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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
PATH 1 NETWORK TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3989885
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
3636 NOBEL DRIVE, SUITE 275, SAN DIEGO, CA 92122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 450-4220
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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N/A N/A
Securities to be registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.001 PAR VALUE PER SHARE
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(Title of Class)
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
BUSINESS
OVERVIEW
We believe there will be, over the next several years, a significant
increase in the number of audio, video and telephony transmissions over the
Internet, and that there will be a market for products which can enable wired
data transmission networks to handle equally adeptly each of these kinds of
transmissions. It is our goal to position ourselves at the forefront of this
movement through the introduction of products based on our proprietary
TrueCircuit-TM- technology. Our TrueCircuit technology is capable of enabling
the efficient transmission of all communications over a single network and
bringing high-level quality of service (QoS) and real-time audio, video and
telephony capabilities to the Internet and to standard Internet Protocol (IP)
networks. Our intended real-time data delivery product line for business and,
ultimately, the home would have the potential to change the way video content
is produced and delivered. TrueCircuit would enable the producer of the
video to transmit the video digitally over an Ethernet network to editors,
who would receive it with negligible latency or jitter. This allows for the
replacement of the current method of using analog video and facilitates a
100% digital approach to video production, distribution, editing and
broadcast. Businesses and ultimately, homes can then receive digital
video over the Internet. In addition, TrueCircuit will ensure that a
phone call placed over the Internet will be delivered as reliably as calls
made over today's telephone network by guaranteeing the same end-to-end
quality of service presently provided by existing telephone networks. Among
other benefits, our intended products would also enable improved interaction
of computers, telephone equipment, video equipment and network appliances.
As it operates today, IP (which is simply a common set of
procedures, conventions and rules to link together computers and information
across the world) fragments information into packets of data and
automatically routes these packets to their correct destination via
intermediate switching nodes called IP routers. This process, known as
"packet-switching", does not ensure that packets will arrive in the same
order in which they were sent, or that they will arrive at their destinations
in a timely manner.
Packet-switching works best for transmission of data, which is
tolerant of packet re-ordering and large variations in transmission time
(known as "jitter"). Jitter causes the recipient of an audio or video
transmission to experience a jerky or otherwise imperfect signal, or lengthy
download times as packets respectively arrive. In contrast, the transmission
of real-time signals, including audio and video, requires timely, predictable
and consistent delivery. Traditional telephone networks use
"circuit-switching" to meet the needs of real-time audio signals. Circuit-
switching ensures that a communications signal always has a consistent, fixed
point-to-point path, or "channel", from source to destination. Because
circuit-switching maintains a constant route, it minimizes end-to-end delays
and jitter. However, traditional circuit-switching is not practical for many
of today's Internet uses due to its relatively rigid and inflexible
structure.
Our technology addresses the inherent deficiencies of packet-switching
as applied to transmission of real-time signals by superimposing a
circuit-switched infrastructure on standard IP networking, while maintaining
full compatibility with existing IP networks.
Although we do not have products ready for sale in the marketplace,
we have developed our core software and hardware technology, TrueCircuit,
and completed production of a first generation of prototype equipment
containing this proprietary TrueCircuit technology. The TrueCircuit
Multimedia Gateway, our initial product, is currently in limited production
and undergoing beta-test field evaluation with several companies. As further
discussed in this section, we have several other proposed products at various
stages in the developmental process. We intend to continue to pursue
development and introduction of our proposed products into wide area networks
(WANs), local area networks (LANs), metropolitan area networks (MANs), and
the Home Networking Market, which includes television, telephone, personal
computers and home security systems.
INDUSTRY BACKGROUND
CONVERGENCE - AN INTERNET MARKET OPPORTUNITY
The ability to utilize intranets and the Internet to make clear,
high-quality telephone calls and transmit live, high-quality video is almost
a reality. Many companies around the world currently produce equipment that
interface standard telephone and video equipment with computer data networks,
including the Internet. However, without the QoS guarantees offered by
TrueCircuit, there is currently degradation in audio and video data
transported over computer networks. TrueCircuit can transport the audio,
video, telephony and other real-time data streams over computer networks
without the latency and jitter these networks currently experience. As such,
TrueCircuit can deliver the quality of real-time data over computer networks
that can facilitate the realization of the Internet as the transmission
network for the multimedia industry.
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There are strong incentives for companies to merge all of their
communication activities over a network of wires, including for data, voice,
video and control. Currently, companies employ several separate networks
throughout an enterprise -- telephone, computer, security and fire protection.
By combining these, an organization would incur the cost of installing and
maintaining only one network, rather than several separate networks, each of
which would require capital outlay and staffing.
Known as "convergence," a shift to a single network would allow these
companies to take full advantage of the significant cost savings and
increased throughput that computer networks provide. Network convergence
technology enables the merging of disparate digital information such as
full-motion video, still video images, audio, telephony and business data
over the same network infrastructure (as compared to the use of separate
networks for separate applications, e.g. using a telephone network to place a
telephone call). The emergence of this network convergence technology has
largely been made possible by the move from analog to digital technology in
all forms of media. Our TrueCircuit technology facilitates efficient
convergence, enabling disparate services to be carried without disruption,
and meets the specific technical requirements of each service in their
combined carriage over LANs, MANs, and WANs.
In addition to cost savings, we intend that "convergence" products
developed using our TrueCircuit technology could provide enhanced quality to
IP networks in businesses and at home by enabling real-time audio, video and
telephony to be delivered over a single IP network with the equivalent of
"circuit-switched" QoS. QoS, a recognized industry term, is simply a
statement of a technology's capabilities in transporting information across a
network. The term "QoS" can pertain to one or more factors (e.g. latency,
jitter or throughput) relating to quality of data transport across a network.
Our "circuit-switched" QoS specifications cover the following key factors:
(i) jitter, (ii) latency (which is the delay in transmission of an
information packet from source to destination across a network), (iii)
reliability (which is defined as the percentage of packets that are delivered
across the network), (iv) sequence (which is defined as delivery of packets
of information in the correct order), and (v) throughput (which is defined as
the consistent transport and delivery of a certain specified level of
information packets per second). Thus, when we state that TrueCircuit can
provide "circuit-switched" QoS, it means that our intended products will
minimize jitter and latency and assure sufficient sequence, reliability and
throughput capabilities so as to enable DVD-quality video, CD-quality radio,
telephony and other time-critical information to all be transported
simultaneously, alongside non-real-time data, over one IP network.
THE NEED FOR A SOLUTION
Computer data is tolerant of packet-switching jitter and other QoS
problems because computer data does not require real-time delivery; it does not
matter when or in what order the packets arrive. In contrast, real-time
services (e.g. voice, audio and live, interactive video) require timely,
predictable and consistent delivery. As a result of current network systems'
packet-switching jitter and other QoS problems, multimedia and other time
critical transmissions experience long delays and degradation. Therefore, IP
network systems cannot currently provide the convergence of real-time voice,
high-fidelity audio, and live, interactive video services with computer data
over a single network.
Current delays and delivery problems associated with real-time
transmission result from the collision of packets carrying data when network
traffic volume is high. With existing IP computer networks, there is a lack
of an effective traffic management infrastructure to eliminate such
collisions. Despite this deficiency, IP has become the de facto standard for
computer networks. Within LANs, the vast majority of computers communicate
via IP networks, such as Ethernet, the most prevalent of local IP networks.
Within WANs, most computers communicate using IP switching over ATM/SONET
links, which are circuit-switched networks. Furthermore, major telecomm
vendors, such as Cisco, IBM, the Bell Companies and Enron have publicly
indicated that they plan to move to IP-only equipment -- entirely eliminating
ATM from their networks -- because IP systems are less costly.
Our TrueCircuit technology responds to the need to enable
packet-switched IP networks to provide high-quality, real-time transmissions by
coordinating the transport of packets across the network to eliminate or
minimize delays and unreliable delivery. In this regard, we believe our
TrueCircuit technology can make available the best of both worlds - the
reliability and speed of circuit-switched networks along with the data carrying
capability and low cost of IP networks.
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As the demand for real-time network services grows, the traffic
control of the transmitted information becomes increasingly important.
Congestion of information packets at points of contention (bottlenecks in a
network), results in QoS failures, as these information packets are forced to
"queue" at those points of contention rather than proceeding without delay to
their destinations. The greater the bandwidth demanded by a particular
traffic stream, the higher the potential for service degradation, with packet
collisions rising as the network utilization increases. This is evidenced by
delays and degradation of the images, sound and other real-time data that are
transmitted. In a simple analogy, the packets can be likened to cars
competing for space on a crowded freeway leading to their destination.
Collisions and delays are difficult to avoid in such circumstances; however,
timing and control systems such as express lanes, ramp meters which time the
car's access to the freeway and changeable message signs that coordinate more
expeditious routing can substantially reduce delays and collisions.
Similarly, our TrueCircuit technology provides the timing, channels and
coordination that eliminate or minimize the delays and collisions of packets
across the network from source to destination.
Thus, TrueCircuit's mechanism for a coordinated flow of real-time
packets to avoid points of network contention has the ability to help improve
QoS and permit multiple, simultaneous uses of the network (i.e., computer
traffic, voice and video).
The elimination or avoidance of bottlenecks in the network would also
reduce the need for queuing at network nodes because the time critical-data
would be transported over dedicated channels, leaving the remaining bandwidth
for non-time-critical data. This should enable businesses to reduce network
equipment costs, as a result of increased utilization of networks at any given
capacity level.
Bandwidth demands continue to grow due to technological innovations and
new applications. Unless bandwidth supply significantly exceeds bandwidth demand
(a scenario that no one foresees), there will always be bottlenecks if packet
traffic flow is not coordinated. Therefore, increases in bandwidth supply
notwithstanding, there will continue to be a need for solutions such as those
offered by TrueCircuit technology. As more and more high-speed corporate LANs
connect to slower external WANs, and as newer high-speed networks link to
existing, slower ones, bottlenecks will continue to rise at points of ingress
from the faster networks to the slower ones. These networks will saturate, again
resulting in increased congestion. And within LANs shared by many users across
different organizations, competing demands for the network's available bandwidth
supply causes packet collisions that degrade the quality of service provided
over the network. We believe our proposed products, based on our proprietary
TrueCircuit technology, will be able to effectively address the problem of
increased demand at a given level of bandwidth supply by coordinating the flow
of packets end-to-end.
Services that are dependent on time-critical data stand to benefit the
most from TrueCircuit-TM- technology's QoS solution. These include:
- IP telephony
- Video distribution
- Transaction processing
- Security systems
- Data acquisition and control
- Factory floor automation
We demonstrated a prototype of the TrueCircuit Multimedia Gateway
(TMG), a proof-of-concept product, at the Networld+Interop trade show held at
Las Vegas in May 1999. This show exposed us to potential customers, including
telecommunications services providers, systems integrators and other equipment
manufacturers that might incorporate TrueCircuit in future network products. No
direct business was generated from our appearance at this trade show. However,
the demonstration of our technology at this show provided us with positive
feedback from
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industry representatives such as Intel, Panasonic and the Department of the
Navy regarding TrueCircuit's ability to solve QoS problems which currently
inhibit the convergence of real-time audio, video and telephony and
non-real-time data over IP networks.
SERVICES
THE PATH 1 SOLUTION: TRUECIRCUIT-TM-
As networks integrate and become faster, we expect there will be an
increased demand for real-time services (e.g., telephone and video conferencing)
driven by new applications and ever-increasing expectations on the part of
business and consumers. Real-time services require predictability and minimal
delays from end-to-end. Our technology satisfies these requirements and because
it has been designed to industry standards and protocols, is compatible with
today's IP networks.
TrueCircuit, our core technology, is a software and hardware-based
solution for managing network traffic that is, at its essence, a method (or
algorithm) for the transmission of data on a real-time basis over IP
networks. TrueCircuit software is developed to interface with the specific
hardware and infrastructure systems on which it will be hosted. For example,
the software can be tailored to operate with a wireless infrastructure,
twisted pair telephone wiring or fiber optic cable. TrueCircuit addresses the
fundamental issue of network traffic management by creating a separate
dedicated channel for each real-time stream -- isolating each stream from
other real-time streams and the non-real-time data traffic. These dedicated,
end-to end channels, technically termed "isochronous" channels, provide a
means of carrying real-time data and ensuring the fast, regular and timely
delivery of packets end-to-end across the network. In addition, TrueCircuit
has a dynamic allocation system which sets up channels for the bandwidth
required for a specific stream of data and then "eliminates" the channel when
it is no longer needed. This allocation scheme maximizes the productivity of
a network, providing bandwidth only as required, as compared with systems
that allocate fixed bandwidth, which cannot adapt to continuously changing
requirements.
TrueCircuit works with the existing wiring of a standard Internet
Protocol (IP) network. This compatibility would benefit potential customers
such as, for example, Internet Service Providers (ISPs), who by using
TrueCircuit-based products will have the ability to provide their customers
with "circuit-switched" QoS for the transmission of real-time signals within
an IP network. Without such traffic management, there would be visible delays
and degradation of sound and images transmitted over a network.
TrueCircuit can be implemented cost effectively because it is
compatible with already-installed legacy equipment. As such, the end user
does not have to incur the cost of installing an entirely new network. When
IP networks that are shared across a corporation, such as Ethernet LANs, are
conditioned with TrueCircuit, collisions for real-time traffic can be
eliminated, thereby unlocking the full potential of the existing IP/Ethernet
computer network infrastructures.
Ethernet (the name commonly used for Institute for Electrical and
Electronic Engineering (IEEE) 802.3 CSMA/CD, which is a standard that defines
the implementation of an Ethernet network) is the dominant cabling and
low-level data delivery technology used in LANs and is also used for MANs and
WANs. First developed in the 1970s, it was published as an open standard by
DEC, Intel, and Xerox (or DIX) and later described as a formal standard by
the IEEE. TrueCircuit`s ability to provide "circuit-switched" QoS for
real-time multimedia over this most prevalent cabling in the industry
provides considerable market growth opportunity for Path 1.
Furthermore, our management is currently unaware of any other
technology that can deliver the "circuit-switched" QoS directly over IP
networks that is made possible by our patent pending technology. As a result,
we are well positioned to capitalize on emerging telecommunications
technology that are rapidly moving toward convergence of real-time multimedia
over IP, as the network of choice.
Some of our intended products based on our TrueCircuit technology
could also offer significant advantages for ISPs by making new billing
approaches possible, such as call-based and/or class-based billing, rather
than just packet-based or flat-rate billing systems that are currently in
use. The fast, automatic set-up and tear-down of dedicated end-to-end
communication channels allows ISPs to adopt a telephone company
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billing model based on actual usage, if desired. Furthermore, some of our
intended products based on our TrueCircuit technology could be able to
provide an immediate measurement of the true cost of an end-to-end channel as
the sum of the per-link utilization of a route. This metering capability of
TrueCircuit not only provides a mechanism for ISPs to offer new
toll services, but also provides the practical basis for economic rationing
of toll services.
PRODUCTS
In developing our intended products, we have focused our
resources on the most formidable QoS challenge: delivery of low-latency,
high-quality video over Ethernet/IP networks, with a special emphasis on
Gigabit Ethernet/IP networks, using Internet-compatible QoS protocols (these
protocols are in essence a message format for asking equipment on a network
to provide QoS at the level specified in the message). Those products
intended to meet this challenge include Gigabit Ethernet switches and
broadcast-quality video transport and interfaces. In addition, with an eye
toward packaging TrueCircuit for licensing and incorporation into third party
products, we have designed our TrueCircuit technology to consist of
easy-to-incorporate packages consisting of a reference design, a chip-set,
and firmware application-programmer-interfaces (APIs).
To help in the initial marketing of TrueCircuit-based products, we have
also developed the TrueCircuit Multimedia Gateway to showcase the ease of
implementation and other advantages of our technology.
The following presents a number of Path 1 TrueCircuit-based
products planned for development and introduction to the market during the
second half of 2000 and the first half of 2001.
TMG -TRUECIRCUIT MULTIMEDIA GATEWAY
We are currently re-designing our TrueCircuit Multimedia Gateway (TMG)
prototype in order to build in video capabilities and to reduce its cost of
production. We plan to release this new version during the third quarter of
2000 as TMGII. The TMG has been successfully beta tested for delivery of high
fidelity telephony between different locations in the City of San Diego, and
is functional for video capabilities (when used in conjunction with an
external module that we have prototyped) and Internet access as well.
However, due to the TMG's high production cost, it will not be productized or
marketed; the TMGII, because of its expected lower production cost, will take
the TMG's place.
After we complete testing of the TMGII, we plan to send it to a
certification laboratory (such as Product Safety Engineering Incorporated in
Tampa, Florida) for FCC certification. The findings from this certification
testing process might require us to effect a design change in the TMGII;
however, we do not expect that the certification process and possible design
change will delay the final productization of the TMGII by more than one month.
This possible one month delay has been incorporated into the planned release
schedule for the TMGII in third quarter 2000.
We plan to target the TMGII to the communications and networking needs of
hotels and multi-tenant apartment buildings. The TMGII is designed to allow
Internet access, video-on-demand and telephone access, all through a single,
standard telephone wire. We plan to sell this product in volume through system
integrators that specialize in the installation of telephone and video-on-demand
services for this market. CAIS Internet, one such system integrator, has
expressed interest in reselling the TMGII into this target market. No agreement
yet exists between us and CAIS Internet; negotiations are presently in the
exploratory stages.
The TMGII would be housed in a box approximately 9" x 1 1/2" x 6 1/2." We
plan for it to have a serial port, one telephone jack, one Ethernet jack for a
local computer connection, a telephone jack for external Internet access, and a
video output jack.
PS1/PS100 - TRUECIRCUIT NETWORK SWITCHES
These network switches would be components of a LAN and would
provide the capability to operate computers, telephones, video and audio
equipment on high-speed and very-high-speed LANs, enabling multiple users to
operate in a shared network with access to common data bases and services.
The target market for the PS100 (100 megabit) switch would be small to
medium-size businesses and high-end consumers. The PS1(Gigabit) switch would
be intended for the professional environment such as large offices,
television stations, post-production companies and advertising agencies. It
is expected that this product will be sold through system integrators or
direct to large end-users. The higher capacity of the PS1 allows it to
support up to 4,000 simultaneous video streams.
The PS1 and PS100 TrueCircuit Network Switches are currently in the
development stage. We plan to have beta units of the PS100 for testing in the
later part of second quarter 2000. Because the PS1 would operate at higher
speeds and is more complex in its design than the PS100, we expect beta units of
the PS1 to be ready at the end of second quarter or beginning of third quarter
2000.
PG1 - TRUECIRCUIT GIGABIT ETHERNET PROFESSIONAL VIDEO INTERFACE
PG1 is being designed for business networks and would provide an
efficient method of connecting different services such as video, audio,
telephony and data onto a single high speed Gigabit LAN. The product would be
aimed at professional, multi-user LANs that require fast access to common
real-time databases required by television networks for newsgathering,
commercial / feature editing, program contribution and distribution, distance
education and other professional network applications. PG1 would also allow
simultaneous access to related computer data and telephony or videoconferencing
between users on the network. PG1 would be a high-value, high-margin product
designed to be affordable in a less price sensitive market segment. PG1 would be
a complementary product to PS1. Both products would be used in professional
multimedia networks.
The PG1 is currently in early testing. Its functionality was
demonstrated at the National Association of Broadcasters conference in Las
Vegas on April 10, 2000. The True Circuit technology incorporated into the
PG1 is subject to an exclusive license (even as to us) in favor of Leitch for
sale into the professional broadcast video market. Leitch can either develop
its own version of the PG1 or can purchase the PG1 from us for sale into this
target market. We are currently in negotiations with Leitch to enter into a
distribution agreement pursuant to which we would develop and produce the PG1
for sale and distribution by Leitch. We also retain the right to sell the PG1
into markets other than the professional broadcast video market. Additional
development will be required before the PG1 is ready for product shipment. We
expect to be able to begin shipment of the PG1 during third quarter 2000.
DOTCAM -TM- DIGITAL TV CAMERA WITH TRUECIRCUIT
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Development of this product is the result of cooperation with a
leading industrial television camera manufacturer, who recognized the need to
provide efficient direct access from its cameras to Ethernet LANs.
The addition of TrueCircuit technology to an industrial TV camera
would enable video, audio and control data to be accommodated on a single
circuit, which would lower the cost, improve performance and simplify the
operation of industrial applications such as surveillance at airports,
prisons and processing plants. There is also an identified need for dotCAM in
distance education.
We anticipate that we would derive revenue from the TrueCircuit
card or module fitted inside of each dotCAM camera. We also plan to develop a
"spin-off" interface product that can be sold into a wider market, providing
the capability to connect any type of video camera to an Ethernet network.
The dotCAM is expected to be marketed via original equipment
manufacturers (OEMs) and system integrators.
The dotCam has been prototyped but further development work will be
required before it will be productized. We intend to demonstrate a functional
prototype in May 2000 at the Network+Interop conference in Las Vegas. We intend
to have the first units of the dotCam product ready for shipment in third
quarter 2000.
PMM1 PATH1 NETWORK MANAGER
PMM1 would be an Internet web-compatible software package that would
enable users to configure, operate and monitor TrueCircuit products such as
the PG1 Multimedia Gateway and PS1 Gigabit Ethernet Switch.
PMM1 would provide a graphical user interface (GUI) with computer
generated screens that provide clear instructions on how to configure, control
and monitor each TrueCircuit component in the network.
PMM1 would be licensed to customers on a site-by-site basis, with
software support and upgrade options providing added revenue. The Network
Manager would be supplied direct to large professional users, or through
system integrators and OEMs.
We plan to have the intended PMM1 product function with our intended PG1
prototype. We expect the PMM1 to be productized and ready to ship along with the
PG1 in third quarter 2000.
MARKET
Although the market for the intended TrueCircuit-based products and
technology is global, we will initially center our marketing efforts on the
rapid move toward IP networking in the US. Should we be successful in
marketing and selling our product in the US, we anticipate that we will
expand such marketing and sales efforts to include Europe, where there is the
same need for technology that facilitates convergence of disparate digital
information (e.g. full-motion video, audio and telephony).
In the United States, the market for network infrastructure equipment
is dominated by a few large competitors, including companies such as Cisco
Systems, Lucent Technologies, Nortel Networks, and 3Com Corporation, which are
the main players in the US market. These companies have announced their
intention to offer technology for network convergence. They will either attempt
to develop technology themselves or procure it from others. Therefore, they are
potentially powerful competitors to Path 1 as well as potential significant
customers.
Our TrueCircuit technology can be provided as licensed intellectual
property, as a chip-set and reference design for integration, or as a
component of an overall system, or can be embedded in our own intended
TrueCircuit hardware products.
LOCAL AREA NETWORK (LAN) APPLICATIONS AND GATEWAYS
LANs, which share data across an organization, are the largest initial
market we expect to target with our technology. TrueCircuit can benefit LANs by
managing the flow of integrated real-time and data services (e.g., video, audio,
telephony and Internet access). We then plan to migrate our technology to
MANs and WANs.
ISPs can particularly benefit from our technology as applied to
the LAN market. In addition to the "circuit-switched" QoS provided for
real-time data, TrueCircuit provides ISPs with a metering capability, as
described in the Services section.
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Hotels, multi-tenant apartment buildings, businesses in the
publishing, broadcasting, entertainment, marketing and public relations
areas, and even aircraft have immediate demand for carrying real-time
services over their computer networks. Integrated service, multimedia gateway
devices, if built around TrueCircuit, would for the first time have the
ability to tie together all major communications services - video, telephone,
and Internet access - through the existing building phone or cable wiring.
TrueCircuit technology has the ability to manage all such
services within a standard LAN with no degradation in signal quality because
of its ability to transport each real-time transmission over its own
dedicated channel from end-to-end, thereby almost entirely eliminating the
collisions inherent in a standard network, where real-time and non-real-time
data compete for transmission over the same network.
METROPOLITAN AREA NETWORK (MAN) APPLICATIONS
Beyond the corporate LAN, there is a demand for video conferencing
among corporate plants and within a metropolitan area.
The key to effectively exploiting this market is to have very low
latency and jitter to enable real-time personal interaction. Video conferencing
in the past has not been particularly successful because delay and degradation
of speech and video images are not conducive to effective interpersonal
communication.
We would intend to seek to enter into strategic alliances with ISPs
through which we would deploy TrueCircuit technology within metropolitan areas
to distribute private video and/or audio programming, and implement video
conferencing and private telephone networks. Under such alliances, the ISPs
would condition their networks with TrueCircuit technology to enhance the
quality of real-time data that they provide to their customers. As of the time
of this filing, we have not yet entered into negotiation for any specific
strategic alliances for use in MAN applications.
WIDE AREA NETWORK (WAN) APPLICATIONS
All networks crossing interface boundaries require bridge devices.
TrueCircuit can be used a a bridge from an ATM WAN to a LAN in the business
enterprise. Such TrueCircuit bridges would convert transmissions between
business LANs and ATM/SONET, T1/E1, xDSL, and cable modem infractructures.
TrueCircuit would also be used as a bridge to bring real-time multimedia to
home users wishing to access real-time multimedia over their IP network.
According to the Federal Communications Commission, the opportunity
exists in the US alone for some 12,000 radio stations, 1,600 television
stations and 10,000 cable Master System Operators (MSOs) to stream their
programming to national and international consumers via the Internet.
According to the FCC, this movement towards utilization of the Internet in
this manner has already started with some radio stations providing their
studio output directly to the Internet. Quality at the present time is
relatively poor compared with over-the-air FM and AM broadcasts. Path 1
technology has the potential to eliminate this QoS problem by installing
TrueCircuit technology at the program source and also at the ISP location
where the program is spooled out to subscribers. The final link could be
established by making TrueCircuit available to consumers as a computer card,
or set-top box module. Internet broadcasting QoS can then equate to direct
over-the-air radio broadcasts. This can also apply to streaming of TV
programs from networks, cable MSOs and program content providers using the
same TrueCircuit technology.
We would intend to seek to license TrueCircuit technology to others
to create the appropriate bridge devices for network interfaces. We have not
yet initiated negotiations with specific companies to license TrueCircuit for
use in WAN applications. If we do not, or are unable to, work with others to
create the appropriate bridge devices, we may still use a combination of
intended Path 1 products (e.g. the PS100) in combination with off-the-shelf
third party hardware to provide the same functionality.
VIDEO/AUDIO NETWORK (VAN) APPLICATIONS
Video signals are most sensitive to jitter and latency. Even 200
nanoseconds of packet delivery deviation can severely degrade a live video
feed. The market consisting of broadcasters, audio and video production and
post-production studios is substantial. These fields are quickly moving from
analog film and tape to digital media, and we expect they will generate a
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demand for solutions such as those offered by TrueCircuit technology to
transport their video and audio feeds and distribute them to their computer
editing workstations.
HOME NETWORKING
Home Phone Network Alliance (HomePNA), the current standard for
computer networking of multiple PCs, multiple TVs, telephones, security
system, etc., over standard home phone wiring does not adequately address the
QoS issue. The existing HomePNA standard uses a shared network approach
wherein collisions are common. Furthermore, the effects of collisions within
HomePNA are much more severe than within Ethernet because the quality of
wiring and less stringent installation standards in the home make it more
difficult to attain higher bandwidths. TrueCircuit can eliminate these
collisions within HomePNA and guarantee compatibility with home real-time
services, such as multiple phone lines and audio/video entertainment feeds
shared with computer web browsing.
We are now in the early stages of exploring potential commercial
arrangements with semiconductor manufacturers that sell chips for HomePNA.
Such an arrangement would provide for embedding the TrueCircuit technology
during the manufacturing of these chips. The sale by these semiconductor
maufacturers of products that incorporate our TrueCircuit technology would
be considered a natural extension of these companies' existing product
offerings in the Home PNA market.
STRATEGY
There are five components to our strategic framework:
1. INITIALLY TARGET HIGH-MARGIN MARKETS OF "EARLY ADOPTERS." Some
market niches have a history of early adoption because of
extreme competition. Our initial product directions are being
targeted to markets that have an immediate need for
"circuit-switched" QoS. Our management has conducted
discussions with end users, equipment vendors and system
integrators to assist in selecting our optimal initial market
niche and defining our initial product offerings. The highest
visibility early adopters are the digital television
broadcasters and their related production companies. These
companies must satisfy an FCC mandate to convert to digital
television. They require the highest quality of signal
transport. We officially introduced and demonstrated our
video transport technology at a trade show, NetWorld+Interop`
99, in Las Vegas on May 10, 1999. The feedback on our
technology and range of product options from industry
attendees has helped to guide us in finalizing our marketing
decisions to target this market as well as other lower-end
video network interface markets.
2. SEEK RESEARCH AND DEVELOPMENT (R&D) FUNDING FROM KEY
CUSTOMERS-- We have the technology and intellectual resources
that make it plausible to seek R&D funds from key customers to
develop products. The R&D area is of central importance to our
long-term plans. We will strive to ensure that any arrangement
for R&D funds is open-ended (e.g. we will retain the right to
use our technology in other markets and products). To date, we
have yet to receive R&D funds via this route, but we will
continue to seek such arrangements as the opportunities arise.
Not receiving this R&D funding increases our reliance on our
operational funds to support the R&D necessary to remain at
the forefront of communications technology.
3. ESTABLISH STRATEGIC MARKETING RELATIONSHIPS-- The development
of strategic marketing relationships will largely be centered
upon Original Equipment Manufacturers (OEMs), system
integrators and network operators who are, like us, focused on
the convergence of digital media. Strategic marketing
relationships provide immediate access to early adopters and
increase the number and type of channels to market. Direct
sales of the company's products will be created through
recruitment of qualified sales staff, operating from
strategically important locations,
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augmented by headquarters support staff with the
Internet as a sales and technical support resource. In
April 2000, we entered into a Technology License Agreement
with Leitch Technology Corporation under which we provided
Leitch a non-exclusive, worldwide license (except as to
TrueCircuit technology designed for the professional
broadcast video market, which is subject to an exclusive
license in favor of Leitch) to utilize our intellectual
property to develop and sell products which incorporate our
TrueCircuit technology. This relationship with Leitch will
allow us to take advantage of Leitch's superior manufacturing
and distribution capabilities to bring TrueCircuit-enhanced
products to market on an expedited basis.
4. CONTINUE ADHERENCE TO INDUSTRY STANDARDS FOR QoS--We will
ensure that TrueCircuit will continue to adhere to industry
standards for specifying QoS. Operating on Internet Protocol
(IP), TrueCircuit offers substantial advantages over competing
approaches for effective traffic control management. It works
with such industry QoS over IP standards as RSVP, MPLS, and
IETF DiffServ. However, unlike existing implementations,
TrueCircuit provides negligible latency and jitter. If we did
not design to industry standards, we would not have the
compatibility with existing systems and equipment to have
acceptance in the marketplace. For this reason, all of our
development strictly conforms to current industry standards
and protocols.
5. LEVERAGE IN-HOUSE EXPERTISE IN SIGNAL PROCESSING AND
NETWORKING--Our personnel have significant expertise in
digital signal processing, mixed-signal analog/digital circuit
design, and networking, with dozens of publications and
patents to their names. Dr. Ronald Fellman has published 35
papers in signal processing and networking and has 1 patent
issued. Dr. Douglas Palmer has published 20 papers and has
12 patents in signal processing and telecommunications. Dr.
Yendo Hu has three patents in the area of MPEG2
implementation. Mr. Beer has received four patents for his
developments. We believe this expertise gives us the
capability to design products to quickly enter the high-end
video and audio markets with TrueCircuit networking
technology.
COMPETITION
We have developed a corporate strategy of seeking to enter markets
where our intellectual property gives us a competitive advantage. In the
professional video market, TrueCircuit is the only means of which we are
currently aware for meeting the low jitter requirements within IP/Ethernet
networks. In April 2000, we provided an exclusive license to our TrueCircuit
technology for the professional broadcast video market (as incorporated into
the PG1) to Leitch Technology Corporation. We anticipate that we will
continue to develop the TrueCircuit technology for our intended products for
this market, but that Leitch will market and sell our intended products for
this market space. Competition for using new networked technology in this
market comes from FibreChannel and SerialBus, both of which use alternative
network approaches. However, neither of these companies' approaches has yet
become dominant in this area. We believe that backward compatibility, a fully
developed routing capability and a large existing infrastructure of
IP/Ethernet gives our approach a competitive advantage technologically.
We must still co-exist with a number of major, entrenched network
equipment providers such as Cisco, Nortel Networks, 3Com and Lucent. Each of
these vendors has announced a strategy for convergence. All of these
companies can be seen either as potential partners in licensing or
distributing our technology, or as strong competition. Although we are
initially focusing on high-end applications and markets that require
proprietary technology not yet demonstrated by these companies, the risk
clearly exists that these companies, or new startups we are not yet aware of,
may develop their own competitive technology and enter our markets.
All the major network equipment manufacturers stress their adherence
to recognized international standards. We therefore designed TrueCircuit to
be compatible with all appropriate IP standards - RSVP/MPLS, IETF DiffServ,
and IEEE 802.1pq. A major advantage of TrueCircuit is in its ability to
provide ATM compatibility and "circuit-switched" QoS over a standard Ethernet
or IP network. However, a potential risk is that one of the major equipment
manufacturers may choose to develop its own proprietary standard that is
incompatible with the implementation of our technology.
Cisco has announced a strong push towards IP telephony. It has
announced IP telephones in the $300 range, along with the switching equipment
to go with it. However, Cisco has adopted a queue-based protocol that gives
priority-based preference to packets of data. The problem with queues is that
they introduce unpredictable delay. For telephone signals, this translates to
latency and jitter. For smaller numbers of simultaneous phone calls, such
latency and jitter may not be noticeable. However, the adverse effects of
queues become apparent when telephone or other real-time traffic becomes a
large fraction of the overall network capacity and in high-end applications
such as interactive CD-quality audio or high-quality video. Such applications
require either TrueCircuit or some other equally effective means for
transporting converged application traffic. In particular, interactive and
high-end video requires very low jitter, under 200 nanoseconds. TrueCircuit,
as incorporated in our intended products, will be able to provide this whereas
queue-based Weighted Fair Queuing QoS cannot. However, there remains the risk
that Cisco or others may reduce the price of bandwidth to the extent that a
customer could obtain competitive QoS by partitioning and upgrading their
networks to operate at much higher data rates and thereby reduce network
contention.
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The Grass Valley Group and Sony are both established
manufacturers of professional video equipment. Their current video products
use older analog cabling as well as specialized, single-feed serial links to
form point-to-point connections between expensive video switch boxes and
video sources. Our intended video networking products would create a more
cost-efficient and practical solution by eliminating the large bundles of
coaxial cables and multiple switch boxes. Our solution would be less
expensive because it would replace a costly and inflexible infrastructure
with a few strands of fiber optic links connected to a centralized Path 1
video switch. It would also concurrently upgrade a facility for digital
television, thereby eliminating the need to purchase a separate costly
upgrade. In addition, the U.S. Government has mandated a phase-in period for
digital television. We anticipate that the manufacturers of legacy video
equipment would wish to purchase TrueCircuit video network interface modules
to make their equipment operate over IP networks. These modules would be sold
subject to the Leitch license agreement.
Integrated service access in hotels, multi-tenant apartments, and
the home is a new and expanding market. We are not aware of products that now
directly address this market to combine phone, video-on-demand, and Internet
access all via a HomePNA phone wire interface with "circuit-switched" QoS.
Scientific-Atlanta, General Instrument, and others make set-top boxes, but
these devices do not have all the integrated capabilities offered by our
TrueCircuit technology, nor can multiple set-top boxes interconnect as a
network with "circuit-switched" QoS.
The market with the closest apparent competition arises in
metropolitan-area multimedia services, such as video conferencing. Here, Lucent
and the telecom industry represent indirect competition through their
development of ATM/SONET and T1/T3/xDSL multiplexors that can create isolated
virtual channels for different services over the same SONET, T1, T3, or xDSL
line. In general, such equipment is pre-configured to create and set aside
separate channels for each service, regardless of whether that service may or
may not come into use. This approach is appropriate only for point-to-point
links. Our equipment would have the advantage of creating a private multi-point
network that dynamically allocates channels only while they are needed. The Path
1 system would allow more efficient utilization of the limited outgoing link
bandwidth.
Finally, we may find ourselves in competition with an alternative
technology for QoS over IP. We are aware of one such technology by Peak
Audio, Inc. of Colorado. Peak Audio currently has no products of its own.
Instead, it licenses its CobraNet audio distribution over Ethernet. However,
unlike Peak Audio, our technology is not confined to audio transmission.
Rather, TrueCircuit is designed to handle all forms of time sensitive data,
such as video and sensor data.
Competition, of course, is not based solely on technological
superiority. Customers may choose a technologically inferior product if the
product's provider can give better pricing, availability, manufacturing,
quality, service or reliability of continued supply. Our philosophy will be
to build positive customer relationships in which we are a truly valued-added
partner and problem solver for our customers. Our operations will be oriented
toward meeting the needs of our customers cost-effectively and in a timely
manner. We realize that customers have other choices and we will work with
customers to assist them in becoming more competitive in order to minimize
the risk that they will chose another technology supplier.
SALES
DISTRIBUTION CHANNELS
We intend to ship a variety of products. Each product is targeted
for a different type of customer, so each product requires a different
distribution channel and sales strategy to reach the intended customer. Our
initial distribution plans involve relationships with systems integrators and
ISPs in which our technology will be incorporated into their systems.
Depending on the specific requirements of our customers, these distribution
plans could call for us to provide hardware embedding our technology or a
chip-set with reference design, or licensing of our technology as
intellectual property. To date, we have been beta testing our aforementioned
TMG evaluation product, with American Digital Network, our first ISP partner,
and Console, Inc., our first system integrator. These are local, San
Diego-based companies that we can easily work with and who can provide
essential early feedback on our products and strategies. They may also become
future customers of our products.
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PROFESSIONAL VIDEO MARKET
We have identified Leitch Technologies Corporation as an experienced
distributor and manufacturer of professional video products and pursuant to
that certain Technology License Agreement with Leitch dated April 10, 2000,
we have provided Leitch exclusive rights (even as to us) to develop, market
and sell our TrueCircuit technology intended for the professional broadcast
video market.
LICENSING AND SOFTWARE SALES
We plan to seek to derive revenue from licensing TrueCircuit for the
dotCAM and other potential TrueCircuit-enabled consumer appliances, from the
licensing of TrueCircuit network interface driver software, and from sales of
the TrueCircuit NetManager software. We intend to bundle the QoS Driver
Software with a TrueCircuit-capable network interface to enable video and
audio over the Internet Protocol using standard PCs. The distribution
channels for this software will be the network interface card manufacturers,
provided we are able to successfully enter into arrangements with these
manufacturers to write a QoS-enabled driver for their products.
We may alternatively sell our TrueCircuit QoS Driver Software
separately to enterprise clients as part of a full network system integration
package for introducing QoS real-time networking services.
In addition to its exclusive license to sell into the professional
broadcast video market, we have provided Leitch non-exclusive rights to
create, develop, market and sell commercial products which incorporate our
TrueCircuit technology.
APARTMENT/HOTEL/MOTEL USE OF TRUECIRCUIT-ENABLED PRODUCTS
We expect a variation on the TrueCircuit MultiMedia Gateway to be
used in hotels and multi-tenant apartment buildings. This product would
enable services beyond those currently available in today's multi-occupant
buildings. With TrueCircuit, apartment dwellers and hotel guests could access
potentially thousands of video channels as well as high-fidelity audio
channels. They could also have effective security systems and automated
control systems. To reach this market, we currently plan to use systems
integrators that specialize in this market segment. We have initiated talks
with one such system integrator. Negotiations with this system integrator
are at an early stage.
PRODUCT DEVELOPMENT MANAGEMENT
Central to each intended Path 1 product is the TrueCircuit core
technology. A single development team develops and enhances the TrueCircuit
core technology used across all Path 1 products. This team consists of two
software engineers and two hardware engineers.
In addition to the core technology team, it is our intent that each
Path 1 product will have a program manager, a lead engineer and an assigned
sales/marketing manager. These teams are to define, design and implement
their assigned products. The size of each team will depend on scope of the
specific product and may be partially outsourced.
We anticipate that in the future, we will work closely with Leitch
Technologies Corporation to develop products for the professional broadcast
video market. The nature and extent of such collaboration is as yet
undetermined.
MANUFACTURING / PRODUCTION
Instead of developing our own manufacturing capabilities, we plan to
utilize the services of ISO 9000 certified component distributors and an ISO
9000 certified contract manufacturer. Path 1 has commenced preliminary
discussions with AVNET for manufacturing of prospective TrueCircuit hardware
products. In addition, we anticipate that we will collaborate with Leitch
Technology Corporation in the development of products that are intended for
the professional broadcast video market. Leitch shall manufacture such
intended products in accordance with any reasonable quality and performance
criteria with which we provide them.
We would propose to monitor the contract manufacturing operation
and Leitch manufacturing efforts via our own quality control team. This
team's responsibilities will include evaluating contract manufacturers as
well as monitoring production through statistical quality control metrics.
RESEARCH AND DEVELOPMENT
We expend significant effort in developing our intended products,
designing enhancements to core technologies and addressing additional technical
challenges inherent in developing new product applications. We
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expect that we will continue to commit substantial resources to product
research and development in the future. Over the next six months, we
anticipate that we will spend approximately $1,000,000 for research and
$3,000,000 for development of our intended products.
We also have entered into a co-development agreement with San
Diego-based Integrated Systems Design Center, Inc. (doing business as Dr.
Design, Inc.) to co-develop on our behalf a range of professional video
products that utilize Path 1's TrueCircuit technology. Under this agreement,
Dr. Design will perform architecture studies of our existing technology and
will recommend additional enhancements, requirements and features to these
intended products. This co-development arrangement allows us to leverage Dr.
Design's specific expertise in commercialization of video technologies for
use by production studios and television broadcast facilities.
In addition, we have entered into a license agreement with Leitch
Technologies Corporation. This agreement provides Leitch an extensive license
to make, market, sell and maintain products that incorporate our TrueCircuit
technology. We anticipate that we will work closely with Leitch in
development of products intended for the professional broadcast video market.
CUSTOMERS
We have yet to generate revenue from sales to customers. This lack of
sales revenue is due to the fact that we are still developing some of our
enabling technology and have only recently commenced production of prototypes
and evaluation units of some of our intended products.
We have entered into several beta test agreements with potential
customers for the use and evaluation of the TrueCircuit Multimedia Gateway.
We expect to enter into additional beta-test agreements with other potential
customers for both this initial product and our video products as they become
available. We plan to have such beta-test agreements in third quarter 2000
for our initial video products, the dotCAM and the PG1.
PROTECTING INTELLECTUAL PROPERTY
Our success will depend, in part, on our ability to obtain and
protect our patents, trademarks and trade secrets and operate without
infringing upon the proprietary rights of others in the United States and
other countries. If we were to become involved in a dispute regarding our
intellectual property, it could become necessary for us to participate in
interference proceedings before the United States Patent and Trademark Office
to determine whether we have a valid claim to the rights involved, or to
litigate the issues in court. Such proceedings could be costly and time
consuming, even if we were to eventually prevail. Should we not prevail, we
could be forced to pay significant damages, obtain a license to the
technology in question, stop marketing one or more of our products or lose
the ability to prevent others from using our technology in their own
products.
PATENTS
We filed three patent applications in late 1998 covering the core
aspects of our TrueCircuit technology. Two additional patent disclosures have
also been filed and applications covering these new inventions are in
preparation.
Among the areas covered by our patent applications and disclosures
are: end-to-end quality of service mechanisms; virtual channel creation and
management in an IP or CSMA/CD network and across multiple TrueCircuit
domains; TrueCircuit-enabled network switches; TrueCircuit-enabled
repeaters/hubs; network security, maintenance of QoS within a legacy
environment; and compatibility of TrueCircuit with legacy equipment.
We cannot guarantee that any patents will be granted to us or that any
patents that are granted to us will be sufficiently broad to protect our
interests.
TRADE SECRETS
In addition to the protection afforded by patent law, implementations
of TrueCircuit technology contain trade secrets which we keep confidential.
These trade secrets cover areas of fast context switching in embedded operating
systems, real-time embedded architectures, signal processing techniques for
artifact-free signals, and low-latency
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software drivers. We initially require each external party that obtains access
to our technology (including, but not limited to, manufacturers, distributors,
consultants and potential strategic partners) to sign
confidentiality/non-disclosure agreements. However, our plan to embed our
technology into a small set of integrated circuits by third quarter 2000 will
eliminate this requirement. There are risks that these other parties may not
comply with the terms of their agreements with us, and that we may not be able
to adequately enforce our rights against such parties and other persons.
TRADEMARKS
We have trademarked the name TrueCircuit for our core technology to
describe its fundamental functionality. TrueCircuit technology establishes
the equivalent of "true" hardwired "circuits" over the traditionally
packet-switched Internet Protocol. We expect also to trademark the names we
give to products which we develop and market.
CONFIDENTIALITY AGREEMENTS
We require our employees, potential strategic partners, potential
customers and other parties who become privy to our proprietary technology to
execute confidentiality agreements with us. These agreements generally
provide that all confidential information developed or made known to the
employees and outside parties during the course of their relationship with us
is to be kept confidential and not to be disclosed to third parties, except
under certain specific circumstances. In the case of employees and
consultants, the agreements also provide that all inventions and works of
authorship conceived by the employees in the course of their employment or
consultancy will be our exclusive property.
EMPLOYEES
As of April 21, 2000, we employed ten people full-time and one
person part-time. It is anticipated that additional employees will be hired
as needed to, among other things, strengthen management and help in the
commercial launch of our products.
We believe our relationship with our employees is good. None of our
employees is a member of a labor union.
CORPORATE HISTORY AND ADDRESS
We were incorporated in January 1998 in the State of Delaware under
the name Millennium Network Technologies, Inc. In March 1998, we changed our
name to Path 1 Network Technologies Inc. and we commenced operations in San
Diego, California in May 1998. Our headquarters are presently located at 3636
Nobel Drive, Suite 275, San Diego, California 92122. Interested persons may
visit our website at www.path1.net. Information on our web site is not a part
of this registration statement, and you should bear that in mind if you read
the information on this site.
REPORTS TO SECURITY HOLDERS
Following the effective date of this registration statement, we will
be required to comply with the reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and will file annual, quarterly and
other reports with the Securities and Exchange Commission (the "SEC"). We
will also be subject to the proxy solicitation requirements of the Exchange
Act and, accordingly, will furnish an annual report with audited financial
statements to our stockholders.
AVAILABLE INFORMATION
Copies of this registration statement may be inspected, without
charge, at the SEC's Public Reference Room by calling the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Pacific Regional Offices of
the SEC located at 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036. The public may obtain
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information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0300. Copies of this material also are available through the Internet
by using the SEC's EDGAR Archive, the address of which is http://www.sec.gov.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW. YOU SHOULD
ALSO REFER TO THE OTHER INFORMATION IN THIS REGISTRATION STATEMENT, INCLUDING
OUR FINANCIAL STATEMENTS AND THE RELATED NOTES. IF ANY OF THE FOLLOWING RISKS
ACTUALLY MATERIALIZE, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION WOULD SUFFER. IN THAT EVENT, THE TRADING PRICE OF OUR STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT IN OUR COMMON STOCK.
MANY PARTS OF THIS REGISTRATION STATEMENT ALSO INCLUDE FORWARD-LOOKING
STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED
IN THESE FORWARD-LOOKING STATEMENTS. THIS DIFFERENCE COULD RESULT FROM THE RISK
FACTORS DESCRIBED HEREIN OR FROM OTHER UNANTICIPATED FACTORS.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS BECAUSE WE HAVE NOT YET LAUNCHED ANY
PRODUCTS COMMERCIALLY.
We have a relatively brief operating history. We were incorporated
in January 1998 and commenced operations in May 1998. We do not yet have any
products in commercial production. Accordingly, we are subject to all of the
risks associated with new business ventures including, without limitation,
those associated with raising capital, acquiring or developing products which
function as intended, arranging for suitable manufacturing facilities,
entering into strategic relationships with other companies, identifying and
retaining necessary personnel, establishing and penetrating markets for our
proposed products and achieving profitable operations.
WE NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS, AND OUR PROSPECTS FOR
OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN.
As we are a new business with no sales or revenues to date, we
anticipate that we will require additional financing to fund expansion, to
develop new or enhance existing services or products, to respond to competitive
pressures or to acquire complementary products, businesses or technologies. If
additional funds are raised through the issuance of equity or equity-linked
securities, the percentage ownership of our stockholders would be reduced. In
addition, these securities may have rights, preferences or privileges senior to
the rights of the securities held by our current stockholders. We cannot
guarantee that additional financing will be available in the future on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to continue our operations, fund our
expansion, take advantage of potential opportunities, develop or enhance
products, or otherwise respond to competitive pressures would be significantly
limited. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Liquidity and Capital Resources" for a discussion of
working capital.
WE ARE RELYING ON LEITCH TECHNOLOGY CORPORATION FOR MARKETING INTO OUR FIRST
TARGET MARKET.
We have granted Leitch Technology Corporation an exclusive license
to our TrueCircuit technology for the professional broadcast video market.
Our ability to profit from this market will, therefore, depend heavily on the
motivation and success of Leitch in developing, launching manufacturing and
marketing TrueCircuit-based products in this field, which would enable us to
receive royalties. In addition, if Leitch's TrueCircuit-based products have
difficulties, TrueCiruit could receive a poor reputation which would make it
difficult to market TrueCircuit-based products in other fields.
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OUR PROPOSED PRODUCTS ARE ONLY AT A DEVELOPMENTAL STAGE
Our proposed products are either at the conceptual stage, i.e.,
ideas for products, or have been reduced to beta units or prototypes that
must be tested and modified. Our product development and commercialization
process will incorporate the necessary steps to assure conformance to
industry standards and protocols. This conformance shall include FCC part 68
compliance, the North American Telecom Testing Standards, for the telephone
interface on the TMGII (none of our other products, as currently envisioned,
have a telephone interface and therefore do not have this requirement) and
Underwriter Laboratories certification for the PG1 (all of our other products
were designed so as not to require this certification). Our current marketing
plans and product designs do not require any other certifications. We must
continue our efforts to design these proposed products and arrange for
prototypes of each product to be manufactured, tested and de-bugged before we
can implement our marketing plan. There is no assurance that each of these
milestones can be achieved or that, if they are achieved, we will be able to
effectively market our products and achieve profitable operations.
WE MAY BE UNABLE TO OBTAIN PATENT PROTECTION FOR OUR CORE TECHNOLOGY AND
PRODUCTS, AND THERE IS A RISK OF INFRINGEMENT
We intend to patent our core technology and our products. However,
there can be no assurance that patents will be issued to us, or, if patents are
issued, that they will be broad enough to prevent significant competition or
that third parties will not infringe upon or design around such patents to
develop a competing product. Furthermore, others may design and manufacture
superior products.
In addition to seeking patent protection for our products, we intend
to rely upon a combination of trade secret, copyright and trademark laws, and
contractual provisions to protect our proprietary rights in our products.
There can be no assurance that these protections will be adequate or that
competitors will not independently develop technologies that are
substantially equivalent or superior to our products.
There has been a trend toward litigation regarding patent and other
intellectual property rights in the telecommunications industry. Although
there are currently no lawsuits pending against us regarding possible
infringement claims, there can be no assurance such claims will not be
asserted in the future or that such assertions will not materially adversely
affect our business, financial conditions and results of operation. Any such
suit, whether or not it has merit, would be costly to us in terms of employee
time and defense costs and could materially adversely affect us. If an
infringement or misappropriation claim is successfully asserted against us,
we may need to obtain a license from the claimant to use the intellectual
property rights. There can be no assurance that such a license will be
available on reasonable terms or at all.
WE FACE COMPETITION IN OUR INDUSTRY FROM MUCH LARGER COMPANIES WITH
SIGNIFICANTLY GREATER RESOURCES THAN OUR OWN, AND SUCH COMPETITION IS LIKELY TO
INCREASE IN THE FUTURE.
