exceed
one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing
limitation shall not apply to shares registered in the public offering under the
Securities Act. The Optionee shall be subject to this Section provided and only
if the officers and directors of the Company are also subject to similar
arrangements.
17. BINDING EFFECT.
Subject to the restrictions on transfer set forth herein, this
Option Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns.
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18. TERMINATION OR AMENDMENT.
The Board may terminate or amend the Plan or the Option at any time;
provided, however, that except as provided in Section 8.2 in connection with a
Transfer of Control, no such termination or amendment may adversely affect the
Option or any unexercised portion hereof without the consent of the Optionee
unless such termination or amendment is necessary to comply with any applicable
law or government regulation. No amendment or addition to this Option Agreement
shall be effective unless in writing.
19. INTEGRATED AGREEMENT.
This Option Agreement and the Plan constitute the entire
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein and therein and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein or therein. To the
extent contemplated herein or therein, the provisions of this Option Agreement
shall survive any exercise of the Option and shall remain in full force and
effect.
20. APPLICABLE LAW.
This Option Agreement shall be governed by the laws of the State of
California as such laws are applied to agreements between California residents
entered into and to be performed entirely within the State of California.
SILICON ENTERTAINMENT, INC.
By:
------------------------
Title:
---------------------
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in Section 11 and the Right of First Refusal set forth in
Section 12, and hereby accepts the Option subject to all of the terms and
provisions thereof. The Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under this Option Agreement. The undersigned acknowledges receipt of a
copy of the Plan.
OPTIONEE
Date:
------------------------------ -------------------------------
[Optionee]
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<PAGE> 1
EXHIBIT 10.4
SILICON ENTERTAINMENT, INC.
1998 EXECUTIVE STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1 ESTABLISHMENT. The Silicon Entertainment, Inc. 1998 Executive
Stock Option Plan (the "PLAN") is hereby established effective as of June 9,
1998 (the "EFFECTIVE DATE").
2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed. However, all Options shall be granted, if at
all, within ten (10) years from the earlier of the date the Plan is adopted by
the Board or the date the Plan is duly approved by the shareholders of the
Company.
2. DEFINITIONS AND CONSTRUCTION.
1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Silicon Entertainment, Inc., a California
corporation, or any successor corporation thereto.
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(e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "FAIR MARKET VALUE" means, as of any date, the value of a
share of stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.
(i) "INCENTIVE STOCK OPTION" means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(j) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(k) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(l) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(m) "OPTIONEE" means a person who has been granted one or more
Options.
(n) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
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(q) "STOCK" means the common stock, without par value, of the
Company, as adjusted from time to time in accordance with Section 4.2.
(r) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(s) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
2 POWERS OF THE BOARD. In addition to any other powers set forth in
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or
other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax
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<PAGE> 4
withholding obligation arising in connection with the Option or such shares,
including by the withholding or delivery of shares of stock, (iv) the timing,
terms and conditions of the exercisability of the Option or the vesting of any
shares acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of employment or service
with the Participating Company Group on any of the foregoing, and (vii) all
other terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option
in substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the exercisability
of any Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee's termination of
employment or service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(i) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
4. SHARES SUBJECT TO PLAN.
1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Seven Hundred Thousand (700,000) and shall
consist of authorized but unissued or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the
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<PAGE> 5
number and class of shares subject to the Plan and to any outstanding Options
and in the exercise price per share of any outstanding Options. If a majority of
the shares which are of the same class as the shares that are subject to
outstanding Options are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event, as defined in Section
8.1) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the outstanding Options to provide that such Options are
exercisable for New Shares. In the event of any such amendment, the number of
shares subject to, and the exercise price per share of, the outstanding Options
shall be adjusted in a fair and equitable manner as determined by the Board, in
its sole discretion. Notwithstanding the foregoing, any fractional share
resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or
down to the nearest whole number, as determined by the Board, and in no event
may the exercise price of any Option be decreased to an amount less than the par
value, if any, of the stock subject to the Option. The adjustments determined by
the Board pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees" shall include prospective Employees to whom Options are granted in
connection with written offers of employment with the Participating Company
Group, and "Consultants" shall include prospective Consultants to whom Options
are granted in connection with written offers of engagement with the
Participating Company Group. Eligible persons may be granted more than one (1)
Option.
2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on
the effective date of the grant of an Option to such person may be granted only
a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
3 FAIR MARKET VALUE LIMITATION. To the extent that the aggregate
Fair Market Value of stock with respect to which options designated as Incentive
Stock Options are exercisable by an Optionee for the first time during any
calendar year (under all stock option plans of the Participating Company Group,
including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.3, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of stock shall be determined as of the time the option
with respect to such stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.3, such different
limitation shall be deemed incorporated herein effective as of the date and with
respect to such Options as required or permitted by such amendment to the Code.
If an Option is treated as an Incentive Stock Option in part and as a
Nonstatutory Stock Option in part
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by reason of the limitation set forth in this Section 5.3, the Optionee may
designate which portion of such Option the Optionee is exercising and may
request that separate certificates representing each such portion be issued upon
the exercise of the Option. In the absence of such designation, the Optionee
shall be deemed to have exercised the Incentive Stock Option portion of the
Option first.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Option granted
to a Ten Percent Owner Optionee shall have an exercise price per share less than
one hundred ten percent (110%) of the Fair Market Value of a share of Stock on
the effective date of grant of the Option. Notwithstanding the foregoing, an
Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Option shall be exercisable after the expiration of ten (10) years
after the effective date of grant of such Option, (b) no Incentive Stock Option
granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the effective date of grant of such Option,
and (c) no Option granted to a prospective Employee or prospective Consultant
may become exercisable prior to the date on which such person commences service
with a Participating Company.
3 PAYMENT OF EXERCISE PRICE.
(A) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or
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<PAGE> 7
loan with respect to some or all of the shares being acquired upon the exercise
of the Option (including, without limitation, through an exercise complying with
the provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by the
Optionee's promissory note in a form approved by the Company, (v) by such other
consideration as may be approved by the Board from time to time to the extent
permitted by applicable law, or (vi) by any combination thereof. The Board may
at any time or from time to time, by adoption of or by amendment to the standard
forms of Option Agreement described in Section 7, or by other means, grant
Options which do not permit all of the foregoing forms of consideration to be
used in payment of the exercise price or which otherwise restrict one or more
forms of consideration.
(B) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(C) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
(D) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through
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payroll withholding, cash payment or otherwise, including by means of a Cashless
Exercise, to make adequate provision for any such tax withholding obligations of
the Participating Company Group arising in connection with the Option or the
shares acquired upon the exercise thereof. The Company shall have no obligation
to deliver shares of Stock or to release shares of Stock from an escrow
established pursuant to the Option Agreement until the Participating Company
Group's tax withholding obligations have been satisfied by the Optionee.
5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to
a right of first refusal, one or more repurchase options, or other conditions
and restrictions as determined by the Board in its sole discretion at the time
the Option is granted. The Company shall have the right to assign at any time
any repurchase right it may have, whether or not such right is then exercisable,
to one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
7. STANDARD FORMS OF OPTION AGREEMENT.
1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board at
the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Immediately Exercisable Incentive Stock Option Agreement adopted
by the Board concurrently with its adoption of the Plan and as amended from time
to time.
2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the Board
at the time the Option is granted, an Option designated as a "Nonstatutory Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Immediately Exercisable Nonstatutory Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
3 STANDARD TERM OF OPTIONS. Except as otherwise provided in Section
6.2 or by the Board in the grant of an Option, any Option granted hereunder
shall have a term of ten (10) years from the effective date of grant of the
Option.
4 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement shall be in
accordance with the terms of the Plan. Such authority shall include, but not by
way of limitation, the authority to grant Options which are not immediately
exercisable.
8. TRANSFER OF CONTROL.
8
<PAGE> 9
1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. Any Options which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the Transfer of Control nor exercised as of the date of the Transfer of
Control shall terminate and cease to be outstanding effective as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such
9
<PAGE> 10
Option except as otherwise provided in such Option Agreement. Furthermore,
notwithstanding the foregoing, if the corporation the stock of which is subject
to the outstanding Options immediately prior to an Ownership Change Event
described in Section 8.1(a)(i) constituting a Transfer of Control is the
surviving or continuing corporation and immediately after such Ownership Change
Event less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that are
members of an affiliated group within the meaning of Section 1504(a) of the Code
without regard to the provisions of Section 1504(b) of the Code, the outstanding
Options shall not terminate unless the Board otherwise provides in its sole
discretion.
9. PROVISION OF INFORMATION. At least annually, copies of the Company's
balance sheet and income statement for the just completed fiscal year shall be
made available to each Optionee and purchaser of shares of Stock upon the
exercise of an Option. The Company shall not be required to provide such
information to persons whose duties in connection with the Company assure them
access to equivalent information.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. TRANSFER OF COMPANY'S RIGHTS. In the event any Participating
Company assigns, other than by operation of law, to a third person, other than
another Participating Company, any of the Participating Company's rights to
repurchase any shares of Stock acquired upon the exercise of an Option, the
assignee shall pay to the assigning Participating Company the value of such
right as determined by the Company in the Company's sole discretion. Such
consideration shall be paid in cash. In the event such repurchase right is
exercisable at the time of such assignment, the value of such right shall be not
less than the Fair Market Value of the shares of Stock which may be repurchased
under such right (as determined by the Company) minus the repurchase price of
such shares. The requirements of this Section 11 regarding the minimum
consideration to be received by the assigning Participating Company shall not
inure to the benefit of the Optionee whose shares of Stock are being
repurchased. Failure of a Participating Company to comply with the provisions of
this Section 11 shall not constitute a defense or otherwise prevent the exercise
of the repurchase right by the assignee of such right.
12. REPRESENTATIONS AND WARRANTIES.
In connection with the receipt of the Option and any acquisition of
shares upon the exercise thereof (collectively, the "SECURITIES"), the Optionee
hereby agrees, represents and warrants as follows:
1 INVESTMENT INTENT. The Optionee is acquiring the Securities solely
for the Optionee's own account for investment and not with a view to or for sale
in connection with any distribution of the Securities or any portion thereof and
not with any present intention of selling,
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<PAGE> 11
offering to sell or otherwise disposing of or distributing the Securities or any
portion thereof in any transaction other than a transaction exempt from
registration under the Securities Act. The Optionee further represents that the
entire legal and beneficial interest of the Securities is being acquired, and
will be held, for the account of the Optionee only and neither in whole nor in
part for any other person.
2 ABSENCE OF SOLICITATION. The Optionee was not presented with or
solicited by any form of general solicitation or general advertising, including,
but not limited to, any advertisement, article, notice, or other communication
published in any newspaper, magazine, or similar media, or broadcast over
television, radio or similar communications media, or presented at any seminar
or meeting whose attendees have been invited by any general solicitation or
general advertising.
3 RESIDENCE. The Optionee's principal residence is located at the
address indicated beneath the Optionee's signature below.
4 INFORMATION CONCERNING THE COMPANY. The Optionee is aware of the
Company's business affairs and financial condition and has acquired sufficient
information about the Company to reach an informed and knowledgeable decision to
acquire the Securities. The Optionee further represents and warrants that the
Optionee has discussed the Company and its plans, operations and financial
condition with its officers, has received all such information as the Optionee
deems necessary and appropriate to enable the Optionee to evaluate the financial
risk inherent in acquiring the Securities and has received satisfactory and
complete information concerning the business and financial condition of the
Company in response to all inquiries in respect thereof.
5 ECONOMIC RISK. The Optionee realizes that his acquisition of the
Securities will be a highly speculative investment and that the Optionee is
able, without impairing his or her financial condition, to hold the Securities
for an indefinite period of time and to suffer a complete loss on the Optionee's
investment.
6 CAPACITY TO PROTECT INTERESTS. The Optionee has (i) a preexisting
personal or business relationship with the Company or any of its officers,
directors, or controlling persons, consisting of personal or business contacts
of a nature and duration to enable the Optionee to be aware of the character,
business acumen and general business and financial circumstances of the person
with whom such relationship exists, or (ii) such knowledge and experience in
financial and business matters as to make the Optionee capable of evaluating the
merits and risks of an investment in the Securities and to protect the
Optionee's own interests in the transaction, or (iii) both such relationship and
such knowledge and experience.
7 RESTRICTED SECURITIES. The Optionee understands and acknowledges
that:
(a) The issuance of the Securities to the Optionee has not been
registered under the Securities Act, and the Securities must be held
indefinitely unless a transfer
11
<PAGE> 12
of the Securities is subsequently registered under the Securities Act or an
exemption from such registration is available, and that the Company is under no
obligation to register the Securities;
(b) The Company will make a notation in its records of the
aforementioned restrictions on transfer and legends.
8 DISPOSITION UNDER RULE 144. The Optionee understands that any
shares acquired upon exercise of the Option will be restricted securities within
the meaning of Rule 144 promulgated under the Securities Act; that the exemption
from registration under Rule 144 will not be available in any event for at least
one year from the date of acquisition of the shares, and even then will not be
available unless (a) a public trading market then exists for the Common Stock of
the Company, (b) adequate information concerning the Company is then available
to the public, and (c) other terms and conditions of Rule 144 are complied with;
and that any sale of the shares may be made only in limited amounts in
accordance with such terms and conditions. There can be no assurance that the
requirements of Rule 144 will be met, or that the shares will ever be salable.
9 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
the Optionee's representations and warranties set forth above, the Optionee
further agrees that the Optionee will in no event make any disposition of all or
any portion of any shares which the Optionee acquires upon exercise of the
Option unless:
(a) There is then in effect a Registration Statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with said Registration Statement; or
(b) The Optionee will have notified the Company of the proposed
disposition and furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, and either:
(i) The Optionee will have furnished the Company with an
opinion of the Optionee's own counsel to the effect that such disposition will
not require registration of such shares under the Securities Act, and such
opinion of the Optionee's counsel will have been concurred in by counsel for the
Company and the Company will have advised the Optionee of such concurrence; or
(ii) The disposition is made in compliance with Rule 144
after the Optionee has furnished the Company such detailed statement and after
the Company has had a reasonable opportunity to discuss the matter with the
Optionee.
10 RELIANCE BY COMPANY. The Optionee understands that the Option and
any shares acquired upon exercise of the Option have not been qualified under
the Corporate Securities Law of 1968, as amended, of the State of California by
reason of a specific exemption therefrom, which exemption depends upon, among
other things, the bona fide nature of the
12
<PAGE> 13
Optionee's representations as expressed herein. The Optionee understands that
the Company is relying on the Optionee's representations and warrants that the
Company is entitled to rely on such representations and that such reliance is
reasonable.
13. INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan, or any right granted hereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such person
is liable for gross negligence, bad faith or intentional misconduct in duties;
provided, however, that within sixty (60) days after the institution of such
action, suit or proceeding, such person shall offer to the Company, in writing,
the opportunity at its own expense to handle and defend the same.
14. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend
the Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
shareholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no expansion in the class of persons
eligible to receive Nonstatutory Stock Options. In any event, no termination or
amendment of the Plan may adversely affect any then outstanding Option or any
unexercised portion thereof, without the consent of the Optionee, unless such
termination or amendment is required to enable an Option designated as an
Incentive Stock Option to qualify as an Incentive Stock Option or is necessary
to comply with any applicable law or government regulation.
15. SHAREHOLDER APPROVAL. The Plan or any increase in the maximum
number of shares of Stock issuable thereunder as provided in Section 4.1 (the
"MAXIMUM SHARES") shall be approved by the shareholders of the Company within
twelve (12) months of the date of adoption thereof by the Board. Options granted
prior to shareholder approval of the Plan or in excess of the Maximum Shares
previously approved by the shareholders shall become exercisable no earlier than
the date of shareholder approval of the Plan or such increase in the Maximum
Shares, as the case may be.
13
<PAGE> 14
STANDARD FORM OF
SILICON ENTERTAINMENT, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
<PAGE> 15
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
SILICON ENTERTAINMENT, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (the
"OPTION AGREEMENT") is made and entered into as of [Date_of_Grant] by and
between Silicon Entertainment, Inc. and [Optionee] (the "OPTIONEE").
The Company has granted to the Optionee pursuant to the Silicon
Entertainment, Inc. 1998 Executive Stock Option Plan (the "PLAN") an option to
purchase certain shares of Stock, upon the terms and conditions set forth in
this Option Agreement (the "OPTION"). The Option shall in all respects be
subject to the terms and conditions of the Plan, the provisions of which are
incorporated herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan. Whenever used
herein, the following terms shall have their respective meanings set forth
below:
(a) "DATE OF OPTION GRANT" means [Date_of_Grant].
(b) "NUMBER OF OPTION SHARES" means [No_of_Shares] shares of
Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
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<PAGE> 16
(d) "EXERCISE PRICE" means $[Option_Price] per share of Stock,
as adjusted from time to time pursuant to Section 9.
(e) "INITIAL EXERCISE DATE" means the later of the Date of
Option Grant or the date the Optionee's Service commences.
(f) "INITIAL VESTING DATE" means the Date of Option Grant.
(g) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, 1/1
</TABLE>
(h) "OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.
(i) "COMPANY" means Silicon Entertainment, Inc., a California
corporation, or any successor corporation thereto.
(j) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company Group because
of the sickness or injury of the Optionee.
(k) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(l) "SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Optionee's Service
has terminated and the effective date of such termination.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX CONSEQUENCES.
2
<PAGE> 17
2.1 TAX STATUS OF OPTION. This Option is intended to be a
Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option
within the meaning of Section 422(b) of the Code.
2.2 ELECTION UNDER SECTION 83(b) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of
forfeiture if, for example, (a) they are unvested and are subject to a right of
the Company to repurchase such shares at the Optionee's original purchase price
if the Optionee's Service terminates, or (b) the Optionee is subject to a
restriction on transfer to comply with "Pooling-of-Interests Accounting" rules.
Failure to file an election under Section 83(b), if appropriate, may result in
adverse tax consequences to the Optionee. The Optionee acknowledges that the
Optionee has been advised to consult with a tax advisor prior to the exercise of
the Option regarding the tax consequences to the Optionee of the exercise of the
Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE
DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE
EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b)
ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS
THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION.
All questions of interpretation concerning this Option Agreement
shall be determined by the Board, including any duly appointed Committee of the
Board. All determinations by the Board shall be final and binding upon all
persons having an interest in the Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, or election which is the responsibility of or which
is allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
4. EXERCISE OF THE OPTION.
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares less the number of shares previously acquired
upon exercise of the Option, subject to the Optionee's agreement that any shares
purchased upon exercise are subject to the Company's repurchase rights set forth
in Section 11 and Section 12.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to
3
<PAGE> 18
the provisions of this Option Agreement. The written notice must be signed by
the Optionee and must be delivered in person, by certified or registered mail,
return receipt requested, by confirmed facsimile transmission, or by such other
means as the Company may permit, to the Chief Financial Officer of the Company,
or other authorized representative of the Participating Company Group, prior to
the termination of the Option as set forth in Section 6, accompanied by (i) full
payment of the aggregate Exercise Price for the number of shares of Stock being
purchased and (ii) an executed copy, if required herein, of the then current
forms of escrow and security agreement referenced below. The Option shall be
deemed to be exercised upon receipt by the Company of such written notice, the
aggregate Exercise Price, and, if required by the Company, such executed
agreements.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the
Company's sole discretion at the time the Option is exercised, by the Optionee's
promissory note for the aggregate Exercise Price, or (v) by any combination of
the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if an exercise of the Option using a promissory note would be a
violation of any law. The promissory note permitted in clause (iv) of Section
4.3(a) shall be a full recourse note in a form satisfactory to the Company, with
principal payable no more than four (4) years after the date the Option is
exercised. Interest on the principal balance of the promissory note shall be
payable in annual installments at the minimum interest rate necessary to avoid
imputed interest pursuant to all applicable sections of the Code. Such recourse
promissory note shall be secured
4
<PAGE> 19
by the shares of Stock acquired pursuant to the then current form of security
agreement as approved by the Company. At any time the Company is subject to the
regulations promulgated by the Board of Governors of the Federal Reserve System
or any other governmental entity affecting the extension of credit in connection
with the Company's securities, any promissory note shall comply with such
applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations. Except as the Company in its sole discretion shall determine, the
Optionee shall pay the unpaid principal balance of the promissory note and any
accrued interest thereon upon termination of the Optionee's Service with the
Participating Company Group for any reason, with or without cause.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is vested, and the Company shall have
no obligation to issue a certificate for such shares or release such shares from
any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any
5
<PAGE> 20
regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION.
The Option may be exercised during the lifetime of the Optionee only
by the Optionee or the Optionee's guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of
descent and distribution. Following the death of the Optionee, the Option, to
the extent provided in Section 7, may be exercised by the Optionee's legal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
6. TERMINATION OF THE OPTION.
The Option shall terminate and may no longer be exercised on the
first to occur of (a) the Option Expiration Date, (b) the last date for
exercising the Option following termination of the Optionee's Service as
described in Section 7, or (c) a Transfer of Control to the extent provided in
Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's legal
representative, or other person who acquired the right to exercise the Option by
reason of the Optionee's death) at any time prior to the expiration of six (6)
months after the date on which the Optionee's Service terminated, but in any
event no later than the Option Expiration Date. The Optionee's Service shall be
deemed to have terminated on account of death if the Optionee dies within thirty
(30) days after the Optionee's termination of Service.