Although our strategy is to seek to enter markets where our
intellectual property gives us a strong competitive advantage, we still
presently face indirect and direct competition in these markets. We anticipate
that
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the competitive pressures we currently face will increase significantly in
the future. A number of major network equipment providers such as Cisco
Systems, 3Com and Lucent have announced network convergence strategies. Other
competitors are developing alternative network approaches which, if
successful, could materially and adversely affect us. Many of our current and
potential competitors have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and
substantially larger customer bases then we have. In addition, many of our
competitors may be able to respond more quickly than we can to new or
emerging technologies, as well as devote greater resources than we can to the
development, promotion and sale of their products. Increased competition
could force us to reduce prices, could lower our projected margins and could
hinder our ability to gain or hold market share. In addition, if we expand
internationally, we may face additional competition. There can be no
assurance that we will be able to compete successfully against current and
future competitors.
WE MAY NOT BE ABLE TO PROFIT FROM GROWTH IN OUR BUSINESS IF WE ARE UNABLE TO
EFFECTIVELY MANAGE THE GROWTH
With the exception of Michael Elliott, our President and Chief
Executive Officer, our senior managers have limited or no experience in
management positions and in managing rapid growth. We anticipate (but by no
means do we guarantee) that we will grow rapidly in the near future and that
this growth will place significant strain on our managerial, financial and
personnel resources. The pace of our anticipated expansion, together with the
complexity of the technology involved in our proposed products, demands an
unusual amount of focus on the operational needs of our future customers for
quality and reliability, as well as timely delivery and post-installation
field support. In addition, relationships with new customers generally
require significant engineering support. Therefore, adoption of our products
by customers would increase the strain on our resources, especially our
engineers. To reach our goals, we will need to hire on a rapid basis, while,
at the same time, invest in our infrastructure. We expect that we will also
have to expand our facilities. In addition, we will need to:
- successfully train, motivate and manage new employees;
- expand our sales and support organization;
- integrate new management and employees into our overall
operations; and
- establish improved financial and accounting systems.
We may not succeed in anticipating all of the changing demands that
growth would impose on our systems, procedures and structure. If we fail to
effectively manage our expansion, our business may suffer.
COMPETITION FOR EMPLOYEES IN OUR INDUSTRY IS INTENSE, AND WE MAY NOT BE ABLE TO
HIRE KEY EMPLOYEES.
Our future success will depend, in part, on our ability to attract
and retain highly skilled employees, particularly management (including
senior management), technical and sales personnel. We believe our current
roster of senior management is incomplete and that if we are to succeed we
must identify and hire several additional professional senior managers,
including a Chief Financial Officer, Vice President of Marketing and Sales,
Vice President of Engineering and a Vice President of Corporate Development.
Competition for employees in our industry and in our geographic region is
intense due to the scarcity of available people with the necessary
professional technical skills. We may be unable to identify and attract
highly qualified employees in the future. In addition, we may not be able to
successfully assimilate these employees or hire qualified key management
personnel to replace them.
WE ARE DEPENDENT ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS, AND NONE OF THESE
KEY EMPLOYEES IS OBLIGATED TO STAY WITH US.
Our success depends on the efforts and abilities of our senior
management, specifically Ronald Fellman, Douglas Palmer, Michael Elliott,
and other senior managers yet to be identified and hired, and certain other
key personnel including Yendo Hu, John Hooker, Grady Taylor and John Beer. We
currently do not have key man life
17
<PAGE>
insurance on any of these employees. If any of these key employees leaves or is
seriously injured and unable to work and we are unable to find a qualified
replacement, then our business could be harmed.
WE ARE IN LITIGATION WITH A FORMER COMPANY INSIDER. THIS LITIGATION MAY BE
PROTRACTED AND MAY DIVERT COMPANY RESOURCES AWAY FROM THE CONDUCT OF OUR
BUSINESS.
Franklin Felber, a former director and officer of ours, has sued us
and three of our directors for alleged wrongdoing in connection with an
option to purchase 255,640 shares of our Class A Common Stock which he
granted to Jyra Research, Inc. in January 1999. Felber's action, filed
November 29, 1999, seeks unspecified compensatory and punitive damages. Also,
we are suing him for breach of oral contract, breach of fiduciary duty,
breach of the covenant of good faith and fair dealing, and unfair business
practices in connection with representations made to us to induce us to issue
stock to him. We are seeking damages.
The litigation may cause a substantial expense for attorneys fees
and a diversion of management attention, regardless of the outcome of the
litigation. In addition, disputes such as this one can be harmful to
companies, especially a company such as ours which is in the early stage of
development.
OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS CURRENTLY MAINTAIN
SUBSTANTIAL VOTING CONTROL OVER US, WHICH WILL ALLOW THEM TO CONTROL MOST
MATTERS SUBMITTED TO STOCKHOLDERS FOR APPROVAL.
Our executive officers, directors and 5% stockholders beneficially
own, in the aggregate, 59% of our outstanding Class A Common Stock. As a
result, these stockholders (or subgroups of them) retain substantial control
over matters requiring approval by our stockholders, such as the election of
directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing
a change in control.
UNANTICIPATED DELAYS OR PROBLEMS IN INTRODUCING OUR PROPOSED PRODUCTS OR
IMPROVEMENTS TO OUR PROPOSED PRODUCTS MAY CAUSE CUSTOMER DISSATISFACTION OR
DEPRIVE US OF THE "FIRST-TO-MARKET" ADVANTAGE.
Except for Michael Elliott, management has limited or no experience
in manufacturing and shipping products. In addition, delays in the
development of prototype products are not uncommon in high-tech industries
such as ours. If we experience problems related to the introduction or
modification of our proposed products or the reliability and quality of such
products, which problems delay the introduction of our proposed products or
product improvements by more than a few months, we could experience reduced
product sales and adverse publicity. We believe that whichever company is
first-to-market with viable products in the markets we intend to address will
gain a significant advantage with customers; delays could prevent us from
being the company which gains this advantage.
Our proposed products are complex and are likely to contain a number of
undetected errors and defects, especially when these proposed products are first
released. These errors or defects, if significant, could harm the performance of
these proposed products, result in ongoing redevelopment and maintenance costs
and/or cause dissatisfaction on the part of customers. These costs, delays or
dissatisfaction could harm our business.
MANAGEMENT MAY APPLY THE PROCEEDS RECEIVED FROM ANY ONGOING OR FUTURE SALE OF
OUR SECURITIES TO USES THAT DECREASE OUR PROFITS OR MARKET VALUE.
We have used, and will continue to use, the net proceeds from sale of
our securities for general corporate purposes, including working capital, and
for research and development, but also for matters such as legal fees for
litigation. We determine, based on our existing needs, how the proceeds will be
allocated among the anticipated uses. Accordingly, our management has
significant flexibility in applying the net proceeds from any sale of our
securities and operating income (if any). The money may be used for corporate
purposes that have the unintended effect of decreasing stockholder value.
TO DATE THERE HAS BEEN ONLY A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK AND
THERE IS NO ASSURANCE THAT AN ACTIVE TRADING MARKET FOR OUR COMMON STOCK WILL
EVER EXIST.
As of April 21, 2000, there were 7,712,651 shares of our Class A
Common Stock outstanding. Prior to this registration of our Class A Common
Stock under the Securities Exchange Act of 1934, there has been only a
limited public market for Path 1 securities. There can be no assurance that a
broad public market for our securities will arise once our Class A Common
Stock is registered. We may be unable to attract and maintain good-quality
market makers. In the event a liquid market for our Class A Common Stock does
develop, there can be no assurance that the market will be strong enough to
absorb all of the Class A Common Stock currently owned by our
18
<PAGE>
stockholders. In addition, subsequent issuances of equity or equity-linked
securities may further saturate the market for our Class A Common Stock. The
resale of substantial amounts of our Class A Common Stock will have a depressive
effect on the market.
Principal stockholders with an aggregate of 3,339,360 shares of
Class A Common Stock were subject to a lock-up agreement which expired on
February 1, 2000. 1,655,000 of these shares were sold by two of these
principal stockholders to Leitch Technology Corporation in April 2000.
Because these principal stockholders were "affiliates" for purposes of Rule
144, tacking was not permitted and Leitch was required to commence a new
holding period. These 1,655,000 shares may not be resold under Rule 144 until
April 2001, one year after they were purchased. Public resales of an
additional 1,428,720 of the shares previously subject to the lock-up
agreement, beginning three months after the effective date of this
registration statement, could result in an imbalance of supply and demand in
the market for our Class A Common Stock. These 1,428,720 shares cannot be
resold publicly before the three-month point because they are "control
securities" which could only be resold under Rule 144, and by its terms Rule
144 has not been available for resales for some time before February 1, 2000
and will also not be available for the first three months after our
Securities Exchange Act registration via this Form 10. Franklin Felber, the
former owner of the remaining 255,640 shares of Class A Common Stock subject
to the expired lock-up agreement, is not subject to Rule 144; he has sold all
but 1,000 of his shares of Class A Common Stock.
THE MARKET PRICE OF OUR CLASS A COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, IN
WHICH CASE STOCKHOLDERS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
Our Class A Common Stock is presently quoted for trading on the Pink
Sheets as well as on the Third Segment of the Frankfurt Stock Exchange.
The market price for our Class A Common Stock is susceptible to a number of
internal and external factors including:
- quarterly variations in operating results;
- announcements of technological innovations;
- the introduction of new products or changes in product pricing
policies by us or our competitors;
- proprietary rights disputes or litigation; and
- changes in earnings estimates by analysts or other factors.
In addition, stock prices for many technology companies fluctuate
widely for reasons which may be unrelated to operating results. These
fluctuations, as well as general economic, market and political conditions
such as interest rate increases, recessions or military conflicts, may
materially and adversely affect the market price of our Class A Common Stock.
WE OFFER STOCK OPTIONS TO OUR EMPLOYEES, WHICH COULD RESULT IN SUBSTANTIAL
DILUTION TO ALL STOCKHOLDERS.
In order to provide incentives to current employees and induce
prospective employees and consultants to work for us, we have offered and
issued options to purchase our Class A Common Stock and Class B Common Stock.
As of April 21, 2000, there were options outstanding to purchase 891,086
shares of our Class A Common Stock, and there were options outstanding under
our 1999 Stock Option/Stock Issuance Plan to purchase 1,042,996 shares of Class
B Common Stock. We will continue to issue options to purchase sizable numbers
of shares of stock to new and existing employees, directors, advisors,
consultants or other individuals as we deem appropriate and in our best
interests. The grant and subsequent exercise of such options could result in
substantial dilution to all stockholders. As of April 21, 2000, 457,004
shares of Class B Common Stock under our 1999 Stock Option/Stock Issuance
Plan remain authorized but not yet subject to options.
19
<PAGE>
FORWARD-LOOKING STATEMENTS
This registration statement contains forward-looking statements.
These statements relate to future events or our future business 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 actual results, levels of activity, performance or
achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by such
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. To the extent
required by federal law, we shall update these forward-looking statements
after the date of this registration statement to conform such statements to
actual results.
FINANCIAL INFORMATION
SELECTED HISTORICAL FINANCIAL DATA
In the table below, we provide you with selected historical
financial data. We have prepared this information using financial statements
for the period from January 30, 1998 (inception) to December 31, 1998 and the
twelve-month period ended December 31, 1999. The financial statements for the
period from January 30, 1998 (inception) to December 31, 1998, and for the
twelve-month period ended December 31, 1999, have been audited by Ernst &
Young LLP, independent auditors. When you read this selected historical
financial data, it is important that you read along with it the historical
financial statements and related notes as well as the section titled
"Management's Discussion and Analysis of Financial Condition and Operating
Results" included elsewhere in this registration statement. Historical
results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Period From
January 30, 1998 Twelve Months
(Inception) To Ended
December 31, 1998 December 31, 1999
----------------- -----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Research and development.......................................... $ 661,735 $ 1,347,631
Sales and marketing............................................... 291,698 359,039
General and administrative........................................ 1,717,936 2,293,082
Total operating expenses............................................. $(2,671,369) $ (3,999,752)
Interest income, net................................................. 7,123 19,392
Recognized loss of investment in
Jyra Research, Inc................................................ - (33,720)
Net loss............................................................. $(2,664,246) $ (4,014,080)
Net loss per share (1):
Basic and diluted................................................. $ (0.57) $ (0.71)
Weighted average shares--basic and diluted........................ 4,712,194 5,678,757
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 119,394 $ 453,951
Working capital...................................................... 74,177 257,387
Total assets......................................................... 311,594 712,473
Total stockholders' equity........................................... 256,252 429,977
</TABLE>
- ----------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the net loss per share and the number of shares used in the
per share calculation.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
financial statements and the accompanying notes.
Our only material financial transactions have been capital raising,
paying costs of forming our company and commencing limited operations,
including research and development. We are a corporation with a limited
operating history; we were incorporated on January 30, 1998. We are a
development-stage company with no revenues to date. We have insufficient
operating history on which to base an evaluation of our business and
prospects. Any such evaluation must be made in light of the risks frequently
encountered by companies in their early stages of development, particularly
for companies in the rapidly evolving sector related to the Internet. Among
the risks we face are the absence of an established customer base, lack of a
significant presence in the marketplace, untested operating capacity and the
need for additional capital. There is no assurance that we will be successful
in addressing these risks.
We believe that our success depends, in large part, on our ability to
create market awareness and acceptance for our products, raise additional
operating capital to grow operations, build technology and non-technology
infrastructures and continue product research and development.
RESULTS OF OPERATIONS (FROM INCEPTION THROUGH DECEMBER 31, 1998 COMPARED WITH
THE TWELVE MONTHS ENDED DECEMBER 31, 1999)
SALES. We had no revenue from product sales in either 1998 or 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development
expenses were $661,735 for the period from inception through December 31,
1998, compared to $1,347,631 for the twelve months ended December 31, 1999,
as the receipt of additional invested funds over this twelve month period (as
opposed to the nine month period in 1998) enabled us to ramp up our research
and development effort. We incurred approximately $310,000 in costs related
to consulting fees, the large majority of which was paid to Dr. Design for
its engineering services. We incurred $73,351 in compensation expense in 1998
and $311,247 in compensation expense in 1999 related to options given to
consultants for research and development services rendered to us.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses were
$291,698 for the period from inception through December 31, 1998; of this
amount, $196,000 is compensation expense related to shares given to a
certain employee. Our sales and marketing expenses were $359,039 for the
twelve months ended December 31, 1999, as we continued our ongoing efforts to
increase market awareness and acceptance of our technology and our intended
products. The increase in sales and marketing expenses from 1998 to 1999 is
due primarily to the increased costs of conducting sales and marketing
efforts for a full twelve months (as opposed to approximately nine months
during 1998).
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses were $1,717,936 for the period from inception through December 31,
1998, of which $1,419,407 was amortization of compensation expense related to
options granted to employees at less than fair market value, compared to
$2,293,082 for the twelve months ended December 31, 1999, of which $1,299,938
was amortization of compensation expense related to options granted to
employees at less than fair market value. The increase in general and
administrative expenses from 1998 to 1999 is primarily due to (i) higher
personnel costs, as we filled two executive officer positions with new hires,
and increased salaries for our existing executive officers and employees,
(ii) $487,831 in legal costs ($251,667 of which were legal costs associated
with the ongoing litigation), (iii) increased rent payment for our premises,
(iv) the increase in compensation expenses related to employee option grants
at below fair market value and (v) the costs of doing business for a full
twelve months (as opposed to approximately nine months during 1998). After
this registration statement becomes effective, we will have ongoing
additional legal and accounting expenses as a result of being a reporting
"public company".
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our cash requirements through
issuances of our Class A Common Stock to accredited investors in Europe and
the United States. In the period from March to May 1998, we conducted a
private offering to accredited individual and institutional investors in the
United States and Europe in which we sold 1,614,833 shares of Class A Common
Stock at a price of $0.60 per share, resulting in net cash proceeds of
$967,840. In the period from February to April 1999, we conducted a private
offering to accredited individual and institutional investors in Europe in
which we sold 419,500 shares of our Class A Common Stock at a price of $4.00
per share, resulting in net cash proceeds
21
<PAGE>
of $1,595,508. In May 1999, we authorized a private offering to accredited
individual and institutional investors of up to 1,250,000 shares of our Class
A Common Stock at a price of $8.00 per share. As of April 21, 2000, we had
sold 501,800 shares of our Class A Common Stock in this $8 offering,
resulting in aggregate cash proceeds (not including offering-related expenses
incurred to date) of $4,014,400. Proceeds totalling $3,000,000 have been
received after December 31, 1999. In April 1999, Leitch Technology
Corporation ("Leitch") purchased 1,250,000 shares of our Class A Common Stock
at a price of $8 US per share, resulting in aggregate proceeds of
$10,000,000. In addition, we received 200,000 shares of Leitch common stock,
no par value. On April 26, 2000, the last reported bid price for Leitch common
shares on the Toronto Stock Exchange was $23.05 CDN per share.
The litigation against Michael Berns, James Berns, Rona Berns,
Franklin Felber and Berns & Berns cost us $251,667 through December 31, 1999.
It is possible we will incur substantially more expenses in the future
related to our claims against Felber and to our defense against Felber's
cross-complaint. Due to the inherently unpredictable nature of the litigation
process, it is difficult to estimate with any confidence the amount of such
future expenses.
As of December 31, 1999 we had $453,951 in cash available to fund
operations. We operate in a very competitive industry in which large amounts
of capital are required in order to develop and promote products. We believe
our cash resources at December 31, 1999 plus the net proceeds of $3.0 million
from our sales of Class A Common Stock from January 1, 2000 through April 21,
2000 and the net proceeds of $10,000,000 from our sale of 1,250,000 shares of
Class A Common Stock to Leitch (as well as the receipt of 200,000 shares of
Leitch common stock worth approximately $4,600,000 CDN) will be sufficient to
fund capital expenditures, working capital and cash requirements for the next
eighteen months. We anticipate that we will require additional funds to
continue our research and development activities, expand our marketing and
sales capabilities, fund our capital expenditures necessary to accomodate our
anticipated customer base and expand certain financial and administrative
functions. If we are unable to obtain additional financing, we may be
required to delay, reduce the scope of or eliminate research and development
of one or more of our intended products and significantly reduce expenditures
on infrastructure.
Our actual revenues and expenses could vary materially from
the amounts we anticipate or budget, and such variations may affect the
additional financing needed for our operations. Accordingly, there can be no
assurance that we will be able to obtain the capital that we will require.
To the extent that we acquire the amounts necessary to fund our
operations through the issuance of equity securities, our then-current
stockholders may experience dilution in the value per share of their equity
securities.
We have no material commitments for capital expenditures.
YEAR 2000 COMPLIANCE
In 1998 and 1999, the Company established plans to become Year 2000 ready. In
late 1999, the Company completed its remediation and testing of systems. As a
result of those planning and implementation efforts, the Company experienced
no significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company incurred minimal expenses
during 1999 in connection with remediating its systems. The Company is not
aware of any material problems resulting from Year 2000 issues, either with
its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000
to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
22
<PAGE>
PROPERTIES.
We do not own any real property. We currently lease 4,142 square
feet of office space at 3636 Nobel Drive, San Diego, California under a
three-year lease that expires on May 31, 2002. Base rent for the period June
1, 1999 through May 31, 2000 is $8,491 per month. Thereafter the rent shall
be adjusted annually to reflect a fixed four percent (4%) increase over the
prior year's rent, resulting in monthly base rent payments of $8,831 per
month for the period June 1, 2000 through May 31, 2001, and $9,184 per month
for the period June 1, 2001 through May 31, 2002. We believe that our present
facilities are adequate to meet our current business requirements and that
suitable facilities for expansion will be available when required.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information known to us with respect to
beneficial ownership of our Class A Common Stock as of April 21, 2000 by:
- each person, or group of affiliated persons, known by us to
own beneficially more than 5% of our outstanding Class A
Common Stock;
- each director;
- our Chief Executive Officer;
- each person who served as our Chief Executive Officer in 1999;
- each executive officer whose 1999 compensation from us was
over $100,000; and
- our directors and our executive officers as a group.
The following table gives effect to the shares of Class A Common Stock
issuable within 60 days of April 21, 2000 upon the exercise of all options
and other rights beneficially owned by the indicated stockholders on that
date. Except as indicated in the footnotes to the following table, the
persons named in the table have sole voting and investment power with respect
to all shares of our Class A Common Stock shown as beneficially owned by
them, subject to community property laws, where applicable. Percentage of
ownership in the following table is calculated under the SEC's Rule
13d-3(d)(1).
<TABLE>
<CAPTION>
Class A Common Stock Beneficially Owned
Name / Address of ----------------------------------------------------------
Beneficial Owners # of Shares of Class A Common Stock % of Class
- ----------------- ----------------------------------- -----------------
<S> <C> <C>
Leitch Technology Corporation 2,905,000 37.7%
25 Dyas Road
North York, Ontario
Canada M3B 1V7
John MacDonald 2,905,000(1) 37.7%
25 Dyas Road
North York, Ontario
Canada M3B 1V7
Reginald Tiessen 2,905,000(1) 37.7%
25 Dyas Road
North York, Ontario
Canada M3B 1V7
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Michael Berns
231 Barnard Road
Larchmont, New York 10538 ---(2) ---
Michael Elliott ---(3) ---
3636 Nobel Drive, Suite 275
San Diego, CA 92130
Ronald Fellman
12989 Chaparral Ridge Road
San Diego, CA 92130 1,148,720 14.9%
Douglas Palmer
1229 Trieste Drive
San Diego, CA 92107 502,000(4) 6.6%
Paul Robinson
22 Pond Place
London SW3 6QJ
England 372,018(5) 4.8%
Roderick Adams
211a Stephendale Road
London SW6 2PR
England 372,018(5) 4.8%
John Hooker 84,000(6) 1.1%
4548 Mercurio Street
San Diego, CA 92130
All directors and executive officers
as a group (7 persons) 5,134,738(7) 62.3%
</TABLE>
(1) Includes 2,905,000 shares of Class A Common Stock beneficially owned by
Leitch Technology Corporation, of which the indicated person is an
officer. The indicated person disclaims beneficial ownership in these
shares except to the extent of his pecuniary ownership in such shares.
(2) Michael Berns served as our Chief Executive Officer until January 1999
and as Chairman of our Board of Directors until May 1999. He was the
beneficial owner, through his wife Rona Berns, of 1,148,720 shares of
Class A Common Stock; these shares were sold in April 2000 to Leitch
Technology Corporation.
(3) Dr. Elliott has been granted options under our 1999 Stock Option/Stock
Issuance Plan (the "Plan") to purchase 400,000 shares of Class B Common
Stock, 65,000 shares of which are fully vested. At present, there are
no shares of Class B Common Stock outstanding, although options to
purchase 1,042,996 shares of Class B Common Stock have thus far been
granted under the Plan to various employees, consultants and advisors
(including Dr. Elliott). Dr. Elliott's beneficial ownership of Class B
Common Stock has been omitted from the table because inclusion of these
shares and the method of SEC Rule 13d-3(d)(1) would incorrectly imply
that Dr. Elliott beneficially owns 100% of the Class B Common Stock.
(4) Includes options to purchase 306,000 shares of Class A Common Stock.
(5) Includes options to purchase 95,000 shares of Class A Common Stock;
also includes 277,018 shares of Class A Common Stock beneficially owned
by Jyra Research, Inc., of which the indicated person is an officer.
The indicated person disclaims beneficial ownership in these shares
except to the extent of his pecuniary ownership in such shares. We
believe Mr. Robinson, Mr. Adams, and Jyra Research, Inc. may be deemed
to constitute a "group."
(6) Includes options to purchase 28,000 shares of Class A Common Stock.
(7) Includes options to purchase 524,000 shares of Class A Common Stock;
also includes 277,018 shares of Class A Common Stock owned by Jyra
Research, Inc., as to which beneficial ownership is disclaimed except
to the extent of Mr. Robinson's and Mr. Adams' pecuniary ownership in
such shares.
24
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS.
Our directors, executive officers and key employees, and their ages
and positions, are:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Ronald D. Fellman 44 Chairman of the Board and
Chief Technology Officer
Michael T. Elliott 56 President, Chief Executive
Officer and Director
Douglas A. Palmer 49 Executive Vice President,
Treasurer, Chief Operating Officer
and Director
Paul Robinson 36 Director
Roderick Adams 36 Director
John A. MacDonald 46 Director
Reginald J. Tiessen 43 Director
KEY EMPLOYEES:
Yendo Hu 36 Vice President of Video Products
John Hooker 44 Director of Customer Support
John Beer 35 Director of Software Development
Grady Taylor 41 Director of Embedded Systems
</TABLE>
Messrs. Hooker, Beer and Taylor are not members of our Board of
Directors.
Dr. Ronald D. Fellman serves as our Chairman of the Board of
Directors, a position he assumed in May 1999, and as Chief Technology
Officer, a position he assumed in April 2000. Dr. Fellman had previously
served as our President from March 1998 until April 2000 and as Chief
Executive Officer from January 1999 until April 2000. From July 1996 to
December 1997, Dr. Fellman worked as an independent consultant and also
co-founded and served as Chief Technology Officer for Newsletter
Technologies, Inc., a pioneer in commerce over the Internet. From 1988 to
1996, Dr. Fellman served as a professor of Electrical and Computer
Engineering at the University of California at San Diego. He has extensive
expertise in high-speed, real-time computer networks, multiprocessing, mixed
analog/digital integrated circuits and systems, and signal processing, and
has published over 35 papers in these areas. His industrial experience
includes senior engineering positions at Hewlett-Packard Corporate Labs and
Tektronics Labs. Dr. Fellman received his B.S. (Summa Cum Laude), M.S., and
Ph.D. degrees from the University of California at Berkeley.
Dr. Michael Elliott, our President and Chief Executive Officer,
joined Path 1 in April 2000. Prior to joining us, Dr. Elliott served as Vice
President and General Manager of Advanced Engineering for Compaq Computer
Corporation from October 1997 to November 1999. While at Compaq, Dr. Elliott
had responsibility for all new display products for both the consumer and
commercial markets. Prior to his tenure at Compaq, Dr. Elliott served as
Sector Vice President and President of SAI Technology for Science
Applications International Corporation (SAIC) from February 1995 to October
1997, where he was responsible for the successful growth of SAIC's mobile
computing and display system. Dr. Elliott has received over 10 patents in the
field of physics and has authored over 30 technical articles that were
published in leading physics journals. Dr. Elliott received his B.S. from the
University of California at Berkeley and his Ph.D. in Solid State Physics
from the University of Notre Dame.
Dr. Douglas Palmer has served as Treasurer, Executive Vice President
and as a director of Path 1 since March 1998 and as Chief Operating Officer
since April 2000. Dr. Palmer had previously served as our Chief Technology
Officer from May 1999 until April 2000. Prior to co-founding Path 1, Dr.
Palmer served as the Director of Networking for TrexCommunications Corp. from
December 1996 to January 1998, and as a Senior Scientist for ThermoElectron
Corp. from 1988 to December 1996. Dr. Palmer brings extensive expertise in
digital signal processing, image processing, digital communications, and
real-time computer software. He has held senior research positions at M/A-Com
Linkabit, Western Research Corporation and ThermoTrex Corp. In the business
area, he has assisted in the startup and funding of HNC Software and Trex
Communications Corp. and worked in the area of corporate acquisitions for
ThermoElectron Corp. identifying takeover candidates and performing technical
due diligence. He has received over 12 patents in signal processing and
telecommunications. He is a former professor at the University of California
at San Diego. Dr. Palmer received his B.A. in Physics from the University of
California at San Diego (Magna Cum Laude), and his M.Phil. and Ph.D. degrees
from Yale University.
Dr. Yendo Hu, Vice President of Video Products, joined Path 1 in
September 1999. Prior to joining us, Dr. Hu served as Director of Systems
Engineering for Tiernan Communications, Inc. from June 1996 to September
1999. Dr. Hu also served as a member of the technical staff at AT&T Bell
Laboratories from 1987 until 1990. Dr. Hu left AT&T Bell Laboratories in 1990
to attend the University of California at San Diego, where he completed his
Ph.D. in Electrical Engineering in June 1996. Dr. Hu brings extensive
experience in video technology and the professional broadcast market. At
Tiernan Communications, he developed MPEG2 video and multiplexing compression
technology, which lead to the first commercially available MPEG2 4:2:2 level
solution. He was also
25
<PAGE>
instrumental in establishing Tiernan Communications as the sole HDTV
corporate distribution compression provider for both the ABC and NBC
television networks. Dr. Hu received his B.S. and M.S. in Electrical
Engineering from Cornell University. Dr. Hu holds three patents in the area
of MPEG2 implementation.
Paul Robinson has served as a director of Path 1 since his
appointment to the board in March 1998. Mr. Robinson has also served as
Chairman of the Board of Directors, President, and Chief Executive Officer of
Jyra Research Inc., since June 3, 1996. Jyra Research Inc. is in the business
of developing network monitoring software. From August 1995 to October 1,
1996, Mr. Robinson was an Account Manager for Cisco Systems, handling
customers in the United Kingdom financial sector. From 1992 to August 1995,
Mr. Robinson was employed by Biss Ltd. as a new business sales executive.
Roderick Adams has served as a director of Path 1 since his
appointment to the board in March 1998. Mr. Adams has served as a director
and Vice President of Corporate Affairs of Jyra Research Inc. since its
inception in May 1996. Since 1991 Mr. Adams has acted as a consultant to
companies seeking financing. Mr. Adams provides services and advice to these
companies on corporate finance and investor and media relations.
John A. MacDonald was elected to our Board of Directors in April
2000. Mr. MacDonald has served as the President and Chief Executive Officer
of Leitch Technology Corporation since 1999. Prior to joining Leitch, Mr.
MacDonald worked at Bell Canada where he served as Chief Technology Officer
from 1994 to 1997, Chief Operating Officer from 1997 to 1998 and President
and Chief Operating Officer from 1998 to 1999. Mr. MacDonald presently serves
as Chairman of the Science and Technology Advisory Committee to the
government of Canada. Mr. MacDonald serves on the board of directors of
Rogers Communications Inc. and SaskTel. Mr. MacDonald received his B. Eng
from Technical University of Nova Scotia and his B.S. from Dalhousie
University.
Reginald J. Tiessen was elected to our Board of Directors in April
2000. Mr. Tiessen has served as Leitch's Vice President of Finance and Chief
Financial Officer since January 1998. Prior to joining Leitch, Mr. Tiessen
spent the past five years in senior financial roles at public and private
companies within the high-tech industry. Mr. Tiessen is a member of the
Institute of Chartered Accountants of Ontario. Mr. Tiessen graduated from the
University of Waterloo with a B.S. in Mathematics.
John Hooker has served as the Director of Customer Support since July
1998. Prior to joining Path 1, Mr. Hooker served as the Marketing Support
Engineer, Senior Consultant and Project Manager for the Professional Services
Group of TriTeal Corporation from May 1995 to June 1998. From January 1995 to
May 1995, Mr. Hooker was employed as an outside consultant for TriTeal. Mr.
Hooker brings nearly 20 years of technical and sales experience in the field of
computer integration and software. He has received sales support awards and
honors such as the "Top Performer" and "Circle of Excellence" (twice) from
Digital Equipment Corporation. He has experience in software engineering,
hardware/software integration, and solution design. He received his B.A. in
Physics at the University of California at San Diego.
John Beer has served as the Director of Software Development since
July 1998. Prior to joining Path 1, Mr. Beer served as the Principal Research
Engineer for TriTeal Corporation from December 1995 to May 1998. While at
TriTeal, he researched, designed, and prototyped thin-client, a
network-centric desktop user interface using Java, XML, and HTML languages,
and httpd servers. From 1991 to December 1995, Mr. Beer performed consulting
work for IBM as a contract consultant through his official employer, Ralph
Kirkley Associates. He worked on many projects for IBM Corporation including
AIX Windows Visual System Management. Mr. Beer brings software expertise in
network and graphical user interface products using many languages and
operating systems. Mr. Beer has received four patents for his developments.
He received his B.S. in Computer Science from The University of Texas at
Austin.
Grady Taylor has served as the Director of Embedded Systems since
September 1998. Prior to joining Path 1, Mr. Taylor served as Program Manager
and Senior Software Engineer at ThermoTrex Corporation from April 1986 to
September 1998. While at ThermoTrex, he worked on adaptive optics systems,
microwave imaging systems
26
<PAGE>
and laser interferometry. He has expertise in embedded microprocessors and
operating systems utilized in the demanding environments. Mr. Taylor received
his B.S. in Mathematics with an emphasis in Computer Science from San Diego
State University.
BOARD OF DIRECTORS
The Board of Directors may consist of at least one and not more than
seven directors. Our Board of Directors is currently comprised of seven (7)
members. Directors are elected to serve until the next annual meeting of
stockholders.
BOARD COMMITTEES
In November, 1998, the Board of Directors authorized the formation
of an Executive Committee which currently consists of Ronald Fellman and
Douglas Palmer. The third seat on the Executive Committee, previously held by
James Berns, is presently vacant. The Executive Committee oversees the
routine matters of Path 1, including the hiring and firing of employees and
the retention of consultants (to the extent these matters are not delegated
to our senior executive officers). The Executive Committee is also
responsible for the creation and administration of all stock option plans and
grants thereunder for the Company. The Executive Committee does not have the
power to bind us on other matters not in the ordinary course of business.
EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation earned by, or
which we paid to, the following persons (the "Named Executive Officers") with
respect to 1998 and 1999 for all services rendered to us in all capacities:
- each person who served as our Chief Executive Officer in 1999;
and
- each of our other executive officers whose total salary and
bonus in 1999 exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- -------------------------------
SALARY BONUS SECURITIES UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#)
- ----------------------------- ------ -------- ------- -------------------------------
<S> <C> <C> <C> <C>
Ronald D. Fellman, 1999 175,833 -- --
Chief Executive Officer 1998 105,416 -- --
Michael Berns, 1999 60,000 -- --
Chief Executive Officer 1998 105,000 -- --
Douglas A. Palmer, 1999 137,083 -- --
Chief Technology Officer 1998 72,019 -- 362,000
John Hooker 1999 100,000 -- --
Director of Customer Support 1998 50,000 -- 168,000
</TABLE>
Based on Michael Berns' assertion to us that he was not a partner in
the Berns & Berns law firm, to which we paid $42,339 with respect to 1998 and
approximately $29,000 with respect to 1999 for legal services, we have not
included any of such amounts for him in this table.
The salaries of all of our officers are subject to the approval of
the Executive Committee of the Board of Directors. Due to our stage of
development, the Executive Committee attempted to pay our executive officers
at the market rate for persons with their credentials and expertise and did
not attempt to tie or relate their compensation to corporate performance.
OPTION GRANTS IN LAST YEAR
No options to acquire shares of our Class A and Class B Common Stock
were granted during the year ended December 31, 1999 to the Named Executive
Officers.
27
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the number and
value of unexercised options held by each of the Named Executive Officers at
December 31, 1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
ACQUIRED ON VALUE ---------------------------- -----------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald Fellman -- -- -- -- -- --
Michael Berns -- -- -- -- -- --
Douglas Palmer -- -- 278,000 84,000 $2,849,500 $861,000
John Hooker 28,000 56,000 $ 287,000 $574,000
</TABLE>
(1) The last reported bid price of our Class A Common Stock as of December 31,
1999 was $10.25 per share.
EXECUTIVE COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The two current members of the Executive Committee, Ronald Fellman
and Douglas Palmer, are presently executive officers of Path 1 and were
officers of Path 1 during the year ended December 31, 1999.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Dr. Michael Elliott
dated April 7, 2000. This agreement provides for a base salary of $200,000
per year, subject to annual review by the Board of Directors. In addition to
this salary, Dr. Elliott shall be entitled to receive 1% of the cash proceeds
from any equity financing (excluding the $10,000,000 Leitch investment)
obtained from investment bankers, strategic partners or similar
organizations. This agreement also calls for Dr. Elliott to receive options
to purchase 300,000 shares of Class B Common Stock at $4.35 per share, 50,000
of which vested upon commencement of his employment and the remainder of
which shall vest in equal quarterly installments over two years. Dr. Elliott
shall receive options to purchase an additional 100,000 shares of Class B
Common Stock if, at some point in the next two years, the market
capitalization of the Company exceeds $400,000,000 for a continuous 90-day
period or audited revenues exceed $50,000,000 for one year. Upon a change of
control of the Company, vesting shall be completed immediately.
We entered into an employment agreement with Dr. Yendo Hu dated
August 31, 1999. The agreement provides for a base salary of $112,000 per
annum and calls for Dr. Hu to receive options to purchase 225,000 shares of
Class B Common Stock at $2.00 per share, 25,000 shares of which vested upon
commencement of his employment with us and 200,000 shares of which will vest
over a four-year period in equal annual installments. In the event that Dr.
Hu's position with us is terminated as a direct result of a merger,
consolidation, buy-out, takeover, or other change in control of Path 1, he
will receive severance pay equal to three months' base salary.
We entered into an employment agreement with John Hooker dated June 10,
1998 and effective as of July 1, 1998. The agreement provides for a base salary
of $100,000 per annum and calls for Mr. Hooker to receive a grant of our Class A
Common Stock totaling 56,000 shares, par value $0.001 per share, plus options to
purchase an additional 112,000 shares of Class A Common Stock at an exercise
price of $0.60 per share. These options to purchase the 112,000 shares of Class
A Common Stock are scheduled to vest over a four-year period starting June 29,
1998 in equal annual installments.
We entered into an employment agreement with Grady Taylor dated
September 8, 1998. The agreement provides for a base salary of $77,500 per annum
and calls for Mr. Taylor to receive options to purchase 25,000 shares of our
Common Stock at an exercise price of $2.50 per share. These options are
scheduled to vest over a four-year period in equal annual installments. Mr.
Taylor's employment with us is governed in accordance with the rules and
regulations concerning at-will, exempt employees in the State of California.
DIRECTOR COMPENSATION
Each of our directors, and each member of any committee established
by the Board of Directors is reimbursed for all reasonable out-of-pocket
expenses incurred by such director or member in connection with the
attendance by such director or member at meetings of the Board of Directors
or at meetings of committees of the Board of Directors, in any case, held in
accordance with the Bylaws. In March 1998, in connection with their
appointments as directors on our Board, Paul Robinson and Roderick Adams each
received fully vested options to purchase 95,000 shares of our Class A Common
Stock.
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<PAGE>
1999 STOCK OPTION/STOCK ISSUANCE PLAN
Our 1999 Stock Option/Stock Issuance Plan (the "Plan"), our equity
incentive plan, was adopted by the Board of Directors as of August 3, 1999
and by our stockholders as of April 25, 2000. The Plan shall be administered
by the Board; however, the Board has delegated Plan administrative functions
to the Executive Committee. The Plan Administrator (either the Board or the
Executive Committee) shall have broad authority to administer the Plan as it
deems appropriate; decisions of the Plan Administrator shall be final and
binding.
1,500,000 shares of Class B Common Stock have been reserved for
issuance under the Plan. This share reserve includes 325,556 shares of
Class B Common Stock that were subject to outstanding options as of
December 31, 1999.
The Plan is divided into two separate equity programs:
(i) the discretionary option grant program, under which the
Plan Administrator may grant eligible persons options to purchase shares of
Class B Common Stock; and
(ii) the stock issuance program, under which the Plan
Administrator may issue shares of Class B Common Stock directly to eligible
persons, either through immediate purchase of such shares or as a bonus for
services rendered to us.
Persons eligible to participate in the Plan are as follows:
(i) Employees;
(ii) non-employee members of the Board of Directors; and
(iii) consultants and other independent advisors who provide
services to the us.
The Plan Administrator shall have full authority to determine, (i) with
respect to the grants made under the Option Grant Program, which eligible
persons are to receive the option grants, the time or times when those grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for which
the option is to remain outstanding, and (ii) with respect to stock issuances
made under the Stock Issuance Program, which eligible persons are to receive
such stock issuances, the time or times when those issuances are to be made, the
number of shares to be issued to each individual, the vesting schedule (if any)
applicable to the issued shares and the consideration to be paid by the
individual for such shares.
The exercise price for the options shall be payable in cash or check to
Path1. Should the Class B Common Stock be registered under Section 12 of the
1934 Act at the time the option is exercised, then the exercise price may also
be paid (i) in some circumstances in shares of Class B Common Stock valued at
fair market value on the date of exercise, or (ii) a same-day sale program
without any cash outlay by the option holder.
The Plan does not provide for automatic acceleration of unvested shares
in the event of (i) a merger or consolidation in which we are not the surviving
entity, or (ii) a sale, transfer or other disposition of all or substantially
all of our assets (each of which shall constitute a "Corporate Transaction"),
although the Plan Administrator has discretion to grant individual options which
so provide. In the event of a Corporate Transaction, all options shall be
assumed or equivalent options shall be substituted by the successor corporation
(or other entity) or a parent or subsidiary of such successor corporation (or
other entity). If such successor does not agree to assume the options or to
substitute equivalent options therefor, unless the Plan Administration shall
determine otherwise, such options will expire upon such event.
29
<PAGE>
The Plan shall terminate upon the earliest (i) the expiration of the
ten (10)-year period measured from the date the Plan is adopted by the Board,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction. All options and unvested
stock issuances outstanding at the time of a clause (i) termination event
shall continue to have full force and effect in accordance with the
provisions of the documents evidencing those options or issuances.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 15, 1998, our Board of Directors authorized the creation of
the Series A Convertible Preferred Stock ("Series A Preferred") which was issued
to Jyra Research, Inc. ("Jyra"), a publicly-held, United Kingdom-based company,
which is in the business of developing network monitoring software. The
agreement provided for Jyra to make a strategic investment in Path1 and for
Path1 to make a strategic investment in Jyra. Under this agreement, Path 1
exchanged ten shares of its Series A Preferred (convertible into 277,018 shares
of Class A Common Stock) for 16,000 restricted common shares of Jyra. There were
no other material terms to this agreement, although our Certificate of
Incorporation provided for the Series A Preferred to elect two directors to our
Board of Directors. These seats were occupied by Paul Robinson and Roderick
Adams. Mr. Robinson, also serves as a director and Chief Executive Officer of
Jyra, while Mr. Adams serves as a director and Vice President of Corporate
Affairs of Jyra. Mr. Robinson and Mr. Adams each have been given fully vested
options to purchase 95,000 shares of Path 1's Class A Common Stock at an
exercise price of $0.60 per share as consideration for their service as
directors on our Board.
In March 1998, in connection with services provided by Michael Berns as
promoter, legal counsel and as the de facto chief executive officer of Path 1,
we made available to him 1,245,600 shares of Class A Common Stock for an
aggregate consideration of $346. Mr. Berns arranged for these shares to be
purchased by his wife, Rona Berns. Some of these shares were transferred (on a
pro rata basis with the other founders) to Douglas Palmer and John Hooker upon
commencement of their employment with us, leaving Rona Berns with 1,148,720
shares of Path 1 Class A Common Stock. Also, in March 1998, Michael Berns'
brother, James Berns, was issued 554,400 shares of the Company's Class A Common
Stock for an aggregate purchase price of $154. Some of these shares were
transferred (on a pro rata basis with the other founders) to Douglas Palmer and
John Hooker, and 5,000 additional shares were transferred to a member of the
immediate family of James Berns, leaving him with 506,280 shares. Rona Berns
and James Berns subsequently sold all 1,655,000 shares of their Class A
Common Stock to Leitch Technology Corporation in April 2000.
The law firm of Berns & Berns acted as general counsel from early
1998 to April 1999. James Berns was a partner in this firm throughout this
time period. Berns & Berns charged us $42,339 in legal fees for 1998 and
approximately $29,000 in legal fees for 1999.
On April 14, 2000, we entered into an Agreement of Purchase and Sale
with Leitch Technology Corporation. Pursuant to this Agreement of Purchase
and Sale (the "Agreement"), Leitch purchased 1,250,000 shares of our Class A
Common Stock for $10,000,000 US and 200,000 common shares of Leitch. The
trading price of Leitch's common shares on the Toronto Stock Exchange as of
April 26, 2000 was $23.05 CDN per share. Leitch represented to us that its
shares are freely tradeable through an appropriately registered dealer in
Canada; however, in the event that Leitch's shares are not freely tradeable
(provided that it is through no fault or omission on our part), then Leitch
shall use its reasonable best efforts to qualify the shares for distribution
in Ontario, Canada. In connection with the Agreement, we entered into a
Stockholders Agreement dated April 10, 2000 with Leitch, Dr. Fellman, Dr.
Palmer and Dr. Elliott pursuant to which John MacDonald, the President and
Chief Executive Officer of Leitch, and Reginald Tiessen, the Chief Financial
Officer of Leitch, were nominated and elected to our Board of Directors.
Under the terms of this Stockholders Agreement, our executive officers who
are parties to the Stockholders Agreement covenant to vote their equity
securities in favor of a Board of Directors whose members shall include
designees of Leitch who constitute 2/7ths of the entire Board of Directors.
This Stockholders Agreement also provides Leitch (i) a right of first refusal
to purchase any stock (now or hereafter acquired) offered for sale in a
private transaction by Drs. Palmer. Fellman or Elliott (or any transferees
thereof), (ii) a right of subscription for new securities offered by the
Company, and (iii) the right to require (after the earlier of the first
anniversary of (A) the effective date of this Form 10, or (B) the date on
which a class of our securities shall be registered under the Securities
Exchange Act of 1934, as amended) registration of its shares of our Class A
Common Stock. The Stockholders' Agreement also requires Leitch to refrain
from the purchase of additional shares of our equity securities except with
the approval of our Board of Directors or as otherwise provided for in the
Agreement of Purchase and Sale.
LEGAL PROCEEDINGS.
On September 20, 1999, we filed a complaint in the San Diego County
(Calif.) Superior Court against several persons, including Franklin Felber,
former Treasurer and a former director. This complaint, and all counterclaims
arising out of it, have since been resolved as to all parties other than Dr.
Felber.
Our complaint against Dr. Feller is for breach of oral contract,
breach of fiduciary duty, breach of the covenant of good faith and fair
dealing, and unfair business practices, primarily in connection with the
allocation of founders' stock of Path 1. We are seeking damages.
A cross-complaint filed on November 29, 1999 by Franklin Felber in
connection with the above mentioned litigation also remains outstanding. This
cross-complaint, filed against us, Ronald Fellman, Douglas Palmer, Roderick
Adams and Jyra alleges fraud, breach of fiduciary duty, breach of the
covenant of good faith and fair dealing, and misrepresentation in connection
with the grant in January 1999 by Felber and the exercise in July 1999 by
assignees of Jyra of a private option to purchase from Felber, for $4.00 per
share, 255,640 shares of Path 1 Class A Common Stock. This private,
irrevocable option was granted by Felber to Jyra pursuant to an option
agreement
30
<PAGE>
executed in January 1999 in connection with a lock-up agreement signed by our
major stockholders. This option granted Jyra the right to purchase 30,000 shares
of Class A Common Stock from Felber at any point during February 1999, and upon
purchase of these 30,000 shares of Class A Common Stock, Jyra was automatically
granted the right to purchase the additional 225,640 shares of Class A Common
Stock subject to the option. The cross-complaint seeks an unspecified amount of
compensatory and punitive damages.
Pursuant to a November 9, 1999 filing with the Delaware Chancery
Court, Dr. Felber is seeking to enforce his asserted rights to
indemnification and advancement of defense expenses from us.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Class A Common Stock is quoted on the Pink Sheets under the
symbol "PNWK". We do not know whether this meets the definition of an
"established public trading market" for our Class A Common Stock. We are also
listed on the Third Segment of the Frankfurt Stock Exchange.
The following table sets forth the high and low bid prices for our
Class A Common Stock on the OTC Bulletin Board for the periods indicated. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
high low high low
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Quarter ended March 31 8.1250 3.5625 - -
Quarter ended June 30 16.625 6.8750 - -
Quarter ended September 30 12.500 8.1250 2.8750 2.2500
Quarter ended December 31 14.500 9.0000 6.0000 2.6250
</TABLE>
As of April 21, 2000, there were approximately 110 shareholders of
record of our 7,712,651 issued and outstanding shares of Class A Common
Stock, and there were no outstanding shares of Class B Common Stock. There
were also options outstanding as of April 21, 2000 to purchase 891,086 shares
of Class A Common Stock and 1,042,996 shares of Class B Common Stock. On
February 17, 2000, the last reported bid price of Path 1's Class A Common
Stock on the OTC Bulletin Board was $14.1875 per share.
We currently have outstanding 5,541,351 shares of Class A Common
Stock that were sold pursuant to Securities Act Rule 504 and, under the terms
of Rule 504 as then in effect, did not thereby become "restricted
securities". However, 1,655,000 of these shares were sold by affiliates of
Path 1 to Leitch Technology Corporation, and thus have once again become
"restricted securities" and cannot be resold by Leitch unless they are
registered or they qualify for exemption from registration under Rule 144 of
the Securities Act or otherwise. These 1,655,000 shares will not be eligible
for resale under Rule 144 until April 2001, one year after they were
purchased. 1,649,738 of the shares sold under Rule 504 as previously in
effect could be resold in the public market without restriction except that
these shares are held by persons who currently are affiliates of Path 1, so
such shares cannot be resold now without compliance with Rule 144's volume
limitation and current public information requirements. The remaining
2,236,613 shares of Class A Common Stock held by existing stockholders are
also "restricted securities" as that term is defined by Rule 144. None of
such restricted securities has yet been held for a full year, so none is yet
eligible for public resale under Rule 144; and because no exemption from
registration would be available for them other than Rule 144, they currently
cannot be sold unless they are registered. Of these shares, 419,500 will
become available for public resale under Rule 144 three months after the
effective date of this Form 10, and the remainder will become eligible at
various points beginning June 2000 one year after they were purchased.
We have not paid any cash dividends on our Class A Common Stock and do
not presently intend to do so. Future dividend policy will be determined by our
Board of Directors on the basis of earnings, capital requirements, financial
condition and other factors deemed relevant.
31
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES.
The following discussion describes all securities sold by us within the
past three years without registration.
From inception through March 1998, we issued 3,600,000 shares of Class
A Common Stock to founders for nominal consideration pursuant to Rule 504 under
the Securities Act.
In March 1998, the Board of Directors authorized a private placement
under which we sold 1,614,833 shares of Class A Common Stock at $0.60 per share
to accredited institutional and individual investors in the United States and
Europe. The offering was closed in May 1998. In connection with the offering, we
issued 49,500 shares of Class A Common Stock to LTR Consultancy as payment for
finders fees and incurred other offering-related expenses of $18,726. These
shares of Class A Common Stock were sold pursuant to Rule 504, promulgated under
the Securities Act. We relied on the fact that under $1,000,000 was raised in
the offering to make this exemption available.
In February 1999, the Board of Directors authorized a private placement
under which we sold 419,500 shares of Class A Common Stock at $4 per share to
accredited institutional and individual investors in Europe. This offering was
closed in April 1999. In connection with this offering, we paid commissions to
LTR Consultancy consisting of (i) cash payments equal to 5% of the subscription
funds received and (ii) options to purchase 20,975 shares of our Class A Common
Stock. The Class A Common Stock was sold pursuant to Rule 505, promulgated under
the Securities Act. We relied on the fact that under $5,000,000 was raised in
the offering and the number and nature of the purchasers, together with
compliance with the other requirements of the Rule, to make the exemption
available.
In May 1999, the Board of Directors authorized a private placement
of up to 1,250,000 shares of our Class A Common Stock at a price of $8 per
share to accredited European investors. This offering was expanded on July
23, 1999 to include accredited investors located in the United States. The
offering is authorized to continue for up to twenty-four months from its
inception. As of December 31, 1999, we have sold 126,800 shares of Class A
Common Stock to accredited institutional and individual investors, primarily
in Europe. Since December 31, 1999, we have sold an additional 375,000 shares
of Class A Common Stock under this offering, and sales continue. In connection
with this offering, we agreed to pay LTR Consultancy a cash commission equal
to five (5%) of the subscription funds received from the sale of the Class A
Common Stock to investors located by that firm, plus options to purchase 625
shares of Class A Common Stock (at an exercise price of $8 per share) for
each $100,000 of such subscription funds received. The Class A Common Stock
is being sold pursuant to Rule 506, promulgated under the Securities Act. We
relied upon the number and nature of the purchasers, together with compliance
with the other requirements of the Rule, to make the exemption available.
In April 2000, we sold 1,250,000 shares of our Class A Common Stock
in a private placement to Leitch Technology Corporation for $8 US per share,
resulting in net aggregate proceeds of $10,000,000. We also received 200,000
shares of Leitch common stock worth approximately $4,600,000 CDN (based on a
closing trading price on April 26, 2000 of $23.05 CDN per share). This sale
was independently authorized by our Board of Directors and was not conducted
pursuant to the May 1999 private offering of 1,250,000 shares of Class A
Common Stock. The Class A Common Stock was sold pursuant to Rule 506,
promulgated under the Securities Act.
DESCRIPTION OF SECURITIES.
GENERAL
We are authorized to issue 30,000,000 shares of common stock, $0.001
par value per share, divided into two series designated "Class A Common Stock"
(20,000,000 shares) and "Class B Common Stock" (10,000,000 shares), and ten (10)
shares of preferred stock, designated "Series A Preferred Stock", $0.001 par
value per share. The following describes the Company's capital stock but does
not purport to be complete and is subject to and qualified in its entirety by
our certificate of incorporation and our bylaws, and by the provisions of
applicable Delaware law.
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Our initial Certificate of Incorporation, filed January 30, 1998,
authorized 1,000 shares of an undivided class of common stock, par value $0.001,
all of which were issued to our founders. In March 1998, we amended the
Certificate of Incorporation to authorize 20,000,000 shares of an undivided
class of common stock, par value $0.001 per share. Simultaneously, we authorized
a 3,600-to-1 forward split of all of the outstanding shares of common stock as
of that date, thus increasing the number of shares of our outstanding common
stock from 1,000 shares to 3,600,000 shares of common stock.
32
<PAGE>
In April 1999, we amended the Certificate of Incorporation further to
authorize thirty million (30,000,000) shares of common stock, divided into two
series: Class A Common Stock and Class B Common Stock. The Class A Common Stock
maintained the same rights, preferences and privileges as the original common
stock; the amended Certificate of Incorporation simply renamed that original
security. The Class B Common Stock, a junior common stock, was designed to be
used principally in connection with recruitment of new employees and as a method
of providing incentives to existing employees. In April 2000, we further
amended the Certificate of Incorporation to clarify the respective rights of
the Class A and Class B stockholders.
SERIES A PREFERRED STOCK
In April 2000, we eliminated the Series A Preferred Stock
authorization pursuant to an amendment to our Certificate of Incorporation.
CLASS A COMMON STOCK
The holders of Class A Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, any dividend payable out of funds
legally available for that purpose. Upon liquidation, dissolution or winding up
of the Company, the holders of Class A Common Stock shall be entitled to
receive, prior and in preference to any distribution to holders of Class B
Common Stock, an amount per share equal to $100 per share and any undeclared
but unpaid dividends on the shares. If the assets and funds thus distributed
are insufficient to permit full payment of this preference to the holders of
Class A Common Stock, then our assets and funds will be distributed ratably
among the holders of the Class A Common Stock according to their
proportionate ownership of such shares.
The holders of Class A Common Stock will be entitled to one vote
for each share held of record on all matters to be voted on by the
stockholders, and shall be entitled to notice of any stockholders' meeting in
accordance with the Bylaws of the Company. Except when applicable law
requires a greater vote, matters brought before the stockholders at annual or
special meetings must be approved by a majority of the issued and outstanding
shares of Class A Common Stock present in person or by proxy and entitled to
vote at such meeting (provided a quorum is present). The consent of the
stockholders of the Company may be obtained in lieu of a meeting, provided
that the holders of a majority of all of the issued and outstanding shares of
Class A Common Stock entitled to vote on such matters consent in writing to
such corporate action being taken. Special meetings may be called by
one-fifth of the shares of Class A Common Stock of the Company issued and
outstanding (assuming the issuance of all Class A Common Stock issuable
pursuant to then outstanding warrants, options, convertible or exchangeable
securities and other rights to acquire Class A Common Stock from us, provided
such warrants option, convertible or exchangeable securities are at the time
convertible or exchangeable). The Class A Common Stock is not redeemable. All
outstanding shares of Class A Common Stock are fully paid and non-assessable.
CLASS B COMMON STOCK
The Class B Common Stock has no voting rights (except as expressly
required by law). The Class B Common Stock is not transferable except to the
extent that a proposed transfer is expressly consented to by vote of the
holders of the Class A Common Stock. This restriction on transfer is intended
to comply with Delaware General Corporation Law Section 202. The Corporation
shall be entitled to note conspicuously, on each stock certificate
representing shares of Class B Common Stock, this restriction on transfer.
The Class B Common Stock is not redeemable and is not entitled to receive
dividends unless and until an aggregate of $100,000,000 of dividends has been
declared and paid on the Class A Common Stock. Upon liquidation, dissolution
or winding up of Path 1, the holders of Class B Common Stock shall be
entitled, after the holders of Class A Common Stock have received their full
aforesaid preferential amounts, to share pro rata with the Class A Common
Stock in the distribution of the remaining assets.
In addition, the Class B Common Stock is not automatically
convertible and will be automatically converted into Class A Common Stock on
a 1-for-1 basis upon the occurrence of any of the following events:
(a) The Corporation (or 50% or more of its stock or assets) is
acquired by a person or an affiliated group by merger, reverse
triangular merger, private stock sale, direct stock issuance,
consolidation or otherwise;
(b) The Corporation sells, leases, or exclusively licenses all
or substantially all of its assets (excluding sales of inventory
in the ordinary course of business);
(c) The Corporation reports for any fiscal year revenues from
operations equal to $10,000,000 or more and reports for such
fiscal year EBITDA (earnings before interest, taxes depreciation,
amortization and extraordinary items) of $2,000,000 or more, as
determined in accordance with United States generally accepted
accounting principles; or
(d) The Corporation consummates the sale of its Class A Common
Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act of 1933, as
amended, the public offering price of which is not less than
$25,000,000 in the aggregate.
33
<PAGE>
POSSIBLE ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS AND STATUTES
BYLAWS
Our Bylaws state that special meetings of the stockholders may be
called by the President, the Board of Directors, or one-fifth of the shares
of Class A Common Stock issued and outstanding and entitled to vote at such
meeting. In addition, notwithstanding the fact that no vote of the Board of
Directors may be required, we are required submit to the Board of Directors
for its review and prior approval (a) the proposed sale of all or
substantially all of our assets or any of our subsidiaries, (b) the transfer
or licensing of our technology other than in the ordinary course of business,
or (c) the making, alteration, amendment or repeal of the Certificate of
Incorporation or the Bylaws, or any part thereof. These limitations may defer
the calling of a meeting at which a change of control might be effected and
may serve to deter potential acquirors.
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation
Law which, subject to various exceptions, prohibits a Delaware corporation
from engaging in any business combination with any interested
stockholder--defined as any person or entity that is the beneficial owner of
at least 15% of a corporation's voting stock--for a period of three years
following the time that such stockholder became an interested stockholder,
unless:
- prior to such time, the board of directors of the corporation
approved either the business combination or the transaction
that resulted in the stockholder becoming an interested
stockholder;
- upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding, for purposes of determining the number of shares
outstanding, those shares owned by persons who are directors
and also officers and by employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
- at or subsequent to such time, the business combination is
approved by the board 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 defines business combination to include:
- any merger or consolidation involving the corporation and the
interested stockholder;
- any sale, lease, exchange, mortgage, transfer, pledge or other
disposition involving the interested stockholder and 10% or
more of the assets of the corporation;
- subject to exceptions, any transaction which 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.
TRANSFER AGENT AND REGISTRAR
Our registrar and transfer agent for the Class A Common Stock is
Registrar and Transfer Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation and Bylaws contain provisions
authorizing indemnification of and advancement of expenses to officers and
directors. The indemnities provided by our charter documents (i) shall continue
as to a person who has ceased to be a director or officer, (ii) shall inure to
the benefit of his heirs, executors and administrators, and (iii) shall not be
deemed to limit or exclude any rights, indemnities or limitations of liability
34
<PAGE>
to which any person may be entitled, whether as a matter of law, under the
Bylaws, by agreement, vote of the stockholders or disinterested directors or
otherwise.
Section 145 of the Delaware General Corporation Law permits
indemnification of our officers and directors under certain conditions and
subject to certain limitations. Section 145 of the Delaware General
Corporation Law also provides that a corporation has the power to purchase
and maintain insurance on behalf of its officers and directors against any
liability asserted against such person and incurred by him or her in such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such
liability under the provisions of Section 145 of the Delaware General
Corporation Law. We purchased and presently maintain insurance on behalf of
our officers and directors.
We are currently engaged in litigation in which certain former and
present directors and officers seek indemnification under the Delaware
General Corporation Law and our charter documents for claims brought against
them by us.
FINANCIAL DATA AND SUPPLEMENTARY DATA.
See attached financial statements beginning on page F-1.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
35
<PAGE>
FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS FILED AS PART OF THE REGISTRATION STATEMENT.
Path 1 Network Technologies Inc.
(a development stage company)
Index to Financial Statements
Period from January 30, 1998 (inception) to December 31, 1998 and
December 31, 1999 and the twelve months ended December 31, 1999
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................F-2
Financial Statements
Balance Sheets as of December 31, 1998 and December 31, 1999 ........................................F-3
Statements of Operations for the period from January 30, 1998 (inception) to
December 31, 1998 and December 31, 1999 and the twelve months ended December 31, 1999 ...............F-4
Statements of Stockholders' Equity for the period from January 30, 1998
(inception) to December 31, 1998 and the twelve months ended
December 31, 1999 ...................................................................................F-5
Statements of Cash Flows for the period from January 30, 1998 (inception) to
December 31, 1998 and December 31, 1999 and the twelve months ended December 31, 1999................F-7
Notes to Financial Statements........................................................................F-8
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Path 1 Network Technologies Inc.
We have audited the accompanying balance sheets of Path 1 Network
Technologies Inc. (a development stage company) as of December 31, 1999 and
1998, and the related statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1999 and for the period from
January 30, 1998 (inception) through December 31, 1998 and December 31, 1999.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Path 1 Network Technologies
Inc. (a development stage company) at December 31, 1999 and 1998, and the
results of its operations and its cash flows for the year ended December 31,
1999 and for the period from January 30, 1998 (inception) through December
31, 1998 and December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
February 10, 2000
except for Note 6, as to which the date is
February 28, 2000 and except for Note 7 and
Note 8, as to which the date is April 27, 2000
F-2
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $453,951 $119,394
Deposits and prepaid expenses 85,932 10,125
---------- ----------
Total current assets 539,883 129,519
Property and equipment, net
Computer equipment 82,560 65,238
Furniture and office equipment 7,449 7,449
Accumulated depreciation (30,419) (19,012)
---------- ----------
59,590 53,675
Investment in Jyra Research, Inc. 113,000 128,400
---------- ----------
$712,473 $311,594
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $282,496 $55,342
---------- ----------
Total current liabilities 282,496 55,342
Commitments and Contingencies
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value;
shares authorized - 10; none and 10 shares issued and
outstanding at December 31, 1999 and 1998, respectively - -
Common stock, $0.001 par value; issuable in series:
Class A - 20,000,000 shares authorized; 6,087,651
and 5,264,333 shares issued and outstanding at
December 31, 1999 and 1998, respectively 6,088 5,264
Class B - 10,000,000 shares authorized; no shares
issued or outstanding at December 31, 1999 and
1998, respectively - -
Additional paid-in capital 10,263,806 3,604,093
Deferred Compensation (3,161,591) (670,539)
Accumulated other comprehensive loss - (18,320)
Deficit accumulated during the development stage (6,678,326) (2,664,246)
---------- ----------
Total stockholders' equity 429,977 256,252
---------- ----------
$712,473 $311,594
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JANUARY 30,
YEAR ENDED 1998 (INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Operating expenses:
Research and development $1,347,631 $ 661,735 $2,009,366
Sales and marketing 359,039 291,698 650,737
General and administrative 2,293,082 1,717,936 4,011,018
----------- ----------- -----------
Total operating expenses (3,999,752) (2,671,369) (6,671,121)
Interest income, net 19,392 7,123 26,515
Recognized loss on investment in
Jyra Research, Inc. (33,720) - (33,720)
----------- ----------- -----------
Net loss $(4,014,080) $(2,664,246) $(6,678,326)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share (basic and diluted)
$ (0.71) $ (0.57)
----------- -----------
----------- -----------
Weighted average shares used in
computing net loss per share (basic and
diluted) 5,678,757 4,712,194
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Stockholders' Equity
For the period from January 30, 1998 (inception) through December 31, 1999
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK CLASS A ADDITIONAL
----------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------ -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Balance at inception on
January 30, 1998 - $- - $ - $ -
Issuance of common stock at
par to founders for cash in
February 1998 - - 3,600,000 3,600 (2,500)
Issuance of Series A convertible
preferred stock in exchange for
stock in Jyra Research, Inc. in
April 1998 10 - - - 146,720
Issuance of common stock at $0.60
per share for cash from March
through May 1998, net of issuance
costs of $48,426 - - 1,664,333 1,664 966,176
Transfer of common stock to employees
by principal stockholders - - - - 330,400
Issuance of stock options to
consultants for services - - - - 73,351
Deferred compensation related
to employee stock options - - - - 2,089,946
Amortization of deferred compensation - - - - -
Unrealized loss on investment
in Jyra Research, Inc. - - - - -
Net loss from inception through
December 31, 1998 - - - - -
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
DEFERRED COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
COMPENSATION LOSS STAGE EQUITY
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at inception on
January 30, 1998 $ - $ - $ - $ -
Issuance of common stock at
par to founders for cash in
February 1998 - - - 1,100
Issuance of Series A convertible
preferred stock in exchange for
stock in Jyra Research, Inc. in
April 1998 - - - 146,720
Issuance of common stock at $0.60
per share for cash from March
through May 1998, net of issuance
costs of $48,426 - - - 967,840
Transfer of common stock to employees
by principal stockholders - - - 330,400
Issuance of stock options to
consultants for services - - - 73,351
Deferred compensation related
to employee stock options (2,089,946) - - -
Amortization of deferred compensation 1,419,407 - - 1,419,407
Unrealized loss on investment
in Jyra Research, Inc. - (18,320) - (18,320)
Net loss from inception through
December 31, 1998 - - (2,664,246) (2,664,246)
</TABLE>
F-5
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK CLASS A ADDITIONAL
----------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 10 - 5,264,333 5,264 3,604,093
Issuance of common stock at $4.00
per share for cash from February
to April 1999, net of issuance
costs of $82,492 - - 419,500 420 1,595,088
Issuance of common stock at
$8.00 per share for cash from
June to December 1999, net of
issuance costs of $51,609 - - 126,800 127 962,665
Conversion of Series A preferred
stock into common stock in
December 1999 (10) - 277,018 277 (277)
Issuance of stock options to
consultants for services - - - - 311,247
Deferred compensation related
to employee stock options - - - - 3,790,990
Amortization of deferred compensation - - - - -
Reversal of unrealized loss
on investment in Jyra
Research, Inc. - - - - -
Net loss for the year ended
December 31, 1999 - - - - -
------- ------ --------- ------ -----------
Balance at December 31, 1999 - $ - 6,087,651 $6,088 $10,263,806
------- ------ --------- ------ -----------
------- ------ --------- ------ -----------
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
DEFERRED COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
COMPENSATION LOSS STAGE EQUITY
------------ ------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1998 (670,539) (18,320) (2,664,246) 256,252
Issuance of common stock at $4.00
per share for cash from February
to April 1999, net of issuance
costs of $82,492 - - - 1,595,508
Issuance of common stock at
$8.00 per share for cash from
June to December 1999, net of
issuance costs of $51,609 - - - 962,792
Conversion of Series A preferred
stock into common stock in
December 1999 - - - -
Issuance of stock options to
consultants for services - - - 311,247
Deferred compensation related
to employee stock options (3,790,990) - - -
Amortization of deferred compensation 1,299,938 - - 1,299,938
Reversal of unrealized loss
on investment in Jyra
Research, Inc. - 18,320 - 18,320
Net loss for the year ended
December 31, 1999 - - (4,014,080) (4,014,080)
------------ ---------- ----------- -----------
Balance at December 31, 1999 $(3,161,591) - $(6,678,326) $ 429,977
------------ ---------- ----------- -----------
------------ ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JANUARY 30,
YEAR ENDED 1998 (INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,014,080) $(2,664,246) $(6,678,326)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 11,407 19,012 30,419
Amortization of deferred compensation 1,299,938 1,419,407 2,719,345
Common stock issued to employees by principal
stockholders - 330,400 330,400
Common stock options issued for services 311,247 73,351 384,598
Recognized loss on investment in Jyra Research,
Inc. 33,720 - 33,720
Changes in operating assets and liabilities:
Deposits and prepaid expenses (75,807) (10,125) (85,932)
Accounts payable and accrued liabilities 227,154 55,342 282,496
------------- ------------ -------------
Net cash flows used for operating activities (2,206,421) (776,859) (2,983,280)
INVESTING ACTIVITIES
Purchases of property and equipment (17,322) (72,687) (90,009)
------------- ------------ -------------
Net cash flows used for investing activities (17,322) (72,687) (90,009)
FINANCING ACTIVITIES
Issuance of common stock for cash, net 2,558,300 968,940 3,527,240
------------- ------------ -------------
Net cash flows provided by financing activities 2,558,300 968,940 3,527,240
------------- ------------ -------------
Net increase in cash and cash equivalents 334,557 119,394 453,951
Cash and cash equivalents at beginning of period 119,394 - -
------------- ------------ -------------
Cash and cash equivalents at end of period $ 453,951 $119,394 $453,951
------------- ------------ -------------
------------- ------------ -------------
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING
ACTIVITIES:
Issuance of Series A convertible preferred stock
in exchange for investment in Jyra Research, Inc. $ - $146,720 $146,720
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Path 1 Network Technologies Inc. (the "Company") was incorporated in Delaware
on January 30, 1998 under the name Millennium Network Technologies, Inc. On
March 16, 1998, the Company changed its name to Path 1 Network Technologies
Inc.
The Company is engaged in the development of proprietary, internet protocol
based, network technology which when developed, will manage and alleviate
network traffic, enabling simultaneous computer, telephone and video
transmissions over one line with improved quality of service. From inception
to date, management of the Company has devoted substantially all of its
efforts in organizing the Company and raising capital necessary to fund
planned operations and conducting product development. Accordingly, at
December 31, 1999 the Company is considered to be in the development stage.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of its
liabilities in the normal course of conducting business. In the period from
January 30, 1998 (inception) through December 31, 1999, the Company incurred
losses totaling $6,678,326. The Company's ability to transition from the
development stage and ultimately, to attain profitable operations, is
dependant upon obtaining sufficient working capital to complete the
successful development of its technology, achieving market acceptance of such
technology and achievement of sufficient levels of revenue to support the
Company's cost structure. Management believes that the funds necessary to
meet its planned capital and operating requirements for the next twelve
months will be raised either from equity or debt financing. However, there
can be no assurances that required equity or debt financing will be available
on terms acceptable to the Company, if at all. Without additional financing,
the Company will be required to delay, reduce the scope of and eliminate one
or more of its research and development projects and significantly reduce
its expenditures on infrastructure.
F-8
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents. As of December 31,
1999, cash and cash equivalents consist primarily of cash deposits in a money
market account.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of computer equipment and is stated
at cost. Depreciation is calculated using the straight-line method over an
estimated useful life of two years.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are charged to expense as incurred.
The Company generally expenses amounts paid to obtain patents or acquire
licenses, as the ultimate recoverability of the amounts paid is uncertain.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
about the future that effect the amounts reported in the financial
statements. Actual results could differ from those estimates.
STOCK OPTIONS
The Company has elected to follow Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"),
and related Interpretations in accounting for its employee stock options
because, as discussed in Note 4, the alternative fair value accounting
provided under Financial Accounting Standards Board Statement of Financial
Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION,
requires the use of option valuation models that were not developed for use
in valuing employee stock options.
Deferred compensation is recognized for options granted to employees to the
extent the exercise price is less than the fair value at date of grant.
Deferred compensation is amortized as the underlying options vest.
Compensation charges for options granted to non-employees has been determined
in accordance with SFAS No. 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of equity instruments issued,
whichever is more reliably measured. Charges for options granted to
non-employees are periodically remeasured as the underlying options vest.
The Company has disclosed the pro forma effect of using the fair value based
method to account for its employee stock-based compensation.
NET LOSS PER SHARE
The Company computes net loss per share following SFAS No. 128, EARNINGS
PER SHARE and SEC Staff Accounting Bulletin No. 98("SAB 98"). SFAS 128
requires the presentation of basic and diluted income (loss) per share
amounts. Under the provisions of SFAS No. 128, basic net income (loss) per
share is computed by dividing the net income (loss) available to common
shareholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares, composed of incremental common shares
issuable upon the exercise of stock options and common shares issuable on
assumed conversion of Series A preferred stock, are included in diluted net
income (loss) per share to the extent these shares are dilutive. Common
equivalent shares are not included in the computation of dilutive net loss
per share for the year ended December 31, 1999 and the period January 30,
1998 (inception) to December 31, 1998 totaling 1,216,642 and 1,078,518,
respectively, because the effect would be anti-dilutive.
Under the provisions of SAB 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
F-9
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
2. INVESTMENT IN JYRA RESEARCH, INC.
On March 16, 1998, the Company entered into an agreement with Jyra Research,
Inc. ("Jyra"), a publicly-held, United Kingdom based company, which is in the
business of developing network monitoring software. The agreement provided
for Jyra to make a strategic investment in the Company and for the Company to
make a strategic investment in Jyra.
Under this agreement the Company exchanged ten shares of its Series A
Preferred stock for 16,000 restricted common shares of Jyra. The agreement
became effective on April 21, 1998. On December 7, 1999, Jyra Research, Inc.
converted its Series A Preferred stock into 277,018 shares of the Company's
Class A common stock.
The common stock received from Jyra is restricted from sale by the Company
for one year from the date of issuance. The Company's management determined
that the fair value of the Jyra shares was more readily determinable than the
fair value of the Company's Series A Preferred stock on the date of the
agreement. Accordingly, the Company recorded the value of the Series A
Preferred stock issued in this non-monetary exchange based on the fair value
of the Jyra common shares on the date of the agreement. The fair value of the
Jyra shares was determined based on the closing market price as reported on
the NASD's OTC Bulletin Board on the date of the transaction.
At December 31, 1999, the Company determined that the decline in the fair
market value of its investment in Jyra was other than temporary and classifies
its investment as available for sale under SFAS No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. As a result, the Company
has recognized a loss on this investment of $33,720 during 1999.
3. COMMITMENTS
LEASES
The Company leases its office facility under an operating lease agreement
which expires in May 2002. The lease is payable in monthly installments of
$8,431, subject to annual rate increases. Rent expense totaled $125,751 for
the year ended December 31, 1999, $27,904 for the period from January 30,
1998 (inception) through December 31, 1998 and $153,655 for the period from
inception to December 31, 1999.
F-10
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
3. COMMITMENTS (CONTINUED)
Annual future minimum lease obligations for operating leases as of December
31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year ending December 31,
2000 $106,024
2001 106,024
2002 44,177
---------
Total $256,225
---------
---------
</TABLE>
4. STOCKHOLDERS' EQUITY
FOUNDERS STOCK
On January 31, 1998, the Company issued 3,600,000 shares of common stock to
the Company's founders for $1,100 in cash.
STOCK SPLIT
On March 15, 1998 the Board of Directors authorized a 3,600 to 1 stock split
of all outstanding common stock. All share and per share amounts and stock
option data within the financial statements have been restated to reflect the
stock split.
AUTHORIZED SHARES
On March 16, 1998, the Company amended its Certificate of Incorporation to
increase the Company's authorized shares of common stock to 20,000,000 and to
authorize ten shares of preferred stock. The common and preferred shares were
authorized with a par value of $0.001 per share.
On April 13, 1999, the Company amended its Certificate of Incorporation to
authorize 10,000,000 shares of Class B Common Stock with a par value of
$0.001 per share, and classify the Company's existing common stock as Class A
Common Stock.
F-11
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK
On December 7, 1999, Jyra Research, Inc. converted ten shares of the
Company's Series A Preferred stock, that was authorized on March 15, 1998 by
the Company's Board of Directors, into 277,018 shares of the Company's Class
A common stock. The Series A Preferred stock was convertible nine months
after issuance at the option of the holder or the Company.
CLASS B COMMON STOCK
The Class B Common Stock has no voting rights and the holders are not
entitled to receive any dividends. Class B Common Stock will convert into
shares of Class A Common Stock, on a one-for-one basis, upon the occurrence
of certain events.
PRIVATE PLACEMENT OFFERINGS
In May 1998, the Company completed a Private Placement offering under which
it sold 1,614,833 shares of common stock at $0.60 per share to accredited
investors, resulting in net cash proceeds totaling $967,840. In connection
with the offering, the Company issued 49,500 Class A common shares to brokers
as payment for finders fees and incurred other offering related expenses of
$18,726.
In April 1999, the Company completed a Private Placement Offering under which
it sold 419,500 shares of common stock at $4.00 per share to accredited
investors, resulting in net cash proceeds totaling $1,595,508. In connection
with the offering, the Company granted options for the purchase of 20,975
shares of Class A common stock with an exercise price of $4.00 per share
through May 2009, to brokers as payment for finders fees and incurred other
offering related expenses of $82,492.
In December 1999, the Company completed a Private Placement Offering under
which it sold 126,800 shares of common stock at $8.00 per share to accredited
investors, resulting in net cash proceeds totaling $962,792. In connection
with the offering, the Company will grant options for the purchase of 6,250
shares of Class A common stock with an exercise price of $8.00 per share
through December 2006, to brokers as payment for finders fees and incurred
other offering related expenses of $51,609.
F-12
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
On August 3, 1999, the Company adopted the 1999 Stock Option/Stock Issuance
Plan (the "Plan") which provides for the grant of incentive and nonstatutory
stock options of Class B common stock, to employees, directors or consultants
of the Company. The Plan authorizes the Company to issue up to 1,500,000
shares of Class B common stock. The Plan provides that incentive stock
options will be granted at no less than the fair value of the Company's
common stock as determined by the Board of Directors at the date of the
grant. The options generally vest and become exercisable either immediately
or over one to four years. Generally, any unvested shares underlying
exercised options will be canceled in the event of termination of employment
or engagement. Options expire no more than ten years after the date of grant,
or earlier if the employment terminates.
Prior to the adoption of the 1999 Plan, the Company granted nonstatutory
stock options of Class A common stock to employees, directors or consultants
of the Company. The options generally vest and become exercisable either
immediately or over one to four years. Options expire no more than ten years
after the date of grant, or earlier if the employment terminates.
The following table summarizes stock option activity; of which only the Class B
option activity was under the Plan.
<TABLE>
<CAPTION>
CLASS A WEIGHTED CLASS B WEIGHTED
STOCK AVERAGE STOCK AVERAGE
OPTION EXERCISE OPTION EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 (inception) - $ - - $ -
Granted 826,500 0.66 - -
Exercised - - - -
Cancelled (25,000) 0.60 - -
-------- -------- --------- --------
Balance at December 31, 1998 801,500 0.66 - -
Granted 128,475 1.70 495,000 2.33
Exercised - - - -
Cancelled (38,889) 2.00 (169,444) 2.00
-------- -------- --------- --------
Balance at December 31, 1999 891,086 $ 0.75 325,556 $ 2.51
-------- -------- --------- --------
-------- -------- --------- --------
Exercisable at December 31, 1999 631,859 $ 0.76 88,040 $ 2.50
-------- -------- --------- --------
-------- -------- --------- --------
</TABLE>
As of December 31, 1999, 1,174,444 shares are available for future grant
under the Plan.
F-13
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Exercise prices and weighted average remaining contractual life for the
options outstanding as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Remaining Weighted Exercise Price of
Number Contractual Life Average Options Options
Exercise Price Outstanding (in years) Exercise Exercisable Exercisable
Price
- -------------- ----------- ---------------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
CLASS A
$0.60 834,000 6.07 $0.60 591,457 $0.60
$2.00 11,111 9.28 $2.00 11,111 $2.00
$2.50 25,000 5.69 $2.50 8,316 $2.50
$4.00 20,975 9.33 $4.00 20,975 $4.00
CLASS B
$2.00 255,556 7.58 $2.00 69,445 $2.00
$4.35 70,000 6.76 $4.35 18,595 $4.35
--------- -------- ------- ------- ---------
1,216,642 6.59 $1.33 719,899 $0.97
--------- -------- ------- ------- ---------
--------- -------- ------- ------- ---------
</TABLE>
STOCK-BASED EMPLOYEE COMPENSATION
The Company has adopted the disclosure-only provision of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation expense
has been recognized for the stock options issued to employees or directors in
accordance with SFAS No. 123. If compensation expense had been determined
consistent with SFAS No. 123, as compared to the intrinsic method in accordance
with APB 25, the Company's net loss would have been changed to the following
pro forma amounts:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net loss, as reported $(4,014,080) $(2,664,246)
Net loss, pro forma (4,147,422) (2,773,926)
Net loss per share, as reported $ (0.71) $ (0.57)
Net loss per share, pro forma $ (0.73) $ (0.59)
</TABLE>
The effects are not likely to be representative of the effects on pro forma
net income or loss in future years.
F-14
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted in 1998 and 1999 is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected life of three to four years; expected
dividend yield of zero percent; expected volatility of 100 percent; and
risk-free interest rate of six percent. The weighted-average fair value of
the options granted to employees during 1999 and the period from January 30,
1998 to December 31, 1998 to employees were $10.82 and $3.19, respectively.
For the year ended December 31, 1999 and for the period January 30, 1998 to
December 31, 1998, the Company amortized $311,247 and $73,351, respectively,
to research and development expense related to options granted under
consulting agreements. At December 31, 1999 and 1998 the Company had 55,145
and 22,392 options exercisable by non-employees. Compensation expense for
non-employees is recorded based on estimated vesting, remeasured upon actual
vesting date and period end, and fair market value of common stock on the OTC
Bulletin Board. Using the Black-Scholes option pricing model and the
following assumptions: expected life of three to four years, expected
dividend yield of zero percent, expected volatility of 100 percent, and
risk-free interest rate of six percent.
For the year ended December 31, 1999 and for the period January 30, 1998 to
December 31, 1998, the Company amortized $1,299,938 and $1,419,407,
respectively, to general and adminstrative expense related to options granted
to employees below fair market value.
On June 18, 1998, the principal stockholders of the Company transferred on a
pro-rata basis 224,000 shares of their holdings of the Company's common stock
to an employee. The fair value of the Company's stock on the date of transfer
was $0.60 per share, resulting in compensation expense of $134,400 during the
period ended December 31, 1998.
On September 16, 1998, the principal stockholders of the Company transferred
on a pro-rata basis 56,000 shares of their holdings of the Company's common
stock to an employee. The fair market value of the Company's stock on the
date of transfer was $3.50 per share, resulting in compensation expense of
$196,000 during the period ended December 31, 1998.
5. INCOME TAXES
Significant components of the Company's deferred tax assets are shown below.
A valuation allowance of $1,570,000 has been recognized at December 31, 1999
to offset the deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,369,000 $ 413,000
Research and development credits 133,000 37,000
Other, net 68,000 14,000
---------- ---------
Total deferred tax assets 1,570,000 464,000
Valuation allowance for deferred tax assets (1,570,000) (464,000)
---------- ---------
Net deferred tax assets $ - $ -
---------- ---------
---------- ---------
</TABLE>
F-15
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
5. INCOME TAXES (CONTINUED)
At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $3,435,000 and $2,894,000, respectively.
The federal and California tax loss carryforwards will begin expiring in 2018
and 2006, respectively unless previously utilized. The Company also had
federal and California research tax credit carryforwards of approximately
$98,000 and $54,000, respectively, which will begin to expire in 2013 unless
previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, the annual use of the
Company's net operating loss carryforwards may be limited in the event of a
cumulative change in ownership of more than 50% which occurs within a three
year period. However, the Company does not believe such limitation will have
a material impact upon the utilization of these carryforwards.
6. RECENT EQUITY TRANSACTIONS
In connection with a Private Placement Offering of up to 1,250,000 shares of
Class A common stock, subsequent to December 31, 1999 through February 21,
2000 the Company sold 475,000 shares of Class A common stock at $8.00 per
share to investors, resulting in net cash proceeds totaling approximately
$3,600,000. Of the net proceeds, approximately $800,000 is restricted and
subject to refund. The Company is in the process of obtaining waivers from
three investors that will allow the Company to keep these currently restricted
funds. In connection with the offering through February 21, 2000, the Company
will grant options for the purchase of 23,750 shares of Class A common stock
to brokers with an exercise price of $8.00 per share through February 2007,
as payment for finders fees and incurred other offering related expenses of
approximately $190,000.
In February 2000, a total of 376,500 Class B and 6,250 Class A common stock
options were granted to employees and consultants which will vest over terms
of up to four years. These options were granted at an exercise price of $4.35
and $8.00 per share, respectively. The Company will recognize deferred
compensation expense for grants to employees to the extent the exercise price
is less than the fair value of date of grant. The Company will recognize
compensation charges in accordance with EITF 96-18 related to options granted
to consultants as the underlying options vest.
7. TRANSACTIONS WITH LEITCH TECHNOLOGY CORPORATION
In April 2000, the Company sold 1,250,000 shares of its Class A common
stock in a private placement to Leitch Technology Corporation ("Leitch") for
$8 per share, resulting in gross proceeds of $10,000,000. The Company also
received 200,000 shares of Leitch common stock. Leitch's common stock is
publically traded on the Toronto Stock Exchange under the symbol "LTV". In
conjunction with the private placement, the Company entered into a technology
license agreement with Leitch and provided Leitch a non-exclusive worldwide
license (except as to TrueCircuit technology designed for the professional
video market, which is subject to an exclusive license in favor of Leitch) to
utilize the Company's intellectual property to develop and sell products
which incorporate its TrueCircuit technology.
8. LEGAL PROCEEDINGS
On September 20, 1999, a complaint by the Company was filed against certain
stockholders and their affiliates for breach of oral contract, professional
negligence, breach of fiduciary duty, constructive trust, breach of the
covenant of good faith and fair dealing and unfair business practice,
primarily in connection with the allocation of founders stock of the Company.
On November 29, 1999, Dr. Felber, who was a defendant in the September 20
complaint, filed a cross-complaint against the Company, certain directors of
the Company and Jyra Research, Inc. alleging fraud, breach of fiduciary duty,
breach of the covenant of good faith and fair dealing, and misrepresentation
in connection with the exercise in July 1999 by Jyra's assignees of Jyra's
arrangement to purchase from this stockholder for $4.00 per share, 255,640
shares of the Company's Class A common stock.
In April 2000, this complaint and all counterclaims arising out of it were
resolved as to all parties other than Dr. Felber.
F-16
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
7. LEGAL PROCEEDINGS (CONTINUED)
This remaining litigation is in the early stages and the Company has not yet
determined the potential financial impact. However, there can be no assurance
that it may not have a material adverse impact on the Company's financial
position and results of operations.
F-17
<PAGE>
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
3.1 Certificate of Incorporation, as amended
3.2 Amended and Restated Bylaws
10.1* Option Agreement Between Franklin S. Felber and Jyra Research,
Inc. dated January 25, 1999.
10.2* Lock-Up Agreement dated January 25, 1999
10.3* Lease Agreement between us and Spieker Properties, L.P. dated
April 10, 1999
10.4* Employment Agreement between us and Yendo Hu dated August 31,
1999
10.5* 1999 Stock Option/Stock Issuance Plan
10.6* Form of Notice of Grant/Stock Option Agreement under the 1999
Stock Option/Stock Issuance Plan
10.7* Form of Notice of Grant/Stock Option Agreement other than
under the 1999 Stock Option/Stock Issuance Plan
10.8* Agreement with Doctor Design, Inc. dated June 4, 1999
10.9 Agreement of Purchase and Sale by and between us and Leitch
Technology Corporation, dated April 10, 2000.
10.10 Stockholders' Agreement by and among us, Leitch Technologies
Corporation, Ronald D. Fellman, Douglas A. Palmer and
Michael T. Elliott dated as of April 10, 2000.
10.11 Technology License Agreement between us and Leitch
Technology Corporation dated April 10, 2000.
10.12 Settlement Agreement and Mutual Release dated April 11, 2000.
10.13 Employment Agreement between us and Michael T. Elliott
dated April 7, 2000.
</TABLE>
* Previously filed.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
PATH 1 NETWORK TECHNOLOGIES INC.
Date: April 28, 2000 By /s/ Michael T. Elliott
---------------------
Michael T. Elliott
President and Chief Executive Officer
F-18
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PATH 1 NETWORK TECHNOLOGIES INC.
PATH 1 NETWORK TECHNOLOGIES INC, a corporation organized and existing
under and by virtue of the General Corporation Law of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That resolutions were adopted by the Board of Directors of the
Corporation setting forth a proposed amendment to the Certificate of
Incorporation, and declaring said amendment to be advisable and recommended for
approval by the stockholders of the Corporation. The resolutions setting forth
the proposed amendment are as follows:
NOW, THEREFORE, BE IT RESOLVED, that the officers of the Corporation
are hereby authorized and directed to execute and file a Certificate of
Amendment to the Certificate of Incorporation (the "Amendment") of the
Corporation, which Amendment shall change Article Fourth so that, as amended,
said Article shall read in its entirety as follows:
FOURTH:
A. CLASSES OF STOCK. This Corporation is authorized to issue a
single class of Thirty Million (30,000,000) shares of Common
Stock, par value $0.001 per share, divided into two series
designated, respectively, "Class A Common Stock," par value
$0.001 per share and "Class B Common Stock," par value $0.001
per share. Twenty Million (20,000,000) shares shall be Class A
Common Stock and Ten Million (10,000,000) shares shall be
Class B Common Stock.
<PAGE>
B. CLASS A COMMON STOCK.
1. DIVIDEND RIGHTS. The holders of the Class A Common
Stock shall be entitled to receive, if, when and as
declared by the Board of Directors, out of any assets
of the Corporation legally available therefor, such
dividends as may be declared from time to time by the
Board of Directors.
2. LIQUIDATION RIGHTS.
(a) Upon any liquidation, dissolution or
winding up of the Corporation, the holders of the
Class A Common Stock shall be entitled to receive,
prior and in preference to any distribution of any of
the assets of this Corporation to the holders of the
Class B Common Stock by reason of their ownership
thereof, an amount per share equal to the sum of $100
and any declared but unpaid dividends on such share.
If upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Class
A Common stock shall be insufficient to permit the
payment to such holders of the full aforesaid
preferential amounts, then the entire assets and
funds of the corporation legally available for
distribution shall be distributed ratably among the
holders of the Class A Common Stock in proportion to
the product of the liquidation preference of each
such share and the number of such shares owned by
each such holder.
(b) After the distributions described in
subsection (a) above have been paid, the remaining
assets of the Corporation available for distribution
to stockholders shall be distributed among the
holders of Class A Common Stock and Class B Common
stock pro rata based on the number of shares of Class
A Common Stock held by each (assuming, for purposes
of this subsection (b), that the Class B Common Stock
had been automatically converted as contemplated by
Section 5 of Division C of this Article Fourth).
3. REDEMPTION. The Class A Common Stock is not
redeemable.
4. VOTING RIGHTS. The holder of each share of Class A
Common Stock shall have the right to one vote, and
shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of this
Corporation, and shall be entitled to vote upon such
matters and in such manner as may be provided by law.
<PAGE>
C. CLASS B COMMON STOCK.
1. DIVIDEND RIGHTS. The holders of Class B Common Stock
shall not be entitled to receive any dividends unless
and until an aggregate of $100,000,000 of dividends
has been declared and paid on the Class A Common
Stock.
2. LIQUIDATION RIGHTS. Upon any liquidation, dissolution
or winding up of the Corporation, the assets of the
Corporation shall be distributed as provided for in
Section 2 of Division B of this Article Fourth.
3. REDEMPTION. The Class B Common Stock is not
redeemable.
4. VOTING RIGHTS. The Class B Common Stock shall have no
right to vote at or to receive notice of any meetings
of stockholders, or to express consent or dissent to
corporate action in writing without a meeting, except
to the extent expressly required by law.
5. CONVERSION. The Class B Common Stock is not
voluntarily convertible by the holders thereof. The
Class B Common Stock shall automatically be converted
into shares of Class A Common Stock, on a one-for-one
basis (appropriately adjusted for any stock splits or
reverse stock splits of, or any stock dividends
declared on, the Class A Common Stock and/or the
Class B Common Stock) upon the occurrence of any of
the following events:
(a) The Corporation (or 50% or more of its
stock or assets) is acquired by a person or
an affiliated group by merger, reverse
triangular merger, private stock sale,
direct stock issuance, consolidation or
otherwise;
(b) The Corporation sells, leases, or
exclusively licenses all or substantially
all of its assets (excluding sales of
inventory in the ordinary course of
business);
(c) The Corporation reports for any fiscal
year revenues from operations equal to
$10,000,000 or more and reports for such
fiscal year EBITDA (earnings before
interest, taxes depreciation, amortization
and extraordinary items) of $2,000,000 or
more, as determined in accordance with
United States generally accepted accounting
principles; or
(d) The Corporation consummates the sale of
its Class A Common Stock in a bona fide,
firm commitment underwriting pursuant to a
registration statement under the
<PAGE>
Securities Act of 1933, as amended, the
public offering price of which is not less
than $25,000,000 in the aggregate.
6. ASSIGNMENT AND TRANSFER RIGHTS. The Class B Common
Stock shall not be transferable except to the extent
that a proposed transfer is expressly consented to by
vote of the holders of the Class A Common Stock. This
restriction on transfer is intended to comply with
Delaware General Corporation Law Section 202. The
Corporation shall be entitled to note conspicuously,
on each stock certificate representing shares of
Class B Common Stock, the restriction on transfer
contained in this Section 6.
SECOND: That, thereafter, the stockholders of said Corporation approved
the amendment by written consent in accordance with Section 228 of the Delaware
General Corporation Law.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.
FOURTH: That the capital of said Corporation shall not be reduced under
or by reason of said amendment.
IN WITNESS WHEREOF, the undersigned has executed this certificate on
April 28, 2000.
/s/ Douglas A. Palmer
-------------------------------------------
Douglas A. Palmer, Executive Vice President
and Chief Operating Officer
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
(A Delaware Company)
AMENDED AND RESTATED BYLAWS
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
(A Delaware Company)
BYLAWS
TABLE OF CONTENTS
ARTICLE 1
STOCKHOLDERS
<TABLE>
<S> <C>
Section 1.1 ANNUAL MEETINGS ............................................................................1
Section 1.2 SPECIAL MEETINGS............................................................................1
Section 1.3 NOTICE OF MEETINGS..........................................................................1
Section 1.4 BUSINESS TRANSACTED AT SPECIAL MEETINGS OF STOCKHOLDERS.....................................1
Section 1.5 QUORUM......................................................................................1
Section 1.6 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING..................................................2
Section 1.7 APPROVAL OR RATIFICATION BY STOCKHOLDERS....................................................2
ARTICLE 2
BOARD OF DIRECTORS
Section 2.1 GENERAL POWERS..............................................................................2
Section 2.2 NUMBER AND TERM OF OFFICE ..................................................................2
Section 2.3 ELECTION OF DIRECTORS.......................................................................2
Section 2.4 ANNUAL AND REGULAR MEETINGS.................................................................3
Section 2.5 SPECIAL MEETINGS; NOTICE....................................................................3
Section 2.6 QUORUM......................................................................................3
Section 2.7 TELEPHONE MEETINGS; ACTION WITHOUT A MEETING................................................3
i
<PAGE>
Section 2.8 RESIGNATIONS................................................................................4
Section 2.9 REMOVAL OF DIRECTORS........................................................................4
Section 2.10 VACANCIES AND NEWLY CREATED DIRECTORSHIPS...................................................4
Section 2.11 COMPENSATION................................................................................4
ARTICLE 3
COMMITTEES
Section 3.1 HOW CONSTITUTED.............................................................................4
Section 3.2 POWERS......................................................................................5
Section 3.3 PROCEEDINGS.................................................................................5
Section 3.4 QUORUM AND MANNER OF ACTING; TELEPHONE MEETINGS.............................................5
Section 3.5 RESIGNATION.................................................................................5
Section 3.6 REMOVAL.....................................................................................5
Section 3.7 VACANCIES...................................................................................5
ARTICLE 4
OFFICERS
Section 4.1 NUMBER......................................................................................6
Section 4.2 ELECTION....................................................................................6
Section 4.3 ADDITIONAL OFFICERS.........................................................................6
Section 4.4 SALARIES....................................................................................6
Section 4.5 RESIGNATIONS................................................................................6
Section 4.6 REMOVAL AND VACANCIES.......................................................................6
Section 4.7 DUTIES OF THE PRESIDENT.....................................................................6
ii
<PAGE>
Section 4.8 DUTIES OF THE VICE-PRESIDENT................................................................7
Section 4.9 DUTIES OF THE SECRETARY.....................................................................7
Section 4.10 DUTIES OF THE CONTROLLER....................................................................7
Section 4.11 EMPLOYEE BONDS..............................................................................7
ARTICLE 5
CAPITAL STOCK
Section 5.1 CERTIFICATES OF STOCK.......................................................................8
Section 5.2 SIGNATURES..................................................................................8
Section 5.3 LOST, STOLEN OR DESTROYED CERTIFICATES......................................................8
Section 5.4 TRANSFER OF STOCK...........................................................................8
Section 5.5 RECORD DATE.................................................................................8
Section 5.6 REGISTERED STOCKHOLDERS.....................................................................9
ARTICLE 6
INDEMNIFICATION
Section 6.1 ACTIONS AGAINST OFFICERS AND DIRECTORS......................................................9
Section 6.2 INSURANCE...................................................................................9
ARTICLE 7
GENERAL PROVISIONS
Section 7.1 DIVIDENDS ..................................................................................9
Section 7.2 RESERVES....................................................................................9
Section 7.3 CHECKS.....................................................................................10
iii
<PAGE>
Section 7.4 FISCAL YEAR................................................................................10
Section 7.5 SEAL.......................................................................................10
Section 7.6 OFFICES....................................................................................10
ARTICLE 8
AMENDMENTS
Section 8.1 AMENDMENTS.................................................................................10
ARTICLE 9
SPECIAL PROVISIONS
Section 9.1 Special Provisions.........................................................................10
</TABLE>
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BY-LAWS
ARTICLE 1
STOCKHOLDERS
Section 1.1 ANNUAL MEETINGS. The annual meeting of the Stockholders of
the Company for the election of directors and for the transaction of such other
business as properly may come before such meeting shall be held at such place
either within or without the State of Delaware and at 10:00 A.M. local time on
the fourth Tuesday in March (or, if such is a legal holiday, then on the next
succeeding business day), or at such other time and date as shall be fixed from
time to time by resolution of the Board of Directors and as set forth in the
notice of the meeting. The Chairman of the Board or, in his absence, the
President, shall determine the purpose or purposes and the agenda of and order
of business at all regular and special meetings called by the Board and of any
committee on which he serves.
Section 1.2 SPECIAL MEETINGS. Special meetings of the stockholders may
be called at any time by the President (or, in the absence or disability of the
President, by any Vice President), or by the Board of Directors, and may be
called by one-fourth of the shares of stock of the Company issued and
outstanding and entitled to vote at such meeting. Any such request by
stockholders shall state the purpose or purposes of the proposed meeting. Such
special meetings of the stockholders shall be held at such places, within or
without the State of Delaware, as shall be specified in the respective notices
or waivers of notice.
Section 1.3 NOTICE OF MEETINGS. The Secretary or any Assistant
Secretary shall cause notice of the time, place and purpose or purposes of each
meeting of the stockholders (such notice to contain the name of the person or
persons calling the meeting, unless such meeting is the annual meeting of the
stockholders) to be mailed, not less than ten but not more than sixty days prior
to the meeting, to each stockholder of record entitled to vote at his
post-office address as the same appears on the books of the Company at the time
of such mailing. Such further notice shall be given as may be required by law.
Notice of any meeting of stockholders need not be given to any stockholder who
shall sign a waiver of such notice in writing, whether before or after the time
of such meeting. Attendance of any stockholder at any meeting in person or by
proxy, without protesting prior to the conclusion of the meeting the lack of
notice of such meeting, shall constitute a waiver of notice by him. Notice of
any adjourned meeting of the stockholders of the Company need not be given.
Section 1.4 BUSINESS TRANSACTED AT SPECIAL MEETINGS OF STOCKHOLDERS.
Business transacted at any special meeting of stockholders shall be limited to
the purposes stated in the notice thereof.
Section 1.5 QUORUM. Except as at the time otherwise required by
statute or by the Certificate of Incorporation, the presence at any stockholders
meeting, in person or by proxy,
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of a majority of the shares of stock then issued and outstanding and entitled to
vote at the meeting, shall be necessary and sufficient to constitute a quorum
for the transaction of business.
Section 1.6 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. To the extent
permitted by any statute at the time in force, whenever the vote of stockholders
at a meeting thereof is required or permitted to be taken for or in connection
with any corporate action, by any statute, by the Certificate of Incorporation
or by these By-Laws, the meeting and vote of stockholders may be dispensed with
if the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted shall consent
in writing to such corporate action being taken. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Section 1.7 APPROVAL OR RATIFICATION BY STOCKHOLDERS. The board of
directors in its discretion may submit any act, transaction or contract for
approval or ratification at any annual meeting of the stockholders, or at any
special meeting of the stockholders called for the purpose of considering any
such act, transaction or contract. Any act, transaction or contract that shall
be approved or be ratified by the vote of the stockholders holding a majority in
voting power of the issued and outstanding shares of the capital stock of the
Company present in person or by proxy at such meeting and entitled to vote
thereat on such matter (provided that a quorum shall be present) shall be as
valid and as binding upon the Company and upon all the stockholders as if it had
been approved or ratified by every stockholder of the Company.
ARTICLE 2
BOARD OF DIRECTORS
Section 2.1 GENERAL POWERS. The property, affairs and business of the
Company shall be managed by the Board of Directors. Each Director shall be at
least eighteen years of age, and each Director shall be a stockholder; PROVIDED,
HOWEVER, that existing Directors shall have the power to waive this requirement
in circumstances which they deem, in their discretion, to be appropriate. The
Board of Directors may exercise all the powers of the Company, whether derived
from law or the Certificate of Incorporation, except such powers as are, by
statute, by the Certificate of Incorporation or by these By-Laws, vested solely
in the stockholders of the Company.
Section 2.2 NUMBER AND TERM OF OFFICE. The Board of Directors shall
consist of at least one and not more than seven Directors, such number to be
fixed from time to time by resolution of the Board of Directors. The initial
Board of Directors shall consist of one (1) Director. Each Director (whenever
elected) shall hold office until his successor shall have been elected and shall
qualify or until he shall have resigned in the manner provided in Section 2.8,
or shall have been removed in the manner provided in Section 2.9.
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Section 2.3 ELECTION OF DIRECTORS. The Directors elected by the
Incorporator shall hold office until the first annual meeting of stockholders,
and until their successors shall have been elected and qualified. Commencing
with the first annual meeting of stockholders, except as otherwise provided in
Sections 2.9 and 2. 10, the Directors shall be elected annually at the annual
meeting of the stockholders. In the event of the failure to elect Directors at
an annual meeting of the stockholders, then Directors may be elected at any
regular or special meeting of stockholders entitled to vote for the election of
Directors provided that notice of such meeting shall contain mention of such
purpose. At each meeting of the stockholders for the election of Directors,
provided a quorum is present, the Directors shall be chosen and elected by a
plurality of the votes validly cast at such election.