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<PAGE> 21
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service
with the Participating Company Group terminates for any reason, except
Disability or death, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee's Service terminated, may be
exercised by the Optionee within thirty (30) days (or such other longer period
of time as determined by the Board, in its sole discretion) after the date on
which the Optionee's Service terminated, but in any event no later than the
Option Expiration Date.
7.2 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11. Except as the Company and the Optionee otherwise
agree, exercise of the Option pursuant to Section 7.1 following termination of
the Optionee's Service may not be made by delivery of a promissory note as
provided in Section 4.3(a).
7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
7.5 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Optionee's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Optionee's right to reemployment with the Participating Company Group remains
guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company (or required by law), a leave of absence
shall not be treated as Service for purposes of determining the Optionee's
Vested Ratio.
8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
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<PAGE> 22
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. The Option shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate unless
the Board otherwise provides in its sole discretion.
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9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
In the event of any stock dividend, stock split, reverse stock
split, recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a
majority of the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to
provide that the Option is exercisable for New Shares. In the event of any such
amendment, the Number of Option Shares and the Exercise Price shall be adjusted
in a fair and equitable manner, as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 9 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the
Exercise Price be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 9 shall be final, binding and conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT.
The Optionee shall have no rights as a shareholder with respect to
any shares covered by the Option until the date of the issuance of a certificate
for the shares for which the Option has been exercised (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends, distributions
or other rights for which the record date is prior to the date such certificate
is issued, except as provided in Section 9. Nothing in this Option Agreement
shall confer upon the Optionee any right to continue in the Service of a
Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee's Service as an Employee
or Consultant, as the case may be, at any time.
11. RIGHT OF FIRST REFUSAL.
11.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section
11.7 below, in the event the Optionee, the Optionee's legal representative, or
other holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the
"TRANSFER SHARES") to any person or entity, including, without limitation, any
shareholder of the Participating Company Group, the Company shall have the right
to repurchase the Transfer Shares under the terms and subject to the conditions
set forth in this Section 11 (the "RIGHT OF FIRST REFUSAL").
11.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
the Transfer Shares, the Optionee shall give a written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. In the event of a bona fide gift or involuntary transfer,
the proposed transfer price shall be deemed to be the Fair Market Value of the
Transfer Shares, as determined by the Board in good faith. If the Optionee
proposes to transfer any Transfer
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<PAGE> 24
Shares to more than one Proposed Transferee, the Optionee shall provide a
separate Transfer Notice for the proposed transfer to each Proposed Transferee.
The Transfer Notice shall be signed by both the Optionee and the Proposed
Transferee and must constitute a binding commitment of the Optionee and the
Proposed Transferee for the transfer of the Transfer Shares to the Proposed
Transferee subject only to the Right of First Refusal.
11.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Optionee in the Transfer Notice is insufficient to
establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Optionee written notice of the Optionee's failure to comply with
the procedure described in this Section 11, and the Optionee shall have no right
to transfer the Transfer Shares without first complying with the procedure
described in this Section 11. The Optionee shall not be permitted to transfer
the Transfer Shares if the proposed transfer is not bona fide.
11.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines
the proposed transfer to be bona fide, the Company shall have the right to
purchase all, but not less than all, of the Transfer Shares (except as the
Company and the Optionee otherwise agree) at the purchase price and on the terms
set forth in the Transfer Notice by delivery to the Optionee of a notice of
exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's right to
exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other Transfer
Notice is issued by the Optionee or issued by a person other than the Optionee
with respect to a proposed transfer to the same Proposed Transferee. If the
Company exercises the Right of First Refusal, the Company and the Optionee shall
thereupon consummate the sale of the Transfer Shares to the Company on the terms
set forth in the Transfer Notice within sixty (60) days after the date the
Transfer Notice is delivered to the Company (unless a longer period is offered
by the Proposed Transferee); provided, however, that in the event the Transfer
Notice provides for the payment for the Transfer Shares other than in cash, the
Company shall have the option of paying for the Transfer Shares by the present
value cash equivalent of the consideration described in the Transfer Notice as
reasonably determined by the Company. For purposes of the foregoing,
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
11.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company
fails to exercise the Right of First Refusal in full (or to such lesser extent
as the Company and the Optionee otherwise agree) within the period specified in
Section 11.4 above, the Optionee may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and conditions described in the
Transfer Notice, provided such transfer occurs not later than ninety (90) days
following delivery to the Company of the Transfer Notice. The Company shall have
the right to demand further assurances from the Optionee and the Proposed
Transferee (in a form satisfactory to the Company) that the transfer of the
Transfer Shares was actually carried out on the terms and conditions described
in the Transfer Notice. No Transfer Shares shall be transferred on the books of
the Company until the Company has received such assurances, if so demanded, and
has approved the proposed transfer as bona fide. Any proposed transfer on terms
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<PAGE> 25
and conditions different from those described in the Transfer Notice, as well as
any subsequent proposed transfer by the Optionee, shall again be subject to the
Right of First Refusal and shall require compliance by the Optionee with the
procedure described in this Section 12.
11.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer
Shares or any interest therein, other than the Company, shall be required as a
condition of such transfer to agree in writing (in a form satisfactory to the
Company) that such transferee shall receive and hold such Transfer Shares or
interest therein subject to all of the terms and conditions of this Option
Agreement, including this Section 12 providing for the Right of First Refusal
with respect to any subsequent transfer. Any sale or transfer of any shares
acquired upon exercise of the Option shall be void unless the provisions of this
Section 12 are met.
11.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of
First Refusal shall not apply to any transfer or exchange of the shares acquired
upon exercise of the Option if such transfer or exchange is in connection with
an Ownership Change Event. If the consideration received pursuant to such
transfer or exchange consists of stock of a Participating Company, such
consideration shall remain subject to the Right of First Refusal unless the
provisions of Section 12.9 below result in a termination of the Right of First
Refusal.
11.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have
the right to assign the Right of First Refusal at any time, whether or not there
has been an attempted transfer, to one or more persons as may be selected by the
Company.
11.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Option Agreement notwithstanding, the Right of First Refusal
shall terminate and be of no further force and effect upon (a) the occurrence of
a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (b)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (ii) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
12. REPRESENTATIONS AND WARRANTIES.
In connection with the receipt of the Option and any acquisition of
shares upon the exercise thereof (collectively, the "SECURITIES"), the Optionee
hereby agrees, represents and warrants as follows:
12.1 INVESTMENT INTENT. The Optionee is acquiring the Securities
solely for the Optionee's own account for investment and not with a view to or
for sale in connection with any distribution of the Securities or any portion
thereof and not with any present intention of selling, offering to sell or
otherwise disposing of or distributing the Securities or any portion thereof in
any transaction other than a transaction exempt from registration under the
Securities Act. The Optionee further represents that the entire legal and
beneficial interest of the Securities is being acquired, and will be held, for
the account of the Optionee only and neither in whole nor in part for any other
person.
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12.2 ABSENCE OF SOLICITATION. The Optionee was not presented with or
solicited by any form of general solicitation or general advertising, including,
but not limited to, any advertisement, article, notice, or other communication
published in any newspaper, magazine, or similar media, or broadcast over
television, radio or similar communications media, or presented at any seminar
or meeting whose attendees have been invited by any general solicitation or
general advertising.
12.3 RESIDENCE. The Optionee's principal residence is located at the
address indicated beneath the Optionee's signature below.
12.4 INFORMATION CONCERNING THE COMPANY. The Optionee is aware of
the Company's business affairs and financial condition and has acquired
sufficient information about the Company to reach an informed and knowledgeable
decision to acquire the Securities. The Optionee further represents and warrants
that the Optionee has discussed the Company and its plans, operations and
financial condition with its officers, has received all such information as the
Optionee deems necessary and appropriate to enable the Optionee to evaluate the
financial risk inherent in acquiring the Securities and has received
satisfactory and complete information concerning the business and financial
condition of the Company in response to all inquiries in respect thereof.
12.5 ECONOMIC RISK. The Optionee realizes that his acquisition of
the Securities will be a highly speculative investment and that the Optionee is
able, without impairing his or her financial condition, to hold the Securities
for an indefinite period of time and to suffer a complete loss on the Optionee's
investment.
12.6 CAPACITY TO PROTECT INTERESTS. The Optionee has (i) a
preexisting personal or business relationship with the Company or any of its
officers, directors, or controlling persons, consisting of personal or business
contacts of a nature and duration to enable the Optionee to be aware of the
character, business acumen and general business and financial circumstances of
the person with whom such relationship exists, or (ii) such knowledge and
experience in financial and business matters as to make the Optionee capable of
evaluating the merits and risks of an investment in the Securities and to
protect the Optionee's own interests in the transaction, or (iii) both such
relationship and such knowledge and experience.
12.7 RESTRICTED SECURITIES. The Optionee understands and
acknowledges that:
(a) The issuance of the Securities to the Optionee has not been
registered under the Securities Act, and the Securities must be held
indefinitely unless a transfer of the Securities is subsequently registered
under the Securities Act or an exemption from such registration is available,
and that the Company is under no obligation to register the Securities;
(b) The Company will make a notation in its records of the
aforementioned restrictions on transfer and legends.
12.8 DISPOSITION UNDER RULE 144. The Optionee understands that any
shares acquired upon exercise of the Option will be restricted securities within
the meaning of Rule 144 promulgated under the Securities Act; that the exemption
from registration under Rule 144 will not be available in any event for at least
one year from the date of acquisition of the shares, and
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<PAGE> 27
even then will not be available unless (a) a public trading market then exists
for the Common Stock of the Company, (b) adequate information concerning the
Company is then available to the public, and (c) other terms and conditions of
Rule 144 are complied with; and that any sale of the shares may be made only in
limited amounts in accordance with such terms and conditions. There can be no
assurance that the requirements of Rule 144 will be met, or that the shares will
ever be salable.
12.9 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
the Optionee's representations and warranties set forth above, the Optionee
further agrees that the Optionee will in no event make any disposition of all or
any portion of any shares which the Optionee acquires upon exercise of the
Option unless:
(a) There is then in effect a Registration Statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with said Registration Statement; or
(b) The Optionee will have notified the Company of the proposed
disposition and furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, and either:
(i) The Optionee will have furnished the Company with an
opinion of the Optionee's own counsel to the effect that such disposition will
not require registration of such shares under the Securities Act, and such
opinion of the Optionee's counsel will have been concurred in by counsel for the
Company and the Company will have advised the Optionee of such concurrence; or
(ii) The disposition is made in compliance with Rule 144
after the Optionee has furnished the Company such detailed statement and after
the Company has had a reasonable opportunity to discuss the matter with the
Optionee.
12.10 RELIANCE BY COMPANY. The Optionee understands that the Option
and any shares acquired upon exercise of the Option have not been qualified
under the Corporate Securities Law of 1968, as amended, of the State of
California by reason of a specific exemption therefrom, which exemption depends
upon, among other things, the bona fide nature of the Optionee's representations
as expressed herein. The Optionee understands that the Company is relying on the
Optionee's representations and warrants that the Company is entitled to rely on
such representations and that such reliance is reasonable.
13. LEGENDS.
The Company may at any time place legends referencing the Unvested
Share Repurchase Option, the Right of First Refusal, and any applicable federal,
state or foreign securities law restrictions on all certificates representing
shares of stock subject to the provisions of this Option Agreement. The Optionee
shall, at the request of the Company, promptly present to the Company any and
all certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to carry out the provisions of this Section.
Unless otherwise specified by the Company, legends placed on such certificates
may include, but shall not be limited to, the following:
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13.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
13.2 Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
13.3 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
13.4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
14. LOCK-UP AGREEMENT.
The Optionee hereby agrees that in the event of any underwritten
public offering of stock, including an initial public offering of stock, made by
the Company pursuant to an effective registration statement filed under the
Securities Act, the Optionee shall not offer, sell, contract to sell, pledge,
hypothecate, grant any option to purchase or make any short sale of, or
otherwise dispose of any shares of stock of the Company or any rights to acquire
stock of the Company for such period of time from and after the effective date
of such registration statement as may be established by the underwriter for such
public offering; provided, however, that such period of time shall not exceed
one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing
limitation shall not apply to shares registered in the public offering under the
Securities Act.
15. RESTRICTIONS ON TRANSFER OF SHARES.
No shares acquired upon exercise of the Option may be sold,
exchanged, transferred (including, without limitation, any transfer to a nominee
or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed
of, including by operation of law, in any
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<PAGE> 29
manner which violates any of the provisions of this Option Agreement and any
such attempted disposition shall be void. The Company shall not be required (a)
to transfer on its books any shares which will have been transferred in
violation of any of the provisions set forth in this Option Agreement or (b) to
treat as owner of such shares or to accord the right to vote as such owner or to
pay dividends to any transferee to whom such shares will have been so
transferred.
16. BINDING EFFECT.
Subject to the restrictions on transfer set forth herein, this
Option Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns.
17. TERMINATION OR AMENDMENT.
The Board may terminate or amend the Plan or the Option at any time;
provided, however, that except as provided in Section 8.2 in connection with a
Transfer of Control, no such termination or amendment may adversely affect the
Option or any unexercised portion hereof without the consent of the Optionee
unless such termination or amendment is necessary to comply with any applicable
law or government regulation. No amendment or addition to this Option Agreement
shall be effective unless in writing.
18. INTEGRATED AGREEMENT.
This Option Agreement and the Plan constitute the entire
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein and therein and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein or therein. To the
extent contemplated herein or therein, the provisions of this Option Agreement
shall survive any exercise of the Option and shall remain in full force and
effect.
19. APPLICABLE LAW.
This Option Agreement shall be governed by the laws of the State of
California as such laws are applied to agreements between California residents
entered into and to be performed entirely within the State of California.
SILICON ENTERTAINMENT, INC.
By:
------------------------
Title:
---------------------
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The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement, including the Right of First Refusal
set forth in Section 11, and hereby accepts the Option subject to all of the
terms and provisions thereof. The Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Option Agreement. The undersigned acknowledges
receipt of a copy of the Plan.
OPTIONEE
Date:
----------------------------- ------------------------------
[Optionee]
16
<PAGE> 1
EXHIBIT 10.5
SILICON ENTERTAINMENT, INC.
STOCK BONUS PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENt. This Stock Bonus Plan (the "PLAN") is hereby
established effective as of August 11, 1998 (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the Stock Bonus
Agreements have lapsed.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "AWARD" means a bonus payable to a Participant in the form
of Stock
pursuant to the terms and conditions of the Plan.
(b) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein.
(d) "COMPANY" means Silicon Entertainment, Inc., a California
corporation, or any successor corporation thereto.
(e) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(f) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) of a
Participating Company; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.
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<PAGE> 2
(g) "PARTICIPANT" means a person who has been granted one or
more Awards.
(h) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Internal
Revenue Code of 1986.
(i) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(j) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(k) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(l) "SERVICE" means an Participant's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a consultant.
(m) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(n) "STOCK BONUS AGREEMENT" means a written agreement between
the Company and a Participant setting forth the terms, conditions and
restrictions applicable to shares of Stock to be issued to the Participant
pursuant to the Plan substantially in the form attached hereto as Exhibit A or
such other form as the Board shall approve from time to time.
(o) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Internal Revenue Code of 1986.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board. All questions of interpretation of the Plan or of any Award shall be
determined by the Board, and such determinations shall be final and binding upon
all persons having an interest in the Plan or such Award. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.
2
<PAGE> 3
3.2 POWERS OF THE BOARD. In addition to any other powers set forth
in the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Awards shall be granted and the number of shares of Stock to be subject
to each Award;
(b) to determine the terms, conditions and restrictions
applicable to each Award (which need not be identical), including, without
limitation, (i) the method for satisfaction of any tax withholding obligation
arising in connection with the Award and (ii) the timing, terms and conditions
of any vesting of the Award;
(c) to approve one or more forms of Stock Bonus Agreement;
(d) to accelerate, continue, extend or defer the vesting of any
Award;
(e) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions; and
(f) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Stock Bonus Agreement and to make all other
determinations and take such other actions with respect to the Plan or any Award
as the Board may deem advisable to the extent consistent with the Plan and
applicable law.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be thirty thousand (30,000) and shall consist
of authorized but unissued or reacquired shares of Stock or any combination
thereof. If any shares of Stock granted pursuant to the Plan are forfeited to,
or are repurchased by, the Company, such forfeited or repurchased shares of
Stock shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to outstanding Awards. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole share. The adjustments determined by
the Board pursuant to this Section 4.2 shall be final, binding and conclusive.
5. PERSONS ELIGIBLE FOR PARTICIPATION.
Awards may be granted only to Employees. Eligible persons may be
granted more than one (1) Award under the Plan.
3
<PAGE> 4
6. TERMS AND CONDITIONS OF AWARDS.
Awards shall be evidenced by Stock Bonus Agreements specifying the
number of shares of Stock covered thereby. No Award or purported Award shall be
a valid and binding obligation of the Company unless evidenced by a fully
executed Stock Bonus Agreement. Stock Bonus Agreements may incorporate all or
any of the terms of the Plan by reference and shall comply with and be subject
to the following terms and conditions:
6.1 NO MONETARY PAYMENT REQUIRED. No monetary payment (other than
applicable withholding taxes) shall be required as a condition of receiving an
Award, the consideration for which shall be services actually rendered to the
Participating Company Group or for its benefit.
6.2 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the payment of any Award, or to accept from the
Participant the tender of, a number of whole shares of Stock having a fair
market value, as determined by the Company, equal to all or any part of the
federal, state, local and foreign taxes, if any, required by law to be withheld
by the Participating Company Group with respect to such Award. Alternatively or
in addition, in its sole discretion, the Company shall have the right to require
the Participant, through payroll withholding, cash payment or otherwise to make
adequate provision for any such tax withholding obligations of the Participating
Company Group arising in connection with the Award. The Company shall have no
obligation to deliver shares of Stock or to release shares of Stock from an
escrow established pursuant to the Stock Bonus Agreement until the Participating
Company Group's tax withholding obligations have been satisfied.
6.3 VESTING AND RESTRICTIONS ON TRANSFER. Shares issued pursuant to
any Award may, but need not, be made subject to vesting conditioned upon the
satisfaction of such Service requirements, performance goals, or other
restrictions (the "VESTING RESTRICTIONS") as shall be determined by the Board
and set forth in the Stock Bonus Agreement evidencing such Award.
6.4 REPURCHASE RIGHTS. Shares issued under the Plan may be subject
to a right of first refusal, one or more repurchase options, or other conditions
and restrictions as determined by the Board in its sole discretion at the time
the Award is granted. The Company shall have the right to assign at any time any
repurchase right it may have, whether or not such right is then exercisable, to
one or more persons as may be selected by the Company.
6.5 VOTING RIGHTS; DIVIDENDS. During such time a share is subject to
Vesting Restrictions, the Participant shall have all of the rights of a
shareholder of the Company holding such share, including the right to vote the
share and to receive all dividends and other distributions paid with respect to
such share; provided, however, that if any such dividends or distributions are
paid in shares of Stock, such shares shall be subject to the same Vesting
Restrictions as the shares of Stock with respect to which they were paid.
6.6 EFFECT OF TERMINATION OF SERVICE. If a Participant's Service
with the Participating Company Group terminates for any reason, whether
voluntary or involuntary (including the Participant's death or disability), the
Participant shall forfeit to the Company
4
<PAGE> 5
shares of Stock acquired by the Participant pursuant to an Award which remain
subject to Vesting Restrictions as of the date of the Participant's termination
of Service.
6.7 NONTRANSFERABILITY OF AWARD. During the lifetime of the
Participant, all rights with respect the Participant's participation in the Plan
shall be personal to the Participant, and no rights or interest therein may be
assigned or transferred in any manner except by will or by the laws of descent
and distribution. Following the death of a Participant, any Award payable to the
Participant shall paid to the Participant's legal representative.
7. PROVISION OF INFORMATION.
At least annually, copies of the Company's balance sheet and income
statement for the just completed fiscal year shall be made available to each
Participant. The Company shall not be required to provide such information to
persons whose duties in connection with the Company assure them access to
equivalent information.
8. COMPLIANCE WITH SECURITIES LAW.
The grant of Awards and the issuance of shares of Stock pursuant to
Awards shall be subject to compliance with all applicable requirements of
federal, state and foreign law with respect to such securities. No shares may be
issued pursuant to an Award if such issuance would constitute a violation of any
applicable federal, state or foreign securities laws or other law or regulations
or the requirements of any stock exchange or market system upon which the Stock
may then be listed. In addition, no shares may be issued pursuant to an Award
unless (a) a registration statement under the Securities Act shall at the time
of such issuance be in effect with respect to the shares issuable pursuant to
the Award or (b) in the opinion of legal counsel to the Company, the shares
issuable pursuant to the Award may be issued in accordance with the terms of an
applicable exemption from the registration requirements of the Securities Act.