Section 2.4 ANNUAL AND REGULAR MEETINGS. The annual meeting of the
Board of Directors for the choosing of officers and for the transaction of such
other business as may come before the meeting shall be held in each year as soon
as possible after the annual meeting of the stockholders at the place of such
annual meeting of the stockholders, and notice of such annual meeting of the
Board of Directors shall not be required to be given. The Board of Directors
from time to time may provide by resolution for the holding of regular meetings
and fix the time and place (which may be within or outside the State of
Delaware) thereof. Notice of such regular meetings need not be given; PROVIDED,
HOWEVER, that in case the Board of Directors shall fix or change the time or
place of regular meetings, notice of such action shall be mailed promptly to
each Director who shall not have been present at the meeting at which such
action was taken.
Section 2.5 SPECIAL MEETINGS; NOTICE. Special meetings of the Board of
Directors shall be held whenever called by a majority of the Board of Directors,
by the President (or, in the absence or disability of the President, by any Vice
President), or by any two Directors, at such time and place (which may be within
or outside of the State of Delaware) as may be specified in the respective
notices or waivers of notice thereof. Neither the business to be transacted at
nor the purpose of any special meeting need be specified in the waiver of notice
of such meeting. Special meetings of the Board of Directors may be called on one
day's notice to each Director, personally or by telephone, telegram or
telecopier, or on two days' notice by mail. Notice of any special meeting need
not be given to any Director who shall be present at such meeting, and any
business may be transacted thereat. No notice need be given of any adjourned
meeting.
Section 2.6 QUORUM. At all meetings of the Board of Directors, the
presence of a majority of the total number of Directors shall be necessary and
sufficient to constitute a quorum for the transaction of business. Except when
otherwise required by statute, the act of a majority of the Directors present at
any meeting at which a quorum is present shall be the act of the Board of
Directors. In the absence of a quorum, a majority of the Directors present may
adjourn the meeting for time to time, until a quorum shall be present.
Section 2.7 TELEPHONE MEETINGS; ACTION WITHOUT A MEETING. Any one or
more members of the Board or any Committee thereof may participate in a meeting
of the Board or Committee by means of a conference telephone or any means of
communication by which all persons participating in the meeting can hear each
other at the same time, and participation at such a meeting shall constitute
presence in person at such meeting for all purposes. Any action required or
permitted to be taken at any meeting of the Board of Directors or Committee may
be
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taken without a meeting, if written consents thereto are signed by all members
of the Board or Committee, as the case may be, and such written consents are
filed with the minutes of proceedings of the Board or Committee.
Section 2.8 RESIGNATION. Any Director may resign at any time by
delivering a written resignation to the Company. Unless otherwise specified
therein, such resignation shall take effect upon receipt thereof.
Section 2.9 REMOVAL OF DIRECTORS. Except as the stockholders may
otherwise agree, any Director may be removed at any time for cause upon the
affirmative vote of the holders of majority of the outstanding shares of stock
of the Company entitled to vote for the election of such Director, held at a
special meeting of such stockholders called for the purpose. Except as the
stockholders may otherwise agree, any vacancy in the Board of Directors caused
by any such removal may be filled at such meeting by the stockholders entitled
to vote for the election of the Director so removed. Except as the stockholders
may otherwise agree, if such stockholders do not fill such vacancy at such
meeting, such vacancy may be filled in the manner provided in Section 2.10.
Section 2. 10 VACANCIES AND NEWLY CREATED DIRECTORSHIPS. If any
vacancies shall occur in the Board of Directors, by reason of death,
resignation, removal (for or without cause) or otherwise, or if the authorized
number of Directors shall be increased, the Directors then in office shall
continue to act, and, except as the stockholders may otherwise agree, such
vacancies may be filled by a majority of the Directors then in office, though
less than a quorum, and the Directors so chosen shall hold office until the next
annual election and until their successors are duly elected and qualified,
unless sooner displaced. Any such vacancies or newly created Directorships may
also be filled by the stockholders in accordance with the provisions of Section
2.9.
Section 2.11 COMPENSATION. The amount, if any, which each Director
shall be entitled to receive as compensation for his services as such shall be
fixed from time to time by resolution of the Board of Directors.
ARTICLE 3
COMMITTEES
Section 3.1 HOW CONSTITUTED. The Board of Directors, by resolution or
resolutions adopted by a majority of the whole Board of Directors, may designate
an Executive Committee and/or one or more other Committees, each such Committee
to consist of such number of Directors as from time to time shall be fixed by
resolution or resolutions similarly passed. The Board of Directors shall
designate the Chairman of each such committee. Thereafter, members (and
alternate members, if any) of each such Committee shall be designated annually,
in like manner, at any regular or special meeting of the Board of Directors;
PROVIDED, HOWEVER, that any such Committee, from time to time, may be abolished
by resolution or resolutions similarly passed, and may be re-designated in like
manner. Each member (and each
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such alternate member) of any such Committee shall hold office until his
successor shall have been designated or until he shall cease to be a Director,
or until his death, or until he shall have resigned in the manner provided in
Section 2.8, or shall have been removed in the manner provided in Section 2.9.
Section 3.2 POWERS. Each Committee shall have and may exercise such
powers of the Board as provided by resolution or resolutions passed to the
extent permitted by law. Any such Committee may be granted power to authorize
the seal of the Company to be affixed to any or all papers which may require it.
Section 3.3 PROCEEDINGS. Subject to the provisions of Section 2.7,
each such Committee may fix its own rules of procedure and may meet at any such
place or places (within or outside the State of Delaware) at such time or times
and upon such notice (or without notice) as it shall determine from time to
time. It shall keep a record of its proceedings and shall report such
proceedings to the Board of Directors at a meeting of the Board of Directors
when required.
Section 3.4 QUORUM AND MANNER OF ACTING; TELEPHONE MEETINGS. Except as
may be otherwise provided in the resolution designating any such Committee, at
all meetings of any such Committee the presence of members (or alternate
members, if any) consisting of a majority of the total authorized membership of
such Committee shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the act of the majority of the members (or such
alternates) present at any meeting at which a quorum is present shall be the act
of such Committee. In the absence or disqualification of any member or alternate
member of such Committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The members (or
such alternates) of any such Committee shall act only as a Committee, and
individual members (or such alternates) thereof shall have no power as such.
Telephonic meetings may be held as provided in Section 2.7.
Section 3.5 RESIGNATION. Any member (and any alternate member) of any
such Committee may resign at any time by delivering a written resignation to
either the President, a Vice President, the Secretary or an Assistant Secretary.
Unless otherwise specified therein, such resignation shall take effect upon
receipt thereof.
Section 3.6 REMOVAL. Except as the stockholders may otherwise agree,
any member (and any alternate member) of any such Committee, may be removed at
any time, either for or without cause, by resolution adopted by the Board of
Directors.
Section 3.7 VACANCIES. If any vacancy shall occur in any such
Committee, by reason of disqualification, death, resignation, removal or
otherwise, the remaining members (and such alternate members) shall continue to
act and any such vacancy may, except as the stockholders may otherwise agree, be
filled at any meeting of the Board of Directors by resolution adopted by the
Board of Directors.
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ARTICLE 4
OFFICERS
Section 4.1 NUMBER. The officers of the Company shall be chosen by the
Board of Directors and may be a President, a Vice President, a Secretary and a
Controller, who shall hold office until their successors are chosen and qualify.
The Board of Directors may also choose one or more Assistant Vice Presidents,
Assistant Secretaries and Assistant Controllers. Any number of offices may be
held by the same person, but no officer may execute, acknowledge or verify any
instrument in more than one capacity if such instrument is required by law, by
the Certificate of Incorporation, or by these By-laws to be executed,
acknowledged, or verified by two or more officers, and the President (unless he
shall be absent or unavailable, in which case the Controller) must be one of
such executing, acknowledging or verifying officers.
Section 4.2 ELECTION. The Directors elected by the Incorporator may
elect a President, one or more Vice Presidents, one or more Assistant Vice
Presidents, a Secretary, an Assistant Secretary, and a Controller. Thereafter,
the Board of Directors at its first meeting of stockholders shall elect a
President, one or more Vice Presidents, one or more Assistant Vice Presidents, a
Secretary, an Assistant Secretary, and a Controller. Any officer so elected
shall hold office for the term for which he is elected and until a successor is
elected, subject to earlier termination due to removal or resignation.
Section 4.3 ADDITIONAL OFFICERS. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.
Section 4.4 SALARIES. The salaries of all officers and agents of the
Company shall be fixed by the Board of Directors.
Section 4.5 RESIGNATIONS. Any officer may resign at any time by
delivering a written resignation to the Company. Unless otherwise specified
therein, such resignation shall take effect upon receipt thereof.
Section 4.6 REMOVAL AND VACANCIES. Except as the stockholders may
otherwise agree, any officer elected or appointed by the Board of Directors may
be removed at any time either with or without cause by the affirmative vote of a
majority of the Board of Directors. Except as the stockholders may otherwise
agree, any vacancy occurring in any office of the Company shall be filled by the
Board of Directors.
Section 4.7 DUTIES OF THE PRESIDENT. The President shall be the chief
executive officer of the Company. He shall, when present, preside at all
meetings of the stockholders, Directors, and all committees on which he serves,
shall have the general and executive management and control of the business of
the Company, and shall see that all orders and votes of the Board are carried
into effect, except where and to the extent that the execution of such orders
and votes of the Board and management of the business of the Company are
expressly
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delegated by the Board of Directors to some other officer or agent, or a
Committee, of the Company. He shall execute bonds, mortgages, notes, contracts,
agreements, and other contracts, obligations or instruments in the name of the
Company, may countersign and deliver all certificates for shares of the capital
stock of the Company and other documents requiring a seal under the seal of the
Company, except where required or permitted by law to be otherwise signed and
executed and except where the signing and execution thereof shall be expressly
delegated by the Board of Directors to another officer or agent of the Company.
Section 4.8 DUTIES OF THE VICE PRESIDENT. In the event of the absence
or disability of the President, the first Vice President shall perform all the
duties of the President, and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the President. Except where by law the
signature of the President is required, the Vice President shall possess the
same power as the President to sign all certificates, contracts, obligations and
other instruments of the Company; PROVIDED the signature of the Controller of
the Company shall also be obtained. The Vice President shall perform such other
duties and may exercise such other powers as from time to time may be assigned
to him by these By-Laws or by the Board of Directors or by the President.
Section 4.9 DUTIES OF THE SECRETARY. The Secretary shall, if present,
act as Secretary of, and keep the minutes of, all the proceedings of the
meetings of the stockholders and of the Board of Directors, and of any committee
of the Board of Directors in one or more books to be kept for that purpose;
shall perform such other duties as shall be assigned to him by the President or
the Board of Directors; and, in general, shall perform all duties incident to
the office of Secretary.
Section 4.10 DUTIES OF THE CONTROLLER. The Controller shall keep or
cause to be kept full and accurate records of all receipts and disbursements in
the books of the Company and shall have the care and custody of all funds and
securities of the Company. He shall disburse the funds of the Company as may be
ordered by the Board of Directors, shall render to the President and Directors,
whenever they request it, an account of all of his transactions as Controller,
and shall perform such other duties as may be assigned to him by the President
or the Board of Directors. He shall prepare or cause to be prepared appropriate
financial statements for the Company. The Controller shall also perform such
other duties as may be assigned to him by the President or the Board of
Directors; and, in general, shall perform all duties incident to the office of
Controller. Except where by law the signature of the President is required, the
Controller shall possess the same power as the President to sign all
certificates, contracts, obligations and other instruments of the Company;
PROVIDED the signature of any Vice President of the Company shall also be
obtained.
Section 4.11 EMPLOYEE BONDS. The Board of Directors may require the
Controller, the Assistant Controllers and any other officers, agents or
employees of the Company to give bond for the faithful discharge of their
duties, in such sum and of such character as the Board may from time to time
prescribe.
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ARTICLE 5
CAPITAL STOCK
Section 5.1 CERTIFICATES OF STOCK. Every holder of stock in the
Company shall be entitled to have a certificate signed by, or in the name of the
Company by, the President or Vice President, and by the Controller or an
Assistant Controller, or the Secretary or an Assistant Secretary of the Company,
certifying the number of shares owned by him in the Company. Each such
certificate shall state upon the face thereof. (i) that the Company is formed
under the laws of Delaware, (ii) the name of the person or persons to whom the
stock is issued, and (iii) the number and class of shares, and the designation
of the series, if any, which such certificate represents.
Section 5.2 SIGNATURES. Any or all of the signatures on such
certificate may be a facsimile if the certificate is countersigned by a transfer
agent or registered by a registrar other than the Company itself or its
employee. In case any officer, transfer agent or registrar who has signed, or
whose facsimile signature has been placed upon a certificate, shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Company with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
Section 5.3 LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of
Directors may direct that a new certificate or certificates be issued in place
of any certificate or certificates theretofore issued by the Company alleged to
have been stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate of stock to be lost or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the Company a bond in such sum as it may
direct as indemnity against any claim that may be made against the Company with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5.4 TRANSFER OF STOCK. Except as the stockholders may
otherwise agree, upon surrender to the Company or the transfer agent of the
Company of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Company to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
Section 5.5 RECORD DATE. In order to determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix in advance a record date,
which shall not be more than fifty nor less than ten days before the date of
such meeting, or other corporate action or event to which it relates. If no
record date is fixed, the record date shall be that date prescribed by statute
as then in effect.
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Section 5.6 REGISTERED STOCKHOLDERS. Prior to due presentment for
registration of transfer of a security in registered form, the Company may treat
the registered owner as the person exclusively entitled to vote, to receive
notifications, and otherwise to exercise all the rights and powers of an owner.
ARTICLE 6
INDEMNIFICATION
Section 6.1 ACTIONS AGAINST OFFICERS AND DIRECTORS. The Company shall
indemnify to the full extent now or hereafter authorized or permitted by the
Delaware General Corporation Law (or any successor or related statute or
statutes and whether or not specifically required, permitted, or authorized
thereby) any person made, or threatened to be made, a party to an action, suit
or proceeding (whether civil, criminal, administrative or investigative) by
reason of the fact that he is or was a director or officer of the Company or is
or was serving as an officer or director of any other corporation at the request
of the Company. The indemnification provided hereby shall continue as to a
person who has ceased to be a director or officer, inure to the benefit of his
heirs, executors and administrators, and shall not be deemed exclusive of any
other rights provided by any law, agreement, vote of stockholders or directors
or otherwise.
Section 6.2 INSURANCE. The Company may purchase and maintain insurance
on behalf of any such person against any liability (including legal expenses)
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Company would have the power to indemnify
him against such liability under the Delaware General Corporation Law or any
successor or related statute or statutes.
ARTICLE 7
GENERAL PROVISIONS
Section 7.1 DIVIDENDS. Dividends upon the stock of the Company,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, bonds, in property, or in shares of
stock, subject to provisions of the Certificate of Incorporation.
Section 7.2 RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the Company available for dividends such sum or sums
as the Directors from time to time, in their absolute discretion, think proper
as a reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Company, or for such other
purposes as the Directors shall think conducive to the interest of the Company,
and the Directors may modify or abolish any such reserve.
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Section 7.3 CHECKS. All checks or demands for money and notes of the
Company shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 7.4 FISCAL YEAR. The fiscal year of the company shall be fixed
by resolution of the Board of Directors.
Section 7.5 SEAL. The corporate seal shall have inscribed thereon the
name of the Company, the year of its incorporation, and the words "Corporate
Seal, Delaware". The seal may be used in causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 7.6 OFFICES. An office of the Company shall be located at such
place or places as the Board of Directors shall designate from time to time. The
Company may have offices at such places both within or outside the State of
Delaware as the Board of Directors may from time to time determine or the
business of the Company may require.
ARTICLE 8
AMENDMENTS
Section 8.1 AMENDMENTS. Except as the stockholders may otherwise
agree, these By-Laws may be altered, amended or repealed by a majority of the
stockholders of the Company at any regular meeting of the stockholders or at any
special meeting of the stockholders if notice of such alteration or repeal be
contained in the notice of such special meeting. Except as the stockholders may
otherwise agree, these By-laws may likewise be amended by a majority vote of all
Directors at any regular or special meeting of the Board of Directors if notice
of such alteration or repeal be contained in the notice of such special meeting.
ARTICLE 9
SPECIAL PROVISIONS
Section 9.1 SPECIAL PROVISIONS. Notwithstanding anything to the
contrary contained herein, the following provisions shall control:
a. Special meetings of the Board of Directors may be
called by any Director of the Company upon written notice given,
pursuant to the requirements of the By-laws, to each of the other
Directors.
b. Directors and committee members, as the case may be,
must be given at least 48 hours' written notice of any Board of
Directors meeting or meeting of any committee of the Board of
Directors. Any Director(s) shall be allowed to participate in Board and
committee meetings via telephone.
c. The Company shall reimburse each director of the
Company and each member of any committee established by the Board of
Directors for all reasonable out-of-
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pocket expenses incurred by such director or member in connection with
the attendance by such director or member at meetings of the Board of
Directors of the Company or at meetings of committees of the Board of
Directors, in any case, held in accordance with the By-laws.
d. Any stockholder or stockholder group holding at least
20% of the issued and outstanding Common Stock of the Company (assuming
the issuance of all Common Stock issuable pursuant to then outstanding
warrants, options, convertible or exchangeable securities and other
rights to acquire Common Stock from the Corporation, provided such
warrants, options, convertible or exchangeable securities are at the
time convertible or exchangeable) may call a special meeting of the
stockholders of the Company.
e. Notwithstanding the fact that no vote of the Board of
Directors may be required, or (in the specific instances requiring a
percentage vote) that a lesser percentage vote may be allowed by the
Delaware General Corporation Law, by the Certificate of Incorporation
or the By-laws of the Company or otherwise, the Company shall submit to
the Board of Directors (and not to any committee thereof) for its
review and prior approval all of the following items and actions:
(i) the Company's consolidated annual operating and
capital budgets;
(ii) the Company's consolidated business plan;
(iii) the making, alteration, amendment or repeal of the
Certificate of Incorporation of the Company or any part
thereof, or the making, alteration, amendment or repeal of the
By-laws or any part thereof, of the Company;
(iv) the (a) incurrence of indebtedness for borrowed money
in the name, for the account or on behalf of the Company or
any of its subsidiaries in excess of an aggregate amount of
$5,000,000 or (b) investment in the Company or any of its
subsidiaries by another person or entity;
(v) the investment (exclusive of amounts on deposit with
banks or lending institutions and short term U.S. government
obligations) by the Company or any of its subsidiaries
(whether by way of exchange, purchase, loan, advance, capital
contribution or otherwise) in any person or entity or
affiliated person or entity in excess of an aggregate amount
of $1,000,000;
(vi) (a) any capital expenditures by the Company or any of
its subsidiaries in excess of $1,000,000, or (b) the Company
or any of its subsidiaries entering into any contract or other
agreement involving anticipated expenditures or otherwise
having a total value over the term of such contract or
agreement greater than $1,000,000; and
(vii) (a) the sale of all or substantially all of the
assets of the Company or any of its subsidiaries in any one
transaction or a series of related transactions, or (b) the
transfer or licensing of the technology (or any part thereof)
of the Company or
11
<PAGE>
any of its subsidiaries other than in the ordinary course of
business (including, on an exclusive basis in terms of
territory, field of use or otherwise).
12
<PAGE>
AGREEMENT OF PURCHASE AND SALE
BY AND BETWEEN
LEITCH TECHNOLOGY CORPORATION
AND
PATH 1 NETWORK TECHNOLOGIES INC.
DATED AS OF APRIL 10, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. PURCHASE AND SALE OF THE PATH 1 SHARES.................................................................1
1.1 Purchase and Sale of the Path 1 Shares........................................................1
1.2 Purchase Price................................................................................1
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................................1
2.1 Organization and Qualification; Company Subsidiaries..........................................2
2.2 Conflicts.....................................................................................2
2.3 Capitalization................................................................................2
2.4 Reports; Financial Statements; Undisclosed Liabilities........................................3
2.5 Issuance of Path 1 Shares.....................................................................3
2.6 Absence of Certain Changes....................................................................3
2.7 Taxes.........................................................................................4
2.8 Real Property Owned or Leased.................................................................4
2.9 Title to Assets...............................................................................4
2.10 Contractual and Other Obligations.............................................................5
2.11 Employee Benefit Plans........................................................................5
2.12 Labor Relations...............................................................................5
2.13 Insurance.....................................................................................5
2.14 Litigation....................................................................................5
2.15 Permits; Compliance with Applicable Law.......................................................5
2.16 Intellectual Property.........................................................................6
2.17 Consents......................................................................................6
2.18 Foreign Person................................................................................6
2.19 Authority.....................................................................................6
2.20 Brokers and Finders...........................................................................7
2.21 Compensation..................................................................................7
2.22 Full Disclosure...............................................................................7
2.23 Investment....................................................................................7
2.24 Legend........................................................................................8
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF PURCHASER.........................................................10
3.1 Organization and Qualification; Purchaser Subsidiaries.......................................10
3.2 Conflicts....................................................................................10
3.3 Capitalization...............................................................................10
3.4 Financial Statements; Undisclosed Liabilities................................................10
3.5 Issuance of Leitch Shares....................................................................11
3.6 Consents.....................................................................................11
3.7 Authority....................................................................................11
3.8 Reports......................................................................................11
3.9 Full Disclosure..............................................................................12
3.10 Investment...................................................................................12
3.11 Legend.......................................................................................13
3.12 Brokers and Finders..........................................................................13
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
3.13 Leitch Shares................................................................................13
ARTICLE IV. ADDITIONAL COVENANTS AND AGREEMENTS..................................................................14
4.1 Interim Operations of the Company............................................................14
4.2 Alternative Proposals........................................................................16
4.3 Reasonable Best Efforts......................................................................17
4.4 Purchaser Access to Information..............................................................18
4.5 Publicity....................................................................................18
4.6 Notification of Certain Matters..............................................................18
4.7 Stock Exchange Listings and Form 10..........................................................19
4.8 Company Disclosure Schedule..................................................................19
4.9 Registration Rights..........................................................................19
ARTICLE V. CLOSING...............................................................................................20
5.1 Time and Place of Closing....................................................................20
5.2 Closing Deliveries...........................................................................20
5.3 Delivery of Path 1 Shares....................................................................21
5.4 Tax Matters..................................................................................22
ARTICLE VI. CONDITIONS TO THE PURCHASE AND SALE OF THE PATH 1 SHARES.............................................22
6.1 Conditions to Each Party's Obligations to Close..............................................22
6.2 Conditions to the Obligations of Purchaser...................................................22
6.3 Conditions to the Obligations of the Company.................................................23
ARTICLE VII. TERMINATION.........................................................................................24
7.1 Termination..................................................................................24
7.2 Effect of Termination........................................................................25
ARTICLE VIII. INDEMNIFICATION....................................................................................25
8.1 Indemnity....................................................................................25
8.2 Limitation on Indemnity......................................................................25
8.3 Procedure....................................................................................25
8.4 Remedies.....................................................................................26
8.5 Time Limit...................................................................................26
ARTICLE IX. MISCELLANEOUS AND GENERAL............................................................................26
9.1 Payment of Expenses and Other Payments.......................................................26
9.2 Survival of Representations and Warranties...................................................26
9.3 Modification or Amendment....................................................................26
9.4 Waiver of Conditions.........................................................................26
9.5 Counterparts.................................................................................27
9.6 Governing Law................................................................................27
9.7 Jurisdiction; Waiver of Trial by Jury........................................................27
9.8 Notices......................................................................................27
9.9 Entire Agreement; Assignment.................................................................28
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9.10 Parties in Interest..........................................................................28
9.11 Validity.....................................................................................28
9.12 Captions.....................................................................................29
9.13 Specific Performance.........................................................................29
9.14 "Knowledge"of the Company or Purchaser.......................................................29
ARTICLE X. DEFINITIONS...........................................................................................29
10.1 Certain Definitions..........................................................................29
</TABLE>
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<PAGE>
AGREEMENT OF PURCHASE AND SALE
AGREEMENT OF PURCHASE AND SALE (this "Agreement") dated as of
April 10, 2000, by and between Leitch Technology Corporation, a corporation
organized under the laws of the Province of Ontario ("Purchaser"), and Path 1
Network Technologies Inc., a Delaware corporation (the "Company"). Capitalized
terms used herein and not defined in the specific Section in which they are used
shall have the meanings assigned to such terms in Article X hereof.
RECITALS
WHEREAS, the Company is engaged in the business of developing
software and hardware technologies which enable the merging of disparate digital
information over the same network infrastructure and related activities from its
headquarters in San Diego, California;
WHEREAS, Purchaser desires to acquire from the Company
1,250,000 newly issued shares of Class A common stock, $.001 par value (the
"Path 1 Class A Common Stock"), of the Company (all such 1,250,000 shares of
Path 1 Class A Common Stock being hereinafter referred to as the "Path 1
Shares") and the Company desires to sell all of the Path 1 Shares to Purchaser,
on the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements set forth
herein, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF THE PATH 1 SHARES
1.1 PURCHASE AND SALE OF THE PATH 1 SHARES. Subject to
the terms and conditions of this Agreement and on the basis of the
representations, warranties, covenants and agreements herein contained, at the
Closing (as hereinafter defined), the Company agrees to sell, assign and convey
to Purchaser, and Purchaser agrees to purchase, acquire and accept from the
Company, the Path 1 Shares.
1.2 PURCHASE PRICE. The purchase price (the "Purchase
Price") for the Path 1 Shares is Ten Million U.S. Dollars ($10,000,000) and
200,000 common shares, no par value (the "Leitch Common Shares"), of Purchaser
(such 200,000 Leitch Common Shares being hereinafter referred to as the "Leitch
Shares"). The Purchase Price for the Path 1 Shares is payable at the Closing by
delivery to the Company of a wire transfer in immediately available funds to an
account designated by the Company in the amount of U.S. $10,000,000 and a
certificate representing the Leitch Shares registered in the name of the
Company.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser as
follows:
<PAGE>
2.1 ORGANIZATION AND QUALIFICATION; COMPANY SUBSIDIARIES.
The Company is a corporation validly existing and in good standing under the
laws of the State of Delaware, and has all requisite corporate power and
authority to own, operate and lease its assets and properties and to conduct the
businesses in which it is now engaged. The Company is duly qualified to transact
business as a foreign corporation in all jurisdictions wherein it is required to
be so qualified, except where the failure to be so qualified would not have a
Company Material Adverse Effect. The Company does not have any subsidiaries
other than as set forth in Section 2.1 of the disclosure schedule delivered to
Purchaser by the Company concurrently with the execution hereof (the "Company
Disclosure Schedule"). The Company does not own any capital stock or other
proprietary interest, directly or indirectly, in any corporation, association,
trust, partnership, joint venture, limited liability company or other Person nor
is the Company bound by any agreement to acquire any such capital stock or other
proprietary interest.
2.2 CONFLICTS. Neither the execution and delivery of this
Agreement by the Company, nor the consummation of the transactions contemplated
hereby (the "Transactions") to be consummated by the Company, (a) violates any
provision of the Certificate of Incorporation or By-laws of the Company or (b)
constitutes a violation of any Applicable Law. Except as set forth in Section
2.2 of the Company Disclosure Schedule, neither the execution and delivery of
this Agreement by the Company, nor the consummation of the Transactions
contemplated hereby to be consummated by the Company, violates, conflicts with,
results in any breach of any of the terms of, or results in the termination of
or the creation of any Lien pursuant to the terms of any material agreement,
instrument, or contract to which the Company is a party or by which it is bound,
except where such violation, conflict, breach, termination or Lien would not
have a Company Material Adverse Effect.
2.3 CAPITALIZATION. The authorized capital stock of the
Company consists of: (i) 20,000,000 shares of Path 1 Class A Common Stock, of
which, as of the date hereof, 6,462,651 shares were issued and outstanding, (ii)
10,000,000 shares of Path 1 Class B Common Stock, of which, as of the date
hereof, no shares of Path 1 Class B Common Stock were issued and outstanding and
(iii) 10 shares of Series A preferred stock, of which, as of the date hereof, no
shares were issued and outstanding. Except for (i) 897,336 options to purchase
the same number of shares of Path 1 Class A Common Stock, (ii) 642,996 options
to purchase the same number of shares of Path 1 Class B Common Stock and (iii)
up to a maximum of 650,000 options to purchase the same number of shares of Path
1 Class B Common Stock which may be granted to current or future officers,
employees or consultants of the Company, there are no outstanding options,
warrants, rights, convertible or exchangeable securities, proxy or stockholders'
agreements or agreements of any kind for the purchase or acquisition from, or
issuance by, the Company of any of its securities. Except for the Stockholders'
Agreement, there are no outstanding agreements or other arrangements to which
the Company is a party concerning the voting of any shares of capital stock of
the Company or which obligate the Company to redeem or otherwise acquire from
any Person any shares of capital stock of the Company. All outstanding shares of
capital stock of the Company are duly authorized, validly issued, fully paid and
nonassessable.
2
<PAGE>
2.4 REPORTS; FINANCIAL STATEMENTS; UNDISCLOSED
LIABILITIES.
(a) On March 23, 2000, the Company re-filed a
General Form for Registration of Securities on Form 10 (the "Form 10") with the
Securities and Exchange Commission (the "SEC") pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). On the re-filing date,
the Form 10 complied in all material respects with the applicable requirements
of the Exchange Act, and the published rules and regulations of the SEC
thereunder. The Form 10 will not, on the effective date thereof, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(b) On the filing date, the financial statements
(including the related notes thereto) of the Company included in the Form 10
complied in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto, were
prepared in conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis during the periods involved (except as otherwise
noted therein) and presented fairly in all material respects the financial
position of the Company as of their respective dates, and the results of its
operations and cash flows for the periods presented therein (subject, in the
case of the unaudited interim financial statements, to normal year-end
adjustments). As of the date of the Company's most recent regularly prepared
consolidated balance sheet, the Company had less than $10,000,000 of
consolidated total assets.
(c) Except (i) as set forth in Section 2.4(c) of
the Company Disclosure Schedule, (ii) as set forth in the balance sheet of the
Company as of December 31, 1999 set forth in the Form 10 (the "Balance Sheet")
and (iii) for current liabilities and obligations incurred in the ordinary
course of business consistent with past practice since December 31, 1999 (and
not materially different in type or amount), the Company does not have any
material liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) required by GAAP to be recognized or disclosed on a
balance sheet of the Company or in the notes thereto.
2.5 ISSUANCE OF PATH 1 SHARES. When issued, sold and
delivered to Purchaser in accordance with the terms of this Agreement for the
consideration expressed herein, the Path 1 Shares shall be duly and validly
authorized, fully paid and non-assessable shares of Path 1 Class A Common Stock
free and clear of any restrictions on transfer, other than restrictions on
transfer under the Stockholders' Agreement or applicable state, foreign and
federal securities laws, and free and clear of any preemptive or similar rights.
2.6 ABSENCE OF CERTAIN CHANGES. Since the date of the
Balance Sheet, (i) the Company has conducted its business in the ordinary and
usual course consistent with past practice, and (ii) there has not occurred any
events or changes having, or reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect.
3
<PAGE>
2.7 TAXES. Except as set forth in Section 2.7 of the
Company Disclosure Schedule:
(a) The Company has filed or caused to be filed
on a timely basis all returns, reports or other declarations relating to Taxes
required to be filed by it (the "Tax Returns"), except for any such Tax Returns
the failure to file which would not have a Company Material Adverse Effect, and
the Company has timely paid or caused to be paid all federal, state, local,
provincial and foreign taxes (including, but not limited to, income, franchise,
property (real, tangible and intangible), sales, use, unemployment, withholding,
gross receipts, business license, transfer, capital, net worth, gains, excise,
social security and workers' compensation taxes and estimated income and
franchise tax payments, and penalties, interest and fines with respect to any
thereof) (collectively, "Taxes") payable by it with respect to the periods
covered by such Tax Returns.
(b) The Company has not received written notice
from any taxing authority of any deficiency, claim or other dispute relating to
the payment or assessment of any Taxes for any period which remains unsettled at
the date hereof.
(c) The Company has not executed any waiver of
any statute of limitations on the assessment or collection of Taxes.
(d) There are no Liens for Taxes (other than
Permitted Liens) upon or, to the Company's Knowledge threatened against any
assets of the Company, other than Liens which would not have a Company Material
Adverse Effect.
(e) The Company is not a party to any pending
or, to the Company's Knowledge, threatened action, proceeding or assessment by
any taxing authority, foreign or domestic, relating to the Company.
(f) No election under Section 341(f) of the Code
has been made to treat the Company as a "consenting corporation" as defined in
such Section 341(f).
(g) The Company is not and never has been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code.
2.8 REAL PROPERTY OWNED OR LEASED. The Company does not
own any real property. Except as set forth in Section 2.8 of the Company
Disclosure Schedule, the Company enjoys peaceful and undisturbed possession
under all leases under which it is the lessee, and all said leases are valid and
subsisting and in full force and effect, except with respect to Permitted Liens,
or as could not reasonably be expected to have a Company Material Adverse
Effect.
2.9 TITLE TO ASSETS. Except as set forth in Section 2.9
of the Company Disclosure Schedule, the Company has good and merchantable title
to all of the properties and assets (tangible and intangible) which it owns and
valid and existing leaseholds, licenses or other rights to use all of the other
properties and assets which it leases, licenses or uses in the operation of its
business as currently conducted, in any case, free and clear of all Liens,
except for Permitted Liens, or as could not reasonably be expected to have a
Company Material Adverse Effect.
4
<PAGE>
2.10 CONTRACTUAL AND OTHER OBLIGATIONS. The Company does
not have and is not bound by any material contract, agreement, lease,
commitment, or proposed transaction, judgment, order, writ or decree, written or
oral, absolute or contingent, other than those that have been entered into in
the ordinary course of business or as set forth on Section 2.10 of the Company
Disclosure Schedule. The Company is not, and to the Company's Knowledge no other
Person party thereto is, in violation or default in any material respect of any
provision of any material agreement, instrument, or contract to which the
Company is a party or by which the Company is bound.
2.11 EMPLOYEE BENEFIT PLANS. Except as set forth in
Section 2.11 of the Company Disclosure Schedule, the Company does not maintain
or sponsor, nor is it required to make contributions to, any pension,
profit-sharing, bonus, incentive, welfare or other employee benefit plan within
the meaning of Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") (such plans and related trusts, insurance and annuity
contracts, funding media and related agreements and arrangements, being
hereinafter referred to as the "Benefit Plans").
2.12 LABOR RELATIONS. Except as set forth in Section 2.12
of the Company Disclosure Schedule, there are no labor strikes, stoppages or
lockouts between the Company and its employees and the Company is not a party to
any contract or agreement with any labor organization or collective bargaining
unit.
2.13 INSURANCE. The Company carries insurance covering its
properties and business adequate and customary for the type and scope of the
properties and business.
2.14 LITIGATION. Except or as set forth in Section 2.14 of
the Company Disclosure Schedule, there is no litigation, arbitration, claim or
other legal proceeding (collectively, "Actions") pending or, to the Company's
Knowledge, threatened against the Company, or any of its properties or assets
(tangible or intangible), except Actions which, individually or in the
aggregate, could not reasonably be expected to result in a Company Material
Adverse Effect.
2.15 PERMITS; COMPLIANCE WITH APPLICABLE LAW.
(a) PERMITS. The Company has all permits,
licenses, approvals, franchises and authorizations (collectively, the "Permits")
required for the conduct of the business in which it is presently engaged,
except for such Permits which the failure to have, individually or in the
aggregate, would not have a Company Material Adverse Effect. All of the Permits
are in full force and effect, except where the failure to be in effect,
individually or in the aggregate, would not have a Company Material Adverse
Effect.
(b) APPLICABLE LAW. Except as set forth in
Section 2.15(b) of the Company Disclosure Schedule, the Company is not in
violation of any Applicable Law applicable to it, except where the failure to be
in compliance, individually or in the aggregate, could not, individually or in
the aggregate, reasonably be expected to have a Company Material Adverse Effect.
5
<PAGE>
2.16 INTELLECTUAL PROPERTY. As of the date hereof, the
Company does not have any issued patents or trademarks. Section 2.16 of the
Company Disclosure Schedule sets forth a list as of the date hereof of all the
Company's pending applications for patents, all of the Company's pending
applications for trademarks, tradenames and service marks, all registrations of
copyrights and all pending applications therefor, and all licenses and
agreements in respect thereof (collectively, the "Registered Intellectual
Property"). To the Company's Knowledge, all of the patents, trademarks,
tradenames, service marks, copyrights and licenses or other agreements listed in
Section 2.16 of the Company Disclosure Schedule are valid and in full force and
effect, except as otherwise noted in Section 2.16 of the Company Disclosure
Schedule. Except as set forth in Section 2.16 of the Company Disclosure Schedule
and except as could not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect, (i) to the Company's
Knowledge, the rights of the Company to the Registered Intellectual Property and
to all other intellectual property used or held for use in the business of the
Company, except commercially available over-the-counter shrink-wrapped software,
(the "Other Intellectual Property") do not conflict with or infringe on the
rights of any Person and the Company has not received any written notice
alleging that the Company has violated or, by conducting its business as
proposed, would violate the intellectual property rights of such Person, and
(ii) to the Company's Knowledge, no other Person is infringing on the rights of
the Company to its Registered Intellectual Property or the Other Intellectual
Property.
2.17 CONSENTS. Except for such filings as are required to
be made by the Company and exemptions, rulings or orders as are required under
any federal, state or foreign securities laws (all of which will be made or
obtained on or prior to the Closing) and except as set forth in Section 2.17 of
the Company Disclosure Schedule, no consents, approvals or authorizations of, or
filings with, any Governmental Authority or any other Person are required on the
part of the Company in connection with the execution and delivery of this
Agreement by the Company and the consummation of the Transactions contemplated
hereby to be consummated by the Company, except where the failure to obtain such
consents, approvals, or authorizations, or make such filings, could not,
individually or in the aggregate, have a Company Material Adverse Effect. No
security of the Company is, as of the date hereof, (i) listed on any national
securities exchange, (ii) authorized for quotation on The Nasdaq Stock Market or
(iii) held of record by more than 2,000 stockholders.
2.18 FOREIGN PERSON. The Company is not a foreign person
within the meaning of Section 1445(f)(3) of the Code.
2.19 AUTHORITY. The Company has the requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
Transactions. The execution, delivery and performance of this Agreement has been
duly and validly authorized by the Company's Board of Directors and no other
corporate action on the part of the Company is necessary to authorize this
Agreement or to consummate the transactions contemplated by this Agreement. This
Agreement has been duly and validly executed and delivered by the Company and,
assuming this Agreement constitutes the valid and binding agreement of
Purchaser, constitutes the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except that the
enforcement hereof may be limited (i) by bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally, (ii) by general principles of equity (regardless of
whether
6
<PAGE>
enforceability is considered in a proceeding in equity or at law) and (iii) as
to rights to indemnity that are contrary to applicable securities laws.
2.20 BROKERS AND FINDERS. Other than First Security Van
Kasper, the Company has not entered into a written agreement with any investment
banker, broker, finder, advisor, consultant or intermediary in connection with
the Transactions which would be entitled to any investment banking, brokerage,
finders, advisory or similar fee or commission in connection with this Agreement
or the Transactions.
2.21 COMPENSATION. Except as set forth in Section 2.22 of
the Company Disclosure Schedule, the Company is not bound by any bonus plan,
incentive plan, stock option plan, stock purchase plan, severance plan or other
benefits plans or arrangements.
2.22 FULL DISCLOSURE. No representation or warranty by the
Company in this Agreement and no statement by the Company contained in any
exhibit, disclosure schedule, or certificate contemplated by this Agreement
contains or will contain any untrue statement of material fact or omits or will
omit to state any material fact necessary, in light of the circumstances under
which it was made, in order to make the statements herein or therein not
misleading.
2.23 INVESTMENT. Without limiting the effect of Article
VIII hereof:
(a) The Company understands that Purchaser
proposes to issue and deliver to the Company the Leitch Shares pursuant to this
Agreement without registration under the Securities Act of 1933, as amended (the
"Securities Act") or under any other Applicable Law; that for such purpose
Purchaser will rely upon the Company's representations and warranties contained
herein; and that registration under the Securities Act may be required if such
representations and warranties are not correct.
(b) The Company has received such information
relating to the business and affairs of Purchaser which could reasonably be
deemed necessary or appropriate by the Company, and all additional information
which is necessary to verify the accuracy of the information so received. The
Company has had the opportunity to ask questions of and receive answers from
Purchaser concerning the business and affairs of Purchaser and concerning terms
and conditions of the Transactions. On the basis of the foregoing, the Company
is familiar with the operations, business plans and financial condition of
Purchaser.
(c) The Company understands that, under the
existing rules of the SEC, the Company may be unable to sell the Leitch Shares
issued to the Company pursuant to this Agreement, except to the extent that such
shares may be sold (i) pursuant to an effective registration statement covering
such sale pursuant to the Securities Act and applicable state securities laws or
an applicable exemption therefrom or (ii) in a bona fide private placement to a
purchaser who shall be subject to the same restrictions on any resale or (iii)
subject to the restrictions contained in Rule 144 under the Securities Act
("Rule 144") or (iv) outside the United States in compliance with the
requirements of Rule 904 of Regulation S under the Securities Act ("Rule 904").
7
<PAGE>
(d) The Company is not relying on Purchaser
respecting the financial, tax and other economic considerations of an investment
in the Leitch Shares issued to the Company pursuant to this Agreement, and the
Company has relied on the advice of, or has consulted with, its own advisors.
(e) The Company is familiar with the provisions
of Rule 144 and Rule 904 and the limitations upon the availability and
applicability of such rules.
(f) The Company is an "accredited investor"
within the meaning of Regulation D under the Securities Act and is a
sophisticated investor familiar with the type of risks inherent in the
acquisition of restricted securities such as the Leitch Shares issued to the
Company pursuant to this Agreement, and its financial position is such that it
can afford to retain such shares for an indefinite period of time without
realizing any direct or indirect cash return on its investment.
(g) The Company has such knowledge and
experience in financial, tax and business matters so as to enable it to utilize
the information made available to it in connection with the issuance of the
Leitch Shares issued to the Company pursuant to this Agreement to evaluate the
merits and risks of an investment in such shares and to make an informed
investment decision with respect thereto.
(h) The Company is acquiring the Leitch Shares
issued to the Company pursuant to this Agreement as an investment for its
account, and without any present view towards the resale or other distribution
thereof.
(i) The Company has been independently advised
as to or is aware of the restrictions with respect to trading in the Leitch
Shares imposed by applicable securities legislation in the jurisdiction in which
it resides and confirms that no representation has been made respecting such
restrictions with respect to trading in the Leitch Shares.
(j) The Company acknowledges that the Leitch
Shares are not qualified for distribution to the public in Canada. The Company
certifies that (a) the Company is not a Canadian resident nor acting for the
account or benefit of a Canadian resident; (b) the Leitch Shares were not
offered to the Company in Canada, and the Company was, at the time of agreeing
to sell the Path 1 Shares, and is outside Canada; and (c) for a period ending 40
days after the date of issuance of the Leitch Shares to the Company, the Company
will not resell the Leitch Shares to any Canadian resident or in Canada and,
thereafter, any resale by the Company to a Canadian resident or in Canada will
be made in accordance with applicable securities laws of the provinces and
territories of Canada.
2.24 LEGEND. Each certificate representing Leitch Shares
issued to the Company pursuant to this Agreement, shall contain upon its face or
upon the reverse side thereof a legend to the following effect:
"These securities have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or
qualified for distribution to the public in Canada or
qualified under state securities laws and may not be sold,
pledged, or otherwise
8
<PAGE>
transferred unless (a) covered by an effective registration
statement under the Securities Act, and qualified under
applicable state securities laws; (b) sold outside the United
States in accordance with Rule 904 of Regulation S under the
Securities Act; (c) pursuant to an exemption from registration
under the Securities Act provided by Rule 144 thereunder, if
available; or (d) in compliance with certain other procedures
satisfactory to Leitch Technology Corporation upon the
furnishing to Leitch Technology Corporation of an opinion from
counsel of recognized national standing in form and substance
satisfactory to Leitch Technology Corporation to the effect
that no registration or qualification is legally required for
such transfer. The holder hereof, by acquiring such
securities, agrees for the benefit of Leitch Technology
Corporation that for a period ending 40 days after the date of
the issuance of those securities by Leitch Technology
Corporation, the holder will not resell those securities to
any Canadian resident or in Canada. Delivery of this
certificate may not constitute "good delivery" in settlement
of transactions on the Toronto Stock Exchange. A new
certificate, bearing no legend, delivery of which will
constitute "good delivery", may be obtained from Leitch
Technology Corporation's Transfer Agent in connection with a
sale made pursuant to Rule 904 of Regulation S at a time
Leitch Technology Corporation is a "foreign private issuer" as
defined in Rule 405 under the Securities Act upon delivery of
this certificate after 40 days after the issuance of the
securities by Leitch Technology Corporation and a duly
executed declaration, in a form satisfactory to such Transfer
Agent and Leitch Technology Corporation, to the effect that
(A) the sale of the securities represented hereby is being
made in compliance with Rule 904 of Regulation S under the
Securities Act; and (B) certifying that (1) the buyer is not
an "Affiliate" (as defined in Rule 405 under the Securities
Act) of Leitch Technology Corporation; (2) the offer of such
securities was not made to a person in the United States and
either (x) at the time the buy order was originated, the buyer
was outside the United States, or Path 1 Network Technologies,
Inc. and any person acting on its behalf reasonably believe
that the buyer was outside the United States, or (y) the
transaction was executed on or through the facilities of the
Toronto Stock Exchange and neither Path 1 Network
Technologies, Inc. nor any person acting its behalf knows that
the transaction has been prearranged with a buyer in the
United States; (3) neither Path 1 Network Technologies, Inc.
nor any person acting on its behalf engaged in any directed
selling efforts in connection with the offer and sale of such
securities; (4) the sale is bona fide and not for the purpose
of "washing off" resale restrictions imposed because the
securities are "restricted securities"; and (5) the sale is
not a
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transaction or part of a series of transactions which,
although in technical compliance with Regulation S, is part of
a plan or scheme to evade the registration requirements of the
Securities Act. Terms used herein have the meanings given to
them by Regulation S."
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to the Company that:
3.1 ORGANIZATION AND QUALIFICATION; PURCHASER
SUBSIDIARIES. Purchaser is validly existing, under the laws of the jurisdiction
of its organization, and has all requisite corporate power, authority and legal
right to own, operate and lease its assets and properties and to conduct the
businesses in which it is now engaged. Purchaser is duly qualified to transact
business as a foreign corporation in all jurisdictions wherein it is required to
be so qualified, except where the failure to be so qualified would not have a
Purchaser Material Adverse Effect. Copies of the Articles of Incorporation and
By-laws or other organizational documents of Purchaser have been heretofore made
available to the Company, which copies are complete and correct and include all
amendments, modifications or supplements thereto.
3.2 CONFLICTS. Neither the execution and delivery of this
Agreement by Purchaser, nor the consummation of the Transactions to be
consummated by Purchaser, (a) violates any provision of the Articles of
Incorporation or By-laws of Purchaser or (b) subject to receipt of regulatory
approvals and required filings under federal, state and provincial securities
laws and the Ontario Business Corporations Act, constitutes a violation of any
Applicable Law. Neither the execution and delivery of this Agreement by
Purchaser nor the consummation of the Transactions contemplated hereby to be
consummated by Purchaser, violates, conflicts with, results in any breach of any
of the terms of, or results in the termination of or the creation of any
material Lien pursuant to the terms of any material contract or other obligation
to which Purchaser is subject, except where such violation, conflict, breach,
termination or Lien would not have a Purchaser Material Adverse Effect.
3.3 CAPITALIZATION. The authorized capital stock of
Purchaser consists of: (i) an unlimited number of shares of Leitch Common
Shares, of which, as of the date hereof, 25,071,573 shares of Leitch Common
Shares were issued and outstanding and (ii) an unlimited number of preference
shares, of which, as of the date hereof, no preference shares were issued and
outstanding. All outstanding shares of capital stock of Purchaser are, and all
shares of Leitch Common Shares to be issued as part of the Purchase Price will
be, when so issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights.
3.4 FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES.
Purchaser has made available to the Company its audited consolidated financial
statements dated April 30, 1999 and its unaudited consolidated financial
statements (including the related notes thereto) of Purchaser for the nine
months ended January 31, 2000 which have been prepared in conformity with GAAP
in Canada applied on a consistent basis during the periods involved (except as
otherwise noted therein), and presented fairly in all material respects the
consolidated financial position of Purchaser as of their respective dates, and
the consolidated results of their operations and cash
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flows for the periods presented therein (subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments).
3.5 ISSUANCE OF LEITCH SHARES. When issued, sold and
delivered in accordance with the terms of this Agreement for the consideration
expressed herein to the Company, the Leitch Shares shall be duly and validly
authorized, fully paid and non-assessable Leitch Common Shares free and clear of
any restrictions on transfer, other that the restrictions on transfer under this
Agreement, or applicable state, federal, provincial and foreign securities laws.
Prior to the date hereof, Purchaser has filed an application with The Nasdaq
Stock Market to list the Leitch Common Shares thereon.
3.6 CONSENTS. Except for (i) such filings as may be
required by the By-laws, rules, regulations or policies of The Toronto Stock
Exchange in respect of Leitch Common Shares to be issued as part of the Purchase
Price and the listing of such Leitch Common Shares on The Toronto Stock Exchange
and (ii) such filings as are required to be made and exemption rulings or orders
as are required under the Ontario Business Corporations Act and Canadian
securities laws, no consents, approvals or authorizations of, or filings with,
any Governmental Authority or any other person or entity are required in
connection with the execution and delivery of this Agreement by Purchaser and
the consummation of the Transactions contemplated hereby to be consummated by
Purchaser, except where the failure to obtain such consents, approvals, or
authorizations, or make such filings, would not have a Purchaser Material
Adverse Effect.
3.7 AUTHORITY. Purchaser has the requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
Transactions. The execution, delivery and performance of this Agreement and the
consummation by Purchaser of the Transactions have been duly and validly
authorized by the Board of Directors of Purchaser, and no other corporate action
on the part of Purchaser is necessary to authorize this Agreement or to
consummate the Transactions. This Agreement has been duly and validly executed
and delivered by Purchaser and, assuming this Agreement constitutes the valid
and binding agreement of the Company, constitutes the valid and binding
agreement of Purchaser, enforceable against it in accordance with its terms,
except that the enforcement hereof may be limited (i) by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally, (ii) by general principles of equity
(regardless of whether enforceability is considered in a proceeding in equity or
at law) and (iii) as to rights to indemnity under securities laws, by Applicable
Laws.
3.8 REPORTS. Purchaser is a reporting issuer under the
Securities Act (Ontario) (the "Ontario Securities Act"), is not on the list of
defaulting reporting issuers maintained under the Ontario Securities Act, and
has made available to the Company a true and complete copy of each quarterly,
annual or other form, report, filing or document filed by Purchaser with the
Governmental Authorities under the Ontario Securities Act, or under the rules,
policies, listing agreements or other requirements of The Toronto Stock Exchange
("Exchange Filing Requirements"), since July 9, 1999 which are all the forms,
reports, filing or documents (other than preliminary material) that Purchaser
was required to file with the Governmental Authorities under the Ontario
Securities Act, or pursuant to Exchange Filing Requirements, since July 9,
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1999. All of such forms, reports, filing or documents filed prior to the date of
this Agreement are hereinafter referred to as the "Purchaser Disclosure
Documents."
(b) As of their respective filing dates, the
Purchaser Disclosure Documents complied in all material respects with the
requirements of the Ontario Securities Act, the rules and regulations of
Governmental Authorities under the Ontario Securities Act, other Applicable Law,
and the Exchange Filing Requirements. As of their filing dates or effective
dates (whichever is later), none of the Purchaser Disclosure Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
3.9 FULL DISCLOSURE. No representation or warranty by
Purchaser in this Agreement and no statement by Purchaser contained in any
exhibit, disclosure schedule, or certificate contemplated by this Agreement
contains or will contain any untrue statement of material fact or omits or will
omit to state any material fact necessary, in light of the circumstances under
which it was made, in order to make the statements herein or therein not
misleading.
3.10 INVESTMENT. Without limiting the effect of Article
VIII hereof:
(a) Purchaser understands that the Company
proposes to issue and deliver to Purchaser Path 1 Shares pursuant to this
Agreement without registration under the Securities Act; that for such purpose
the Company will rely upon Purchaser's representations and warranties contained
herein; and that registration under the Securities Act may be required if such
representations and warranties are not correct.
(b) Purchaser has received such information
relating to the business and affairs of the Company which Purchaser has
requested, and all additional information which Purchaser has considered
necessary to verify the accuracy of the information so received. Purchaser has
had the opportunity to ask questions of and receive answers from the Company
concerning the business and affairs of the Company and concerning terms and
conditions of the Transactions. On the basis of the foregoing, Purchaser is
familiar with the operations, business plans and financial condition of the
Company.
(c) Purchaser understands that, under the
existing rules of the SEC, Purchaser may be unable to sell the Path 1 Shares
issued to Purchaser pursuant to this Agreement, except to the extent that such
shares may be sold (i) pursuant to an effective registration statement covering
such sale pursuant to the Securities Act and applicable state securities laws or
an applicable exemption therefrom, (ii) in a bona fide private placement to a
purchaser who shall be subject to the same restrictions on any resale or (iii)
subject to the restrictions contained in Rule 144.
(d) Purchaser is not relying on the Company
respecting the financial, tax and other economic considerations of an investment
in the Path 1 Shares issued to Purchaser pursuant to this Agreement, and
Purchaser has relied on the advice of, or has consulted with, its own advisors.
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<PAGE>
(e) Purchaser is familiar with the provisions of
Rule 144 and the limitations upon the availability and applicability of such
rules.
(f) Purchaser is an "accredited investor" within
the meaning of Regulation D under the Securities Act and is a sophisticated
investor familiar with the type of risks inherent in the acquisition of
restricted securities such as the Path 1 Shares issued to Purchaser pursuant to
this Agreement, and its financial position is such that it can afford to retain
such shares for an indefinite period of time without realizing any direct or
indirect cash return on its investment.
(g) Purchaser has such knowledge and experience
in financial, tax and business matters so as to enable it to utilize the
information made available to it in connection with the issuance of the Path 1
Shares issued to Purchaser pursuant to this Agreement to evaluate the merits and
risks of an investment in such shares and to make an informed investment
decision with respect thereto.
(h) Purchaser is acquiring the Path 1 Shares
issued to Purchaser pursuant to this Agreement as an investment for its account,
and without any present view towards the resale or other distribution thereof.
(i) Purchaser has been independently advised as
to or is aware of the restrictions with respect to trading in the Path 1 Shares
imposed by applicable securities legislation in the jurisdiction in which it
resides and confirms that no representation has been made respecting such
restrictions with respect to trading in the Path 1 Shares.
3.11 LEGEND. Each certificate representing Path 1 Shares
issued to Purchaser pursuant to this Agreement, shall contain upon its face or
upon the reverse side thereof a legend as required by the Stockholders'
Agreement.
3.12 BROKERS AND FINDERS. Other than Yorkton Securities
Inc., Purchaser has not employed any investment banker, broker, finder, advisor,
consultant or intermediary in connection with the Transactions which would be
entitled to any investment banking, brokerage, finder's, advisory or similar fee
or commission in connection with this Agreement or the Transactions and the
Company does not, nor will it, have any obligation to pay Yorkton Securities
Inc. any fee or commission in connection with this Agreement or the consummation
of the Transactions.
3.13 LEITCH SHARES. Assuming (i) the accuracy of the
Company's representations and warranties as set forth in Section 2.23 hereof,
(ii) the Company's compliance with the requirements contained in the legend as
set forth in Section 2.24 hereof and (iii) that the Company does not hold, alone
or in combination with others, more than 20% of the outstanding voting
securities of Purchaser and does not otherwise hold a sufficient number of any
securities of Purchaser which would affect materially the control of Purchaser,
then the Leitch Shares will be freely tradeable through an appropriately
registered dealer in Canada.
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<PAGE>
ARTICLE IV.
ADDITIONAL COVENANTS AND AGREEMENTS
4.1 INTERIM OPERATIONS OF THE COMPANY. Except with
respect to (i) the investment in the Company of up to $5 million by certain
investors currently contemplated by the Company, (ii) all contracts, options,
bonuses, stock purchase agreements or other compensation and other arrangements
made with respect to Michael T. Elliott and [****] and (iii) bonuses
not to exceed $50,000 and option grants not to exceed 50,000 shares of capital
stock of the Company made to certain employees or consultants, other than
Michael T. Elliott and [****], and except as set forth in Section 4.1
of the Company Disclosure Schedule, during the period from the date of this
Agreement to the date of Closing or termination of this Agreement pursuant to
Article VII hereof (unless Purchaser shall otherwise agree in writing and except
as otherwise contemplated by this Agreement), the Company shall conduct its
operations according to its ordinary and usual course of business in
substantially the same manner as heretofore conducted and use its reasonable
best efforts to preserve intact its current business organization, keep
available the services of its current officers and subject to the prudent
management of workforce needs, its employees and preserve its relationships with
customers, suppliers and others having business dealings with it. Without
limiting the generality of the foregoing, and except as otherwise contemplated
by this Agreement or as set forth in Section 4.1 of the Company Disclosure
Schedule, the Company shall not without the prior written consent of Purchaser:
(i) directly or indirectly, amend its
Certificate of Incorporation or By-laws or similar organizational documents;
(ii) (A) declare, set aside or pay any dividend
or other distribution payable in cash, stock or property with respect to the
Company's capital stock, (B) redeem, purchase or otherwise acquire directly or
indirectly any shares of any class or series of the Company's capital stock or
any instrument or security which consists of or includes a right to acquire such
shares; (C) issue, sell, transfer, pledge, dispose of or encumber any shares of
any class or series of the Company's capital stock or voting debt, or securities
convertible into or exchangeable for, or options, warrants, calls, commitments
or rights of any kind to acquire, any shares of any class or series of the
Company's capital stock or voting debt, other than (x) shares of Path 1 Class A
Common Stock and/or Path 1 Class B Common Stock issued upon the exercise of
options or other rights outstanding on the date hereof and (y) the issuance of
options to employees or consultants to the Company in the ordinary course of
business; or (D) split, combine or reclassify the outstanding capital stock of
the Company;
(iii) acquire or agree to acquire by merging or
consolidating with, or by purchasing an equity interest in a substantial portion
of the assets of, or by any other manner, any business or any Person or other
business organization or division thereof;
(iv) alter (through merger, liquidation,
reorganization, restructuring or in any other fashion), the corporate structure
or ownership of the Company;
(v) make any new capital expenditures outside
the ordinary course of business;
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(vi) amend or terminate any material contract or
enter into any agreement which would constitute a material contract, except, in
any case, in the ordinary course of business consistent with past practice;
PROVIDED that any such amendment or termination does not have a Company Material
Adverse Effect, or waive, release or assign any material rights or claims;
(vii) transfer, lease, license, sell or dispose of
any of their respective assets other than dispositions in the ordinary course of
business and consistent with past practice; PROVIDED that the fair market value
of assets sold does not exceed $100,000 in any single transaction or $500,000 in
the aggregate;
(viii) mortgage, pledge or encumber any of their
respective assets, except, in any case, in the ordinary course of business
consistent with past practice; PROVIDED that any such actions would not have a
Company Material Adverse Effect.
(ix) except the employment agreement to be
entered into between the Company and Michael T. Elliott, enter into any
employment or severance agreement with or grant any severance or termination pay
to any officer or director of the Company;
(x) except in the ordinary and usual course of
business, as required to comply with Applicable Law or expressly provided in
this Agreement, (A) adopt, enter into, amend or increase the amount or
accelerate the payment or vesting of any benefit or award or amount payable
under, any Benefit Plan or other contract, agreement, commitment, arrangement,
plan, trust, fund or policy maintained by, contributed to or entered into by the
Company for the current or future benefit or welfare of any director, officer or
current or former employee, except to the extent necessary to coordinate any
such Benefit Plans with the terms of this Agreement, (B) increase in any manner
the compensation or fringe benefits of, or pay any bonus to, any director,
officer or employee or consultant of the Company (other than normal recurring
increases in wages to employees who are not officers or directors or Affiliates
in the ordinary course of business consistent with past practice), (C) pay any
benefit not provided for under any Benefit Plan, (D) grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
Benefit Plan (including the grant of stock options, stock appreciation rights,
stock based or stock related awards, performance units or restricted stock, or
the removal of existing restrictions in any Benefit Plans or agreements or
awards made thereunder, except, in the case of stock grants or option grants to
employees of or consultants to the Company made in the ordinary course of
business) or (E) take any action to fund or in any other way secure the payment
of compensation or benefits under any employee plan, agreement, contract or
arrangement or Benefit Plan;
(xi) (A) incur or assume any long term
indebtedness, or except in the ordinary course of business, incur or assume any
short term indebtedness in amounts inconsistent with past practice (provided,
that such short-term indebtedness outstanding does not exceed $25,000 at any
given time), (B) modify the terms of any indebtedness or other liability, except
as set forth in Section 4.1 of the Company Disclosure Schedule, (C) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person (except for
checks endorsed for collection in the ordinary course of business) or (D) make
any loans, advances or capital contributions to, or investments
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in, any other Person other than (x) travel and other expense advances to
employees in the ordinary course of business and (y) investments in publicly
traded securities constituting less than 1.0% of the outstanding equity of the
issuing entity);
(xii) change any of the accounting methods used by
it unless required by GAAP;
(xiii) make any material election relating to
Taxes, change any material election relating to Taxes already made, adopt any
material accounting method relating to Taxes, change any material accounting
method relating to Taxes unless required by GAAP, enter into any closing
agreement relating to Taxes, settle any claim or assessment relating to Taxes or
consent to any claim or assessment relating to Taxes or any waiver of the
statute of limitations for any such claim or assessment;
(xiv) pay, settle, release, discharge or satisfy
any claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise, including without limitation, the
Litigation), other than the payment or satisfaction of any such claims,
liabilities or obligations, in the ordinary course of business and consistent
with past practice, and of claims, liabilities or obligations reflected or
reserved against in, or contemplated by, the consolidated financial statements
(or the notes thereto) of the Company;
(xv) amend in any material respect, renew,
terminate or cause to be extended any material lease, agreement or arrangement
relating to any of its leased properties or enter into any material lease,
agreement or arrangement with respect to any real property;
(xvi) permit any insurance policy having the
Company as a beneficiary or a loss payable payee to be cancelled or terminated
unless comparable replacement coverage is obtained; and
(xvii) take, or agree or commit to take, any action
that would or is reasonably likely to result in any of the conditions to the
consummation of the Transactions set forth in Article VI hereof not being
satisfied, or would make any representation or warranty of the Company contained
herein inaccurate in any respect at, or as of any time prior to, the Closing, or
that would materially impair the ability of the Company or Purchaser to
consummate the Transactions in accordance with the terms hereof or delay such
consummation.
4.2 ALTERNATIVE PROPOSALS.
(a) Neither the Company nor any Affiliate shall
(and the Company shall use its reasonable best efforts to cause the officers,
directors, employees, representatives and agents of the Company, and each of its
Affiliates, including, but not limited to, investment bankers, attorneys and
accountants, not to), directly or indirectly, solicit, participate in,
encourage, or initiate discussions or negotiations with, or provide any
information to, any Person (other than Purchaser, any of its Affiliates or
representatives) concerning or which would reasonably facilitate or be expected
to lead to any Takeover Proposal, except that nothing contained in this Section
4.2 or any other provision hereof shall prohibit the Company or the Company's
Board of Directors from making such disclosure to the Company's stockholders as,
in the good faith judgment of the Company's Board of Directors, after receiving
advice from
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outside counsel, is required under Applicable Law, provided that the Company may
not, approve or recommend, or propose to approve or recommend, any Takeover
Proposal, or enter into any letter of interest, agreement or other arrangement
with respect to any Takeover Proposal. Upon execution of this Agreement, the
Company will immediately cease any existing activities, discussions or
negotiations with any Persons conducted heretofore with respect to any of the
foregoing. Notwithstanding the foregoing, prior to the Closing, the Company may
furnish information concerning its business, properties or assets to any Person
or group and may negotiate and participate in discussions and negotiations with
such Person or group concerning a Takeover Proposal if: the Company's Board of
Directors determines in good faith, after consultation with outside legal
counsel that such action is necessary for it to comply with its fiduciary duty
under Applicable Law.
The Company will promptly notify Purchaser of the existence of
any proposal, discussion, negotiation or inquiry received by the Company
regarding any Takeover Proposal, and the Company will promptly communicate to
Purchaser the terms of any proposal, discussion, negotiation or inquiry which it
may receive (and will promptly provide to Purchaser copies of any written
materials received by the Company in connection with such proposal, discussion,
negotiation or inquiry) regarding any Takeover Proposal and the identity of the
party making such proposal or inquiry or engaging in such discussion or
negotiation. The Company will promptly provide to Purchaser any non-public
information concerning the Company provided to any other Person which was not
previously provided to Purchaser. The Company will keep Purchaser informed of
the status and details of any such Takeover Proposal and of any amendments or
proposed amendments to any Takeover Proposal and will promptly (but in no case
later than 24 hours) notify Purchaser of any determination by the Company's
Board of Directors that it is considering accepting a Takeover Proposal.
4.3 REASONABLE BEST EFFORTS.
(i) Prior to the Closing, upon the terms and
subject to the conditions of this Agreement, Purchaser and the Company agree to
use their respective reasonable best efforts (x) to take, or cause to be taken,
all actions, and (y) to do, or cause to be done, all things necessary, proper or
advisable (subject to any Applicable Law) to consummate the Transactions as
promptly as practicable including, but not limited to (i) the preparation and
filing of all forms, registrations and notices required to be filed to
consummate the Transactions and the taking of such actions as are necessary to
obtain any requisite approvals, consents, orders, exemptions or waivers by any
third party or Governmental Entity and (ii) the satisfaction of the other
parties' conditions to effect the Transactions. In addition, no party hereto
shall take any action after the date hereof that would reasonably be expected to
delay the obtaining of, or result in not obtaining, any permission, approval or
consent from any Governmental Entity necessary to be obtained prior to the
Closing.
(b) Prior to the Closing, subject to Applicable
Law, each party shall promptly consult with the other parties hereto with
respect to, provide any necessary information with respect to, and provide the
other parties (or their respective counsel) with copies of, all filings made by
such party with any Governmental Entity or any other information supplied by
such party to a Governmental Entity in connection with this Agreement, and the
Transactions. Each party hereto shall promptly inform the other parties of any
communication from any
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Governmental Entity regarding any of the Transactions. If any party hereto or
Affiliate thereof receives a request for additional information or documentary
material from any such Governmental Entity with respect to any of the
Transactions, then such party shall endeavor in good faith to make, or cause to
be made, as soon as reasonably practicable and after consultation with the other
parties, an appropriate response in compliance with such request.
(c) Notwithstanding the foregoing, nothing
contained in this Agreement shall be deemed to require the Company or Purchaser
to commence any litigation against any Person in order to facilitate the
consummation of any of the Transactions or, except for the Company, to defend
against any litigation brought by any Governmental Entity seeking to prevent the
consummation of any of the Transactions.
4.4 PURCHASER ACCESS TO INFORMATION. Upon reasonable
notice, the Company shall, afford to the officers, employees, accountants,
counsel, financing sources and other representatives of Purchaser, access,
during normal business hours during the period prior to the Closing, to all its
properties, books, contracts, commitments, records and employees and, during
such period, the Company shall (and shall cause its employees to), (1) furnish
promptly to Purchaser (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of the federal securities laws and (b) all other information
concerning its business, properties and personnel as Purchaser may reasonably
request. Until the Closing, unless otherwise required by Applicable Law or in
order to comply with disclosure requirements applicable to any filings or
communications with Governmental Entities and stock exchanges, Purchaser will
hold any such information which is nonpublic in confidence.
4.5 PUBLICITY. The initial press release with respect to
the execution of this Agreement shall be a joint press release acceptable to
Purchaser and the Company. Thereafter, until the Closing or the date the
Transactions are terminated or abandoned, neither the Company, Purchaser nor any
of their respective Affiliates shall issue or cause the publication of any press
release or other announcement with respect to this Agreement or the other
Transactions without prior consultation with the other parties, except in order
to comply with fiduciary obligations or as may be required by Applicable law,
the rules and regulations of any national or other securities exchange or
over-the-counter market or by any listing agreement with a national or other
securities exchange or over-the-counter market.
4.6 NOTIFICATION OF CERTAIN MATTERS.The Company shall
give prompt notice to Purchaser of (i) the occurrence or non-occurrence of any
event known to the Company which would cause any representation or warranty of
the Company contained in this Agreement to be untrue or inaccurate in any
material respect at or prior to the Closing and (ii) any material failure of the
Company to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by such Person hereunder; PROVIDED, HOWEVER, that the
delivery of any notice pursuant to this Section 4.6 shall not limit or otherwise
affect the remedies available hereunder to the party receiving such notice.
(b) Purchaser shall give prompt notice to the
Company of (i) the occurrence or non-occurrence of any event known to Purchaser
which would cause any representation or warranty of Purchaser contained in this
Agreement to be untrue or inaccurate in
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<PAGE>
any material respect at or prior to the Closing and (ii) any material failure of
Purchaser to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; PROVIDED, HOWEVER, that the delivery
of any notice pursuant to this Section 4.6 shall not limit or otherwise affect
the remedies available hereunder to the party receiving such notice.
4.7 STOCK EXCHANGE LISTINGS AND FORM 10. Purchaser shall
use its reasonable best efforts to promptly cause the Leitch Shares to be issued
pursuant to this Agreement to be approved for listing on The Toronto Stock
Exchange, subject to official notice of issuance, prior to the Closing, and, if
such listing shall not have occurred prior to the Closing, Purchaser shall use
its reasonable best efforts to cause such shares to be listed on The Toronto
Stock Exchange within 90 days after the Closing.
(b) Purchaser shall use its reasonable best
efforts to cause the Leitch Shares to be issued pursuant to this Agreement to be
approved for listing on The Nasdaq Stock Market as soon as reasonably
practicable after the Closing.
(c) The Company shall use its reasonable best
efforts to cause the Form 10 to be declared effective by the SEC as soon as
reasonably practicable after the Closing.
4.8 COMPANY DISCLOSURE SCHEDULE. The Company shall
deliver to Purchaser the Company Disclosure Schedule no later than 5:00 P.M.
(San Diego time) on April 14, 2000. Purchaser shall notify the Company of (a)
its acceptance of the Company Disclosure Schedule or (b) its rejection of the
Company Disclosure Schedule, in any case, within three (3) Business Days after
receipt thereof, provided, however, that Purchaser may reject the Company
Disclosure Schedule only in accordance with Section 6.2(viii) hereof.
4.9 REGISTRATION RIGHTS. In the event that the Leitch
Shares are not freely tradeable after 40 days after the date of issuance of the
Leitch Shares to the Company and the Company has used its best efforts to ensure
that the assumptions described above in Section 2.23 at the time of resale are
correct and the Company has used its best efforts to comply with the
requirements as set out in the legend in section 2.24, the Company, upon written
notice to Purchaser, may require Purchaser to use its reasonable best efforts to
qualify all, but not less than all, of the Leitch Shares for distribution in
Ontario (the "Distribution"), subject to the following terms and conditions:
(a) Purchaser will so qualify the Leitch Shares
for Distribution by way of a secondary offering only, or if Purchaser shall
determine in its sole discretion, by way of a primary offering and secondary
offering.
(b) The Company agrees that it will comply with
all regulatory requirements in connection with the Distribution and agrees to
furnish to Purchaser and any underwriters all necessary, normal and customary
documents and information required in connection with the Distribution.
(c) The rights of the Company to qualification
pursuant to this Section shall be conditioned upon the Company's participation
in any underwriting relating to the Distribution. The Company shall (together
with Purchaser) enter into an underwriting agreement in normal and customary
form with the underwriter or underwriters selected by Purchaser.
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Notwithstanding any provision of this Section, if the underwriter, in its sole
discretion, determines that marketing factors require a limitation of the number
of securities to be underwritten, the underwriter may exclude some or all of the
Leitch Shares for which the Company seeks qualification from inclusion in the
Distribution. The Company may not request Purchaser qualify some or all of the
Leitch Shares excluded from the Distribution under this Section 4.9(c) more than
once in any 12 month period.
(d) If Purchaser shall furnish to the Company, a
certificate signed by the Chief Executive Officer of Purchaser stating that, in
the good faith judgement of the board of directors of Purchaser, it would be
seriously detrimental to Purchaser and its shareholders for the Leitch Shares to
be qualified for Distribution and it its therefore in the best interests of
Purchaser to defer the qualification of the Leitch Shares, then Purchaser may
delay the qualification of the Leitch Shares, once but not more than once, for a
period not in excess of one hundred twenty (120) days.
(e) Purchaser shall have no obligation under
this Section 4.9 to qualify for distribution any Leitch Shares if Purchaser
shall deliver to the Company an opinion of its Canadian counsel to the effect
that the proposed sale or disposition for which qualification was requested does
not require qualification under applicable Ontario laws.
(f) The costs and expenses (other than
underwriting discounts or commissions and fees and disbursements of counsel of
the Company) relating to the Distribution, and of all other actions that
Purchaser is required to take or effect pursuant to this Section 4.9, shall be
paid by Purchaser.
ARTICLE V.
CLOSING
5.1 TIME AND PLACE OF CLOSING. The closing of the
purchase and sale of the Path 1 Shares as set forth herein (the "Closing") shall
be held at the offices of Brobeck, Phleger & Harrison LLP, 12390 El Camino Real,
San Diego, California, 92130 at 10:00 A.M., local time, on the date specified in
writing by Purchaser to the Company on which all conditions precedent set forth
in Article VI have been satisfied, or at such other time and place as agreed to
in writing by Purchaser and the Company.
5.2 CLOSING DELIVERIES. On or prior to the Closing,
(a) Purchaser shall have delivered, or cause to
be delivered to the Company, the following:
(i) the cash portion of the Purchase
Price, by wire transfer in immediately available funds to an account designated
by the Company;
(ii) a certificate representing the
Leitch Shares registered in the name of the Company;
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(iii) a certificate of an officer of
Purchaser, in form and substance reasonably satisfactory to the Company and its
counsel, to evidence compliance with Section 6.3(i);
(iv) resolutions of the Board of
Directors of Purchaser and complete and correct copies of Purchaser's
certificate of incorporation and by-laws, or other charter documents, as
applicable, including all amendments, modifications or supplements thereto, to
evidence compliance with Section 6.3(ii), together with a certificate of an
officer of Purchaser; and
(v) the Stockholders' Agreement duly
executed by Purchaser on or before the Closing; and
(vi) such other documents as the Company
may reasonably request for the purpose of facilitating the consummation of the
Transactions.
(b) the Company shall have delivered, or cause
to be delivered to Purchaser, the following:
(i) a certificate representing the Path
1 Shares registered in the name of Purchaser;
(ii) a certificate of an officer of the
Company, in form and substance reasonably satisfactory to Purchaser and its
counsel, to evidence compliance with Section 6.2(i);
(iii) the License Agreement duly executed
by the Company on or before the Closing;
(iv) resolutions of the Company's Board
of Directors and complete and correct copies of the Company's certificate of
incorporation and by-laws, including all amendments, modifications or
supplements thereto, to evidence compliance with Section 6.2(iii), together with
a certificate of an officer of the Company; and
(v) the Stockholders' Agreement duly
executed by the Company on or before the Closing;
(vi) the Company Disclosure Schedule in
form and substance reasonably satisfactory to Purchaser; and
(vii) such other documents as Purchaser
may reasonably request for the purpose of facilitating the consummation of the
Transactions.
5.3 DELIVERY OF PATH 1 SHARES. Delivery of the Path 1
Shares shall be made by the Company to Purchaser at the Closing by delivering
one or more certificates in negotiable form representing the Path 1 Shares, each
such certificate to be accompanied by any requisite documentary or stock
transfer taxes.
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5.4 TAX MATTERS. All transfer, documentary, sales, use,
stamp, registration, value added and other such taxes and fees (including any
penalties and interest) incurred in connection with this Agreement shall be
borne and paid by the Company when due, and the Company will, at its own
expense, file all necessary tax returns and other documentation with respect to
all such taxes and fees, and, if required by applicable law, Purchaser will join
in the execution of any such tax returns and other documentation.
ARTICLE VI.
CONDITIONS TO THE PURCHASE AND SALE OF THE PATH 1 SHARES
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CLOSE. The
respective obligations of each party to consummate the Transactions are subject
to the satisfaction at or prior to the Closing of each of the following
conditions, any and all of which may be waived in whole or in part by the
Company or Purchaser, as the case may be, to the extent permitted by Applicable
Law:
(i) all regulatory approvals
required to consummate the Transactions shall have been obtained and are in
full force and effect; and
(ii) there shall not be in effect any
Applicable Law, executive order, decree, ruling or injunction or other order
of any Governmental Entity directing that the Transactions contemplated
herein not be consummated.
6.2 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The
obligations of Purchaser to consummate the Transactions are subject to the
satisfaction (or waiver by Purchaser in its sole discretion) of the following
further conditions:
(i) the Company shall have performed
in all material respects all of their obligations hereunder required to be
performed by it at or prior to the Effective Time, the representations and
warranties of the Company contained in this Agreement shall be true in all
material respects at and as of the Closing as if made at and as of such time,
and Purchaser shall have received a certificate signed by an executive
officer of the Company to the foregoing effect;
(ii) Purchaser shall have consummated
the transactions contemplated by the Berns Agreement;
(iii) Purchaser shall have received a
copy of the resolutions of the Company's Board of Directors authorizing the
Transactions, the Stockholders' Agreement (including the election of
Purchaser's nominees to the Company's Board of Directors and the amendment of
the Company's By-laws as required thereby) and the Licensing Agreement, and
complete and correct copies of the Company's certificate of incorporation and
by-laws, including all amendments, modifications or supplements thereto
(including the amendments to the By-laws contemplated by the Stockholders'
Agreement) which copies shall be certified by an executive officer of the
Company;
(iv) All litigation claims or
disputes set forth in, related to or arising out of the complaint filed by
the Company against James Berns and Rona Berns and other
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defendants in San Diego County Superior Court on September 20, 1999 (Case No.
GIC 735665) including any cross-complaints filed by James Berns and Rona Berns
or others against the Company and the proceedings commenced by any of the
defendants in the Delaware Chancery Court on November 9, 1999, shall have been
settled or otherwise resolved and dismissed with prejudice in a manner and on
terms satisfactory to Purchaser in its sole discretion;
(v) the Company shall have entered
into the License Agreement on or before the Closing;
(vi) the Company shall have entered
into the Stockholders' Agreement (and shall have amended the By-laws in the
form attached as an exhibit thereto concurrently with the Closing) on or
before the Closing;
(vii) on or prior to the Closing,
Purchasers' two designees to be appointed to the Company's Board of Directors
in accordance with the provisions of the Stockholders' Agreement shall have
been so appointed;
(viii) Purchaser shall have received
the Company Disclosure Schedule in accordance with Section 4.8 hereof, in
which event such Company Disclosure Schedule shall be deemed accepted by
Purchaser and this condition to Closing shall be deemed satisfied; provided,
however, that the Company Disclosure Schedule shall not be deemed accepted
and this condition to Closing shall not be deemed satisfied to the extent it
contains, and only with respect to, disclosures (x) regarding the Company's
Registered Intellectual Property which would, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect
or (y) which would materially limit Purchaser from enjoying the benefits of
the License Agreement; and
(ix) Purchaser shall have completed
to its satisfaction its financial and legal due diligence of the Company.
6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company to consummate the Transactions are subject to the
satisfaction (or waiver by the Company in its sole discretion) of the following
further conditions:
(i) Purchaser shall have performed in all
material respects all of its obligations hereunder required to be performed by
it at or prior to the Closing, the representations and warranties of Purchaser
contained in this Agreement shall be true in all material respects at and as of
the Closing as if made at and as of such time, and the Company shall have
received a certificate signed by an executive officer of Purchaser to the
foregoing effect;
(ii) the Company shall have received a copy of
the resolutions of the Board of Directors of Purchaser authorizing the
Transactions, and complete and correct copies of Purchaser's certificate of
incorporation and by-laws, or other charter documents, as applicable, including
all amendments, modifications or supplements thereto which copies shall be
certified by an executive officer of Purchaser;
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(iii) Purchaser shall have entered into the
Stockholders' Agreement and the License Agreement, on or before the Closing; and
(iv) all litigation claims or disputes set
forth in, related to or arising out of the complaint filed by the Company
against James Berns and Rona Berns in San Diego County Superior Court on
September 20, 1999 (Case No. GIC 735665) including any cross-complaints filed
by James Berns and Rona Berns against the Company and the proceedings
commenced by any of the defendants in the Delaware Chancery Court on November
9, 1999, shall have been settled or otherwise resolved and dismissed with
prejudice in a manner and on terms satisfactory to the Company.
ARTICLE VII.
TERMINATION
7.1 TERMINATION. This Agreement may be terminated and
the Transactions contemplated hereby may be abandoned at any time prior to
the Closing:
(i) by mutual written consent of Purchaser
and the Company;
(ii) by either the Company or Purchaser, if
the Closing has not occurred by June 30, 2000 (provided that the right to
terminate this Agreement under this clause shall not be available to any
party whose failure to fulfill any of its obligations under this Agreement
has been the cause of or resulted in the failure to consummate the
Transactions by such date);
(iii) by either the Company or Purchaser, if
there shall be any Applicable Law that makes consummation of the Transactions
illegal or otherwise prohibited or if any judgment, injunction, order or
decree of a court of competent jurisdiction shall restrain or prohibit the
consummation of the Transactions, and such judgment, injunction, order or
decree shall become final and nonappealable;
(iv) by either the Company or Purchaser, if
there has been a breach by the other party of any representation or warranty
contained in this Agreement which would have or would be reasonably likely to
have a Purchaser Material Adverse Effect or Company Material Adverse Effect,
as the case may be; or
(v) by Purchaser if:
(A) there shall have been a material
breach of any provision of Section 4.2;
(B) any Person or "group" (within
the meaning of Section 13(d)(3) of the Exchange Act), other than Purchaser,
or its Affiliates or any group of which any of them is a member, shall have
acquired or announced its intention to acquire beneficial ownership (as
determined pursuant to Rule 13d-3 promulgated under the Exchange Act) of 25%
or more of the shares of Path 1 Class A Common Stock or of any other class of
voting capital stock of the Company; or
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(C) if the Company receives a Takeover
Proposal from any Person (other than Purchaser) and the Company's Board of
Directors shall have recommended or approved such Takeover Proposal or takes
a neutral position or makes no recommendation with respect to such Takeover
Proposal after a reasonable amount of time (and in no event more than ten
Business Days following such receipt) has elapsed for the Company's Board of
Directors to review and make a recommendation with respect to such Takeover
Proposal or the Company has entered into an agreement with respect to a
Takeover Proposal.
7.2 EFFECT OF TERMINATION. In the event of the
termination of this Agreement as provided in Section 7.1 hereof, written
notice thereof shall forthwith be given to the other party or parties
specifying the provision hereof pursuant to which such termination is made,
and this Agreement shall forthwith become null and void, and there shall be
no liability on the part of Purchaser, the Company or their respective
directors, officers, employees, representatives, agents, advisors or
stockholders other than the obligations pursuant to this Section 7.2, except
that the agreements contained in Article IX hereof shall survive the
termination hereof. Nothing contained in this Section 7.2 or in Article VIII
shall relieve any party from liability for fraud or for willful breach of
this Agreement.
ARTICLE VIII.
INDEMNIFICATION
8.1 INDEMNITY. Subject to the terms and conditions of
this Article VIII, from and after the Closing, the Company shall indemnify
and hold harmless Purchaser from and against any and all Damages resulting
from or arising out of any misrepresentation, breach or failure of any
representation or warranty made by the Company in this Agreement; and (b)
subject to the terms and conditions of this Article VIII, from and after the
Closing, Purchaser shall indemnify and hold harmless the Company from and
against any and all Damages resulting from or arising out of any
misrepresentation, breach or failure of any representation or warranty made
by Purchaser in this Agreement.
8.2 LIMITATION ON INDEMNITY
(a) Neither the Company nor Purchaser shall
have liability for amounts payable pursuant to their respective
indemnification obligations in this Article VIII until the total of all
Damages incurred by Purchaser or the Company, respectively, exceeds Two
Hundred and Fifty Thousand Dollars (U.S. $250,000) in the aggregate (the
"Threshold Amount"), after which the indemnification obligations of the
Company or Purchaser, as the case may be, shall, subject to subsection (b)
below, only include all such Damages in excess of the Threshold Amount.
(b) Neither the Company nor Purchaser shall
have liability pursuant to its indemnification obligations in this Article
VIII to the extent that the total of all Damages suffered by Purchaser or the
Company, respectively, exceeds an aggregate of Ten Million Dollars
($10,000,000).
8.3 PROCEDURE. With respect to any Damages, whether a
claim, the commencement of any proceeding, any written demand, or the
occurrence of any other
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similar event, any of which may constitute a separate matter or series of
matters ("Indemnification Matter") against which Purchaser or the Company (such
applicable party referred to as the "Indemnitee") is indemnified under this
Article VIII:
(a) Within 30 days after the Indemnitee
receives written notice pertaining to the demand or proceeding underlying
such Indemnification Matter, or, if such Indemnification Matter does not
involve a third party demand or claim, within 30 days after the Indemnitee
first has actual knowledge of such Indemnification Matter, the Indemnitee
shall give notice to the Company or Purchaser, as the case may be, of the
nature of such Indemnification Matter and the amount demanded or claimed in
connection therewith. Such notice shall be a condition precedent to any
indemnification liability under this Article VIII, but the Indemnitee shall
not lose its right to indemnification other than under this Article VIII as a
result of the failure to give such notice in a timely manner.
8.4 REMEDIES. Notwithstanding anything in this
Agreement to the contrary, following the Closing, the rights of
indemnification under this Article VIII are the sole and exclusive remedy of
Purchaser or the Company, as the case may be, with respect to any and all
matters covered in Section 8.1 above, except that, notwithstanding the
foregoing and Section 8.5 below, Purchaser or the Company, as the case may
be, shall be entitled to all remedies which are available under Applicable
Law for fraudulent conduct and under Section 10(b) of the Exchange Act and
the rules and regulations of the SEC thereunder.
8.5 TIME LIMIT. Damages to be indemnified under this
Article VIII must be claimed within one year after the Closing, except for
Damages resulting from or arising out of Indemnification Matters for which
proper notice under Section 8.3 above shall have been given prior to the
expiration of such one-year period.
ARTICLE IX.
MISCELLANEOUS AND GENERAL
9.1 PAYMENT OF EXPENSES AND OTHER PAYMENTS.. All fees
and expenses incurred in connection with this Agreement and the Transactions
shall be paid by the party incurring such fees or expenses, whether or not
the Transactions are consummated.
9.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made herein shall not survive beyond the
earlier of termination of this Agreement, subject to Section 8.5 above, or
one year from the date of Closing. This Section 9.2 shall not limit any
covenant or agreement of the parties hereto which by its terms contemplates
performance after the Closing.
9.3 MODIFICATION OR AMENDMENT. Subject to the
compliance with Applicable Law, at any time prior to the Closing, the parties
hereto may modify or amend this Agreement, by written agreement executed and
delivered by duly authorized officers of the respective parties.
9.4 WAIVER OF CONDITIONS. Except as otherwise provided
in this Agreement, any failure of any of the parties to comply with any
obligation, covenant, agreement or condition herein may be waived by the
party or parties entitled to the benefits thereof only by a written
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instrument signed by the party granting such waiver, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
9.5 COUNTERPARTS. This Agreement may be executed in
two or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when two or more counterparts have been
signed by each of the parties (including by telecopy) and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
9.6 GOVERNING LAW. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Delaware
without giving effect to the principles of conflicts of law thereof.
9.7 JURISDICTION; WAIVER OF TRIAL BY JURY. THE PARTIES
HERETO HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY NEW YORK STATE OR
UNITED STATES FEDERAL COURT SITTING IN THE CITY OF NEW YORK OVER ANY ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND HEREBY
IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY
BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURT. THE PARTIES
AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT
OR IN ANY OTHER MANNER PROVIDED BY LAW. THE PARTIES FURTHER WAIVE TRIAL BY
JURY, ANY OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO ANY ACTION OR
PROCEEDING IN SUCH STATE ON THE BASIS OF FORUM NON CONVENIENS. THE PARTIES
FURTHER AGREE THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT SHALL BE BROUGHT ONLY IN A NEW YORK STATE OR UNITED STATES
FEDERAL COURT SITTING IN NEW YORK COUNTY.
9.8 NOTICES. Any notice, request, instruction or other
document to be given hereunder by any party to the other parties shall be in
writing and delivered personally or sent by registered or certified mail,
postage prepaid, or by nationally recognized overnight courier, or by
telecopy, as follows:
If to the Company, to
3636 Nobel Drive
Suite 275
San Diego, California 92122
Attention: Ronald D. Fellman
Telecopy: (858) 450-4203
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with a copy to:
Brobeck, Phleger & Harrison LLP
12390 El Camino Real
San Diego, California 92130
Attention: Hayden Trubitt, Esq.
Telecopy: (858) 720-2555
If to Purchaser, to
25 Dyas Road
North York, Ontario
Canada M3B 1V7
Attention: Reg J. Tiessen
Telecopy: (416) 445-4308
with a copy to:
Torys
237 Park Avenue
New York, New York 10017
Attention: Bradley P. Cost, Esq.
Telecopy: (212) 682-0200
All such notices and communications shall be deemed to have
been duly given at the time delivered by hand, if personally delivered, upon
receipt, if sent by telecopy, on the next Business Day, if sent by a
nationally recognized courier, or three (3) Business Days after being
deposited in the mail, if sent by registered or certified mail. Any party
may, upon written notice to the other parties hereto, change the address to
which notices or other communications to such party are to be delivered or
mailed.
9.9 ENTIRE AGREEMENT; ASSIGNMENT This Agreement (a)
constitutes the entire agreement among the parties with respect to the
subject matter hereof and supersedes all other prior agreements and
understandings, both written and oral, among the parties or any of them with
respect to the subject matter hereof and (b) shall not be assigned by
operation of law or otherwise without the prior written consent of the other
parties. This Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective permitted successors and
assigns.
9.10 PARTIES IN INTEREST Nothing in this Agreement,
express or implied, is intended to or shall confer upon any other Person any
rights, benefits or remedies of any nature whatsoever under or by reason of
this Agreement.
9.11 VALIDITY If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions of
this Agreement shall remain in full force and effect and shall in no way be
affected, impaired
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or invalidated so long as the economic or legal substance of the Transactions
is not affected in any manner materially adverse to any party.
9.12 CAPTIONS. The Article, Section and paragraph
captions herein are for convenience of reference only, do not constitute part
of this Agreement and shall not be deemed to limit or otherwise affect any of
the provisions hereof.
9.13 SPECIFIC PERFORMANCE. Each of the parties hereto
acknowledges and agrees that in the event of any breach of this Agreement,
each non-breaching party would be irreparably and immediately harmed and
could not be made whole by monetary damages. It is accordingly agreed that
the parties hereto (a) will waive, in any action for specific performance,
the defense of adequacy of a remedy at law and (b) shall be entitled, in
addition to any other remedy to which they may be entitled at law or in
equity, to compel specific performance of this Agreement in any action
instituted in a court of competent jurisdiction.
9.14 "KNOWLEDGE" OF THE COMPANY OR PURCHASER. For
purposes of this Agreement, unless otherwise expressly provided where the
term is used, "knowledge" of the Company, or Purchaser, as the case may be,
will be deemed to mean the actual knowledge of any director or executive
officer of the Company or Purchaser, as the case may be, after reasonable
inquiry.
ARTICLE X.
DEFINITIONS
10.1 CERTAIN DEFINITIONS. The following terms when used
herein shall have the meanings assigned to them below (certain other terms
are defined elsewhere herein):
"Actions" shall have the meaning set forth in Section 2.14
hereof.
"Affiliate" means a Person who directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is
under common control with, another person.
"Agreement" shall have the meaning set forth in the
recitals hereof.
"Applicable Law" shall mean the collective reference to any
federal, state, local, provincial or foreign law, rule, regulation,
ordinance, writ, judgment, injunction, decree, determination, award or other
order of any Governmental Authority or stock exchange, in each case excluding
any and all Environmental Laws.
"Balance Sheet" shall have the meaning set forth in Section
2.4(c) hereof.
"Benefit Plan" shall have the meaning set forth in Section
2.11 hereof.
"Berns Agreement" shall mean the Stock Purchase Agreement,
dated as of March 10, 2000, by and among Purchaser, James Berns and Rona
Berns, together with any amendment or supplement thereto.
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"Business Day" shall mean a day other than a Saturday or
Sunday or other day on which commercial banks in New York, New York are
authorized or required to close."
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Company Board" shall have the meaning set forth in Section
2.20 hereof.
"Company Disclosure Schedule" shall have the meaning set
forth in Section 2.1 hereof.
"Company Material Adverse Effect" shall mean any change,
circumstance or fact that (i) is reasonably likely to be materially adverse
to the business, condition (financial or otherwise) or results of operations
of the Company provided that the term "Company Material Adverse Effect" as
used herein shall not include any effect attributable to (a) changes in the
economy generally or (b) changes or circumstances affecting the industries in
which the Company engages, which change, circumstance or effect (in the case
of clause (b)) does not affect the Company, disproportionately relative to
other entities operating in such industries, or (ii) would materially impair
the ability of the Company to perform its obligations under this Agreement.
"Damages" shall mean all losses, liabilities, damages,
costs and expenses (including, without limitation, reasonable attorneys' fees
(including those incurred in connection with a dispute among the parties (or
any of them) hereto), investigation expenses, court costs, interest and
penalties) actually incurred in connection with any matter for which
indemnification is provided under Article VIII hereof.
"ERISA" shall have the meaning set forth in Section
2.11(a) hereof.
"Exchange Act" shall have the meaning set forth in Section
2.4(a) hereof.
"Form 10" shall have the meaning set forth in Section
2.4(a) hereof.
"GAAP" shall have the meaning set forth in Section 2.4(b)
hereof.
"Governmental Authority" or "Governmental Entity" shall
mean the collective reference to any court, administrative agency, tribunal,
authority, commission or other foreign or domestic, whether federal, state,
provincial or local governmental authority or instrumentality.
"Indemnification Matter" shall have the meaning set forth
in Section 8.3 hereof.
"Indemnitee" shall have the meaning set forth in Section
8.3 hereof.
"License Agreement" shall mean that certain Joint Product
Development and License Agreement between Purchaser and the Company to be
executed on or before the Closing in form and substance mutually agreed upon
by Purchaser and the Company.
"Lien" shall mean any mortgage, pledge, encumbrance, charge
or other security interest of any kind or nature whatsoever.
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"Other Intellectual Property" shall have the meaning set
forth in Section 2.17 hereof.
"Path 1 Class A Common Stock" shall have the meaning set
forth in the recitals hereof.
"Path 1 Class B Common Stock" shall have the meaning set
forth in Section 2.3 hereof.
"Permits" shall have the meaning set forth in Section
2.15(b) hereof.
"Permitted Liens" shall mean:
(a) Liens for Taxes not yet due or which are being
contested in good faith by appropriate proceedings, provided that adequate
reserves with respect to contested Taxes are maintained on the books of the
Company or Purchaser, as applicable;
(b) pledges or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other social security legislation;
(c) easements, rights-of-way, restrictions and other
similar encumbrances previously incurred in the ordinary course of business
which, in respect of properties or assets of the Company or Purchaser or any
Purchaser Subsidiary, as applicable, are not material, and which, in the case
of such encumbrances on the assets or properties of the Company or Purchaser
or any Purchaser Subsidiary, as applicable, do not materially detract from
the value of any such properties or assets or materially interfere with any
present use of such properties or assets;
(d) carriers', warehousemen's, mechanics',
materialmen's, repairmen's or other like Liens arising in the ordinary course
of business which are not overdue for a period of more than 90 days or which
are being contested in good faith by appropriate proceedings;
(e) deposits to secure the performance of bids,
contracts (other than for borrowed money), leases, statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a like
nature incurred in the ordinary course of business;
(f) statutory and contractual Liens on the property of
the Company or Purchaser or any Purchaser Subsidiary, as applicable, in favor
of landlords securing leases; and
(g) Liens in existence at the Effective Time listed in
Section 2.9 to the Company Disclosure Schedule.
"Person" means an individual, a corporation, a partnership,
an association, a trust or any other entity or organization, including a
government or political subdivision or any agency or instrumentality thereof.
"Purchaser" shall have the meaning set forth in the
recitals hereof.
31
<PAGE>
"Purchaser Material Adverse Effect" shall mean any change,
circumstance or fact that (i)is reasonably likely to be materially adverse to
the business, condition (financial or otherwise) or results of operations of
Purchaser and its subsidiaries, taken as a whole, provided that the term
"Purchaser Material Adverse Effect" as used herein shall not include any
effect attributable to (a) changes in the economy generally or (b) changes or
circumstances affecting the industries in which Purchaser and its
subsidiaries engage, which change, circumstance or effect (in the case of
clause (b)) does not affect Purchaser disproportionately relative to other
entities operating in such industries, or (ii) would materially impair the
ability of Purchaser to perform its obligations under this Agreement.
"Registered Intellectual Property" shall have the meaning
set forth in Section 2.17 hereof.
"SEC" shall have the meaning set forth in the Section
2.4(a) hereof.
"Stockholders' Agreement" shall mean that certain
Stockholders' Agreement by and among the Company, Purchaser, Ronald D.
Fellman, Douglas A. Palmer and Michael T. Elliott to be executed on or before
the Closing in the form of Exhibit A hereto.
"Takeover Proposal" means any bona fide proposal or offer,
whether in writing or otherwise, from any Person (other than Purchaser or any
Affiliates thereof) (a "Third Party") to acquire beneficial ownership (as
determined pursuant to Rule 13d-3 promulgated under the Exchange Act) of all
or a material portion of the assets of the Company or 25% or more of any
class of equity securities of the Company pursuant to a merger, consolidation
or other business combination, sale of shares of capital stock, sale of
assets, tender offer, exchange offer or similar transaction with respect to
the Company, including any single or multi-step transaction or series of
related transactions, which is structured to permit such Third Party to
acquire beneficial ownership of any material portion of the assets of or 25%
or more of the equity interest in the Company.
"Taxes" shall have the meaning set forth in Section 2.7
hereof.
"Tax Returns" shall have the meaning set forth in
Section 2.7 hereof.
"Transactions" shall have the meaning set forth in Section
2.2 hereof.
* * *
32
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of
the day and year first above written.
PATH 1 NETWORK TECHNOLOGIES INC.
By: /s/ Vera Moldt
----------------------------
Name:
Title:
LEITCH TECHNOLOGY CORPORATION
By: /s/ John A. MacDonald
----------------------------
Name:
Title:
By: /s/ Reginald J. Tiessen
----------------------------
Name:
Title:
33
<PAGE>
COMPANY DISCLOSURE SCHEDULE
Inclusion of information on this Company Disclosure Schedule does not
constitute an admission by the Company that the information is material. The
Company's approach has been to try to err on the side of over-inclusiveness and
over-disclosure.
SECTION 2.1
The Company is not qualified to do business as a foreign corporation in
California. The Company intends to become qualified forthwith and does not
believe that any past or future non-qualification would cause a Company Material
Adverse Effect.
On March 16, 1998, the Company entered into an agreement with Jyra Research,
Inc. ("Jyra") providing for the Company to make a strategic investment in Jyra
and for Jyra to make a strategic investment in the Company. Under this
agreement, the Company exchanged ten shares of its Series A Preferred Stock for
16,000 restricted common shares of Jyra, which the Company still holds.
SECTION 2.3
On April 10, 2000, the Board approved Michael Elliott as its Chief Executive
Officer. In connection with that, Mr. Elliott will receive options to purchase
up to 400,000 shares of the Company's Class B Common Stock.
The Company is contemplating hiring [****] to become its Chief
Financial Officer. In connection with that, the Company may grant [****]
options to purchase up to 250,000 shares of Class B Common Stock.
The Company has made informal commitments to grant options to purchase up to
approximately 50,000 shares of Class B Common Stock to certain current or future
employees, consultants, and/or advisors of the Company.
The Company may sell up to another $5 million of its Class A Common Stock to
certain investors before its ongoing stock offering is completed.
SECTION 2.4
The Company may have a material liability or obligation with respect to the
pending and threatened litigation involving Mr. Felber (including for
indemnification of individuals sued or threatened by him).
Note also Michael and James Berns'claim for indemnification and advancement of
expenses.
<PAGE>
SECTION 2.6
The Company's Form 10 (general form for registration of securities under the
Securities Exchange Act of 1934) has not been declared effective. As a result,
as of March 2000, the Company's securities have been removed from the OTC
Bulletin Board.
The Company has received $3.8 million pursuant to subscription agreements for
its Class A Common Stock.
The Company has also received a subscription agreement for 125,000 shares of its
Class A Common Stock at $8 per share.
The Company may sell up to another $5 million of its Class A Common Stock to
certain investors before its ongoing stock offering is completed.
See the Section 2.4 disclosure.
SECTION 2.7
The Company failed to timely pay its annual Delaware state franchise tax for
fiscal year 1999. The Company has directed its outside tax advisor to file, with
payment, the necessary documentation as promptly as possible.
SECTION 2.10
Lease Agreement between the Company and Spieker Properties, L.P. dated April 10,
1999.
Agreement with Doctor Design, Inc. dated June 4, 1999.
The Company is negotiating a proposed agreement with [****].
Berns Settlement Agreement dated April 2000.
The Company has also received a subscription agreement for 125,000 shares of its
Class A Common Stock at $8 per share.
SECTION 2.11
The Company maintains a medical and dental plan.
The Company has a stock option plan.
SECTION 2.14
<PAGE>
The Company and its indemnifiable officials are being sued and threatened by Mr.
Felber. Note also Michael and James Berns' claim in Delaware for indemnification
and advancement of expenses.
SECTION 2.15
The Company does not have any permits, certificates or other authorization from
the Federal Communications Commission, Underwriters Laboratories or any European
Union agency which may be required in order to sell certain products.
As of March 2000, the Company's securities have been removed from the OTC
Bulletin Board, which does not relate directly to the conduct of the Company's
business
SECTION 2.16
- --------------------------------------------------------------------------------
PENDING TRADEMARKS AND PATENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------- ---------------------------------- -------------- ----------------------- ---------------
MATTER FILING
TYPE TITLE DATE APPLICATION NO. STATUS
- ------------------- ---------------------------------- -------------- ----------------------- ---------------
<S> <C> <C> <C> <C>
Trademark TRUECIRCUIT 12/11/98 75/605,234 Pending
- ------------------- ---------------------------------- -------------- ----------------------- ---------------
Trademark DOTCAM 11/29/99 75/859,744 Pending
- ------------------- ---------------------------------- -------------- ----------------------- ---------------
Patent (U.S.) [****] 12/29/98 [****] Pending
- ------------------- ---------------------------------- -------------- ----------------------- ---------------
Patent (PCT) [****] 11/3/99 [****] Pending
- ------------------- ---------------------------------- -------------- ----------------------- ---------------
Patent (U.S.) Methods and Apparatus for 8/19/98 [****] Pending
[****]
- ------------------- ---------------------------------- -------------- ----------------------- ---------------
Patent (PCT) Methods and Apparatus for 8/18/99 [****] Pending
[****]
- ------------------- ---------------------------------- -------------- ----------------------- ---------------
Patent (U.S.) Methods and Apparatus for 12/31/98 [****] Pending
[****]
- ------------------- ---------------------------------- -------------- ----------------------- ---------------
</TABLE>
None of the above are "valid and in full force and effect," because they are
merely applications. They are valid and legitimate applications.