The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance of any shares hereunder shall relieve the
Company of any liability in respect of the failure to issue such shares as to
which such requisite authority shall not have been obtained. As a condition to
the issuance of shares pursuant to any Award, the Company may require the
Participant to satisfy any qualifications that may be necessary or appropriate,
to evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be requested by the
Company.
9. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN.
The Board may amend, suspend or terminate the Plan at any time;
provided, however, that without the approval of the Company's shareholders,
there shall be no amendment of the Plan that would require approval of the
Company's shareholders under any applicable law, regulation or rule.
5
<PAGE> 6
EXHIBIT A
STANDARD FORM OF
SILICON ENTERTAINMENT, INC.
STOCK BONUS AGREEMENT
<PAGE> 7
SILICON ENTERTAINMENT, INC.
STOCK BONUS PLAN
STOCK BONUS AGREEMENT
THIS STOCK BONUS AGREEMENT (the "AGREEMENT") is made and entered into
as of ___________ , 199 , (the "EFFECTIVE DATE") by and between Silicon
Entertainment, Inc. (the "COMPANY") and ____________ (the "PARTICIPANT").
The Company hereby grants to the Participant ____________ fully-vested
shares of Stock, as adjusted from time to time pursuant to Section 4 (the
"SHARES"), upon the terms and conditions set forth in this Agreement and subject
to the terms and conditions of the Plan, the provisions of which are
incorporated herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Agreement. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
2. RIGHT OF FIRST REFUSAL.
2.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section
2.8 below, in the event the Participant, the Participant's legal representative
or other holder of the Shares proposes to sell, exchange, transfer, pledge, or
otherwise dispose of (including by gift or operation of law) any Shares (the
"TRANSFER SHARES") to any person or entity, including, without limitation, any
shareholder of the Company, the Company shall have the right to repurchase the
Transfer Shares under the terms and subject to the conditions set forth in this
Section 2 (the "RIGHT OF FIRST REFUSAL").
2.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
the Transfer Shares, the Participant shall deliver written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. If the Participant proposes to transfer any Transfer
Shares to more than one Proposed Transferee, the Participant shall provide a
separate Transfer Notice for the proposed transfer to each Proposed Transferee.
The Transfer Notice shall be signed by both the Participant and the Proposed
Transferee and must constitute a binding
<PAGE> 8
commitment of the Participant and the Proposed Transferee for the transfer of
the Transfer Shares to the Proposed Transferee subject only to the Right of
First Refusal.
2.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Participant in the Transfer Notice is insufficient
to establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Participant written notice of the Participant's failure to comply
with the procedure described in this Section 2, and the Participant shall have
no right to transfer the Transfer Shares without first complying with the
procedure described in this Section 2. The Participant shall not be permitted to
transfer the Transfer Shares if the proposed transfer is not bona fide.
2.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines
the proposed transfer to be bona fide, the Company shall have the right to
purchase all, but not less than all, of the Transfer Shares (except as the
Company and the Participant otherwise agree) for a purchase price determined in
accordance with Section 2.5 by delivery to the Participant of a notice of
exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's right to
exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other Transfer
Notice is issued by the Participant or issued by a person other than the
Participant with respect to a proposed transfer to the same Proposed Transferee.
2.5 PAYMENT OF REPURCHASE PRICE. The price per Transfer Share being
repurchased pursuant to the Right of First Refusal shall be an amount equal to
the Repurchase Price, which shall be paid by the Company in cash or a cash
equivalent within sixty (60) days following its receipt of the Participant's
Transfer Notice. For purposes of the foregoing, cancellation of any indebtedness
of the Participant to the Company shall be treated as payment to the Participant
in cash to the extent of the unpaid principal and any accrued interest canceled.
2.6 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails
to exercise the Right of First Refusal in full (or to such lesser extent as the
Company and the Participant otherwise agree) within the period specified in
Section 2.4 above, the Participant may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and conditions described in the
Transfer Notice, provided such transfer occurs not later than ninety (90) days
following delivery to the Company of the Transfer Notice. The Company shall have
the right to demand further assurances from the Participant and the Proposed
Transferee (in a form satisfactory to the Company) that the transfer of the
Transfer Shares was actually carried out on the terms and conditions described
in the Transfer Notice. No Transfer Shares shall be transferred on the books of
the Company until the Company has received such assurances, if so demanded, and
has approved the proposed transfer as bona fide. Any proposed transfer on terms
and conditions different from those described in the Transfer Notice, as well as
any subsequent proposed transfer by the Participant, shall again be subject to
the Right of First Refusal and shall require compliance by the Participant with
the procedure described in this Section 2.
2
<PAGE> 9
2.7 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer
Shares or any interest therein, other than the Company, shall be required as a
condition of such transfer to agree in writing (in a form satisfactory to the
Company) that such transferee shall receive and hold such Transfer Shares or
interest therein subject to all of the terms and conditions of this Agreement,
including this Section 2 providing for the Right of First Refusal with respect
to any subsequent transfer. Any sale or transfer of any Shares shall be void
unless the provisions of this Section 2 are met.
2.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the
right to assign the Right of First Refusal at any time, whether or not there has
been an attempted transfer, to one or more persons as may be selected by the
Company.
2.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Agreement notwithstanding, the Right of First Refusal shall
terminate and be of no further force and effect upon the existence of a public
market for the class of shares subject to the Right of First Refusal. A "PUBLIC
MARKET" shall be deemed to exist if such stock is listed on a national
securities exchange, as that term is used in the Securities Exchange Act of
1934, as amended.
3. ESCROW.
3.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Right of First Refusal shall be available for repurchase, the Company may, but
need not, require the Participant to deposit the certificate evidencing the
Shares with an agent designated by the Company under the terms and conditions of
an escrow agreement approved by the Company. If the Company does not require
such deposit as a condition of the issuance of the Shares, the Company reserves
the right at any time to require the Participant to so deposit the certificate
in escrow. The Company shall bear the expenses of the escrow.
3.2 DELIVERY OF SHARES TO PARTICIPANT. As soon as practicable after
the expiration of the Right of First Refusal, the escrow agent shall deliver to
the Participant the shares and any other property no longer subject to such
restrictions.
3.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Right of
First Refusal, the notices required to be given to the Participant shall be
given to the escrow agent, and any payment required to be given to the
Participant shall be given to the escrow agent. Within thirty (30) days after
payment by the Company, the escrow agent shall deliver the shares and any other
property which the Company has purchased to the Company and shall deliver the
payment received from the Company to the Participant.
4. ADJUSTMENT TO SHARES SUBJECT TO AGREEMENT.
If, from time to time during the term of this Agreement, there is
any stock dividend or liquidating dividend of cash or property, stock split,
reverse stock split, recapitalization, reclassification or other similar change
in the character or amount of any of the
3
<PAGE> 10
outstanding securities of the Company, then, in such event any and all new,
substituted or additional securities or other property to which the Participant
is entitled by reason of his ownership of Shares will be immediately subject to
the provisions of this Agreement on the same basis as all Shares originally
acquired hereunder, and will be included in the word "Shares" for all purposes
of this Agreement with the same force and effect as the Shares presently subject
to this Agreement. For purposes of Section 2 hereof, while the total price
payable upon the exercise of the rights provided in such section will remain the
same after each such event, the price payable per share to exercise such rights
will be appropriately adjusted.
5. TAX WITHHOLDING.
At the time that this Agreement is executed, or at any time
thereafter as requested by the Company, the Participant hereby authorizes
withholding from payroll and any other amounts payable to the Participant, and
otherwise agrees to make adequate provision for any sums required to satisfy the
federal, state, local and foreign tax withholding obligations. The Participant
is cautioned that the Company shall have no obligation to issue a certificate
for the Shares or release Shares from any escrow provided for herein unless the
tax withholding obligations of the Company have been satisfied.
6. EMPLOYMENT MATTERS.
Nothing in this Agreement will create in any manner whatsoever an
employment agreement between Company and the Participant or affect in any manner
the right or power of the Company, or a Parent Corporation or Subsidiary
Corporation, to terminate the Participant's Service for any reason or no reason,
with or without cause, subject to any other agreements between Company and the
Participant.
7. RIGHTS AS A SHAREHOLDER.
The Participant shall have no rights as a shareholder with respect
to the Shares until the Issuance Date. No adjustment shall be made for dividends
or distributions or other rights for which the record date is prior to the
Issuance Date. On the Issuance Date, the Participant shall become the record
holder of the Shares, entitled to dividends, if any, voting rights and other
rights of a holder thereof, subject to the provisions of this Agreement. Subject
to the provisions of this Agreement, the Participant shall, during its term,
have all rights and privileges of a shareholder with respect to Shares deposited
in escrow.
8. RESTRICTIONS ON ISSUANCE OF SHARES.
Notwithstanding any other provision of this Agreement to the
contrary, no Shares shall be issued if the issuance or delivery of such shares
would constitute a violation of any applicable federal, state or foreign
securities laws or other law or regulations or the requirements of any stock
exchange or market system upon which the Stock may then be listed. The inability
of the Company to obtain from any regulatory body having jurisdiction the
authority, if any, deemed by the Company's legal counsel to be necessary to the
lawful issuance of the Shares
4
<PAGE> 11
hereunder shall relieve the Company of any liability in respect of the failure
to issue such shares as to which such requisite authority shall not have been
obtained. As a condition to the issuance and delivery of the Shares, the Company
may require the Participant to satisfy any qualifications that may be necessary
or appropriate, to evidence compliance with any applicable law or regulation and
to make any representation or warranty with respect thereto as may be requested.
9. RESTRICTIONS ON TRANSFER OF SHARES.
No shares acquired pursuant to this Agreement may be sold,
exchanged, transferred (including, without limitation, any transfer to a nominee
or agent of the Participant), assigned, pledged, hypothecated or otherwise
disposed of, including by operation of law, in any manner which violates any of
the provisions of this Agreement. The Company shall not be required (a) to
transfer on its books any shares which shall have been transferred in violation
of any of the provisions set forth in this Agreement or (b) to treat as owner of
such shares or to accord the right to vote as such owner or to pay dividends to
any transferee to whom such shares shall have been so transferred.
10. PUBLIC OFFERING.
The Participant hereby agrees that in the event of any underwritten
public offering of stock, including an initial public offering of stock, made by
the Company pursuant to an effective registration statement filed under the
Securities Act, the Participant shall not offer, sell, contract to sell, pledge,
hypothecate, grant any option to purchase or make any short sale of, or
otherwise dispose of any shares of stock of the Company or any rights to acquire
stock of the Company for such period of time from and after the effective date
of such registration statement as may be established by the underwriter for such
public offering; provided, however, that such period of time shall not exceed
one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing
limitation shall not apply to shares registered in the public offering under the
Securities Act.
11. LEGENDS.
The Company may at any time place legends referencing the Right of
First Refusal and any applicable federal, state or foreign securities law
restrictions on all certificates representing shares of stock subject to the
provisions of this Agreement. The Participant shall, at the request of the
Company, promptly present to the Company any and all certificates representing
shares acquired pursuant to the Agreement in the possession of the Participant
in order to carry out the provisions of this Section. Unless otherwise specified
by the Company, legends placed on such certificates may include, but shall not
be limited to, the following:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE
IS MADE IN ACCORDANCE WITH
5
<PAGE> 12
RULE 144 OR RULE 701 UNDER THE ACT, OR THE CORPORATION RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY
SATISFACTORY TO THE CORPORATION, STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND REPURCHASE RIGHTS IN FAVOR OF THE
CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN
INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS
CORPORATION."
12. MISCELLANEOUS.
12.1 ADMINISTRATION. All questions of interpretation concerning this
Agreement shall be determined by the Board. All determinations by the Board
shall be final and binding upon all persons having an interest in the Shares.
12.2 FRACTIONAL SHARES. No fractional shares shall be issued
pursuant to this Agreement.
12.3 NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given (except to the extent
that this Agreement provides for effectiveness only upon actual receipt of such
notice) upon personal delivery or upon deposit in the United States Post Office,
by registered or certified mail, with postage and fees prepaid, addressed to the
other party at the address shown below that party's signature or at such other
address as such party may designate in writing from time to time to the other
party.
12.4 BINDING EFFECT. Subject to the restrictions on transfer set
forth herein, this Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
12.5 ENTIRE AGREEMENT. This Agreement, together with the exhibits
hereto, and the Plan constitute the entire understanding and agreement of the
Participant and the Company with respect to the subject matter contained herein
and therein and there are no agreements or understandings between the
Participant and the Company with respect to such subject matter other than those
as set forth or provided for herein. No amendment or addition hereto will be
deemed effective unless agreed to in writing by the parties hereto.
12.6 SPECIFIC PERFORMANCE. The Participant agrees that the Company
will be entitled to a decree of specific performance of the terms hereof or an
injunction restraining violation of this Agreement in addition to any other
remedies available to the Company.
6
<PAGE> 13
12.7 WAIVER. No failure on the part of any party to exercise or
delay in exercising any right hereunder will be deemed a waiver thereof, nor
will any such failure or delay, or any single or partial exercise of any such
right, preclude any further or other exercise of such right or any other right.
12.8 VALIDITY. If any provision of this Agreement, or the
application thereof, is for any reason and to any extent determined by a court
of competent jurisdiction to be invalid or unenforceable, the remainder of this
Agreement and the application of such provision will be interpreted so as best
to reasonably effect the intent of the parties hereto.
12.9 APPLICABLE LAW. This Agreement shall be governed by the laws of
the State of California, without regard to such state's conflicts of laws.
SILICON ENTERTAINMENT, INC.
By:
-------------------------
Title:
----------------------
Address:
The undersigned Participant acknowledges receipt of a copy of the Plan
in the form attached hereto as Exhibit A. The Participant represents that the
Participant has read and is familiar with the terms and provisions of the Plan
and this Agreement, including the Right of First Refusal set forth in Section 2,
and hereby accepts the Shares subject to all of the terms and provisions hereof.
The Participant hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Board upon any questions arising under this
Agreement.
PARTICIPANT
Date:
-------------------------- ----------------------------
Participant Address:
----------------------------
----------------------------
ATTACHMENTS
Exhibit A: Stock Bonus Plan
7
<PAGE> 14
EXHIBIT A
SILICON ENTERTAINMENT, INC.
STOCK BONUS PLAN
<PAGE> 1
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED ON A REQUEST FOR
CONFIDENTIAL TREATMENT
EXHIBIT 10.7
LICENSE AGREEMENT
BY AND BETWEEN
NATIONAL ASSOCIATION FOR STOCK CAR AUTO RACING, INC.
AND
LBE TECHNOLOGIES, INC.
THIS LICENSE AGREEMENT (this "Agreement") is made and entered into this
18th day of August, 1997 (the "Effective Date") by and between the NATIONAL
ASSOCIATION FOR STOCK CAR AUTO RACING, INC., a Florida corporation with a
principal business address of P.O. Box 2875, Daytona Beach, Florida 32120-2875
("Licensor") and LBE TECHNOLOGIES, INC., a California corporation with a
principal business address of 10401 Bubb Road, Cupertino, California 95014
("Licensee").
RECITALS
WHEREAS, Licensor, by the expenditure of time, skill, effort and money,
has developed and owns a distinctive system for establishing, operating and
sanctioning stock car and stock truck racing in North America and is engaged in,
among other things, the promotion of racing events and development and
merchandising of various products relating to stock car and stock truck racing,
and is the owner of certain trademarks and service marks and the goodwill
related thereto; and
WHEREAS, Licensee, by the expenditure of time, skill, effort and money,
has developed and owns a distinctive system for photonic, electronic,
electromechanical and hydraulic simulated representation real world vehicle
operation, including stock car racing and for simultaneous competitive display
of multiple vehicles in apparent real-time and for the engagement of viewers and
spectators, and is the owner of certain trademarks, technical know-how, and
trade secrets.
WHEREAS, Licensee desires to acquire a license from Licensor to obtain the
right to use certain trademarks, service marks and trade dress owned by Licensor
(i) for implementation of the NASCAR marks into the visual display of the NASCAR
stock car and NASCAR stock truck simulators (as defined below), and (ii) in the
development, design, operation, promotion and advertising of retail outlets that
offer to the general public simulator games and concessions predominately
consisting of interactive stock car and stock truck simulation entertainment
(including the Simulators) and which retail outlets have a theme associated and
identified with NASCAR stock car and stock truck racing, and other related
NASCAR themes, and Licensor desires to grant Licensee such license upon the
terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, for and in consideration of the terms and conditions set
forth herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1
***Confidential treatment requested.
<PAGE> 2
1. DEFINITIONS
The following terms shall have the following meanings in this Agreement:
(a) "Advertising" means all forms of advertising, including but not
limited to print advertisements and promotional literature, television and radio
commercials, and advertisements on or through on-line services, the World Wide
Web and other portions of the Internet.
(b) "Affiliate" means, with respect to any Person, any other natural
person or Entity that directly or indirectly, through one or more
intermediaries, controls, is controlled by or is under common control with such
Person. The term "control" (including, with correlative meaning, the terms
"controlling," "controlled by" and "under common control with" means the
possession, directly or indirectly, of the power to direct or cause direction of
the management and policies of a Person, whether through the ownership of voting
securities, by Contract or otherwise; provided, however, that in no event shall
Licensor be deemed an Affiliate of Licensee. For purposes of the definition of
Affiliate, the term "Contract" shall mean any agreement, lease, license,
evidence of debt, mortgage, deed of trust, note, bond, indenture, security
agreement, commitment, instrument, understanding, or other contract, obligation
or arrangement of any kind.
(c) "Entertainment Store" or collectively "Entertainment Stores" shall
mean a self contained retail outlet that offers entertainment to the general
public predominately consisting of indoor simulated stock car and stock truck
race driving experiences using the Simulators and indoor grandstand spectator
seating, but also including a refreshment area and a retail merchandise area,
with a predominant theme associated and identified with NASCAR stock car and
stock truck racing, and other NASCAR racing theme(s) promoted and approved by
NASCAR during the term of this Agreement.
(d) "Entity" or collectively "Entities" shall mean corporations, limited
liability companies, partnerships, joint ventures or other forms of legal
entity.
(e) "Gross Revenue" shall mean all monies and things of value received or
earned or accrued by the Licensee or relating to or associated with the
Entertainment Store, less applicable sales and use taxes, as a result of or in
connection with a revenue-producing activity of any kind on or in connection
with the goods and services licensed under this Agreement. In computing Gross
Revenue, the gross amount set forth in any contract or agreement giving rise to
the right of payment shall be included, and any applicable commissions, fees or
expenses paid to or deducted by sales agents, consultants and other parties
shall not be deducted therefrom. However, Licensee may approach Licensor from
time to time, when unique circumstances warrant the Licensee's use of a third
party sales agent in securing, a sponsorship for the Entertainment Stores and/or
the Remote Sites, at which time the Licensor shall reasonably consider deducting
the sales commission from Gross Revenue computation. Provided however, that the
sales commission rate is based upon a reasonable industry standard and that the
sales agent has been pre-approved by the Licensor, such approval shall not be
unreasonably withheld.
(f) "NASCAR Marks" shall mean only those trademarks, service marks, logos,
emblems or indicia of origin owned exclusively by NASCAR as are listed and
described on
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Exhibit A attached hereto, which NASCAR Marks may be supplemented from time to
time by NASCAR in NASCAR's sole discretion.
(g) "NASCAR Trade Dress" refers to the overall image and impression of the
NASCAR and its sanctioned events and shall be given the meaning ascribed to it
under the cases applying Section 43(a) of the Lanham Act and the cases applying
and interpreting that statute.
(h) "Person" shall mean any natural person or Entity.
(i) "Royalties" shall mean the aggregate of all royalties described in
this Agreement, including, but not limited to royalties described in Section 4
of this Agreement.
(j) "Simulators" shall mean interactive, two-passenger, stock car or stock
truck simulation equipment developed and owned by Licensee, including hardware,
software, firmware and other components, with working gas, clutch and brake
pedals, rearview mirrors and racing tires, which will be mounted on "motion
platforms" capable of moving the Simulator in four degrees of freedom, and which
will incorporate NASCAR stock car and/or stock truck racing theme(s) and which
are developed and owned by the Licensee and which incorporate the NASCAR Marks
and any other elements unique to NASCAR as licensed in this Agreement. Licensor
recognizes that the Licensee has agreements with and will from time to time
establish agreements with stock car drivers, team owners and tracks which are
not subject to the terms herein. In addition, Licensor acknowledges that
Licensee may develop simulations that do not pertain to stock car and stock
truck racing; these simulators shall not be subject to the term herein.
(k) "Site" shall mean the individual location of an Entertainment Store as
approved by Licensor in accordance with Section 9(a) hereof.
(l) "Site Trade Dress" refers to the overall image and impression of the
Entertainment Stores and the Remote Sites and shall be given the meaning
ascribed to it under the cases applying Section 43(a) of the Lanham Act, and the
cases applying and interpreting that statute.
2. GRANT OF LICENSE
(a) Grant of License. Subject to the terms and conditions set forth
herein, Licensor hereby grants to Licensee, during the term of this Agreement,
the non-exclusive, limited right and license to use the NASCAR Marks and NASCAR
Trade Dress solely in connection with: (i) the development, design, creation,
implementation and display of software in the Simulators at locations approved
by NASCAR as provided in this Agreement; (ii) the design, development, building,
construction of the Entertainment Stores and the Remote Sites (as defined in
Section 2(c) hereof) within the territory consisting of the entire world (the
"Territory") and the ownership and operation thereof (the "Business"); and (iii)
"Promotional Activities" relating to the Entertainment Stores and Remote Sites,
all such Promotional Activities are subject to the prior approval of Licensor.
As used herein, the term "Promotional Activities" shall mean all forms of
advertising, marketing, promotional and sponsorship activities relating to or
associated with the Entertainment Stores or Remote Sites.
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(b) Non-Exclusivity. Licensee acknowledges, understands and confirms that
the license granted to Licensee by Licensor during the term of this Agreement
and subject to the terms and conditions of this Agreement are nonexclusive and
Licensor retains the right, at its sole option and discretion, to operate, or
grant to any other Person the right to operate, Entertainment Stores (or any
other related concept) at any location within or outside the Territory, however,
Licensor shall not be entitled to use any of the Licensee's Intellectual
Property [as defined in Section 12(b) of this Agreement] in any other
Entertainment Store not associated with the Licensee. Upon termination or
expiration (without renewal of this Agreement), Licensee shall have no further
rights hereunder, other than the rights held prior to the Grant of License.
(c) Remote Sites. In connection with the license granted to Licensee by
Licensor pursuant to this Agreement, Licensee shall have the right, at its sole
expense, to transport one or more Simulators to locations other than the
premises of the Entertainment Stores temporarily operated by Licensee
(individually a "Remote Site" or collectively the "Remote Sites") for the
purpose of making the Simulators available for use by the general public at
sporting or other entertainment and promotional events; provided that the
locations and times of operation for each Remote Site has been previously
approved in writing by Licensor; and further provided that, in connection with
each Remote Site, Licensee complies with all of the terms and conditions of this
Agreement applicable to the Entertainment Stores insofar as such terms and
conditions could apply to the Simulators or the Remote Site. Notwithstanding the
foregoing, in connection with the Remote Sites, except with respect to the fee
charged by Licensee with respect to the use and operation of the Simulators by
customers, Licensee shall not be permitted to sell at or around a Remote Site
located at or in close proximity to any NASCAR-sanctioned race track facility,
any merchandise or other products or services bearing, containing or displaying
the NASCAR Marks, without Licensor's prior approval. Licensee shall be permitted
to sell approved merchandise at locations other than NASCAR-sanctioned race
track facilities, provided that Licensee has obtained any and all necessary
permits, permissions, licenses, etc. necessary for this type of activity.
(d) Limitations on License Granted to Licensee. In connection with the
license granted to Licensee by Licensor hereunder, Licensee understands and
agrees that:
(1) Theme. Licensee shall use the NASCAR Marks and NASCAR Trade
Dress only in connection with a NASCAR stock car or NASCAR stock truck racing
theme.
(2) Premiums, Bundling and Sweepstakes. Licensee agrees it is not
entitled to, and shall not, except as approved in advance by Licensor in
accordance with the procedures of this subparagraph 2(d)(2) of this Section 2,
use any of the NASCAR Marks or NASCAR Trade Dress (1) in connection with the
manufacture, sale or distribution of goods or services as premiums or for
promotional, publicity, fund-raising, giveaways, bundling, or disposal purposes
or (2) in connection with any sweepstakes, lottery, game of chance or any
similar promotional or sales program. Licensee may submit from time to time
proposals for the activities described in this subparagraph 2(d)(1) and (2).
Each proposal shall be in writing and describe the proposal in reasonable
detail. NASCAR, in its sole discretion, shall approve or disapprove each
proposal within fifteen (15) business days after actual receipt of such
proposal. Failure of NASCAR to reply to a proposal within this time will be
deemed a disapproval of the proposal. Furthermore, Licensee shall not use any of
the NASCAR Marks or NASCAR Trade Dress in connection with
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any sweepstakes, lottery, game of chance or any similar promotional or sales
program unless such program is consistent with applicable law.
(3) Other Trade Names, Trademarks and Service Marks. Except to the
extent permitted by applicable law, Licensee understands and agrees that it is
not entitled to, and shall not, use the names, pictures, identities, trade
names, trademarks or service marks of any racetrack promoting and presenting
NASCAR-sanctioned events, Persons involved in sponsoring or advertising in
connection with such events, NASCAR-licensed officials, drivers, car and truck
owners and crew members, or the cars or trucks involved in such events (the
"Third Party Marks") either by themselves or in conjunction with the NASCAR
Marks, unless Licensee has obtained the rights beforehand to use such Third
Party Marks from the owners(s) of such marks by written agreement. Unless
approved in advance by NASCAR, Licensee shall not use the NASCAR Marks in such
close physical proximity or in such close connection or combination with its own
marks or the marks of any third party that a reasonable consumer of the services
would be likely to get the impression that the NASCAR Marks do not indicate a
separate source of goods or services from other marks.
(4) Sublicensing. Licensee understands and agrees that this
Agreement does not in any manner whatsoever grant to Licensee any right to
sublicense. Licensee may request Licensor's approval, such approval in
Licensor's sole discretion, for sublicensing the rights and license granted to
it under this Agreement to any Person. Each of such request by Licensee shall be
in writing and describe the proposal in reasonable detail. NASCAR, in its sole
discretion, shall approve or disapprove of each proposal within fifteen (15)
business days after actual receipt of such proposal. Failure of NASCAR to reply
to a proposal within this time will be deemed a disapproval of the proposal. The
parties agree that no such sublicensing agreements approved by Licensor and
between Licensee and any other Person may without NASCAR's express written
permission include rights which allow the Person to use the NASCAR Marks or
NASCAR Trade Dress in marketing anything other than the activities licensed in
this Agreement or to hold himself or itself out to the public as an "official"
(or "home" or other words of similar import) provider of NASCAR goods or
services or to be otherwise endorsed by NASCAR.
(5) Warranty Within Territory. NASCAR expressly does not warrant or
represent that the rights under the license granted hereunder are enforceable or
noninfringing upon the rights of others outside of the United States, Canada and
Australia, even though the Territory provided in this Agreement extends beyond
the United States, Canada and Australia. Licensee agrees that use of the Marks
outside of these countries shall be at the sole risk of the Licensee, and that
Licensee agrees to indemnify and hold NASCAR and its Affiliates, and the
shareholders, employees, directors, officers and agents of each of them harmless
against all cost and expense incurred, including settlements, judgments and
reasonable attorneys' fees in the defense of any claim that arises solely as a
result of the use by one of the Licensee (and not by NASCAR or any other NASCAR
licensee) of the NASCAR Marks outside of the United States, Canada and
Australia. From time to time Licensee may present a list of prospective
territories outside of the United States, Canada and Australia in which the
Licensee is considering establishing additional Entertainment Store locations,
at which time the Licensor will notify the Licensee of any known rights-related
issues that might encumber such expansion.
(e) "NASCAR Silicon Motor Speedway" Mark and Logo. The word mark NASCAR
SILICON MOTOR SPEEDWAY is included in the NASCAR Marks licensed to Licensee in
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Section 2(a) above. In addition, Licensee may develop logos containing this mark
and versions of the mark in stylized lettering (collectively, the "Speedway
Logos") which, subject to the prior written approval by NASCAR of the appearance
and use of such Speedway Logos, shall also be included in the NASCAR Marks
licensed under this Agreement. NASCAR shall, at its own discretion and expense
pursue U.S. trademark registrations for the word mark NASCAR SILICON MOTOR
SPEEDWAY and the Speedway Logos, and such foreign registrations as are mutually
agreed upon between the parties. NASCAR shall, both during and after the Term of
this Agreement, own all right, title and interest in the word mark NASCAR
SILICON MOTOR SPEEDWAY and the Speedway Logos, which may be used by Licensee
only during the term of this Agreement and only in accordance with the terms of
this Agreement, except that Licensee shall be permitted both during and after
the term of this Agreement to use the word mark SILICON and the word mark
SILICON MOTOR SPEEDWAY (without the word NASCAR) and logos containing these
marks and stylized letter versions of these marks, provided that such logos and
stylized letter versions are not confusingly similar to any of the Speedway
logos. Notwithstanding the foregoing, Licensee shall be permitted to use the
fonts contained in the stylized letter version of the words "SILICON MOTOR
SPEEDWAY" found in the NASCAR Marks and Speedway logos and attached to this
Agreement, provided that these uses are not confusingly similar to any of the
Speedway logos and provided that these fonts shall not be used by the Licensee
or featured in any logo for an Entertainment Store following the termination of
this Agreement. Licensor agrees not to use the NASCAR SILICON MOTOR SPEEDWAY
word mark or any of the Speedway Logos following the termination of this
Agreement without the prior consent of the Licensee. Licensor also agrees not to
alter the Speedway logos without the prior consent of the Licensee; however,
Licensor shall be permitted to alter the word-mark NASCAR and its design as part
of the Speedway logos at any time and at the Licensor's sole discretion.
3. TERM OF LICENSE
(a) Term. The Term of this Agreement shall be for a period of four (4)
consecutive years commencing on the Effective Date and ending on August 12, 2001
(the "Term"). The Term may be earlier terminated by Licensor and Licensee as
provided in this Agreement.
(b) Renewal. The term of this Agreement may only be renewed upon the
mutual written agreement of Licensor and Licensee.
4. ROYALTIES
(a) Guaranteed Minimum Royalty.
(1) Schedule. In consideration of the license granted to Licensee
hereunder, Licensee shall pay to Licensor a nonrefundable advance against
royalties owed under this Agreement (the "Guaranteed Minimum Royalty") as
follows:
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[***]
(2) Payment Terms. Guarantees shall be calculated on a [***]
basis and payable in conjunction with the [***] royalty payment schedule, as
specified in this Section 4(b)(4). The Guaranteed Minimum Royalty for each
calendar year shall be credited against the Revenue Royalty only for that same
calendar year. Under no circumstances shall any payments of the Guaranteed
[***] Minimum Royalty be refundable, including upon termination or
expiration of this Agreement by either party for any reason.
(3) Guarantee Waiver. In the event that Licensee pays Licensor [***]
in royalties by end of the [***] , Guarantee Minimum Royalties for years three
and four shall be waived.
(b) Revenue Royalty. In consideration of the license granted hereunder,
Licensee shall pay to Licensor a percentage of the categories of Gross Revenue
defined in this Section 4(b) (collectively referred to as the "Revenue Royalty")
as follows:
(1) Entertainment Store Revenue Royalty. Licensee shall pay to
Licensor the following royalties associated with each Entertainment Store:
(i) Simulator Revenue Royalty. Licensee shall pay to Licensor
a revenue royalty in an amount equal to [***] of each Entertainment Store's
Simulator Revenue for each calendar [***] (the "Simulator Revenue Royalty"). The
term "Simulator Revenue" means Gross Revenue derived directly from allowing use
of the Simulators located in such Entertainment Store, whether by cash, check,
credit card, debit card, or any other means of payment and any revenue derived
from the sale of NASCAR Silicon Motor Speedway Driver Licenses. The value of
gift certificates relating to Simulators and the amounts paid therefor shall be
included in Simulator Revenue upon the issuance of such gift certificates.
(ii) Merchandise/Food and Beverage Revenue Royalty. Licensee
shall pay to Licensor a royalty in an amount equal to [***] of each
Entertainment Store's Merchandise/Food and Beverage Revenue for each calendar
[***] (the "Merchandise/Food and Beverage Revenue Royalty"). The term
"Merchandise/Food and Beverage Revenue" means Gross Revenue derived from sales
by Licensee of merchandise and food and beverages at such Entertainment Store,
whether by cash, check, credit card, debit card or other means of payment. The
value of gift certificates relating to merchandise and/or food and beverage
sales and the amounts paid therefor shall be included in Merchandise/Food and
Beverage Revenue upon the issuance of such gift certificates.
(iii) Sponsor Revenue Royalty. Licensee shall pay to Licensor
a royalty in an amount equal to [***] of each Entertainment Store's Sponsor
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Revenue for each calendar year (the "Sponsor Revenue Royalty"). The term
"Sponsor Revenue" means Gross Revenue derived from sponsors, promoters, and
advertisers in connection with the development and operation of the
Entertainment Stores or one or more parts thereof or activities therein.
(2) Remote Site Revenue Royalty. Licensee shall pay to Licensor the
following royalties associated with each Remote Site:
(i) Remote Simulator Revenue Royalty. Licensee shall pay to
Licensor a royalty in an amount equal to [***] of each Remote Site's Remote
Simulator Revenue for each calendar [***] (the "Remote Simulator Revenue
Royalty"). The term "Remote Simulator Revenue" means Gross Revenue derived from
allowing use of the Simulators located in each Remote Site, whether by cash,
check, credit card, debit card or other means of payment. The value of gift
certificates relating to the Simulators of the Remote Sites and the amounts paid
therefor shall be included in Remote Simulator Revenue upon the issuance of such
gift certificates.
(ii) Remote Sponsor Revenue Royalty. Licensee shall pay to
Licensor a royalty in an amount equal to [***] of each Remote Site's Remote
Sponsor Revenue for each calendar [***] (the "Remote Sponsor Revenue Royalty").
The term "Remote Sponsor Revenue" means Gross Revenue derived from sponsors,
promoters, and advertisers in connection with the development and operation of
the Remote Sites or activities therein.
(3) Miscellaneous Revenue Royalty. In the event that the
Entertainment Stores produce revenue related to a stock car or stock truck theme
other than the revenue derived in the aforementioned categories, Licensee and
Licensor shall [***]. The term "Miscellaneous Revenue" means any Gross
Revenue not included in Simulator Revenue, Merchandise/Food and Beverage
Revenue, Sponsor Revenue, Remote Simulator Revenue, and Remote Sponsor Revenue
as defined above.
(4) Payment of the Revenue Royalty. The Revenue Royalty hereunder
shall be accounted for and paid [***] during the term of this Agreement, shall
be nonrefundable, and shall be fully earned when paid. Such [***] payments of
the Revenue Royalty will be based on the Simulator Revenue, Merchandise/Food and
Beverage Revenue, Sponsor Revenue, Remote Simulator Revenue, Remote Sponsor
Revenue, and Miscellaneous Revenue for the preceding calendar quarter, with a
credit for any Guaranteed Minimum Royalty payment made to Licensor for that
calendar year. Payment of the Revenue Royalty shall be due and payable by
Licensee to Licensor on or before the [***] day of the first calendar month
following each calendar [***] .
(5) Interest on Late Payments. All payments which are not timely
paid to Licensor by Licensee in accordance with this Section 4, will bear
interest after their due date at a rate of [***] per month or the highest
contract rate of interest permitted by law, whichever is less. Licensee and
Licensor each acknowledge that this Section 4(b)(5) does not constitute
Licensor's agreement to accept any payments after they are due or its commitment
to extend credit to, or otherwise finance Licensee's operation of, any
Entertainment Store or Remote Site.
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(6) Quarterly and Annual Revenue Royalty Reports. On or before the
thirtieth (30th) day of the first calendar month following each calendar quarter
during the term of this Agreement, Licensee shall deliver to Licensor a complete
and accurate written statement setting forth the amount of Licensee's Simulator
Revenue, Merchandise/Food and Beverage Revenue, Sponsor Revenue, Remote
Simulator Revenue, Remote Sponsor Revenue, and Miscellaneous Revenue for the
preceding calendar quarter, including a complete and accurate copy of the state
and local sales tax return (if any is required) at such time that the tax
returns are actually due to the state and local governments. On or before March
1 of each calendar year during the term of this Agreement, Licensee shall
deliver to Licensor a complete and accurate written statement setting forth the
amount of the Simulator Revenue, Merchandise/Food and Beverage Revenue, Sponsor
Revenue, Remote Simulator Revenue, Remote Sponsor Revenue, and Miscellaneous
Revenue for the calendar year. Each of the quarterly reports and the annual
reports referenced herein shall be signed and verified by one of Licensee's
principal executive officers. Licensee shall also deliver to Licensor any other
sales data which may be reasonably requested from time to time by Licensor in
the form, manner and frequency requested.
(7) Underpayment or Overpayment of the Revenue Royalty. On or before
March 1st of each calendar year during the term of this Agreement, Licensee
shall calculate the Simulator Revenue, Merchandise/Food and Beverage Revenue,
Sponsor Revenue, Remote Simulator Revenue, Remote Sponsor Revenue, and
Miscellaneous Revenue for the preceding calendar year and shall deliver directly
to Licensor funds in an amount equal to the total Revenue Royalty payment owed
for the preceding calendar year less (i) all [***] Revenue Royalty payments made
by Licensee to Licensor with respect to the preceding calendar year and (ii) the
Guaranteed Minimum Royalty paid by Licensee to Licensor with respect to the
preceding calendar year ("Reconciliation Amount"); provided, however, that no
interest shall be due on the Reconciliation Amount if timely paid [including,
but not limited to, the interest set forth in Section 4(b)(5)]. If Licensee
overpaid the Revenue Royalty owed for the preceding calendar year, such
overpayment may be applied to offset against subsequent Revenue Royalty payments
owed by Licensee pursuant to this Section 4(b)(7).
(8) No Credits Against the Guaranteed Minimum Royalty. No payment of
the Revenue Royalty for any calendar year in excess of payments of the
Guaranteed Minimum Royalty shall be credited against the Guaranteed Minimum
Royalty due to Licensor for any other calendar year.
(9) Payment of Revenue Royalty Upon expiration of the Agreement.
Upon expiration of the term of this Agreement, Licensee shall as soon as
practicable calculate the Simulator Revenue, Merchandise/Food and Beverage
Revenue, Sponsor Revenue, Remote Simulator Revenue, Remote Sponsor Revenue, and
Miscellaneous Revenue for the partial calendar year ending on the date of such
expiration and shall deliver to Licensor an amount equal to Revenue Royalty owed
for such partial calendar year less all [***] Revenue Royalty payments
previously made by Licensee to Licensor with respect to such partial calendar
year; provided, however, that in the event that Licensee overpaid the Revenue
Royalty owed for such partial calendar year, such overpayment shall be promptly
refunded to Licensee by Licensor.
(10) Records and Audits. Licensee's books and records which relate
to the calculation and determination of the Revenue Royalty shall be made
available at Licensee's office for inspection, examination, copying, or audit by
a certified public accountant or other
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authorized representative selected by Licensor at its sole discretion during,
normal business hours upon ten (10) business days prior written notice to
Licensee by Licensor, provided that the Licensor shall not be entitled to no
more than to two (2) individual audits each year. Such examination, copying or
audit shall be at Licensor's sole expense unless it is disclosed that the
Simulator Revenue, Merchandise/Food and Beverage Revenue, Sponsor Revenue,
Remote Simulator Revenue, Remote Sponsor Revenue, and Miscellaneous Revenue
reported by Licensee for the period being audited by Licensor is understated to
the extent of [***] or more, in which case all costs and expenses related to
such audit shall be borne by Licensee. Licensee shall immediately pay Licensor
on demand any deficiency in the Revenue Royalty, together with: (i) interest at
the lower of the maximum rate permitted by law or [***] per annum, accruing from
the date on which they are paid in full, (ii) a late fee of [***] of the amount
of fees so understated, and (iii) if applicable, all costs and expenses of
Licensor related to such audit.
5. DEVELOPMENT FEE
(a) Development Fee. Simultaneously with the execution and delivery of
this Agreement, Licensee shall pay, by cashier's check, money order or by wire
transfer, to NASCAR an amount equal to [***] (the "Development Fee"), which
Development Fee shall be nonrefundable and fully earned by Licensor when paid by
Licensee.
(b) Credit Applied Against Royalty Payments. Upon execution of this
Agreement and the payment to Licensor of the Development Fee by Licensee,
Licensor agrees to provide Licensee with an aggregate credit in the amount of
[***] (the "Credit") which shall be applied against the payments of Royalties
otherwise due to Licensor hereunder as such Royalties become due and payable
until such time as the Credit has been applied in full to payment of such
Royalties by Licensee after which time Licensee shall be required to pay all
further Royalties to Licensor as they become due as provided hereunder.