<PAGE>
SECTION 2.22 (RELATING TO SECTION 2.21)
Michael Elliott, as Chief Executive Officer, will receive an employment
agreement and options to purchase up to 400,000 shares of the Company's Class B
Common Stock.
The Company may hire [****] to become its Chief Financial Officer. In
connection with that, the Company may grant [****] options to purchase up
to 250,000 shares of Class B Common Stock.
The Company has made informal commitments to grant options to purchase up to
approximately 50,000 shares of Class B Common Stock to certain current or future
employees, consultants, and/or advisors of the Company.
The Company has a stock option plan.
<PAGE>
STOCKHOLDERS AGREEMENT
BY AND AMONG
PATH 1 NETWORK TECHNOLOGIES INC.,
LEITCH TECHNOLOGY CORPORATION,
RONALD D. FELLMAN,
DOUGLAS A. PALMER
AND
MICHAEL T. ELLIOTT
Dated as of April 10, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Certain Definitions......................................................................................1
2. Composition of Board of Directors; Committees; Directors'Expenses........................................3
3. Right of First Refusal...................................................................................4
4. Purchasers or Transferees of Common Stock................................................................6
5. Elliott Put Option.......................................................................................7
6. Right of Subscription for New Securities.................................................................8
7. Registration of the Securities...........................................................................9
8. Standstill..............................................................................................16
9. Legend and Compliance with Securities Laws..............................................................17
10. Amendment to By-Laws....................................................................................17
11. Termination of this Agreement...........................................................................18
12. Notices.................................................................................................18
13. Counterparts............................................................................................20
14. Entire Agreement........................................................................................20
15. Governing Law...........................................................................................20
16. Jurisdiction; Waiver of Trial by Jury...................................................................20
17. Headings................................................................................................20
18. Severability............................................................................................20
19. Binding Effect..........................................................................................21
20. Construction............................................................................................21
21. Effectiveness...........................................................................................21
</TABLE>
<PAGE>
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT dated as of April 10, 2000 (this
"Agreement") among Path 1 Network Technologies Inc., a Delaware corporation
(the "Corporation"), Leitch Technology Corporation, a corporation organized
under the laws of the Province of Ontario ("Leitch"), Michael T. Elliott
("Elliott"), Ronald D. Fellman ("Fellman") and Douglas A. Palmer ("Palmer";
Fellman and Palmer being hereinafter together referred to as the "Management
Stockholders", and together with Leitch and Elliott, the "Stockholders").
W I T N E S S E T H:
WHEREAS, pursuant to and upon the closing of the
transactions contemplated by that certain Stock Purchase Agreement of even
date herewith (the "Purchase Agreement") by and among Leitch and the
Corporation, Leitch will acquire 1,250,000 shares of Class A Common Stock,
$.001 par value per share (the "Common Stock") of the Corporation (such
1,250,000 shares being hereinafter referred to as the "Purchased Shares")
(the date of the closing under the Purchase Agreement is hereinafter referred
to as the "Effective Date");
WHEREAS, Fellman and Palmer beneficially own 1,148,720 and
224,000 shares of Common Stock of the Corporation, respectively (together
with any additional shares of Common Stock so held after the date hereof, the
"Management Shares");
WHEREAS, Elliott owns options to purchase 15,000 shares of
Class B Common Stock of the Corporation (together with any additional shares
of Common Stock and/or Class B Common Stock beneficially held after the date
hereof, the "Elliott Shares");
WHEREAS, on March 10, 2000, Leitch entered into a Stock
Purchase Agreement, as amended (the "Berns Agreement"), with James Berns and
Rona Berns to acquire 1,655,000 shares of Common Stock (the "Berns Shares,"
together with the Purchased Shares and any additional shares of Common Stock
so held after the date hereof, the "Leitch Shares"); and
WHEREAS, from and after the Effective Date, the parties
hereto deem it in the best interests of the Corporation to provide for
continuity in the control and operation of the Corporation and to address
certain other matters, all as herein provided.
NOW, THEREFORE, in consideration of the mutual benefits to
be derived and the conditions and promises herein contained, and intending to
be legally bound hereby, the parties hereto agree as follows, which
agreements shall automatically become effective only in accordance with
Section 21 hereof:
1. CERTAIN DEFINITIONS. For purposes of this
Agreement, unless the context otherwise requires, the following terms shall
have the following respective meanings:
"Affiliate" shall mean any person or entity which directly
or indirectly controls, is controlled by or is under common control with such
person or entity. For purposes hereof, the terms "control" and "controlled
by" mean the possession, directly or indirectly, of the power to
<PAGE>
direct or cause the direction of the management or policies of a person or
entity, whether through the ownership of voting securities, by contract
(written or oral) or otherwise.
"Berns Agreement" shall have the meaning set forth in the
recitals to this Agreement.
"Board of Directors" or "Board" shall mean the board of
directors of the Corporation.
"By-laws" shall mean the by-laws of the Corporation.
"Certificate of Incorporation" shall mean the certificate
of incorporation of the Corporation.
"Class B Common Stock" shall mean the Corporation's Class B
Common Stock, par value $.001 per share.
"Corporation" shall have the meaning as set forth in the
recitals to this Agreement.
"Commission" shall mean the Securities and Exchange
Commission.
"Competing Offer" shall have the meaning as set forth in
Section 3(d) hereof.
"Dispose" or "Disposition" in connection with any Security
shall mean a sale, assignment, gift, pledge, mortgage, hypothecation or any
other transfer of, including, without limitation, the transfer by
testamentary gift, the imposition of any lien or encumbrance on or the grant
of any interest in or right to acquire any Securities or any interest
therein, whether occurring voluntarily or involuntarily, directly or
indirectly, or by operation of law or otherwise.
"Elliot Put Shares" shall mean the outstanding shares of
Common Stock held by Elliot from time to time.
"Elliott Shares" shall have the meaning as set forth in the
recitals to this Agreement.
"Management Stockholders" shall have the meaning set forth
in the recitals to this Agreement.
"New Securities" shall have the meaning as set forth in
Section 6(b) hereof.
"Public Transferee" shall have the meaning set forth in
Section 3(e) hereof.
"Registration Shares" shall have the meaning as set forth
in Section 7(a) hereof.
"Requested Registration Shares" shall have the meaning as set
forth in Section 7(a) hereof.
2
<PAGE>
"Rule 144" shall mean shall mean Rule 144 as promulgated by
the Commission under the Securities Act, as such Rule may be amended from
time to time, or any similar successor rule that may be promulgated by the
Commission.
"Securities" shall mean the shares of the Common Stock of
the Corporation from time to time held beneficially or owned of record by the
Stockholders and any additional "equity securities" (as such term is defined
under the Securities Exchange Act of 1934, as amended) of the Corporation or
any successor to the business and assets of the Corporation (by purchase,
merger or otherwise) at any time issued to or acquired by the Stockholders,
or any of them, including without limitation, in connection with any
reorganization, reclassification, stock split, stock dividend or stock
distribution, or upon exercise of any stock subscription, option, right or
warrant or of any conversion rights inherent in any securities, in any case,
whether owned on the date hereof or hereafter acquired by any Stockholder.
"Securities Act" shall have the meaning set forth in
Section 7(a) hereof.
"Securities Exchange Act" shall have the meaning set forth
in Section 7(k) hereof.
"Seller's Shares" shall have the meaning as set forth in
Section 3(a) hereof.
"Selling Stockholder" shall have the meaning as set forth
in Section 3(a) hereof.
"Stockholders" shall mean, without duplication, each
Management Stockholder, Leitch, and Elliott.
"Strategic Entity" shall have the meaning set forth in
Section 6(b) hereof.
"Strategic Event" shall have the meaning set forth in
Section 6(d) hereof.
"Strategic Transaction" shall have the meaning set forth in
Section 6(b) hereof.
"Transferee" shall have the meaning set forth in Section 4
hereof.
2. COMPOSITION OF BOARD OF DIRECTORS; COMMITTEES;
DIRECTORS' EXPENSES.
(a) Each of the Management Stockholders,
Elliott and each Transferee (other than a Public Transferee) of any of such
persons, covenant and agree that in any election of directors of the
Corporation, including by written consent, they shall, for so long as Leitch
or any Affiliate of Leitch holds a number of the outstanding voting equity
securities and Class B Common Stock of the Corporation representing at least
20% of the number of all issued and outstanding voting equity securities and
Class B Common Stock of the Corporation (assuming the issuance of all voting
equity securities and Class B Common Stock of the Corporation issuable
pursuant to then outstanding warrants, options, convertible or exchangeable
securities and other rights to acquire voting equity securities and Class B
Common Stock of the Corporation from the Corporation), vote all voting
Securities of the Corporation owned or controlled by them in favor of a Board
of Directors of the Corporation whose members shall include designees of
Leitch who constitute 2/7th of the entire Board of Directors (rounded up or
down to the nearest whole Board member (with 0.5 or greater being rounded
up)); it being
3
<PAGE>
understood and agreed that such Board of Directors shall consist initially of
seven (7) members, of which initially two (2) shall be designated by Leitch;
it being further understood and agreed that, in the event that Leitch or any
Affiliate of Leitch acquires Management Shares pursuant to Section 3 hereof
and/or Elliott Put Shares pursuant to Section 5 hereof, Leitch shall be
entitled to appoint, and such persons shall vote any and all voting
Securities of the Corporation owned or controlled by them for, that number of
directors which will result in Leitch having Board representation which is
commensurate with the percentage ownership of the issued and outstanding
voting equity securities and Class B Common Stock of the Corporation owned by
Leitch (rounded up or down to the nearest whole board member (with 0.5 or
greater being rounded up)).
(b) In the event of any vacancy in the Board
of Directors of the Corporation occurring for any reason, each of the
Management Stockholders, Elliott and each Transferee (other than a Public
Transferee) of such person covenant and agree to vote all voting Securities
of the Corporation owned or controlled by him or it and otherwise to use his
or its best efforts to fill the vacancy in such a manner that the Board of
Directors of the Corporation will consist of directors designated in
accordance with the provisions of subsection (a) above. In addition to the
foregoing, in the event that at any time Leitch determines to replace or
remove any or all of its designees to the Board of Directors of the
Corporation, each of the Management Stockholders, Elliott and each Transferee
(other than a Public Transferee) of such person covenant and agree to vote
all voting Securities of the Corporation owned or controlled by him or it for
such replacement or removal and for the replacement designee(s) of Leitch in
accordance with the terms of this Section 2 and otherwise to use his or its
best efforts to effect such a replacement or removal and replacement.
(c) The Corporation hereby agrees to use its
best efforts to cause such designated candidates, pursuant to subsection (a)
above, and replacements, pursuant to subsection (b) above, to be elected to
the Board of Directors of the Corporation and to recommend that the
stockholders of the Corporation approve and elect such designated candidates.
(d) The parties hereto agree to use their
respective best efforts to cause each committee formed by the Board of
Directors of the Corporation to include at least one (1) designee of Leitch.
(e) For purposes of this Section 2, the
parties hereto agree that the initial Board of Directors of the Corporation
after the Effective Date shall be as follows:
Michael T. Elliott, Ronald D. Fellman; Douglas A. Palmer, Archie Adams, and
Paul Robinson and, as the nominees of Leitch, John A. MacDonald and Reg J.
Tiessen.
3. RIGHT OF FIRST REFUSAL.
(a) Until the occurrence of a Strategic
Event, whenever and as often as any of the Management Stockholders or any of
the Transferees (other than Public Transferees) of such persons (each, a
"Selling Stockholder") shall desire to Dispose of any Securities pursuant to
a bona fide offer for the purchase or other acquisition thereof in a private
transaction with a
4
<PAGE>
person or entity not an Affiliate of the Selling Stockholder, the Selling
Stockholder shall give written notice (the "Notice") to Leitch and to the
secretary of the Corporation to such effect, enclosing a copy of such bona
fide offer (it being agreed that the Selling Stockholder shall cause any such
offer to be reduced to a writing between the Selling Stockholder and the
prospective acquirer) and specifying the number of Securities which the
Selling Stockholder desires to Dispose of (collectively, the "Seller's
Shares"), the name of the person or entity to whom the Selling Stockholder
desires to make such Disposition and the dollar value of the consideration
which has been offered in connection therewith. Upon receipt of the Notice,
Leitch shall have the first right and option (the "Right of First Refusal")
to purchase all, but not less than all, of the Seller's Shares, at a purchase
price equal to the dollar value of such consideration (in the event such
consideration includes non-cash consideration, the dollar value of such
non-cash consideration shall be determined by an independent third-party who
shall be mutually agreed upon by Leitch and the transferring Management
Stockholder, whose good faith determination shall be conclusive and whose
reasonable fees and expenses shall be paid by the Corporation) exercisable
for a period of ten (10) days from the later of the date of receipt by Leitch
of the Notice or the date of receipt of the independent third-party
determination of value, if any, contemplated by this sentence (the "Notice
Period"). In the event that such offer includes consideration payable other
than in cash, in connection with the exercise of the Right of First Refusal
hereunder, Leitch may pay the non-cash portion of the purchase price
hereunder by paying the cash equivalent of such non-cash consideration, as so
determined in good faith by such independent third-party. Failure of Leitch
to respond to the Notice within the Notice Period shall constitute a
notification to the Selling Stockholder of Leitch's decision not to exercise
the Right of First Refusal under this Section 3(a).
(b) Leitch shall exercise the Right of First
Refusal, if at all, by giving written notice to the Selling Stockholder and
the secretary of the Corporation not later than the close of business on the
final day of the Notice Period (or if such date is not a business day, then
on or before the close of business on the next succeeding business day),
advising of the election to exercise the same and the date (not later than
five (5) business days after the expiration of the Notice Period) upon which
payment of the purchase price for the Seller's Shares to be purchased by
Leitch shall be made. The Selling Stockholder shall cause to be delivered to
Leitch at Leitch's principal executive office, on the payment date specified
in such notice, the certificate or certificates representing the Seller's
Shares to be purchased by Leitch, properly endorsed for transfer, together
with all necessary transfer and documentary stamps affixed thereto and
together with a certificate signed by the Selling Stockholder or the personal
representative or executor of the estate of the Selling Stockholder to the
effect that the Securities being transferred are free and clear of all liens,
encumbrances or rights of third parties of every nature whatsoever, against
payment of the purchase price therefor by Leitch.
(c) If all the Seller's Shares are not
purchased by Leitch in accordance with this Section 3, the Selling
Stockholder (i) shall not be required to sell any of the Seller's Shares to
Leitch and (ii) may, during the 90-day period commencing on the expiration of
the Right of First Refusal, sell all (but not less than all) of the Seller's
Shares to the transferee named in the Notice for a consideration the dollar
value of which is equal to or greater than the dollar value of the
consideration specified in the Notice, free of the restrictions contained in
this Section 3 (but subject to the other terms and conditions hereof).
5
<PAGE>
(d) Any attempted Disposition or issuance of
securities other than in accordance with this Agreement (other than
involuntary transfers or transfers by operation of law), including, without
limitation, in violation of this Section 3 or Section 6 hereof, shall be null
and void and the Corporation shall refuse to recognize any such Disposition
or issuance and shall not reflect on its records any change in the record
ownership of any securities, as applicable, pursuant to any such Disposition
or issuance.
(e) Notwithstanding the foregoing, if a
Strategic Event has occurred, the Right of First Refusal shall cease.
However, if after the occurrence of a Strategic Event, a Selling Stockholder
desires to Dispose of Securities pursuant to a bona fide offer for the
purchase or other acquisition thereof in a private transaction with a person
or entity not an Affiliate of the Selling Stockholder, the Selling
Stockholder shall deliver the Notice containing the information prescribed by
Section 3(a) to Leitch and the secretary of the Corporation. Upon receipt of
such Notice, Leitch shall be given the opportunity for a period of ten (10)
days from the date of receipt of the Notice (the "Competing Offer Period"),
to make an offer (the "Competing Offer") to purchase the Seller's Shares.
Upon receipt by the Selling Stockholder of any Competing Offer, the Selling
Stockholder shall notify Leitch, within five (5) business days after the
expiration of the Competing Offer Period, that the Selling Stockholder
intends to accept the Competing Offer. Failure of the Selling Stockholder to
respond to the Notice within the Notice Period shall constitute a rejection
of the Competing Offer. In the event that the Selling Stockholder accepts the
Competing Offer, Leitch shall purchase the Seller's Shares in accordance with
the procedures set forth in Section 3(b) above. If Leitch fails to make a
Competing Offer to the Selling Stockholder within the Competing Offer Period,
the Selling Stockholder may Dispose of the Seller's Shares, in accordance
with and subject to clause 3(b)(ii) above. For purposes of this Section 3, a
Strategic Event shall have occurred if (x) a Strategic Entity, in a single
transaction, purchases Common Stock or other equity securities of the
Corporation for at least U.S. $6,000,000 or (y) the Corporation shall have
achieved during any twelve-month trailing period at least U.S. $30,000,000 of
gross revenues as determined in accordance with generally accepted accounting
principles ("GAAP") and as reflected in the financial statements of the
Corporation.
(f) Notwithstanding the foregoing, the
provisions of this Section 3 shall not apply and Leitch shall have no rights
under this Section 3, with respect to a sale of any Securities by any of the
Management Stockholders or any Transferees of any of them in a block trade,
to a market maker for the Securities or in an open market transaction,
whether such open market transaction is effected pursuant to Rule 144 of the
Securities Act or otherwise (the Transferee of Securities in a block trade,
sale to a market maker or an open market transaction, hereinafter, a "Public
Transferee").
4. PURCHASERS OR TRANSFEREES OF COMMON STOCK. Except
as otherwise specifically provided herein, and as a condition to the transfer
of any such Securities on the books and records of the Corporation, any
person or entity (other than a Public Transferee) who shall acquire (either
voluntarily or involuntarily, by operation of law or otherwise) any
Securities from (i) any of the Management Stockholders, Leitch or Elliott or
(ii) any transferee of any of them (other than Public Transferees) (any such
transferee of any of them, a "Transferee"), shall execute an agreement
wherein such Transferee (other than a Public Transferee) shall agree to be
bound by, subject to and shall enjoy the rights and benefits of, this
Agreement to the same extent,
6
<PAGE>
and subject to the same covenants and agreements, as the party hereto
transferring such Securities to such Transferee.
5. ELLIOTT PUT OPTION.
(a) Leitch shall, concurrently with the
purchase of any Seller's Shares pursuant to the Right of First Refusal or a
Competing Offer, deliver to Elliott written notice of such purchase (the "Put
Notice"). Upon receipt of the Put Notice, Elliott shall have the option (the
"Put Option"), exercisable by written notice to Leitch given within five (5)
business days of receipt by Elliott of the Put Notice, to require that Leitch
acquire a pro rata portion of the Elliott Put Shares. The pro rata portion of
the Elliott Put Shares for purposes of this Put Option is the ratio of the
total number of Seller's Shares purchased by Leitch pursuant to Section 3
hereof to the total number of Management Shares beneficially owned by
Management Stockholders and their Transferees (other than Public Transferees)
immediately prior to the purchase by Leitch pursuant to Section 3 hereof. For
example, if Leitch purchases from the Management Stockholders, pursuant to
Section 3 above, 333,333 shares of Common Stock out of a total of 1,000,000
Management Shares, then the ratio would be 1/3 and Elliott would have the
right to require Leitch to purchase 1/3 of the Elliott Put Shares.
(b) The purchase price to be paid by Leitch
for the Elliott Put Shares shall be equal to the purchase price paid to the
Management Stockholders for the Seller's Shares and shall be payable in the
same form or forms of consideration paid to the Management Stockholders for
the Seller's Shares.
(c) The closing (a "Put Closing") of the
purchase and sale of the Elliott Put Shares shall take place no later than
five (5) business days following the exercise of the Put Option by written
notice to Leitch pursuant to Section 5(a) above. The exercise of the Put
Option (which exercise is evidenced by the delivery of a Put Notice to
Leitch) shall constitute an unconditional and irrevocable commitment by
Elliott, on the one hand, and Leitch, on the other hand, to sell and purchase
the Elliott Put Shares in accordance with the provisions of this Section 5.
On the date of a Put Closing, Elliott shall deliver to Leitch at the Leitch's
principal executive office set forth in Section 12 below, against receipt of
payment of the purchase price therefor, the certificate or certificates
representing the Elliott Put Shares being sold, properly endorsed for
transfer, signature guaranteed, with all necessary transfer and documentary
stamps affixed thereto, together with a certificate signed by Elliott to the
effect that the Elliott Put Shares being transferred are free and clear of
all liens, encumbrances or rights of third parties of any nature whatsoever.
(d) Notwithstanding Section 4 hereof, it is
understood and agreed by the parties hereto that a Put Option is not
transferable or otherwise assignable without the prior written consent of the
Management Stockholders and Leitch, and any attempt to transfer or otherwise
assign the Put Option in violation of this Section 5(d) will render the Put
Option void and of no further force or effect.
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6. RIGHT OF SUBSCRIPTION FOR NEW SECURITIES.
(a) The Corporation hereby grants, on the terms
set forth in this Section 6, to Leitch and to each Transferee of Leitch (other
than Public Transferees), the right of first offer to purchase Leitch's or such
Transferee's, as applicable, pro rata share of the New Securities (as defined in
Section 6(b) below) which the Corporation may, from time to time, propose to
sell or issue. Leitch and such Transferees shall have the right to purchase said
New Securities on the same terms and at the same price at which the Corporation
proposes to sell the New Securities. A person's or entity's pro rata share of
the New Securities, for purposes of this right of first offer, shall be the
ratio of the total number of voting equity securities and Class B Common Stock
of the Corporation held by Leitch or by such Transferee(s), as applicable, to
the total number of voting equity securities and Class B Common Stock of the
Corporation issued and outstanding immediately prior to the issuance of the New
Securities (assuming the issuance of all voting equity securities and Class B
Common Stock of the Corporation issuable pursuant to then outstanding warrants,
options, convertible or exchangeable securities and other rights to acquire
voting equity securities and Class B Common Stock of the Corporation from the
Corporation).
(b) "New Securities" shall mean any capital
stock of the Corporation, whether now authorized or not, and any rights, options
or warrants to purchase said capital stock, and securities or debt of any type
whatsoever that are, or may become, convertible into or exchangeable for such
capital stock; provided that "New Securities" do not include (i) shares of
capital stock issued upon conversion of any convertible securities or exercise
of any options or warrants; (ii) securities issued pursuant to the bona fide
acquisition by the Corporation of another corporation or other entity, which
corporation or other entity would qualify as a Strategic Entity, by merger,
purchase of substantially all of the assets or stock of such corporation, or
other acquisition, reorganization or similar transaction; (iii) all shares of
capital stock or other securities, options or other rights to purchase capital
stock hereafter issued or issuable to officers, directors, employees or
consultants of the Corporation pursuant to any employee or consultant stock
offering, stock purchase or stock option plan or other arrangement approved by
the Board of Directors of the Corporation; (iv) any shares of capital stock
purchased from or issued by the Corporation by/to an entity which is a Strategic
Entity in a Strategic Transaction. For purposes hereof, a Strategic Transaction
shall mean a transaction with a Strategic Entity which is a "major player" in
the industry in which the Corporation operates (a "Strategic Entity") and which
Strategic Entity, as part of the transaction, enters into a licensing,
technology and distribution agreement with the Corporation.
(c) The Corporation shall give Leitch and each
Transferee of Leitch (other than Public Transferees) written notice prior to any
sale or issuance of New Securities (the "New Issuance Notice"), describing the
type of New Securities, the price and the terms upon which the Corporation
proposes to sell or issue the New Securities. If Leitch or any such Transferee
determines to exercise its rights pursuant to this Section 6, Leitch or such
Transferee, as applicable, shall, within ten (10) days from the date of receipt
of the New Issuance Notice (the "New Issuance Notice Period"), deliver written
notice to the Corporation of its election to purchase its pro rata share of the
New Securities and stating therein the quantity of New Securities to be
purchased. Upon exercise of its rights pursuant to this Section 6, Leitch or
such
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Transferee, as applicable, shall purchase, and the Corporation shall sell or
issue to Leitch or such Transferee, as applicable, such person's or entity's
pro rata share of the New Securities simultaneously with the closing of the sale
or issuance of the other New Securities by the Corporation. In the event that
the consideration paid by an acquiror of New Securities includes non-cash
consideration, the dollar value of such non-cash consideration shall be
determined by an independent third party mutually agreed upon by Leitch and the
Corporation, whose good faith determination shall be conclusive and whose
reasonable fees and expenses shall be paid by the Corporation, and Leitch or
such Transferee, as applicable, may pay the non-cash portion of the purchase
price hereunder by paying the cash equivalent of such non-cash consideration, as
so determined by such independent third-party.
(d) In the event Leitch or such Transferee, as
applicable, fails to exercise the right of first offer within the New Issuance
Notice Period, the Corporation shall have 90 days thereafter to sell or enter
into an agreement (pursuant to which the sale of New Securities covered thereby
shall be closed, if at all, within 90 days from date of said agreement) to sell
the New Securities otherwise purchasable by Leitch or such Transferee, as
applicable, at a price and upon terms no more favorable to the purchasers
thereof than specified in the New Issuance Notice. In the event the Corporation
has not sold or entered into an agreement to sell the New Securities within said
90 day period (or sold and issued New Securities in accordance with the
foregoing within 90 days from the date of said agreement) the Corporation shall
not thereafter issue or sell any New Securities without first offering such
securities to Leitch and such Transferees in the manner provided above.
(e) Notwithstanding the foregoing, the
Corporation shall have no obligation, pursuant to this Section 6, at the request
of Leitch or otherwise, to issue, sell, or otherwise convey or enter into any
negotiation or transaction to issue, sell or convey New Securities.
7. REGISTRATION OF THE SECURITIES.
(a) At any time after the first anniversary date
of the earlier to occur of (i) the date of effectiveness of the Form 10 (as such
term is defined in the Purchase Agreement) and (ii) the date on which a class of
securities of the Corporation shall be registered under the Securities Exchange
Act, Leitch and any Transferee of Leitch (other than Public Transferees) shall
have the right to request that the Corporation effect the registration under the
Securities Act of 1933, as amended (the "Securities Act") of any or all shares
of Class A Common Stock of the Corporation (for purposes of this Section 7 only,
the "Securities") beneficially owned by Leitch and/or such Transferee (the
Securities requested to be registered are hereinafter collectively referred to
as the "Requested Registration Shares"). In such event, the Corporation shall
use its reasonable best efforts to cause the Requested Registration Shares to be
registered under the Securities Act and to effect and to comply with all such
qualifications, compliances and requirements as may be necessary to permit the
sale or other transfer of such Requested Registration Shares in the manner
described in such request, including, without limitation, qualifications under
applicable blue sky or other state securities laws (provided that the
Corporation shall not be required in connection therewith to qualify as a
foreign corporation or to execute a general consent to service of process in any
state); provided, however, that (i) the Corporation shall not be obligated to
file and cause to become effective more than two registration statements in
which Requested Registration Shares are sold pursuant to this
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subsection (a), (ii) the Corporation shall not be obligated to file and cause to
become effective more than one such registration statement under this subsection
(a) in any six-month period and (iii) in the event that, for any reason (other
than as a result of a request made by Leitch or any Transferee of Leitch to
withdraw such person's or entity's Requested Registration Shares from such
registration), less than one-half of the number of Requested Registration Shares
shall be registered under the Securities Act in accordance with a request made
by Leitch or any Transferee of Leitch (other than Public Transferees) pursuant
to this subsection (a), then such registration shall not constitute one of the
registration statements referred to above. Leitch's and such Transferee's rights
under this subsection (a) shall terminate upon the earlier to occur of (1) the
seventh anniversary of the date hereof or (2) the date on which all of the
shares of Common Stock held by Leitch and Transferees of Leitch (other than
Public Transferees) may be sold pursuant to Rule 144 of the Securities Act
during a 90-day period. If Leitch and any Transferees of Leitch initiating a
registration request under this subsection (a) intend to distribute the
Requested Registration Shares covered by such request by means of an
underwriting and the managing underwriter of such underwriting advises Leitch
and any such Transferees that marketing factors require a limitation of the
number of shares to be underwritten, then the number of Securities that may be
included in the underwriting shall be allocated among each of Leitch and/or any
such Transferees desiring to include any Requested Registration Shares in
proportion to the amount of Securities owned by each such person or entity;
provided, however, that the number of shares of Requested Registration Shares to
be included in such offering shall not be reduced unless all other securities
are first entirely excluded from the underwriting.
(b) [Intentionally omitted].
(c) In the event that, at any time or from time
to time on or prior to the seventh anniversary of the date hereof, the
Corporation proposes to register on its behalf or on behalf of any selling
stockholder(s) of the Corporation any securities (the "Registration Shares"),
including shares of Common Stock, under the Securities Act, other than pursuant
to a registration statement on Forms S-4 or S-8, or any successor to such Forms
promulgated by the Securities Exchange Commission (the "Commission"), and other
than in an initial public offering of Securities, for the purpose of the sale or
other transfer of the Registration Shares, the Corporation shall mail or deliver
to Leitch and to each Transferee of Leitch (other than Public Transferees) at
least 30 days prior to the filing of the registration statement covering such
Registration Shares or securities, a written notice (a "Registration Notice") of
its intention so to register the Registration Shares.
(d) In the event that a Registration Notice
shall have been so mailed or delivered, Leitch, at its election, may mail or
deliver to the Corporation a written notice (a "Supplemental Notice") (i)
specifying the number of shares of Common Stock ("Supplemental Registration
Shares") proposed to be sold or otherwise transferred and (ii) requesting the
registration thereof under the Securities Act; provided, however, that such
Supplemental Notice shall be so mailed or delivered by Leitch not more than 15
days after the date of the Registration Notice.
(e) From and after receipt of a Supplemental
Notice, the Corporation shall, subject to the sale or other transfer of some or
all of such Registration Shares by means of the registration thereof and to the
provisions of subsection (a) above, use its reasonable best
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efforts to cause the Supplemental Registration Shares specified in such
Supplemental Notice to be registered under the Securities Act and to effect and
to comply with all such qualifications, compliances and requirements as may be
necessary to permit the sale or other transfer of such Supplemental Registration
Shares in the manner described in such Supplemental Notice, including, without
limitation, qualifications under applicable blue sky or other state securities
laws (provided that the Corporation shall not be required in connection
therewith to qualify as a foreign corporation or to execute general consent to
service of process in any state); provided, however, that if (i) in the case of
an underwritten public offering of securities, the managing underwriter shall
advise the Corporation in writing that inclusion of some or all of such
Supplemental Registration Shares would, in such managing underwriter's opinion,
materially interfere with the proposed distribution of the securities to be
issued by the Corporation, then the Corporation may, upon written notice to
Leitch and to each Transferee of Leitch (other than Public Transferees) allocate
the Supplemental Registration Shares to be included in the registration
statement (if and to the extent such allocation is certified by such managing
underwriter as necessary to eliminate such interference) pro rata among Leitch
and such Transferees, on the one hand, and other selling stockholders, on the
other hand, on the basis of the number of shares of Common Stock held by Leitch
and held by such selling stockholders (assuming the issuance of Common Stock
issuable pursuant to all outstanding warrants, options, convertible and/or
exchangeable securities or other rights to acquire Common Stock, provided that
such securities are at the time exercisable, convertible or exchangeable),
provided that in no event shall the Supplemental Registration Shares be reduced
below 20% of the total amount of securities included in such offering, or (ii)
any firm of counsel representing the Corporation in connection with such
registration shall advise the Corporation, Leitch and such Transferees, in
writing that in their opinion the steps contemplated hereby are not necessary to
permit the sale of the Supplemental Registration Shares in a transaction
constituting a public offering within the meaning of the Securities Act, then
the Corporation shall not be required to take any action with respect to such
step or steps.
(f) If and whenever the Corporation is required
by the provisions of this Section 7 to use its reasonable best efforts to effect
the registration under the Securities Act of any securities requested to be so
registered by Leitch, the Corporation will, as promptly as possible:
(i) prepare and file with the
Commission a registration statement with respect to such securities and use its
reasonable best efforts to cause such registration statement to become
effective;
(ii) prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period from the date of the effectiveness
thereof through the earlier of (1) the date which is nine (9) months after the
date of effectiveness thereof and (2) the date on which all Requested
Registration Shares or Supplemental Registration Shares, as the case may be,
included in such registration statement shall have been sold pursuant to such
registration statement, and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by such
registration statement whenever Leitch or Transferees of Leitch (other than
Public Transferees) shall desire to sell or otherwise dispose of the same within
such period;
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(iii) furnish to Leitch and such
Transferees such number of copies of a prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and
such other documents as may reasonably be requested thereby in order to
facilitate the public sale or other disposition of such securities owned
thereby;
(iv) notify Leitch and such
Transferees, in writing, at any time when a prospectus relating to such
securities is required to be delivered under the Securities Act within the
appropriate period mentioned in clause (ii) immediately preceding, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of
circumstances then existing, and promptly prepare (and file with the
Commission) and furnish to Leitch and such Transferees a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of
the circumstances then existing; and
(v) furnish, at the request of
Leitch or such Transferees, on the date that its securities are delivered to
the underwriters for sale pursuant to a registration thereof pursuant hereto
or, if such securities are not being sold through underwriters, on the date
the registration statement with respect to such securities becomes effective
(x) an opinion (in the form customarily provided to underwriters in such
transactions) dated such date of the counsel representing the Corporation for
the purposes of such registration, addressed to the underwriters, if any, and
to Leitch and such Transferees, and (y) a letter dated such date from the
independent public accountants of the Corporation addressed to the
underwriters, if any, in each case covering substantially the same matters
with respect to the issuer, such registration statement (and the prospectus
included therein) and, in the case of the accountants' letter, with respect
to the financial statements and financial information included in such
registration statement (and the prospectus included therein) and with respect
to events subsequent to the date of the financial statements included in such
registration statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to the underwriters in
underwritten public offerings of securities.
(g) Leitch and such Transferees agree to
furnish the Corporation such information regarding Leitch and the proposed
distribution of Requested Registration Shares or Supplemental Registration
Shares, as the case may be, by Leitch and such Transferees as the Corporation
may from time to time reasonably request in writing in order to prepare a
registration statement and prospectus or any supplement or amendment thereto
pursuant to the Securities Act and the rules and regulations promulgated
thereunder.
(h) Leitch and such Transferees agree that,
upon receipt of a written notice from the Corporation of the happening of any
event of the kind described in clause (iv) of Section 7(e) above, they will
forthwith discontinue their disposition of Requested Registration Shares or
Supplemental Registration Shares, as the case may be, pursuant to the
registration statement relating to such Requested Registration Shares or
Supplemental Registration Shares, as the case may be, until their receipt of
the copies of the supplemented or amended prospectus
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contemplated by clause (iv) of Section 7(f) above and, if so requested by the
Corporation in writing, will deliver to the Corporation (at the Corporation's
expense) all copies then in their possession, other than permanent file copies,
of the prospectus relating to such Requested Registration Shares or Supplemental
Registration Shares, as the case may be.
(i) The Corporation shall pay all expenses
necessary to effect under the Securities Act any registration statements,
amendments or supplements filed pursuant to this Section 7 (other than
underwriters' discounts and commissions and brokerage commission and fees, if
any, payable with respect to securities sold by Leitch or such Transferees),
including, without limitation, printing expenses, fees of the Commission and the
National Association of Securities Dealers, Inc., expenses of compliance with
blue sky and other state securities laws, and accounting and legal fees and
expenses (including the reasonable legal fees and expenses of one counsel to
Leitch and such Transferees exercising their rights under this Section 7);
provided, however, that the Corporation shall not be required to pay for any
expenses of any registration proceeding begun pursuant to subsection (a) above
if the registration request is subsequently withdrawn at the request of Leitch
and/or any such Transferee, unless Leitch and/or any such Transferee agrees to
forfeit their right to one demand registration pursuant to subsection (a) above.
(j) Whenever a registration statement requested
pursuant to Section 7(a) covers an underwritten public offering, the Corporation
will have, subject to the reasonable approval of Leitch, the right to select the
managing underwriter(s) to administer the offering; provided that the managing
underwriters shall be of nationally recognized standing. Other than pursuant to
a registration statement requested pursuant to Section 7(a), if the Corporation
at any time proposes to register any of its securities under the Securities Act
for sale for its own account and such securities are to be distributed by or
through one or more underwriter(s), the Corporation will have the right to
select the managing underwriter(s) to administer the offering.
(k) From and after such date as the Corporation
shall have filed a registration statement pursuant to the requirements of
Section 12 of the Securities Exchange Act of 1934 (the "Securities Exchange
Act") relating to any class of equity securities of the Corporation or a
registration statement pursuant to the requirements of the Securities Act, the
Corporation covenants that it will, so long as any Securities remain
outstanding, file all reports required to be filed by it under the Securities
Act or the Securities Exchange Act and the rules and regulations promulgated by
the Commission thereunder, and the Corporation will take such further reasonable
action as any Stockholder may reasonably request, all to the extent required
from time to time to enable such Stockholder to sell such restricted shares held
by them without registration within the limitations of the exemptions provided
by (i) Rule 144 of the Securities Act or (ii) any similar rule or regulation
hereafter promulgated by the Commission.
(l) In the event of any registration pursuant to
this Section 7 covering securities beneficially owned by Leitch and any
Transferee of Leitch (other than Public Transferees), the Corporation will
indemnify and hold harmless Leitch and any such Transferee (if securities of
Leitch or such Transferee are included in the subject registration statement)
(collectively, the "Indemnitees") against any losses, claims, damages, costs,
expenses (including reasonable attorneys' fees), or liabilities (or actions in
respect thereof) under the Securities Act or otherwise, which arise out of or
are based upon any untrue statement or alleged untrue
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statement of any material fact contained in any such registration statement, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Corporation will not be liable in any such case to an Indemnitee to the
extent that any such loss, claim, damage or liability arises out of or is based
upon (x) an untrue statement or alleged untrue statement or omission or alleged
omission made in said registration statement, said preliminary prospectus, said
prospectus, or any said amendment or supplement, in reliance upon and in
conformity with written information furnished by such Indemnitee, specifically
for use in the preparation thereof or (y) such Indemnitee's failure to deliver a
copy of the prospectus or any amendments or supplements thereto (if required by
applicable law) to the person asserting any loss, claim, damage or liability
after the Corporation has furnished such Indemnitee with the same. The
Corporation also agrees to reimburse each Indemnitee for any legal or other
expenses reasonably incurred by such Indemnitee in connection with investigating
or defending any such loss, claim, damage, liability or action. Notwithstanding
the foregoing, the indemnity agreement contained in this subsection (l) shall
not apply to amounts paid in settlement of any such loss, claim, damage, cost,
expense or liability if such settlement is effected without the consent of the
Corporation (which consent shall not be unreasonably withheld).
(m) In the event of any registration pursuant to
this Section 7 covering securities beneficially owned by Leitch or any
Transferee of Leitch (other than Public Transferees), Leitch or such Transferee,
as applicable, (if securities of Leitch or such Transferee are included in the
subject registration statement) shall severally (and not jointly) as to such
person in the instances and to the extent set forth in this subsection (m)
indemnify and hold harmless the Corporation, each of its directors and officers
who has signed any registration statement, and each person, if any, who controls
the Corporation within the meaning of the Securities Act, against any losses,
claims, damages, costs, expenses (including reasonable attorneys' fees), or
liabilities (or actions in respect thereof) to which the Corporation or any such
director, officer, or controlling person may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in said
registration statement, said preliminary prospectus, said prospectus, or said
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said prospectus, or said amendment or
supplement, in reliance upon and in conformity with written information
furnished by such stockholder, as the case may be, specifically for use in the
preparation thereof. Such stockholder, as the case may be, shall severally (and
not jointly) reimburse any legal or other expenses reasonably incurred by the
Corporation or any such director, officer, or controlling person in connection
with investigating or defending any such loss, claim, damage, liability or
action.
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(n) Promptly after receipt by an indemnified
party under this Section 7 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 7 notify the indemnifying party of the
commencement thereof; provided, however, that failure to so notify the
indemnifying party shall not affect an indemnifying party's obligations
hereunder, except to the extent that a party is actually prejudiced by such
failure. In case any such action is brought against any indemnified party, and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in the defense thereof, with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party may retain its own counsel, who shall be
reasonably satisfactory to the indemnifying party. The reasonable fees and
expenses of such counsel shall be borne by the indemnifying party.
(o) With respect to any underwritten offering,
each stockholder (if securities of that person are included in the subject
registration statement) and the Corporation shall, in addition to the foregoing,
provide the underwriter of such offering with customary representations and
warranties, and indemnification, in each instance as shall be reasonably
requested by the underwriter, provided, however, that any such agreement to
indemnify an underwriter with respect to any preliminary prospectus shall not
inure to the benefit of any such underwriter to the extent that any loss, claim,
damage or liability of any such underwriter results solely from an untrue
statement of material fact contained in, or the omission of a material fact
from, such preliminary prospectus which untrue statement or omission was
corrected in the final prospectus, if such underwriter failed to send or give a
copy of the final prospectus to the person asserting such loss, claim, damage or
liability at or prior to the written confirmation of the sale of such securities
to such person, and provided further that any such agreement by any stockholder
to indemnify an underwriter shall be on a several (and not joint) basis in
proportion to the number of securities sold by such stockholder, as the case may
be, in such underwritten offering and shall be limited in amount to the net
proceeds received by such stockholder, as the case may be, in such underwritten
offering. To the extent that the provisions on indemnification and contribution
contained in the underwriting agreement entered into in connection with any
underwritten offering are in conflict with the provisions contained in this
Section 7, the provisions in the underwriting agreement shall control.
(p) Notwithstanding anything to the contrary in
this Section 7, if the Corporation shall furnish to Leitch or any Transferee
requesting and/or participating in a registration statement pursuant to this
Section 7 a certificate signed by the Chief Executive Officer of the Corporation
stating that, in the good faith judgment of the Board of Directors of the
Corporation, it would be seriously detrimental to the Corporation and its
stockholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, the Corporation
shall have the right to defer taking action with respect to such filing for a
period of not more than 120 days; provided, however, that the Corporation may
not utilize this right more than once in any twelve-month period.
(q) Neither Leitch nor any Transferee shall have
any right to obtain or seek an injunction restraining or otherwise delaying any
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 7.
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(r) Each of Leitch and any Transferee hereby
agrees that, during the period of duration specified by the Corporation and
an underwriter of Common Stock or other securities of the Corporation,
following the date of the first sale to the public pursuant to a registration
statement of the Corporation filed under the Securities Act, it shall not, to
the extent requested by the Corporation and such underwriter, directly or
indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
any securities of the Corporation held by it at any time during such period
except Common Stock included in such registration; provided, however, that:
(i) such agreement shall be
applicable only to the first such registration statement of the Corporation
which covers Common Stock (or other securities) to be sold on its behalf to
the public in an underwritten offering;
(ii) all officers and directors of
the Corporation enter into similar agreements; and
(iii) such market stand-off time
period shall not exceed 180 days.
In order to enforce the foregoing covenant, the Corporation
may impose stop-transfer instructions with respect to the shares subject to
this subsection (r) until the end of such period. Notwithstanding the
foregoing, the obligations described in this subsection (r) shall not apply
to a registration relating solely to employee benefit plans on Form S-l or
Form S-8 or similar forms which may be promulgated in the future, or a
registration relating solely to a Rule 145 transaction on Form S-4 or similar
forms which may be promulgated in the future.
8. STANDSTILL. Leitch and each Transferee of Leitch
(other than Public Transferees) agree that from and after the date of this
Agreement, unless such shall have been specifically invited or approved in
writing by the Board of Directors of the Corporation, neither Leitch nor any
Affiliate of Leitch and neither a Transferee of Leitch (other than Public
Transferees) nor any Affiliate of such Transferee will in any manner,
directly or indirectly, except as provided in this Agreement or in the
Corporation's By-laws, (a) effect or seek, offer or propose (whether publicly
or otherwise) to effect, or cause or participate in or in any way assist any
other person or entity to effect or seek, offer or propose (whether publicly
or otherwise) to effect or participate in, (i) any acquisition of any voting
equity securities of the Corporation and any shares of Class B Common Stock
(or beneficial ownership thereof) or all or substantially all of the assets
of the Corporation or any of its subsidiaries, (ii) any tender or exchange
offer (other than to tender or exchange securities of the Corporation in a
tender offer or exchange offer effected by another person or entity not an
Affiliate of Leitch and not an Affiliate of such Transferee) or merger or
other business combination involving the Corporation or any of its
subsidiaries, (iii) any recapitalization, restructuring, liquidation,
dissolution or other extraordinary transaction with respect to the
Corporation or any of its subsidiaries, or (iv) any "solicitation" of
"proxies" (as such terms are used in the proxy rules of the Commission) or
consents to vote securities of the Corporation, (b) form, join or in any way
participate in a "group" (as defined under the Securities Exchange Act of
1934, as amended), (c) except as may result from Leitch's representation on
the Board of Directors of the Corporation, otherwise act,
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alone or in concert with others, to seek to control or influence the
management, Board of Directors or policies of the Corporation, (d) take any
action which might force the Corporation to make a public announcement
regarding any of the types of maters set forth in (a) above, or (e) enter
into any discussions or arrangements with any third-party (other than the
directors of the Corporation) with respect to any of the foregoing. Leitch
and each Transferee of Leitch (other than Public Transferees) shall not
amend, waive, modify, or seek from the Corporation (acting through its
officers) the amendment, waiver or modification of, or act in contravention
of, directly or indirectly, the provisions of this Section 8 (including this
sentence) without the prior written consent of the Board of Directors of the
Corporation. Notwithstanding anything to the contrary set forth in this
Section 8, Leitch and each Transferee of Leitch shall be permitted to acquire
(x) any or all of the Management Shares and the Elliott Shares pursuant to
the terms of this Agreement, (y) New Securities pursuant to the terms of
Section 6 hereof or (z) any securities in connection with the consummation of
the transactions contemplated by the Berns Agreement.
9. LEGEND AND COMPLIANCE WITH SECURITIES LAWS. The
stock certificates evidencing the Management Shares, the Elliott Shares and
the Leitch Shares, including any additional shares acquired by any such party
to this Agreement pursuant to the terms of this Agreement or otherwise, shall
bear a legend reading substantially as follows:
"The securities represented by this certificate have
not been registered under the Securities Act of 1933, as
amended, or qualified under state securities laws and may not
be sold, pledged, or otherwise transferred unless (a) covered
by an effective registration statement under the Securities
Act of 1933, as amended, and qualified under applicable state
securities laws, or (b) Path 1 Network Technologies Inc. has
been furnished with a written opinion of counsel acceptable to
it or by its counsel to the effect that no registration or
qualification is legally required for such transfer.
The securities represented by this certificate are
subject to a Stockholders Agreement dated as of April 10,
2000, and any subsequent amendments or supplements thereto.
Any sale, transfer, pledge or other disposition of the
securities represented by this certificate is subject to the
provisions of said agreement, a copy of which is on file and
may be obtained at the offices of Path 1 Network Technologies
Inc."
Each of the Management Stockholders, Elliott and Leitch
consent to the Corporation making a notation on its records and giving
instructions to any transfer agent of the Securities in order to implement any
restrictions on transfer established in this Agreement.
10. AMENDMENT TO BY-LAWS. On or prior to the Effective
Date, the Corporation shall cause the By-laws of the Corporation to be amended
to include the provisions set forth in Annex A attached hereto (the
"Amendment"). The parties hereto hereby covenant and agree that once the
provisions set forth in the Amendment have been adopted by the Board of
Directors, the parties hereto shall not, for so long as Leitch and any Affiliate
of Leitch own a
17
<PAGE>
number of the outstanding voting equity securities and Class B Common Stock
of the Corporation representing at least 20% of the number of issued and
outstanding voting equity securities and Class B Common Stock of the
Corporation (assuming the issuance of all voting equity securities and Class
B Common Stock of the Corporation issuable pursuant to then outstanding
warrants, options, convertible or exchangeable securities and other rights to
acquire voting equity securities and Class B Common Stock of the Corporation
from the Corporation), without the prior written consent of Leitch, alter,
amend or repeal the Amendment or any other provision of the By-laws which
shall have the same effect as altering, amending or repealing the Amendment,
notwithstanding the fact that no vote of stockholders of the Corporation may
be required, or that a lesser percentage vote may be specified by law, by the
Certificate of Incorporation or the By-laws.
11. TERMINATION OF THIS AGREEMENT. All rights and
obligations created by this Agreement (other than as provided in Section 7
above, which Section 7 shall control) shall terminate upon the earlier to occur
of (a) the written agreement of the Corporation and all of such of Leitch,
Elliott and the Management Stockholders who own Securities at the time, (b) the
acquisition by a single purchaser of all of the issued and outstanding shares of
Common Stock, (c) the close of business on the tenth anniversary of the date of
the execution and delivery of this Agreement, (d) the merger or consolidation of
the Corporation with or into another entity following which merger or
consolidation more than 50% of the then outstanding voting equity securities of
the Corporation are held by persons or entities different than immediately prior
to such merger or consolidation or (e) the closing of the Corporation's
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offer and sale of shares of the
Corporation's voting equity securities in which not less than $25,000,000 of net
proceeds are received by the Corporation for the account of the Corporation.
12. NOTICES. Any notice or other communication under this
Agreement shall be in writing and sufficient if delivered personally or sent by
registered or certified mail, postage prepaid, by recognized overnight courier,
or by telecopy, addressed as follows:
If to the Corporation:
3636 Nobel Drive
Suite 275
San Diego, California 92122
Telecopy: (858) 450-4203
Telephone: (858) 450-4220
Attention: President
with copies to Leitch (at the address provided below)
and to:
Brobeck, Phleger & Harrison LLP
12390 El Camino Real
San Diego, California 92130
Telecopy: (858) 720-2555
Telephone: (858) 720-2750
Attention: Hayden Trubitt, Esq.
18
<PAGE>
If to Leitch:
25 Dyas Road
North York, Ontario
Canada M3B 1V7
Telecopy: (416) 445-4308
Telephone: (416) 445-9640
Attention: Mr. Reg T. Tiessen
with a copy to:
Torys
237 Park Avenue
New York, New York 10017
Telecopy: (212) 682-0200
Telephone: (212) 880-6000
Attention: Bradley P. Cost, Esq.
If to Fellman:
12989 Chaparral Ridge Road
San Diego, California 92130
Telecopy: (858) 450-4203
Telephone: (858) 450-4220
If to Palmer:
1229 Trieste Drive
San Diego, California 92107
Telecopy: (858) 450-4203
Telephone: (858) 450-4220
If to Elliott:
c/o the Corporation
3636 Nobel Drive
Suite 275
San Diego, California 92122
All such notices and communications shall be deemed to have been duly given at
the time delivered by hand, if personally delivered, upon receipt, if sent by
telecopy, on the next business day, if sent by a nationally recognized courier,
or three (3) business days after being deposited in the mail, if sent by
registered or certified mail. Any party may, upon written notice to the other
19
<PAGE>
parties hereto, change the address to which notices or other communications to
such party are to be delivered or mailed.
13. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, including by telecopy, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
14. ENTIRE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof.
All of the parties hereto agree that this Agreement may be amended or modified
or any provision hereof may be waived by a written agreement among the parties;
provided that notwithstanding the foregoing, any amendment, modification or
waiver of Section 8 may be effected pursuant to the written agreement of Leitch
and the Corporation only (acting through, and under written direction from, its
Board of Directors). This Agreement supersedes all prior understandings,
negotiations and agreements relating to the subject matter hereof.
15. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed entirely within such State, without regard
to the conflict of laws principles of such State.