6. DEVELOPMENT OF THE INITIAL PLAN OF BUSINESS
(a) Initial Plan. On or before the Effective Date of the Agreement,
Licensee agrees to submit, in the form of a written proposal to Licensor,
Licensee's plans and specifications (the "Initial Plan") regarding the
development, design, building, construction and operation of the Entertainment
Stores (the "Business"). Such Initial Plan shall be prepared by Licensee at its
own expense and shall include, without limitation, detailed and specific plans
regarding the management, marketing, advertising, design, attractions, building,
construction, proposed locations of the Entertainment Stores, Site Trade Dress,
and systems development for the Business as well as future plans for expansion
of the Business. Licensor agrees to approve or disapprove the Initial Plan
within thirty (30) days after the delivery of the Initial Plan to Licensor from
License, such approval shall not be unreasonably withheld.
(b) Licensee's Continuing Obligation to Provide Status Reporting to
Licensor. Licensee agrees that at least once every three (3) months commencing
on the last day of the third (3rd) month following the date on which the Initial
Plan is approved by Licensor, and on the last day of the month each and every
three (3) months thereafter during the term of this Agreement, Licensee shall
have a continuing obligation to deliver to Licensor a written status report
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providing a general overview of progress made by Licensee in meeting the
objectives and plans set forth and described in the Initial Plan. Any proposed
material modifications by Licensee to the Initial Plan or any material
alterations to any previously approved Initial Plan are subject to the approval
of Licensor.
7. ENTERTAINMENT STORES' DESIGN AND TRADE DRESS
(a) Entertainment Stores' Design. Licensee shall be responsible for
developing the Business, including, without limitation the requirements for
building and constructing each Entertainment Store, the Simulators and the
dimensions, design, image, interior, layout, and Site Trade Dress of each
Entertainment Store; all of which shall be in substantial compliance with the
Initial Plan.
(b) Site Trade Dress. The Site Trade Dress of each Entertainment Store
that is opened to the general public must substantially comply with the Initial
Plan, as such Initial Plan may be amended from time to time with Licensor's
approval.
8. DEVELOPMENT SCHEDULE
(a) Total Number of Entertainment Stores. Licensee shall develop a total
of at least eleven (11) Entertainment Stores within the Territory during the
term of this Agreement pursuant to the terms of this Agreement in accordance
with the following development schedule (the "Development Schedule"):
(i) Licensee shall have opened to the general public at least
[***] Entertainment Store on or before December 31, 1997;
(ii) Licensee shall have opened to the general public at least
[***] additional Entertainment Stores on or before December 31, 1998,
resulting in a cumulative minimum number of at least [***] Entertainment
Stores opened to the general public and in operation by December 31, 1998;
(iii) Licensee shall have opened to the general public at
least [***] additional Entertainment Stores on or before August 31, 1999,
resulting in a cumulative minimum number of at least [***] Entertainment Stores
opened to the general public and in operation by August 31, 1999; and
(iv) Licensee shall have opened to the general public at least
[***] additional Entertainment Stores on or before August 31, 2000, resulting
in a cumulative minimum number of at least eleven (11) Entertainment Stores
opened to the general public and in operation by August 31, 2000.
Licensee understands and acknowledges that the development and
establishment by Licensee of any Remote Units shall not be counted towards nor
shall it satisfy any of Licensee's obligations to fully comply with the
development schedule contained in this Section 8.
(b) Additional Entertainment Stores. During the term of this Agreement,
and subject to the other provisions of this Agreement, including, but not
limited to, Licensor's consent to the
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Site of each of the Entertainment Stores as set forth in Section 9(a) below,
Licensee is free to develop more than the minimum number of Entertainment Stores
specified in the Development Schedule.
(c) Failure to Comply with Development Schedule. Strict compliance with
the Development Schedule specified in this Section 8(a) is of the essence in
this Agreement. Licensee's failure to fulfill its specified development
obligations with respect to the Development Schedule specified in Section 8(a)
shall constitute a default under Section 20 hereof. However, if the Licensee is
working in good faith to rectify any Development Schedule deficiencies, Licensor
shall consider waiving a portion or all of this stipulation using its reasonable
discretion.
(d) Force Majeure. Notwithstanding the foregoing, if Licensee is unable to
comply with the Development Schedule as set forth in this Section 8 solely due
to an event of "Force Majeure," the Development Schedule shall be extended by
Licensor for a reasonable period of time not to exceed nine (9) months, as
determined by Licensor in its reasonable discretion; provided that, Licensee
continues at all times during the term of this Agreement to use its best efforts
to fully comply with and timely satisfy the Development Schedule and perform all
of its obligations in accordance with this Agreement. For purposes of this
Agreement, "Force Majeure" shall mean an event caused by fire, strike, flood,
embargo, Acts of God, or other similar causes beyond Licensee's control.
9. CONDITIONS PRECEDENT TO THE DEVELOPMENT OF THE ENTERTAINMENT STORES
Prior to developing, acquiring, constructing, designing and building each
Entertainment Store, Licensee shall have satisfied all of the following
conditions (each of which shall be in form and substance reasonably satisfactory
to Licensor). Licensor recognizes that some of these conditions may be unable to
be met by the Licensee until after the development process has already begun;
Licensee shall notify the Licensor when this occurs:
(a) Site. Licensee shall have received the prior approval of Licensor as
to the suitability and selection of the Site on which the Entertainment Store
shall be located and Licensee shall have obtained all rights necessary in order
to operate the Entertainment Store in the manner provided for in this Agreement
by either holding fee simple title to the Site, Letter of Intent with the
Leasor, or by entering into a lease for the Site (provided that the term of such
lease shall not be less than the term of this Agreement):
(b) Licenses and Permits. Licensee shall have obtained all licenses,
permits and other governmental authorizations and approvals necessary or
required for the development, construction and building of the Entertainment
Store or to conduct the businesses currently contemplated by Licensee (including
without limitation all necessary licenses and permits relating to zoning,
building, utility, sign, health, sanitation, business and other permits and
licenses required to build, acquire and construct the Entertainment Store):
(c) Compliance with Laws. Licensee shall have complied with all applicable
federal, state, local, municipal and county laws, rules and regulations
necessary or required for the development, construction, acquisition and
building of the Entertainment Store:
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(d) Insurance. Licensee has furnished Licensor with complete and accurate
copies of all certificates of insurance and copies of insurance policies
pertaining to the Entertainment Store, as required by this Agreement in
accordance with Section 18:
(e) Design. Licensee shall have received the prior approval of Licensor as
to the design (including the Site Trade Dress) of the Entertainment Store.
Provided, however, if the design is consistent with the Initial Plan previously
approved by the Licensor, no such additional approval shall be necessary:
(f) Related Items. Licensee shall have provided to Licensor all other
related items which Licensor may reasonably request or require in connection
with the development, construction, acquiring and building, of the Entertainment
Store.
Licensee acknowledges that Licensor's consent to a proposed Site for an
Entertainment Store and any information communicated to Licensee regarding the
proposed Site does not constitute a representation or warranty of any kind,
express or implied, as to the suitability of the proposed Site for an
Entertainment Store or for any other purpose. Licensor's consent to such Site
indicates only that Licensor believes that the particular Site meets the general
criteria of Site acceptability which Licensor has established as of the time of
its consent to the Site. Application of criteria that have appeared effective
with respect to other locations of Entertainment Stores may not accurately
reflect the potential for all locations of the Entertainment Stores, and, after
Licensor's consent to the Site, demographic and/or other factors included in or
excluded from Licensor's Site criteria could change, thereby altering the Site's
potential. The uncertainty and instability of such criteria are beyond
Licensor's control, and Licensee agrees that Licensor will not be responsible
for the failure of the Site to which Licensor has consented to meet Licensee's
expectations as to potential revenue or operational criteria.
10. CONDITIONS PRECEDENT TO THE OPENING OF EACH ENTERTAINMENT STORE
Prior to the opening to the general public of each Entertainment Store,
Licensee shall have satisfied all of the following conditions (each of which
shall be in form and substance satisfactory, to the Licensor):
(a) Compliance with Initial Plan. The Entertainment Store has been
designed and constructed in substantial compliance with the Initial Plan, and as
such Initial Plan may be modified from time to time with the approval of
Licensor.
(b) Inspection. Licensor has inspected and/or approved the Entertainment
Store. As an alternative to Licensor's physical inspection of the Entertainment
Store, Licensor may request that Licensee provide Licensor with such videotapes
and/or photographs of the Entertainment Store as Licensor deems necessary to
provide Licensor's approval as to the Entertainment Store.
(c) Licenses and Permits. Licensee shall have obtained all licenses,
permits and other governmental authorizations and approvals necessary or
required for the ownership, use and operation of the Entertainment Store and to
conduct the related businesses currently contemplated by Licensee (including
without limitation all necessary licenses and permits
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relating to zoning, building, utility, sign, health, sanitation, business and
other permits and licenses required to own and operate the Entertainment Store):
(d) Compliance with Laws. Licensee shall have complied with all applicable
federal, state, local, municipal and county laws, rules and regulations
necessary or required for the ownership, operation and use of the Entertainment
Store:
(e) Insurance. Licensee has furnished to Licensor with complete and
accurate copies of all certificates of insurance and copies of insurance
policies pertain to the Entertainment Store, as required by this Agreement in
accordance with Section 18:
(f) Simulators. Licensee shall have at least four (4) Simulators on
display at each Entertainment Store and offered for use to prospective customers
of the Entertainment Store.
(g) Related Items. Licensee has provided Licensor with all other related
items which Licensor may reasonably request or require in connection with the
opening to the general public of the Entertainment Store. Licensor shall not
unreasonably uphold the opening of the Entertainment Store locations.
11. DESIGN AND OPERATION STANDARDS OF THE ENTERTAiNMENT STORES
(a) General Provisions. In order to maintain uniform standards of
operation for the Entertainment Stores to be developed by Licensee under the
terms of this Agreement and to protect the goodwill of Licensor in the NASCAR
Marks and NASCAR Trade Dress, Licensee covenants and agrees to operate the
Entertainment Store at all times as a high quality retail outlet consisting of
interactive stock car and stock truck racing simulation entertainment as
described herein, offering high quality products and services to the general
public, and Licensee further covenants and agrees at all times during the Term
to fully comply with the following standards and operating procedures:
(i) Licensee shall maintain accurate, orderly books and
records, including, without limitation sales, inventory, and expense
information.
(ii) Licensee shall maintain an amount of capital that is
necessary or desirable for the efficient and profitable operation of the
Entertainment Stores, including sufficient working capital.
(iii) Licensee shall (1) maintain its trade accounts in
current status and seek to resolve any disputes with trade suppliers promptly,
(2) timely pay all creditors of Licensee and the Entertainment Stores in full,
(3) satisfy all debts and liabilities of Licensee and the Entertainment Stores
as they become due and (4) timely pay all taxes incurred in connection with the
operation of the Business or the assets related thereto, unless Licensee is, in
good faith and by appropriate proceedings, contesting such amount.
(iv) Licensee shall operate the Entertainment Stores in
compliance with all applicable federal, state, local, county and municipal laws,
rules and regulations relating thereto.
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(v) Upon five (5) days advance written request by Licensor,
Licensee shall provide Licensor or its employees, representatives and agents
access to any of the Entertainment Stores in order to conduct physical
inspections of such Entertainment Store and interview Licensee's managers and
employees at any reasonable time to determine whether such Entertainment Store
is being operated in accordance with the terms of this Agreement and to ensure
protection of the NASCAR Marks, NASCAR Trade Dress and the Site Trade Dress, and
the goodwill associated therewith. In addition, Licensor and/or its designated
representatives or agents shall have the right at any time during such
Entertainment Store's regular business hours to observe, photograph and
videotape the operations of such Entertainment Store for such consecutive or
intermittent periods as it deems necessary and inspect and copy any books,
records and documents relating to Licensee's operation of such Entertainment
Store. Licensee agrees to fully cooperate with Licensor in connection with any
such inspection, observations, photographing, videotaping, copying, and
interviews, all such costs shall be at Licensor's expense.
(vi) Licensee shall maintain each of the Entertainment Stores'
interior and exterior and the surrounding area within Licensee's control in a
high degree of cleanliness, orderliness and sanitation and comply with the
requirements of all federal, state, municipal and county laws, rules and
regulations relating thereto.
(vii) Licensee shall maintain all licenses, permits and other
governmental authorizations and approvals necessary or required for the
ownership, use and operation of the Entertainment Stores, and Licensee shall
maintain all minimum levels of insurance as required by this Agreement in
accordance with Section 18.
(viii) Licensee shall maintain at least four (4) Simulators on
display at each Entertainment Store and offered for use to prospective customers
of the Entertainment Store.
(ix) During the Term of this Agreement, in connection with
those Entertainment Stores that predominately contain the NASCAR stock car and
NASCAR stock truck racing theme(s), Licensee shall use the name "NASCAR Silicon
Motor Speedway" in identifying itself and in connection with all related signage
thereof, provided however, in connection with any Entertainment Store which
predominately contains racing themes other than the stock car and stock truck
racing theme, Licensee may, at its option, in the alternative, use the name
"Silicon Motor Speedway" in identifying itself.
(b) Retail Merchandising Sales Space. Licensee covenants and agrees that
any retail merchandising sales areas within an Entertainment Store shall not
have in excess of 700 square feet of Retail Merchandising Sales Space and/or not
exceed more than fifteen (15) percent of the total Entertainment Store space or
whichever is less, unless a larger space is expressly approved by Licensor in
writing. As used herein, the term "Retail Merchandising Sales Space" means the
actual square footage of any and all space in the Entertainment Store in which
any of the following take place: (i) merchandise sales occur, (ii) merchandise
is displayed, (iii) merchandise is stored, or (iv) merchandise is otherwise
sold. Licensee from time to time may request from the Licensor that the Retail
Merchandising Sales Space be expanded, Licensor will evaluate each request on a
case-by-case basis and issue any approval or disapproval. In the event that the
Licensee's Retail Merchandising Sales Space in any way violates any of the
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Licensor's current Agreements with any of the Licensor's other licensees or
sponsors, the Licensee shall use its best efforts to work with the Licensor to
resolve any of these issues. In addition, the Licensee shall not be permitted to
operate any "free-standing" merchandise kiosks within sixteen (16) miles of any
NASCAR Thunder retail store developed or opened prior to or subsequent to the
date of this Agreement. Licensee understands and agrees that in no event shall
any such "free-standing" merchandise kiosks be any larger than 300 square feet.
Licensee further understands and agrees that it shall be required to cease
operation and close to the general public any such "free-standing" merchandise
kiosk within five (5) months following written notice by Licensor.
(c) Advertising/Promotion and Right of Approval. All advertising and
Promotional Activities shall conform to the standards and requirements that
Licensor prescribes from time to time and must be approved in advance by
Licensor, and, in connection therewith, Licensee covenants and agrees as
follows:
(i) Licensee shall be required to conduct all advertising or
promotion generally in accordance with the general marketing and design aspects
set forth in the Initial Plan. Any actual advertising or promotion by Licensee
shall be conducted in a dignified and professional manner generally consistent
with the Initial Plan. Not in limitation of the foregoing, Licensee shall
continuously maintain white pages and yellow pages telephone directory listings
in the telephone book(s) which cover the local telephone calling area in which
each of the Entertainment Stores are located.
(ii) Licensor shall have the right of prior approval of all
uses of the NASCAR Marks on or in conjunction with the Entertainment Stores and
in materials used for Promotional Activities. Licensee agrees to submit in a
timely manner to Licensor, free of cost, for its prior approval as to quality,
style and content, all uses of the NASCAR Marks on or in conjunction with the
Entertainment Stores and all advertising and promotional materials used for
Promotional Activities. Comments or approval with respect to any materials for
which Licensee must seek Licensor's approval hereunder will be provided by
Licensor to Licensee within [***] business days from the date of Licensor's
receipt of such materials. Licensor shall provide Licensee with a copy of any
existing advertising guidelines developed from time to time by Licensor.
(iii) Licensee agrees that [***] or more of its Promotional
Activities for advertising with respect to the activity licensed by this
Agreement shall be directed to the interactive Simulators contained within the
Entertainment Stores licensed hereunder by Licensor.
(d) Maintenance and Changes to the Entertainment Stores. In connection
with the operation of the Entertainment Stores, Licensee covenants and agrees
that:
(i) It shall at all times maintain the Entertainment Stores,
their respective furnishings, fixtures and equipment (including without
limitation, the Simulators) in good condition and in repair and shall be solely
responsible for all maintenance, repair, and replacement where necessary to
maintain such furnishings, fixtures and equipment in the Entertainment Stores in
good operating condition, and it shall be solely responsible for all liabilities
arising from the operation of the Entertainment Stores.
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(ii) It shall obtain the approval of Licensor prior to making
any changes to the Site Trade Dress as applied at the Entertainment Stores if
such changes result in any of the Entertainment Stores being materially
different from any other Entertainment Stores developed pursuant to this
Agreement or from the Entertainment Stores design approved pursuant to Section 7
hereof. To the extent any change is made to the Site Trade Dress as applied at
any of the Entertainment Stores Licensor shall have reasonable access to such
Entertainment Store while the work is in progress to verify that such
alterations or modifications of the Site Trade Dress as applied at such
Entertainment Store complies with this Section 11.
(e) Approved Products, Merchandise, Merchandise Sales, and Food Sales. In
connection with the sale of approved products, merchandise and food sales at or
around the Entertainment Stores, in connection with any activity approved in
advance by Licensor in accordance with the terms and conditions contained in
Section 2(d), Licensee covenants and agrees as follows:
(i) Unless otherwise approved by Licensor, Licensee agrees to
purchase from Licensor's approved and authorized licensees all articles,
products and merchandise that bear, contain or display any of the NASCAR Marks,
provided that this merchandise is comparable to any other vendor merchandise
that the Licensee is considering and within [***] of the other vendor's pricing.
However, if the Licensor's licensees do not offer merchandise that is comparable
to other vendor's merchandise and not within [***] of the other vendor's prices,
the Licensor will consider licensing the Licensee's other vendors on a temporary
basis to produce NASCAR SILICON MOTOR SPEEDWAY exclusive merchandise, provided
that each vendor would enter into a separate License Agreement with Licensor,
such approval and licensing of other vendors shall not be unreasonably withheld.
(ii) Except as provided herein, Licensee agrees that [***] of
the merchandise bearing or containing the NASCAR Marks sold by Licensee at the
Entertainment Stores shall be manufactured pursuant to license agreements with
Licensor's approved and authorized licensees unless Licensor expressly approves
the sale of other items bearing, displaying or containing, the NASCAR Marks at
the Entertainment Stores.
(iii) "Official Label" means an "Officially Licensed Product"
tag or label in the form prescribed by Licensor which shall be affixed to each
Licensed Product, its Packaging or Advertising by the Licensee.
(iv) Licensee agrees not to sell any food or beverage items at
the Entertainment Stores other than items listed and described on the menu
attached on Exhibit B. Food items shall be limited to snack food types (i.e.,
pre-packaged chips, pretzels, soft-drinks, etc.) and be self service (meaning no
waiters and/or waitresses). In addition, prior to offering any food item for
sale, Licensee shall seek written approval for all such food items for each
Entertainment Store, except for items previously approved by Licensor and
appearing on Exhibit B. Licensee may request, from time to time, that Licensor
approve additional food items for sale at the Entertainment Stores, such
approval subject to Licensor's sole discretion.
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(f) Exclusive Sponsors and Exclusive Licensee.
(i) Licensee acknowledges and agrees that Licensor has entered
into and may in the future enter into exclusive relationships with sponsors and
licensees (to the exclusion of Licensee) with respect to, among other things,
merchandise, programming, racing events, racing services, advertising and
promotion, official sponsorships and other designations, and products and
services that display or promote the NASCAR Marks (collectively, "Exclusive
Sponsors and Licensees"). A current listing of all Exclusive Sponsors and
Licensees is attached hereto as Exhibit C. Licensor agrees to provide Licensee
updates and changes to such listing periodically during the term of this
Agreement. Licensee agrees to honor the commitments that Licensor has made to
Exclusive Sponsors and Licensees. Licensee agrees that prior to negotiating with
any sponsor or company that manufactures or produces a product or provides a
service in a category in which one of Licensor's Exclusive Sponsors and
Licensees engages, Licensee shall first negotiate with Licensor's Exclusive
Sponsors and Licensees for any and all Promotional Activities for the
Entertainment Stores. If Licensee desires to enter into a relationship with a
sponsor that is not one of Licensor's Exclusive Sponsors and Licensees for
Promotional Activities that will take place within the Entertainment Stores,
Licensee must obtain Licensor's approval, which approval shall not be
unreasonably withheld.
(ii) If, however, Licensee desires to enter into a
relationship with a sponsor that is not one of Licensor's Exclusive Sponsors and
Licensees for Promotional Activities outside of the Entertainment Stores,
Licensee must obtain Licensor's approval, which may not be unreasonably
withheld. Notwithstanding the foregoing, Licensee may however, have [***]
sponsors per Entertainment Store location in competing categories with
Licensor's Exclusive Sponsors and Licensees per year. If Licensee enters into an
agreement with one of Licensor's Exclusive Sponsors and Licensees but is
thereafter notified by Licensor that such sponsor or entity is no longer one of
Licensor's Exclusive Sponsors and Licensees, Licensee may continue to use such
sponsor or entity only during the term of Licensee's agreement with such entity.
From and after the expiration of the term of such agreement or its earlier
termination, whichever shall occur first. Except as provided herein, Licensee
agrees to use its best efforts to enter into an agreement with one of Licensor's
then current Exclusive Sponsors and Licensees unless otherwise approved by
Licensor, which approval shall not be unreasonably withheld. All sponsor or
vendor agreements entered into by Licensee shall have a term of no more than
[***] years with no automatic renewals.
12. OWNERSHIP AND PROTECTION OF NASCAR MARKS AND TRADE OR RELATED PROPRIETARY
RIGHTS
(a) Licensor's Rights. Licensee acknowledges and agrees that NASCAR
exclusively owns and will continue to exclusively own during and after the Term
of this Agreement the NASCAR Marks and any registrations therefor and all
goodwill associated with them, as well as any trademarks, trade names, logos and
service marks adopted and used or approved for use by NASCAR and all goodwill
associated with them, and the NASCAR Trade Dress and all goodwill associated
with them, along with NASCAR's unique characteristics, NASCAR Rulebook, and
"look and feel" (all collectively referred to herein as the "NASCAR Indicia").
Licensor acknowledges that the Licensee owns the Site Trade Dress, however,
Licensee agrees that all NASCAR Trade Dress items and NASCAR Indicia contained
within the Site Trade Dress are owned by the Licensor. Licensee further
acknowledges that NASCAR owns and will
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continue to own during and after the Term of this Agreement all common law and
statutory copyrights in its rules, procedures, publications and all other
original works of authorship fixed in a tangible means of expression
(hereinafter "NASCAR Copyrighted Works"), and that NASCAR owns and will continue
to own during and after the Term of this Agreement trade secret rights in its
customer lists, membership lists, and other information meeting the definition
of a Licensor Trade Secret in Section 15 of this Agreement. The NASCAR Marks,
NASCAR Indicia, NASCAR Copyrighted Works, and Licensor Trade Secrets are
hereinafter referred to collectively as the "NASCAR Intellectual Property."
Licensee acknowledges that nothing contained in this Agreement shall provide
Licensee with any right, title or interest to the NASCAR Intellectual Property
other than the right to use the NASCAR Marks and NASCAR Trade Dress pursuant to
the licenses granted under this Agreement. Licensee further acknowledges and
agrees that nothing contained in this Agreement shall, in any manner whatsoever,
preclude, restrict or prohibit Licensor from selling, distributing,
manufacturing or providing, or authorizing others to do so, any products,
merchandise or services containing, displaying or bearing the NASCAR Marks or
the NASCAR Trade Dress, or any trade or service marks other than the NASCAR
Marks, within or outside the Territory through distribution channels other than
the Entertainment Stores.
(b) Licensee's Intellectual Property. Except for NASCAR's right, title and
interest in the Marks, NASCAR Indicia, NASCAR Copyrighted Works, and NASCAR
Trade Secrets, it is expressly agreed that Licensee is the sole owner of all
right, title and interest, including all copyrights, patents, trademarks, trade
names, trade secrets, algorithms, audio visual rights and moral rights and other
intellectual property rights, in the Entertainment Stores and pertaining to the
Simulators created by Licensee and its personnel and any collateral materials
such as customer lists, source code, object code, algorithms, audio visual
displays, technical specifications, user manuals, documentation, fonts (such as
that used in the "Silicon" portion of the NASCAR Silicon Motor Speedway logo as
found in Exhibit A) and quick reference guides underlying the Entertainment
Stores and Simulators created, designed, authored or conceived by Licensee or
its personnel (hereinafter referred to collectively as "Licensee's Intellectual
Property").
(c) Acknowledgment of Validity of the Marks. Licensee acknowledges the
validity of each of the NASCAR Marks and the state and federal registrations
NASCAR owns, obtains or acquires for the NASCAR Marks. Licensees shall not, at
any time, file any trademark application with the United States Patent and
Trademark Office, or any application with any other governmental entity in any
country claiming rights in the NASCAR Marks, NASCAR Indicia, NASCAR Copyrighted
Works, or Licensor Trade Secrets. Except as expressly authorized in advance by
NASCAR, Licensee shall not use any of the NASCAR Marks or any similar mark as,
or as part of, a trademark, service mark, trade name, fictitious name, company
or corporate name anywhere in the world other than "NASCAR Silicon Motor
Speedway" as provided in this Agreement. Any trademark or service mark
registration obtained or applied for that contains the Marks or any similar mark
shall be transferred to NASCAR without compensation beyond the mutual promises
in this Agreement.
(d) Challenge or Objection. Licensee shall not oppose or seek to cancel or
challenge in any forum, including, but not limited to, the United States Patent
and Trademark Office, any application or registration of NASCAR. Licensee shall
not object to, or file any action or lawsuit
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because of, any use by NASCAR of the NASCAR Intellectual Property for any goods
or services, whether such use is by NASCAR directly or through different
licenses or authorized users, except that Licensees may bring a breach of
contract claim for breach of any exclusive rights they are granted under this
Agreement.
(e) Good Will. Licensee acknowledges that: (1) the NASCAR Marks are unique
and original and NASCAR holds the right to the commercial exploitation of the
NASCAR Marks; (2) NASCAR has acquired valuable goodwill in the Marks and the
NASCAR Trade Dress; and (3) all goodwill derived from Licensee's use of any
NASCAR Marks, NASCAR Trade Dress and Site Trade Dress will inure to the benefit
of NASCAR.
(f) Infringement by Third Parties. Licensee shall not, during the Term or
anytime thereafter, dispute or contest, nor cause or assist or aid others in
disputing or contesting, NASCAR's exclusive right to the NASCAR Intellectual
Property. Licensee shall fully cooperate with and assist NASCAR (at NASCAR's
cost and expense) in preventing or prosecuting any infringement of NASCAR
Intellectual Property which NASCAR in its sole discretion decides to pursue, and
Licensee shall not share in any recovery in any such action. Licensee shall give
prompt written notice to Licensor of any improper use of the NASCAR Marks or
NASCAR Trade Dress, any other trademark or service mark or trade dress used by
any third party except Licensor's authorized licensees which is confusingly
similar to the NASCAR Marks or NASCAR Trade Dress which comes to Licensee's
attention or any event or advertisement which it believes may constitute an
infringement upon NASCAR Marks or other NASCAR Intellectual Property or any
challenge to Licensor's ownership or Licensee's use of the NASCAR Marks or
NASCAR Intellectual Property, which comes to Licensee's attention.
(g) Quality Standards. Licensee acknowledges that if any aspect of the
goods and services promoted and marketed by it hereunder were of inferior
quality in design or workmanship, the goodwill which NASCAR has established and
now possesses in the NASCAR Marks and NASCAR Trade Dress would be impaired.
Licensee agrees to maintain the quality of goods and services offered in
connection with the NASCAR Marks, NASCAR Trade Dress, Site Trade Dress at a high
level.
(h) Copyright. Licensee shall not attempt to obtain or assert copyright or
trademark rights on behalf of Licensee in any artwork, logo or design which
contains the NASCAR Marks or the NASCAR Trade Dress. If any such works are
created, Licensee shall include copyright notices on behalf of NASCAR in such
works, and assign to NASCAR any copyrights obtained or asserted by Licensee.
(i) Injunctive Relief. Licensee acknowledges that its breach of the
intellectual property provisions of this Agreement will result in immediate and
irreparable harm to Licensor and that money damages alone would be inadequate to
compensate Licensor. Therefore, in the event of such breach, Licensor may, in
addition to other remedies, immediately obtain and enforce injunctive relief
prohibiting the breach or threatened breach or compelling specific performance.
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13. NON-ASSIGNABILITY AND TRANSFERABILITY OF AGREEMENT OR OWNERSHIP INTEREST
OF LICENSEE
(a) Transfer by Licensor. This Agreement is fully assignable by Licensor
to any Affiliate of Licensor and inures to the benefit of such assignee or any
other legal successor to the interest of Licensor and if such assignee or other
legal successor agrees to assume the rights and obligations of Licensor under
this Agreement, Licensor shall be released from all obligations and liabilities
hereunder. Licensee agrees to execute any documents and other forms that
Licensor may reasonably request in connection with any such transfer or
assignment by Licensor.
(b) Transfer by Licensee. Licensee understands and acknowledges that the
rights and duties created by this Agreement are personal to Licensee and that
Licensor has granted the licenses hereunder to Licensee in reliance upon its
perceptions of Licensee's individual character, skill, aptitude, attitude,
business ability and financial capacity. Accordingly, Licensee agrees as
follows:
(i) Restrictions on Transfer of Licenses. Licensee shall not
sell, assign, convey, give away, pledge, encumber, mortgage, or otherwise
transfer all or any portion of any right and/or interest in this Agreement, the
NASCAR Marks, or the NASCAR Trade Dress, any license granted hereunder, or any
interest herein or related thereto (collectively, the "Proprietary Interests")
without the prior written consent of Licensor, which may be withheld by Licensor
for any reason whatsoever.
(ii) Permitted Transfers. If Licensor shall consent to a
transfer under subparagraph (i) of this Section 13 above, Licensee shall
nonetheless remain primarily and fully obligated to Licensor under this
Agreement. In addition, the transferee shall be bound by the terms of this
Agreement (including, but not limited to Licensor's right to terminate this
Agreement) as if such transferee had originally signed this Agreement as
Licensee, and the transferee shall sign all documents, instruments and
agreements that Licensor requires in order to bind transferee to the terms and
conditions of this Agreement.
(iii) Exception to Restrictions on Transfers. The restrictions
in Section 13(b)(i) above shall not apply to an Initial Public Offering or any
Secondary Offering by Licensee (as such terms are defined in the Warrant
attached hereto as Exhibit D to this Agreement), provided that such Initial
Public Offering or any Secondary Offering by Licensee is in accordance with the
terms of this Agreement and the Warrant. Licensor's consent to a transfer of
this Agreement or any interest in Licensee does not constitute a representation
as to the fairness of the terms of any contract between Licensee and the
transferee, does not provide any guarantee of the prospects of success of the
transferee nor does such consent provide any waiver of any claims Licensor may
have against Licensee or as to Licensor's right to demand the transferee's exact
compliance with any of the terms and conditions of this Agreement.
14. NON-DISCLOSURE
(a) Non-Disclosure of Licensor Trade Secrets. For purposes of this Agreement,
the term "Licensor Trade Secrets" means any information of Licensor and/or its
Affiliates which (i) derives its economic value, actual or potential, from not
being generally known to other persons who can obtain economic value from its
disclosure or use, (ii) is the subject of efforts
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that are reasonable under the circumstances to maintain its secrecy or
confidentiality, or (iii) is identified by Licensor in writing as confidential.
Licensor Trade Secrets shall include, without limitation, financial documents
and information, marketing, plans and strategies and other items not related to
the Business but excluding Licensee Trade Secrets and Licensee Confidential
Information (the above information hereinafter referred to as the "Licensor
Proprietary Information"). Licensee acknowledges and agrees that all of the
Licensor Proprietary Information is economically valuable, that such value is
derived from such Licensor Proprietary Information containing Licensor Trade
Secrets not generally known to others, and that reasonable efforts have been
taken by Licensor to maintain the secrecy and confidentiality of the Licensor
Proprietary Information and Licensor Trade Secrets, and that Licensee has
entered into this Agreement in order to use such Licensor Proprietary
Information to the economic benefit of Licensee. To the extent that any Licensor
Trade Secrets are disclosed to Licensee pursuant to this Agreement, Licensee
shall not, during and after the term of this Agreement for so long as any such
information shall remain trade secrets, use or permit the duplication or
disclosure of any such Licensor Trade Secrets, unless such use, duplication or
disclosure is specifically authorized by Licensor in advance in writing.
(b) Non-Disclosure of Licensee Trade Secrets. For purposes of this
Agreement, the term "Licensee Trade Secrets" means any information of Licensee
and/or its Affiliates which (i) derives its economic value, actual or potential,
from not being generally known to other persons who can obtain economic value
from its disclosure or use, (ii) is the subject of efforts that are reasonable
under the circumstances to maintain its secrecy or confidentiality, or (iii) is
identified by Licensee in writing as confidential. Licensee Trade Secrets shall
include, without limitation, financial documents and information, marketing
plans and strategies of Licensee and other items whether or not related to the
Business (the above information hereinafter referred to as "Licensee Proprietary
Information"). Licensor acknowledges and agrees that all of the Licensee
Proprietary Information is economically valuable, that such value is derived
from such Licensee Proprietary Information containing Licensee Trade Secrets not
generally known to others, and that reasonable efforts have been taken by
Licensee to maintain the secrecy and confidentiality of the Licensee Proprietary
Information and Licensee Trade Secrets. To the extent that any Licensee Trade
Secrets are disclosed to Licensor pursuant to this Agreement or otherwise,
Licensor will not, during and after the term of this Agreement for so long as
any such information shall remain trade secrets, use or permit the duplication
or disclosure of any such Licensee Trade Secrets, unless such use, duplication
or disclosure is specifically authorized by Licensee in advance in writing.
(c) Non-Disclosure of Licensor Confidential Information. For purposes of
this Agreement, the term "Licensor Confidential Information" shall mean any data
or information of Licensor which is not related to the Business, other than
Licensor Trade Secrets, that is competitively sensitive, that is not disclosed
to the public by Licensor or that is not generally known by the public,
including without limitation any of the Licensor Proprietary Information, and
other items or compilations of such information, whether in printed or magnetic
form, relating to Licensor and/or its business or that is identified by Licensor
in writing as confidential. Licensor Confidential Information shall also mean
any information received by Licensee from Licensor or any agent or Affiliate of
Licensor or any other third party providing such information in confidence to
Licensee. To the extent that any Licensor Confidential Information is disclosed
to Licensee, Licensee shall not, during the term of this Agreement and for five
(5) years after
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termination or expiration of this Agreement, use or permit the duplication or
disclosure of any such Licensor Confidential Information, unless such use,
duplication or disclosure is specifically authorized by Licensor in advance.
(d) Non-Disclosure of Licensee Confidential Information. For purposes of
this Agreement, the term "Licensee Confidential Information" shall mean any data
or information, other than Licensee Trade Secrets, that is competitively
sensitive, that is not disclosed to the public by Licensee or that is not
generally known to the public, including without limitation items or
compilations of such information, whether in printed or magnetic form, used in
or related to the Business, or that is identified by Licensee in writing, as
confidential. Licensee Confidential Information also shall mean any information
received by Licensor or Licensee from any agent or Affiliate of Licensee or any
other third party providing such information in confidence to such party. To the
extent that any Licensee Confidential Information is disclosed to Licensor,
Licensor shall not, during the term of this Agreement and for five (5) years
after termination or expiration of this Agreement, use or permit the duplication
or disclosure of any such Licensee Confidential Information, unless such use,
duplication or disclosure is specifically authorized by Licensee in advance in
writing.
(e) Exception. Licensee and Licensor shall not be obligated to maintain in
confidence under Sections 14(a) through 14(d) above:
(i) information which is, or subsequently may become within
the knowledge of the public generally through no fault of the receiving party;
(ii) information which the receiving party can show was
previously known to it as a matter of record at the time of receipt;
(iii) information which may subsequently be obtained lawfully
from a third party who has lawfully obtained the information through no fault of
Licensee or Licensor; and
(iv) information which may subsequently be developed as a
matter of record, independently of disclosure, by the Licensee.
(f) Ownership. All Licensor Trade Secrets and Licensor Confidential
Information furnished or disclosed by Licensor to Licensee directly or
indirectly hereunder are and shall remain the property of Licensor. Any
reproductions, notes, summaries or similar documents relating to the Licensor
Trade Secrets and Licensor Confidential Information and any files, memoranda or
reports relating thereto shall become and remain the property of Licensor
immediately upon their creation. Upon termination of this Agreement or upon the
prior demand of Licensor, Licensee shall immediately return all such materials
together with all copies thereof to Licensor. It is also understood that all
Licensee Trade Secrets and Licensee Confidential Information furnished or
disclosed by Licensee to Licensor directly or indirectly hereunder are and shall
remain the property of Licensee. Any reproductions, notes, summaries or similar
documents relating to the Licensee Trade Secrets and Licensee Confidential
Information and any files, memoranda or reports relating thereto shall become
and remain the property of Licensee immediately upon their creation. Upon
termination of this Agreement or upon the prior demand
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of Licensee, Licensor shall immediately return all such materials together with
all copies thereof to Licensee.
15. LICENSEE'S REPRESENTATIONS, WARRANTIES AND COVENANTS
Licensee makes to and for the benefit of Licensor the following
representations, warranties and covenants:
(a) Authority. Licensee has the requisite authority to execute, deliver
and perform its obligations under this Agreement, Licensee has obtained all
required corporate approval including board of directors or other consents,
Licensee is duly organized or formed and validly existing, in good standing,
under the laws of the state of its incorporation or formation, and Licensee's
entering into this Agreement does not in any manner whatsoever violate or
conflict with any other agreement previously entered into by Licensee, an
Affiliate of Licensee, any Owner or any Affiliate of any Owner. Furthermore,
Licensee represents and warrants that it is the sole and exclusive owner of all
intellectual property rights in the Simulators, including but not limited to all
patents, copyrights, trade secrets and other proprietary rights in the software,
hardware, firmware and other components of the Simulators.
(b) Exclusivity Regarding Simulators. Except as expressly provided in
Section 16(h) hereof, Licensee covenants and agrees that the Simulators shall be
available for use by the general public or otherwise solely at the Sites of the
Entertainment Stores [each Site subject to the prior approval of Licensor in
accordance with Section 9(a) hereof] and in connection therewith. Except as
provided herein, Licensee further covenants and agrees not to sell, convey,
transfer or assign, nor grant a license to use, any of the stock car or stock
truck themed Simulators nor any of the hardware, software, firmware or other
components of these Simulators to any Person without the prior approval of
Licensor, which approval shall not be unreasonably withheld, however, Licensee
shall be permitted to sell Simulators or any components of the Simulators to any
Licensor wholly-owned subsidiaries or Licensor joint venture partners of the
Licensee. Notwithstanding the foregoing, if at any time during the Term of this
Agreement Licensee is willing to sell one or more Simulators solely to Licensor,
Licensee agrees to sell [***] individual Simulators to Licensor at a purchase
price equal to Licensee's actual cost of labor, equipment and materials for each
such Simulator.
(c) Ownership. Exhibit E to this Agreement completely and accurately
describes all of Licensee's current owners together with their respective
ownership and voting interests in Licensee (such owners, together with any
successors thereto or other owners of ownership or voting interest in Licensee,
the "Owners" or, singly, an "Owner"). Each of the Owners are set forth on
Exhibit E.
(d) Warrant. Licensee has duly executed and delivered to Licensor the
Warrant in the form attached hereto as Exhibit D (the "Warrant).
(e) Conflicts. Licensee acknowledges that upon execution of the Agreement,
that the Licensor has previously engaged in various marketing and promotional
activities which are designed to promote and enhance the sport of stock car and
stock truck racing and the goodwill of the NASCAR Marks. Licensee further
acknowledges that Licensor's marketing, and promotional activities involve
relationships with numerous companies, organizations and
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individuals who serve as sponsors, owners, advertisers and business partners
(hereinafter referred to as "Other NASCAR Licensees"). Licensee agrees that in
the event Licensor determines that Licensee's activities taken pursuant to this
Agreement come into conflict with the interests or rights of other NASCAR
Licensees, Licensee shall in good faith cooperate with Licensor in order to
resolve the conflict and, in the event the conflict cannot be resolved, shall
take the action requested by NASCAR as long as it is legal and commercially
practical to do so. Licensee acknowledges that NASCAR has previously granted a
license to third parties who will operate an online multiplayer service (which
has been referred to publicly as the NASCAR Racing Online Series) which will
allow multiple players to compete online in the same race, and may to some
extent directly or indirectly compete with Licensee for the same users (although
targeted at home users rather than users in retail outlet locations).
(f) Control of NASCAR Marks and NASCAR Trade Dress. It understands that it
is an essential condition of this Agreement to protect the high reputation
enjoyed by Licensor and the NASCAR Marks, and that Licensor retains the sole and
exclusive right and authority to control the nature and quality of each and
every use of the NASCAR Marks and NASCAR Trade Dress by Licensee, and Licensee
shall comply with and abide by any and all requirements or restrictions on the
use of the NASCAR Marks and NASCAR Trade Dress under the terms of this
Agreement. Licensee agrees that the NASCAR Marks and NASCAR Trade Dress shall be
used solely in connection with the Entertainment Stores and that Licensor shall
retain the sole and exclusive right and authority to control the nature,
quality, and character of the goods and services with which the NASCAR Marks and
NASCAR Trade Dress are utilized, provided, however, that Licensee shall not be
obligated to replicate the numbers, sponsors, or colors of the cars of actual
NASCAR competitors. Licensee agrees that it shall not use the term "SpeedPark"
in any manner to identify the Entertainment Stores or in conjunction with the
NASCAR trials. In the event that it becomes advisable at any time, in Licensor's
sole discretion, to modify or discontinue the use of any one or more of the
NASCAR Marks or to use one or more additional or substitute marks, Licensee
agrees at its expense to promptly comply with the instructions of Licensor in
that regard as soon as commercially practicable but, in any event, no later than
four (4) years from receipt of notice of such instructions from Licensor.