16. JURISDICTION; WAIVER OF TRIAL BY JURY. THE PARTIES
HERETO HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY NEW YORK
STATE OR UNITED STATES FEDERAL COURT SITTING IN THE CITY OF NEW YORK OVER ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND HEREBY
IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING SHALL
BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURT. THE PARTIES
AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE
AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY
OTHER MANNER PROVIDED BY LAW. THE PARTIES FURTHER WAIVE TRIAL BY JURY, ANY
OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO ANY ACTION OR PROCEEDING
IN SUCH STATE ON THE BASIS OF FORUM NON CONVENIENS. THE PARTIES FURTHER AGREE
THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL
BE BROUGHT ONLY IN A NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN
NEW YORK COUNTY.
17. HEADINGS. The headings in this Agreement are solely
for convenience of reference and shall not affect the interpretation of any of
the provisions hereof.
18. SEVERABILITY. If any provision herein contained shall
be held to be illegal or unenforceable, such holding shall not affect the
validity or enforceability of the other provisions of this Agreement.
20
<PAGE>
19. BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefit of the Corporation, each of the Stockholders, each of
their respective successors, permitted assigns, executors, administrators, legal
representatives and heirs, as applicable.
20. CONSTRUCTION.
(a) The parties hereto agree that this Agreement
is the product of negotiations between sophisticated parties and individuals,
all of whom were represented by counsel, and each of whom had an opportunity to
participate in, and did participate in, the drafting of each provision hereof.
Accordingly, ambiguities in this Agreement, if any, shall not be construed
strictly or in favor of or against any party hereto but rather shall be given a
fair and reasonable construction without regard to the rule of contra
proferentem.
(b) The provisions of this Agreement shall apply
MUTATIS MUTANDI to any shares or other securities resulting from any stock split
or reverse split, stock dividend, reclassification of the capital stock of the
Corporation, consolidation, merger or reorganization of the Corporation or of
any successor company which may be received by any of the Stockholders (and/or
their respective Transferees, successors, permitted assigns, legal
representatives and heirs) by virtue of such person's or entity's ownership of
Common Stock.
21. EFFECTIVENESS. Notwithstanding anything to the
contrary contained herein or otherwise, this Agreement automatically shall
become effective (without further act or deed by any party hereto or otherwise),
and shall thereafter be in full force and effect, on (and only on and after) the
Effective Date.
* * * *
21
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed
this Stockholders' Agreement on the date first above written.
PATH 1 NETWORK TECHNOLOGIES INC.
By: /s/ Vera Moldt
------------------------------
Name: Vera Moldt
Title: Secretary
LEITCH TECHNOLOGY CORPORATION
By: /s/ J. A. MacDonald
------------------------------
Name: John A. MacDonald
Title: President and Chief Executive
Officer
By: /s/ Reg J. Tiessen
------------------------------
Name: Reg J. Tiessen
Title: Chief Financial Officer
/s/ Ronald D. Fellman
---------------------------------
Ronald D. Fellman
/s/ Douglas A. Palmer
---------------------------------
Douglas A. Palmer
/s/ Michael T. Elliott
---------------------------------
Michael T. Elliott
22
<PAGE>
ANNEX A
AMENDMENT TO BY-LAWS
1. Special meetings of the Board of Directors may be called by
any director of the Corporation upon written notice given, pursuant to the
requirements of the By-laws, to each of the other directors.
2. Directors and committee members, as the case may be, must be
given at least 48 hours' written notice of any Board of Directors meeting or
meeting of any committee of the Board of Directors. Any Director(s) shall be
allowed to participate in Board and committee meetings via telephone.
3. The Corporation shall reimburse each director of the
Corporation and each member of any committee established by the Board of
Directors for all reasonable out-of-pocket expenses incurred by such director or
member in connection with the attendance by such director or member at meetings
of the Board of Directors of the Corporation or at meetings of committees of the
Board of Directors, in any case, held in accordance with the By-laws.
4. Any stockholder or stockholder group holding at least 20% of
the issued and outstanding Common Stock of the Corporation (assuming the
issuance of all Common Stock issuable pursuant to then outstanding warrants,
options, convertible or exchangeable securities and other rights to acquire
Common Stock from the Corporation, provided such warrants, options, convertible
or exchangeable securities are at the time convertible or exchangeable) may call
a special meeting of the stockholders of the Corporation.
5. Notwithstanding the fact that no vote of the Board of
Directors may be required, or (in the specific instances requiring a
percentage vote) that a lesser percentage vote may be allowed by the Delaware
General Corporation Laws, by the Certificate of Incorporation or the By-laws
of the Corporation or otherwise, the Corporation shall submit to the Board of
Directors (and not to any committee thereof) for its review and prior
approval all of the following items and actions:
(i) the Corporation's consolidated annual operating
and capital budgets;
(ii) the Corporation's consolidated business plan;
(iii) the making, alteration, amendment or repeal of the
Certificate of Incorporation of the Corporation or any part thereof, or the
making, alteration, amendment or repeal of the By-laws or any part thereof,
of the Corporation;
(iv) the (a) incurrence of indebtedness for borrowed
money in the name, for the account or on behalf of the Corporation or any of
its subsidiaries in excess of an aggregate amount of $5,000,000 or (b)
investment in the Corporation or any of its subsidiaries by another person or
entity;
(v) the investment (exclusive of amounts on deposit
with banks or lending institutions and short term U.S. government
obligations) by the Corporation or any of its
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<PAGE>
subsidiaries (whether by way of exchange, purchase, loan, advance, capital
contribution or otherwise) in any person or entity or affiliated person or
entity in excess of an aggregate amount of $1,000,000;
(vi) (a) any capital expenditures by the Corporation or
any of its subsidiaries in excess of $1,000,000, or (b) the Corporation or
any of its subsidiaries entering into any contract or other agreement
involving anticipated expenditures or otherwise having a total value over the
term of such contract or agreement greater than $1,000,000; and
(vii) (a) the sale of all or substantially all of the
assets of the Corporation or any of its subsidiaries in any one transaction
or a series of related transactions, or (b) the transfer or licensing of the
technology (or any part thereof) of the Corporation or any of its
subsidiaries other than in the ordinary course of business (including, on an
exclusive basis in terms of territory, field of use or otherwise).
24
<PAGE>
LEITCH TECHNOLOGY CORPORATION
- AND -
PATH 1 NETWORK TECHNOLOGIES INC.
- --------------------------------------------------------------------------------
TECHNOLOGY LICENSE AGREEMENT
- --------------------------------------------------------------------------------
MADE AS OF APRIL 10, 2000
<PAGE>
TECHNOLOGY LICENSE AGREEMENT
THIS AGREEMENT is made on this 10th day of April, 2000.
B E T W E E N:
LEITCH TECHNOLOGY CORPORATION, a corporation incorporated
under the laws of Ontario
(hereinafter referred to as "Leitch")
- and -
PATH 1 NETWORK TECHNOLOGIES INC., a corporation incorporated
under the laws of Delaware
(hereinafter referred to as "Path 1")
RECITALS:
WHEREAS Leitch is engaged in the business of designing, manufacturing
and selling analog and digital electronic equipment that is used to receive,
distribute, process and switch high-quality video and audio signals through
broadcast networks;
AND WHEREAS Path 1 is engaged in the business of designing,
constructing and licensing systems which facilitate the delivery of video and
audio signals over an Internet Protocol network with negligible latency and
jitter;
AND WHEREAS Leitch wishes to license from Path 1 the Path 1
Intellectual Property (as defined below) and the Network Operating System (as
defined below) in accordance with the terms and conditions set out herein;
AND WHEREAS Leitch and Path 1 wish to set out their respective rights
to exploit the Path 1 Intellectual Property and the Network Operating System and
their agreement with respect to the payment of royalties and other terms and
conditions relating to the licensing of intellectual property contemplated
hereunder;
NOW THEREFORE in consideration of the mutual covenants and agreements
contained in this Agreement and other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged) the Parties agree as
follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Agreement, the following terms shall have the following
meanings:
<PAGE>
1.1.1 "AFFILIATE" means, in respect of a Person, another
Person that Controls the first Person, is Controlled
by the first Person or is Controlled by the same
Person that Controls the first Person;
1.1.2 "AGGREGATE ANNUAL FEES" means the sum of all monies
or other consideration paid by Leitch or any of its
Affiliates to Path 1 or any of its Affiliates in the
applicable Exclusive Year, whether paid in accordance
with this Agreement or otherwise, including, without
limitation, all payments made by Leitch to Path 1
pursuant to Section 3.1, all payments made by Leitch
or any of its Affiliates to Path 1 or any of its
Affiliates relating directly or indirectly to the
Network Operating System, and any other consideration
paid by Leitch or any of its Affiliates to Path 1 or
any of its Affiliates in respect of products,
services or other benefits provided by Path 1 to
Leitch or any of its Affiliates or customers.
Notwithstanding the foregoing, however, Aggregate
Annual Fees shall not include any consideration paid
by Leitch and/or any of its Affiliates in exchange
for equity of Path 1 or any of its Affiliates;
1.1.3 "AGREEMENT" means this agreement, and all schedules
attached to this agreement, in each case as they may
be amended or supplemented from time to time, and the
expressions "HEREOF", "HEREIN", "HERETO",
"HEREUNDER", "HEREBY" and similar expressions refer
to this Agreement. Unless otherwise indicated,
references to "ARTICLES" and "SECTIONS" are to
articles and sections in this Agreement;
1.1.4 "ARM'S LENGTH LICENSEE" means any Person in which
neither Path 1 nor any Path 1 Affiliate directly or
indirectly owns any equity interest;
1.1.5 "BUSINESS DAY" means any day, other than Saturday,
Sunday or any statutory holiday in the Province of
Ontario or the State of California;
1.1.6 "CALENDAR DAY" means any day, including weekdays,
Saturdays, Sundays and statutory holidays in the
Province of Ontario or the State of California;
1.1.7 "CONFIDENTIAL INFORMATION" of a Party means any and
all information of a Party or any of its Affiliates
(in this definition called the "DISCLOSING PARTY")
which has or shall come into the possession or
knowledge of the other Party or any of its Affiliates
(in this definition called the "Recipient Party") in
connection with or as a result of entering into this
Agreement including information concerning the
Disclosing Party's past, present and future
customers, suppliers, Technology, and business,
provided that such information and material that a
Party discloses in a tangible form shall be labelled
as confidential or proprietary or, if disclosed
orally or in another intangible form, shall be
identified as confidential or proprietary prior to
disclosure, and shall be reduced to a writing
designated as confidential or proprietary and sent to
the Recipient Party within thirty (30) Calendar Days
after its initial disclosure. For the purposes of
this definition,
3
<PAGE>
"information" includes Know-How, data, patents,
copyrights, trade secrets, processes, techniques,
programs, designs, formulae, marketing,
advertising, financial, commercial, sales or
programming materials, written materials,
compositions, drawings, diagrams, computer
programs, studies, work in progress, visual
demonstrations, ideas, concepts, and other data,
in oral, written, graphic, electronic, or any
other form or medium whatsoever. Notwithstanding
the foregoing, "Confidential Information" does not
include the following information:
1.1.7.1 information disclosed in a tangible form
that is not labelled as confidential or
proprietary;
1.1.7.2 information disclosed orally or in another
intangible form that is not thereafter
reduced to writing, designated as
confidential or proprietary, and provided to
the Recipient Party within thirty (30)
Calendar Days after its initial disclosure;
1.1.7.3 information which is in the public domain
when it is received by or becomes known to
the Recipient Party or which subsequently
enters the public domain through no fault of
the Recipient Party (but only after it
enters the public domain);
1.1.7.4 information which is already known to the
Recipient Party at the time of its
disclosure to the Recipient Party by the
Disclosing Party and is not known by the
Recipient Party to be the subject of an
obligation of confidence of any kind;
1.1.7.5 information which is independently developed
by the Recipient Party without any use of or
reference to the Confidential Information of
the Disclosing Party and which such
independent development can be established
by evidence that would be acceptable to a
Court of competent jurisdiction; and
1.1.7.6 information which is received by the
Recipient Party in good faith without an
obligation of confidence of any kind from a
third party who the Recipient Party had no
reason to believe was not lawfully in
possession of such information free of any
obligation of confidence of any kind, but
only until the Recipient Party subsequently
comes to have reason to believe that such
information was subject to an obligation of
confidence of any kind when originally
received;
4
<PAGE>
1.1.8 "CONTROL" means the deemed control by one Person of
another in accordance with the following rules. A
Person (a "First Person") controls:
1.1.8.1 a body corporate if securities of the body
corporate to which are attached fifty
percent (50%) or more of the votes that may
be cast to elect directors of the body
corporate are beneficially owned by the
First Person;
1.1.8.2 an unincorporated Person, other than a
limited partnership, if fifty percent (50%)
or more of the ownership interests, however
designated, into which the unincorporated
Person is divided are beneficially owned by
the First Person and the First Person is
able to direct the business and affairs of
the unincorporated Person;
1.1.8.3 a limited partnership if that First Person
is the general partner of the limited
partnership;
1.1.8.4 any Person that is controlled, or deemed to
be controlled, by any of the Persons
specified in Sections 1.1.8.1, 1.1.8.2, or
1.1.8.3 above other than the First Person;
or
1.1.8.5 a Person (a "Second Person") where the
aggregate of:
1.1.8.5.1 any securities of the Second
Person that are beneficially owned
by the First Person; and
1.1.8.5.2 any securities of the Second
Person that are beneficially owned
by any Person controlled by the
First Person;
is such that, if the First Person and all of the
Persons, other than the First Person, referred to
in Sections 1.1.8.1, 1.1.8.2, or 1.1.8.3 above
that beneficially own securities of the Second
Person were one owner, that owner would control
the Second Person;
1.1.9 "CORE USE" means the general transport or switching
of data within a network (including, without
limitation, a consumer network, local area network,
metropolitan area network or wide area network), such
as that performed by network operating systems,
switches, routers, hubs, firewalls, gateways,
repeaters, bridges, general purpose NIC cards,
backbones and trunks;
1.1.10 "EFFECTIVE DATE" means April 10, 2000;
1.1.11 "ENHANCEMENTS" means repairs, corrections,
improvements, modifications, refinements, upgrades,
updates, enhancements, new
5
<PAGE>
features, new functions, new versions, and new
applications, in any form or medium whatsoever,
and all Intellectual Property Rights therein;
1.1.12 "EXCLUSIVE MARKET USE" means: the conversion of
Professional Material from video, audio and/or
associated data to packet data and the conversion of
Professional Material from packet data to video,
audio and/or associated data. Without limiting the
generality of the foregoing, "EXCLUSIVE MARKET USE"
includes, without limitation, the conversion of
Professional Material from Internet Protocol data
packets to video, audio and/or associated data, and
the conversion of Professional Material from video,
audio and/or associated data to Internet Protocol
data packets. For greater certainty, use in
connection with: consumer applications; corporate,
industrial, medical and scientific video; industrial
automation and control; still imaging;
teleconferencing; audio or video telephony;
videoconferencing; transaction processing; or any
Core Use shall not constitute "EXCLUSIVE MARKET USE";
1.1.13 "EXCLUSIVE TERM" means the Initial Exclusive Term and
any period during which the Initial Exclusive Term or
any renewal thereof is extended pursuant to Section
6.2;
1.1.14 "EXCLUSIVE YEAR" means:
1.1.14.1 the period commencing on the [****]
[****] and ending one (1) year
thereafter; and
1.1.14.2 each subsequent contiguous one (1) year
period during the Exclusive Term following
the previous Exclusive Year;
1.1.15 "FORCE MAJEURE" means: acts of God and the public
enemy; the elements; fire; accidents; vandalism;
sabotage; power failure; failure, delay or disruption
of transportation or telecommunications facilities;
civil or public disturbances; any laws, orders,
rules, regulations, acts or restraints of any
government or governmental body or authority, civil
or military, including the orders and judgments of
courts; third party non-performance caused by an
event of Force Majeure; and any other similar cause;
1.1.16 "INITIAL EXCLUSIVE TERM" shall have the meaning
ascribed to that term in Section 6.2;
1.1.17 "INITIAL TERM" shall have the meaning ascribed to
that term in Section 6.1;
1.1.18 "INTELLECTUAL PROPERTY RIGHTS" means:
1.1.18.1 any and all proprietary rights provided
under:
1.1.18.1.1 patent law;
6
<PAGE>
1.1.18.1.2 copyright law (including moral
rights);
1.1.18.1.3 trade-mark law;
1.1.18.1.4 design patent or industrial
design law;
1.1.18.1.5 semi-conductor chip, integrated
circuit topography or mask work
law; or
1.1.18.1.6 any other statutory provision or
common law principle applicable
to this Agreement, including
trade secret law,
which may provide a right in either ideas,
formulae, algorithms, concepts, inventions
or know-how generally, or the expression or
use of such ideas, formulae, algorithms,
concepts, inventions or know-how generally,
or the expression or use of such ideas,
formulae, algorithms, concepts, inventions
or know-how generally, or the expression or
use of such ideas, formulae, algorithms,
concepts, inventions or know-how; and
1.1.18.2 any and all applications, registrations,
licenses, sub-licenses, franchises,
agreements or any other evidence of a right
in any of the foregoing; and
1.1.18.3 all licenses and waivers and benefits of
waivers of the intellectual property rights
set out in Sections 1.1.18.1 and 1.1.18.2
above, all future income and proceeds from
the intellectual property rights set out in
Sections 1.1.18.1 and 1.1.18.2 above, and
all rights to damages and profits by reason
of the infringement of any of the
intellectual property rights set out in
Sections 1.1.18.1 and 1.1.18.2 above;
1.1.19 "INTERNET PROTOCOL" means the network layer protocol
used by computers to transmit, receive and process
data over the Internet;
1.1.20 "KNOW-HOW" means experience, skills and expertise in
non-tangible form relating to Technology and
consulting and advisory services relating to such
experience, skills and expertise;
1.1.21 [****]
7
<PAGE>
[****]
1.1.22 "NET TRUECIRCUIT PRODUCT REVENUE" means, in respect
of each TrueCircuit Product sold by Leitch or any
Leitch sublicensee, all monies or other consideration
collected by Leitch or such Leitch sublicensee, as
applicable, in connection with the sale of such
TrueCircuit Product, net of all: (i) taxes collected
by Leitch or such Leitch sublicensee, as applicable,
on such revenue (including, without limitation,
sales, use, goods and services, and other similar
taxes imposed by any federal, provincial, municipal
or other governmental body), credits (including
shipping and restocking costs, if applicable) and bad
debts; (ii) agency commissions; and (iii) shipping
costs, credit card transaction fees paid to or
deducted by third parties, and duties or brokerage
costs incurred by Leitch or such Leitch sublicensee,
as applicable, in each case calculated in accordance
with Canadian GAAP;
1.1.23 "NETWORK OPERATING SYSTEM" means a software kernel
including TrueCircuit Technology which, like a
computer operating system, allocates, manages and
controls the network resources including, without
limitation, [****], bandwidth, [****] and [****],
and collects statistics relating to these resources
and to the users thereof;
1.1.24 "NON-EXCLUSIVE MARKET USE" means any and all uses
other than Exclusive Market Uses;
1.1.25 "OFFER" shall have the meaning ascribed to that term
in Section 2.4;
1.1.26 "PARTIES" means Leitch and Path 1 and "PARTY" means
any one of them (as the context indicates);
1.1.27 "PATH 1 INTELLECTUAL PROPERTY" means:
1.1.27.1 all Technology, Technology Documentation,
Know-How and other Confidential Information
relating to the TrueCircuit Technology owned
or licensed by Path 1 as of the Effective
Date;
1.1.27.2 Enhancements to any of the Technology,
Technology Documentation, Know-How or other
Confidential Information identified in
Section 1.1.27.1;
1.1.27.3 any new Technology, Technology
Documentation, Know-How or other
Confidential Information relating to the
TrueCircuit Technology;
1.1.27.4 the Network Operating System; and
8
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1.1.27.5 any trade-marks, trade names, service marks,
logos or other distinguishing features of
Path 1 which Leitch is required to display
pursuant to Section 4.1 hereof;
1.1.28 "PERSON" means any individual, partnership, limited
partnership, joint venture, syndicate, sole
proprietorship, company or corporation with or
without share capital, unincorporated association,
trust, trustee, executor, administrator or other
legal personal representative, regulatory body or
agency, government or governmental agency, authority
or entity however designated or constituted;
1.1.29 "PROFESSIONAL MATERIAL" means:
1.1.29.1 audio or video signals created or
distributed by commercial Persons
(including, without limitation, producers
and broadcasters) for ultimate receipt or
use by non-commercial Persons; and
1.1.29.2 data relating to, describing or otherwise
used in connection with the signals
described in Section 1.1.29.1, including,
without limitation: specification, control
and monitoring data; closed captioning
information; teletext; and teleprompting
information.
Without limiting the generality of the foregoing,
"PROFESSIONAL MATERIAL" includes, without limitation,
audio or video signals created or distributed by
motion picture studios, television and cable networks
(including, without limitation, networks such as ABC,
NBC, CBS and FOX), radio stations and networks, and
entities licensed by the U.S. Federal Communications
Commission or any equivalent foreign regulatory
authority;
1.1.30 "PROPOSED LICENSEE" shall have the meaning ascribed
to that term in Section 2.2(ii)(A);
1.1.31 "ROYALTY-FREE PERIOD" means the period beginning on
the Effective Date and continuing for a period of
[****] from the [****];
1.1.32 "SUBLICENSE" means granting end-user licenses to
executable code to use, but not to modify, executable
versions of software provided in connection with
TrueCircuit Products;
1.1.33 "TECHNOLOGY" means computer programs, applications,
application programming and other interfaces,
integrations, applets, software, firmware, hardware,
mainframes, personal computers, servers,
client/server stations, network equipment,
semi-conductor chips, embedded software, routers,
communication lines and other equipment
9
<PAGE>
technology products, trade secrets, processes,
other intellectual property and technology, and
any services related to any of the foregoing
(including all Intellectual Property Rights
therein);
1.1.34 "TECHNOLOGY DOCUMENTATION" means all information,
instructions, manuals, designs, drawings, models,
samples, schematics, experimental or test data,
notes, charts, reports, specifications, prototypes
and other information:
1.1.34.1 relating to the development, use,
installation, implementation, integration,
set-up, configuration, operation, updating,
enhancement, modification, maintenance or
support of Technology; or
1.1.34.2 used in connection with the instruction and
training of individuals in the development,
use, installation, implementation,
integration, set-up, configuration,
operation, updating, enhancement,
modification, maintenance or support of
Technology,
in any form or medium whatsoever and whether or not
copyrightable, and all Intellectual Property Rights
therein;
1.1.35 "TERM" means the Initial Term and any period during
which the Initial Term or any extension thereof is
extended pursuant to Section 6.1;
1.1.36 "TRUECIRCUIT TECHNOLOGY" means Technology which is
designed to facilitate the real-time transport of
data over Internet Protocol networking
infrastructures and includes, without limitation, all
Enhancements to such Technology developed by Path 1
during the Term hereof; and
1.1.37 "TRUECIRCUIT PRODUCTS" shall have the meaning
ascribed to that term in Section 2.1.
1.2 HEADINGS AND TABLE OF CONTENTS
The inclusion of headings and a table of contents in this Agreement are
for convenience of reference only and shall not affect the construction
or interpretation hereof.
1.3 TECHNICAL TERMS
Each word and abbreviation which has a technical or trade meaning is
used in this Agreement in accordance with such recognized meaning.
1.4 CURRENCY
Except where otherwise expressly provided, all amounts in this
Agreement are stated and shall be paid in the lawful currency of the
United States.
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<PAGE>
1.5 EXTENDED MEANINGS
Unless the context requires otherwise, words importing the singular
include the plural and vice versa and words importing gender include
all genders. The terms "including" and "include" shall mean "including
without limitation" and "include without limitation", respectively.
1.6 LEGAL COUNSEL
The Parties acknowledge that their respective legal counsel have
reviewed and participated in settling the terms of this Agreement, and
that any rule of construction to the effect that any ambiguity is to be
resolved against the drafting Party shall not be applicable in the
interpretation of this Agreement.
1.7 AGREEMENT AND SCHEDULES AMENDMENTS AND SUPPLEMENTS
This Agreement, including each Schedule to this Agreement, may not be
amended or supplemented except by mutual written agreement of
authorized representatives of the Parties. Any such agreement shall
expressly state that it is intended to amend or supplement, as the case
may be, this Agreement.
ARTICLE 2
RIGHTS GRANTED
2.1 LICENSE OF PATH 1 INTELLECTUAL PROPERTY
During the Term, and subject to the following sentence, Path 1 grants
to Leitch a non-exclusive, worldwide license to use, copy, modify,
enhance, sell, distribute, support, maintain, and create derivative
works from the Path 1 Intellectual Property in connection with the
development, use and exploitation by Leitch of commercial products
which incorporate or exploit Path 1 Intellectual Property (each, a
"TRUECIRCUIT PRODUCT"). The license granted in this Section 2.1 shall
not include any rights to the source code of the Network Operating
System.
2.2 EXPLOITATION RIGHTS IN TRUECIRCUIT PRODUCTS
(i) During the Exclusive Term, Leitch shall have the
exclusive, worldwide right to make, have made, sell,
offer for sale, Sublicense, support, maintain and
otherwise exploit the TrueCircuit Products in
connection with commercial activities directed to the
Exclusive Market Use.
(ii) During the Exclusive Term, Leitch shall have the
exclusive, worldwide right to grant to any Person the
non-exclusive right to make, have made, sell, offer
for sale, Sublicense, support, maintain and otherwise
exploit the TrueCircuit Products in connection with
commercial activities directed to the Exclusive
Market Use, subject to the following:
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<PAGE>
(A) prior to granting any rights to any Person
pursuant to this Section 2.2(ii), Leitch
shall provide written notice to Path 1
identifying the Person to whom Leitch
proposes to grant such rights (the "PROPOSED
LICENSEE");
(B) Path 1 may, within thirty (30) Calendar Days
following the receipt of such notice, notify
Leitch in writing that Leitch may not grant
any rights to the Proposed Licensee,
provided that Path 1 may only provide such
notice to Leitch if, in Path 1's reasonable
determination, there is a material and
foreseeable likelihood that the Proposed
Licensee's exercise of such rights shall
have a material adverse effect on Path 1's
commercial activities relating to the
Non-Exclusive Market Use;
(C) if Path 1 provides the notice referred to in
Section 2.2(ii)(B) within thirty (30)
Calendar Days following the receipt by Path
1 of the notice provided by Leitch pursuant
to Section 2.2(ii)(A), Leitch shall not be
entitled to grant the rights to such Person
pursuant to this Section 2.2(ii); and
(D) if Path 1 does not provide the notice
referred to in Section 2.2(ii)(B) within
thirty (30) Calendar Days following the
receipt by Path 1 of the notice provided by
Leitch pursuant to Section 2.2(ii)(A),
Leitch shall be entitled to grant the rights
to such Person pursuant to this Section
2.2(ii).
(iii) During the period commencing on the first Calendar
Day following the expiry of the Exclusive Term and
continuing for the duration of the Term, Leitch shall
have the non-exclusive, worldwide right to make, have
made, sell, offer for sale, Sublicense, support,
maintain and otherwise exploit the TrueCircuit
Products in connection with commercial activities
directed to the Exclusive Market Use.
(iv) During the Term, subject to any exclusive rights
granted by Path 1 in accordance with Section 2.4 and
the limitations thereon set forth in Section 2.4,
Leitch shall have the non-exclusive, worldwide right
to make, have made, sell, offer for sale, Sublicense,
support, maintain and otherwise exploit the
TrueCircuit Products in connection with commercial
activities relating to the Non-Exclusive Market Use.
The terms and conditions of this Agreement shall
apply to the exercise by Leitch of this right;
provided, however, the Parties agree to negotiate in
good faith such different or additional terms and
conditions governing the exercise by Leitch of this
right as may be commercially reasonable and
consistent with industry standard and which shall be
at least as favourable in all respects as the terms
and conditions extended to any other customer or
licensee of Path 1.
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<PAGE>
(v) Leitch shall have no right to grant sublicenses under
this Agreement other than the rights specifically set
forth in Section 2.2 (ii) and the right to grant
Sublicenses specifically set forth in this Section
2.2.
2.3 QUALITY AND PERFORMANCE
Leitch shall design and manufacture TrueCircuit Products in accordance
with any reasonable quality and performance criteria provided by Path 1
to Leitch in writing. Leitch shall, upon request, provide on a loan
basis to Path 1 a reasonable number of samples of TrueCircuit Products
for testing, together with instruction and service manuals. In the
event that Path 1 shall provide Leitch with written notice that any
TrueCircuit Product offered for sale by Leitch does not comply with
such reasonable quality and performance criteria, Leitch shall, within
one hundred twenty (120) days of receipt of such notice from Path 1,
either a) remedy the noncompliance or b) suspend the sale of the same.
In addition, Leitch shall include in its agreements with its Proposed
Licensees requirements comparable to those contained in this Section
2.3.
2.4 RIGHT OF FIRST OFFER IN RESPECT OF PATH 1 INTELLECTUAL
PROPERTY
Path 1 shall have the right to grant to an Arm's Length Licensee the
exclusive right to use the Path 1 Intellectual Property to manufacture
products and to sell such products in connection with commercial
activities relating to any Non-Exclusive Market Use, provided that Path
1 shall not grant any such exclusive right without first providing
Leitch with the option to acquire that exclusive right in accordance
with the following procedure:
(i) Path 1 shall provide written notice to Leitch
specifying the major terms and conditions pursuant to
which Path 1 proposes to grant to Leitch the
exclusive right to use the Path 1 Intellectual
Property to manufacture products and to sell such
products in connection with commercial activities
relating to a Non-Exclusive Market Use (the "OFFER").
The terms and conditions proposed by Path 1 in the
Offer shall be reasonable, consistent with this
Agreement and consistent with industry standards;
(ii) Leitch shall provide written notice to Path 1
indicating whether it rejects the Offer or whether it
wishes to negotiate the terms of the Offer with Path
1 within fourteen (14) Calendar Days of the date
Leitch receives such notice. If Leitch does not
respond to Path 1 within such fourteen (14) Calendar
Day period, Leitch shall be deemed to have rejected
the Offer and Path 1 shall be governed by the
provisions of Section 2.4(vi);
(iii) if Leitch provides written notice to Path 1 that it
wishes to negotiate the terms of the Offer with Path
1 in accordance with Section 2.4(ii), then, for a
period of up to thirty (30) Calendar Days following
the date upon which Leitch received the Offer from
Path 1, Leitch and Path 1 shall negotiate exclusively
the terms upon which Leitch shall be exclusively
entitled to use the Path 1 Intellectual Property to
manufacture products and to sell
13
<PAGE>
such products in connection with commercial
activities relating to such Non-Exclusive Market
Use based upon the terms and conditions set out in
the Offer. The Parties may extend this thirty (30)
Calendar Day exclusive negotiating period upon
mutual written agreement;
(iv) if Leitch and Path 1 agree in writing to the terms
and conditions pursuant to which Leitch shall be
exclusively entitled to use the Path 1 Intellectual
Property to manufacture products and to sell such
products in connection with commercial activities
relating to such Non-Exclusive Market Use, then Path
1 shall grant such exclusive rights to Leitch;
(v) if Leitch and Path 1 fail to agree in writing to the
terms and conditions pursuant to which Leitch shall
be exclusively entitled to use the Path 1
Intellectual Property to manufacture products and to
sell such products in connection with commercial
activities relating to such Non-Exclusive Market Use
or if Leitch notifies Path 1 in writing that it
rejects the Offer, then Leitch shall be deemed to
have rejected the Offer;
(vi) if Leitch is deemed to have rejected the Offer
pursuant to Section 2.4(ii) or Section 2.4(v), then
Path 1 may grant the exclusive right to use the Path
1 Intellectual Property to manufacture products and
to sell such products in connection with commercial
activities relating to such Non-Exclusive Market Use
to any Arm's Length Licensee upon terms and
conditions which, taken as a whole, are not
materially more favourable than those offered to
Leitch, provided that Path 1 may not grant such
rights to any such Arm's Length Licensee later than
one hundred and eighty (180) Calendar Days after the
date that Leitch is deemed to have rejected the Offer
without Leitch's prior written consent. If Path 1
wishes to grant to any Arm's Length Licensee the
exclusive right to use the Path 1 Intellectual
Property to manufacture products and to sell such
products in connection with commercial activities
relating to a Non-Exclusive Market Use on terms and
conditions which, taken as a whole, are materially
more favourable than those offered to Leitch, Path 1
must first offer such more favourable terms to Leitch
on an exclusive basis, and the Parties shall attempt
to negotiate the exclusive right to use the Path 1
Intellectual Property to manufacture products and to
sell such products in connection with commercial
activities relating to such Non-Exclusive Market Use
in accordance with the provisions of this Section
2.4;
(vii) if Path 1 enters into an agreement with an Arm's
Length Licensee pursuant to which it grants to such
Arm's Length Licensee the exclusive right to use the
Path 1 Intellectual Property to manufacture products
and to sell such products in connection with
commercial activities relating to a Non-Exclusive
Market Use after complying with the requirements of
this Section 2.4, then Path 1 shall provide a copy of
such agreement to Leitch, and Leitch shall agree
that, subject to Section 2.4(viii), it shall not
knowingly sell any TrueCircuit Products within the
exclusive market
14
<PAGE>
segment granted by Path 1 to such Arm's Length
Licensee for so long as the Arm's Length Licensee
is granted exclusive rights in such market
segment. Notwithstanding anything else in this
Agreement, Leitch shall have no liability to Path
1, any Arm's Length Licensee, or any other Person
in the event that any TrueCircuit Products sold by
Leitch to Persons who are not within the exclusive
market segment granted by Path 1 to an Arm's
Length Licensee are sold within the exclusive
market segment granted to such Arm's Length
Licensee without Leitch's knowledge;
(viii) Notwithstanding Section 2.4(vii), Leitch shall have
the following rights with respect to any exclusive
market segment granted by Path 1 to an Arm's Length
Licensee:
(A) during the period commencing on the date
that Path 1 provides to Leitch a copy of the
agreement between Path 1 and the applicable
Arm's Length Licensee relating to such
exclusive market segment and continuing
until the earlier of: (a) [****]; or
(b) until inventory of TrueCircuit Products
and parts existing or ordered as of the
commencement of such period have been
exhausted, Leitch shall have the right to
sell and offer for sale TrueCircuit Products
to, and support and maintain TrueCircuit
Products sold by Leitch for, any Person in
the exclusive market segment granted to such
Arm's Length Licensee;
(B) during the period commencing on the date
that Path 1 provides to Leitch a copy of the
agreement between Path 1 and the applicable
Arm's Length Licensee relating to such
exclusive market segment and continuing for
a period of [****], Leitch shall
have the right to sell and offer for sale
TrueCircuit Products to, and support and
maintain TrueCircuit Products sold by Leitch
for, any Person in the exclusive market
segment granted to such Arm's Length
Licensee who purchased any TrueCircuit
Product from Leitch prior to the effective
date of the exclusivity granted by Path 1 to
such Arm's Length Licensee; and
(C) during the period commencing on the date
that Path 1 provides to Leitch a copy of the
agreement between Path 1 and the applicable
Arm's Length Licensee relating to such
exclusive market segment and continuing for
a period of [****], Leitch shall
have the right to provide support and
maintenance services relating to the
TrueCircuit Products sold by Leitch for any
Person in the exclusive market segment
granted to such Arm's Length Licensee who
purchased any TrueCircuit Product from
Leitch.
(ix) Path 1 shall not enter into an agreement with an
Arm's Length Licensee pursuant to which Path 1 grants
to such Arm's Length Licensee the
15
<PAGE>
exclusive right to use the Path 1 Intellectual
Property to manufacture products and to sell such
products in connection with commercial activities
relating to any Core Use unless such agreement
contains a provision requiring such Arm's Length
Licensee to sell such products to Leitch under
terms and conditions at least as favourable in all
respects as those extended to any other customer
or licensee of the Arm's Length Licensee.
2.5 NETWORK OPERATING SYSTEM
Path 1 shall develop a Network Operating System and shall enter into a
license agreement with Leitch pursuant to which Path 1 grants to Leitch
a license to use, and sell and distribute sublicenses to use, the
Network Operating System in connection with the development, use and
exploitation by Leitch of TrueCircuit Products in accordance with the
terms of this Agreement. The Network Operating System shall be supplied
in object code format only; however, Path 1 shall enter into a separate
source code escrow agreement with Leitch and an escrow agent acceptable
to both Leitch and Path 1. Such license agreement shall provide that
Leitch shall pay to Path 1 a license fee in respect of the Network
Operating System to be mutually agreed to by the Parties, which such
license fee shall:
(i) be consistent with similar license fees charged for
the right to use and exploit similar Technology in
the market segment in respect of which Leitch has the
right to use and exploit the Network Operating System
and be commercially reasonable based upon the value
of the market segment in respect of which Leitch has
the right to use and exploit the Network Operating
System, taking into account the market's size,
potential, competitive pressures and other
characteristics which affect its value;
(ii) be at least as favourable to Leitch as the most
favourable license fee paid by any Person to Path 1
for similar license rights to use and exploit similar
Technology in a market segment similar to the market
segment in respect of which Leitch has the right to
use and exploit the Network Operating System; and
(iii) subject to applicable competition or anti-trust laws,
be in an amount which, based on the characteristics
of the market in respect of which Leitch has the
right to use and exploit the Network Operating
System, enables Leitch to charge a price to its
customers for the Network Operating System which
includes a margin of no less than [****].
ARTICLE 3
ROYALTIES, FEES AND RELATED MATTERS
3.1 ROYALTY FOR PATH 1 INTELLECTUAL PROPERTY
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<PAGE>
In consideration of the rights granted by Path 1 to Leitch pursuant to
Article 2, commencing on the first Business Day following the expiry of
the Royalty-Free Period and continuing in respect of each consecutive
three (3) month period thereafter, Leitch shall pay Path 1 a royalty in
respect of each individual TrueCircuit Product sold by Leitch or any
Leitch sublicensee for which Leitch or such Leitch sublicensee has
received full payment during such three-month period which is equal to
the lesser of:
3.1.1 [****]; and
3.1.2 [****] of the Net TrueCircuit Product
Revenue for such TrueCircuit Product.
3.2 PAYMENT PROCESS AND REPORTING
Within thirty (30) Calendar Days after the end of each three-month
period in respect of which a royalty payment is due, Leitch shall
provide to Path 1 a written report containing all relevant information
upon which Leitch's calculation of the royalty due and payable is
based. Within ten (10) Business Days after delivery of the report, Path
1 shall render to Leitch an invoice indicating the amount of the
royalty due for such period. All such royalty payments shall be due and
payable by Leitch within thirty (30) Calendar Days following the
receipt by Leitch of such invoice.
3.3 TAXES
Each Party shall be responsible for the payment of those taxes, duties,
and levies levied on that Party from time to time in relation to such
Party's performance pursuant to this Agreement. Where one Party is
required to collect and remit taxes payable by the other Party, that
Party shall so collect and remit such taxes. Without limiting the
generality of the foregoing, Leitch shall be entitled to withhold from
all fees payable to Path 1 hereunder all applicable withholding taxes
and to remit same to all applicable taxing authorities as required by
law.
3.4 AUDIT
Leitch will keep complete and accurate books and records containing
information reasonably necessary for the purpose of determining the
amount of royalties payable to Path 1 hereunder. At the request of Path
1, such books and supporting data will be made available, upon
reasonable notice during the Term of this Agreement and for a period of
two (2) years after its termination or expiration, for inspection by an
independent third party auditor selected by the Party requesting the
audit and reasonably acceptable to Leitch. In the event any such audit
reveals an error in the books and records relating to the royalties
payable to Path 1, the overpayment or deficiency will be paid by the
appropriate Party within thirty (30) calendar days after completion of
the audit. The cost of such audit will be paid by the Party requesting
the audit, provided that if such audit reveals an error adverse to the
auditing Party in excess of ten percent (10%), Leitch will pay, in
addition to the deficiency, the reasonable, documented fees and
expenses of such auditor.
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<PAGE>
ARTICLE 4
TRADE-MARKS; STANDARDIZATION; PUBLIC ANNOUNCEMENTS
4.1 USE OF PATH 1 TRADE-MARK
Leitch agrees that it shall include, in all user manuals provided to
its customers in relation to any products or services which include
Path 1 Intellectual Property, an acknowledgement specifying that such
product or service includes Path 1 Intellectual Property, which
acknowledgement shall include a reference to the applicable trade-mark
of Path 1. The form of such acknowledgement shall be mutually agreed to
by the Parties. In addition, Leitch shall include in its agreements
with its Proposed Licensees a requirement that the Proposed Licensee
shall comply with provisions substantially similar to this Section 4.1.
4.2 STANDARDIZATION
Leitch and Path 1 each agree to market and promote the products and
services sold by the Parties hereunder in a manner designed to
encourage the widespread and universal adoption of such products and
services as the industry standard.
4.3 PUBLIC ANNOUNCEMENTS
Neither Party shall disclose or permit the disclosure to any other
person of the existence of this Agreement or any of the transactions
contemplated hereby unless such disclosure is approved in writing in
advance by the other Party or is required by any applicable law,
regulation (including, but not limited to, stock exchange regulations)
or legal process. Any public announcement or similar publicity with
respect to this Agreement or the transactions contemplated hereby shall
be issued, if at all, at such time and in such manner as is agreed by
the Parties.
ARTICLE 5
CONFIDENTIALITY, OWNERSHIP AND PROTECTION
5.1 CONFIDENTIALITY COVENANT
5.1.1 Each Party shall at all times, both during the term
of this Agreement and thereafter, keep and hold all
Confidential Information of the other Party in the
strictest confidence, and shall not use such
Confidential Information for any purpose, other than
as may be reasonably necessary for the performance of
its duties pursuant to this Agreement or as otherwise
expressly permitted by this Agreement, without the
other Party's prior written consent.
5.1.2 Each Party agrees:
(A) that it shall not disclose to any third
party or use any Confidential Information
disclosed to it by the other except as
expressly permitted in this Agreement; and
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<PAGE>
(B) that it shall take all reasonable measures
to maintain the confidentiality of all
Confidential Information of the other Party
in its possession or control, which shall in
no event be less than the measures it uses
to maintain the confidentiality of its own
information of similar importance.
5.1.3 Notwithstanding any other provision of this Section
5.1, each Party may disclose Confidential
Information:
(A) to the extent required by a court of
competent jurisdiction or other governmental
authority or otherwise as required by law;
or
(B) on a "need-to-know" basis under an
obligation of confidentiality to its
Affiliates and to its and its Affiliates'
authorized agents, contractors, legal
counsel, accountants, banks and other
financing sources and their advisors.
5.1.4 The terms and conditions of this Agreement constitute
Confidential Information of each Party and shall not
be disclosed without the written consent of the other
Party which consent shall not be unreasonably
withheld or delayed.
5.1.5 Each Party acknowledges that its failure to comply
with the provisions of this Section 5.1 shall cause
irreparable harm to the other Party which cannot be
adequately compensated for in damages, and
accordingly acknowledges that the other Party shall
be entitled to obtain, in addition to any other
remedies available to it, interlocutory and permanent
injunctive relief to restrain any anticipated,
present or continuing breach of this Section 5.1.
5.2 RETURN OF CONFIDENTIAL INFORMATION
Upon the termination of this Agreement, each Party shall return to the
other Party or destroy, upon the other Party's request to that effect,
all Confidential Information of the other which is then in its
possession or control, and shall remove all digital representations
thereof in any form from all electronic storage media in its possession
or under its control.
5.3 PATH 1 INTELLECTUAL PROPERTY
Leitch acknowledges and agrees that, except as expressly provided
hereunder, Path 1 shall own all Intellectual Property Rights in all
Path 1 Intellectual Property including, without limitation, the Network
Operating System. Without limiting the generality of the foregoing,
Path 1 shall have the exclusive, worldwide right, at its own expense,
to pursue the registration of Intellectual Property Rights in the Path
1 Intellectual Property and to enforce its Intellectual Property Rights
therein. Leitch shall co-operate with Path 1, at Path 1's expense, in
the pursuit of registration of Intellectual Property Rights in the Path
1 Intellectual Property. Leitch further agrees that it shall promptly
notify Path 1 in
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<PAGE>
writing of any infringement of any Intellectual Property Rights in any
Path 1 Intellectual Property of which it becomes aware and that it
shall co-operate with Path 1, at Path 1's expense, in enforcing Path
1's Intellectual Property Rights against third parties.
ARTICLE 6
AGREEMENT TERM, EXCLUSIVE TERM AND TERMINATION
6.1 DURATION OF AGREEMENT TERM
This Agreement shall begin on the Effective Date and shall continue for
a period of five (5) years (the "INITIAL TERM") unless terminated
earlier in accordance with Section 6.3. This Agreement shall
automatically renew for consecutive additional periods of five (5)
years unless:
6.1.1 terminated earlier in accordance with Section 6.3; or
6.1.2 either Party provides written notice to the other
Party on or prior to the Calendar Day which is ninety
(90) Calendar Days prior to the end of the
then-current Initial Term or renewal thereof
indicating that it wishes to terminate the Agreement
at the end of the then-current Initial Term or
renewal thereof; provided that Path 1 may only
provide such a notice of termination if the Exclusive
Term has expired as of the Calendar Day that Path 1
wishes to provide such notice of termination.
6.2 DURATION OF EXCLUSIVE TERM
6.2.1 The initial duration of the Exclusive Term shall be
the period beginning on the Effective Date and
continuing until the end of the first Exclusive Year
as described in Section 1.1.14.1 (the "INITIAL
EXCLUSIVE TERM"). The Exclusive Term shall thereafter
automatically renew for consecutive additional
periods of one (1) year (each of which, for greater
certainty, shall constitute an Exclusive Year) if, in
respect of the then-current Exclusive Year, Path 1
has received Aggregate Annual Fees equal to or
greater than the minimum Aggregate Annual Fees
requirement applicable to each such Exclusive Year.
The minimum Aggregate Annual Fees requirements
applicable to each of the first five (5) Exclusive
Year Periods are set out in Section 6.2.2 below. The
minimum Aggregate Annual Fees requirement applicable
to each Exclusive Year after the fifth (5th)
Exclusive Year shall be determined in accordance with
Section 6.2.3.
6.2.2 The Parties agree that the minimum Aggregate Annual
Fees requirement applicable to each of the first five
(5) Exclusive Years shall be as indicated in the
table below:
<TABLE>
<CAPTION>
-------------------------------------------------- -------------------------------------------------
EXCLUSIVE YEAR AGGREGATE ANNUAL FEES
-------------------------------------------------- -------------------------------------------------
<S> <C>
First [****]
-------------------------------------------------- -------------------------------------------------
Second [****]
-------------------------------------------------- -------------------------------------------------
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-------------------------------------------------- -------------------------------------------------
Third [****]
-------------------------------------------------- -------------------------------------------------
Fourth [****]
-------------------------------------------------- -------------------------------------------------
Fifth [****]
-------------------------------------------------- -------------------------------------------------
</TABLE>
6.2.3 The Parties agree to follow the process set out in
this Section 6.2.3 in order to determine the minimum
Aggregate Annual Fees requirement applicable to the
sixth (6th) and each subsequent Exclusive Year. No
later than ninety (90) Calendar Days prior to the end
of the then-current Exclusive Year, the Parties shall
meet and negotiate in good faith the Aggregate Annual
Fees requirement applicable to the following
Exclusive Year. The Parties agree that each such
Aggregate Annual Fees requirement shall be no less
than the Aggregate Annual Fees requirement applicable
to the preceding Exclusive Year and no greater than
one and one half (1.5) times the Aggregate Annual
Fees requirement applicable to the preceding
Exclusive Year.
6.2.4 Path 1 may reduce the Aggregate Annual Fees
requirement in any Exclusive Year or extend the
period of time in respect of which Leitch must
achieve such Aggregate Annual Fees requirement beyond
the Exclusive Year in the event that the actual
market conditions during such Exclusive Year are less
favourable than the forecasted market conditions for
such Exclusive Year.
6.3 TERMINATION
6.3.1 Either Party may terminate this Agreement by
providing written notice to the other Party if the
other Party commits a material breach of a material
term of this Agreement and fails to cure such breach
within thirty (30) Calendar Days of receipt of
written notice of such breach from the non-breaching
Party.
6.3.2 Either Party may terminate this Agreement if the
other Party: (i) becomes the subject of a voluntary
or involuntary petition in bankruptcy or any
proceeding relating to insolvency, receivership,
liquidation, or composition for the benefit of
creditors, if that petition or proceeding is not
dismissed within sixty (60) Calendar Days after
filing; (ii) suspends the operation of its present
business or liquidates its business assets; or (iii)
generally fails to pay its debts as such debts become
due or admits in writing its inability to pay its
debts.
6.4 EFFECTS OF TERMINATION OR EXPIRATION
Upon the termination or expiration of this Agreement, Leitch shall have
the following rights:
6.4.1 during the period commencing on the effective date of
such termination or expiration and continuing for the
earlier of: (a) [****]; or (b) until
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inventory of TrueCircuit Products and parts existing
or ordered as of the date of termination or
expiration have been exhausted;or expiration. Leitch
shall have the non-exclusive, worldwide right to sell
and offer for sale TrueCircuit Product to, and
support and maintain the TrueCircuit Products sold by
Leitch for, any Person in connection with commercial
activities relating to the Exclusive Market Use and
the Non-Exclusive Market Use;
6.4.2 during the period commencing on the effective date of
such termination or expiration and continuing for a
period of [****], Leitch shall have the
non-exclusive, worldwide right to sell and offer for
sale TrueCircuit Products to, and support and
maintain TrueCircuit Products sold by Leitch for, any
Person who purchased any TrueCircuit Product from
Leitch prior to the effective date of termination or
expiration of this Agreement;
6.4.3 during the period commencing on the effective date of
such termination or expiration and continuing for a
period of [****], Leitch shall have the right
to provide support and maintenance services relating
to the TrueCircuit Products sold by Leitch for any
Person who purchased any TrueCircuit Product from
Leitch; and
6.4.4 during the periods referred to in Sections 6.4.1 to
6.4.3, Leitch shall have a non-exclusive, worldwide
license to use, copy, modify, enhance, sell,
distribute, support, maintain, and create derivative
works from the Path 1 Intellectual Property as
required in order to exercise the rights set out in
each of Sections 6.4.1, 6.4.2, and 6.4.3,
respectively.
6.5 SURVIVAL
The provisions of Articles 5 and 7 and Sections 6.4, 6.5, 9.5 and
9.7 shall survive any termination or expiration of this Agreement.
ARTICLE 7
WARRANTY, INDEMNITY AND LIMITATION OF LIABILITY
7.1 LEITCH REPRESENTATIONS, WARRANTIES AND COVENANTS
Leitch represents, warrants and covenants to Path 1 as follows and
acknowledges that Path 1 has relied upon the completeness and accuracy
of such representations, warranties and covenants in entering into this
Agreement:
7.1.1 it has the corporate capacity to enter into this
Agreement and to perform each of its obligations
hereunder;
7.1.2 it has duly authorized, executed and delivered this
Agreement and this Agreement constitutes a legally
valid and binding obligation of it enforceable
against it in accordance with its terms except as
such enforcement may be limited by applicable
bankruptcy, insolvency and
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other laws of general application affecting the
enforcement of creditors' rights and subject to
general equitable principles; and
7.1.3 Leitch's performance of the obligations in this
Agreement shall comply with and shall neither
contravene, breach nor infringe any laws or
regulations applicable in Canada.