(g) Additional Covenant by Licensee. Licensee covenants and agrees to use
its best efforts to provide and grant to Licensor the licensing right to use
Simulators within the theme park commonly known as "DAYTONA USA" located on the
property of the Daytona International Speedway, provided that financially
reasonable terms are reached with Licensor. In addition, proposed Entertainment
Stores within the Volusia County, Florida limits shall be approved or
disapproved based on the Licensor's sole discretion.
(h) Licensee's Requirement to Disclose to Licensor all Owners and
Directors of Licensee. Licensee covenants and agrees to provide Licensor, within
five (5) business days following any request by Licensor from time to time
during the Term of this Agreement, a complete and accurate written list and
description, as of the date of such request by Licensor, of: (x) all of the
owners of Licensee, together with their respective ownership and voting interest
in Licensee; and (y) the Members of the Board of Directors of Licensee, and the
total authorized number of Board of Directors of Licensee.
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16. LICENSOR'S REPRESENTATIONS, WARRANTIES AND COVENANTS
Licensor hereby makes to and for the benefit of Licensee the following
representations, warranties and covenants:
(a) Authority. It has the authority to execute, deliver and perform its
obligations under this Agreement, Licensor has obtained all required board of
directors or other consents, and it is duly organized or formed and validly
existing in good standing under the laws of the state of its incorporation or
formation.
(b) Representations. It has the exclusive ownership right, title, and
interest to all of the existing registrations and pending applications for
registration of the NASCAR Marks as listed from time to time on Exhibit A
hereto, and within the United States, to the knowledge of Licensor, the NASCAR
Marks do not infringe the rights of any third party, and that Licensor is
authorized to grant to Licensee the license to use such NASCAR Marks on the
terms and conditions in this Agreement.
(c) Covenant. Licensor shall use commercially reasonable efforts to assist
Licensee in creating the most NASCAR authentic experience possible. NASCAR's
Competition, Administration, Marketing, Licensing, and Public Relations
departments shall work with Licensee to develop an official and realistic NASCAR
atmosphere in the Entertainment Stores. In addition, Licensor shall provide
Licensee with reasonable assistance and direction in the Licensee's efforts to
obtain sponsorship.
17. INDEMNIFICATION
(a) Licensee agrees to indemnify, defend and hold harmless Licensor, its
shareholders, directors, officers, employees, affiliates, professionals and
agents, from any and all loss, costs, expenses (including reasonable attorneys'
fees) claims, damages and liabilities related to or associated with Licensee or
arising out of Licensee's ownership or operation of the Entertainment Stores,
including, but not limited to (i) claims related to personal or property
injuries occurring in the Entertainment Stores or any surrounding area within
Licensee's control, (ii) any unauthorized use of or infringement of any
trademark, service mark, trade dress, copyright patent, process, method or
device by Licensee, (iii) alleged defects or deficiencies in any of the
Entertainment Stores or the use thereof, or any false advertising, fraud or
misrepresentation by Licensee, (iv) the unauthorized use of the NASCAR Marks or
NASCAR Trade Dress or any breach by Licensee of this Agreement (v) libel or
slander against, or invasion of the right of privacy, publicity or property of,
or violation or misappropriation of any other right of any third party, (vi) the
breach of any covenants, representations, and/or warranties of Licensee
contained in this Agreement and/or (vii) the breach of agreements or alleged
agreements made or entered into by Licensee to effectuate the terms of this
Agreement. Licensor shall give Licensee notice of the making of any claim or the
institution of any action hereunder and Licensor may at its sole discretion
participate in any action.
(b) Licensee agrees to notify Licensor immediately of any apparent
infringement or challenge to Licensee's use of any NASCAR Marks, or of any claim
by any person of any rights in any NASCAR Marks, and Licensee agrees not to
communicate with any person other than Licensor, or its respective attorneys and
Licensee's attorneys, in connection with any such
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infringement, challenge, or claim, unless legally required to do so. Licensor
has sole discretion to take such action as Licensor deems appropriate and the
right to control exclusively any litigation, U.S. Patent and Trademark Office
proceeding, or any other proceeding arising out of such infringement, challenge,
or claim or otherwise relating to any NASCAR Marks, the Speedway Logos or
related wordmarks. Licensee agrees to render such assistance and do such acts
and things as, in the opinion of Licensor's attorneys, may be reasonably
necessary or advisable to protect and maintain Licensor's interest in any
litigation, Patent and Trademark Office or other proceeding, or otherwise to
protect and maintain Licensor's interest in the wordmark NASCAR SILICON MOTOR
SPEEDWAY and the Speedway Logos. Licensee shall not institute any suit or take
any action on account of any infringements or imitations without first obtaining
the consent of Licensor to do so. Licensee understands and agrees that it is not
entitled to share in any proceeds received by Licensor (by settlement or
otherwise) in connection with any formal or informal action brought by Licensor
hereunder.
(c) Licensor agrees to indemnify and defend Licensee against and to
reimburse Licensee for all damages for which Licensee is held liable in any
claim or proceeding referred to in Section 17(b) hereof in the United States,
Canada and Australia, provided that Licensee's use of the NASCAR Marks was
authorized by Licensor pursuant to and in compliance with this Agreement and for
all costs reasonably incurred by Licensee in the defense of any such claim
brought against Licensee or in any such proceeding, in which Licensee is named
as a party, provided that Licensee has timely notified Licensor of such claim or
proceeding, having given Licensor sole control of the defense (including the
selection of attorneys to represent Licensee) and settlement of any such claim
or proceeding, and have otherwise complied with this Agreement. If it becomes
legally necessary for Licensee to modify or discontinue the use of any NASCAR
Marks and/or use one or more additional or substitute trademarks or service
marks, Licensee agrees to comply with Licensor's directions within a reasonable
time after receiving notice thereof. Licensor shall not be obligated in any
manner whatsoever to reimburse Licensee for any loss of revenue, lost profits,
start-up or other such expenses, or any direct or consequential damages
attributable to any modified or discontinued NASCAR Marks or for any
expenditures Licensee makes to promote a modified or substitute trademark or
service mark.
18. INSURANCE
(a) Insurance Coverage. Licensee shall secure and maintain insurance
coverage for itself and its concessionaires, including general liability and
products liability coverage, with insurance carriers acceptable to Licensor and
in accordance with Licensor's current insurance requirements, as set forth from
time to time by Licensor. Licensee shall provide evidence of such insurance
before obtaining possession of a Site or at such other time that Licensor
specifies. The coverage shall comply with the requirements of any lease for
financing for a Site and include coverage for risk, in such amounts and subject
to such policy limits and deductible amounts as Licensor shall determine from
time to time. In any event (i) the amount of coverage provided for each Site
under any comprehensive general liability insurance shall not be less than
[***]; (ii) property and casualty insurance shall be for the full replacement
value of the Entertainment Store and its contents; (iii) Licensee shall carry
business interruption insurance which shall provide benefits over a period of
not less than [***] and (iv) no insurance shall have greater than a [***]
deductible unless approved in writing in advance by Licensor. Licensee also
shall carry such workers'
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compensation insurance for itself and its concessionaires as may be required by
applicable law. In addition, Licensor may require as a condition to approval of
any food and beverage supplier to the Entertainment Stores that such supplier
includes Licensor and Licensee as additional insureds on such supplier's product
liability insurance.
(b) Conditions of Coverage. Licensee agrees to name Licensor as an
additional insured on all insurance policies required by this Section 18 to the
extent of its interest and provide Licensor certificates of insurance evidencing
such coverage. All policies shall provide Licensor with at least thirty (30)
days' prior written notice of cancellation or termination of coverage. Licensor
reserves the right to specify reasonable changes in the types and amounts of
insurance coverage required by this Section 18. Should Licensee fail or refuse
to procure the required insurance coverage from an insurance carrier acceptable
to Licensor, or to maintain such coverage throughout the Term of this Agreement,
Licensor may, but not shall be obligated to, procure such coverage for Licensee,
in which event Licensee agrees to pay the required premiums and/or to fully
reimburse Licensor for them.
19. TERMINATION BY LICENSEE WITH CAUSE
During the term of this Agreement, Licensee in the exercise of its best
business judgment, may determine that it is necessary or advisable to close an
Entertainment Store or to otherwise cease operating such Entertainment Store
pursuant to the terms of this Agreement. If, and only if, Licensee reasonably
determines that with respect to an Entertainment Store it is unprofitable and
the expenses of an Entertainment Store exceed the Gross Revenue from such
Entertainment Store during any full calendar year in the operation of such
Entertainment Store; provided, however, that Licensee shall timely pay all
creditors and satisfy all of its debts and liabilities relating to such
Entertainment Store prior to closing of such Entertainment Store to the general
public. In connection therewith, in the event that Licensee discontinues the
operation of an Entertainment Store or causes the operation of an Entertainment
Store to be discontinued in accordance with this Section 20, Licensee shall
provide Licensor [***] days written notice prior to discontinuing the operation
of an Entertainment Store and Licensee shall fully comply with Section 21
hereof.
This Agreement (i) shall be automatically terminated (without any further
action required by Licensee) upon the expiration of the Term and (ii) may be
terminated, subject to any applicable cure period, in Licensee's sole
discretion, upon the occurrence of any Default (as defined below).
(a) Events of Default; Termination. Licensee may elect, without prejudice
to any other rights or remedies which it may have hereunder, at law or in
equity, immediately to terminate this Agreement upon occurrence of any of the
following (a "Default"), which shall constitute an event of default under this
Agreement.
(i) Misrepresentation and Misconduct. Licensor has knowingly
made any material misrepresentation or omission in connection with its ownership
of the license granted hereby or in connection with entering into this
Agreement; or if Licensor engages in any dishonest conduct or act of moral
turpitude that materially adversely affects the goodwill associated with the
license granted hereunder or the NASCAR Marks.
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20. TERMINATION BY LICENSOR
This Agreement (i) shall be automatically terminated (without any further
action required by Licensor) upon the expiration of the Term and (ii) may be
terminated, subject to any applicable cure period, in Licensor's sole
discretion, upon the occurrence of any Default (as defined below).
(a) Events of Default; Termination. Licensor may elect, without prejudice
to any other rights or remedies which it may have hereunder, at law or in
equity, immediately to terminate this Agreement upon occurrence of any of the
following (a "Default"), which shall constitute an event of default under this
Agreement:
(i) Sums Due. Licensee's failure to pay any sum which is due
and payable within thirty (30) days after written notice from Licensor that such
amount is due pursuant to this Agreement;
(ii) Misrepresentation and Misconduct. Licensee has knowingly
made any material misrepresentation or omission in connection with its securing
of the license granted hereby or in connection with entering into this
Agreement; or if Licensee engages in any dishonest conduct or act of moral
turpitude that materially adversely affects the goodwill associated with the
NASCAR Marks and/or the NASCAR Trade Dress;
(iii) Violations of Laws and Regulations. Licensee violates
any laws, rules and regulations (including without limitation, health, safety or
sanitation law, ordinance or regulation) and does not cure the noncompliance or
violation within [***] days or such longer grace period as the authorities
allow) of discovering such noncompliance or violation;
(iv) Transfer or Assignment. Licensee makes an unauthorized
transfer or assignment of this Agreement or the Entertainment Store(s);
(v) Understatement of Gross Revenue. Licensee intentionally
understates any of the Entertainment Stores' Gross Revenue;
(vi) Payment of Taxes. Licensee fails to pay within thirty
(30) days when due any federal or state income, service, sales or other taxes
due on the Licensee's operations, unless it is in good faith contesting its
liability for such taxes, has effectively stayed the enforcement of liability
for such taxes and has established adequate reserves for such taxes;
(vii) Abandonment. Licensee's abandonment of any Entertainment
Store(s) by failure to have any Entertainment Store(s) open to the general
public and operating for five (5) or more consecutive days, or an aggregate of
ten (10) days within any calendar quarter (other than in connection with the
permanent cessation of operating an Entertainment Store pursuant to Section 20
hereof) unless such failure to operate is due to scheduled remodeling repairs,
technology upgrades or renovation approved by Licensor, or due to fire, flood,
earthquake or other similar Acts of God beyond Licensee's control;
(viii) Creditor's Remedies, etc. Licensee or any Entertainment
Store is seized, taken over or foreclosed on by a government official in the
exercise of his duties, or by a
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creditor, lien holder or lessor, or any legal action against Licensee by a
creditor resulting in attachment, garnishment or sequestration of Licensee's
interest in any Entertainment Store, and possession is not regained by Licensee
within [***] days or the attachment, garnishment or sequestration is not
discharged within [***] days; or a levy of execution has been made upon Licensee
or upon any property used in the business and it is not discharged within [***]
days of such levy; or the making of an assignment for the benefit of creditors
or the filing of a voluntary or involuntary petition by or against Licensee or
any Entertainment Store under any Section or chapter of the United States
Bankruptcy Code, as amended, or under any similar law or statute of the United
States or any state thereof; or the appointment of a receiver for all or
substantially all of the assets of any Entertainment Store;
(ix) Litigation. Licensee shall contest the enforceability of
this Agreement, or ownership by Licensor of the NASCAR Marks and/or the NASCAR
Trade Dress;
(x) Closing of Multiple Entertainment Stores. An aggregate of
five (5) or more Entertainment Stores are closed to the general public, in
accordance with Section 19 during the Term of this Agreement;
(xi) Licensor's Failure to Approve Initial Plan. Licensor
disapproves or fails to approve Licensee's Initial Plan within [***] days after
the delivery of the Initial Plan by Licensee to Licensor in accordance with
Section 6(a) hereof;
(xii) Breach of Representations, Warranties and Covenants.
Licensee breaches any representation, warranty or covenant contained in this
Agreement;
(xiii) Change in Majority Ownership or Majority Control of
Licensee. Except upon the completion of an Initial Public Offering, the original
owners of Licensee, such original owners' being all of those Owners of Licensee
as of December 15, 1997 (collectively, the "Original Owners"), fail to maintain
at all times during the Term of this Agreement, for any reason whatsoever, at
least [***] or more of the outstanding total and ownership interest in Licensee;
(xiv) Certain Changes in Connection with Board of Directors of
Licensee. More than two (2) of the six (6) original Members of the Board of
Directors of Licensee, such original Members of the Board of Directors of
Licensee being those Members of the Board of Directors of Licensee as of the
Effective Date of this Agreement, as are listed and described on Exhibit E (the
"Original Directors"), do not remain or serve, for any reason whatsoever, as
Members of the Board of Directors of Licensee, unless otherwise approved in
writing by Licensor; or the authorized number of Board of Directors of Licensee
at any time during the Term of this Agreement exceeds seven (7), unless
otherwise approved in writing by Licensor;
(xv) Breach of any Term. Licensee fails to comply with or
violates any of the terms or conditions of this Agreement and such failure or
violation is not cured within [***] days of the date of notice that such failure
or violation occurred; provided, however, such failure or violation can be
corrected or cured but cannot be corrected and cured (to the satisfaction of
Licensor) within such [***] days, Licensee shall be provided with an additional
reasonable amount of time to correct and cure such failure or such violation;
provided
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that Licensee at all times uses its best efforts to correct and cure such
failure or violation; and further provided that, in no event shall such time
period to correct or cure such failure or violation by Licensee extend beyond
sixty (60) days following the date of notice that such failure or violation
occurred; and
Notwithstanding the provisions described in this Section 20, if any,
applicable law or regulation of a governmental authority having jurisdiction
over this Agreement, Licensor and/or Licensee limit-, Licensor's rights of
termination or requires different or longer notice periods than those set forth
herein, the affected portions of this Section 20 shall be deemed amended solely
to conform to such laws and regulations.
(b) Successive Breaches. In addition to and not in limitation of any of
Licensor's remedies for any event of Default set forth in Section 20, if, after
a breach by Licensee of a provision of this Agreement, for which License has
been given notice and an opportunity to cure (if any) as provided herein,
Licensee breaches the same provision twice within any one hundred eighty (180)
day period, Licensor may also immediately terminate this Agreement upon any such
subsequent breach of the same provision within such one hundred eighty day (180)
period, provided that Licensee has been given notice of such subsequent breach
and, if the provision breached provides for an opportunity to cure, Licensee has
also been provided with an additional ten (10) day period during which to cure
such subsequent breach.
(c) Effective Date of Termination. Termination of this Agreement shall be
effective immediately upon Licensor's giving to Licensee written notice of
termination in accordance with the notification provisions set forth in Section
22.
(d) Choice of Remedies. Upon the occurrence of an event of Default under
this Agreement, Licensor may in its sole discretion independently exercise or
not exercise any or all rights which it may have under this Agreement or any
other agreements by and between Licensee and Licensor, and the exercise of
Licensor's rights under this Agreement shall not exclude any other remedies
which Licensor may have at law or in equity. All such remedies of Licensor are
cumulative.
21. EFFECT OF TERMINATION OR EXPIRATION
Upon termination or expiration of this Agreement with respect to any of
the Entertainment Stores, or the closing of an Entertainment Store pursuant to
Section 20:
(a) De-identification. Licensee covenants and agrees that it shall:
(i) after [***] days following the date of termination, not
directly or indirectly at any time or in any manner identify itself or any
business as one of Licensor's licensees, use any NASCAR Mark, any colorable
imitation thereof or other indicia of NASCAR in any manner or for any purpose or
utilize for any purpose any trade-name, trade or service mark or other
commercial symbol that indicates or suggests a connection or association with
Licensor;
(ii) cease all use of and remove, destroy and/or deliver to
Licensor all signs, signs/faces, advertising and promotion materials, forms and
other materials containing any
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NASCAR Mark or otherwise identifying or relating to NASCAR, to the satisfaction
of Licensor within [***] days following the date of termination;
(iii) during the period prior to the discontinuance of use of
the NASCAR Marks at the Entertainment Stores, remain obligated to pay Royalties
with respect to the Gross Revenue of the Entertainment Stores and otherwise
comply with the terms of this Agreement;
(iv) within [***] days following such termination, turn over
to Licensor all copies of all records, files, instructions, correspondence,
agreements, and any and all other materials relating to the NASCAR Marks, in
Licensee's possession, and all copies thereof (all of which are hereby
acknowledged to be Licensor's sole property);
(v) within [***] days and at its own expense make such
alterations to the Entertainment Stores or otherwise to distinguish the
Entertainment Stores clearly from their former appearance and remove any
tradename, trade or service mark or other commercial symbol that indicates or
suggests a connection or association with Licensor so as to prevent confusion
therewith by the public; and
(vi) subject to the terms and conditions in this Agreement,
Licensee shall within [***] days remove from the software of all Simulators all
uses of the NASCAR Marks, NASCAR Trade Dress, NASCAR Indicia, NASCAR Copyrighted
Works, and Licensor Trade Secrets.
(vii) furnish Licensor, within [***] days after the effective
date of expiration or termination of this Agreement, with evidence satisfactory
to Licensor of Licensee's compliance with the foregoing obligations.
(b) Licensee further covenants and agrees that within [***] days following
such termination or expiration of this Agreement, it shall pay all creditors of
the Entertainment Stores in full and discharge and fully satisfy all debts and
liabilities relating to or associated with the Entertainment Stores.
(c) All of Licensee's obligations that expressly or by their nature
survive the expiration or termination of this Agreement under this Agreement
will continue in full force and effect subsequent to and notwithstanding its
expiration or termination and until they are satisfied in full or by their
nature expire.
22. NOTICES
Unless otherwise specified herein, all notices, requests, demands,
payments, consents and other communications hereunder shall be transmitted in
writing, and shall be deemed to have been duly given when hand delivered, upon
delivery when sent by express mail, courier, overnight mail or other overnight
or next day delivery service, or three (3) days after the date mailed when sent
by registered or certified United States mail, postage prepaid, return receipt
requested, or when deposited with a public telegraph company for immediate
transmittal, charges prepaid, or by telecopier, with a confirmation copy sent by
U.S. mail, postage prepaid, addressed as follows:
32
***Confidential treatment requested.
<PAGE> 33
<TABLE>
<S> <C>
Licensor: NASCAR
P.O. Box 2875
Daytona Beach, FL 32120-2875
Attention: Tom Bledsoe
with a copy to (which shall not constitute notice):
NASCAR
13801 Reese Boulevard West
Huntersville, NC 28078
Attention: Contract Administrator
with a copy to (which shall not constitute notice):
Alston & Bird LLP
1201 W. Peachtree Street
Atlanta, GA 30309-3424
Attention: Martin J. Elison, Esq.
Licensee: LBE Technologies, Inc
10401 Bubb Road
Cupertino, CA 95014
Attention: Chris Morse
with a copy to (which shall not constitute notice):
Gray Cary Ware & Freidenrich LLP
400 Hamilton Road
Palo Alto, CA 94301
Attention: James Koshland, Esq.