7.2 PATH 1 REPRESENTATIONS, WARRANTIES AND COVENANTS
Path 1 represents, warrants and covenants to Leitch as follows and
acknowledges that Leitch has relied upon the completeness and accuracy
of such representations, warranties and covenants in entering into this
Agreement:
7.2.1 it has the corporate capacity to enter into this
Agreement and to perform each of its obligations
hereunder;
7.2.2 it has duly authorized, executed and delivered this
Agreement and this Agreement constitutes a legally
valid and binding obligation of it enforceable
against it in accordance with its terms except as
such enforcement may be limited by applicable
bankruptcy, insolvency and other laws of general
application affecting the enforcement of creditors'
rights and subject to general equitable principles;
7.2.3 it is and shall be the legal and beneficial owner or
authorized licensor of all Intellectual Property
Rights in the Path 1 Intellectual Property free and
clear of all liens, charges and encumbrances to the
extent that the same may restrict or limit the
ability of Path 1 to perform its obligations or of
Leitch to exercise its rights under this Agreement
and Path 1 has the full power and authority to grant
the rights in the Path 1 Intellectual Property herein
contemplated without the consent of any other person;
7.2.4 Path 1 has not and shall not grant any rights or
licenses to the whole or any part of the Path 1
Intellectual Property or enter into any agreement or
understanding that would conflict with Path 1's
obligations or Leitch's rights under this Agreement;
7.2.5 no portion of the Path 1 Intellectual Property
contains or shall contain any disabling mechanism or
protection feature designed to prevent its use
including any clock, timer, counter, computer virus,
worm, software lock, drop dead device, Trojan horse
routine, trap door, time bomb or any other codes,
designs, routines or instructions that may be used to
access, modify, replicate, distort, delete, damage or
disable the Path 1 Intellectual Property or any
Technology on which the Path 1 Intellectual Property
is used or displayed except as specifically designed
into the Path 1 Intellectual Property of which Leitch
has actual knowledge; and
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7.2.6 Path 1's performance of the obligations in this
Agreement shall comply with and shall neither
contravene, breach nor infringe any laws or
regulations applicable in the United States of
America.
7.3 LIMITATION OF WARRANTY
THE WARRANTIES SET FORTH IN THIS ARTICLE 7 ARE THE ONLY WARRANTIES
PROVIDED BY EITHER PARTY HERETO. EXCEPT AS EXPRESSLY PROVIDED HEREIN,
EACH PARTY HEREBY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT
LIMITATION, ALL WARRANTIES OF MERCHANTABLE QUALITY, NON-INFRINGEMENT OF
THIRD PARTY RIGHTS AND FITNESS FOR A PARTICULAR PURPOSE.
7.4 INDEMNITIES
7.4.1 Notwithstanding any other provision hereof, Leitch
agrees to defend, indemnify and hold Path 1 and its
Affiliates and their respective directors, officers
and employees harmless from and against all losses,
costs, damages, expenses and liabilities (including
reasonable legal fees) which they may suffer or incur
arising out of or as a result of or relating in any
manner whatsoever to any breach by Leitch of Section
7.1 or Section 5.1 of this Agreement.
7.4.2 Notwithstanding any other provision hereof, Path 1
agrees to defend, indemnify and hold Leitch and its
Affiliates and their respective directors, officers
and employees harmless from and against all losses,
costs, damages, expenses and liabilities (including
reasonable legal fees) which they may suffer or incur
arising out of or as a result of or relating in any
manner whatsoever to any breach by Path 1 of Section
7.2 or Section 5.1 of this Agreement.
7.5 INFRINGEMENT CLAIMS
7.5.1 If all or any portion of the Path 1 Intellectual
Property is, in Path 1's opinion, likely to or
otherwise does become the subject of a claim for
infringement of any Intellectual Property Rights,
Path 1 shall, at its option and its sole cost and
expense, either:
7.5.1.1 procure in favour of Leitch the right to use
the same as contemplated herein;
7.5.1.2 modify the same to become non infringing
provided that any such modification does not
impair the ability of such Path 1
Intellectual Property to conform to and
perform in accordance with the
specifications therefor or the intended use
of such Path 1 Intellectual Property; or
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7.5.1.3 replace the infringing portion of such Path
1 Intellectual Property with compatible,
equivalent and non-infringing Technology,
Technology Documentation, Know-How or
Confidential Information, as applicable.
7.6 LIMITATIONS ON LIABILITY
EXCEPT FOR EACH PARTY'S LIABILITY FOR BREACHES OF SECTIONS 5.1 AND 7.4
AND PATH 1'S OBLIGATIONS PURSUANT TO SECTION 7.5, WHICH SHALL INCLUDE,
WITHOUT LIMITATION, LIABILITY FOR SPECIAL, CONSEQUENTIAL, INDIRECT,
INCIDENTAL, EXEMPLARY OR PUNITIVE DAMAGES AND LOSS OF PROFIT, THE
LIABILITY OF EACH PARTY TO THE OTHER PARTY IN RELATION TO THIS
AGREEMENT SHALL IN ALL CIRCUMSTANCES BE LIMITED TO DIRECT DAMAGES AND
NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT,
INCIDENTAL, EXEMPLARY OR PUNITIVE DAMAGES OR LOSS OF PROFIT, WHETHER IN
CONTRACT, TORT OR OTHERWISE RESULTING FROM ANY CAUSE OF ACTION
WHATSOEVER, INCLUDING NEGLIGENCE, GROSS NEGLIGENCE, NEGLIGENT
MISREPRESENTATION AND/OR FUNDAMENTAL BREACH OR OTHER THEORY OF LAW.
ARTICLE 8
CONTRACT MANAGEMENT AND DISPUTE RESOLUTION
8.1 CONTRACT GOVERNANCE
The Parties agree to utilize the process set out in this Article 8 to
consult and render decisions relating to the interpretation and
implementation of this Agreement.
8.2 CONTACTS AND CONTACT MEETINGS
The Parties agree that each shall designate no more than two (2)
principal contacts for day-to-day liaison and management of their
relationship under this Agreement during the Term (the "Contacts").
Unless otherwise mutually agreed, the Contacts shall meet on a regular
basis in person or by telephone, but in any event no less than once a
month, in order to review the Parties' respective performance under
this Agreement, discuss relevant issues, and resolve or, upon mutual
agreement, escalate issues as necessary. The Contacts shall not have
any authority or right to either amend or revise this Agreement, nor to
waive any obligations, duties or responsibilities of either Party under
this Agreement. Each Party shall pay its own costs associated with its
respective Contacts.
8.3 JOINT MANAGEMENT COMMITTEE
Leitch and Path 1 shall form a management committee (the "Committee")
composed of two or more senior representatives of Leitch and two or
more senior representatives of Path 1 who shall, from time to time,
meet to review and discuss matters related to this Agreement. The
number of representatives of Leitch and Path 1 on the Committee shall
at all times be equal. The Committee in its discretion may invite the
participation of the
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Contacts or others in its deliberations. The Committee shall have
the right to implement the Agreement and make decisions of an
interpretive nature (including without limitation decisions
regarding issues to be put before the Committee as set forth
herein), but the Committee shall not have the authority or right to
either amend or revise this Agreement, or to waive any obligations,
duties or responsibilities of either Party under this Agreement.
Each Party shall pay its own costs associated with its respective
Committee representatives.
8.4 DISPUTE RESOLUTION AND APPLICABLE LAW
Leitch and Path 1 expressly agree to the following exclusive internal
dispute escalation provisions governing all performance and disputes
under this Agreement:
8.4.1 In the event that Leitch and Path 1 cannot resolve a
dispute under the Agreement in the normal course of
performance (including through recourse to the
Contacts), then each Party's designated Committee
members shall confer immediately and use reasonable
efforts to resolve the dispute within fifteen (15)
Calendar Days of their initial conference. No dispute
shall be considered resolved until both Parties have
agreed to the resolution in writing. The designated
Committee members shall mutually agree on the methods
by which they attempt to resolve any dispute such as,
for example, telephone and/or video conferences,
e-mail and fax communications, and/or face to face
meetings. The costs under this Subsection 8.4.1 shall
be shared equally by the Parties.
8.4.2 In the event that each Party's designated Committee
members cannot resolve a dispute under the Agreement
as specified in Section 8.4.1 above, then each
Party's respective Presidents (or an equivalent or
higher position) having responsibility for this
Agreement shall confer immediately and use reasonable
efforts to resolve the dispute within fifteen (15)
Calendar Days of their initial conference. No dispute
shall be considered resolved until both Parties have
agreed to the resolution in writing. The respective
Presidents (or equivalents) shall mutually agree on
the methods by which they attempt to resolve any
dispute such as, for example, telephone and/or video
conferences, e-mail and fax communications, and/or
face to face meetings. The costs under this
Subsection 8.4.2 shall be shared equally by the
Parties.
8.4.3 In the event that each Party's respective Presidents
(or equivalents) cannot resolve a dispute under the
Agreement as specified in Subsection 8.4.2 above,
then the Parties shall resolve such dispute by
arbitration administered by the American Arbitration
Association under its Commercial Arbitration Rules,
and judgment on the award rendered by the
arbitrator(s) may be entered in any court of
competent jurisdiction.
ARTICLE 9
GENERAL
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9.1 EXPENSES
Each of Leitch and Path 1 shall be responsible for the expenses
(including fees and expenses of legal advisers, accountants and other
professional advisers) incurred by it, respectively, in connection with
the negotiation and settlement of this Agreement and the completion of
the transactions contemplated hereby.
9.2 NOTICES
Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be given by prepaid first-class
mail, by facsimile or other means of electronic communication or by
delivery as hereafter provided. Any such notice or other communication,
if mailed by prepaid first-class mail at any time other than during a
general discontinuance of postal service due to strike, lockout or
otherwise, shall be deemed to have been received on the fourth Business
Day after the post-marked date thereof, or if sent by facsimile or
other means of electronic communication, shall be deemed to have been
received on the Business Day following the sending, or if delivered by
hand shall be deemed to have been received at the time it is delivered
to the applicable address noted below either to the individual
designated below or to an individual at such address having apparent
authority to accept deliveries on behalf of the addressee. Notice of
change of address shall also be governed by this Section. In the event
of a general discontinuance of postal service due to strike, lock-out
or otherwise, notices or other communications shall be delivered by
hand or sent by facsimile or other means of electronic communication
and shall be deemed to have been received in accordance with this
Section. Notices and other communications shall be addressed as
follows:
9.2.1 if to Path 1:
Path 1 Network Technologies Inc.
3636 Nobel Drive, Suite 275
San Diego, California
USA 92122
Attention: Douglas A. Palmer
Telecopier No.: (858) 450-4203
9.2.2 if to Leitch:
Leitch Technology Corporation
25 Dyas Road
North York, Ontario
Canada M3B 1V7
Attention: Reg Tiessen
Telecopier No.: (416) 445-4308
Copy to:
Attention: James J. Sterling
Telecopier No.: (416) 445-0125
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<PAGE>
Notwithstanding the foregoing, any notice or other communication
required or permitted to be given by any Party pursuant to or in
connection with any arbitration procedures contained in any Schedule
hereto may only be delivered by hand or by facsimile or other means of
electronic communication.
9.3 TIME IS OF THE ESSENCE
Time is of the essence of this Agreement.
9.4 RELATIONSHIP OF PARTIES
This Agreement is not intended to, and none of the provisions of this
Agreement shall:
9.4.1 create a partnership between Leitch and Path 1;
9.4.2 create a fiduciary relationship between Leitch and
Path 1;
9.4.3 create a relationship of principal and agent between
Leitch and Path 1;
9.4.4 grant either Leitch or Path 1 any authority to bind
the other to perform any obligations to any third
party, or to hold itself out as having such authority
to third parties; or
9.4.5 create any joint or several liability between Leitch
and Path 1.
9.5 FURTHER ASSURANCES
Each of the Parties hereto shall promptly do, make, execute or deliver,
or cause to be done, made, executed or delivered, all such further
acts, documents and things as the other Party hereto may reasonably
require from time to time for the purpose of giving effect to this
Agreement and shall use commercially reasonable efforts and take all
such steps as may be reasonably within its power to implement to their
full extent the provisions of this Agreement.
9.6 SEVERABILITY
Any provision of this Agreement which is invalid or unenforceable in
any jurisdiction shall, as to that jurisdiction, be ineffective to the
extent of such invalidity or unenforceability and shall be severed from
the balance of this Agreement, all without affecting the remaining
provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction and
appropriate amendments shall be made to this Agreement to put the Party
who is disadvantaged by such invalidity or unenforceability in the same
financial position as if no provision hereof were invalid or
unenforceable. In the event that any portion of this Agreement shall
have been so determined to be or become invalid or unenforceable (the
"Offending Portion"), the Parties shall negotiate in good faith such
changes to this Agreement as shall best preserve for the Parties the
benefits and obligations of such Offending Portion.
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<PAGE>
9.7 GOVERNING LAW
This Agreement shall be exclusively governed by, and construed in
accordance with, the laws applicable in the State of New York, United
States of America. Any state or Federal courts situated within the
State of New York shall have the exclusive jurisdiction to adjudicate
any dispute arising out of this Agreement. Each Party hereby:
9.7.1 submits and attorns to the exclusive jurisdiction of
the federal or state courts located in New York;
9.7.2 consents to service of process being effected upon
the other Party by registered mail sent to the
address set forth in Section 9.2 hereof;
9.7.3 waives the right to a trial by jury in any dispute
arising out of this Agreement.
9.8 REMEDIES CUMULATIVE
Unless otherwise expressly stated herein, all rights and remedies of
each Party under this Agreement are in addition to that Party's other
rights and remedies and are cumulative, not alternative.
9.9 FORCE MAJEURE
Any delay in or failure of performance by either Party under this
Agreement shall not be considered a breach of this Agreement and shall
be excused to the extent caused by an event of Force Majeure.
9.10 SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and shall inure to the benefit of
and be enforceable by each of the Parties, their respective successors
and permitted assigns. Neither Party shall assign or subcontract all or
any portion of this Agreement without the other Party's prior written
consent. Notwithstanding the foregoing, either Party may assign this
Agreement or any of its rights or obligations hereunder to an Affiliate
or to a purchaser of all or substantially all of that Party's assets
without the other Party's prior consent. For the purposes of this
Section 9.10 a change in Control of a Party shall not constitute an
assignment.
9.11 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the Parties
pertaining to the subject matter of this Agreement. There are no
warranties, conditions, or representations (including any that may be
implied by statute) and there are no agreements in connection with such
subject matter except as specifically set forth or referred to in this
Agreement. No reliance is placed on any warranty, representation,
opinion, advice or assertion of fact made either prior to,
contemporaneous with, or after entering into this Agreement, or any
amendment or supplement thereto, by any Party to this Agreement or its
directors,
29
<PAGE>
officers, employees or agents, to any other Party to this Agreement
or its directors, officers, employees or agents, except to the
extent that the same has been reduced to writing and included as a
term of this Agreement, and none of the Parties to this Agreement
has been induced to enter into this Agreement or any amendment or
supplement by reason of any such warranty, representation, opinion,
advice or assertion of fact. Accordingly, there shall be no
liability, either in tort or in contract, assessed in relation to
any such warranty, representation, opinion, advice or assertion of
fact, except to the extent contemplated above.
9.12 WAIVER
A waiver of any default, breach or non-compliance under this Agreement
is not effective unless in writing and signed by the Party to be bound
by the waiver. No waiver shall be inferred from or implied by any
failure to act or delay in acting by a Party in respect of any default,
breach, non-observance or by anything done or omitted to be done by
another Party. The waiver by a Party of any default, breach or
non-compliance under this Agreement shall not operate as a waiver of
that Party's rights under this Agreement in respect of any continuing
or subsequent default, breach or non-compliance (whether of the same or
any other nature).
9.13 AGREEMENT DRAWN IN ENGLISH
The Parties confirm that it is their wish that this Agreement, as well
as all other documents relating hereto, including all notices, have
been and shall be drawn up in the English language only. Les parties
aux presentes confirment leur volonte que cette convention, de meme que
tous les documents, y compris tout avis, qui s'y rattachent, soient
rediges en langue anglaise.
9.14 COUNTERPARTS
This Agreement may be signed in counterparts (including counterparts
signed by facsimile transmission) and each of such counterparts shall
constitute an original document and such counterparts, taken together,
shall constitute one and the same instrument.
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IN WITNESS WHEREOF the Parties have executed this Agreement.
LEITCH TECHNOLOGY CORPORATION
By: /s/ J. A. MacDonald
-----------------------------
Name:
Title:
By: /s/ Reg J. Tiessen
-----------------------------
Name:
Title:
PATH 1 NETWORK TECHNOLOGIES INC.
By: /s/ Vera Moldt
-----------------------------
Name:
Title:
By: /s/ Michael Elliott
-----------------------------
Name:
Title:
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<PAGE>
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE ("Agreement") is made and
entered into on April 11, 2000 among PATH 1 NETWORK TECHNOLOGIES INC., a
Delaware corporation ("Path 1"), DOUGLAS A. PALMER, RONALD D. FELLMAN, RODERICK
ADAMS, PAUL ROBINSON, MICHAEL BERNS, JAMES BERNS, RONA BERNS and BERNS & BERNS,
who agree as follows:
1. RECITALS. This Agreement is made with reference to the
following facts:
1.1 On September 20, 1999, Path 1 filed, and there is now
pending, a lawsuit against Michael Berns, James Berns, Rona Berns, Berns & Berns
(collectively, the "Berns Parties") and Franklin Felber in the San Diego County
Superior Court, Case No. GIC 735665 (the "Lawsuit"). The Lawsuit relates in part
to 1,655,000 shares of Path 1 Class A Common Stock issued to James Berns and
Rona Berns (the "Berns Path 1 Shares"). Rona Berns has specially appeared to
contest personal jurisdiction over her in the Lawsuit.
1.2 On November 9, 1999, Michael Berns and James Berns,
and Franklin Felber, filed, and there is now pending, a lawsuit against Path 1
in the Delaware Court of Chancery in and for New Castle County (Civil Action No.
17562) for indemnification and advancement of defense expenses with respect to
the Lawsuit (the "Delaware Action").
1.3 James Berns and Rona Berns are renegotiating an
agreement to sell all of their Berns Path 1 Shares to Leitch Technology
Corporation.
1.4 The parties desire to settle any and all disputes
presently existing between them in accordance with the provisions of this
Agreement.
2. CLOSING. The closing under this Agreement ("Closing") shall be
deemed to have occurred when (a) this Agreement has been duly executed and
delivered by all of the parties hereto and (b) all of the other conditions
listed in Sections 2.1 and 2.2 below have been satisfied or waived. All actions
to be taken and all documents to be executed and delivered by all parties at or
before the Closing shall be deemed to have been taken and executed
simultaneously at the Closing and no such action shall be deemed taken nor any
such documents executed or delivered until all have been taken, executed and
delivered, unless waived by the party benefited by any condition, or agreed
otherwise by the parties in writing on or before the Closing. The parties agree
to use their best efforts to satisfy the conditions to Closing. If the Closing
does not occur on or before April 11, 2000 or such later date as Path 1 and the
Berns Parties may agree to in writing, then at any time thereafter, but before
the Closing occurs, Path 1 or the Berns Parties, if not then in breach or
default hereunder, may cancel and terminate this Agreement by giving written
notice thereof to the other parties.
2.1 PATH 1 CONDITIONS. The obligation of Path 1 to
perform its executory undertakings hereunder and to close are, at the option of
Path 1, subject to the following conditions precedent:
<PAGE>
(a) The representations and warranties of the
Berns Parties contained herein shall be repeated at and as of the Closing and
shall be true and correct both with respect to the time when made and to the
time when repeated (except to the extent of changes caused by the transactions
herein contemplated), and the Berns Parties shall have performed and complied
with all agreements and conditions required hereunder to be performed or
complied with by them prior to or at the Closing.
(b) Leitch Technology Corporation and the Berns
Parties shall have entered into a renegotiated agreement or new agreement for
the purchase and sale of the Berns Path 1 Shares on terms and conditions
acceptable to Leitch Technology Corporation and the Berns Parties, each in their
sole discretion.
(c) The Delaware Action, in respect of Path 1
and the Berns Parties, shall have been dismissed with prejudice pursuant to the
provisions of this Agreement.
(d) Path 1's board of directors shall have
approved the execution and delivery of this Agreement by Path 1 and the
consummation by Path 1 of the transactions contemplated hereby.
(e) The Berns Parties shall have executed and
delivered to Path 1 all of the items described in Section 2.4 below.
(f) Rona Berns shall have executed and delivered
to Path 1 an executed written consent action counterpart to be prepared by Path
1 and dated as of or before March 22, 1999, approving the amendment of Path 1's
certificate of incorporation to, among other things, create Class B Common
Stock; together with a written representation that she had in fact executed and
delivered to Path 1, before April 12, 1999, a written consent action counterpart
of like tenor.
2.2 BERNS PARTIES CONDITIONS. The obligation of the Berns
Parties to perform their executory undertakings hereunder and to close are, at
the option of the Berns Parties, subject to the following conditions precedent:
(a) The representations and warranties of Path 1
contained herein shall be repeated at and as of the Closing and shall be true
and correct both with respect to the time when made and to the time when
repeated (except to the extent of changes caused by the transactions herein
contemplated), and Path 1 shall have performed and complied with all agreements
and conditions required hereunder to be performed or complied with by Path 1
prior to or at the Closing.
(b) Leitch Technology Corporation and the Berns
Parties shall have entered into a renegotiated agreement or new agreement for
the purchase and sale of the Berns Path 1 Shares on terms and conditions
acceptable to Leitch Technology Corporation and the Berns Parties, each in their
sole discretion.
(c) The Lawsuit, in respect of Path 1 and the
Berns Parties, shall have been dismissed with prejudice pursuant to the
provisions of this Agreement.
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<PAGE>
(d) Path 1's board of directors shall have
approved the execution and delivery of this Agreement by Path 1 and the
consummation by Path 1 of the transactions contemplated hereby.
(e) There shall have been no adverse change in
the business or financial condition of Leitch Technology Corporation between the
date hereof and the Closing.
(f) Path 1 shall have executed and delivered to
the Berns Parties all of the items described in Section 2.3 below.
2.3 DELIVERIES BY PATH 1. Path 1 shall deliver or cause
to be delivered to the Berns Parties at the Closing:
(a) A fully executed counterpart of a Dismissal
With Prejudice of all causes of action against the Berns Parties in the Lawsuit.
(b) Certified resolutions of Path 1's board of
directors or other evidence reasonably acceptable to the Berns Parties of Path
1's authority to execute, deliver and perform this Agreement.
(c) Such other instruments and documents as may
be reasonably requested by the Berns Parties or their counsel in order to
effectuate the provisions of this Agreement.
2.4 DELIVERIES BY THE BERNS PARTIES. The Berns Parties
shall deliver or cause to be delivered to Path 1 at the Closing:
(a) A fully executed counterpart of a Dismissal
With Prejudice of all of their causes of action against Path 1 in the Delaware
Action.
(b) Such other instruments and documents as may
be reasonably requested by Path 1 or its counsel in order to effectuate the
provisions of this Agreement.
3. INDEMNITY.
3.1 Effective as of the Closing, the Berns Parties shall
have no liability for and are hereby discharged of, and Path 1 shall assume and
be solely liable for and shall protect, defend, indemnify and hold the Berns
Parties free and harmless from and against, any and all obligations,
liabilities, taxes, claims, demands, losses, costs, expenses, damages,
judgments, amounts paid in settlement, liens, encumbrances, security interests,
recoveries and deficiencies, attorneys' fees and disbursements, directly or
indirectly arising out of, resulting from or relating in any way to (a) the
business or activities of Path 1 including, by way of example and not by
limitation, claims of any kind now or hereafter asserted by Franklin Felber,
Jyra Research Inc. and/or Jyra Research Limited (whether by way of direct
action, derivative action, class action, individual action or otherwise), (b)
any liability or obligation of Path 1 of any kind, whether arising from events
that occurred on or before the date of this Agreement or that occur after the
date of this Agreement, (c) the fact that any of the Berns Parties is or was a
director, officer, shareholder, employee, agent, attorney, consultant, advisor,
representative or person in control of
3
<PAGE>
Path 1, or (d) any acts, occurrences or matters relating to Path 1 that took
place before the date of this Agreement.
3.2 If any Berns Party so requests, Path 1 shall have the
obligation to assume, undertake and conduct the defense or settlement of any
such suit, claim or demand described in Section 3.1, including (a) the
obligation to employ separate and independent legal counsel selected by any
Berns Party, subject to Path 1's approval which shall not be unreasonably
withheld, and to pay all fees and expenses related thereto as such fees and
expenses are incurred and (b) the power to litigate or settle the same, provided
that the Berns Parties shall have the right to review and approve or disapprove
any settlement pertaining to them unless (i) the sole relief provided is a
monetary payment that is paid in full by Path 1, (ii) there is no finding or
admission of any liability, wrongdoing, misconduct or violation of any kind or
other grounds for the basis of any other claims that may be made against any
Berns Party and (iii) no Berns Party will have any obligation or liability of
any kind with respect to such settlement. Approval by the Berns Parties of any
settlement, if required, shall not be unreasonably withheld. The Berns Parties
and Path 1 shall cooperate with each other in the defense or settlement of any
third party claims, including giving the other reasonable access to relevant
books and records and making themselves available for interviews and
depositions. The Berns Parties shall not act in concert with, or as an agent
for, any party for whose claims they are being indemnified for the purpose of
promoting such claims, except that the Berns Parties may, if requested by Path 1
and agreed to by them, act as mediators or intermediaries for the purpose of
attempting to settle any disputes presently existing between Franklin Felber and
Path 1.
3.3 The foregoing indemnification provisions shall (a)
apply to the fullest extent permitted by law, (b) provide indemnification
against the Berns Parties' alleged primary, secondary and vicarious liability in
any capacity whatsoever, (c) continue in effect at all times after the date of
this Agreement, and (d) be in addition to and not in lieu of any other
indemnification or other rights to which the Berns Parties are or may be
entitled pursuant to law, the certificate of incorporation or bylaws of Path 1,
agreement, insurance or otherwise.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PATH 1. In
addition to the representations, warranties and agreements contained elsewhere
in this Agreement, Path 1 hereby represents and warrants to and agrees with the
Berns Parties as follows:
4.1 Path 1 is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, is duly
qualified and in good standing as a foreign corporation authorized to transact
intrastate business in the State of California and has full power and authority
to conduct its business in the manner in which it is presently being conducted.
Path 1 has all requisite corporate power and authority to execute, deliver and
perform this Agreement and every agreement, instrument or document required to
be delivered pursuant to this Agreement. The execution, delivery and performance
of this Agreement and every agreement, instrument or document required to be
delivered pursuant to this Agreement by Path 1 have been duly authorized by all
necessary or appropriate corporate action and no other corporate proceedings are
necessary to authorize this Agreement or any agreement, instrument or document
required to be delivered pursuant to this Agreement. This Agreement constitutes,
and the other agreements, instruments and documents executed or delivered in
connection with this
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Agreement will constitute when executed, the valid and legally binding
obligations of Path 1 enforceable against Path 1 in accordance with their terms.
4.2 Neither the execution, delivery or performance of
this Agreement or any agreement, instrument or document required to be delivered
pursuant to this Agreement by Path 1, nor the consummation by Path 1 of the
transactions contemplated hereby and thereby, will, with or without the giving
of notice or lapse of time or both: (a) violate, conflict with or result in any
breach of any provision of the certificate of incorporation or bylaws of Path 1,
(b) to the best knowledge of Path 1, require any permit or consent of any
governmental entity, (c) conflict with or constitute a default under any of the
terms or requirements of any permit that is held by Path 1, (d) result in a
violation or breach of, or constitute a default (or give rise to any rights of
termination, amendment, cancellation or acceleration) under, any of the terms,
conditions or provisions of any contract or agreement to which Path 1 is a party
or, to the best knowledge of Path 1, by which it is bound, or (e) to the best
knowledge of Path 1, violate, conflict with or result in any breach of any law
applicable to Path 1.
5. MUTUAL GENERAL RELEASE.
5.1 Effective as of the Closing, and except for the
rights and obligations of the parties under this Agreement or any of the
documents delivered in connection with this Agreement, Path 1, Douglas A.
Palmer, Ronald D. Fellman, Roderick Adams and Paul Robinson (collectively, the
"Path 1 Parties"), on the one hand, and the Berns Parties, on the other hand,
hereby fully and forever releases and discharges the other from any and all
rights, claims, debts, contracts, liabilities, demands, obligations, costs,
charges, accounts, expenses, damages, actions and causes of action, of any kind
or nature whatsoever, which the releasor either had or now has or may hereafter
claim to have against the releasee by reason of any matter or thing whatsoever
occurring prior to the date hereof. The claims hereby released include, by way
of example and not by limitation, all claims directly or indirectly arising out
of, resulting from or relating in any way to the subject matter of the Lawsuit
or the Delaware Action, including but not limited to the filing, maintenance or
prosecution of the Lawsuit or the Delaware Action.
5.2 The foregoing mutual release constitutes a general
release and shall extend to all claims of every nature and kind whatsoever,
known or unknown, suspected or unsuspected, including, but not limited to, any
claims based on contract, tort, statute, breach of duty, bad faith, negligence,
or any other theory of liability.
5.3 The Path 1 Parties and the Berns Parties explicitly
waive any and all rights which they may have under the provisions of California
Civil Code section 1542, which section reads as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
5.4 The foregoing mutual release shall inure to the
benefit of and be binding upon the parties and their respective predecessors,
successors, assigns, heirs, executors,
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administrators, spouses, employees, agents, servants, partners, shareholders,
directors, officers, managers, parents and subsidiaries, affiliates, guarantors,
representatives, insurers and attorneys.
5.5 Franklin Felber is not a party to, nor included
within or benefitted by, the foregoing mutual release in this Section 5. Any
claims for indemnity or contribution that may be brought by any of the parties
to this Agreement (other than Path 1) as a result of claims brought (or that may
be brought) by Franklin Felber are not released in this Section 5.
6. COVENANT NOT TO SUE. Effective as of the Closing, the Path 1
Parties, on the one hand, and the Berns Parties, on the other hand, each agrees
to forever refrain and forebear from commencing, voluntarily assisting,
instituting or prosecuting any litigation, action, arbitration, administrative
or other proceeding of any kind against the other directly or indirectly arising
out of, resulting from or relating in any way to the subject matter of the
release contained in Section 5.
7. EXCLUSIONS. Notwithstanding the provisions of Sections 5 and
6, the releases and covenants not to sue contained therein shall not apply to
(a) the rights and obligations of the parties under this Agreement or any of the
documents delivered in connection with this Agreement, (b) claims by the parties
to this Agreement (other than Path 1) for indemnity or contribution arising out
of any action, claim or proceeding of any kind brought (or that may be brought)
by Franklin Felber, and (c) the rights and claims, if any, of the parties to
this Agreement against Jyra Research Inc. and/or Jyra Research Limited
(collectively, "Jyra") or of Jyra against the parties to this Agreement. This
Section 7 does not affect the indemnity provisions of Section 3 above.
8. NO LIABILITY ADMITTED. Each of the parties explicitly
acknowledges and agrees that this Agreement represents a settlement of disputed
claims and that by entering to this Agreement, no party admits or acknowledges
the existence of any liability or wrongdoing. The provisions of this Agreement
shall not be construed as an admission of liability or wrongdoing by any party.
9. ADVICE OF COUNSEL. In executing this Agreement, each party
represents and warrants to the other that he, she or it has relied upon the
legal advice of his, her or its own attorney, that the provisions of this
Agreement have been completely read and explained by his, her or its attorney,
and that the provisions of this Agreement are fully understood and voluntarily
accepted by him, her or it.
10. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. In addition to the
representations, warranties and agreements contained elsewhere in this
Agreement, the Path 1 Parties, on the one hand, and the Berns Parties, on the
other hand, each hereby represents and warrants to and agrees with the others as
follows:
10.1 This Agreement and the execution, delivery and
performance hereof by them (a) have been duly authorized and approved by all
necessary action on their part and (b) do not require the consent or approval of
any other person.
10.2 Except for the assignment of claims by Douglas A.
Palmer and Ronald D. Fellman to Path 1 (all of whom are parties to this
Agreement and the mutual release in
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Section 5), they have not heretofore assigned, transferred or pledged, or
purported to assign, transfer or pledge, voluntarily, involuntarily or by
operation of law, to any person, any interest in any of the claims released by
them under Section 5.
10.3 They agree to protect, defend, indemnify and hold
harmless the other parties from and against any and all claims, losses, damages,
liabilities and expenses, including attorneys' fees, arising from or on account
of any misrepresentation, breach of warranty or failure to perform any of their
representations, warranties, covenants or agreements contained in this
Agreement.
11. GENERAL PROVISIONS.
11.1 PUBLIC ANNOUNCEMENTS. Path 1 agrees to consult with
the Berns Parties before issuing any press release or otherwise making any
public statement (other than in reports required to be filed with the Securities
and Exchange Commission pursuant to federal securities laws) with respect to
this Agreement, the settlement of the Lawsuit or the Delaware Action or the sale
and purchase of the Berns Path 1 Shares. All press releases and other public
statements with respect to this Agreement, the settlement of the Lawsuit or the
Delaware Action or the sale and purchase of the Berns Path 1 Shares shall be
subject to the Berns Parties' prior written approval which shall not be
unreasonably withheld.
11.2 ATTORNEYS' FEES. In any action or proceeding
(including, but not limited to, arbitration, appellate and bankruptcy
proceedings) arising out of or relating to this Agreement or to the subject
matter, enforcement or breach hereof, the prevailing party shall be entitled to
reasonable attorneys' fees, costs and expenses (including, but not limited to,
litigation expenses such as expert witness fees, copying costs and postage,
delivery, telephone and telecopying charges). This provision applies to this
entire Agreement and shall survive any resulting judgment, which the parties
agree shall contain an explicit provision that attorneys' fees incurred in
enforcing the judgment shall be included as costs collectible by the prevailing
party judgment creditor.
11.3 INTEGRATION. This Agreement is intended to be and
constitutes the final, complete and exclusive agreement between the parties
regarding the subject matter of this Agreement and all prior or contemporaneous
agreements, understandings, representations and statements, oral or written, are
merged into and superseded by this Agreement. No parol or extrinsic evidence of
any kind and no course of dealing or usage of trade or course of performance
shall be used to vary, contradict, supplement or add to the terms of this
Agreement.
11.4 AMENDMENT. No amendment, modification, termination or
waiver of this Agreement or any of its provisions shall be valid unless the same
is in writing and signed by the party against which such amendment,
modification, termination or waiver is sought to be enforced.
11.5 WAIVER. No waiver of any breach of any provision or
condition of this Agreement shall be deemed a waiver of a breach of a similar or
dissimilar provision or condition at the same time or any prior or subsequent
time or of the provision or condition itself.
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11.6 TIME OF ESSENCE. Time is of the essence of this
Agreement and each of its provisions in which a time for performance is
specified.
11.7 BINDING EFFECT. This Agreement shall bind and inure
to the benefit of the parties hereto and their respective successors, assigns
and legal representatives. Except as otherwise stated in this Agreement, no
other party shall have any rights under or be deemed a beneficiary of this
Agreement.
11.8 COOPERATION. Each party shall execute and deliver or
cause to be executed and delivered such further instruments and documents and
shall take such further action as may be reasonably required to effectuate the
provisions of this Agreement.
11.9 SURVIVAL. All representations, warranties, covenants
and agreements contained in this Agreement shall survive the execution and
delivery hereof, the Closing and any and all performances in accordance with
this Agreement.
11.10 GOVERNING LAW. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of
California.
11.11 WARRANTY OF AUTHORITY. The persons signing this
Agreement represent and warrant that they have the requisite authority to bind
the parties on whose behalf they are signing.
11.12 RULES OF CONSTRUCTION. The section headings contained
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement. References to a section without
further attribution shall refer to the sections of this Agreement. When
indicated by the context, each number, both singular and plural, includes all
numbers, and each gender includes all genders. As used herein, the terms
"include," "including" and similar terms shall be construed as if followed by
the words "without limitation;" the term "person" includes natural person, firm,
partnership, corporation, limited liability company, association and any other
private or public entity; and the term "provisions" shall be construed as if
followed by the words "covenants, agreements, representations, warranties,
indemnities, terms and/or conditions".
11.13 SEVERABILITY. If any one or more of the provisions of
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement and this Agreement shall
be construed as if such invalid, illegal or unenforceable provisions had never
been contained herein.
11.14 COUNTERPARTS. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which, together, shall constitute one and the same instrument.
11.15 INTERPRETATION OF AGREEMENT. This Agreement has been
negotiated at arm's length and each party has been represented by independent
legal counsel of his own choice and representing his own interests. Accordingly,
any rule of law (including, but not limited to,
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California Civil Code Section 1654) or legal decision that would require
interpretation of any ambiguities in this Agreement against the party that has
drafted it is not applicable and is waived.
11.16 EQUITABLE REMEDIES. The parties agree that they would
be irreparably damaged if the provisions of this Agreement were not capable of
being specifically enforced. Accordingly, the parties agree that the provisions
of this Agreement shall be specifically enforceable, that any violation of any
provision of this Agreement may be enjoined or restrained and that such
equitable relief shall not in any way limit or deny any other remedy which the
parties may have under this Agreement or at law.
11.17 EFFECTIVENESS OF AGREEMENT. This Agreement shall
become effective when it has been executed and delivered by all of the parties
hereto. Facsimile signatures and delivery by facsimile transmission shall be
valid and effective.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed this Agreement the date
first above written.
PATH 1 NETWORK TECHNOLOGIES INC., BERNS & BERNS,
a Delaware corporation a general partnership
By: /s/ Michael Elliott By: /s/ James Berns
------------------------------- --------------------------------
James Berns, Partner
-------------, President
By: /s/ Vera Moldt By: /s/ Michael Berns
------------------------------- --------------------------------
Michael Berns, Partner
-------------, Secretary
/s/ Douglas A. Palmer /s/ James Berns
- ------------------------------------ -------------------------------------
Douglas A. Palmer James Berns
/s/ Ronald D. Fellman /s/ Michael Berns
- ------------------------------------ -------------------------------------
Ronald D. Fellman Michael Berns
/s/ Roderick Adams /s/ Rona Berns
- ------------------------------------ -------------------------------------
Roderick Adams Rona Berns
/s/ Paul Robinson
- ------------------------------------ -------------------------------------
Paul Robinson
[SIGNATURE PAGE TO SETTLEMENT AGREEMENT AND MUTUAL RELEASE]
<PAGE>
APPROVED AS TO FORM:
SULLIVAN, HILL, LEWIN, REZ & ENGEL
Attorneys for the Berns Parties
By: /s/ Jeffrey D. Lewin
------------------------------------
ALSCHULER GROSSMAN STEIN & KAHAN LLP
Attorneys for Path 1, Ronald D. Fellman
and Douglas A. Palmer
By: /s/ Michael Sherman
------------------------------------
PEPPER HAMILTON LLP
Attorneys for Roderick Adams and
Paul Robinson
By: /s/ M. Duncan Grant
------------------------------------
[SIGNATURE PAGE TO SETTLEMENT AGREEMENT AND MUTUAL RELEASE]
<PAGE>
Exhibit 10.13
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of April 7, 2000, by
and between Path 1 Network Technologies Inc., a Delaware corporation (the
"Company"), and Dr. Michael T. Elliott ("Employee").
WHEREAS, the Company desires to secure the services of
Employee, and Employee is willing to provide such services, each upon the terms
and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, the parties
agree as follows:
1 CERTAIN DEFINITIONS.
For the purposes of this Agreement, the parties hereby adopt the following
definitions:
"Board" has the meaning set forth in Section 2.1.
"Cause" means commission by Employee of any act or omission to perform
any act provided that any act or omission was done or omitted willfully or
through the gross negligence or bad faith of Employee (but excluding any
business decision undertaken in good faith which does not violate any law, and
also excluding the effect of any such business decision on the company's
operating results), including, but not limited to:
A. any harassment of any employee of the Company, which results
in, or is presently determined by the Board to be reasonably
likely to result in, serious adverse consequences to the
Company;
B. material breach of any of Employee's agreements set forth in
this Agreement including, but not limited to, continual
material failure to perform his duties with the Company,
excessive absenteeism and dishonesty;
C. Employee's indictment for, or written confession of, or
commission of, a felony or any crime involving moral turpitude
under the laws of the United States or any state;
D. death or total disability of Employee; or
E. declaration by a court that Employee is insane or incompetent
to manage his business affairs;
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A "Change in Control" shall be deemed to have occurred if,
during the term of this contract, any person or group of persons (as defined in
Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"1934 Act")) together with its affiliates, excluding employee benefit plans of
the Company, and excluding the Employee and any affiliates of the Employee, (A)
is or becomes, directly or indirectly, the "beneficial owner" (as defined in
rule 13d-3 promulgated under the 1934 Act) of securities of the Company
representing more than 50% of the combined voting power of the Company's then
outstanding securities or (B) acquires, through purchase, merger or otherwise,
directly or indirectly, all or substantially all of the Company's assets.
"Company" means Path 1 Network Technologies Inc., a Delaware
corporation.
"Dollars", "$" and "US$" means United States dollars.
"Employee" means Dr. Michael T. Elliott.
"Good Reason" means that Employee voluntarily terminates his
employment hereunder following (x) a change in the reporting relationship
between Employee and the Board, committees of the Board or the Company's
Chairman of the Board, i.e. if the Company interposes some other person between
Employee and the Board, a Board committee or the Chairman or (y) a requirement
by the Board that Employee must move in order to carry out his duties under this
Agreement.
"Initial Option" has the meaning set forth in Section 6(a).
"Termination" means, according to the context, the termination
of this Agreement or the cessation of rendering employment services by Employee.
"Total Disability" means Employee shall become disabled to an
extent which renders him unable to perform the essential functions of his job,
with or without reasonable accommodation, for a cumulative period of twenty-four
(24) weeks in any twelve (12) month period.
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2 EMPLOYMENT.
2.1 Position
Commencing on the date of this Agreement, the Company hereby employs Employee
and Employee hereby accepts employment by the Company to serve as President and
Chief Executive Officer of the Company. Employee shall perform services of an
executive nature consistent with the chief executive office of the Company as
may from time to time be reasonably assigned or delegated to him by the Board.
Nothing in this Agreement is intended to ensure that Employee will continue as
the Chief Executive Officer of the Company, and he understands that he serves in
that position at the pleasure of the Board. Nevertheless, so long as Employee
serves as the Chief Executive Officer of the Company, the Company agrees that he
will be nominated as one of the management nominees for service on the Board, at
each annual meeting of the shareholders of the Company occurring after the date
of this Agreement.
2.2 Employee Responsibilities
/ / Overall corporate management responsibility/authority to increase
shareholder value.
/ / Grow business to $100+ Million revenue within 2 years and to $500+
Million revenue within 5-7 years.
/ / Effectively represent corporation to outside customers, suppliers,
partners, government officials, financing organizations, media and
internally to employees.
/ / Promulgate corporate culture.
/ / Set standard for ethical behavior.
/ / Set up corporate organization, both structurally and legally, to
achieve business objectives.
/ / Establish and ensure adequacy of proper process, procedures and
policies.
/ / Ensure implementation and execution of strategic/tactical, business and
financial plans to meet both short term and long-term growth and profit
objectives.
/ / Assure adequacy of funding availability to meet short term and
long-term goals, including mergers, acquisitions and corporate
partnerships.
/ / Ensure clear responsibility and authority for all subordinates.
/ / Assess risks and opportunities.
/ / Ensure adequacy and balance of personnel compensation plans.
/ / Provide for adequacy of infrastructure to meet plans.
/ / Set up Executive Council to oversee successfully meeting corporate
commitments (internal and external).
/ / Report quarterly to Board of Directors as to state of company against
corporate objectives.
/ / Hire first-rate management team.
2.3 Location
Employee shall perform his duties under this Agreement principally in or around
San
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Diego, California. It is contemplated Employee will frequently travel to carry
out his duties under this Agreement, and in these instances air travel and other
travel arrangements will comply with current Company policies respecting class
of travel, etc.
2.4 Medical Coverage
The Company will provide to Employee, his spouse and children medical benefits
which are provided to other similarly situated employees of the Company.
2.5 Vacation
Employee shall have three (3) weeks paid vacation and one (1) week of unpaid
vacation during each year of this Agreement taken at such times as are mutually
convenient to Employee and the Company.
2.6 Inventions Agreement
Employee shall sign and abide by the terms of the: "EMPLOYEE PROPRIETARY
INFORMATION AND INVENTIONS AGREEMENT"
3 TERM OF EMPLOYMENT.
3.1 This Agreement and Employee's employment hereunder shall commence on
the date of this Agreement, and continue until the second anniversary
of such date, unless earlier terminated for "Cause".
3.2 Notwithstanding Paragraph 3.1 above, this Agreement may be sooner
terminated by the Company with or without Cause or by Employee with or
without Good Reason. Unvested shares are returned to the company
except as covered under Section 6.5.
3.3 On termination of this Agreement pursuant to Paragraph 3.1 or 3.2
above, all benefits and compensation shall cease as of the date of such
Termination, but nothing in this provision is intended to alter the
specific provisions contained in Section 6 relating to either a
Termination by the Company without Cause, or a Termination by Employee
for Good Reason. Also, nothing in this provision is intended to alter
or limit the Company's obligations under COBRA.
4 BUSINESS EXPENSE REIMBURSEMENT.
Employee will be entitled to reimbursement by the Company for the reasonable
business expenses paid by him on behalf of the Company in the course of his
employment hereunder on presentation to the Company of appropriate vouchers
(accompanied by receipts or paid bills) setting forth information sufficient to
establish:
A. the amount, date, and place of each such expense;
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B. the business reason for each such expense and the nature of
the business benefit derived or expected to be derived as a
result thereof; and
C. the names, occupations, addresses, and other information
sufficient to establish the business relationship to the
Company of any person who was entertained by Employee.
5 COMPENSATION AND BENEFITS.
The Company agrees to pay Employee, and Employee agrees to accept from the
Company, during the first year after the date hereof, for the services to be
rendered by him hereunder a salary at the rate of US$200,000.00 per annum
payable in arrears in installments that are paid at least monthly. Employee
shall receive annual salary reviews by the Board to consider increases for
merit, cost of living, and the like.
In addition to a salary the Employee shall receive 1% of the cash proceeds to
the Company from any equity financing obtained by Path 1 from Investment
Bankers, strategic partners, or similar organizations. This does not apply to
the $10,000,000.00 financing by Leitch. This also does not apply if it conflicts
with any government regulations.
If the Company has instituted or institutes a retirement, bonus or other benefit
plan which applies generally to U.S. executives of the Company, Employee shall
be entitled to participate therein, on terms determined by the Board to be
comparable to other U.S. executives of the Company, but not to the extent such
benefits would be duplicative of the benefits herein. The Company will provide
annual reviews by the Board of Employee's performance for consideration of his
participation in the Company's cash bonus plan, if such a plan is implemented.
Since Employee will have a significant ownership of options on shares of the
common stock of the Company (under 6. below), this participation shall not
include stock option plans, or similar plans, unless the Board determines
otherwise. The Company agrees that if other directors or senior officers are
granted indemnification agreements, in addition to the indemnification
provisions in the Company's by-laws, Employee shall be entitled to a similar
indemnification agreement. The Company agrees to maintain director's and
officer's insurance, for the benefit of directors and officers, including
Employee, as per similarly situated companies.
6 ISSUANCE OF STOCK.
6.1 Stock Issuance.
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The Company shall issue to the Employee a non-transferable incentive option
for 300,000 shares of Class "B" Common Stock of the Company ("Initial
Option"), upon the following terms and conditions:
1. the options are exercisable at $4.35 per share;
2. the options expire seven (7) years from the date of grant;
3. 50,000 of the options "vest" immediately and from that point
till the end of the term of this contract the remainder of the
options vest in quarterly increments.
6.2 Stock Bonus
In addition to the Initial Option the Company will issue 100,000 additional
incentive options for Class "B" Common Stock to the Employee with the
proviso that Path 1 has the right to take back the options if the following
condition is not met within two years of the date of this contract: the
market cap of the Company exceeds $400,000,000 for a continuous 90 day period
or audited revenues exceed $50M for one year.
6.3 Investment Representation, Etc.
Employee understands and agrees that the Initial Option shall not be
transferable (except by will or intestacy or transfer into trust for the sole
benefit of Employee or his spouse or issue), and that the common stock issuable
upon conversion of the Initial Option will be restricted as to transfer so as to
ensure compliance with applicable securities laws.
6.4 Employee Understands the Terms of Class "B" Stock Issuance
The Employee represents and warrants that he understands the conditions and
provisos surrounding the Class "B" shares issued by the Company.
6.5 Under a "Change in Control" of the Company vesting shall be completed
immediately.
7 FORMER EMPLOYMENT
7.1 No Conflict
Employee represents and warrants that the execution and delivery by him of this
Agreement, his employment by the Company and his performance of duties under
this Agreement will not conflict with and will not be constrained by any prior
employment or consulting agreement or relationship, or any other contractual
obligation.
7.2 No use of Prior Confidential Information
Employee will not intentionally disclose to the Company or use on its behalf any
confidential information belonging to any of his former employers, but during
his
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employment by the Company he will use in the performance of his duties all
information (but only such information) which is generally known and used by
persons with training and experience comparable to his own or is common
knowledge in the industry or otherwise legally in the public domain.
8 BENEFIT AND BINDING EFFECT.
This Agreement shall inure to the benefit of and be binding upon the Company,
its successors and assigns, including but not limited to any corporation, person
or other entity which may acquire all or substantially all of the assets, shares
or business of the Company or any corporation with or into which it may be
consolidated or merged. The rights and obligations of Employee hereunder may not
be delegated or assigned.
9 COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same instrument.
10 GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF
THE STATE OF CALIFORNIA WITHOUT REFERENCE TO THE CHOICE OF LAW PRINCIPLES
THEREOF.
11 ENTIRE AGREEMENT.
This Agreement (including the other agreements referred to herein) sets forth
and is an integration of all of the promises, agreements, conditions and
understandings among the parties hereto with respect to all matters contained or
referred to herein, and all prior promises, agreements, conditions,
understandings, warranties or representations, oral, written, express or
implied, are hereby superseded and merged herein.
12 VALIDITY OF PROVISIONS.
Should any provision(s) of this Agreement be void or unenforceable in whole or
in part, the remainder of this Agreement shall not in any way be affected
thereby, and such provision(s) shall be modified or amended so as to provide for
the accomplishment of the provision(s) and intentions of this Agreement to the
maximum extent possible.
13 MODIFICATIONS OR DISCHARGE.
This Agreement shall not be deemed waived, changed, modified, discharged or
terminated in whole or in part, except as expressly provided for herein or by
written instrument signed by the party or parties to be charged therewith.
14 NOTICES.
Any notice which any party may wish to give to the other party hereunder shall
be deemed to have been given when delivered to the party to whom it is
addressed. Notices
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hereunder may be sent by courier, mail, telefax, to the following addresses, or
to such other addresses as the parties may from time to time furnish to each
other by like notice:
To: Path 1 Network Technologies Inc.
3636 Nobel Drive #275
San Diego, CA 92122
To: Employee:
Dr. Michael Elliott
2929 Buffalo Speedway
Houston, TX 77098
15 NUMBER; GENDER.
In this Agreement, the masculine shall include the feminine and neuter and vice
versa, and the singular shall include the plural and vice versa, as the context
may reasonably require or permit.
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<PAGE>
16. EMPLOYMENT REGULATIONS.
Applicable employment regulations require that Employee complete a Form W-4 and
Form I-9 upon employment providing verification of his legal right to work in
the United States, which Employee agrees to complete.
17. ALLOWANCE FOR CONSULTING & BOARD MEMBERSHIP.
The Company agrees to allow Employee to: (a) sit on non-competing outside Boards
and (b) provide those same companies with limited personal consulting services
so long as (a) and (b) are restricted to a level which does not interfere with
his Path 1 duties. Disclosure shall be made to Path 1 for each company
represented.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
COMPANY: Path 1 Network Technologies Inc.
Signature: /s/ Ronald D. Fellman
-----------------------------
Title: Chairman and CTO
-----------------------------
Signature: /s/ Douglas A. Palmer
-----------------------------
Title: COO/Executive Vice President
-----------------------------
EMPLOYEE: Dr. Michael T. Elliott
/s/ Michael Elliott
----------------------------------------
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