</TABLE>
23. MISCELLANEOUS
(a) Further Acts. The parties agree to execute such other documents and
perform such further acts as may be necessary or desirable to carry out the
purposes of this Agreement.
(b) Entire Agreement. This Agreement and the exhibits hereto, which are
incorporated herein by this reference, represent the entire understanding
between the parties with respect to the subject matter contained herein and
supersedes all other negotiations, agreements, representations and covenants,
oral or written, and any other agreement executed by Licensor or its affiliates
and Licensee in connection herewith. The parties intend this Agreement to be the
entire integration of all of their agreements of any nature on the subject
matter hereof. This Agreement may not be modified except by a written instrument
signed by the parties.
(c) Waiver. Failure by the parties to enforce any of their respective
rights under this Agreement shall not be construed as waiver of such rights. Any
waiver, including waiver of default, in any one instance shall not constitute a
continuing waiver or a waiver in any other
33
<PAGE> 34
instance. Any acceptance of money or other performance by one party from another
party shall not constitute a waiver of any default except as to the payment of
the particular payment or performance so received.
(d) Effectiveness. The submission of this Agreement does not constitute an
offer to license and this Agreement shall become effective only upon execution
thereof by Licensee and Licensor.
(e) Governing Law. THIS AGREEMENT IS A CONTRACT MADE UNDER AND SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA.
(f) Severability. In the event that any term or provision in this
Agreement is held to be invalid, void, illegal or unenforceable in any respect,
the Agreement shall not fail, but shall be deemed amended to delete the void or
unenforceable term or provision, and the remainder of this Agreement shall be
enforced in accordance with its terms and shall not in any way be affected or
impaired thereby. In the event that any term or provision of this Agreement is
held to be unreasonable, the same shall not fail, but shall be deemed amended
only to the extent necessary to render it reasonable, and the parties agree to
be bound by the same as thus amended.
(g) Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(h) Disclaimer of Warranties. Licensee hereby acknowledges and agrees that
Licensor has made no promises, representations, guarantees or warranties, of any
nature, that the Entertainment Stores will be successful or profitable. Licensee
further represents to Licensor that Licensee has independently reviewed and
evaluated the business to be conducted by Licensee hereunder, and the decision
to enter into this Agreement was made by Licensee solely in reliance upon such
independent evaluation.
(i) Relationship of the Parties. The relationship between the parties
hereto is solely that of licensee and licensor, and nothing herein shall be
deemed or construed to create any franchise, joint venture, partnership or any
relationship other than that of licensee and licensor. In all dealings with
third parties, including, without limitation, employers, suppliers and
customers, Licensee shall disclose in an appropriate manner acceptable to
Licensor, that Licensee is an independent entity licensed by Licensor. Nothing
in this Agreement is intended by the parties hereto to create a fiduciary
relationship between them, nor to constitute one party an agent, legal
representative, subsidiary, franchise, joint venture, partner, employee or
servant of another party for any purpose whatsoever. It is understood and agreed
that Licensee is an independent contractor and is in no way authorized to make
any contract, warranty or representation or to create any obligation on behalf
of Licensor.
(j) Jurisdiction. ANY DISPUTE ARISING OUT OF OR RELATED TO THE AGREEMENT,
WHICH CANNOT BE RESOLVED BY NEGOTIATION, SHALL BE SETTLED BY BINDING ARBITRATION
IN ACCORDANCE WITH THE AMERICAN ARBITRATION ASSOCIATION COMMERCIAL ARBITRATION
RULES AND PROCEDURES AS AMENDED BY THIS AGREEMENT. THE COST OF ARBITRATION,
34
<PAGE> 35
INCLUDING THE FEES AND EXPENSES OF THE ARBITRATOR, SHALL BE SHARED EQUALLY BY
THE PARTIES UNLESS THE ARBITRATION AWARD PROVIDES OTHERWISE. EACH PARTY SHALL
BEAR THE COST OF PREPARING AND PRESENTING ITS CASE. THE PARTIES AGREE THAT THIS
PROVISION AND THE ARBITRATOR'S AUTHORITY TO GRANT RELIEF SHALL BE SUBJECT THE
UNITED STATES ARBITRATION ACT, 9 U.S.C. 1-16 ET SEQ. (AUSAA@), THE PROVISIONS OF
THIS AGREEMENT, AND THE ABA-AAA CODE OF ETHICS FOR ARBITRATORS IN COMMERCIAL
DISPUTES. THE PARTIES AGREE THAT THE ARBITRATOR SHALL HAVE NO POWER OR AUTHORITY
TO MAKE AWARDS OR ISSUE ORDERS OF ANY KIND EXCEPT AS EXPRESSLY PERMITTED BY THIS
AGREEMENT, AND IN NO EVENT SHALL THE ARBITRATOR HAVE THE AUTHORITY TO MAKE ANY
AWARD THAT PROVIDES FOR PUNITIVE OR EXEMPLARY DAMAGES. THE ARBITRATOR'S DECISION
SHALL FOLLOW THE PLAIN MEANING OF THE RELEVANT DOCUMENTS, AND SHALL BE FINAL AND
BINDING. THE AWARD MAY BE CONFIRMED AND ENFORCED IN ANY COURT OF COMPETENT
JURISDICTION. ALL POST-AWARD PROCEEDINGS SHALL BE GOVERNED BY THE USAA. THIS
PROVISION SHALL NOT BE CONSTRUED SO AS TO PROHIBIT EITHER PARTY FROM SEEKING
PRELIMINARY OR PERMANENT INJUNCTIVE RELIEF IN ANY COURT OF COMPETENT
JURISDICTION.
(k) Headings. Titles and captions of sections, subsections and clauses in
this Agreement are for convenience only, and neither limit nor amplify the
provisions of this Agreement.
(l) Survival of Representations, Warranties and Covenants. The several
representations and warranties of Licensee contained in this Agreement and each
of the covenants of Licensee contained in Section 4, Section 12, Section 14,
Section 15, Section 16, Section 18(b) and Section 21 hereof, and the
indemnification obligations of Licensee contained herein, shall all survive the
expiration or termination of this Agreement indefinitely.
The representations and warranties of Licensor contained in this
Agreement, and each of the covenants of Licensor contained in Section 14 and
Section 16 hereof, shall all survive the expiration or termination of this
Agreement indefinitely.
(m) Approvals and Similar Actions. Where the approval, acceptance,
consent, authorization, or similar action of Licensor is required under this
Agreement, such approval, acceptance, consent, authorization, or similar action
must be in writing, and the same may be given, denied or withheld by Licensor in
its sole discretion, except where otherwise indicated.
(n) Equitable Relief. In the event of a breach or threatened breach by
either Licensor or Licensee of the terms hereof, the non-breaching party shall
be entitled to injunctive and other equitable relief.
(o) Warranty Disclaimer. EXCEPT AS PROVIDED HEREIN, EACH OF THE PARTIES
AGREES THAT NONE OF THE PARTIES HERETO MAKES ANY WARRANTIES, EITHER EXPRESS OR
IMPLIED, WITH RESPECT TO ANY OF THE SIGNS, FIXTURES, FURNISHINGS, DECOR,
APPROVED EQUIPMENT, OTHER EQUIPMENT, PRODUCTS, SUPPLIES, INVENTORY AND MATERIALS
THAT MAY BE
35
<PAGE> 36
USED IN CONNECTION WITH ANY ENTERTAINMENT STORE. FURTHERMORE, NONE OF THE
PARTIES MAKES ANY WARRANTY OF MERCHANTABILITY FOR A PARTICULAR PURPOSE.
(p) Marketing Fund Contribution. In addition to any amounts payable by
Licensee under this Agreement, Licensee shall pay to Licensor an amount equal to
[***] in each year of the term, beginning in 1998, of this Agreement in
consideration for Licensee's participation in Licensor's Buyer's Guide and other
promotional projects determined by Licensor. The fee payable by Licensee under
this SECTION 23(p) shall be subject to an [***] increase of up to [***] during
the term of this Agreement in Licensor's sole discretion and without notice to
Licensee. Licensee hereby agrees to participate in Licensor's Buyer's Guide,
which participation includes, but is not limited to, providing Licensor with all
necessary materials for the Buyer's Guide.
[Signatures Appear on the Following Page]
36
***Confidential treatment requested.
<PAGE> 37
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Agreement Date first above written.
LICENSOR:
NATIONAL ASSOCIATION FOR
STOCK CAR AUTO RACING, INC.
By: /s/
---------------------------------------------
Title: VP Licensing
------------------------------------------
LICENSEE:
LBE TECHNOLOGIES, INC.
By: /s/ DAMON DANIELSON
---------------------------------------------
Title: President & CEO
------------------------------------------
Attest: CHRIS MORSE
-----------------------------------------
Title: VP Business Development
------------------------------------------
37
<PAGE> 38
EXHIBIT A
GENERAL DESCRIPTION OF NASCAR MARKS
1. The general mark NASCAR & DESIGN as reflected in U.S. Reg. No.
1,850,527, and any modifications or replacements thereof.
2. The mark NASCAR SILICON MOTOR SPEEDWAY & Design [picture to be
included].
H-1
<PAGE> 39
[GRAPHICS]
H-2
<PAGE> 40
AMENDMENT #1 TO THE LICENSE AGREEMENT
BY AND BETWEEN LBE TECHNOLOGIES, INC.
AND NATIONAL ASSOCIATION FOR STOCK CARE AUTO RACING, INC.
This Amendment (the "Amendment") shall amend the License Agreement (the
"Agreement") by an between LBE TECHNOLOGIES, INC. ("License") and National
Association for Stock Car Auto Racing, Inc. ("Licensor").
RECITALS
WHEREAS, Licensee and Licensor have entered into the Agreement, the
effective date of which was August 18, 1997.
WHEREAS, Licensee and Licensor wish to amend the Agreement as set forth in
this Amendment.
WHEREAS, Defined terms not defined herein will have the same meanings as
ascribed to such terms in this Agreement.
THEREFORE, for adequate consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
AMENDMENT
The License Agreement is hereby modified by the following:
1. Both parties acknowledge and agree that Licensee has changed its
corporate name to SILICON ENTERTAINMENT, INC. a, California Corporation with a
principal business address of 210 Hacienda Avenue, Campbell, California 95008.
All rights and obligations held by LBE Technologies, Inc. under the Agreement
and Amendment hereto shall now be held by Silicon Entertainment, Inc.
2. DEFINITIONS.
"Category" means operator assisted location-based interactive
stockcar or stock-truck entertainment experiences that consist of no less than
five (5) linked simulator units, with each on a motion-based platform and each
allowing a maximum of two (2) people to participate in each individual simulator
unit; each location shall be permanent in nature, in an out of home retail
environment, such as a mall, and shall be no less than 3,000 square feet in size
with a minimum of three (3) permanent perimeter walls and a fixed ceiling.
3. Paragraph 2(b) is amended, in its entirety as follows:
"Exclusivity. Licensee acknowledges, understands and confirms that the
license granted to Licensee by Licensor during the term of this Agreement
and subject to the terms and conditions of this Agreement are EXCLUSIVE in
the category only for a period commencing the date of this Amendment and
ending on
H-3
<PAGE> 41
December 31, 2002. The license does not include coin-operated video
games or arcade games, including, but not limited to networked arcade
units; individual "free-standing" simulator units; simulators that permit
more than two users to participate at one time and that are not user
controlled, such as the "Thompson" simulators. In the event Licensor
elects to exercise its option to render this Agreement NON-EXCLUSIVE in
the category as provided for in Section 5(a) herein; Licensor shall retain
the right, at its sole discretion, to operate or grant to any other person
the right to operate Entertainment Stores (or any other related concept)
at any location within or outside the Territory, provided however,
Licensor shall not be entitled to use any of Licensee's Intellectual
Property (as defined in Section 12(b) of the Agreement) in any other
Entertainment Store associated with the Licensor. Upon termination or
expiration (without renewal of this Agreement), Licensee shall have no
further rights hereunder, other than the rights held prior to the Grant of
License."
4. Paragraph 2(d)(5) shall be amended, in its entirety, as follow:
"Warranty Within Territory". Licensor imposes upon Licensee no limitation
on the territorial scope of the License, which is worldwide in scope, but
Licensor expressly does not warrant or represent that the rights under the
license granted hereunder are enforceable or non-infringing upon the rights of
others outside of the United States and Canada. Licensee agrees that use of the
Marks outside of these countries shall be at the sole risk of the Licensee, and
that Licensee agrees to indemnify and hold Licensor and its affiliates,
shareholders, employees, directors, officers and agents of each of them harmless
against all cost and expense incurred, including settlements, judgments and
reasonable attorney's fees in the defense of any claim that arises solely as a
result of the use by of Licensee of the Marks outside of the United States and
Canada. At Licensee's expense, Licensee may present a list of prospective
territories outside of the United States and Canada in which the Licensee is
considering establishing additional Entertainment Store locations, at which time
the Licensor will research and notify the Licensee of any known rights-related
issues that might encumber such expansion; provided that Licensee may offset
such costs and expenses against future royalties earned from such countries. For
example; if Licensee notifies Licensor that it would like to go to Country X,
Licensor will research any and all third-parties rights, which might encumber
such expansion and Licensor shall take any steps it deems necessary, at its sole
discretion with respect to clearing such rights, and all costs associated with
such research and steps taken to clear the NASCAR Marks ("Costs") shall be paid
for by Licensee; provided further that Licensee may offset future royalties or
Guaranteed Minimum Royalties earned in Country X against such Costs."
5. Paragraph (3) "TERMS OF LICENSE" shall be amended, in its entirety, as
follows:
"(a) Term. The Term of this Agreement shall commence on the Effective Date
of the Agreement and end on December 31, 2005; with the period beginning
with the Effective Date of the Amendment and commencing until December 31,
2002 being EXCLUSIVE. At the end of the Exclusivity Period NASCAR shall
have the option, in its sole discretion, to extend the exclusivity period.
If Licensor
H-4
<PAGE> 42
elects to not extend the exclusivity period, the remaining term January 1,
2003 through December 31, 2005 shall be NON-EXCLUSIVE."
6. Paragraph 4(a)(1) "Guaranteed Minimum Royalty" shall be amended, in its
entirety, as follows:
"(1) Schedule. In consideration of the license granted to Licensee,
hereunder, Licensee shall pay to Licensor a non-refundable advance against
royalties owed under this Agreement (the "Guaranteed Minimum Royalty") as
follows:
[***]
7. Paragraph 8(a)(iii) shall be amended, in its entirety, as follows:
"(iii) Licensee shall have opened to the general public at least
[***] additional Entertainment Stores on or before September 30, 1999, resulting
in a cumulative minimum number of at least [***] Entertainment Stores opened to
the general public and in operation by September 30, 1999; and . . .
8. EXCLUSIVITY FEE
(a) Licensee shall pay Licensor an Exclusivity Fee of [***] which
shall be fully earned and non-refundable upon receipt by Licensor upon the
signing of this Amendment #1 and shall not be credited against royalties or
Annual Guaranteed Minimum payments owed to the Licensor by the Licensee.
(b) Licensor shall have the rights provided in the Nonstatutory
Stock Option, included as Exhibit A. These rights include but are not limited to
the purchase of [***] shares of Licensee's stock at [***] per share.
9. SPECIAL STIPULATIONS
(a) Licensee acknowledges, understands and confirms that the license
granted to Licensee by Licensor during the term of this Agreement and Addendum
thereto shall become non-exclusive on [***], in the event Licensee fails to
execute a public offering of stock on or before [***].
H-5
***Confidential treatment requested.
<PAGE> 43
(b) The Las Vegas location of the NASCAR Cafe shall be permitted to
operate a simulator experience similar to that of Licensee and this operation
shall be excluded from the exclusivity provision in Paragraph 3(a) of this
Amendment. Notwithstanding the foregoing, NASCAR will utilize commercially
reasonable efforts to ensure that the simulator experience located at the NASCAR
Cafe in Las Vegas does not directly convey an "official" or perceived
endorsement by NASCAR. NASCAR shall determine what constitutes an "official" or
perceived endorsement at its reasonable discretion.
10. All other provisions of the Agreement shall remain in full force and
effect, it being understood that, in the event of a conflict the terms of this
Amendment and the Agreement, the terms of this Amendment will take precedence.
IN WITNESS WHEREOF, the parties have executed the Amendment to be
effective the date of last signature below.
<TABLE>
<S> <C>
LICENSEE: LICENSOR:
SILICON ENTERTAINMENT, INC. NATIONAL ASSOCIATION FOR STOCK CAR
AUTO RACING, INC.
By: /s/ CHRIS MORSE By: /s/
--------------------------------- ---------------------------------
Print Name: Print Name:
------------------------- -------------------------
Title: VP Title:
------------------------------ ------------------------------
Date: 7-7-99 Date:
------------------------------- -------------------------------
</TABLE>
H-6
<PAGE> 44
AMENDMENT #2 TO THE LICENSE AGREEMENT
BY AND BETWEEN LBE TECHNOLOGIES, INC.
AND NATIONAL ASSOCIATION FOR STOCK CAR AUTO RACING, INC.
This Amendment (the "Amendment") shall amend the License Agreement (as
amended), (the "Agreement") by and between LBE TECHNOLOGIES, INC. ("Licensee")
and National Association for Stock Car Auto Racing, Inc. ("Licensor").
RECITALS
WHEREAS, Licensee and Licensor have entered into the Agreement, the
effective date of which was August 18, 1997 and which was subsequently amended.
WHEREAS, Licensee and Licensor wish to amend the Agreement as set forth in
this Amendment.
WHEREAS, Defined terms not defined herein will have the same meanings as
ascribed to such terms in the Agreement (as amended).
THEREFORE, for adequate consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
AMENDMENT
The Licensee Agreement is hereby modified by the following:
1. Section 20(a)(xiv) of the Agreement, as amended, is hereby deleted in
its entirety and the following language is substituted therefore:
Section 20(a)(xiv) Certain Changes In Connection With Board of Directors of
Licensee
More than two (2) of the (5) Members of the Board of Directors of Licensee,
such members of the Board of Directors of Licensee being those Members of the
Board of Directors of Licensee as of the Effective Date of this Amendment, and
as are listed and described on Exhibit E, do not remain or serve, for any reason
whatsoever, as Members of the Board of Directors of Licensee, unless otherwise
approved in writing by Licensor; or the authorized number of Board of Directors
of Licensee at any time during the Term of this Agreement exceeds seven (7),
unless otherwise approved in writing by Licensor.
2. Section 8 of the Agreement (as amended is hereby deleted in its
entirety and the following is substituted therefore
8. DEVELOPMENT SCHEDULE
(a) Total Number of Entertainment Stores. Licensee shall develop
a total of at least eleven (11) Entertainment Stores within the Territory
during the Term of this
<PAGE> 45
Agreement pursuant to the terms of this Agreement in accordance with the
following development schedule (the "Development Schedule")
(i) Licensee shall have opened to the general public at least [***]
Entertainment Store on or before December 31, 1997;
(ii) Licensee shall have opened to the general public at least [***]
additional Entertainment stores on or before December 31, 1998
resulting in a cumulative minimum number of at least [***]
Entertainment Stores opened to the general public and in
operation by December 31, 1998;
(iii) Licensee shall have opened to the general public at least [***]
additional Entertainment stores on or before January 31, 2000
resulting in a cumulative minimum number of at least nine (9)
Entertainment Stores opened to the general public and in
operation by January 31, 2000;
(iv) Licensee shall have opened to the general public at least [***]
additional Entertainment stores on or before August 31, 2000
resulting in a cumulative minimum number of at least thirteen
(13) Entertainment Stores opened to the general public and in
operation by August 31, 2000;
3. Exhibit E, the section titled Board of Directors is hereby deleted and
the following substituted therefore:
Board of Directors
David S. Morse - President, Chief Executive Officer and Chairman of the Board
William Hart - Director
Robert Manschot - Director
Chris Besing - Director
Robert Cheadle - Director
10. All other provisions of the Agreement, as amended, shall remain in full
force and effect, it being understood that, in the event of a conflict the
terms of this Amendment and the Agreement, the terms of this Amendment will
take precedence.
IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THE AMENDMENT TO BE
EFFECTIVE THE DATE OF LAST SIGNATURE BELOW.
*** Confidential treatment requested.
<PAGE> 46
LICENSEE: SILICON LICENSOR: National Association for
ENTERTAINMENT, Inc. Stock Car Auto Racing, Inc.
By: /s/ CHRISTOPHER O. MORSE By: /s/
------------------------------ ------------------------------
Print Name: Christopher O. Morse Print Name:
---------------------- ----------------------
Title: V.P. Title:
--------------------------- ---------------------------
Date: 9-7-99 Date:
---------------------------- ----------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF PRICEWATERHOUSECOOPERS LLP
INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated June 7, 1999, except for Note 11, which is as of September 8,
1999 relating to the financial statements of Silicon Entertainment, Inc., which
appear in such Registration Statement. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 13, 1999
